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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 - Commission File Number 1-6523
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BankAmerica Corporation
(Exact name of registrant as specified in its charter)
Delaware 56-0906609
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(State of incorporation) (IRS Employer Identification No.)
Bank of America Corporate Center
Charlotte, North Carolina
28255
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(Address of principal executive offices)
(Zip Code)
704/386-5000
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock New York Stock Exchange
London Stock Exchange
Pacific Stock Exchange
Tokyo Stock Exchange
7 3/4% Debentures, due 2002 American Stock Exchange
9 7/8% Subordinated Notes, due 2001 New York Stock Exchange
8 1/2% Subordinated Notes, due 2007 New York Stock Exchange
10 7/8% Subordinated Notes, due 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any amendment to
this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates is approximately $126,732,283,000 (based on the March 15, 1999,
closing price of such common stock of $73.75 per share). As of March 15, 1999,
there were 1,739,020,301 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant Form 10-K Reference Location
Portions of the 1999 Proxy Statement PART III
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BANKAMERICA CORPORATION
Form 10-K Index
Page
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PART I
Item 1. Business ..................................................................... 2
Primary Market Areas ......................................................... 2
Acquisition and Disposition Activity ......................................... 2
Government Supervision and Regulation ........................................ 3
Competition .................................................................. 5
Employees .................................................................... 6
Business Segment Operations .................................................. 13-16
Net Interest Income .......................................................... 16-18
Securities ................................................................... 26, 56,
64-66
Loans and Leases ............................................................. 19, 26-27,
34-44, 57-
58, 67-68
Deposits ..................................................................... 27, 68
Short-Term Borrowings and Trading Account Liabilities ........................ 27-28, 69
Market Risk Management ....................................................... 29-33
Selected Quarterly Operating Results ......................................... 45
Item 2. Properties ................................................................... 6
Item 3. Legal Proceedings ............................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders .......................... 7
Item 4A. Executive Officers of the Registrant ......................................... 7
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters ..... 8
Item 6. Selected Financial Data ...................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 9
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................... 50
Item 8. Consolidated Financial Statements and Supplementary Data ..................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................... 96
PART III
Item 10. Directors and Executive Officers of the Registrant ........................... 96
Item 11. Executive Compensation ....................................................... 96
Item 12. Security Ownership of Certain Beneficial Owners and Management ............... 96
Item 13. Certain Relationships and Related Transactions ............................... 96
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............. 97
1
PART I
Item 1. BUSINESS
General
On September 25, 1998, NationsBank Corporation, a North Carolina
corporation ("NationsBank"), was reincorporated in Delaware by forming a new,
wholly owned Delaware subsidiary named NationsBank (DE) Corporation
("NationsBank (DE)"), and merging NationsBank with and into NationsBank (DE).
As the surviving corporation in this merger, NationsBank (DE) was renamed
"NationsBank Corporation." On September 30, 1998, the former BankAmerica
Corporation, a Delaware corporation ("BankAmerica"), merged with and into
NationsBank Corporation, with NationsBank Corporation as the surviving
corporation in this merger. In connection with this merger, NationsBank
Corporation changed its name to "BankAmerica Corporation" (the "Corporation").
As the successor issuer of NationsBank, the Corporation's predecessor companies
were initially incorporated in 1968. The Corporation has announced that it will
operate under the "Bank of America" name.
The Corporation is a multi-bank holding company registered under the Bank
Holding Company Act of 1956, as amended, with its principal assets being the
stock of its subsidiaries. The Corporation and its subsidiaries are subject to
supervision by various U.S. federal and state banking and other regulatory
authorities.
For additional information about the Corporation and its operations, see
Table Two and the narrative comments under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Business
Segment Operations."
The principal executive offices of the Corporation are located in the Bank
of America Corporate Center, Charlotte, North Carolina 28255.
Primary Market Areas
Through its banking subsidiaries (the "Banks") and various non-banking
subsidiaries, the Corporation provides a diversified range of banking and
non-banking financial services and products, primarily throughout the
Mid-Atlantic (Maryland, Virginia and the District of Columbia), the Midwest
(Illinois, Iowa, Kansas and Missouri), the Southeast (Florida, Georgia, North
Carolina, South Carolina and Tennessee), the Southwest (Arizona, Arkansas, New
Mexico, Oklahoma and Texas), the Northwest (Alaska, Oregon and Washington) and
the West (California, Idaho and Nevada) regions of the United States and in
selected international markets. The Corporation serves an aggregate of
approximately 30 million households and two million businesses in these
regions, and management believes that these are desirable regions in which to
be located. Based on the most recent available data, personal income levels in
the states in these regions as a whole rose 5.9 percent (annualized) in the
first half of 1998. In addition, the population in these states as a whole rose
an estimated 1.4 percent between 1997 and 1998. The number of housing permits
authorized increased 12.8 percent between 1997 and 1998, ranging from an
increase of 5.2 percent in the Midwest to an increase of 21.3 percent in the
Southwest. Between 1997 and 1998, the levels of unemployment in these states as
a whole fell by approximately .03 percentage points, for an unemployment rate
in the Corporation's overall market area of 4.5 percent at year-end 1998. These
states created more than 1.7 million new jobs in 1998, 2.5 percent above 1997,
compared to 1.4 percent job growth in the other states.
The Corporation has the leading bank deposit market share position in
California, Florida, Georgia, Maryland, New Mexico, North Carolina, Texas and
Washington. In addition, the Corporation ranks second in terms of bank deposit
market share in Arizona, Arkansas, Kansas, Missouri, Nevada, Oregon, South
Carolina, Virginia and the District of Columbia; third in Oklahoma; fifth in
Illinois and Tennessee; sixth in Alaska and Idaho; and eighth in Iowa. The
Corporation has announced its intention to exit the Alaska retail market.
Acquisition and Disposition Activity
As part of its operations, the Corporation regularly evaluates the
potential acquisition of, and holds discussions with, various financial
institutions and other businesses of a type eligible for bank holding company
ownership or control. In addition, the Corporation regularly analyzes the
values of, and submits bids for, the acquisition of customer-based funds and
other liabilities and assets of such financial institutions and other
businesses. The Corporation also regularly considers the potential disposition
of certain of its assets, branches, subsidiaries
2
or lines of businesses. As a general rule, the Corporation publicly announces
any material acquisitions or dispositions when a definitive agreement has been
reached.
For additional information regarding the Corporation's acquisition
activity, see Note Two of the consolidated financial statements on page 61.
Government Supervision and Regulation
General
As a registered bank holding company, the Corporation is subject to the
supervision of, and to regular inspection by, the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Banks are organized
principally as national banking associations, which are subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
(the "Comptroller"). The Banks are also subject to regulation by the Federal
Deposit Insurance Corporation (the "FDIC") and other federal and state
regulatory agencies. In addition to banking laws, regulations and regulatory
agencies, the Corporation and its subsidiaries and affiliates are subject to
various other laws and regulations and supervision and examination by other
regulatory agencies, all of which directly or indirectly affect the operations
and management of the Corporation and its ability to make distributions. The
following discussion summarizes certain aspects of those laws and regulations
that affect the Corporation.
The activities of the Corporation, and those of companies which it
controls or in which it holds more than 5 percent of the voting stock, are
limited to banking or managing or controlling banks, furnishing services to or
performing services for its subsidiaries, or any other activity which the
Federal Reserve Board determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve Board is required to consider whether
the performance of such activities by a bank holding company or its
subsidiaries can reasonably be expected to produce benefits to the public such
as greater convenience, increased competition or gains in efficiency that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Generally, bank holding companies, such as the Corporation, are
required to obtain prior approval of, or provide prior notice to, the Federal
Reserve Board to engage in any new activity or to acquire more than 5 percent
of any class of voting stock of any company.
Bank holding companies are also required to obtain the prior approval of
the Federal Reserve Board before acquiring more than 5 percent of any class of
voting stock of any bank which is not already majority-owned by the bank
holding company. Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank
holding company may acquire banks in states other than its home state without
regard to the permissibility of such acquisitions under state law, but subject
to any state requirement that the bank has been organized and operating for a
minimum period of time, not to exceed five years, and the requirement that the
bank holding company, prior to or following the proposed acquisition, controls
no more than 10 percent of the total amount of deposits of insured depository
institutions in the United States and no more than 30 percent of such deposits
in that state (or such lesser or greater amount set by state law).
Subject to certain restrictions, the Interstate Banking and Branching Act
also authorizes banks to merge across state lines, thereby creating interstate
branches. Furthermore, pursuant to the Interstate Banking and Branching Act, a
bank may open new branches in a state in which it does not already have banking
operations if such state enacts a law permitting such de novo branching. To the
extent permitted under these laws, the Corporation plans to consolidate its
banking subsidiaries into a single bank as soon as practicable (with the
exception of its two limited purpose credit card banks which are headquartered
in Arizona and Delaware, which the Corporation intends to merge into a single
credit card bank). The Corporation currently operates two interstate banks
(i.e., banks with branch offices in more than one state): NationsBank, N.A.,
headquartered in Charlotte, North Carolina, with branch offices primarily in
Arkansas, Florida, Georgia, Illinois, Iowa, Kansas, Maryland, Missouri, New
Mexico, North Carolina, Oklahoma, South Carolina, Virginia, Tennessee, Texas
and the District of Columbia; and Bank of America NT&SA, headquartered in San
Francisco, California, with branch offices primarily in Alaska, Arizona,
California, Florida, Idaho, Illinois, Nevada, New Mexico, Oregon and
Washington. Separate banks continue to operate in Arizona, California, Delaware
and Texas. In addition, the Corporation has
3
a federal savings bank headquartered in Portland, Oregon with branch offices in
a number of states. As previously described, the Corporation regularly
evaluates merger and acquisition opportunities, and it anticipates that it will
continue to evaluate such opportunities.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. At the present time, Congress is
considering legislation that would increase the permissible scope of securities
and insurance activities in which a bank holding company or its affiliates may
engage. The likelihood and timing of any such proposals or legislation and the
impact they might have on the Corporation and its subsidiaries cannot be
determined at this time.
Capital and Operational Requirements
The Federal Reserve Board, the Comptroller and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States banking organizations. In addition, these regulatory agencies may
from time to time require that a banking organization maintain capital above
the minimum levels, whether because of its financial condition or actual or
anticipated growth. The Federal Reserve Board risk-based guidelines define a
three-tier capital framework. Tier 1 capital consists of common and qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
Tier 2 capital consists of preferred stock not qualifying as Tier 1 capital,
subordinated and other qualifying debt, and the allowance for credit losses up
to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated
debt that is unsecured, fully paid, has an original maturity of at least two
years, is not redeemable before maturity without prior approval by the Federal
Reserve and includes a lock-in clause precluding payment of either interest or
principal if the payment would cause the issuing bank's risk-based capital
ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier
2 capital less investments in unconsolidated subsidiaries represents qualifying
total capital, at least 50 percent of which must consist of Tier 1 capital.
Risk-based capital ratios are calculated by dividing Tier 1 and total capital
by risk-weighted assets. Assets and off-balance sheet exposures are assigned to
one of four categories of risk-weights, based primarily on relative credit
risk. The minimum Tier 1 capital ratio is 4 percent and the minimum total
capital ratio is 8 percent. The Corporation's Tier 1 and total risk-based
capital ratios under these guidelines at December 31, 1998 were 7.06 percent
and 10.94 percent, respectively. At December 31, 1998, the Corporation had no
subordinated debt that qualified as Tier 3 capital.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3 percent, most
banking organizations are required to maintain ratios of at least 100 to 200
basis points above 3 percent. The Corporation's leverage ratio at December 31,
1998 was 6.22 percent. Management believes that the Corporation meets its
leverage ratio requirement.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5 percent of the bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore,
in the event of the bankruptcy of the parent holding company, such guarantee
would take priority over the parent's general unsecured creditors. In addition,
FDICIA requires the various regulatory agencies to prescribe certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6 percent, a total capital ratio of at
least 10 percent and a leverage
4
ratio of at least 5 percent and not be subject to a capital directive order.
Under these guidelines, each of the Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentrations of credit risk; (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position); and (iii) risks from non-traditional activities,
as well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to
incorporate a measure for market risk. In accordance with the amended
guidelines, the Corporation and any Bank with significant trading activity (as
defined in the amendment) must incorporate a measure for market risk in their
regulatory capital calculations effective for reporting periods after January
1, 1998. The revised guidelines did not have a material impact on the
Corporation or the Banks' regulatory capital ratios or their well capitalized
status.
Distributions
The Corporation's funds for cash distributions to its stockholders are
derived from a variety of sources, including cash and temporary investments.
The primary source of such funds, however, is dividends received from the
Banks. Each of the Banks is subject to various regulatory policies and
requirements relating to the payment of dividends, including requirements to
maintain capital above regulatory minimums. The appropriate federal regulatory
authority is authorized to determine under certain circumstances relating to
the financial condition of the bank or bank holding company that the payment of
dividends would be an unsafe or unsound practice and to prohibit payment
thereof.
In addition to the foregoing, the ability of the Corporation and the Banks
to pay dividends may be affected by the various minimum capital requirements
and the capital and non-capital standards established under FDICIA, as
described above. The right of the Corporation, its stockholders and its
creditors to participate in any distribution of the assets or earnings of its
subsidiaries is further subject to the prior claims of creditors of the
respective subsidiaries.
Source of Strength
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and
to commit resources to support each such subsidiary. This support may be
required at times when a bank holding company may not be able to provide such
support. Similarly, under the cross-guarantee provisions of the Federal Deposit
Insurance Act, in the event of a loss suffered or anticipated by the FDIC -
either as a result of default of a banking or thrift subsidiary of the
Corporation or related to FDIC assistance provided to a subsidiary in danger of
default - the other Banks may be assessed for the FDIC's loss, subject to
certain exceptions.
Competition
The activities in which the Corporation and its four major business
segments (Consumer Banking, Commercial Banking, Global Corporate and Investment
Banking, and Principal Investing and Wealth Management) engage are highly
competitive. Generally, the lines of activity and markets served involve
competition with other banks, thrifts, credit unions and other non-bank
financial institutions, such as investment banking firms, brokerage firms,
investment companies and insurance companies, as well as other entities which
offer financial services, located both domestically and internationally. The
methods of competition center around various factors, such as customer
services, interest rates on loans and deposits, lending limits and location of
offices.
The commercial banking business in the various local markets served by the
Corporation's business segments is highly competitive. The four major business
segments compete with other commercial banks, thrifts, finance companies and
other businesses which provide similar services. The business segments actively
compete in commercial lending activities with local, regional and international
banks and non-bank financial organizations, some of which are larger than
certain of the Corporation's non-banking subsidiaries and the Banks. In its
consumer lending operations, the competitors of the business segments include
other banks, thrifts, credit unions, regulated small loan companies and other
non-bank organizations offering financial services. In the investment banking,
investment advisory and brokerage business, the Corporation's non-banking
subsidiaries compete with
5
other banking and investment banking firms, investment advisory firms,
brokerage firms, investment companies and other organizations offering similar
services. The Corporation's mortgage banking units compete with commercial
banks, thrifts, government agencies, mortgage brokers and other non-bank
organizations offering mortgage banking services. In the trust business, the
Banks compete with other banks, investment counselors and insurance companies
in national markets for institutional funds and corporate pension and profit
sharing accounts. The Banks also compete with other banks, trust companies,
insurance agents, thrifts, financial counselors and other fiduciaries for
personal trust business. The Corporation and its four major business units also
actively compete for funds. A primary source of funds for the Banks is
deposits, and competition for deposits includes other deposit-taking
organizations, such as commercial banks, thrifts, and credit unions, as well as
money market mutual funds.
The Corporation's ability to expand into additional states remains subject
to various federal and state laws. See "Government Supervision and Regulation -
General" for a more detailed discussion of interstate banking and branching
legislation and certain state legislation.
Employees
As of December 31, 1998, there were 170,975 full-time equivalent employees
within the Corporation and its subsidiaries. Of the foregoing employees, 90,029
were employed within Consumer Banking, 5,196 were employed within Commercial
Banking, 11,758 were employed within Global Corporate and Investment Banking,
and 7,109 were employed within Principal Investing and Wealth Management. The
remainder were employed within the Corporation and its other subsidiaries.
Approximately 5,000 non-officer employees in the State of Washington are
covered by a collective bargaining agreement. These employees work for the
Washington division of Bank of America NT&SA, which is doing business as
Seafirst Bank. None of the Corporation's other domestic employees are covered
by a collective bargaining agreement. Management considers its employee
relations to be good.
Item 2. PROPERTIES
As of December 31, 1998, the principal offices of the Corporation, and its
Consumer and Commercial Banking business segments, were located in the 60-story
Bank of America Corporate Center in Charlotte, North Carolina, which is owned
by a subsidiary of the Corporation. The Corporation occupies approximately
521,000 square feet and leases approximately 593,000 square feet to third
parties at market rates, which represents substantially all of the space in
this facility. As of December 31, 1998, the principal offices of Global
Corporate and Investment Banking and Principal Investing and Wealth Management
were located at 555 California Street in San Francisco, California. A
subsidiary of the Corporation has a 50% ownership interest in this building
through a joint venture partnership, and the Corporation leases approximately
479,000 square feet in this building from the partnership.
The Corporation also leases or owns a significant amount of space
worldwide, in addition to these facilities in Charlotte and San Francisco. As
of December 31, 1998, the Corporation and its subsidiaries owned or leased
approximately 11,500 locations in 47 states, the District of Columbia and 37
foreign countries.
Item 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation's predecessor, BankAmerica, and certain of its
subsidiaries, including Bank of America NT&SA, were named in one such suit by
the City of San Francisco and several related public entities, and by the State
of California, in an action entitled State of California, etc ex rel Stull v.
Bank of America NT&SA, et al. (No. 968-484). The case was instituted on April
1, 1995 in the Superior Court for the City and County of San Francisco. The
City of San Francisco and related public entities intervened in the case on May
1, 1997, and the State of California took over prosecution of the case on May
5, 1997. The chief allegation of this suit is that Bank of America NT&SA and
its predecessors retained unclaimed funds related to bonds and coupons that
were not
6
presented by bondholders rather than returning them to certain bond issuers or
escheating such funds to the State. The suit also alleges False Claims Act
exposure for alleged fee overcharges and claims that Bank of America NT&SA and
its predecessors improperly invested bond program funds. On November 12, 1998,
the plaintiffs and the Corporation and its named subsidiaires settled this suit
whereby the Corporation and its named subsidiaries agreed to pay $187.5 million
to the plaintiffs. The settlement is subject to court approval.
The Corporation and certain present and former officers have been named as
defendants in approximately 24 uncertified class actions filed in federal court
alleging, among other things, that the defendants failed to disclose material
facts about BankAmerica's losses relating to D.E. Shaw & Co., L.P. until
mid-October 1998, in violation of various provisions of the federal securities
laws. The uncertified classes consist generally of persons who were entitled to
vote on the merger of NationsBank and BankAmerica, or who purchased or acquired
securities of the Corporation or its predecessors between August 4, 1998 and
October 13, 1998. Similar actions are pending in California state court,
alleging violations of the California Corporations Code and involving factual
allegations essentially the same as the federal actions. In addition, certain
cases filed in California state court have alleged that the proxy
statement-prospectus of August 4, 1998, falsely stated that the merger would be
one of equals, and allege a conspiracy on the part of certain executives to
gain control over the newly merged entity. At least one such complaint seeks
recovery under various state common law theories. The Corporation believes the
actions lack merit and will defend them vigorously. The amount of any ultimate
exposure cannot be determined with certainty at this time.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 1998.
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to the Instructions to Form 10-K and Item 401(b) of Regulation
S-K, the name, age and position of each current executive officer and the
principal accounting officer of the Corporation are listed below along with
such officer's business experience during the past five years. Officers are
appointed annually by the Board of Directors at the meeting of directors
immediately following the annual meeting of stockholders.
James H. Hance, Jr., age 54, Vice Chairman and Chief Financial Officer.
Mr. Hance was named Chief Financial Officer in August 1988, and was named Vice
Chairman in October 1993. He first became an officer in 1987. He also serves as
Vice Chairman, Chief Financial Officer and a director of NationsBank, N.A. and
Bank of America NT&SA.
Kenneth D. Lewis, age 51, President. Mr. Lewis was named to his present
position in January 1999. Prior to that time, he served as President, Consumer
and Commercial Banking, from October 1998 to January 1999, and as President
from October 1993 to October 1998. He first became an officer in 1971. Mr.
Lewis also serves as President and a director of NationsBank, N.A. and as a
director of Bank of America NT&SA.
Hugh L. McColl, Jr., age 63, Chairman of the Board and Chief Executive
Officer of the Corporation and the Banks. Mr. McColl has served as Chairman of
the Board of the Corporation for at least five years except from January 7,
1997 until September 30, 1998. He first became an officer in 1962. He also
serves as a director of the Corporation, NationsBank, N.A. and Bank of America
NT&SA.
Michael J. Murray, age 54, President, Global Corporate and Investment
Banking. Mr. Murray first became an officer and was named to his present
position in October 1998. Prior to that time, he served as President, Global
Wholesale Bank of BankAmerica from 1997 to 1998, as Vice Chairman of
BankAmerica from 1995 to 1997 and as Group Executive Vice President, U.S.
Corporate Group of Bank of America NT&SA from 1994 to 1995. From 1993 to 1994,
he served as Vice Chairman of Continental Bank Corporation. He also serves as
President and a director of Bank of America NT&SA and as a director of
NationsBank, N.A.
Marc D. Oken, age 52, Executive Vice President and Principal Financial
Executive. Mr. Oken was named to his present position in October 1998. From
June 1989 to October 1998, he served as Chief Accounting Officer. He first
became an officer in 1989.
7
F. William Vandiver, Jr., age 56, Corporate Risk Management Executive. Mr.
Vandiver was named to his present position in October 1998. From June 1997 to
October 1998, he served as Chairman, Corporate Risk Policy. Prior to that time,
from January 1996 to June 1997, he served as President, Global Finance, and
from January 1994 to January 1996 he served as President, Specialized Finance
Group. He first became an officer in 1968. He also serves as Corporate Risk
Management Executive and a director of NationsBank, N.A. and Bank of America
NT&SA.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The principal market on which the Common Stock is traded is the New York
Stock Exchange. The Common Stock is also listed on the London Stock Exchange
and the Pacific Stock Exchange, and certain shares are listed on the Tokyo
Stock Exchange. The following table sets forth the high and low sales prices of
the Common Stock on the New York Stock Exchange Composite Transactions List for
the periods indicated:
Quarter High Low
--------- ------------ ----------
1997 first $65 $48
second 70 54
third 71 11/16 56 5/8
fourth 66 3/8 55
1998 first 75 1/8 56 1/4
second 85 72 1/16
third 88 7/16 47 7/8
fourth 66 5/8 44
As of December 31, 1998, there were 295,937 record holders of Common
Stock. During 1997 and 1998, the Corporation paid dividends on the Common Stock
on a quarterly basis. The following table sets forth dividends declared per
share of Common Stock for the periods indicated:
Quarter Dividend
--------- ---------
1997 first $.33
second .33
third .33
fourth .38
1998 first .38
second .38
third .38
fourth .45
For additional information regarding the Corporation's ability to pay
dividends, see "Government Supervision and Regulation - Distributions" and Note
Twelve of the consolidated financial statements on page 78.
8
Item 6. SELECTED FINANCIAL DATA
See Table One for Selected Financial Data.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On September 25, 1998, BankAmerica Corporation (the Corporation)
reincorporated in Delaware and on September 30, 1998, NationsBank Corporation
(NationsBank) completed its merger with the former BankAmerica Corporation
(BankAmerica) and changed its name to "BankAmerica Corporation". In addition,
on January 9, 1998, the Corporation completed its merger with Barnett Banks,
Inc. (Barnett). The BankAmerica and Barnett mergers were each accounted for as
a pooling of interests and, accordingly, all financial information has been
restated for all periods presented.
This report contains certain forward-looking statements that are subject
to risks and uncertainties and include information about possible or assumed
future results of operations. Many possible events or factors could affect the
future financial results and performance of the Corporation. This could cause
results or performance to differ materially from those expressed in our
forward-looking statements. Words such as "expects", "anticipates", "believes",
"estimates", variations of such words and other similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in, or
implied by, such forward-looking statements. Readers of this report should not
rely solely on the forward-looking statements and should consider all
uncertainties and risks discussed throughout this report. These statements are
representative only on the date hereof, and the Corporation undertakes no
obligation to update any forward-looking statements made.
The possible events or factors include the following: the Corporation's
loan growth is dependent on economic conditions as well as various
discretionary factors, such as decisions to securitize, sell, or purchase
certain loans or loan portfolios, syndications or participations of loans,
retention of residential mortgage loans generated by the mortgage subsidiaries,
the management of borrower, industry, product and geographic concentrations and
the mix of the loan portfolio. The rate of charge-offs and provision expense
can be affected by local, regional and international economic and market
conditions, concentrations of borrowers, industries, products and geographic
locations, the mix of the loan portfolio and management's judgments regarding
the collectibility of loans. Liquidity requirements may change as a result of
fluctuations in assets and liabilities and off-balance sheet exposures, which
will impact the capital and debt financing needs of the Corporation and the mix
of funding sources. Decisions to purchase, hold or sell securities are also
dependent on liquidity requirements and market volatility, as well as, on- and
off-balance sheet positions. Factors that may impact interest rate risk include
local, regional and international economic conditions, levels, mix, maturities,
yields or rates of assets and liabilities, utilization and effectiveness of
interest rate contracts and the wholesale and retail funding sources of the
Corporation. Factors that may cause actual noninterest expense to differ from
estimates include uncertainties relating to the Corporation's efforts to
prepare its information technology systems and non-information technology
systems for the Year 2000 and the Euro conversion, as well as uncertainties
relating to the ability of third parties with whom the Corporation has business
relationships to address the Year 2000 issue and the Euro conversion issue in a
timely and adequate manner. The Corporation is also exposed to the potential of
losses arising from adverse changes in market rates and prices which can
adversely impact the value of financial products, including securities, loans,
deposits, debt and derivative financial instruments, such as futures, forwards,
swaps, options and other financial instruments with similar characteristics.
In addition, the banking industry in general is subject to various
monetary and fiscal policies and regulations, which include those determined by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, state regulators and the Office of
Thrift Supervision, which policies and regulations could affect the
Corporation's results. Other factors that may cause actual results to differ
from the forward-looking statements include competition with other local,
regional and international banks, savings and loan associations, credit unions
and other non-bank financial institutions, such as investment banking firms,
investment advisory firms, brokerage firms, mutual funds and insurance
companies, as well as other entities
9
which offer financial services, located both within and outside the United
States; interest rate, market and monetary fluctuations; inflation; market
volatility; general economic conditions and economic conditions in the
geographic regions and industries in which the Corporation operates;
introduction and acceptance of new banking-related products, services and
enhancements; fee pricing strategies, mergers and acquisitions and their
integration into the Corporation, and management's ability to manage these and
other risks.
1998 Compared to 1997
Overview
The Corporation is a multi-bank holding company headquartered in
Charlotte, North Carolina, providing a diversified range of banking and certain
non-banking financial services both domestically and internationally through
four major Business Segments: Consumer Banking, Commercial Banking, Global
Corporate and Investment Banking, and Principal Investing and Wealth
Management. On December 31, 1998, the Corporation had $618 billion in assets,
making it the largest banking company in the United States. On September 30,
1998, the Corporation completed its merger with BankAmerica, a multinational
bank holding company headquartered in San Francisco, California. In addition,
on January 9, 1998, the Corporation merged with Barnett, a multi-bank holding
company headquartered in Jacksonville, Florida. The Corporation accounted for
each transaction as a pooling of interests and, accordingly, all financial
information has been restated for all periods presented.
On October 1, 1997, the Corporation completed the acquisitions of
Montgomery Securities, Inc. (NationsBanc Montgomery Securities) and Robertson,
Stephens & Company Group, L.L.C. (Robertson Stephens). The Corporation
accounted for both acquisitions as purchases. The Corporation sold the
investment banking operations of Robertson Stephens on August 31, 1998 and sold
the investment management operations on February 26, 1999.
Significant changes in the Corporation's results of operations and
financial position are described in the following sections.
Refer to Table One and Table Twenty for annual and quarterly selected
financial data, respectively.
Key performance highlights for 1998 were:
o Operating net income (net income excluding merger-related charges) totaled
$6.49 billion, or $3.73 per common share, in 1998 compared to $6.81 billion,
or $3.86 per common share in 1997. Diluted operating earnings per common share
were $3.64 for 1998 compared to $3.76 for 1997. Including merger-related
charges of $1.80 billion ($1.33 billion, net of tax) and $374 million ($264
million, net of tax) for 1998 and 1997, respectively, net income was $5.17
billion and $6.54 billion, respectively. Earnings per common share and diluted
earnings per common share including merger-related charges were $2.97 and
$2.90, respectively for 1998 and $3.71 and $3.61, respectively, for 1997.
o Taxable-equivalent net interest income declined less than 1 percent to $18.46
billion in 1998 as an 8 percent increase in managed loans and an increase in
core deposits were offset by the impact of spread compression,
securitizations, divestitures and earning asset sales. Excluding the impact of
securitizations, divestitures and earning asset sales, net interest income
increased $526 million, or 3 percent over 1997. The net interest yield
decreased to 3.69 percent in 1998 compared to 4.00 percent in 1997, primarily
reflecting higher levels of investment securities, which have a lower yield
than loans, and a decrease in spreads between loans and deposits.
o The provision for credit losses covered net charge-offs and totaled $2.92
billion in 1998, compared to $1.90 billion in 1997. The increase was partially
due to a $500 million provision related to international economic conditions
and higher net commercial charge-offs. For additional discussion see "Recent
International Developments" on page 42. Net charge-offs totaled $2.47 billion
in 1998 compared to $1.85 billion in 1997, while net charge-offs as a
percentage of average loans and leases were 0.71 percent in 1998 compared to
0.54 percent in 1997. Higher net charge-offs were primarily the result of a
$372 million write-down of a credit agreement with DE Shaw Securities Group,
Inc. (DE Shaw), a trading and investment firm. Nonperforming assets were $2.76
billion on December 31, 1998 compared to $2.42 billion on December 31, 1997,
mainly the result of higher commercial nonperforming loans.
o Noninterest income increased approximately 4 percent to $12.2 billion in 1998.
This growth was attributable to higher levels of income from most categories,
including investment banking income, brokerage income, credit card income, and
other income, which included gains on securitizations, as well as the sale of
a partial
10
ownership interest in a mortgage company and the sale of the manufactured
housing lending business. Partially offsetting these increases were
securities trading losses and a decrease in mortgage servicing income.
Trading account profits and fees totaled $171 million in 1998 compared to
$976 million in 1997. The decrease was primarily attributed to a write-down
of Russian securities and losses in corporate bonds and commercial mortgage
products as spreads widened during the third quarter of 1998. Mortgage
servicing income for 1998 totaled $115 million compared to $401 million in
1997. The decrease was due to a $250 million write-down of mortgage
servicing assets resulting from an increase in anticipated prepayment rates.
o Merger-related charges totaled $1.8 billion and $374 million for the years
ended December 31, 1998 and 1997, respectively. The total $1.8 billion charge
for 1998 included $1.3 billion associated with the BankAmerica merger, as well
as $900 million associated with the Barnett merger, which was offset by a $430
million gain resulting from the regulatory required divestitures of certain
Barnett branches. See Note Two of the consolidated financial statements on
page 61 for additional information.
o Other noninterest expense increased 6 percent to $18.7 billion in 1998, mainly
as a result of increases in personnel and data processing expenses associated
with the purchases of Oxford Resources, Corp. (NationsBanc Auto Leasing, Inc.)
NationsBanc Montgomery Securities and Robertson Stephens, which was sold in
the third quarter of 1998, and costs of the BankAmerica and Barnett transition
projects.
o Operating cash basis ratios, which measure operating performance excluding
merger-related charges, intangible assets and the related amortization
expense, declined with cash basis diluted earnings per common share of $4.15
in 1998 compared to $4.24 in 1997. Return on average tangible common
shareholders' equity, excluding merger-related charges, decreased to 25.24
percent compared to 27.77 percent in 1997. The cash basis efficiency ratio was
58.2 percent in 1998, an increase of 293 basis points from 55.27 in 1997 due
to the increase in noninterest expense associated with the NationsBanc
Montgomery Securities, Robertson Stephens and NationsBanc Auto Leasing, Inc.
acquisitions in the fourth quarter of 1997.
As of the end of the third quarter of 1998, a banking subsidiary of the
Corporation charged off $372 million of a credit agreement to DE Shaw, to which
the banking subsidiary had outstanding balances of approximately $1.4 billion
prior to the charge-off. The outstanding credit agreement with DE Shaw was
restructured to provide, among other things, for an accelerated schedule of
repayments.
Throughout the fourth quarter of 1998, the Corporation reduced its
exposure to DE Shaw. During the fourth quarter of 1998, the banking subsidiary
purchased approximately $20 billion of fixed income securities and related
hedge positions from DE Shaw. Of the $20 billion of fixed income securities
purchased, $13.6 billion was subsequently sold and $5.8 billion has been
incorporated into the Corporation's trading and investment portfolio. In
addition, the Corporation is carrying the original loan to DE Shaw as an
investment on its books and marking it to market each quarter. During the
fourth quarter of 1998, the Corporation marked down the investment by $158
million. In addition, DE Shaw made a regularly scheduled payment of $100
million. As a result of the write-down and repayment, the investment was $770
million at December 31, 1998.
Losses associated with DE Shaw originated primarily as a result of global
market turbulence and uncertainties during the third quarter of 1998.
Uncertainties continue to exist in overseas economies and global markets, which
may be volatile in 1999. Accordingly, the Corporation may experience weakness
in 1999 relating to the impact of such conditions on the Corporation's credit
and trading portfolios and weaknesses in income from operating units, such as
investment banking, that may be adversely impacted by such conditions.
The remainder of management's discussion and analysis of the consolidated
financial condition and results of operations of the Corporation should be read
in conjunction with the consolidated financial statements and related notes
presented on pages 50 through 95.
11
Table One
Five-Year Summary of Selected Financial Data
(Dollars in Millions Except Per-Share Information)
1998 1997
-------------- --------------
Income statement
Interest income ......................................................... $ 38,588 $ 37,333
Interest expense ........................................................ 20,290 18,901
Net interest income (taxable-equivalent) ................................ 18,461 18,589
Net interest income ..................................................... 18,298 18,432
Provision for credit losses ............................................. 2,920 1,904
Gains (losses) on sales of securities ................................... 1,017 271
Noninterest income ...................................................... 12,189 11,756
Merger-related charges, net ............................................. 1,795 374
Other noninterest expense ............................................... 18,741 17,625
Income before taxes ..................................................... 8,048 10,556
Income tax expense ...................................................... 2,883 4,014
Net income .............................................................. 5,165 6,542
Net income available to common shareholders ............................. 5,140 6,431
Net income (excluding merger-related charges) ........................... 6,490 6,806
Average common shares issued and outstanding (in thousands) ............. 1,732,057 1,733,194
Per common share
Earnings ................................................................ $ 2.97 $ 3.71
Earnings (excluding merger-related charges) ............................. 3.73 3.86
Diluted earnings ........................................................ 2.90 3.61
Diluted earnings (excluding merger-related charges) ..................... 3.64 3.76
Cash dividends paid ..................................................... 1.59 1.37
Shareholders' equity (year-end) ......................................... 26.60 25.49
Balance sheet (year-end)
Total loans and leases .................................................. 357,328 342,140
Total assets ............................................................ 617,679 570,983
Total deposits .......................................................... 357,260 346,297
Long-term debt .......................................................... 45,888 42,887
Common shareholders' equity ............................................. 45,866 43,907
Total shareholders' equity .............................................. 45,938 44,584
Performance ratios
Return on average assets ................................................ .88% 1.20%
Return on average assets (excluding merger-related charges) ............. 1.11 1.25
Return on average common shareholders' equity ........................... 11.56 15.26
Return on average common shareholders' equity
(excluding merger-related charges) ..................................... 14.54 15.88
Efficiency ratio (excluding merger-related charges) ..................... 61.15 58.08
Total equity to total assets (year-end) ................................. 7.44 7.81
Total average equity to total average assets ............................ 7.67 8.02
Dividend payout ratio ................................................... 50.18 32.09
Risk-based capital ratios (year-end) (1)
Tier 1 .................................................................. 7.06 6.50
Total ................................................................... 10.94 10.89
Leverage capital ratio .................................................. 6.22 5.57
Cash basis financial data (2)
Earnings per common share ............................................... $ 3.49 $ 4.20
Earnings per common share (excluding merger-related charges) ............ 4.25 4.36
Diluted earnings per common share ....................................... 3.41 4.09
Diluted earnings per common share (excluding merger-related
charges) ............................................................... 4.15 4.24
Return on average tangible assets ....................................... 1.07% 1.40%
Return on average tangible assets (excluding merger-related charges)..... 1.30 1.45
Return on average tangible common shareholders' equity .................. 20.70 26.80
Return on average tangible common shareholders' equity
(excluding merger-related charges) ..................................... 25.24 27.77
Efficiency ratio (excluding merger-related charges) ..................... 58.20 55.27
Tangible equity to tangible assets ...................................... 5.18 5.19
Market price per share of common stock
Closing price ........................................................... $ 60 1/8 $ 60 13/16
High for the period ..................................................... 88 7/16 71 11/16
Low for the period ...................................................... 44 48
1996 1995 1994
-------------- -------------- -------------
Income statement
Interest income ......................................................... $ 33,636 $ 32,158 $ 25,562
Interest expense ........................................................ 16,682 16,369 11,080
Net interest income (taxable-equivalent) ................................ 17,082 15,824 14,549
Net interest income ..................................................... 16,954 15,789 14,482
Provision for credit losses ............................................. 1,645 945 798
Gains (losses) on sales of securities ................................... 147 68 (48)
Noninterest income ...................................................... 9,604 8,132 7,124
Merger-related charges, net ............................................. 398 -- --
Other noninterest expense ............................................... 15,351 14,667 13,750
Income before taxes ..................................................... 9,311 8,377 7,010
Income tax expense ...................................................... 3,498 3,230 2,656
Net income .............................................................. 5,813 5,147 4,354
Net income available to common shareholders ............................. 5,611 4,896 4,078
Net income (excluding merger-related charges) ........................... 6,058 5,147 4,354
Average common shares issued and outstanding (in thousands) ............. 1,638,382 1,613,404 1,590,925
Per common share
Earnings ................................................................ $ 3.42 $ 3.03 $ 2.56
Earnings (excluding merger-related charges) ............................. 3.58 3.03 2.56
Diluted earnings ........................................................ 3.36 2.98 2.54
Diluted earnings (excluding merger-related charges) ..................... 3.51 2.98 2.54
Cash dividends paid ..................................................... 1.20 1.04 0.94
Shareholders' equity (year-end) ......................................... 22.10 20.89 18.31
Balance sheet (year-end)
Total loans and leases .................................................. 317,709 302,804 273,615
Total assets ............................................................ 477,702 461,775 426,997
Total deposits .......................................................... 309,100 296,316 291,127
Long-term debt .......................................................... 40,041 34,349 24,748
Common shareholders' equity ............................................. 35,429 33,532 29,718
Total shareholders' equity .............................................. 37,793 36,295 33,036
Performance ratios
Return on average assets ................................................ 1.20% 1.13% 1.07%
Return on average assets (excluding merger-related charges) ............. 1.25 1.13 1.07
Return on average common shareholders' equity ........................... 16.32 15.52 14.46
Return on average common shareholders' equity
(excluding merger-related charges) ..................................... 17.04 15.52 14.46
Efficiency ratio (excluding merger-related charges) ..................... 57.52 61.22 63.44
Total equity to total assets (year-end) ................................. 7.91 7.86 7.74
Total average equity to total average assets ............................ 7.61 7.51 7.68
Dividend payout ratio ................................................... 30.05 29.13 30.53
Risk-based capital ratios (year-end) (1)
Tier 1 .................................................................. 7.76 7.24 7.43
Total ................................................................... 12.66 11.58 11.47
Leverage capital ratio .................................................. 7.09 6.27 6.18
Cash basis financial data (2)
Earnings per common share ............................................... $ 3.76 $ 3.38 $ 2.90
Earnings per common share (excluding merger-related charges) ............ 3.91 3.38 2.90
Diluted earnings per common share ....................................... 3.69 3.32 2.87
Diluted earnings per common share (excluding merger-related
charges) ............................................................... 3.84 3.32 2.87
Return on average tangible assets ....................................... 1.34% 1.27% 1.22%
Return on average tangible assets (excluding merger-related charges)..... 1.39 1.27 1.22
Return on average tangible common shareholders' equity .................. 23.65 23.56 22.56
Return on average tangible common shareholders' equity
(excluding merger-related charges) ..................................... 24.60 23.56 22.56
Efficiency ratio (excluding merger-related charges) ..................... 55.49 58.89 61.01
Tangible equity to tangible assets ...................................... 6.31 6.19 5.91
Market price per share of common stock
Closing price ........................................................... $ 48 7/8 $ 34 13/16 $ 22 9/16
High for the period ..................................................... 52 5/8 37 3/8 28 11/16
Low for the period ...................................................... 32 3/16 22 5/16 21 11/16
(1) Ratios prior to 1998 are former NationsBank ratios and have not been
restated to reflect the impact of the BankAmerica and Barnett mergers.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
12
Business Segment Operations
The Corporation provides a diversified range of banking and certain
nonbanking financial services and products through its various subsidiaries.
Management reports the results of the Corporation's operations through four
business segments: Consumer Banking, Commercial Banking, Global Corporate and
Investment Banking, and Principal Investing and Wealth Management.
The business segments summarized in Table Two are primarily managed with a
focus on various performance objectives including net income, return on average
equity and operating efficiency. These performance objectives are also
presented on a cash basis, which excludes the impact of goodwill and other
intangible assets and related amortization expense. The net interest income of
the business segments reflects the results of a funds transfer pricing process
which derives net interest income by matching assets and liabilities with
similar interest rate sensitivity and maturity characteristics. Equity capital
is allocated to each business segment based on an assessment of its inherent
risk.
See Note Sixteen of the consolidated financial statements on page 90 for
additional business segment information, including adjustments and
reconciliations to consolidated amounts.
Consumer Banking
The Consumer Banking segment provides comprehensive retail banking
services to individuals and small businesses through multiple delivery channels
including approximately 4,700 banking centers and 14,000 automated teller
machines (ATMs). These banking centers and ATMs are located principally
throughout the Corporation's franchise and serve approximately 30 million
households in 22 states and the District of Columbia. This segment also
provides specialized services such as the origination and servicing of
residential mortgage loans, issuance and servicing of credit cards, direct
banking via telephone and personal computer, student lending and certain
insurance services. The consumer finance component provides personal, mortgage,
home equity and automobile loans to consumers, retail finance programs to
dealers and lease financing to purchasers of new and used cars.
Consumer Banking's earnings increased 14 percent to $4.0 billion in 1998.
Taxable-equivalent net interest income decreased 3 percent to $12.0 billion in
1998, primarily reflecting the impact of securitizations, divestitures and loan
sales, partially offset by reduced funding costs from deposit expense
management. As the Corporation continues to securitize loans, its role becomes
that of a servicer and the servicing income, as well as the gains on
securitizations are reflected in noninterest income. The net interest yield
increased 3 basis points in 1998, reflecting the impact of lower earning assets
coupled with changes in spreads on loans and deposits. Excluding the impact of
securitizations, acquisitions and divestitures, average total loans and leases
increased approximately 6 percent over average levels in 1997. Average total
deposits of $232.3 billion declined slightly from the 1997 level of $234.2
billion, primarily due to $3.5 billion in divestitures in 1998 and 1997,
partially offset by core deposit growth.
The provision for credit losses decreased $306 million to $1.3 billion in
1998 from $1.6 billion in 1997 primarily due to securitizations, loan sales and
divestitures.
Noninterest income in Consumer Banking rose 6 percent to $6.7 billion in
1998 due to increased credit card fee income, non-deposit service charges and
fee income, and miscellaneous income primarily related to a $479 million gain
on the sale of a manufactured housing unit and loan sales. These gains were
partially offset by lower mortgage servicing income resulting from a write-down
of mortgage servicing rights of approximately $250 million.
Noninterest expense decreased 2 percent to $11.1 billion. This reflects
the efficiencies obtained from the successful integration of the former
Boatmen's Bancshares, Inc. (Boatmen's) and Barnett franchises and expense
management efforts. The cash basis efficiency ratio was 56.3 percent, an
improvement of approximately 140 basis points compared to 1997. The return on
risk-adjusted tangible equity increased to 30 percent in 1998 compared to 26
percent in 1997.
Consumer Banking's earnings in 1997 increased 21 percent to $3.5 billion
compared to $2.9 billion for 1996. Taxable-equivalent net interest income in
1997 of $12.4 billion increased 8 percent from 1996. Noninterest income
increased 26 percent in 1997 to $6.3 billion compared to $5.0 billion for 1996.
The net interest yield decreased 13 basis points from 1996 to 4.73 percent.
13
Commercial Banking
The Commercial Banking segment provides a wide range of commercial banking
services for businesses with annual revenues of up to $500 million. Services
provided include commercial lending, treasury and cash management services,
asset-backed lending, leasing and factoring. Also included in this segment are
the Corporation's commercial finance operations which provide: equipment loans
and leases, loans for debt restructuring, mergers and working capital, real
estate and health care financing and inventory financing to manufacturers,
distributors and dealers.
Commercial Banking's earnings rose 2 percent to $875 million in 1998.
Taxable-equivalent net interest income decreased $42 million from 1997
primarily reflecting higher costs of funds partially offset by higher loan
levels. Commercial Banking's average loan and lease portfolio during 1998
increased 8 percent to $51.1 billion compared to $47.3 billion in 1997.
Noninterest income rose 23 percent to $699 million in 1998 primarily due
to increased investment banking fees as well as deposit service charges.
Noninterest expense in 1998 increased 10 percent to $1.3 billion, primarily due
to increases in data processing and personnel expenses. The cash basis
efficiency ratio increased approximately 310 basis points to 45.1 percent. The
return on risk-adjusted tangible equity decreased to 25 percent from 29
percent.
Commercial Banking's earnings in 1997 increased 18 percent to $861 million
compared to $729 million for 1996. Taxable-equivalent net interest income in
1997 of $2.0 billion increased 14 percent from 1996. Noninterest income
increased 18 percent in 1997 to $568 million compared to $480 million for 1996.
The net interest yield decreased 9 basis points from 1996 to 3.79 percent.
Global Corporate and Investment Banking
The Global Corporate and Investment Banking segment provides a broad array
of financial and investment banking products such as capital-raising products,
trade finance, treasury management, investment banking, capital markets and
financial advisory services to domestic and international corporations,
financial institutions and government entities. Clients are supported through
offices in 37 countries in four distinct geographic regions: U.S. and Canada;
Asia; Europe, Middle East and Africa; and Latin America. Products and services
provided include loan origination, cash management, foreign exchange, leasing,
leveraged finance, project finance, real estate, senior bank debt, structured
finance, and trade services. Through its Section 20 subsidiary, NationsBanc
Montgomery Securities, the Global Corporate and Investment Banking segment is a
primary dealer of U.S. Government Securities. This segment underwrites,
distributes and makes markets in high-grade and high-yield debt securities,
municipal bonds and equity securities. Asset-backed securitization, commercial
paper, debt and equity securities research, loan syndications, mergers and
acquisitions consulting and private placements are also provided through
NationsBanc Montgomery Securities. Additionally, Global Corporate and
Investment Banking is a market maker in risk management products which include
swap agreements, option contracts, forward settlement contracts, financial
futures, and other derivative products in certain interest rate, foreign
exchange, commodity and equity markets. In support of these activities, Global
Corporate and Investment Banking takes positions to support client demands and
its own account.
Global Corporate and Investment Banking's net income decreased to $244
million in 1998 compared to $1.6 billion in 1997. Taxable-equivalent net
interest income increased 8 percent in 1998 to $3.7 billion compared to $3.4
billion in 1997, reflecting higher loan volumes and increased trading related
activities. Excluding the impact of a $4.2 billion securitization completed in
1997, the Global Corporate and Investment Banking average loan and lease
portfolio increased approximately 11 percent over the levels in 1997.
The provision for credit losses increased from $342 million in 1997 to
$1.6 billion in 1998 primarily due to international economic conditions and
higher net commercial charge-offs.
14
Table Two
Business Segment Summary
For the Year Ended December 31
(Dollars in Millions)
Consumer Banking Commercial Banking
----------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ---------- ---------- ----------
Net income .................................... $ 3,999 $ 3,523 $ 2,918 $ 875 $ 861 $ 729
Cash basis earnings (1) ....................... 4,545 4,089 3,257 966 953 771
Net interest yield ............................ 4.76% 4.73% 4.86% 3.39% 3.79% 3.88%
Average equity to average assets .............. 7.35 7.26 6.51 7.29 7.06 5.69
Return on risk-adjusted average equity ........ 20 17 17 19 21 26
Return on risk-adjusted tangible equity (1) ... 30 26 24 25 29 31
Efficiency ratio .............................. 59.5 60.9 60.6 48.8 45.9 45.7
Cash basis efficiency ratio (1) ............... 56.3 57.7 58.2 45.1 42.0 43.6
Average
Total loans and leases ....................... $174,409 $183,627 $51,120 $47,319
Total deposits ............................... 232,324 234,226 18,081 16,906
Total assets ................................. 277,820 291,210 64,881 59,299
Year-end
Total loans and leases ....................... 175,471 177,200 53,372 49,031
Total deposits ............................... 237,816 233,732 20,948 19,672
Total assets ................................. 269,458 285,686 67,366 65,243
Global Corporate & Principal Investing &
Investment Banking Wealth Management
------------------------------------ --------------------------------
1998 1997 1996 1998 1997 1996
------------ ----------- ----------- ---------- ---------- ----------
Net income ...................................... $ 244 $ 1,632 $ 1,537 $ 497 $ 560 $ 520
Cash basis earnings (1) ......................... 383 1,725 1,593 517 580 542
Net interest yield .............................. 1.97% 2.01% 2.04% 2.81% 3.30% 3.39%
Average equity to average assets ................ 5.65 5.30 4.76 12.73 13.01 14.63
Return on risk-adjusted average equity .......... 2 15 20 20 28 29
Return on risk-adjusted tangible equity (1) ..... 4 18 22 23 32 35
Efficiency ratio ................................ 71.3 54.8 52.1 66.9 61.4 58.6
Cash basis efficiency ratio (1) ................. 68.7 53.0 50.8 65.8 60.3 57.2
Average
Total loans and leases ........................ $107,279 $ 99,191 $15,183 $12,001
Total deposits ................................ 63,174 59,746 11,865 10,883
Total assets .................................. 223,143 199,766 19,317 15,569
Year-end ........................................
Total loans and leases ........................ 111,550 101,870 17,853 13,123
Total deposits ................................ 68,915 60,477 12,621 11,573
Total assets .................................. 248,264 204,862 22,246 18,320
(1) Cash basis calculations exclude intangible assets and the related
amortization expense.
Noninterest income in 1998 was $2.8 billion, a decrease of 8 percent from
1997, reflecting lower trading income due to weaker global markets and lower
miscellaneous income due to $158 million of losses associated with the
investment in DE Shaw, as well as a $112 million write-down of other equity
investments. Partially offsetting these decreases were higher investment
banking fees and brokerage income due to the NationsBanc Montgomery Securities
and Robertson Stephens acquisitions in the fourth quarter of 1997.
Noninterest expense rose to $4.7 billion due primarily to higher personnel
expenses associated with the NationsBanc Montgomery Securities and Robertson
Stephens acquisitions. Expenses in most other categories also increased in 1998
due to the NationsBanc Montgomery Securities and Robertson Stephens
acquisitions. The cash basis efficiency ratio increased to 68.7 percent
primarily due to higher expense ratios at NationsBanc Montgomery Securities and
Robertson Stephens. The return on risk-adjusted tangible equity decreased to 4
percent in 1998 from 18 percent in 1997 reflecting difficult international
market conditions.
15
Global Corporate and Investment Banking earnings in 1997 increased 6
percent to $1.6 billion compared to $1.5 billion for 1996. Taxable-equivalent
net interest income in 1997 of $3.4 billion increased 9 percent from 1996.
Noninterest income increased 26 percent in 1997 to $3.1 billion compared to
$2.5 billion for 1996. The net interest yield decreased 3 basis points from
1996 to 2.01 percent.
Principal Investing and Wealth Management
The Principal Investing and Wealth Management segment includes Wealth
Management which provides asset management, banking and trust services for high
net worth clients both in the U.S. and internationally through its Private
Bank. In addition, this segment provides full service and discount brokerage,
investment advisory and investment management, as well as advisory services for
the Corporation's affiliated family of mutual funds. The Principal Investing
area includes direct equity investments in businesses and investments in
general partnership funds.
Principal Investing and Wealth Management earned $497 million in 1998
compared to $560 million in 1997, a decrease of 11 percent. The results are due
to strong growth in the segment's core business, offset by the sales of certain
corporate and institutional trust businesses during the third quarter of 1997.
Taxable-equivalent net interest income increased 8 percent in 1998 to $451
million compared to $418 million a year ago, reflecting income from increased
loan levels. The average loan and lease portfolio in 1998 increased to $15.2
billion compared to $12.0 billion in 1997.
Noninterest income remained essentially level with 1997 at $1.9 billion in
1998. Core revenue growth was offset by the sales of certain corporate and
institutional businesses, which occurred in the third quarter of 1997.
Noninterest expense increased 10 percent due primarily to increases in
personnel expense, support costs and a bond litigation settlement during the
fourth quarter of 1998. See Note Eleven of the consolidated financial
statements on page 74 for additional information on litigation. The cash basis
efficiency ratio increased approximately 550 basis points to 65.8 percent in
1998 compared to 60.3 percent in 1997. The return on risk-adjusted tangible
equity decreased to 23 percent.
Principal Investing and Wealth Management earnings in 1997 increased 8
percent to $560 million compared to $520 million for 1996. Taxable-equivalent
net interest income in 1997 of $418 million increased 29 percent from 1996.
Noninterest income increased 12 percent in 1997 to $1.9 billion compared to
$1.7 billion for 1996. The net interest yield decreased 9 basis points from
1996 to 3.30 percent.
Results of Operations
Net Interest Income
An analysis of the Corporation's taxable-equivalent net interest income
and average balance sheet levels for the last three years and most recent five
quarters is presented in Tables Three and Twenty-One, respectively. The changes
in net interest income from year to year are analyzed in Table Four.
Taxable-equivalent net interest income decreased approximately 1 percent
to $18.5 billion in 1998 compared to $18.6 billion in 1997 due primarily to a
reduction in the net difference between loan and deposit rates and the impact
of securitizations, divestitures and asset sales. The decrease was partially
offset by loan growth and increased core funding. As the Corporation continues
to securitize loans, its role becomes that of a servicer and the servicing
income, as well as the gains on securitizations are reflected in noninterest
income.
Average earning assets increased nearly $35 billion from 1997 to $499.7
billion in 1998, driven primarily by an increase in investment securities.
These security additions were mainly funded with short-term borrowings,
accounting for the majority of the increases in interest income and interest
expense, respectively. Loan yields declined 33 basis points during 1998,
reflecting lower market interest rates, the competitive market environment and
a change in loan mix resulting from strong growth in both consumer and
commercial products, offset by securitizations and divestitures, primarily in
the consumer product lines.
The net interest yield decreased 31 basis points to 3.69 percent in 1998
compared to 4.00 percent in 1997, primarily reflecting higher levels of
investment securities, which have a lower yield than loans, and a reduction in
the net difference between loan and deposit rates.
Loan growth is dependent on economic conditions as well as various
discretionary factors, such as decisions to securitize certain loan portfolios
and the management of borrower, industry, product and geographic
concentrations.
16
Table Three
12-Month Taxable-Equivalent Data
(Dollars in Millions)
1998 1997
------------------------------- -------------------------------
Average Average
Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amounts Expense Rates
----------- --------- --------- ----------- --------- ---------
Earning assets
Loans and leases (1)
Commercial - domestic ........................................ $130,177 $ 9,988 7.67% $117,465 $ 9,386 7.99%
Commercial - foreign ......................................... 31,015 2,246 7.24 28,295 1,995 7.05
Commercial real estate - domestic ............................ 28,418 2,503 8.81 29,468 2,748 9.33
Commercial real estate - foreign ............................. 330 33 10.05 156 30 19.24
-------- ------- ----- -------- ------- -----
Total commercial ............................................ 189,940 14,770 7.78 175,384 14,159 8.07
-------- ------- ----- -------- ------- -----
Residential mortgage ......................................... 70,842 4,880 6.89 80,593 5,683 7.05
Home equity lines ............................................ 16,129 1,741 10.79 14,760 1,813 12.29
Direct/Indirect consumer ..................................... 40,204 3,506 8.72 39,270 3,464 8.82
Consumer finance ............................................. 14,368 1,529 10.64 13,845 1,625 11.73
Bankcard ..................................................... 12,960 1,638 12.64 15,920 2,127 13.36
Foreign consumer ............................................. 3,397 357 10.51 3,379 301 8.90
-------- ------- ----- -------- ------- -----
Total consumer .............................................. 157,900 13,651 8.65 167,767 15,013 8.95
-------- ------- ----- -------- ------- -----
Total loans and leases ...................................... 347,840 28,421 8.17 343,151 29,172 8.50
-------- ------- ----- -------- ------- -----
Securities
Held for investment .......................................... 4,113 282 6.88 5,402 389 7.19
Available for sale (2) ....................................... 62,571 4,286 6.85 42,867 2,959 6.90
-------- ------- ----- -------- ------- -----
Total securities ............................................ 66,684 4,568 6.85 48,269 3,348 6.94
-------- ------- ----- -------- ------- -----
Federal funds sold and securities purchased under
agreements to resell ......................................... 27,288 1,828 6.70 23,437 1,516 6.47
Time deposits placed and other short-term investments ......... 7,649 514 6.72 8,379 541 6.46
Trading account securities .................................... 39,774 2,634 6.62 38,284 2,588 6.76
Other earning assets .......................................... 10,504 786 7.49 3,442 325 9.46
-------- ------- ----- -------- ------- -----
Total earning assets (3) .................................... 499,739 38,751 7.75 464,962 37,490 8.06
-------- ------- ----- -------- ------- -----
Cash and cash equivalents ...................................... 24,907 24,187
Other assets, less allowance for credit losses ................. 59,841 54,647
-------- --------
Total assets ................................................ $584,487 $543,796
======== ========
Interest-bearing liabilities
Domestic interest-bearing deposits
Savings ...................................................... $ 22,692 421 1.86 $ 24,559 490 2.00
NOW and money market deposit accounts ........................ 96,541 2,536 2.63 95,204 2,529 2.66
Consumer CDs and IRAs ........................................ 74,655 3,915 5.24 77,479 4,101 5.29
Negotiated CDs, public funds and other time deposits ......... 7,604 414 5.44 6,412 360 5.62
-------- ------- ----- -------- ------- -----
Total domestic interest-bearing deposits .................... 201,492 7,286 3.62 203,654 7,480 3.67
-------- ------- ----- -------- ------- -----
Foreign interest-bearing deposits (4)
Banks located in foreign countries ........................... 24,587 1,405 5.72 22,100 1,274 5.77
Governments and official institutions ........................ 10,517 590 5.61 10,801 591 5.47
Time, savings and other ...................................... 24,261 1,530 6.30 22,093 1,339 6.06
-------- ------- ----- -------- ------- -----
Total foreign interest-bearing deposits ..................... 59,365 3,525 5.94 54,994 3,204 5.83
-------- ------- ----- -------- ------- -----
Total interest-bearing deposits ............................. 260,857 10,811 4.14 258,648 10,684 4.13
-------- ------- ----- -------- ------- -----
Federal funds purchased and securities sold under
agreements to repurchase and other short-term
borrowings ................................................... 90,630 5,239 5.78 70,399 4,105 5.83
Trading account liabilities ................................... 17,472 895 5.12 15,285 975 6.38
Long-term debt (5) ............................................ 49,969 3,345 6.69 46,337 3,137 6.77
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities (6) ...................... 418,928 20,290 4.84 390,669 18,901 4.84
-------- ------- ----- -------- ------- -----
Noninterest-bearing sources
Noninterest-bearing deposits .................................. 84,628 78,235
Other liabilities ............................................. 36,102 31,282
Shareholders' equity .......................................... 44,829 43,610
-------- --------
Total liabilities and shareholders' equity .................. $584,487 $543,796
======== ========
Net interest spread ............................................ 2.91 3.22
Impact of noninterest-bearing sources .......................... .78 .78
----- -----
Net interest income/yield on earning assets .................... $18,461 3.69% $18,589 4.00%
======= ===== ======= =====
1996
--------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
----------- --------- ----------
Earning assets
Loans and leases (1)
Commercial - domestic ........................................ $102,176 $ 7,963 7.79%
Commercial - foreign ......................................... 24,357 1,768 7.25
Commercial real estate - domestic ............................ 26,563 2,434 9.16
Commercial real estate - foreign ............................. 365 20 5.50
-------- ------- -----
Total commercial ............................................ 153,461 12,185 7.94
-------- ------- -----
Residential mortgage ......................................... 81,375 6,234 7.66
Home equity lines ............................................ 11,694 1,012 8.66
Direct/Indirect consumer ..................................... 34,442 3,089 8.97
Consumer finance ............................................. 11,955 1,459 12.20
Bankcard ..................................................... 16,655 2,251 13.52
Foreign consumer ............................................. 2,749 284 10.36
-------- ------- -----
Total consumer .............................................. 158,870 14,329 9.02
-------- ------- -----
Total loans and leases ...................................... 312,331 26,514 8.49
-------- ------- -----
Securities
Held for investment .......................................... 7,788 514 6.61
Available for sale (2) ....................................... 33,791 2,333 6.90
-------- ------- -----
Total securities ............................................ 41,579 2,847 6.85
-------- ------- -----
Federal funds sold and securities purchased under
agreements to resell ......................................... 24,166 1,371 5.67
Time deposits placed and other short-term investments ......... 7,208 536 7.43
Trading account securities .................................... 31,753 2,232 7.03
Other earning assets .......................................... 2,068 264 12.77
-------- ------- -----
Total earning assets (3) .................................... 419,105 33,764 8.06
-------- ------- -----
Cash and cash equivalents ...................................... 22,800
Other assets, less allowance for credit losses ................. 42,285
--------
Total assets ................................................ $484,190
========
Interest-bearing liabilities
Domestic interest-bearing deposits
Savings ...................................................... $ 25,063 519 2.07
NOW and money market deposit accounts ........................ 82,854 2,057 2.48
Consumer CDs and IRAs ........................................ 68,998 3,537 5.13
Negotiated CDs, public funds and other time deposits ......... 6,614 387 5.85
-------- ------- -----
Total domestic interest-bearing deposits .................... 183,529 6,500 3.54
-------- ------- -----
Foreign interest-bearing deposits (4)
Banks located in foreign countries ........................... 24,043 1,361 5.66
Governments and official institutions ........................ 9,582 501 5.23
Time, savings and other ...................................... 19,158 1,238 6.46
-------- ------- -----
Total foreign interest-bearing deposits ..................... 52,783 3,100 5.87
-------- ------- -----
Total interest-bearing deposits ............................. 236,312 9,600 4.06
-------- ------- -----
Federal funds purchased and securities sold under
agreements to repurchase and other short-term
borrowings ................................................... 65,834 3,699 5.62
Trading account liabilities ................................... 13,643 880 6.45
Long-term debt (5) ............................................ 37,444 2,503 6.69
-------- ------- -----
Total interest-bearing liabilities (6) ...................... 353,233 16,682 4.72
-------- ------- -----
Noninterest-bearing sources
Noninterest-bearing deposits .................................. 66,816
Other liabilities ............................................. 27,283
Shareholders' equity .......................................... 36,858
--------
Total liabilities and shareholders' equity .................. $484,190
========
Net interest spread ............................................ 3.34
Impact of noninterest-bearing sources .......................... .74
-----
Net interest income/yield on earning assets .................... $17,082 4.08%
======= =====
(1) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(2) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) Interest income includes taxable-equivalent adjustments of $163, $157 and
$128 in 1998, 1997 and 1996, respectively. Interest income also includes the
impact of risk management interest rate contracts, which increased interest
income on the underlying linked assets $174, $159, and $31 in 1998, 1997 and
1996, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which increased (decreased) interest expense on the underlying
linked liabilities of $45, $(15) and $50 in 1998, 1997, and 1996,
respectively.
17
Table Four
Changes in Taxable-Equivalent Net Interest Income
(Dollars in Millions)
This table presents an analysis of the year-to-year changes in net
interest income on a fully taxable-equivalent basis for the years shown. The
changes for each category of income and expense are divided between the portion
of change attributable to the variance in average levels or yields/rates for
that category. The amount of change that cannot be separated is allocated to
each variance proportionately.
From 1997 to 1998
------------------------------------------------
Increase (Decrease)
in Income/Expense
Due to Change in
---------------------
Percentage
Average Yields/ Increase
Levels Rates Total (Decrease)
--------- ----------- ------------- ------------
Earning assets:
Loans and leases
Commercial - domestic ....................... $ 986 $ (384) $ 602 6.41%
Commercial - foreign ........................ 196 55 251 12.58
Commercial real estate - domestic .......... (96) (149) (245) ( 8.92)
Commercial real estate - foreign ........... 22 (19) 3 10.00
--------
Total commercial ........................... 1,145 (534) 611 4.32
--------
Residential mortgage ........................ (674) (129) (803) (14.13)
Home equity lines ........................... 159 (231) (72) ( 3.97)
Direct/Indirect consumer .................... 82 (40) 42 1.21
Consumer finance ............................ 60 (156) (96) ( 5.91)
Bankcard .................................... (379) (110) (489) (22.99)
Foreign consumer ............................ 2 54 56 18.60
--------
Total consumer ............................. (864) (498) (1,362) ( 9.07)
--------
Total loans and leases .................... 395 (1,146) (751) ( 2.57)
--------
Securities:
Held for investment ......................... (89) (18) (107) (27.51)
Available for sale .......................... 1,350 (23) 1,327 44.85
--------
Total securities ........................... 1,262 (42) 1,220 36.44
--------
Federal funds sold and securities
purchased under agreements to resell ........ 256 56 312 20.58
Time deposits placed and other short-term
investments ................................. (48) 21 (27) ( 4.99)
Trading account securities ................... 99 (53) 46 1.78
Other earning assets ......................... 541 (80) 461 141.85
--------
Total interest income ...................... 2,733 (1,472) 1,261 3.36
--------
Interest-bearing liabilities:
Domestic interest-bearing deposits:
Savings ..................................... (36) (33) (69) (14.08)
NOW and money market deposit
accounts ................................... 35 (28) 7 .28
Consumer CDs and IRAs ....................... (148) (38) (186) ( 4.54)
Negotiated CDs, public funds and other
time deposits .............................. 65 (11) 54 15.00
--------
Total domestic interest-bearing
deposits .................................. (79) (115) (194) ( 2.59)
Foreign interest-bearing deposits:
Banks located in foreign countries .......... 142 (11) 131 10.28
Governments and official institutions ....... (16) 15 (1) ( .17)
Time, savings and other ..................... 135 56 191 14.26
----------
Total foreign interest-bearing deposits..... 259 62 321 10.02
----------
Total interest-bearing deposits ............ 91 36 127 1.19
----------
Federal funds purchased, securities sold
under agreements to repurchase and
other short-term borrowings ................. 1,170 (36) 1,134 27.62
Trading account liabilities .................. 128 (208) (80) ( 8.21)
Long-term debt ............................... 243 (35) 208 6.63
----------
Total interest expense ..................... 1,369 20 1,389 7.35
----------
Net interest income ........................... 1,560 (1,688) $ (128) ( .69)
==========
From 1996 to 1997
-----------------------------------------
Increase (Decrease)
in Income/Expense
Due to Change in
-------------------
Percentage
Average Yields/ Increase
Levels Rates Total (Decrease)
--------- --------- --------- -----------
Earning assets:
Loans and leases
Commercial - domestic ....................... $1,217 $ 206 $1,423 17.87%
Commercial - foreign ........................ 279 (52) 227 12.84
Commercial real estate - domestic .......... 270 44 314 12.90
Commercial real estate - foreign ........... (17) 27 10 50.00
------
Total commercial ........................... 1,767 207 1,974 16.20
------
Residential mortgage ........................ (59) (492) (551) ( 8.84)
Home equity lines ........................... 308 493 801 79.15
Direct/Indirect consumer .................... 427 (52) 375 12.14
Consumer finance ............................ 224 (58) 166 11.38
Bankcard .................................... (98) (26) (124) ( 5.51)
Foreign consumer ............................ 59 (42) 17 5.99
------
Total consumer ............................. 797 (113) 684 4.77
------
Total loans and leases .................... 2,620 38 2,658 10.02
------
Securities:
Held for investment ......................... (169) 44 (125) (24.32)
Available for sale .......................... 626 -- 626 26.83
------
Total securities ........................... 464 37 501 17.60
------
Federal funds sold and securities
purchased under agreements to resell ........ (42) 187 145 10.58
Time deposits placed and other short-term
investments ................................. 81 (76) 5 .93
Trading account securities ................... 444 (88) 356 15.95
Other earning assets ......................... 143 (82) 61 23.11
------
Total interest income ...................... 3,697 29 3,726 11.04
------
Interest-bearing liabilities:
Domestic interest-bearing deposits:
Savings ..................................... (10) (19) (29) ( 5.59)
NOW and money market deposit
accounts ................................... 321 151 472 22.95
Consumer CDs and IRAs ....................... 446 118 564 15.95
Negotiated CDs, public funds and other
time deposits .............................. (12) (15) (27) ( 6.98)
------
Total domestic interest-bearing
deposits .................................. 733 247 980 15.08
Foreign interest-bearing deposits:
Banks located in foreign countries .......... (112) 25 (87) ( 6.39)
Governments and official institutions ....... 66 24 90 17.96
Time, savings and other ..................... 181 (80) 101 8.16
------
Total foreign interest-bearing deposits..... 129 (25) 104 3.35
------
Total interest-bearing deposits ............ 920 164 1,084 11.29
------
Federal funds purchased, securities sold
under agreements to repurchase and
other short-term borrowings ................. 263 143 406 10.98
Trading account liabilities .................. 105 (10) 95 10.80
Long-term debt ............................... 602 32 634 25.33
------
Total interest expense ..................... 1,803 416 2,219 13.30
------
Net interest income ........................... 2,124 (617) $1,507 8.82
======
18
Provision for Credit Losses
The provision for credit losses was $2.9 billion in 1998 compared to $1.9
billion in 1997. The increase in the provision for credit losses was primarily
due to the establishment of a $500 million provision related to international
economic conditions and higher net commercial charge-offs. The provision for
credit losses for 1998 and 1997 covered net charge-offs of $2.5 billion and
$1.9 billion, respectively. Higher commercial net charge-offs in 1998 included
a credit agreement with DE Shaw. Higher commercial net charge-offs were
partially offset by lower net charge-offs in the consumer loan portfolio. For
additional information on the allowance for credit losses, certain credit
quality ratios and credit quality information on specific loan categories see
the "Credit Risk Management and Credit Portfolio Review" section beginning on
page 34.
Gains on Sales of Securities
Gains on sales of debt securities were $1.0 billion in 1998 compared to
$271 million in 1997. Securities gains were higher in 1998 as a result of
increased activity connected with the Corporation's overall risk management
activity and favorable market conditions for certain debt instruments caused by
turbulence in equity markets.
Noninterest Income
As presented in Table Five, noninterest income increased approximately 4
percent to $12.2 billion in 1998, primarily reflecting higher levels of income
from investment banking, brokerage, and credit card activities, offset by
declines in mortgage banking and trading income.
Table Five
Noninterest Income
(Dollars in Millions)
Change
-------------------
1998 1997 Amount Percent
--------- --------- -------- ----------
Service charges on deposit accounts ..................... $ 3,396 $ 3,373 $ 23 .7%
Mortgage servicing and other mortgage-related income .... 115 401 (286) (71.3)
Investment banking income ............................... 2,009 1,476 533 36.1
Trading account profits and fees ........................ 171 976 (805) (82.5)
Brokerage income ........................................ 728 355 373 105.1
Other nondeposit-related service fees ................... 652 680 (28) ( 4.1)
Asset management and fiduciary service fees ............. 973 990 (17) ( 1.7)
Credit card income ...................................... 1,448 1,231 217 17.6
Other income ............................................ 2,697 2,274 423 18.6
------- ------- ------ -----
$12,189 $11,756 $ 433 3.7%
======= ======= ====== =====
o Mortgage servicing and other mortgage-related income decreased to $115
million in 1998, primarily due to a $250 million write-down of mortgage
servicing rights caused by an increase in anticipated prepayment rates. The
average portfolio of loans serviced increased 9 percent from $204 billion in
1997 to $222 billion in 1998. Mortgage loan originations through the
Corporation's mortgage units increased to $65.1 billion in 1998 compared to
$35.7 billion in 1997, primarily due to a decline in interest rates.
Origination volume in 1998 was composed of approximately $30.1 billion of
retail loan volume and $35.0 billion of correspondent and wholesale loan
volume.
In conducting its mortgage production activities, the Corporation is exposed
to interest rate risk for the period between loan commitment date and
subsequent delivery date. To manage this risk, the Corporation enters into
various financial instruments including forward delivery and option contracts.
The notional amount of such contracts was approximately $9.8 billion on
December 31, 1998 with associated net unrealized losses of $8.0 million. These
contracts generally have an average expected maturity of less than 90 days. To
manage risk associated with changes in prepayment rates and the impact on
mortgage servicing rights, the Corporation uses various financial instruments
including options and certain interest rate swaps. The notional amount
19
of such contracts on December 31, 1998 was $22.4 billion with an associated
net unrealized gain of $190 million. As of December 31, 1998, the amount of
net realized deferred gains associated with terminated derivative products
related to the mortgage servicing portfolio was $266 million. For additional
information on mortgage banking activities, see Note One of the consolidated
financial statements on page 56.
o Investment banking income increased 36 percent to $2.0 billion in 1998,
mainly reflecting changes in the levels of syndication fees, securities
underwriting activity and advisory fees, primarily due to the acquisitions
of NationsBanc Montgomery Securities and Robertson Stephens in the fourth
quarter of 1997. Securities underwriting fees increased $289 million to $558
million in 1998 as a result of the NationsBanc Montgomery Securities and
Robertson Stephens acquisitions. Syndication fees increased 28 percent due
to increased syndication activities in 1998. Advisory services fees
increased $204 million to $384 million reflecting the impact of the
NationsBanc Montgomery Securities and Robertson Stephens acquisitions. On
August 31,1998, as a result of the BankAmerica merger, the Corporation sold
the investment banking operations of Robertson Stephens. Investment banking
income by major business activity follows:
1998 1997
(Dollars in Millions) --------- ---------
Investment Banking Income
Principal investing ............. $ 570 $ 581
Securities underwriting ......... 558 269
Syndications .................... 426 333
Advisory services ............... 384 180
Other ........................... 71 113
------ ------
Total ........................... $2,009 $1,476
====== ======
o Trading account profits and fees totaled $171 million in 1998 compared to
$976 million in 1997. The decrease is primarily attributable to a write-down
of Russian securities and losses in corporate bonds and commercial mortgage
products as spreads widened in the third quarter. The fair values of the
components of the Corporation's trading account assets and liabilities on
December 31, 1998 and 1997 as well as their average fair values for 1998 and
1997 are disclosed in Note Four of the consolidated financial statements on
page 66. Trading account profits and fees by major business activity
follows:
1998 1997
(Dollars in Millions) --------- -------
Trading Account Profits and Fees
Foreign exchange contracts ............ $ 531 $478
Interest rate contracts ............... 209 166
Securities trading .................... (610) 287
Other ................................. 41 45
------ ----
Total ................................. $ 171 $976
====== ====
o Brokerage income increased 105 percent to $728 million in 1998, due mainly to
the acquisitions of NationsBanc Montgomery Securities and Robertson Stephens
as well as continued internal growth.
o Asset management and fiduciary service fees decreased $17 million in 1998,
reflecting the impact of the third quarter 1997 sales of certain corporate
and institutional trust businesses, which included businesses that provided
administrative and record-keeping services for employee benefit plans. An
analysis of asset management and fiduciary service fees by major business
activity follows:
20
1998 1997
(Dollars in Millions) ----------- -----------
Asset Management and Fiduciary Service Fees
Private bank .............................. $ 728 $ 690
Funds and institutional investment management 182 154
Retirement services, corporate trust and other 63 146
-------- --------
Total ................................... $ 973 $ 990
======== ========
Market Value of Assets
Assets under management ................... $233,500 $211,470
Assets under administration ............... 300,167 372,040
The Private Bank provides investment management, personal trust, tax and estate
planning, customized lending and banking for high-net-worth clients and private
businesses. Funds and Institutional Investment Management includes brokerage
(full-service and discount services with access to a wide range of
non-FDIC-insured investments, including stocks, bonds, fixed-income securities
and mutual funds), mutual funds (investment advisor to over 50 funds including
money market, fixed-income and equity funds), and institutional investment
management (investment advisory and management services for institutional
clients are offered by TradeStreet Investment Associates, Inc., Chicago Equity
Partners, Sovran Capital Management Corporation and Boatmen's Capital
Management, Inc.). Fees received by Retirement Services and Corporate Trust
decreased in 1998 from 1997 as the result of the sale of certain businesses
which provided administrative, fiduciary and record-keeping services for
businesses and institutional customers.
o Credit card income increased 18 percent to $1.4 billion in 1998 due primarily
to higher transaction volume and exchange fees. Credit card income includes
$178 million and $98 million from credit card securitizations in 1998 and
1997, respectively.
o Other income totaled $2.7 billion in 1998, an increase of $423 million over
1997. The increase over 1997 was due primarily to the $479 million gain from
the sale of the manufactured housing lending business and a $110 million
gain on the sale of a partial ownership interest in a mortgage company,
partially offset by write-downs of $158 million of losses associated with
the investment in DE Shaw in the fourth quarter of 1998 and other equity
investments of $162 million. Other income also includes certain prepayment
fees and other fees, net rental income on automobile leases classified as
operating leases, servicing and related fees from the consumer finance
business, insurance commissions and earnings and bankers' acceptances and
letters of credit fees.
Other Noninterest Expense
As presented in Table Six, the Corporation's other noninterest expense
increased 6 percent in 1998 over 1997. Excluding acquisitions and related
transition expenses, other noninterest expense increased 3 percent over 1997.
Table Six
Other Noninterest Expense
(Dollars in Millions)
1998 1997 Change
------------------------ ------------------------ -----------------------
Amount Percent (1) Amount Percent (1) Amount Percent
---------- ------------- ---------- ------------- ------------ ----------
Personnel ................................... $ 9,412 30.7% $ 8,703 28.7% $ 709 8.1%
Occupancy, net .............................. 1,643 5.4 1,576 5.2 67 4.3
Equipment ................................... 1,404 4.6 1,408 4.6 (4) ( .3)
Marketing ................................... 581 1.9 655 2.2 (74) (11.3)
Professional fees ........................... 843 2.8 763 2.5 80 10.5
Amortization of intangibles ................. 902 2.9 855 2.8 47 5.5
Data processing ............................. 765 2.5 626 2.1 139 22.2
Telecommunications .......................... 563 1.8 491 1.6 72 14.7
Other general operating ..................... 2,044 6.6 2,059 6.8 (15) ( .7)
General administrative and miscellaneous..... 584 1.9 489 1.6 95 19.4
------- ---- ------- ---- ------ -----
$18,741 61.1% $17,625 58.1% $1,116 6.3%
======= ==== ======= ==== ====== =====
(1) Percent of taxable-equivalent net interest and noninterest income.
21
A discussion of the significant components and changes in other
noninterest expense in 1998 compared to 1997 follows:
o Personnel expense increased 8 percent to $9.4 billion in 1998, primarily due
to the acquisitions of NationsBanc Montgomery Securities, Robertson Stephens
and NationsBanc Auto Leasing, Inc. Excluding these acquisitions, 1998
personnel expense increased by 3 percent over 1997. On December 31, 1998,
the Corporation had approximately 171,000 full-time equivalent employees
compared to approximately 181,000 full-time equivalent employees on December
31, 1997.
o Marketing expense amounted to $581 million in 1998, a decrease of
approximately 11 percent from 1997, reflecting a decline in advertising and
promotional expenses.
o Professional fees increased $80 million over 1997 to $843 million, primarily
due to increases in outside legal fees.
o Data processing expense increased to $765 million in 1998 compared to $626
million in 1997 due to increased processing costs associated with the
NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto
Leasing, Inc. acquisitions.
o Telecommunications expense increased $72 million over 1997 to $563 million,
mainly due to acquisition and transition efforts, expenses related to the
implementation of Model Bank, a banking platform, and increased call volume.
o General administrative and miscellaneous expense increased to $584 million
compared to $489 million in 1997, primarily due to the addition of
NationsBanc Montgomery Securities, Robertson Stephens and NationsBanc Auto
Leasing, Inc.
Year 2000 Project
The following is a Year 2000 Readiness Disclosure.
General
Because computers frequently use only two digits to recognize years, on
January 1, 2000, many computer systems, as well as equipment that uses embedded
computer chips, may be unable to distinguish between 1900 and 2000. If not
-- --
remediated, this problem could create system errors and failures resulting in
the disruption of normal business operations. Since the Year 2000 is a leap
year, there could also be business disruptions as a result of the inability of
many computer systems to recognize February 29, 2000.
In October 1995 and February 1996, respectively, NationsBank and
BankAmerica established project teams to address these issues. Each of these
teams remains in place and continues to work on solving problems related to the
Year 2000. Although each of these Year 2000 teams proceeds according to its
respective work plan, they are capitalizing on the best practices of both
teams. Going forward, the Year 2000 efforts of both teams are being integrated.
Personnel from the Corporation's business segments and project teams have
identified and analyzed, and are correcting and testing, computer systems
throughout the Corporation ("Systems"). Personnel have also taken inventory of
equipment that uses embedded computer chips (i.e., "non-information technology
systems" or "Infrastructure") and scheduled remediation or replacement of this
Infrastructure, as necessary. Examples of Infrastructure include ATMs, building
security systems, fire alarm systems, identification and access cards, date
stamps and elevators. The NationsBank team tracks Systems and Infrastructure
separately, whereas the BankAmerica team tracks Systems and Infrastructure
collectively ("Projects"). For purposes of this section, the information
provided for Systems and Projects is generally provided on a combined basis.
State of Readiness
The Corporation's Year 2000 efforts are generally divided into phases for
analysis, remediation, testing and compliance. In the analysis phase, the
Corporation identifies Systems/Projects and Infrastructure that have Year 2000
issues and determines the steps necessary to remediate these issues. In the
remediation phase, the Corporation replaces, modifies or retires
Systems/Projects or Infrastructure, as necessary. During the testing phase, the
Corporation performs testing to determine whether the remediated
Systems/Projects and Infrastructure
22
accurately process and identify dates. In the compliance phase, the Corporation
internally certifies the Systems/Projects and Infrastructure that are Year
2000 ready and implements processes to enable these Systems/Projects and
Infrastructure to continue to identify and process dates accurately through the
Year 2000 and thereafter.
As of December 31, 1998, the NationsBank team has identified over 1,500
Systems, and the BankAmerica team has identified approximately 2,900 Projects,
for a total of approximately 4,400 Systems/Projects. In addition, the
NationsBank team has identified over 17,000 Infrastructure items that may have
Year 2000 implications. For Systems/Projects, as of December 31, 1998, the
analysis and remediation phases were substantially complete, the testing phase
was approximately 95% complete and the compliance phase was approximately 90%
complete. For Infrastructure, as of December 31, 1998, the analysis phase was
approximately 98% complete, the remediation phase was approximately 91%
complete, the testing phase was approximately 89% complete and the compliance
phase was approximately 84% complete. The Corporation expects to substantially
complete all phases by June 30, 1999, in accordance with guidelines established
by the Federal Financial Institutions Examination Council (FFIEC).
The Corporation tracks Systems/Projects and Infrastructure for Year
2000-required changes based on a risk evaluation. Of the identified
Systems/Projects and Infrastructure, approximately 1,900 Systems/Projects and
1,100 Infrastructure items have been designated "mission critical" (i.e., if
not made Year 2000 ready, these Systems/Projects or Infrastructure items
would substantially impact the normal conduct of business). For mission
critical Systems/Projects, as of December 31, 1998, the analysis and
remediation phases were substantially complete, the testing phase was
approximately 96% complete and the compliance phase was approximately 90%
complete. The Corporation will also perform "time machine testing" (i.e.,
emulate Year 2000 conditions in a dedicated environment) on selected mission
critical Systems. For mission critical Infrastructure items, as of December 31,
1998, the analysis phase was approximately 98% complete, the remediation phase
was approximately 77% complete, the testing phase was approximately 86%
complete and the compliance phase was approximately 70% complete.
Ultimately, the potential impact of Year 2000 issues will depend not only
on the corrective measures the Corporation undertakes, but also on the way in
which Year 2000 issues are addressed by governmental agencies, businesses and
other entities which provide data to, or receive data from, the Corporation, or
whose financial condition or operational capability is important to the
Corporation as borrowers, vendors, customers, investment opportunities (either
for the Corporation's accounts or for the accounts of others) or lenders. In
addition, the Corporation's business may be affected by the corrective measures
taken by the landlords and managers of buildings leased by the Corporation.
Accordingly, the Corporation is communicating with certain of these parties to
evaluate any potential impact on the Corporation.
In particular, the Corporation is contacting its service providers and
software vendors (collectively, "Vendors") and requesting information on their
Year 2000 project plans. The Corporation has designated approximately 36% of
these Vendors as "mission critical." As of December 31, 1998, the Corporation
has received assurances that approximately 78% of its Vendors, and
approximately 85% of its mission critical Vendors, are Year 2000 ready. At the
end of 1998, any Vendor which had not provided appropriate documentation, had
not responded timely to the Corporation's inquiries or did not expect to be
Year 2000 ready until 1999 was placed in an "at risk" category. As of December
31, 1998, the Corporation has placed approximately 16% of its Vendors, and
approximately 7% of its mission critical Vendors, in an "at risk" category. In
accordance with its contingency plans, the Corporation will continue to focus
on these "at risk" mission critical Vendors in order to mitigate any potential
risk.
The Corporation is also tracking the Year 2000 compliance efforts of
certain domestic and foreign agencies involved with payment systems, such as
clearing houses, security clearings and central banks. The Corporation has
identified 29 of 195 agencies, or 15%, which have neither responded to the
Corporation's inquiries or which were not Year 2000 ready as of December 31,
1998. Although work involved with the implementation of the Euro resulted in
some delay with respect to the agencies' efforts in this area, the Corporation
will continue to monitor those agencies of particular concern.
In addition, the Corporation has completed Year 2000 risk assessments for
the majority of its commercial credit customers. For any customers deemed
higher risk, on a quarterly basis, the Corporation's Credit Review Committee
reviews the results of customer assessments prepared by the customers'
relationship managers. By July 1, 1999, the Corporation will reassess any
customers deemed "medium risk." Weakness in a borrower's Year
23
2000 strategy is part of the overall risk assessment process. Risk ratings and
exposure strategy are adjusted as required after consideration of all risk
issues. Any impact on the allowance for credit losses is determined through the
normal risk rating process.
The Corporation is also assessing potential Year 2000 risks associated
with its investment advisory and fiduciary activities. Each investment
subsidiary has a defined investment process and is integrating the
consideration of Year 2000 issues into that process. When making investment
decisions or recommendations, the Corporation's investment research areas
consider the Year 2000 issue as a factor in their analysis, and may take
certain steps to investigate Year 2000 readiness, such as reviewing ratings,
research reports and other publicly available information. In the fiduciary
area, the Corporation is assessing Year 2000 risks for business, real estate,
oil and gas, and mineral interests that are held in Trust.
Following the merger with BankAmerica, the Corporation identified its
significant depositors and assessed the Year 2000 readiness of these customers.
The Corporation will continue to monitor these depositors for purposes of
determining any potential liquidity risks to the Corporation.
Costs
The Corporation currently estimates the total cost of the Year 2000
project to be approximately $550 million. Of this amount, the Corporation has
incurred cumulative Year 2000 costs of approximately $410 million through
December 31, 1998. A significant portion of the foregoing cost is not expected
to be incremental to the Corporation but instead will constitute a reallocation
of existing internal systems technology resources and, accordingly, will be
funded from normal operations.
Contingency Plans
The Corporation has existing business continuity plans that address its
response to disruptions to business due to natural disasters, civil unrest,
utility outages or other occurrences. The Corporation is developing business
continuity plans specific to Year 2000 issues that are based on these existing
plans.
The Corporation has made substantial progress on an inventory and
assessment of the existing business contingency plans. Supplements to the
existing plans to address Year 2000 issues are being finalized and will include
detailed plans to respond to these events. The Corporation substantially
completed these supplemental business continuity plans in January 1999. During
the remainder of 1999, the business continuity plans are being tested and
validated with particular attention to event management and communication
processes.
Risks
Although the Corporation's remediation efforts are directed at reducing
its Year 2000 exposure, there can be no assurance that these efforts will fully
mitigate the effect of Year 2000 issues and it is likely that one or more
events may disrupt the Corporation's normal business operations. In the event
the Corporation fails to identify or correct a material Year 2000 problem,
there could be disruptions in normal business operations, which could have a
material adverse effect on the Corporation's results of operations, liquidity
or financial condition. In addition, there can be no assurance that significant
foreign and domestic third parties will adequately address their Year 2000
issues. Further, there may be some such parties, such as governmental agencies,
utilities, telecommunication companies, financial services vendors and other
providers, where alternative arrangements or resources are not available. Also,
risks associated with some foreign third parties may be greater since there is
general concern that some entities operating outside the United States are not
addressing Year 2000 issues on a timely basis.
In addition to the foregoing, the Corporation is subject to credit risk to
the extent borrowers fail to adequately address Year 2000 issues, to fiduciary
risk to the extent fiduciary assets fail to adequately address Year 2000
issues, and to liquidity risk to the extent of deposit withdrawals and to the
extent its lenders are unable to provide the Corporation with funds due to Year
2000 issues. Although it is not possible to quantify the potential impact of
these risks at this time, in future years, there may be increases in problem
loans, credit losses, losses in the fiduciary business and liquidity problems,
as well as the risk of litigation and potential losses from litigation related
to the foregoing.
24
Forward-looking statements contained in the foregoing "Year 2000 Project"
section should be read in conjunction with the cautionary statements included
in the introductory paragraphs under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 9 and 10.
Economic and Monetary Unit (EMU) in Europe
On January 1, 1999, 11 member countries of the European Union launched a
common legal currency called the Euro. EMU monetary policy, including the money
supply and official interest rates for the Euro, is now under the direction of
the European Central Bank. During the transition period, January 1, 1999
through January 1, 2002, the old national currencies will remain legal tender
as denominations of the Euro. Beginning January 1, 2002, Euro denominated bills
and coins will be issued for use in cash transactions, and by July 1, 2002, all
legacy currencies will cease to be legal tender. EMU will impact the
Corporation's payment and clearing systems.
Management expects the elimination of national currencies in favor of the
single Euro currency to reduce cross border barriers to business and reduce the
previous competitive advantage of national firms. The Corporation believes that
it is favorably positioned to benefit from these changes. In addition,
management believes that the Euro conversion presents significant business
opportunities for major pan-European providers of cash management services,
such as the Corporation.
The Corporation prepared actively for the Euro conversion, utilizing a
dedicated EMU project team to ensure that the Corporation's technology and
operations were appropriately modified by January 1, 1999. The project team
also communicated extensively with the Corporation's clients and counterparties
regarding the implications of EMU and the effect it would have on their
business relationships and contracts with the Corporation. The Corporation
completed the initial redenomination event on January 3, 1999.
Most of the costs associated with the Euro conversion were incurred by the
end of fiscal 1998, and these costs have not been material. Such costs have
been and will continue to be expensed by the Corporation during the period in
which they are incurred, and any ongoing costs are not currently anticipated to
be material. The Corporation does not expect the formation of the EMU to have a
material impact on its results of operations or financial condition.
Income Taxes
The Corporation's income tax expense for 1998 and 1997 was $2.9 billion
and $4.0 billion, respectively. Excluding merger-related charges, the effective
tax rates for 1998 and 1997 were 34 percent and 38 percent, respectively. The
reduction in the effective tax rate is due primarily to the reorganization of
certain subsidiaries of the Corporation in 1998. Note Fourteen of the
consolidated financial statements on page 87 includes a reconciliation of
federal income tax expense computed using the federal statutory rate of 35
percent to actual income tax expense.
Balance Sheet Review and Liquidity Risk Management
The Corporation utilizes an integrated approach in managing its balance
sheet, which includes management of interest rate sensitivity, credit risk,
liquidity risk and its capital position. The average balances discussed below
can be derived from Table Three. The following discussion addresses changes in
average balances in 1998 compared to 1997.
Average customer-based funds increased $4.2 billion to $286.1 billion in
1998 compared to average levels for 1997. As a percentage of total sources,
average customer-based funds decreased to 49 percent in 1998 from 52 percent in
1997.
Average market-based funds increased $26.8 billion in 1998 to $167.5
billion and comprised a larger portion of total sources of funds at 29 percent
in 1998 compared to 26 percent in 1997. In addition, 1998 levels of long-term
debt increased by $3.6 billion over 1997, mainly the result of borrowings to
fund business development opportunities and to replace debt maturities.
Average loans and leases, the Corporation's primary use of funds,
increased $4.7 billion to $347.8 billion during 1998. As a percentage of total
uses of funds, average loans and leases decreased to 60 percent in 1998
25
from 63 percent in 1997. The increase in average loans and leases was due
primarily to core loan growth, partially offset by the impact of $19.3 billion
of securitizations in 1997, most of which occurred in the third quarter. The
ratio of average loans and leases to customer-based funds was 122 percent for
both 1998 and 1997.
Average other assets and cash and cash equivalents increased $5.9 billion
to $84.7 billion in 1998 due largely to an increase in derivative-dealer assets
associated with interest rate fluctuations and goodwill associated mainly with
the NationsBanc Montgomery Securities and NationsBanc Auto Leasing, Inc.
acquisitions.
The average securities portfolio in 1998 increased $18.4 billion over 1997
levels, amounting to 11 percent of total uses of funds in 1998 compared to 9
percent in 1997. See the following "Securities" section for additional
information on the securities portfolio.
Cash and cash equivalents were $28.3 billion on December 31, 1998, a
decrease of $189 million from December 31, 1997. During 1998, net cash provided
by operating activities was $10.9 billion, net cash used in investing
activities was $47.2 billion and net cash provided by financing activities was
$36.1 billion. For further information on cash flows, see the Consolidated
Statement of Cash Flows on page 54 in the consolidated financial statements.
Liquidity is a measure of the Corporation's ability to fulfill its cash
requirements and is managed by the Corporation through its asset and liability
management process. The Corporation monitors its assets and liabilities and
modifies these positions as liquidity requirements change. This process,
coupled with the Corporation's ability to raise capital and debt financing, is
designed to cover the liquidity needs of the Corporation. Management believes
that the Corporation's sources of liquidity are more than adequate to meet its
cash requirements.
The following discussion provides an overview of significant on- and
off-balance sheet components.
Securities
The securities portfolio serves a primary role in the overall context of
balance sheet management by the Corporation. The decision to purchase or sell
securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment, liquidity requirements and
on- and off-balance sheet positions.
The securities portfolio on December 31, 1998 consisted of securities held
for investment totaling $2.0 billion and securities available for sale totaling
$78.6 billion compared to $4.8 billion and $62.2 billion, respectively, on
December 31, 1997. The increase in available for sale securities reflects the
management of the Corporation's interest rate sensitivity by adding
fixed-income assets.
On December 31, 1998 and 1997, the market value of the Corporation's
securities held for investment reflected net unrealized losses of $144 million
and net unrealized gains of $83 million, respectively.
The valuation allowance for securities available for sale and marketable
equity securities included in shareholders' equity was $292 million on December
31, 1998, reflecting pre-tax appreciation of $354 million on debt securities
and $165 million on marketable equity securities. The valuation allowance
increased shareholders' equity by $545 million on December 31, 1997. The
decrease in the valuation allowance was primarily attributable to the
realization of securities gains during 1998 and lower market interest rates at
December 31, 1998.
The estimated average duration of securities held for investment and
securities available for sale portfolios were 5.59 and 4.14, respectively, on
December 31, 1998 compared to 4.90 and 4.91, respectively, on December 31,
1997.
Loans and Leases
Total loans and leases increased approximately 4 percent to $357.3 billion
on December 31, 1998 compared to $342.1 billion on December 31, 1997. As
presented in Table Three, average total loans and leases increased 1 percent to
$347.8 billion in 1998 compared to $343.2 billion in 1997 primarily due to core
loan growth, partially offset by the impact of $11.6 billion of securitizations
in 1998 and $19.3 billion of securitizations in 1997.
Average commercial loans increased to $189.9 billion in 1998 compared to
$175.4 billion in 1997, due largely to core loan growth, partially offset by
the impact of $4.2 billion of securitizations in 1997. Average domestic
commercial real estate loans decreased to $28.4 billion in 1998 due mainly to
loan sales.
26
Average residential mortgage loans decreased 12 percent to $70.8 billion
in 1998 compared to $80.6 billion in 1997, mainly the result of loan sales and
the impact of $5.1 billion of securitizations in 1998 and $9.6 billion of
securitizations in 1997.
Average bankcard and other consumer loans, including direct and indirect
consumer loans and home equity loans, decreased $116 million to $87.1 billion
in 1998 due primarily to a decrease in bankcard loans, which included the
impact of $2.0 billion of securitizations in 1998, partially offset by an
increase in other consumer loans.
A significant source of liquidity for the Corporation is the repayments
and maturities of loans. Table Seven shows selected loan maturity data on
December 31, 1998 and indicates that approximately 48 percent of the selected
loans had maturities of one year or less. The securitization and sale of
certain loans and the use of loans as collateral in asset-backed financing
arrangements are also sources of liquidity.
Table Seven
Selected Loan Maturity Data
December 31, 1998
(Dollars in Millions)
This table presents the maturity distribution and interest sensitivity of
selected loan categories (excluding residential mortgage, bankcard, other
consumer loans and lease financing). Maturities are presented on a contractual
basis.
Due after
Due in 1 year
1 year through Due after
or less 5 years 5 years Total
------------ ------------ ------------ -------------
Commercial - domestic ................................................... $ 65,256 $ 47,185 $ 16,195 $ 128,636
Commercial real estate - domestic ....................................... 3,409 6,990 9,405 19,804
Construction real estate - domestic ..................................... 3,866 2,864 378 7,108
Foreign ................................................................. 18,284 8,939 5,526 32,749
-------- -------- -------- ---------
Total selected loans ................................................... $ 90,815 $ 65,978 $ 31,504 $ 188,297
======== ======== ======== =========
Percent of total ........................................................ 48.2% 35.1% 16.7% 100%
Cumulative percent of total ............................................. 48.2 83.3 100.0
Sensitivity of loans to changes in interest rates for loans due after
one year
Predetermined interest rates ........................................... $ 15,154 $ 12,489 $ 27,643
Floating or adjustable interest rates .................................. 50,824 19,015 69,839
-------- -------- ---------
$ 65,978 $ 31,504 $ 97,482
======== ======== =========
Deposits
Table Three provides information on the average amounts of deposits and
the rates paid by deposit category. Through the Corporation's diverse retail
banking network, deposits remain a primary source of funds for the Corporation.
Average deposits increased 3 percent in 1998 over 1997 to $345.5 billion. See
Note Seven of the consolidated financial statements on page 68 for further
details on deposits.
Short-Term Borrowings and Trading Account Liabilities
The Corporation uses short-term borrowings as a funding source and in its
management of interest rate risk. Table Eight presents the categories of
short-term borrowings.
During 1998, total average short-term borrowings increased 29 percent to
$90.6 billion and average trading account liabilities increased 14 percent from
1997 levels, to $17.5 billion in 1998.
27
Table Eight
Short-Term Borrowings
(Dollars in Millions)
1998 1997 1996
-------------------- --------------------- --------------------
Amount Rate Amount Rate Amount Rate
--------- ---------- ---------- ---------- --------- ----------
Federal funds purchased
On December 31 ............................. $ 7,316 5.25% $10,111 5.80% $ 6,187 6.06%
Average during year ........................ 8,201 5.42 6,551 5.54 6,662 5.35
Maximum month-end balance during year ...... 11,187 -- 10,111 -- 9,974 --
Securities sold under agreements to repurchase
On December 31 ............................. 60,227 5.08 51,303 5.83 24,279 5.58
Average during year ........................ 56,710 5.66 45,403 5.58 41,239 5.52
Maximum month-end balance during year ...... 71,595 -- 51,820 -- 43,120 --
Commercial paper
On December 31 ............................. 6,749 5.19 5,925 5.65 5,849 5.52
Average during year ........................ 6,419 5.56 6,184 5.64 6,036 5.66
Maximum month-end balance during year ...... 7,913 -- 6,689 -- 7,028 --
Other short-term borrowings
On December 31 ............................. 24,742 4.52 12,120 6.52 12,239 6.06
Average during year ........................ 19,300 6.35 12,261 7.02 11,897 6.09
Maximum month-end balance during year ...... 25,927 -- 13,974 -- 13,489 --
Long-Term Debt
Long-term debt increased 7 percent from $42.9 billion at December 31, 1997
to $45.9 billion on December 31, 1998 mainly as a result of borrowings to fund
business development opportunities and to replace maturing debt. During 1998,
the Corporation issued $350 million of trust preferred securities and $12.5
billion in long-term senior and subordinated debt. See Notes Eight and Nine of
the consolidated financial statements on pages 69 and 71 for further details on
long-term debt and trust preferred securities.
Other
The Corporation has commercial paper back-up lines totaling $1.1 billion
of which $669 million expires in October 1999 and $479 million expires in
October 2002. In addition, the Corporation has a $1.6 billion line of credit
which expires in May 2001. No borrowings have been made under these lines.
The Corporation's financial position is reflected in the following debt
ratings, which include upgrades as applicable from December 31, 1997 ratings:
Commercial Senior Subordinated
Paper Debt Debt
------------ -------- -------------
Moody's Investors Service ......... P-1 Aa2 Aa3
Standard & Poor's Corporation ..... A-1 A+ A
Duff and Phelps, Inc .............. D-1+ AA- A+
Fitch IBCA, Inc ................... F-1+ AA- A+
Thomson BankWatch ................. TBW-1 AA- A+
In managing liquidity, the Corporation takes into consideration the
ability of its subsidiary banks to pay dividends to the parent company. See
Note Twelve of the consolidated financial statements on page 78 for further
details on dividend capabilities of its subsidiary banks.
Capital Resources And Capital Management
Shareholders' equity on December 31, 1998 was $45.9 billion compared to
$44.6 billion on December 31, 1997. The increase was primarily due to net
earnings (net income less dividends) of $2.6 billion coupled with the issuance
of approximately 30.5 million shares of common stock under various employee
plans. The increase was partially offset by the repurchase of 29.3 million
shares of common stock for approximately $1.8 billion and a net decrease of
$242 million in the market value of securities available for sale and
marketable equity securities.
28
The Corporation's and its significant banking subsidiaries' regulatory
capital ratios, along with a description of the components of risk-based
capital, capital adequacy requirements and prompt corrective action provisions,
are included in Note Twelve of the consolidated financial statements on page
78.
Off-Balance Sheet
Derivatives - Asset and Liability Management (ALM) Activities
Interest rate contracts are used in the asset and liability management
process. These contracts, which are generally non-leveraged generic interest
rate and basis swaps, options and futures, allow the Corporation to effectively
manage its interest rate risk position. Generic interest rate swaps involve the
exchange of fixed-rate and variable-rate interest payments based on the
contractual underlying notional amount. Basis swaps involve the exchange of
interest payments based on the contractual underlying notional amounts, where
both the pay rate and the receive rate are floating rates based on different
indices. Option products primarily consist of caps and floors. Interest rate
caps and floors are agreements where, for a fee, the purchaser obtains the
right to receive interest payments when a variable interest rate moves above or
below a specified cap or floor rate, respectively. Futures contracts used for
ALM activities are primarily index futures providing for cash payments based
upon the movements of a deposit rate index.
The amount of net realized deferred gains associated with terminated ALM
swaps were $294 million and $68 million on December 31, 1998 and December 31,
1997, respectively. The amount of net realized deferred losses associated with
terminated ALM futures and forward rate contracts was $1 million on December
31, 1998, compared to a gain of $9 million on December 31, 1997. The amount of
net realized deferred gains associated with terminated ALM options were $26
million and $13 million on December 31, 1998 and December 31, 1997,
respectively. See Note Eleven of the consolidated financial statements on page
74 for information on the notional amounts and fair values of the Corporation's
ALM interest rate contracts.
In addition, the Corporation uses foreign currency contracts to manage the
foreign exchange risk associated with foreign-denominated assets and
liabilities, as well as the Corporation's equity investments in foreign
subsidiaries. Foreign exchange contracts, which include spot, forward and
futures contracts, represent agreements to exchange the currency of one country
for the currency of another country at an agreed-upon price, on an agreed-upon
settlement date. On December 31, 1998, these contracts had a notional value of
$3.3 billion and a fair value of $72 million.
The fair values of the ALM interest rate and foreign exchange portfolios
should be viewed in the context of the overall balance sheet. The value of any
single component of the balance sheet or off-balance sheet positions should not
be viewed in isolation.
For a discussion of the Corporation's management of risk associated with
mortgage production and servicing activities, see the "Noninterest Income"
section on page 19.
Market Risk Management
In the normal course of conducting its business activities, the
Corporation is exposed to market risks which include both price and liquidity
risk. Market risk is the potential of loss arising from adverse changes in
market rates and prices, such as interest rates (interest rate risk), foreign
currency exchange rates (foreign exchange risk), commodity prices (commodity
risk) and prices of equity securities (equity risk). Financial products that
expose the Corporation to market risk include securities, loans, deposits,
debt, and derivative financial instruments such as futures, forwards, swaps,
options, and other financial instruments with similar characteristics.
Liquidity risk arises from the possibility that the Corporation may not be able
to satisfy current or future financial commitments or that the Corporation may
be more reliant on alternative funding sources such as long-term debt.
Market risk is managed by the Corporation's Finance Committee, which
formulates policy based on desirable levels of market risk. In setting
desirable levels of market risk, the Finance Committee considers the impact on
both earnings and capital of the current outlook in market rates, potential
changes in market rates, world and regional economies, liquidity, business
strategies and other factors.
For a discussion of non-trading, on-balance sheet financial instruments
see Table Nine in the following Market Risk Management section on page 31. For
information on market risk associated with ALM activities,
29
see the following discussion on page 32 of the Market Risk Management section
and the mortgage banking section of Noninterest Income on page 19. Market risk
associated with the trading portfolio is discussed in the following Market Risk
Management section on page 32. The composition of the trading portfolio and
related fair values are included in Note Four of the consolidated financial
statements on page 66.
Prior to the BankAmerica merger, market risk exposure was managed by each
of the previously separate companies. Separate risk management models and
assumptions were used in accordance with each company's unique market risk
profile. The market risk information presented in this section is as of, or for
the year ended, December 31, 1998 and reflects the market risk profile of the
merged company. Prior period amounts have not been presented as such amounts
were based on the risk profiles of the previously separate entities and,
accordingly, are not comparable to current period amounts.
Non-Trading Portfolio
The Corporation's ALM process is used to manage interest rate risk through
the structuring of balance sheet and off-balance sheet portfolios and
identifying and linking such off-balance sheet positions to specific assets and
liabilities. Interest rate risk represents the only material market risk
exposure to the Corporation's non-trading on-balance sheet financial
instruments. To effectively measure and manage interest rate risk, the
Corporation uses sophisticated computer simulations which determine the impact
on net interest income of numerous interest rate scenarios, balance sheet
trends and strategies. These simulations cover the following financial
instruments: short-term financial instruments, securities, loans, deposits,
borrowings and off-balance sheet financial instruments. These simulations
incorporate assumptions about balance sheet dynamics, such as loan and deposit
growth and pricing, changes in funding mix and asset and liability repricing
and maturity characteristics. Simulations are run under various interest rate
scenarios to determine the impact on net income and capital. From these
scenarios, interest rate risk is quantified and appropriate strategies are
developed and implemented. The overall interest rate risk position and
strategies are reviewed on an ongoing basis by senior management. Additionally,
duration and market value sensitivity measures are selectively utilized where
they provide added value to the overall interest rate risk management process.
On December 31, 1998, the interest rate risk position of the Corporation
was relatively neutral as the impact of a gradual parallel 100 basis-point rise
or fall in interest rates over the next 12 months was estimated to be less than
one percent of net interest income.
Table Nine below summarizes the expected maturities, unrealized gains and
losses and weighted average effective yields and rates associated with the
Corporation's significant non-trading on-balance sheet financial instruments.
Cash and cash equivalents, time deposits placed and other short-term
investments, federal funds sold and purchased, resale and repurchase
agreements, commercial paper, other short-term borrowings and foreign deposits,
which are similar in nature to other short-term borrowings, are excluded from
Table Nine as their respective carrying values approximate fair values. These
financial instruments generally expose the Corporation to insignificant market
risk as they have either no stated maturities or an average maturity of less
than 30 days and interest rates that approximate market rates. However, these
financial instruments could expose the Corporation to interest rate risk by
requiring more or less reliance on alternative funding sources, such as
long-term debt. Loans held for sale are also excluded as their carrying values
approximate their fair values, generally exposing the Corporation to
insignificant market risk. For further information on the fair value of
financial instruments see Notes Four and Fifteen of the consolidated financial
statements on pages 66 and 88, respectively.
30
Table Nine
Non-Trading On-Balance Sheet Financial Instruments
December 31, 1998
(Dollars in Millions)
Unrealized
Total Gain/(Loss)
------------- -------------
Assets (1)
Loans (2)(3)
Fixed rate
Book value ............................. $ 116,292 $ 3,331
Weighted average effective yield ....... 8.23%
Variable rate
Book value ............................. $ 221,011 2,591
Weighted average effective yield ....... 6.51%
Securities held for investment (2)
Fixed rate
Book value ............................. $ 1,858 (144)
Weighted average effective yield ....... 6.64%
Variable rate
Book value ............................. $ 139 --
Weighted average effective yield ....... 6.33%
Securities available for sale (2)
Fixed rate
Book value ............................. $ 73,595 237
Weighted average effective yield ....... 6.05%
Variable rate
Book value ............................. $ 4,641 117
Weighted average effective yield ....... 6.63%
Liabilities (1)
Total deposits (4)(5)
Fixed rate
Book value ............................. $ 212,586 (330)
Weighted average effective rate ........ 2.02%
Variable rate
Book value ............................. $ 86,504 5
Weighted average effective rate ........ 2.96%
Long-term debt (excluding obligations
under capital leases) (6)
Fixed rate
Book value ............................. $ 24,761 (1,491)
Weighted average effective rate ........ 7.42%
Variable rate
Book value ............................. $ 21,006 (66)
Weighted average effective rate ........ 5.35%
Trust preferred securities (6)
Fixed rate
Book value ............................. $ 3,811 (290)
Weighted average effective rate ........ 8.03%
Variable rate
Book value ............................. $ 1,143 --
Weighted average effective rate ........ 5.98%
Expected Maturity
----------------------------------------------------------------
After
1999 2000 2001 2002 2003 2003
---------- ---------- ---------- ---------- --------- ----------
Assets (1)
Loans (2)(3)
Fixed rate
Book value ............................. $38,511 $21,075 $14,656 $10,037 $ 6,994 $25,019
Weighted average effective yield .......
Variable rate
Book value ............................. 90,003 35,016 26,197 25,458 14,637 29,700
Weighted average effective yield .......
Securities held for investment (2)
Fixed rate
Book value ............................. 808 147 124 71 119 589
Weighted average effective yield .......
Variable rate
Book value ............................. 80 19 7 18 4 11
Weighted average effective yield .......
Securities available for sale (2)
Fixed rate
Book value ............................. 855 1,448 3,433 6,338 9,050 52,471
Weighted average effective yield .......
Variable rate
Book value ............................. 66 260 333 3,221 66 695
Weighted average effective yield .......
Liabilities (1)
Total deposits (4)(5)
Fixed rate
Book value ............................. 70,087 12,876 12,723 12,034 11,372 93,494
Weighted average effective rate ........
Variable rate
Book value ............................. 19,864 14,087 11,557 9,709 8,191 23,096
Weighted average effective rate ........
Long-term debt (excluding obligations
under capital leases) (6)
Fixed rate
Book value ............................. 1,618 2,069 4,691 3,122 2,937 10,324
Weighted average effective rate ........
Variable rate
Book value ............................. 6,640 6,658 2,482 1,282 2,326 1,618
Weighted average effective rate ........
Trust preferred securities (6)
Fixed rate
Book value ............................. -- -- 900 -- 350 2,561
Weighted average effective rate ........
Variable rate
Book value ............................. -- -- -- 400 -- 743
Weighted average effective rate ........
(1) Fixed and variable rate classifications are based on contractual rates and
are not modified for the impact of asset and liability management
contracts.
(2) Expected maturities reflect the impact of prepayment assumptions.
(3) Excludes leases.
(4) When measuring and managing market risk associated with domestic deposits,
the Corporation considers its long-term relationships with depositors. The
unrealized loss on deposits in this table does not consider these
long-term relationships, therefore only certificates of deposits reflect a
change in value.
(5) Excludes foreign time deposits.
(6) Expected maturities of long-term debt and trust preferred securities
reflect the Corporation's ability to redeem such debt prior to contractual
maturities.
31
Risk management interest rate contracts are utilized in the ALM process.
Such contracts, which are generally non-leveraged generic interest rate and
basis swaps, futures, forwards, and options, allow the Corporation to
effectively manage its interest rate risk position. As reflected in Table Ten,
the notional amount of the Corporation's receive fixed and pay fixed interest
rate swaps on December 31, 1998 was $60.5 billion, primarily converting
variable-rate commercial loans to fixed rate, and $25.8 billion, respectively.
The net receive fixed position on December 31, 1998 was $34.7 billion compared
to $31.1 billion on December 31, 1997. In addition, the Corporation had $7.7
billion of basis swaps linked primarily to loans and long-term debt.
Table Ten also summarizes the expected maturities, weighted average pay
and receive rates and the unrealized gains and losses on December 31, 1998 of
the Corporation's ALM interest rate swaps, as well as the expected maturities
and unrealized gains and losses on December 31, 1998 of the Corporation's ALM
basis swaps, forwards, futures, and options contracts. Unrealized gains and
losses are based on the last repricing and will change in the future primarily
based on movements in one-, three- and six-month LIBOR rates.
The net unrealized gain on the ALM swap portfolio on December 31, 1998 was
$942 million compared to a net unrealized loss of $18 million on December 31,
1997, primarily reflecting a decrease in interest rates.
The net unrealized gain in the estimated value of the ALM interest rate
contracts should be viewed in the context of the overall balance sheet. The
value of any single component of the balance sheet or off-balance sheet
positions should not be viewed in isolation.
For a discussion of the Corporation's management of risk associated with
mortgage production and servicing activities, see the "Noninterest Income"
section on page 19.
Table Ten
Asset and Liability Management Interest Rate Contracts
December 31, 1998
(Dollars in Millions, Average Maturity in Years)
Fair
Value
-----------
Total receive fixed swaps ............. $ 1,958
Notional value ......................
Weighted average receive rate .......
Total pay fixed swaps ................. (1,006)
Notional value ......................
Weighted average pay rate ...........
Basis swaps ........................... (10)
---------
Notional value ......................
Total swaps ........................... 942
Futures and forward rate contracts..... 2
Notional amount .....................
Option products ....................... (46)
---------
Notional amount .....................
Total interest rate contracts ......... $ 898
=========
Maturity
---------------------------------------------------------------------------------------
After
Total 1999 2000 2001 2002 2003 2003
------------ ----------- ----------- ------------ ----------- ------------ ------------
Total receive fixed swaps .............
Notional value ...................... $ 60,450 $ 4,492 $ 8,220 $ 12,213 $ 2,599 $ 15,826 $ 17,100
Weighted average receive rate ....... 6.16% 6.16% 6.28% 6.31% 6.93% 5.59% 6.43%
Total pay fixed swaps .................
Notional value ...................... $ 25,770 $ 6,062 $ 6,900 $ 4,356 $ 1,177 $ 2,481 $ 4,794
Weighted average pay rate ........... 6.73% 6.46% 6.89% 6.47% 7.31% 7.14% 6.76%
Basis swaps ...........................
Notional value ...................... $ 7,736 $ 1,685 $ 743 $ 625 $ 1,669 $ 3,014 $ --
Total swaps ...........................
Futures and forward rate contracts.....
Notional amount ..................... $ 6,348 $ 6,348 $ -- $ -- $ -- $ -- $ --
Option products .......................
Notional amount ..................... $ 26,836 $ 3,225 $ 543 $ 1,088 $ 938 $ 1,950 $ 19,092
Total interest rate contracts .........
Average
Expected
Maturity
---------
Total receive fixed swaps ............. 4.55
Notional value ......................
Weighted average receive rate .......
Total pay fixed swaps ................. 3.18
Notional value ......................
Weighted average pay rate ...........
Basis swaps ........................... 2.88
Notional value ......................
Total swaps ...........................
Futures and forward rate contracts.....
Notional amount .....................
Option products .......................
Notional amount .....................
Total interest rate contracts .........
Trading Portfolio
The Corporation manages its exposure to market risk resulting from trading
activities through a risk management function which is independent of the
various business units. The Trading Risk Committee (TRC) establishes and
monitors various limits on trading activities. These limits include product
volume, gross and net positions, and value-at-risk (VAR) and profit and loss
simulation limits. Product volume limits establish maximum aggregate amounts of
specific types of derivatives, foreign exchange contracts, and securities that
the Corporation may hold in its trading account at any point in time. Position
limits restrict the gross and net amount of contracts that can be held in the
trading account in any specific maturity grouping. VAR measures the potential
loss in future earnings due to market rate movements within the trading
portfolio using proprietary models that are based on statistical probability.
VAR limits establish the maximum amount of potential loss, based upon
sophisticated modeling techniques, that the Corporation is willing to assume at
any point in time. Additionally,
32
the Corporation uses profit and loss simulations to measure the potential for
loss in various segments of the trading portfolio resulting from specific and
extremely adverse scenarios. These scenarios are projected without regard to
the statistical probability of their occurrences. Loss simulation limits
establish the maximum amount of projected loss computed by the simulation that
the Corporation is willing to assume.
The Corporation reduces the market risk to which it is exposed in the
trading account by executing offsetting transactions with other counterparties.
However, the Corporation may also retain, generally on a temporary basis, open
or uncovered trading account positions in an effort to generate revenue by
correctly anticipating future market conditions and customer demands or by
taking advantage of price differentials among the various markets in which it
operates.
The day-to-day management of interest rate and foreign exchange risks
takes place at a decentralized level within the Corporation's various trading
centers. Limits established by the TRC are assigned to each trading center. In
addition, documented trading policies and procedures define acceptable
boundaries within which traders can execute transactions in their assigned
markets.
The Corporation uses a VAR methodology to measure the interest rate,
foreign exchange, commodity and equity risks inherent in its trading
activities. Under this methodology, management models historical data to
statistically calculate, with 99 percent confidence, the potential loss in
earnings the Corporation might experience if an adverse one-day shift in market
prices was to occur.
The Corporation performs the VAR calculation for each major trading
portfolio segment on a daily basis. It then calculates the combined VAR across
these portfolio segments using two different sets of assumptions. The first
calculation assumes that each portfolio segment experiences adverse price
movements at the same time (i.e., the price movements are perfectly
correlated). The second calculation assumes that these adverse price movements
within the major portfolio segments do not occur at the same time (i.e., they
are uncorrelated).
Trading Activities Market Risk
(US Dollar Equivalents in Millions)
Year Ended December 31, 1998
-----------------------------------------
Average VAR High VAR (1) Low VAR (1)
------------- -------------- ------------
Based on perfect positive correlation:
Interest rate ..................... $ 120.2 $ 163.8 $ 92.7
Foreign currency .................. 28.5 46.0 8.3
Commodities ....................... 3.6 6.9 1.4
Equity ............................ 2.0 5.2 0.5
Based on zero correlation:
Interest rate ..................... 37.6 49.9 29.3
Foreign currency .................. 24.0 40.0 6.4
Commodities ....................... 2.7 5.3 1.1
Equity ............................ 1.7 5.2 0.5
(1) The high and low for the entire trading account may not equal the sum of
the individual components as the highs or lows of the components occurred
on different trading days.
The table above sets forth the calculated VAR amounts for the year ended
1998. The amounts are calculated on a pre-tax basis. Although the Corporation's
trading positions have remained generally consistent during 1998, VAR levels
have been impacted by recent volatility in market conditions.
VAR modeling on trading is subject to numerous limitations. In addition,
the Corporation recognizes that there are numerous assumptions and estimates
associated with modeling and actual results could differ from these assumptions
and estimates. The Corporation mitigates these uncertainties through close
monitoring and by examining and updating assumptions on an ongoing basis. The
continual trading risk management process considers the impact of unanticipated
risk exposure and updates assumptions to reduce loss exposure.
33
Credit Risk Management and Credit Portfolio Review
In conducting business activities, the Corporation is exposed to the risk
that borrowers or counterparties may default on their obligations to the
Corporation. Credit risk arises through the extension of loans and leases,
certain securities, letters of credit, financial guarantees and through
counterparty exposure on trading and capital markets transactions. To manage
this risk, the Credit Risk Management group establishes policies and procedures
to manage both on- and off-balance sheet credit risk and communicates and
monitors the application of these policies and procedures throughout the
Corporation.
The Corporation's overall objective in managing credit risk is to minimize
the adverse impact of any single event or set of events. To achieve this
objective, the Corporation strives to maintain a credit risk profile that is
diverse in terms of product type, industry concentration, geographic
distribution and borrower or counterparty concentration.
The Credit Risk Management group works with lending officers, trading
personnel and various other line personnel in areas that conduct activities
involving credit risk and is involved in the implementation, refinement and
monitoring of credit policies and procedures.
The Corporation manages credit exposure to individual borrowers and
counterparties on an aggregate basis including loans and leases, securities,
letters of credit, bankers' acceptances, derivatives and unfunded commitments.
The creditworthiness of a borrower or counterparty is determined by experienced
personnel, and limits are established for the total credit exposure to any one
borrower or counterparty. Credit limits are subject to varying levels of
approval by senior line and credit risk management.
For commercial lending, the originating credit officer assigns borrowers
or counterparties an initial risk rating which is based primarily on the amount
of inherent credit risk and reviewed for appropriateness by senior line and
credit risk personnel. Credits are monitored by line and credit risk management
personnel for deterioration in a borrower's or counterparty's financial
condition which would impact the ability of the borrower or counterparty to
perform under the contract. Risk ratings are adjusted as necessary.
For consumer lending, credit scoring systems are utilized to provide
standards for extension of credit. Consumer portfolio credit risk is monitored
primarily using statistical models and actual payment experience to predict
portfolio behavior.
When required, the Corporation obtains collateral to support credit
extensions and commitments. Generally, such collateral is in the form of real
and personal property, cash on deposit or other highly liquid instruments. In
certain circumstances, the Corporation obtains real property as security for
some loans that are made on the general creditworthiness of the borrower and
whose proceeds were not used for real estate-related purposes.
The Corporation also manages exposure to a single borrower, industry,
product-type or other concentration through syndications of credits,
participations, loan sales and securitizations. Through Global Corporate and
Investment Banking, the Corporation is a major participant in the syndications
market. In a syndicated facility, each participating lender funds only its
portion of the syndicated facility, therefore limiting its exposure to the
borrower. The Corporation also identifies and reduces its exposure to the
funded borrower, product or industry concentrations through loan sales.
Generally, these sales are without recourse to the Corporation.
In conducting derivatives activities in certain jurisdictions, the
Corporation reduces credit risk to any one counterparty through the use of
legally enforceable master netting agreements which allow the Corporation to
settle positive and negative positions with the same counterparty on a net
basis. For more information on the Corporation's off-balance sheet credit risk,
see Note Eleven of the consolidated financial statements on page 74.
An independent credit review group conducts ongoing reviews of credit
activities and portfolios, reexamining on a regular basis risk assessments for
credit exposures and overall compliance with policy.
Loans and Leases Portfolio - The Corporation's credit exposure is focused
in its loans and leases portfolio, which totaled $357.3 billion on December 31,
1998. Table Fifteen presents a distribution of loans and leases by category.
34
Allowance for Credit Losses - The Corporation performs periodic and
systematic detailed reviews of its loan and lease portfolios to identify risks
inherent in and to assess the overall collectibility of those portfolios. These
detailed reviews, combined with historical loss experience, result in the
identification and quantification of loss factors which are used in determining
the amount of the allowance and related provision for credit losses. Consumer
loans and leases, which includes residential mortgages, home equity lines,
direct/indirect, consumer finance and foreign consumer loans, are generally
evaluated as a group, based on loan type. Remaining loans and leases are
evaluated individually due to a general lack of uniformity among individual
loans within each loan type and assigned a risk rating. The loss factors are
applied to each individual loan based on the particular item's risk ratings or
to specific loan groups in order to provide a basis for establishing an
adequate level of allowance for credit losses.
Portions of the allowance for credit losses, as presented on Table Twelve,
are allocated to cover the estimated losses inherent in each loan and lease
category based on the results of the Corporation's detail review process.
Further allocations are made based on specific existing economic conditions as
well as performance trends within specific portfolio segments and individual
concentrations of credit. The remaining unallocated portion of the allowance
for credit losses is determined based on general economic, performance and
credit concentration trends, including geographic concentrations.
The nature of the process by which the Corporation determines the
appropriate allowance for credit losses requires the exercise of considerable
judgment. After review of all relevant matters effecting loan collectibility,
management believes that the allowance for credit losses, see Note Twelve of
the consolidated financial statements on page 78, is appropriate given its
analysis of inherent credit losses on December 31, 1998.
The Corporation's allowance for credit losses was $7.1 billion, or 1.99
percent of loans and leases on December 31, 1998, compared to $6.8 billion, or
1.98 percent, on December 31, 1997, with the increase attributable to the
establishment of a $500 million reserve in the third quarter of 1998, related
to deterioration in certain international economic conditions that arose in the
third quarter of 1998. Table Eleven provides an analysis of the changes in the
allowance for credit losses. Total net charge-offs increased $615 million in
1998 to $2.5 billion, or .71 percent of average loans and leases, compared to
$1.9 billion, or .54 percent, in 1997. The increase was primarily caused by a
$372 million write-down of a credit agreement with DE Shaw and higher foreign
commercial net charge-offs. The increase was partially offset by lower consumer
net charge-offs during 1998.
35
Table Eleven
Allowance For Credit Losses
(Dollars in Millions)
1998 1997
------------ -------------
Beginning Balance .............................................. $ 6,778 $ 6,316
-------- ---------
Loans and leases charged off
Commercial - domestic ........................................ 714 328
Commercial - foreign ......................................... 262 54
Commercial real estate - domestic ............................ 21 59
Commercial real estate - foreign ............................. -- --
-------- ---------
Total commercial ........................................... 997 441
Residential mortgage ......................................... 33 50
Home equity lines ............................................ 27 36
Direct/Indirect consumer ..................................... 562 582
Consumer finance ............................................. 561 426
Bankcard ..................................................... 857 1,043
Other consumer - domestic .................................... -- 12
Foreign consumer ............................................. 13 13
-------- ---------
Total consumer ............................................. 2,053 2,162
-------- ---------
Total loans and leases charged off ........................ 3,050 2,603
-------- ---------
Recoveries of loans and leases previously charged off
Commercial - domestic ........................................ 97 226
Commercial - foreign ......................................... 20 25
Commercial real estate - domestic ............................ 21 59
Commercial real estate - foreign ............................. -- --
-------- ---------
Total commercial ........................................... 138 310
Residential mortgage ......................................... 4 5
Home equity lines ............................................ 10 9
Direct/Indirect consumer ..................................... 157 146
Consumer finance ............................................. 178 155
Bankcard ..................................................... 93 124
Other consumer - domestic .................................... -- --
Foreign consumer ............................................. 3 2
-------- ---------
Total consumer ............................................. 445 441
-------- ---------
Total recoveries of loans and leases previously
charged off .............................................. 583 751
-------- ---------
Net charge-offs .............................................. 2,467 1,852
-------- ---------
Provision for credit losses ................................... 2,920 1,904
Other, net .................................................... (109) 410
-------- ---------
Balance on December 31 ....................................... $ 7,122 $ 6,778
======== =========
Loans and leases outstanding on December 31 ................... $357,328 $ 342,140
Allowance for credit losses as a percentage of loans and
leases outstanding on December 31 ............................ 1.99% 1.98%
Average loans and leases outstanding during the year .......... $347,840 $ 343,151
Net charge-offs as a percentage of average loans and leases
outstanding during the year .................................. 0.71% 0.54%
Ratio of the allowance for credit losses on December 31 to
net charge-offs .............................................. 2.89 3.66
Allowance for credit losses as a percentage of
nonperforming loans .......................................... 287.01% 321.03%
1996 1995 1994
------------- ------------- -------------
Beginning Balance .............................................. $ 6,222 $ 6,377 $ 6,199
--------- --------- ---------
Loans and leases charged off
Commercial - domestic ........................................ 376 329 294
Commercial - foreign ......................................... 29 11 35
Commercial real estate - domestic ............................ 131 105 134
Commercial real estate - foreign ............................. -- 2 6
--------- --------- ---------
Total commercial ........................................... 536 447 469
Residential mortgage ......................................... 61 60 60
Home equity lines ............................................ 47 47 44
Direct/Indirect consumer ..................................... 486 374 334
Consumer finance ............................................. 393 241 208
Bankcard ..................................................... 838 648 554
Other consumer - domestic .................................... 5 -- --
Foreign consumer ............................................. 3 2 1
--------- --------- ---------
Total consumer ............................................. 1,833 1,372 1,201
--------- --------- ---------
Total loans and leases charged off ........................ 2,369 1,819 1,670
--------- --------- ---------
Recoveries of loans and leases previously charged off
Commercial - domestic ........................................ 194 297 310
Commercial - foreign ......................................... 40 64 117
Commercial real estate - domestic ............................ 50 53 83
Commercial real estate - foreign ............................. 5 7 --
--------- --------- ---------
Total commercial ........................................... 289 421 510
Residential mortgage ......................................... 4 3 6
Home equity lines ............................................ 7 7 8
Direct/Indirect consumer ..................................... 137 111 124
Consumer finance ............................................. 156 69 58
Bankcard ..................................................... 108 76 84
Other consumer - domestic .................................... -- -- --
Foreign consumer ............................................. 1 1 1
--------- --------- ---------
Total consumer ............................................. 413 267 281
--------- --------- ---------
Total recoveries of loans and leases previously
charged off .............................................. 702 688 791
--------- --------- ---------
Net charge-offs .............................................. 1,667 1,131 879
--------- --------- ---------
Provision for credit losses ................................... 1,645 945 798
Other, net .................................................... 116 31 259
--------- --------- ---------
Balance on December 31 ....................................... $ 6,316 $ 6,222 $ 6,377
========= ========= =========
Loans and leases outstanding on December 31 ................... $ 317,709 $ 302,804 $ 273,615
Allowance for credit losses as a percentage of loans and
leases outstanding on December 31 ............................ 1.99% 2.05% 2.33%
Average loans and leases outstanding during the year .......... $ 312,331 $ 286,770 $ 251,489
Net charge-offs as a percentage of average loans and leases
outstanding during the year .................................. 0.53% 0.39% 0.35%
Ratio of the allowance for credit losses on December 31 to
net charge-offs .............................................. 3.79 5.50 7.25
Allowance for credit losses as a percentage of
nonperforming loans .......................................... 287.35% 224.86% 206.91%
36
Table Twelve
Allocation of the Allowance for Credit Losses
December 31
(Dollars in Millions)
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- --------- -------- ----------
Commercial - domestic..... $1,540 21.6% $1,580 23.4% $1,436 22.7% $1,306 21.1% $1,184 18.6%
Commercial - foreign ..... 1,327 18.6 1,013 14.9 427 6.8 432 6.9 396 6.2
Commercial real
estate - domestic ....... 925 13.0 847 12.5 764 12.1 992 15.9 1,218 19.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total commercial ........ 3,792 53.2 3,440 50.8 2,627 41.6 2,730 43.9 2,798 43.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Residential mortgage ..... 137 1.9 181 2.7 214 3.4 202 3.2 159 2.5
Home equity lines ........ 46 .6 84 1.2 87 1.4 74 1.2 60 .9
Bankcard ................. 501 7.0 790 11.7 671 10.6 709 11.4 568 8.9
Direct/Indirect
consumer ................ 527 7.5 608 9.0 618 9.8 604 9.7 462 7.3
Consumer finance ......... 658 9.2 785 11.6 645 10.2 460 7.4 413 6.5
Foreign consumer ......... 26 .4 23 .3 21 .3 17 .3 14 .2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total consumer .......... 1,895 26.6 2,471 36.5 2,256 35.7 2,066 33.2 1,676 26.3
Unallocated .............. 1,435 20.2 867 12.7 1,433 22.7 1,426 22.9 1,903 29.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$7,122 100.0% $6,778 100.0% $6,316 100.0% $6,222 100.0% $6,377 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Nonperforming Assets - As presented in Table Thirteen, nonperforming
assets were $2.8 billion, or .77 percent of net loans, leases and foreclosed
properties on December 31, 1998, compared to $2.4 billion, or .71 percent, on
December 31, 1997. Nonperforming loans were $2.5 billion at the end of 1998
compared to $2.1 billion at the end of 1997. The allowance coverage of
nonperforming loans was 287 percent on December 31, 1998 compared to 321
percent at the end of 1997.
Internal loan workout units are devoted to the management and/or
collection of certain nonperforming assets as well as certain performing loans.
Management believes concerted collection strategies and a proactive approach to
managing overall credit risk have expedited the disposition, collection and
renegotiation of nonperforming and other lower-quality assets. As part of this
process, management routinely evaluates all reasonable alternatives, including
the sale of assets individually or in groups, and selects the optimal strategy.
At December 31, 1998 and 1997 residential mortgage loans comprised 26
percent and 31 percent, respectively, of total nonperforming assets. Due to the
nature of the collateral securing residential mortgage loans and a history of
low losses, the Corporation considers these loans to be low risk nonperforming
assets.
Foreclosed properties decreased to $282 million on December 31, 1998
compared to $309 million on December 31, 1997.
37
Table Thirteen
Nonperforming Assets
December 31
(Dollars in Millions)
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Nonperforming loans
Commercial - domestic ....................... $ 812 $ 563 $ 713 $ 914 $ 966
Commercial - foreign ........................ 314 155 110 121 179
Commercial real estate - domestic ........... 299 342 491 1,027 1,304
Commercial real estate - foreign ............ 4 2 2 22 38
------- ------- ------- ------- -------
Total commercial ........................... 1,429 1,062 1,316 2,084 2,487
------- ------- ------- ------- -------
Residential mortgage ........................ 722 744 676 464 437
Home equity lines ........................... 50 52 36 42 28
Direct/Indirect consumer .................... 21 43 53 57 60
Consumer finance ............................ 246 210 116 118 69
Foreign consumer ............................ 14 -- 1 2 1
------- ------- ------- ------- -------
Total consumer ............................. 1,053 1,049 882 683 595
------- ------- ------- ------- -------
Total nonperforming loans .................. 2,482 2,111 2,198 2,767 3,082
Foreclosed properties ......................... 282 309 511 675 981
------- ------- ------- ------- -------
Total nonperforming assets ................. $ 2,764 $ 2,420 $ 2,709 $ 3,442 $ 4,063
======= ======= ======= ======= =======
Nonperforming assets as a percentage of
Total assets ................................ .45% .42% .57% .75% .95%
Loans, leases and foreclosed properties ..... .77 .71 .85 1.14 1.49
The loss of income associated with nonperforming loans on December 31 and
the cost of carrying foreclosed properties were:
1998 1997 1996 1995 1994
--------- --------- --------- --------- -------
Income that would have been recorded in accordance
with original terms ................................. $ 367 $ 349 $ 388 $ 457 $ 268
Less income actually recorded ........................ (130) (130) (130) (135) (98)
------ ------ ------ ------ -----
Loss of income ....................................... $ 237 $ 219 $ 258 $ 322 $ 170
====== ====== ====== ====== =====
Cost of carrying foreclosed properties ............... $ 16 $ 26 $ 35 $ 51 $ 60
====== ====== ====== ====== =====
On December 31, 1998, there were no material commitments to lend additional
funds with respect to nonperforming loans.
Loans Past Due 90 Days or More - Table Fourteen presents total loans past
due 90 days or more and still accruing interest. On December 31, 1998, loans
past due 90 days or more and still accruing interest were $611 million, or .17
percent of loans and leases, compared to $613 million, or .18 percent, on
December 31, 1997.
38
Table Fourteen
Loans Past Due 90 Days or More and Still Accruing Interest
(Dollars in Millions)
December 31, 1998 December 31, 1997
---------------------- ---------------------
Amount Percent (1) Amount Percent (1)
-------- ------------- -------- ------------
Commercial - domestic ..................... $135 .10% $ 52 .04%
Commercial - foreign ...................... 23 .07 3 .01
Commercial real estate - domestic ......... 12 .04 17 .06
---- ---- ---- ----
Total commercial ......................... 170 .09 72 .04
---- ---- ---- ----
Residential mortgage ...................... 31 .04 87 .12
Home equity lines ......................... -- -- 3 .02
Direct/Indirect consumer .................. 174 .43 116 .29
Consumer finance .......................... 16 .10 34 .23
Bankcard .................................. 214 1.72 301 2.01
Foreign consumer .......................... 6 .17 -- --
---- ---- ---- ----
Total consumer ........................... 441 .27 541 .34
---- ---- ---- ----
Total .................................. $611 .17% $613 .18%
==== ==== ==== ====
(1) Represents amounts past due 90 days or more and still accruing interest as
a percentage of net loans and leases for each respective category.
Concentrations of Credit Risk - In an effort to minimize the adverse
impact of any single event or set of occurrences, the Corporation strives to
maintain a diverse credit portfolio as outlined in Tables Seventeen and
Eighteen. Table Fifteen presents the distribution of loans and leases by
category.
Table Fifteen
Distribution of Loans and Leases
December 31
(Dollars in Millions)
1998 1997
--------------------- ---------------------
Amount Percent Amount Percent
----------- --------- ----------- ---------
Commercial - domestic ............. $137,422 38.5% $122,463 35.8%
Commercial - foreign .............. 31,495 8.8 30,080 8.8
Commercial R/E - domestic ......... 26,912 7.5 28,567 8.3
Commercial R/E - foreign .......... 301 .1 324 .1
-------- ----- -------- -----
Total commercial ................. 196,130 54.9 181,434 53.0
-------- ----- -------- -----
Residential mortgage .............. 73,608 20.6 71,540 20.9
Home equity lines ................. 15,653 4.4 16,536 4.8
Direct/Indirect consumer .......... 40,510 11.3 40,058 11.7
Consumer finance .................. 15,400 4.3 14,566 4.3
Bankcard .......................... 12,425 3.5 14,908 4.4
Foreign consumer .................. 3,602 1.0 3,098 .9
-------- ----- -------- -----
Total consumer ................... 161,198 45.1 160,706 47.0
-------- ----- -------- -----
Total loans and leases .......... $357,328 100.0% $342,140 100.0%
======== ===== ======== =====
1996 1995 1994
--------------------- -------------------- ---------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ---------- --------- ---------- ----------
Commercial - domestic ............. $105,737 33.3% $ 99,922 33.1% $ 91,740 33.5%
Commercial - foreign .............. 26,781 8.4 23,395 7.7 20,180 7.4
Commercial R/E - domestic ......... 25,881 8.1 26,381 8.7 27,530 10.1
Commercial R/E - foreign .......... 239 .1 361 .1 394 .1
-------- ----- -------- ----- -------- -----
Total commercial ................. 158,638 49.9 150,059 49.6 139,844 51.1
-------- ----- -------- ----- -------- -----
Residential mortgage .............. 80,400 25.3 77,078 25.5 68,474 25.0
Home equity lines ................. 12,541 3.9 11,143 3.7 9,958 3.6
Direct/Indirect consumer .......... 33,352 10.6 34,071 11.1 31,924 11.8
Consumer finance .................. 13,081 4.1 10,375 3.4 6,948 2.5
Bankcard .......................... 16,561 5.2 17,455 5.8 14,148 5.2
Foreign consumer .................. 3,136 1.0 2,623 .9 2,319 .8
-------- ----- -------- ----- -------- -----
Total consumer ................... 159,071 50.1 152,745 50.4 133,771 48.9
-------- ----- -------- ----- -------- -----
Total loans and leases .......... $317,709 100.0% $302,804 100.0% $273,615 100.0%
======== ===== ======== ===== ======== =====
The following section discusses credit risk in the loan portfolio,
including net charge-offs by loan categories as presented in Table Sixteen.
39
Table Sixteen
Net Charge-offs in Dollars and as a Percentage of Average Loans Outstanding
(Dollars in Millions)
1998 1997
------------------- -------------------
Commercial - domestic ................ $ 617 .47% $ 102 .09%
Commercial - foreign ................. 242 .78 29 .10
Commercial real estate - domestic..... -- -- -- --
Commercial real estate - foreign ..... -- -- -- --
------ ---- ------ ----
Total commercial .................... 859 .45 131 .07
------ ---- ------ ----
Residential mortgage ................. 29 .04 45 .06
Home equity lines .................... 17 .11 27 .18
Direct/Indirect consumer ............. 405 1.01 436 1.11
Consumer finance ..................... 383 2.67 271 1.96
Bankcard ............................. 764 6.03 919 5.90
Other consumer - domestic ............ -- -- 12 --
Foreign consumer ..................... 10 .31 11 .32
------ ---- ------ ----
Total consumer ...................... 1,608 1.02 1,721 1.03
------ ---- ------ ----
Total net charge-offs ............... $2,467 .71 $1,852 .54
====== ==== ====== ====
Managed credit cards net
charge-offs and ratios(1) ........... $1,284 6.27% $1,254 6.19%
1996 1995 1994
---------------------- ---------------------- -------------------
Commercial - domestic ................ $ 182 .18% $ 32 .03% $ (16) n/m%
Commercial - foreign ................. (11) n/m (53) n/m (82) n/m
Commercial real estate - domestic..... 81 .31 52 .19 51 .20
Commercial real estate - foreign ..... (5) n/m (5) n/m 6 .40
-------- ---- -------- ---- ----- -----
Total commercial .................... 247 .16 26 .02 (41) n/m
------- ---- ------- ---- ----- -----
Residential mortgage ................. 57 .07 57 .08 54 .10
Home equity lines .................... 40 .34 40 .39 36 .26
Direct/Indirect consumer ............. 349 1.01 263 .79 210 .78
Consumer finance ..................... 237 1.98 172 1.98 150 1.23
Bankcard ............................. 730 4.47 572 3.88 470 3.79
Other consumer - domestic ............ 5 -- -- -- -- --
Foreign consumer ..................... 2 .10 1 .04 -- --
------- ---- ------- ---- ----- -----
Total consumer ...................... 1,420 .89 1,105 .77 920 .75
------- ---- ------- ---- ----- -----
Total net charge-offs ............... $1,667 .53 $1,131 .39 $ 879 .35
======= ==== ======= ==== ===== =====
Managed credit cards net
charge-offs and ratios(1) ........... $ 888 4.67% $ 651 4.10% $ 549 4.05%
n/m =not meaningful
(1) Includes both on-balance sheet and securitized loans.
Net charge-offs for each loan type are calculated as a percentage of
average outstanding or managed loans for each loan category. Total net
charge-offs are calculated based on total average outstanding loans and
leases.
Commercial Real Estate - Total commercial real estate - domestic loans,
the portion of such loans which are nonperforming, and other real estate credit
exposures are presented in Table Seventeen. The exposures presented represent
credit extensions for real estate-related purposes to borrowers or
counterparties who are primarily in the real estate development or investment
business and for which the ultimate repayment of the credit is dependent on the
sale, lease, rental or refinancing of the real estate.
Total commercial real estate - domestic loans totaled $26.9 billion, or 8
percent of loans and leases, on December 31, 1998 compared to $28.6 billion, or
8 percent, at the end of 1997 with the decrease due to the Corporation's
efforts to lower its exposure to this line of business. Commercial real estate
- - domestic loans past due 90 days or more and still accruing interest were $12
million, or .04 percent of total domestic real estate loans, on December 31,
1998 compared to $17 million, or .06 percent, on December 31, 1997.
The exposures included in Table Seventeen do not include credit extensions
which were made on the general creditworthiness of the borrower for which real
estate was obtained as security and for which the ultimate repayment of the
credit is not dependent on the sale, lease, rental or refinancing of the real
estate. Accordingly, the exposures presented do not include commercial loans
secured by owner-occupied real estate, except where the borrower is a real
estate developer. In addition to the amounts presented in the tables, on
December 31, 1998, the Corporation had approximately $15.1 billion of
commercial loans which were not real estate dependent but for which the
Corporation had obtained real estate as secondary repayment security.
Commercial - Commercial - domestic loan outstandings totaled $137.4
billion and $122.4 billion on December 31, 1998 and 1997, respectively, or 39
percent and 36 percent of loans and leases, respectively. This increase was due
primarily to core loan growth. The Corporation had commercial - domestic loan
net charge-offs in 1998 of $617 million, or .47 percent of average commercial -
domestic loans, compared to $102 million, or .09 percent of average commercial
- - domestic loans, in 1997. Excluding a $372 million charge-off for a credit to
DE Shaw, a trading and investment firm, commercial - domestic loan net
charge-offs were $245 million, or .19 percent of average commercial - domestic
loans, in 1998. Commercial - domestic loans past due 90 days or more and still
accruing interest were $135 million, or .10 percent of commercial - domestic
loans, on December 31, 1998 compared to $52 million, or .04 percent, on
December 31, 1997. Nonperforming commercial - domestic loans were $812 million,
or .59 percent of commercial - domestic loans, on December 31, 1998, compared
to $563 million, or .46 percent, on December 31, 1997. Table Eighteen presents
significant industry commercial loans and lease financings.
40
Table Seventeen
Real Estate Commercial Loans, Foreclosed Properties and Other Real Estate
Credit Exposures
December 31, 1998
(Dollars in Millions)
Loans Other
----------------------------- Foreclosed Credit
Outstanding Nonperforming Properties (1) Exposures (2)
------------- --------------- --------------- --------------
By Geographic Region (3):
California ........................ $ 6,714 $ 28 $ 59 $1,747
Southwest ......................... 3,795 25 12 627
Northwest ......................... 2,849 47 -- 611
Midwest ........................... 2,784 33 6 299
Midatlantic ....................... 2,620 39 9 397
Florida ........................... 1,740 64 13 437
Midsouth .......................... 1,307 14 3 277
Carolinas ......................... 1,185 23 8 1,395
Other states ...................... 3,918 26 31 472
Non-US ............................ 301 4 -- --
------- ---- ---- ------
$27,213 $303 $141 $6,262
======= ==== ==== ======
By Property Type:
Apartments ........................ $ 5,063 $ 18 $ 2 $1,136
Office buildings .................. 4,890 29 11 478
Shopping centers/retail ........... 3,521 62 16 903
Industrial/warehouse .............. 2,640 28 5 335
Residential ....................... 2,596 22 5 355
Hotels/motels ..................... 1,542 19 8 311
Land and land development ......... 1,236 33 67 281
Multiple use ...................... 843 4 1 159
Unsecured ......................... 690 3 -- 62
Miscellaneous commercial .......... 649 14 12 111
Non-US ............................ 301 4 -- --
Resorts/golf courses .............. 134 2 -- 9
Other ............................. 3,108 65 14 2,122
------- ---- ---- ------
$27,213 $303 $141 $6,262
======= ==== ==== ======
(1) Foreclosed properties include commercial real estate loans only.
(2) Other credit exposures include primarily letters of credit and loans held
for sale.
(3) Distribution based on geographic location of collateral.
Commercial-foreign loan outstandings totaled $31.5 billion and $30.1 billion on
December 31, 1998 and 1997, respectively, or 9 percent of loans and leases for
each year. The Corporation had commercial-foreign loan net charge-offs in 1998
of $242 million, or .78 percent of average commercial-foreign loans, compared
to $29 million, or .10 percent of the average commercial-foreign loans in 1997.
The increase in commercial-foreign loan net charge-offs is attributed to
charge-offs in Asia, Latin America, and Eastern Europe. Commercial-foreign
loans past due 90 days or more and still accruing interest were $23 million, or
.07 percent of commercial-foreign loans, on December 31, 1998 compared to $3
million, or .01 percent, on December 31, 1997. Nonperforming commercial-foreign
loans were $314 million, or 1.00 percent of commercial-foreign loans, on
December 31, 1998, compared to $155 million, or .52 percent, on December 31,
1997. For additional information see Recent International Developments on page
42.
41
Table Eighteen
Significant Industry Loans and Leases(1)
December 31, 1998
(Dollars in Millions)
Outstanding
------------
Oil and gas ........................ $10,203
Transportation ..................... 9,903
Media .............................. 8,484
Agribusiness ....................... 8,321
Equipment and general manufacturing 8,052
Health care ........................ 7,795
Retail ............................. 7,396
Business services .................. 6,967
Autos .............................. 6,943
Metals and mining .................. 5,260
(1) Includes only non-real estate commercial loans and leases.
Consumer - On December 31, 1998 and 1997, total domestic consumer loan
outstandings totaled $157.6 billion, or 44 percent of loans and leases and
$157.6 billion or 46 percent of loans and leases, respectively. Total domestic
consumer net charge-offs during 1998 decreased $112 million due mainly to lower
bankcard net charge-offs, partially offset by higher consumer finance net
charge-offs.
Average residential mortgage loans decreased to $70.8 billion compared to
$80.6 billion in 1997, reflecting loan sales and the impact of approximately
$5.1 billion of mortgage loan securitizations in 1998 and $9.6 billion of
mortgage loan securitizations in 1997.
Average managed bankcard receivables (excluding private label bankcards)
increased to $20.5 billion on December 31, 1998 compared to $20.2 billion at
the end of 1997. This increase was partially offset by $2.0 billion of
securitizations in 1998.
Average other consumer loans increased to $70.7 billion in 1998 compared
to $67.9 billion in 1997. The increase was net of the impact of approximately
$3.4 billion of securitizations that occurred throughout 1997 and $4.5 billion
of securitizations in 1998. Average managed other consumer loans increased to
$80.5 billion on December 31, 1998 compared to $73.4 billion at the end of
1997.
Total consumer loans past due 90 days or more and still accruing interest
were $441 million, or .27 percent of total consumer loans, on December 31, 1998
compared to $541 million, or .34 percent, at the end of 1997. Total consumer
nonperforming loans were $1.1 billion, or .65 percent of total consumer loans,
on December 31, 1998 compared to $1.0 billion, or .65 percent, on December 31,
1997.
Recent International Developments - During 1998, and continuing into 1999,
a number of countries in Asia, Latin America and Eastern Europe experienced
economic difficulties due to a combination of structural problems and negative
market reaction that resulted from increased awareness of these problems. While
each country's situation is unique, many share common factors: (1) government
actions which restrain normal functioning of free markets in physical goods,
capital and/or currencies; (2) perceived weaknesses of the banking systems; and
(3) perceived overvaluation of local currencies. In addition, since these
factors have resulted in capital movement out of the countries or in reduced
capital inflows, many of these countries are experiencing liquidity problems in
addition to the structural problems.
Where appropriate, the Corporation has adjusted its activities (including
its borrower selection) in light of the risks and opportunities discussed
above, and has increased its foreign credit reserves related to those risks.
The Corporation also has reduced its exposures in Asia, Latin America and
Central and Eastern Europe during 1998. The Corporation will continue to
monitor and adjust its foreign activities on a country by country basis
depending on management's judgment of the likely developments in each country
and will take action as deemed appropriate. For a more comprehensive discussion
of the Corporation's risk management processes, refer to pages 29 to 35.
42
Exposure Exceeding One Percent of Total Assets(1,2)
Exposure
Public Private Total as a Percentage
(Dollars in Millions) December 31 Sector(2) Banks(2) Sector(2) Exposure of Total Assets
- ----------------------- ------------- ----------- ---------- ----------- ---------- ----------------
Japan 1998 $2,452 $1,519 $1,090 $5,061 .82%
1997 2,485 1,555 2,930 6,970 1.13
1996 1,240 2,030 2,846 6,116 .99
(1) Exposure includes the following assets, primarily in U.S. dollars, with
borrowers or customers in a foreign country: loans, accrued interest,
acceptances, interest-bearing deposits in banks, trading account assets,
securities available for sale and held for investment, other
interest-earning investments, and other monetary assets. Amounts also
include unrealized gains on off-balance-sheet instruments, unused
commitments, standby letters of credit, commercial letters of credit,
formal guarantees, and securities avilable for sale and held for
investment.
(2) Sector definitions are based on Federal Financial Institutions Examination
Council instructions for preparing the Country Exposure Report.
Regional Foreign Exposure - Through its credit and market risk management
activities, the Corporation has been devoting special attention to those
countries that have been negatively impacted by increasing global economic
pressure. This includes special attention to those Asian countries that are
currently experiencing currency and other economic problems, as well as Latin
America and Eastern Europe which are also experiencing similar problems.
In connection with its efforts to maintain a diversified portfolio, the
Corporation limits its exposure to any one geographic region or country and
monitors this exposure on a continuous basis. Table Nineteen sets forth
selected regional exposure as of December 31, 1998. Exposure represents loans,
securities, including restructured debt, and other monetary assets, and also
includes local currency monetary assets that have been funded through local
currency borrowings.
43
The following table is based on the Federal Financial Institutions
Examination Council's instructions for periodic reporting of foreign exposures.
The table has been expanded to include "Gross Local Currency Claims" as defined
per the footnotes. As a result of this addition, the table may not be
consistent with disclosures by others.
Table Nineteen
Regional Foreign Exposure
(Dollars in Millions)
Increase
Total Gross Other Total Total (Decrease)
Cross- Local Cross- Exposure Exposure from
Border Country Border December 31, December 31, December 31,
Loans Claims (1) Claims (2) 1998 1997 1997
Region/Country -------- ------------ ------------ -------------- -------------- -------------
Asia
China ........................ $ 117 $ 142 $ 190 $ 449 $ 765 $ (316)
Hong Kong .................... 54 4,776 358 5,188 5,631 (443)
India ........................ 453 1,937 128 2,518 2,499 19
Indonesia .................... 352 185 186 723 1,510 (787)
Japan ........................ 198 1,826 3,037 5,061 6,970 (1,909)
Korea (South) ................ 561 308 1,010 1,879 3,804 (1,925)
Malaysia ..................... 4 670 54 728 1,254 (526)
Pakistan ..................... 8 335 9 352 550 (198)
Philippines .................. 257 155 171 583 763 (180)
Singapore .................... 171 1,554 281 2,006 2,412 (406)
Taiwan ....................... 370 1,787 133 2,290 2,438 (148)
Thailand ..................... 96 735 119 950 1,957 (1,007)
Other ........................ 7 130 16 153 106 47
------ ------- ------- ------- ------- ---------
2,648 14,540 5,692 22,880 30,659 (7,779)
------ ------- ------- ------- ------- ---------
Central and Eastern Europe
Russian Federation ........... 43 -- 17 60 447 (387)
Other ........................ 338 72 294 704 698 6
------ ------- ------- ------- ------- ---------
381 72 311 764 1,145 (381)
------ ------- ------- ------- ------- ---------
Latin America
Argentina .................... 574 461 232 1,267 1,643 (376)
Brazil ....................... 1,501 586 1,331 3,418 3,630 (212)
Chile ........................ 741 770 140 1,651 1,680 (29)
Colombia ..................... 510 90 198 798 785 13
Mexico ....................... 2,469 391 2,078 4,938 6,112 (1,174)
Venezuela .................... 137 39 381 557 623 (66)
Other ........................ 269 -- 161 430 443 (13)
------ ------- ------- ------- ------- ---------
6,201 2,337 4,521 13,059 14,916 (1,857)
------ ------- ------- ------- ------- ---------
Total ....................... $9,230 $16,949 $10,524 $36,703 $46,720 $ (10,017)
====== ======= ======= ======= ======= =========
(1) Includes the following claims by the Corporation's foreign offices: trading
account securities, derivative products, unused commitments, standby
letters of credit, commercial letters of credit, formal guarantees, and
securities available for sale and held for investment regardless of the
currency.
(2) Includes: accrued interest receivable, acceptances, interest-bearing
deposits in banks, trading account securities, securities under agreement
to resell, other interest-earning investments, other short-term monetary
assets, unrealized gains on off-balance-sheet instruments, unused
commitments, standby letters of credit, commercial letters of credit,
formal guarantees, and securities available for sale and held for
investment, including securities that are collateralized by U.S. Treasury
securities as follows: Mexico - $1,037, Venezuela - $253, Philippines -
$18, and Latin America Other - $85. Held for investment securities
amounted to $960 with a fair value of $921.
Prior period has been restated for comparison.
44
Table Twenty
Selected Quarterly Operating Results
(Dollars in Millions, Except Per-Share Information)
1998 Quarters
---------------------------------------------------
Fourth Third Second First
------------ ------------ ------------ ------------
Interest income ...................................... $ 9,638 $ 9,608 $ 9,637 $ 9,705
Interest expense ..................................... 5,029 5,164 5,011 5,086
Net interest income (taxable-equivalent) ............. 4,650 4,484 4,668 4,659
Net interest income .................................. 4,609 4,444 4,626 4,619
Provision for credit losses .......................... 510 1,405 495 510
Gains on sales of securities ......................... 404 280 120 213
Noninterest income ................................... 2,655 2,405 3,636 3,493
Merger-related charges, net .......................... 600 725 (430) 900
Other noninterest expense ............................ 4,687 4,583 4,767 4,704
Income before taxes .................................. 1,871 416 3,550 2,211
Income tax expense ................................... 709 42 1,252 880
Net income ........................................... 1,162 374 2,298 1,331
Net income (excluding merger-related charges) ........ 1,603 893 2,021 1,973
Earnings per common share ............................ .67 .21 1.32 .77
Earnings per common share (excluding
merger-related charges) ............................. .92 .51 1.16 1.14
Diluted earnings per common share .................... .66 .21 1.28 .75
Diluted earnings per common share (excluding
merger-related charges) ............................. .91 .50 1.13 1.11
Dividends per common share ........................... .45 .38 .38 .38
Yield on average earning assets ...................... 7.44% 7.73% 7.89% 7.98%
Rate on average interest-bearing liabilities ......... 4.60 4.94 4.90 4.93
Net interest spread .................................. 2.84 2.79 2.99 3.05
Net interest yield ................................... 3.58 3.60 3.80 3.83
Average total assets ................................. $606,541 $578,353 $ 573,975 $ 578,841
Average total deposits ............................... 351,766 347,783 342,369 339,867
Average total shareholders' equity ................... 45,051 45,756 44,857 43,628
Return on average assets ............................. .76 .26 1.61 .93
Return on average assets (excluding
merger-related charges) ............................. 1.05 .61 1.41 1.38
Return on average common shareholders'
equity (1) .......................................... 10.23 3.23 20.76 12.46
Return on average common shareholders' equity
(excluding merger-related charges) (1) .............. 14.12 7.73 18.24 18.52
Cash basis financial data (2)
Earnings per common share ........................... $ .80 $ .34 $ 1.45 $ .90
Earnings per common share (excluding
merger-related charges) ............................ 1.05 .64 1.29 1.27
Diluted earnings per common share ................... .79 .34 1.41 .87
Diluted earnings per common share (excluding
merger-related charges) ............................ 1.04 .63 1.25 1.24
Return on average tangible assets ................... .93% .42% 1.81% 1.12%
Return on average tangible assets (excluding
merger-related charges) ............................ 1.22 .79 1.61 1.59
Return on average tangible common
shareholders' equity (1) ........................... 18.18 7.76 35.10 23.02
Return on average tangible common
shareholders' equity (excluding
merger-related charges) (1) ........................ 23.97 14.51 31.23 32.57
Tier 1 capital ratio (3) ............................. 7.06% 7.29% 7.32% 6.80%
Total capital ratio (3) .............................. 10.94 11.25 11.77 11.19
Market price per share of common stock
High for the period ................................. $ 66 5/8 $88 7/16 $ 85 $ 75 1/8
Low for the period .................................. 44 47 7/8 72 1/16 56 1/4
Closing price ....................................... 60 1/8 53 1/2 76 11/16 72 15/16
1997 Quarters
--------------------------------------------------
Fourth Third Second First
------------ ------------ ------------ -----------
Interest income ...................................... $ 9,534 $ 9,443 $ 9,298 $ 9,058
Interest expense ..................................... 4,976 4,808 4,648 4,469
Net interest income (taxable-equivalent) ............. 4,598 4,676 4,689 4,626
Net interest income .................................. 4,558 4,635 4,650 4,589
Provision for credit losses .......................... 498 489 476 441
Gains on sales of securities ......................... 111 54 42 64
Noninterest income ................................... 3,225 3,078 2,796 2,657
Merger-related charges, net .......................... 302 72 -- --
Other noninterest expense ............................ 4,736 4,419 4,240 4,230
Income before taxes .................................. 2,358 2,787 2,772 2,639
Income tax expense ................................... 899 1,057 1,055 1,003
Net income ........................................... 1,459 1,730 1,718 1,635
Net income (excluding merger-related charges) ........ 1,679 1,774 1,718 1,635
Earnings per common share ............................ .84 .99 .97 .91
Earnings per common share (excluding
merger-related charges) ............................. .96 1.02 .97 .91
Diluted earnings per common share .................... .81 .96 .94 .89
Diluted earnings per common share (excluding
merger-related charges) ............................. .94 .99 .94 .89
Dividends per common share ........................... .38 .33 .33 .33
Yield on average earning assets ...................... 8.02% 8.11% 8.10% 8.02%
Rate on average interest-bearing liabilities ......... 4.97 4.90 4.79 4.69
Net interest spread .................................. 3.05 3.21 3.31 3.33
Net interest yield ................................... 3.85 4.00 4.07 4.09
Average total assets ................................. $ 556,595 $ 543,030 $539,433 $535,905
Average total deposits ............................... 338,331 336,418 337,384 335,370
Average total shareholders' equity ................... 43,807 43,241 43,585 43,810
Return on average assets ............................. 1.04 1.26 1.28 1.24
Return on average assets (excluding
merger-related charges) ............................. 1.20 1.30 1.28 1.24
Return on average common shareholders'
equity (1) .......................................... 13.33 16.13 16.14 15.48
Return on average common shareholders' equity
(excluding merger-related charges) (1) .............. 15.36 16.55 16.14 15.48
Cash basis financial data (2)
Earnings per common share ........................... $ .97 $ 1.11 $ 1.09 $ 1.03
Earnings per common share (excluding
merger-related charges) ............................ 1.09 1.14 1.09 1.03
Diluted earnings per common share ................... .94 1.08 1.06 1.00
Diluted earnings per common share (excluding
merger-related charges) ............................ 1.06 1.11 1.06 1.00
Return on average tangible assets ................... 1.23% 1.46% 1.48% 1.43%
Return on average tangible assets (excluding
merger-related charges) ............................ 1.40 1.49 1.48 1.43
Return on average tangible common
shareholders' equity (1) ........................... 24.38 28.08 28.40 26.38
Return on average tangible common
shareholders' equity (excluding
merger-related charges) (1) ........................ 27.59 28.73 28.40 26.38
Tier 1 capital ratio (3) ............................. 6.50% 7.00% 6.83% 7.06%
Total capital ratio (3) .............................. 10.89 11.56 11.32 11.58
Market price per share of common stock
High for the period ................................. $ 66 3/8 $71 11/16 $ 70 $ 65
Low for the period .................................. 55 56 5/8 54 48
Closing price ....................................... 60 13/16 61 7/8 64 9/16 55 1/2
(1) Average common shareholders' equity does not include the effect of market
value adjustments to securities available for sale and marketable equity
securities.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
(3) Ratios for the first and second quarters of 1998 are NationsBank ratios,
and have not been restated to reflect the impact of the BankAmerica
merger. Ratios for 1997 are NationsBank ratios, and have not been restated
to reflect the BankAmerica and Barnett mergers.
45
Table Twenty-One
Quarterly Taxable-Equivalent Data
(Dollars in Millions)
Fourth Quarter 1998
-------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
----------- --------- ---------
Earning assets
Loans and leases (1)
Commercial - domestic .................................................... $136,629 $2,542 7.39%
Commercial - foreign ..................................................... 32,893 569 6.86
Commercial real estate - domestic ........................................ 28,427 601 8.38
Commercial real estate - foreign ......................................... 319 8 9.39
-------- ------ -----
Total commercial ........................................................ 198,268 3,720 7.45
-------- ------ -----
Residential mortgage ..................................................... 73,033 1,336 7.30
Home equity lines ........................................................ 15,781 326 8.17
Direct/Indirect consumer ................................................. 40,557 876 8.57
Consumer finance ......................................................... 14,368 338 9.33
Bankcard ................................................................. 12,078 366 12.01
Foreign consumer ......................................................... 3,551 94 10.47
-------- ------ -----
Total consumer .......................................................... 159,368 3,336 8.32
-------- ------ -----
Total loans and leases ................................................. 357,636 7,056 7.84
-------- ------ -----
Securities
Held for investment ...................................................... 2,948 44 6.09
Available for sale (2) ................................................... 69,354 1,162 6.68
-------- ------ -----
Total securities ........................................................ 72,302 1,206 6.66
-------- ------ -----
Federal funds sold and securities purchased under agreements to resell..... 29,564 486 6.53
Time deposits placed and other short-term investments ..................... 6,702 111 6.56
Trading account securities ................................................ 39,391 613 6.19
Other earning assets ...................................................... 11,471 207 7.19
-------- ------ -----
Total earning assets (3) ................................................ 517,066 9,679 7.44
-------- ------ -----
Cash and cash equivalents .................................................. 25,834
Other assets, less allowance for credit losses ............................. 63,641
--------
Total assets ............................................................ $606,541
========
Interest-bearing liabilities
Domestic interest-bearing deposits
Savings .................................................................. $ 21,702 91 1.67
NOW and money market deposit accounts .................................... 97,589 622 2.53
Consumer CDs and IRAs .................................................... 74,923 956 5.06
Negotiated CDs, public funds and other time deposits ..................... 7,388 96 5.16
-------- ------ -----
Total domestic interest-bearing deposits ................................ 201,602 1,765 3.47
-------- ------ -----
Foreign interest-bearing deposits (4)
Banks located in foreign countries ....................................... 24,938 325 5.17
Governments and official institutions .................................... 10,278 143 5.54
Time, savings, and other ................................................. 26,868 365 5.39
-------- ------ -----
Total foreign interest-bearing deposits ................................. 62,084 833 5.32
-------- ------ -----
Total interest-bearing deposits ......................................... 263,686 2,598 3.91
-------- ------ -----
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings ............................... 104,416 1,422 5.40
Trading account liabilities ............................................... 14,194 165 4.62
Long-term debt (5) ........................................................ 51,779 844 6.52
-------- ------ -----
Total interest-bearing liabilities (6) .................................. 434,075 5,029 4.60
-------- ------ -----
Noninterest-bearing sources
Noninterest-bearing deposits .............................................. 88,080
Other liabilities ......................................................... 39,335
Shareholders' equity ...................................................... 45,051
--------
Total liabilities and shareholders' equity .............................. $606,541
========
Net interest spread ........................................................ 2.84
Impact of noninterest-bearing sources ...................................... .74
-----
Net interest income/yield on earning assets ................................ $4,650 3.58%
====== =====
Third Quarter 1998
--------------------------------
Average
Balance Income
Sheet or Yields/
Amounts Expense Rates
----------- --------- ----------
Earning assets
Loans and leases (1)
Commercial - domestic .................................................... $132,537 $2,538 7.59%
Commercial - foreign ..................................................... 31,245 578 7.35
Commercial real estate - domestic ........................................ 28,027 610 8.64
Commercial real estate - foreign ......................................... 338 8 10.51
-------- ------ -----
Total commercial ........................................................ 192,147 3,734 7.71
-------- ------ -----
Residential mortgage ..................................................... 70,619 1,155 6.53
Home equity lines ........................................................ 16,024 485 12.03
Direct/Indirect consumer ................................................. 39,582 854 8.56
Consumer finance ......................................................... 14,197 385 10.76
Bankcard ................................................................. 12,751 399 12.43
Foreign consumer ......................................................... 3,465 93 10.57
-------- ------ -----
Total consumer .......................................................... 156,638 3,371 8.56
-------- ------ -----
Total loans and leases ................................................. 348,785 7,105 8.09
-------- ------ -----
Securities
Held for investment ...................................................... 4,286 76 6.99
Available for sale (2) ................................................... 61,250 1,046 6.82
-------- ------ -----
Total securities ........................................................ 65,536 1,122 6.83
-------- ------ -----
Federal funds sold and securities purchased under agreements to resell..... 27,646 492 7.06
Time deposits placed and other short-term investments ..................... 7,483 138 7.31
Trading account securities ................................................ 35,487 587 6.59
Other earning assets ...................................................... 10,974 204 7.42
-------- ------ -----
Total earning assets (3) ................................................ 495,911 9,648 7.73
-------- ------ -----
Cash and cash equivalents .................................................. 24,160
Other assets, less allowance for credit losses ............................. 58,282
--------
Total assets ............................................................ $578,353
========
Interest-bearing liabilities
Domestic interest-bearing deposits
Savings .................................................................. $ 22,775 107 1.87
NOW and money market deposit accounts .................................... 95,276 634 2.64
Consumer CDs and IRAs .................................................... 74,313 984 5.25
Negotiated CDs, public funds and other time deposits ..................... 8,696 120 5.45
-------- ------ -----
Total domestic interest-bearing deposits ................................ 201,060 1,845 3.64
-------- ------ -----
Foreign interest-bearing deposits (4)
Banks located in foreign countries ....................................... 27,892 418 5.95
Governments and official institutions .................................... 11,084 156 5.59
Time, savings, and other ................................................. 24,086 411 6.77
-------- ------ -----
Total foreign interest-bearing deposits ................................. 63,062 985 6.20
-------- ------ -----
Total interest-bearing deposits ......................................... 264,122 2,830 4.25
-------- ------ -----
Federal funds purchased, securities sold under agreements to
repurchase and other short-term borrowings ............................... 84,283 1,278 6.02
Trading account liabilities ............................................... 15,454 194 4.97
Long-term debt (5) ........................................................ 51,365 862 6.71
-------- ------ -----
Total interest-bearing liabilities (6) .................................. 415,224 5,164 4.94
-------- ------ -----
Noninterest-bearing sources
Noninterest-bearing deposits .............................................. 83,661
Other liabilities ......................................................... 33,712
Shareholders' equity ...................................................... 45,756
--------
Total liabilities and shareholders' equity .............................. $578,353
========
Net interest spread ........................................................ 2.79
Impact of noninterest-bearing sources ...................................... .81
-----
Net interest income/yield on earning assets ................................ $4,484 3.60%
====== =====
(1) Nonperforming loans are included in the respective average loan balances.
Income on such nonperforming loans is recognized on a cash basis.
(2) The average balance sheet amounts and yields on securities available for
sale are based on the average of historical amortized cost balances.
(3) Interest income includes taxable-equivalent adjustments of $41, $40, $42
and $40 in the fourth, third, second and first quarters of 1998 and $40 in
the fourth quarter of 1997, respectively. Interest income also includes
the impact of risk management interest rate contracts, which increased
interest income on the underlying linked assets $70, $46, $29 and $29 in
the fourth, third, second and first quarters of 1998 and $51 in the fourth
quarter of 1997, respectively.
(4) Primarily consists of time deposits in denominations of $100,000 or more.
(5) Long-term debt includes trust preferred securities.
(6) Interest expense includes the impact of risk management interest rate
contracts, which decreased interest expense on the underlying linked
liabilities of $27, $9, $4 and $5 in the fourth, third, second and first
quarters of 1998 and $22 in the fourth quarter of 1997, respectively.
46
Second Quarter 1998 First Quarter 1998 Fourth Quarter 1997
- ----------------------------------- ----------------------------------- ------------------------------------
Average Average Average
Balance Income Balance Income Balance Income
Sheet or Yields/ Sheet or Yields/ Sheet or Yields/
Amounts Expense Rates Amount Expense Rates Amounts Expense Rates
- ----------- --------- --------- ----------- --------- --------- ----------- --------- ----------
$127,788 $2,496 7.84% $123,586 $2,413 7.91% $118,234 $2,370 7.95%
30,046 556 7.41 29,840 543 7.37 29,291 519 7.04
28,228 644 9.15 29,000 648 9.06 29,020 666 9.11
334 9 9.82 327 8 10.48 0 0 0.00
-------- ------ ----- -------- ------ ----- -------- ------ -----
186,396 3,705 7.97 182,753 3,612 8.01 176,545 3,555 8.01
-------- ------ ----- -------- ------ ----- -------- ------ -----
69,337 1,171 6.76 70,350 1,218 6.95 73,138 1,290 7.05
16,271 473 11.64 16,448 457 11.28 16,308 479 11.65
40,404 895 8.90 40,280 880 8.85 39,562 874 8.78
14,249 387 10.88 14,662 419 11.60 14,163 408 11.42
12,780 409 12.83 14,259 464 13.19 14,762 491 13.17
3,350 87 10.53 3,218 83 10.46 3,403 83 9.68
-------- ------ ----- -------- ------ ----- -------- ------ -----
156,391 3,422 8.77 159,217 3,521 8.94 161,336 3,625 8.91
-------- ------ ----- -------- ------ ----- -------- ------ -----
342,787 7,127 8.34 341,970 7,133 8.44 337,881 7,180 8.44
-------- ------ ----- -------- ------ ----- -------- ------ -----
4,525 79 7.03 4,713 83 7.09 4,853 86 7.00
58,527 1,017 6.95 61,074 1,061 6.98 55,871 962 6.87
-------- ------ ----- -------- ------ ----- -------- ------ -----
63,052 1,096 6.96 65,787 1,144 6.99 60,724 1,048 6.88
-------- ------ ----- -------- ------ ----- -------- ------ -----
25,275 433 6.86 26,632 417 6.35 24,884 414 6.59
7,916 129 6.54 8,517 136 6.48 8,037 142 7.02
42,421 693 6.56 41,868 740 7.14 38,253 691 7.18
10,494 201 7.68 9,047 175 7.76 4,542 99 8.68
-------- ------ ----- -------- ------ ----- -------- ------ -----
491,945 9,679 7.89 493,821 9,745 7.98 474,321 9,574 8.02
-------- ------ ----- -------- ------ ----- -------- ------ -----
25,071 24,558 24,203
56,959 60,462 58,071
-------- -------- --------
$573,975 $578,841 $556,595
======== ======== ========
$ 23,208 112 1.93 $ 23,096 111 1.95 $ 23,596 118 1.98
96,605 638 2.65 96,696 642 2.70 95,570 648 2.69
74,002 983 5.29 75,393 992 5.33 76,939 1,036 5.35
8,388 117 5.63 5,917 81 5.53 6,285 89 5.65
-------- ------ ----- -------- ------ ----- -------- ------ -----
202,203 1,850 3.66 201,102 1,826 3.68 202,390 1,891 3.71
-------- ------ ----- -------- ------ ----- -------- ------ -----
22,393 326 5.84 23,067 336 5.91 22,523 347 6.11
10,629 150 5.64 10,067 141 5.69 9,759 140 5.70
22,592 364 6.49 23,467 390 6.70 22,706 351 6.11
-------- ------ ----- -------- ------ ----- -------- ------ -----
55,614 840 6.07 56,601 867 6.20 54,988 838 6.04
-------- ------ ----- -------- ------ ----- -------- ------ -----
257,817 2,690 4.18 257,703 2,693 4.24 257,378 2,729 4.21
-------- ------ ----- -------- ------ ----- -------- ------ -----
82,385 1,229 5.98 91,358 1,310 5.82 76,245 1,164 6.06
19,817 262 5.30 20,516 274 5.43 17,128 278 6.44
49,254 830 6.74 47,416 809 6.83 46,908 805 6.86
-------- ------ ----- -------- ------ ----- -------- ------ -----
409,273 5,011 4.90 416,993 5,086 4.93 397,659 4,976 4.97
-------- ------ ----- -------- ------ ----- -------- ------ -----
84,552 82,164 80,953
35,293 36,056 34,176
44,857 43,628 43,807
-------- -------- --------
$573,975 $578,841 $556,595
======== ======== ========
2.99 3.05 3.05
.81 .78 .80
------ ----- ------ ----- ------ -----
$4,668 3.80% $4,659 3.83% $4,598 3.85%
====== ===== ====== ===== ====== =====
47
1997 Compared to 1996
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 1997 and
1996. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 50 through 96.
Overview
The Corporation's continued earnings momentum was demonstrated through a
12-percent increase in operating net income to $6.81 billion in 1997 compared
to $6.06 billion in 1996. Operating earnings per common share for 1997
increased 8 percent to $3.86 from $3.57 in 1996. Including merger-related
charges of $374 million ($264 million, net of tax), net income increased 13
percent to $6.54 billion while earnings per common share rose 8 percent to
$3.71 and diluted earnings per common share increased 7 percent to $3.61,
respectively.
Business Segment Operations
Consumer Banking's 1997 earnings increased 21 percent to $3.5 billion.
Return on risk-adjusted average equity remained constant at 17 percent in 1997.
Revenue growth and expense control led to a 50-basis point improvement in the
efficiency ratio in 1997 to 60.9 percent.
Commercial Banking's 1997 earnings increased 18 percent to $861 million.
Return on risk-adjusted average equity decreased to 21 percent in 1997. Revenue
growth and expense control led to a 20-basis point improvement in the
efficiency ratio in 1997 to 45.9 percent.
Global Corporate and Investment Banking's earnings rose to $1.6 billion in
1997. Return on risk-adjusted average equity decreased to 15 percent in 1997.
The efficiency ratio improved 270 basis points to 54.8 percent.
Principal Investing and Wealth Management's earnings rose 8 percent to
$560 million in 1997. Return on risk-adjusted average equity decreased to 28
percent in 1997. The efficiency ratio was 61.4 percent in 1997 compared to 58.6
percent in 1996.
Net Interest Income
Taxable-equivalent net interest income increased 9 percent to $18.6
billion in 1997 compared to $17.1 billion in 1996 due to acquisitions, higher
spreads in the securities portfolio, core loan growth and increased
noninterest-bearing deposits. The increase was partially offset by the impact
of securitizations and a shift in funding to long-term debt.
The net interest yield decreased 8 basis points to 4.00 percent in 1997
compared to 4.08 percent in 1996 caused by lower yields received on average
earning assets, as well as a decrease in the spreads between loans and
deposits.
Provision for Credit Losses
The provision for credit losses covered net charge-offs and was $1.9
billion in 1997 compared to $1.6 billion in the prior year, reflecting the
continuation of a return to more normalized levels of credit losses following
periods of unusually low credit losses. Net charge-offs increased $185 million
to $1.9 billion in 1997 over 1996 primarily due to increases in consumer
finance and bankcard net charge-offs.
The allowance for credit losses was $6.8 billion, or 1.98 percent of loans
and leases, on December 31, 1997 compared to $6.3 billion, or 1.99 percent, at
the end of 1996. The allowance for credit losses was 321 percent of
nonperforming loans on December 31, 1997 compared to 287 percent on December
31, 1996.
Noninterest Income
Noninterest income increased 22 percent to $11.8 billion in 1997, driven
primarily by higher deposit account service charges and asset management and
fiduciary service fees, as well as higher investment banking and credit card
income.
48
Other Noninterest Expense
Other noninterest expense increased 15 percent to $17.6 billion. The
increase in other noninterest expense was primarily caused by 1997 acquisitions
including Boatmen's, NationsBanc Auto Leasing, Inc., Robertson Stephens and
NationsBanc Montgomery Securities.
Income Taxes
The Corporation's income tax expense for 1997 was $4.0 billion, for an
effective tax rate of 38.0 percent of pre-tax income. Income tax expense for
1996 was $3.5 billion, for an effective tax rate of 37.6 percent of pre-tax
income.
49
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Market Risk Management" for Quantitative and Qualitative
Disclosures about Market Risk.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
The management of BankAmerica Corporation is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of the Corporation. The consolidated financial statements and notes have been
prepared by the Corporation in accordance with generally accepted accounting
principles and, in the judgment of management, present fairly the Corporation's
financial position and results of operations. The financial information
contained elsewhere in this report is consistent with that in the consolidated
financial statements. The financial statements and other financial information
in this report include amounts that are based on management's best estimates
and judgments giving due consideration to materiality.
The Corporation maintains a system of internal accounting controls to
provide reasonable assurance that assets are safe-guarded and that transactions
are executed in accordance with management's authorization and recorded
properly to permit the preparation of consolidated financial statements in
accordance with generally accepted accounting principles. Management recognizes
that even a highly effective internal control system has inherent risks,
including the possibility of human error and the circumvention or overriding of
controls, and that the effectiveness of an internal control system can change
with circumstances. However, management believes that the internal control
system provides reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected on a timely basis and corrected through the normal course of business.
As of December 31, 1998, management believes that the internal controls are in
place and operating effectively.
The Internal Audit Division of the Corporation reviews, evaluates,
monitors and makes recommendations on both administrative and accounting
control, which acts as an integral, but independent, part of the system of
internal controls.
The independent accountants were engaged to perform an independent audit
of the consolidated financial statements. In determining the nature and extent
of their auditing procedures, they have evaluated the Corporation's accounting
policies and procedures and the effectiveness of the related internal control
system. An independent audit provides an objective review of management's
responsibility to report operating results and financial condition. Their
report appears on page 51.
The Board of Directors discharges its responsibility for the Corporation's
consolidated financial statements through its Audit Committee. The Audit
Committee meets periodically with the independent accountants, internal
auditors and management. Both the independent accountants and internal auditors
have direct access to the Audit Committee to discuss the scope and results of
their work, the adequacy of internal accounting controls and the quality of
financial reporting.
/s/ Hugh L. McColl Jr.
HUGH L. MCCOLL JR.
Chief Executive Officer
/s/ James H. Hance Jr.
JAMES H. HANCE JR.
Vice Chairman and
Chief Financial Officer
50
Report Of Independent Accountants
To the Board of Directors and Shareholders of BankAmerica Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
BankAmerica Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
January 15, 1999
51
BankAmerica Corporation and Subsidiaries
Consolidated Statement of Income
(Dollars in Millions, Except Per-Share Information)
Year Ended December 31
--------------------------------------
1998 1997 1996
------------ ------------ ------------
Interest income
Interest and fees on loans and leases ...................................... $ 28,331 $ 29,085 $ 26,439
Interest and dividends on securities ....................................... 4,502 3,283 2,797
Federal funds sold and securities purchased under agreements to resell ..... 1,828 1,516 1,371
Trading account securities ................................................. 2,626 2,582 2,229
Other interest income ...................................................... 1,301 867 800
---------- ---------- ----------
Total interest income ..................................................... 38,588 37,333 33,636
---------- ---------- ----------
Interest expense
Deposits ................................................................... 10,811 10,684 9,600
Borrowed funds ............................................................. 5,239 4,105 3,699
Trading account liabilities ................................................ 895 975 880
Long-term debt ............................................................. 3,345 3,137 2,503
---------- ---------- ----------
Total interest expense .................................................... 20,290 18,901 16,682
---------- ---------- ----------
Net interest income ......................................................... 18,298 18,432 16,954
Provision for credit losses ................................................. 2,920 1,904 1,645
---------- ---------- ----------
Net credit income ........................................................... 15,378 16,528 15,309
Gains on sales of securities ................................................ 1,017 271 147
Noninterest income
Service charges on deposit accounts ........................................ 3,396 3,373 2,822
Mortgage servicing and other mortgage-related income ....................... 115 401 340
Investment banking income .................................................. 2,009 1,476 1,028
Trading account profits and fees ........................................... 171 976 885
Brokerage income ........................................................... 728 355 259
Other nondeposit-related service fees ...................................... 652 680 520
Asset management and fiduciary service fees ................................ 973 990 744
Credit card income ......................................................... 1,448 1,231 899
Other income ............................................................... 2,697 2,274 2,107
---------- ---------- ----------
Total noninterest income .................................................. 12,189 11,756 9,604
---------- ---------- ----------
Merger-related charges, net ................................................. 1,795 374 398
Other noninterest expense
Personnel .................................................................. 9,412 8,703 7,501
Occupancy, net ............................................................. 1,643 1,576 1,476
Equipment .................................................................. 1,404 1,408 1,229
Marketing .................................................................. 581 655 589
Professional fees .......................................................... 843 763 634
Amortization of intangibles ................................................ 902 855 544
Data processing ............................................................ 765 626 551
Telecommunications ......................................................... 563 491 413
Other general operating .................................................... 2,044 2,059 1,998
General administrative and miscellaneous ................................... 584 489 416
---------- ---------- ----------
Total other noninterest expense ........................................... 18,741 17,625 15,351
---------- ---------- ----------
Income before income taxes .................................................. 8,048 10,556 9,311
Income tax expense .......................................................... 2,883 4,014 3,498
---------- ---------- ----------
Net income .................................................................. $ 5,165 $ 6,542 $ 5,813
========== ========== ==========
Net income available to common shareholders ................................. $ 5,140 $ 6,431 $ 5,611
========== ========== ==========
Per-share information (1)
Earnings per common share .................................................. $ 2.97 $ 3.71 $ 3.42
========== ========== ==========
Diluted earnings per common share .......................................... $ 2.90 $ 3.61 $ 3.36
========== ========== ==========
Dividends per common share ................................................. $ 1.59 $ 1.37 $ 1.20
========== ========== ==========
Average common shares issued and outstanding (in thousands) (1) ............. 1,732,057 1,733,194 1,638,382
========== ========== ==========
(1) Share and per-share data reflect a 2-for-1 stock split on February 27,
1997.
See accompanying notes to consolidated financial statements.
52
BankAmerica Corporation and Subsidiaries
Consolidated Balance Sheet
(Dollars in Millions)
December 31
-------------------------
1998 1997
------------ ------------
Assets
Cash and cash equivalents ............................................................... $ 28,277 $ 28,466
Time deposits placed and other short-term investments ................................... 6,750 8,363
Securities
Held for investment, at cost (market value - $1,853 and $4,905)......................... 1,997 4,822
Available for sale ..................................................................... 78,590 62,209
-------- --------
Total securities ..................................................................... 80,587 67,031
-------- --------
Federal funds sold and securities purchased under agreements to resell .................. 27,146 20,200
Trading account assets .................................................................. 39,602 35,937
Derivative-dealer assets ................................................................ 16,400 14,824
Loans and leases ........................................................................ 357,328 342,140
Allowance for credit losses ............................................................. (7,122) (6,778)
-------- --------
Loans and leases, net of allowance for credit losses ................................... 350,206 335,362
-------- --------
Premises and equipment, net ............................................................. 7,289 8,123
Customers' acceptance liability ......................................................... 2,671 4,891
Interest receivable ..................................................................... 3,734 3,584
Mortgage servicing rights ............................................................... 2,376 2,040
Goodwill ................................................................................ 12,695 13,551
Core deposits and other intangibles ..................................................... 2,013 2,203
Other assets ............................................................................ 37,933 26,408
-------- --------
Total assets ........................................................................... $617,679 $570,983
======== ========
Liabilities
Deposits in domestic offices
Interest-bearing ....................................................................... $203,644 $202,082
Noninterest-bearing .................................................................... 92,623 85,815
Deposits in foreign offices
Interest-bearing ....................................................................... 59,280 56,719
Noninterest-bearing .................................................................... 1,713 1,681
-------- --------
Total deposits ....................................................................... 357,260 346,297
-------- --------
Federal funds purchased and securities sold under agreements to repurchase .............. 67,543 61,414
Trading account liabilities ............................................................. 14,170 17,300
Derivative-dealer liabilities ........................................................... 16,835 13,639
Commercial paper ........................................................................ 6,749 5,925
Other short-term borrowings ............................................................. 24,742 12,120
Acceptances outstanding ................................................................. 2,671 4,893
Accrued expenses and other liabilities .................................................. 30,929 17,346
Trust preferred securities .............................................................. 4,954 4,578
Long-term debt .......................................................................... 45,888 42,887
-------- --------
Total liabilities ...................................................................... 571,741 526,399
-------- --------
Contingent liabilities and other financial commitments (Notes Eleven and Thirteen)
Shareholders' Equity
Preferred stock: authorized - 100,000,000 shares; issued and outstanding - 1,952,039 and
10,933,884 shares ...................................................................... 83 708
Common stock: authorized - 5,000,000,000 shares; issued and outstanding - 1,724,484,305
and 1,722,537,672 shares ............................................................... 14,837 15,140
Retained earnings ....................................................................... 30,998 28,438
Accumulated other comprehensive income .................................................. 152 407
Other ................................................................................... (132) (109)
-------- --------
Total shareholders' equity ............................................................. 45,938 44,584
-------- --------
Total liabilities and shareholders' equity .......................................... $617,679 $570,983
======== ========
See accompanying notes to consolidated financial statements.
53
BankAmerica Corporation and Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in Millions)
Year Ended December 31
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Operating Activities
Net income ........................................................................... $ 5,165 $ 6,542 $ 5,813
Reconciliation of net income to net cash provided by operating activities
Provision for credit losses ........................................................ 2,920 1,904 1,645
Gains on sales of securities ....................................................... (1,017) (271) (147)
Merger-related charges, net ........................................................ 1,795 374 398
Depreciation and premises improvements amortization ................................ 1,096 1,108 983
Amortization of intangibles ........................................................ 902 855 544
Deferred income tax (benefit) expense .............................................. (100) 971 965
Net increase in trading instruments ................................................ (2,998) (3,271) (3,506)
Net (increase) decrease in interest receivable ..................................... (157) (542) 604
Net increase (decrease) in interest payable ........................................ 94 179 (515)
Other operating activities ......................................................... 3,191 (6,424) (2,904)
--------- --------- ---------
Net cash provided by operating activities ......................................... 10,891 1,425 3,880
--------- --------- ---------
Investing Activities
Proceeds from maturities of securities held for investment ........................... 1,162 1,898 3,440
Purchases of securities held for investment .......................................... (249) (570) (646)
Proceeds from sales and maturities of securities available for sale .................. 81,254 44,268 40,767
Purchases of securities available for sale ........................................... (93,136) (56,825) (24,150)
Net increase in federal funds sold and securities purchased under agreements to
resell ............................................................................. (7,028) (3,531) (2,078)
Net decrease (increase) in time deposits placed and other short-term investments ..... 1,612 (857) (512)
Purchases and net originations of loans and leases ................................... (89,055) (39,394) (30,883)
Proceeds from sales and securitizations of loans and leases .......................... 59,297 30,936 17,947
Purchases and originations of mortgage servicing rights .............................. (853) (419) (654)
Net purchases of premises and equipment .............................................. (437) (888) (1,183)
Proceeds from sales of foreclosed properties ......................................... 525 610 694
Sales and acquisitions of business activities, net of cash ........................... (335) 1,289 795
--------- --------- ---------
Net cash (used in) provided by investing activities ............................... (47,243) (23,483) 3,537
--------- --------- ---------
Financing Activities
Net increase in deposits ............................................................. 16,476 4,774 267
Net increase (decrease) in federal funds purchased and securities sold under
agreements to repurchase ........................................................... 6,137 26,680 (11,959)
Net increase (decrease) in other short-term borrowings and commercial paper .......... 13,672 (1,440) 3,442
Proceeds from issuance of trust preferred securities ................................. 340 1,613 2,965
Proceeds from issuance of long-term debt ............................................. 12,166 7,823 11,199
Retirement of long-term debt ......................................................... (8,809) (6,740) (6,272)
Proceeds from issuance of common stock ............................................... 1,367 1,892 573
Cash dividends paid .................................................................. (2,604) (2,175) (1,888)
Common stock repurchased ............................................................. (1,751) (8,540) (3,193)
Other financing activities ........................................................... (863) (2,036) (63)
--------- --------- ---------
Net cash provided by (used in) financing activities ............................... 36,131 21,851 (4,929)
Effect of exchange rate changes on cash and cash equivalents ......................... 32 102 22
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents .................................. (189) (105) 2,510
Cash and cash equivalents on January 1 ................................................ 28,466 28,571 26,061
--------- --------- ---------
Cash and cash equivalents on December 31 ............................................. $ 28,277 $ 28,466 $ 28,571
========= ========= =========
Supplemental cash flow disclosures:
Cash paid for interest ............................................................... $ 20,198 $ 18,585 $ 17,113
Cash paid for income taxes ........................................................... 2,695 1,760 2,456
Loans transferred to foreclosed properties amounted to $353, $431 and $569 in
1998, 1997 and 1996, respectively.
Loans securitized and retained in the trading and available for sale
securities portfolios amounted to $6,083, $7,842 and $4,558 in 1998, 1997 and
1996, respectively.
The fair value of noncash assets acquired in acquisitions during 1998 was
approximately $109, net of cash acquired. The fair values of noncash assets
acquired and liabilities assumed in acquisitions during 1997 were approximately
$52,226 and $43,024, respectively, net of cash acquired.
See accompanying notes to consolidated financial statements.
54
BankAmerica Corporation and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity
(Dollars in Millions, Shares in Thousands)
Common Stock
Preferred
Stock Shares Amount
------------- ------------- ----------
Balance on December 31, 1995 ........... $ 2,826 1,605,450 $ 13,418
Net income ............................
Other comprehensive income, net
of tax ..............................
Comprehensive income ..................
Cash dividends
Common ..............................
Preferred ...........................
Common stock issued under
dividend reinvestment and
employee plans ...................... 18,463 536
Stock issued in acquisitions .......... 73 55,436 586
Common stock repurchased .............. (85,036) (3,193)
Redemption of preferred stock ......... (381)
Conversion of preferred stock ......... (98) 8,703 98
Other ................................. (7) (252) (26)
----------- --------- --------
Balance on December 31, 1996 ........... 2,413 1,602,764 11,419
========== ========= ========
Net income ............................
Other comprehensive income, net
of tax ..............................
Comprehensive income ..................
Cash dividends
Common ..............................
Preferred ...........................
Common stock issued under
dividend reinvestment and
employee plans ...................... 47,431 1,888
Stock issued in acquisitions .......... 82 219,024 10,320
Common stock repurchased .............. (150,016) (8,540)
Redemption of preferred stock ......... (1,701)
Conversion of preferred stock ......... (86) 3,859 86
Other ................................. (524) (33)
----------- --------- --------
Balance on December 31, 1997 ........... 708 1,722,538 15,140
========== ========= ========
Net income ............................
Other comprehensive income, net
of tax ..............................
Comprehensive income ..................
Cash dividends
Common ..............................
Preferred ...........................
Common stock issued under
dividend reinvestment and
employee plans ...................... 30,489 1,417
Stock issued in acquisitions .......... 385 15
Common stock repurchased .............. (29,349) (1,751)
Redemption of preferred stock ......... (614)
Conversion of preferred stock ......... (11) 444 11
Other ................................. (23) 5
----------- --------- --------
Balance on December 31, 1998 ........... $ 83 1,724,484 $ 14,837
========== ========= ========
Accumulated Total
Other Share-
Retained Comprehensive holders' Comprehensive
Earnings Income(1) Other Equity Income
------------- --------------- ---------- ---------- --------------
Balance on December 31, 1995 ........... $19,953 $282 $ (184) $ 36,295
Net income ............................ 5,813 5,813 $5,813
Other comprehensive income, net
of tax .............................. (262) (262) (262)
------
Comprehensive income .................. $5,551
======
Cash dividends
Common .............................. (1,686) (1,686)
Preferred ........................... (202) (202)
Common stock issued under
dividend reinvestment and
employee plans ...................... 37 573
Stock issued in acquisitions .......... 192 2 853
Common stock repurchased .............. (3,193)
Redemption of preferred stock ......... (381)
Conversion of preferred stock .........
Other ................................. 1 15 (17)
------- ---- ------ --------
Balance on December 31, 1996 ........... 24,071 20 (130) 37,793
======= ==== ====== ========
Net income ............................ 6,542 6,542 $6,542
Other comprehensive income, net
of tax .............................. 387 387 387
-------
Comprehensive income .................. $6,929
=======
Cash dividends
Common .............................. (2,064) (2,064)
Preferred ........................... (111) (111)
Common stock issued under
dividend reinvestment and
employee plans ...................... 4 1,892
Stock issued in acquisitions .......... 10,402
Common stock repurchased .............. (8,540)
Redemption of preferred stock ......... (1,701)
Conversion of preferred stock .........
Other ................................. 17 (16)
------- ---- ------ --------
Balance on December 31, 1997 ........... 28,438 407 (109) 44,584
======= ==== ====== ========
Net income ............................ 5,165 5,165 $5,165
Other comprehensive income, net
of tax .............................. (255) (255) (255)
-------
Comprehensive income .................. $4,910
=======
Cash dividends
Common .............................. (2,579) (2,579)
Preferred ........................... (25) (25)
Common stock issued under
dividend reinvestment and
employee plans ...................... (50) 1,367
Stock issued in acquisitions .......... 15
Common stock repurchased .............. (1,751)
Redemption of preferred stock ......... (614)
Conversion of preferred stock .........
Other ................................. (1) 27 31
---------- ---- ------ --------
Balance on December 31, 1998 ........... $30,998 $152 $ (132) $ 45,938
========= ==== ====== ========
(1) Changes in Accumulated Other Comprehensive Income includes after tax net
unrealized gains (losses) on securities of $(242), $419 and $(239) in
1998, 1997 and 1996 respectively. Changes in Accumulated Other
Comprehensive Income also includes after tax net unrealized losses on
foreign currency translation adjustments of $13, $32 and $23 in 1998, 1997
and 1996 respectively.
See accompanying notes to consolidated financial statements.
55
BankAmerica Corporation and Subsidiaries
Notes to Consolidated Financial Statements
On September 30, 1998, BankAmerica Corporation (BankAmerica) merged with
and into NationsBank Corporation (the Merger). The combined company was renamed
BankAmerica Corporation (the Corporation). The transaction was accounted for as
a pooling of interests. The consolidated financial statements have been
restated to present the combined results of the Corporation as if the Merger
had been in effect for all periods presented.
On January 9, 1998, the Corporation completed its merger with Barnett
Banks, Inc. (Barnett). The transaction was accounted for as a pooling of
interests. The consolidated financial statements have been restated to present
the combined results of the Corporation and Barnett as if the merger had been
in effect for all periods presented.
The Corporation is a Delaware corporation and a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended, with its
principal assets being the stock of its subsidiaries. Through its banking
subsidiaries and its nonbanking subsidiaries, the Corporation provides a
diverse range of banking and nonbanking financial services and products
throughout the U.S. and in selected international markets.
Note One - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the
Corporation and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Results of operations of
companies purchased are included from the dates of acquisition. Certain prior
period amounts have been reclassified to conform to current year
classifications. Assets held in an agency or fiduciary capacity are not
included in the consolidated financial statements.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and disclosures. Actual
results could differ from those estimates. Significant estimates made by
management are discussed in these footnotes as applicable.
On February 27, 1997, the Corporation completed a two-for-one split of its
common stock. Accordingly, the consolidated financial statements for all years
presented reflect the impact of the stock split.
Cash and Cash Equivalents
Cash on hand, cash items in the process of collection and amounts due from
correspondent banks and the Federal Reserve Bank are included in cash and cash
equivalents.
Securities
Debt securities are classified based on management's intention on the date
of purchase. Debt securities which management has the intent and ability to
hold to maturity are classified as held for investment and reported at
amortized cost. Securities that are bought and held principally for the purpose
of resale in the near term are classified as trading instruments and are stated
at fair value. All other debt securities are classified as available for sale
and carried at fair value with net unrealized gains and losses included in
shareholders' equity on an after-tax basis.
Interest and dividends on securities, including amortization of premiums
and accretion of discounts, are included in interest income. Realized gains and
losses from the sales of securities are determined using the specific
identification method.
Marketable equity securities, which are included in other assets, are
carried at fair value with net unrealized gains and losses included in
shareholders' equity, net of tax. Income on marketable equity securities is
included in noninterest income.
56
Loans Held for Sale
Loans held for sale include residential mortgage, commercial real estate
and other loans and are carried at the lower of aggregate cost or market value.
Loans originated with the intent to sell are included in other assets.
Securities Purchased Under Agreements To Resell And Securities Sold Under
Agreements To Repurchase
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions
and are recorded at the amounts at which the securities were acquired or sold
plus accrued interest. The Corporation's policy is to obtain the use of
securities purchased under agreements to resell. The market value of the
underlying securities, which collateralize the related receivable on agreements
to resell, is monitored, including accrued interest, and additional collateral
is requested when deemed appropriate.
Trading Instruments
Instruments utilized in trading activities include securities stated at
fair value. Fair value is generally based on quoted market prices. If quoted
market prices are not available, fair values are estimated based on dealer
quotes, pricing models or quoted prices for instruments with similar
characteristics. Realized and unrealized gains and losses are recognized as
trading account profits and fees.
Derivative-Dealer Positions
Derivative-dealer assets and liabilities represent unrealized gains and
losses, respectively, on interest rate, foreign exchange, commodity and other
derivative contract positions included in the Corporation's trading portfolio.
Derivative-dealer positions are reflected at fair value with changes in fair
value reflected in trading account profits and fees. Fair values are estimated
based on dealer quotes, pricing models or quoted prices for instruments with
similar characteristics.
Loans and Leases
Loans are reported at their outstanding principal balances net of any
unearned income, charge-offs, unamortized deferred fees and costs on originated
loans and premiums or discounts on purchased loans. Loan origination fees and
certain direct origination costs are deferred and recognized as adjustments to
income over the lives of the related loans. Unearned income, discounts and
premiums are amortized to income using methods that approximate the interest
method.
The Corporation provides equipment financing to its customers through a
variety of lease arrangements. Direct financing leases are carried at the
aggregate of lease payments receivable plus estimated residual value of the
leased property, less unearned income. Leveraged leases, which are a form of
financing lease, are carried net of nonrecourse debt. Unearned income on
leveraged and direct financing leases is amortized over the lease terms by
methods that approximate the interest method.
Allowance for Credit Losses
The allowance for credit losses is primarily available to absorb losses
inherent in the loan and lease portfolios. Credit exposures deemed to be
uncollectible are charged against the allowance for credit losses. Recoveries
of previously charged off amounts are credited to the allowance for credit
losses.
Individually identified impaired loans are measured based on the present
value of payments expected to be received, observable market prices, or for
loans that are solely dependent on the collateral for repayment, the estimated
fair value of the collateral. If the recorded investment in the impaired loan
exceeds the measure of estimated fair value, a valuation allowance is
established as a component of the allowance for credit losses.
The Corporation's process for determining appropriate allowance for credit
losses includes management's judgment and use of estimates. The adequacy of the
allowance for credit losses is reviewed regularly by management. This
assessment is made in the context of historical losses as well as existing
economic conditions and performance trends within specific portfolio segments
and individual concentrations of credit. Additions to the allowance for credit
losses are made by charges to the provision for credit losses.
57
Nonperforming Loans
Commercial loans and leases that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to timely
collection, including loans that are individually identified as being impaired,
are generally classified as nonperforming loans unless well secured and in the
process of collection. Loans are considered impaired when it is probable that
all amounts, including principal and interest, will not be collected in
accordance with contractual terms of the loan agreement. Loans whose
contractual terms have been restructured in a manner which grants a concession
to a borrower experiencing financial difficulties are classified as
nonperforming until the loan is performing for an adequate period of time under
the restructured agreement. Impaired loans are included in nonperforming loans.
Generally, all other loans which are past due 90 days or more as to principal
or interest are classified as nonperforming regardless of collateral or
collection status. Interest accrued but not collected is reversed when a loan
or lease is classified as nonperforming.
Interest collections on nonperforming loans and leases for which the
ultimate collectibility of principal is uncertain are applied as principal
reductions. Otherwise, such collections are credited to income when received.
Credit card loans that are 180 days past due are charged off and not
classified as nonperforming. All other consumer loans and residential mortgages
are generally charged off at 120 days past due or placed on nonperforming
status upon repossession or the inception of foreclosure proceedings. Interest
accrued but not collected is generally charged off along with the principal.
Foreclosed Properties
Assets are classified as foreclosed properties and included in other
assets upon actual foreclosure or when physical possession of the collateral is
taken regardless of whether foreclosure proceedings have taken place.
Foreclosed properties are carried at the lower of the recorded amount of
the loan or lease for which the property previously served as collateral, or
the fair value of the property less estimated costs to sell. Prior to
foreclosure, any write-downs, if necessary, are charged to the allowance for
credit losses.
Subsequent to foreclosure, gains or losses on the sale of and losses on
the periodic revaluation of foreclosed properties are credited or charged to
expense. Net costs of maintaining and operating foreclosed properties are
expensed as incurred.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are recognized principally
using the straight-line method over the estimated useful lives of the assets.
Mortgage Servicing Rights
The total cost of mortgage loans originated for sale or purchased is
allocated between the cost of the loans and the mortgage servicing rights (MSR)
based on the relative fair values of the loans and the MSR. MSR acquired
separately are capitalized at cost. During 1998, the Corporation capitalized
$853 million of MSR. The cost of the MSR is amortized in proportion to and over
the estimated period of net servicing revenues. During 1998, amortization was
$476 million.
The fair value on December 31, 1998 of capitalized MSR was approximately
$2.4 billion. Total loans serviced approximated $234.9 billion on December 31,
1998, including loans serviced on behalf of the Corporation's banking
subsidiaries. The predominant characteristics used as the basis for stratifying
MSR are loan type and interest rate. The MSR strata are evaluated for
impairment by estimating their fair value based on anticipated future net cash
flows, taking into consideration prepayment predictions. If the carrying value
of the MSR, including the results of risk management activities, exceeds the
estimated fair value, a valuation allowance is established. Changes to the
valuation allowance are charged against or credited to mortgage servicing
income and fees. The valuation allowance increased $170 million to $180 million
on December 31, 1998. The valuation allowance on December 31, 1997 and 1996 and
changes in the valuation allowance during 1997 and 1996 were insignificant. To
manage risk associated with changes in prepayment rates, the Corporation uses
various financial instruments including purchased options and swaps. The
notional amounts of such contracts on December 31, 1998 was $22.4 billion and
the related unrealized gains were $190 million.
58
Securitizations
The Corporation securitizes, sells and services interests in home equity,
installment, commercial and bankcard loans. When the Corporation sells assets
in securitizations, it may retain interest only strips, one or more
subordinated tranches and, in some cases, a cash reserve account, all of which
are considered retained interests in the securitized assets. Gains upon sale of
the assets depend, in part, on the Corporation's allocation of the previous
carrying amount of the assets to the retained interests. Previous carrying
amounts are allocated in proportion to the relative fair values of the assets
sold and interests retained.
To obtain fair values, quoted market prices are used, if available.
Generally, quoted market prices for retained interests are not available,
therefore the Corporation estimates fair values based upon the present value of
the associated expected future cash flows. This may require management to
estimate credit losses, prepayment speeds, forward yield curves, discount rates
and other factors that impact the value of retained interests.
After the securitization, any of these retained interests that can be
contractually settled in such a way that the Corporation could not recover
substantially all of its recorded investment are adjusted to fair value with
the adjustment reflected as an unrealized gain or loss in shareholders' equity.
If a decline in the fair value is determined to be unrecoverable, it is
expensed.
Goodwill and Other Intangibles
Net assets of companies acquired in purchase transactions are recorded at
fair value at the date of acquisition. Identified intangibles are amortized on
an accelerated or straight-line basis over the period benefited. Goodwill is
amortized on a straight-line basis over a period not to exceed 25 years. The
recoverability of goodwill and other intangibles is evaluated if events or
circumstances indicate a possible impairment. Such evaluation is based on
various analyses, including undiscounted cash flow projections.
Income Taxes
There are two components of income tax provision: current and deferred.
Current income tax expense approximates taxes to be paid or refunded for the
applicable period. Balance sheet amounts of deferred taxes are recognized on
the temporary differences between the bases of assets and liabilities as
measured by tax laws and their bases as reported in the financial statements.
Deferred tax expense or benefit is then recognized for the change in deferred
tax liabilities or assets between periods.
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain temporary
differences, tax operating loss carryforwards and tax credits will be realized.
A valuation allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur.
Retirement Benefits
The Corporation has established qualified retirement plans covering
full-time, salaried employees and certain part-time employees. Pension expense
under these plans is charged to current operations and consists of several
components of net pension cost based on various actuarial assumptions regarding
future experience under the plans.
In addition, the Corporation and its subsidiaries have established
unfunded supplemental benefit plans providing any benefits that could not be
paid from a qualified retirement plan because of Internal Revenue Code
restrictions and supplemental executive retirement plans for selected officers
of the Corporation and its subsidiaries. These plans are nonqualified and,
therefore, in general, a participant's or beneficiary's claim to benefits is as
a general creditor.
The Corporation and its subsidiaries have established several unfunded
postretirement medical benefit plans.
Risk Management Instruments
Risk management instruments are utilized to modify the interest rate
characteristics of related assets or liabilities or hedge against fluctuations
in interest rates, currency exchange rates or other such exposures as part of
the Corporation's asset and liability management process. Instruments must be
designated as hedges and must be effective throughout the hedge period. To
qualify as hedges, risk management instruments must be
59
linked to specific assets or liabilities or pools of similar assets or
liabilities. For risk management instruments that fail to qualify as hedges,
the instruments are recorded at market value with changes in market value
reflected in trading account profits and fees.
Swaps, principally interest rate, used in the asset and liability
management process are accounted for on the accrual basis with revenues or
expenses recognized as adjustments to income or expense on the underlying
linked assets or liabilities.
Gains and losses associated with interest rate futures and forward
contracts used as effective hedges of existing risk positions or anticipated
transactions are deferred as an adjustment to the carrying value of the related
asset or liability and recognized in income over the remaining term of the
related asset or liability.
Risk management instruments used to hedge or modify the interest rate
characteristics of debt securities classified as available for sale are carried
at fair value with unrealized gains or losses deferred as a component of
shareholders' equity, net of tax.
To manage interest rate risk, the Corporation also uses interest rate
option products, primarily purchased caps and floors. Interest rate caps and
floors are agreements where, for a fee, the purchaser obtains the right to
receive interest payments when a variable interest rate moves above or below a
specified cap or floor rate, respectively. Such instruments are primarily
linked to long-term debt, short-term borrowings and pools of similar
residential mortgages. The Corporation also purchases options to protect the
value of certain assets, principally MSR, against changes in prepayment rates.
Option premiums are amortized over the option life on a straight-line basis.
Such contracts are designated as hedges, and gains or losses are recorded as
adjustments to the carrying value of the MSR, which are then subjected to
impairment valuations.
The Corporation also utilizes forward delivery contracts and options to
reduce the interest rate risk inherent in mortgage loans held for sale and the
commitments made to borrowers for mortgage loans which have not been funded.
These financial instruments are considered in the Corporation's lower of cost
or market valuation of its mortgage loans held for sale.
The Corporation has made investments in a number of operations in foreign
countries. Certain assets and liabilities of these operations are often
denominated in foreign currencies, which exposes the Corporation to foreign
currency risks. To qualify for hedge accounting, a foreign exchange contract
must reduce risk at the level of the specific transaction. Realized and
unrealized gains and losses on instruments that hedge firm commitments are
deferred and included in the measurement of the subsequent transaction;
however, losses are deferred only to the extent of expected gains on the future
commitment. Realized and unrealized gains and losses on instruments that hedge
net foreign capital exposure are recorded in shareholders' equity as foreign
currency translation adjustments and included in accumulated other
comprehensive income.
Risk management instruments generally are not terminated. When
terminations do occur, gains or losses are recorded as adjustments to the
carrying value of the underlying assets or liabilities and recognized as income
or expense over either the remaining expected lives of such underlying assets
or liabilities. In circumstances where the underlying assets or liabilities are
sold, any remaining carrying value adjustments and the cumulative change in
value of any open positions are recognized immediately as a component of the
gain or loss on disposition of such underlying assets or liabilities. If a
forecasted transaction to which a risk management instrument is linked fails to
occur, any deferred gain or loss on the instrument is recognized immediately in
income.
Earnings Per Common Share
Earnings per common share for all periods presented is computed by
dividing net income, reduced by dividends on preferred stock, by the weighted
average number of common shares issued and outstanding. Diluted earnings per
common share is computed by dividing net income available to common
shareholders, adjusted for the effect of assumed conversions, by the weighted
average number of common shares issued and outstanding and dilutive potential
common shares, which include convertible preferred stock and stock options.
Dilutive potential common shares are calculated using the treasury stock
method.
Foreign Currency Translation
Assets, liabilities and operations of foreign branches and subsidiaries
are recorded based on the functional currency of each entity. For the majority
of the foreign operations, the functional currency is the local currency,
60
in which case the assets, liabilities and operations are translated, for
consolidation purposes, at current exchange rates from the local currency to
the reporting currency, the U.S. dollar. The resulting gains or losses are
reported as a component of accumulated other comprehensive income within
shareholders' equity on a net-of-tax basis. When the foreign entity is not a
free-standing operation or is in a hyperinflationary economy, the functional
currency used to measure the financial statements of a foreign entity is the
U.S. dollar. In these instances, the resulting gains and losses are included in
income.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). This standard requires the Corporation to
recognize all derivatives as either assets or liabilities in its financial
statements and measure such instruments at their fair values. Hedging
activities must be redesignated and documented pursuant to the provisions of
the statement. This statement becomes effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. At this time, the Corporation is
still assessing the impact of SFAS 133 on its financial condition and results
of operations.
In 1998, Statement of Financial Accounting Standards No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise" (SFAS 134), was issued.
SFAS 134 provides guidance for mortgage banking entities on how to account for
interests retained after securitizing mortgage loans previously held for sale.
SFAS 134 is effective for fiscal quarters beginning after December 15, 1998 and
was adopted by the Corporation on January 1, 1999.
Note Two - Merger-Related Activity
On September 30, 1998, the Corporation completed the Merger with
BankAmerica, a multi-bank holding company headquartered in San Francisco,
California. BankAmerica provided banking and various other financial services
throughout the U.S. and in selected international markets to consumers and
business customers, including corporations, governments and other institutions.
As a result of the Merger, each outstanding share of BankAmerica common stock
was converted into 1.1316 shares of the Corporation's common stock, resulting
in the net issuance of approximately 779 million shares of the Corporation's
common stock to the former BankAmerica shareholders. Each share of NationsBank
common stock continued as one share in the Corporation's common stock. In
addition, approximately 88 million options to purchase the Corporation's common
stock were issued to convert stock options granted to certain BankAmerica
employees. This transaction was accounted for as a pooling of interests. Under
this method of accounting, the recorded assets, liabilities, shareholders'
equity, income and expenses of NationsBank and BankAmerica have been combined
and reflected at their historical amounts. NationsBank's total assets, total
deposits and total shareholders' equity on the date of the Merger were
approximately $331.9 billion, $166.8 billion and $27.7 billion, respectively.
BankAmerica's total assets, total deposits and total shareholders' equity on
the date of the Merger amounted to approximately $263.4 billion, $179.0 billion
and $19.6 billion, respectively.
In compliance with certain requirements of the Federal Reserve Board
(FRB), the Department of Justice and certain New Mexico authorities in
connection with the Merger, the Corporation entered into an agreement to divest
certain branches of Bank of America National Trust and Savings Association
(Bank of America NT&SA) with loans and deposits aggregating approximately $167
million and $500 million, respectively, in various markets in New Mexico. These
transactions were completed in the fourth quarter of 1998.
In connection with the Merger, the Corporation recorded $1,325 million of
pre-tax, merger-related charges in 1998. Approximately $600 million ($441
million after-tax) and $725 million ($519 million after-tax) were recorded in
the fourth and third quarters of 1998, respectively. The total pre-tax charge
for 1998 consisted of approximately $740 million primarily in severance and
change in control and other employee-related items, $150 million in conversion
and related costs including occupancy and equipment expenses and customer
communication, $300 million in exit and related costs and $135 million in other
merger costs (including legal, investment banking and filing fees). The
Corporation anticipates recording an additional pre-tax merger-related charge
of approximately $400 million ($252 million after-tax) in 1999.
61
On January 9, 1998, the Corporation completed its merger with Barnett, a
multi-bank holding company headquartered in Jacksonville, Florida (the Barnett
merger). Barnett's total assets, total deposits and total shareholders' equity
on the date of the merger were approximately $46.0 billion, $35.4 billion and
$3.4 billion, respectively. As a result of the Barnett merger, each outstanding
share of Barnett common stock was converted into 1.1875 shares of the
Corporation's common stock, resulting in the net issuance of approximately 233
million common shares to the former Barnett shareholders. In addition,
approximately 11 million options to purchase the Corporation's common stock
were issued to convert stock options granted to certain Barnett employees. This
transaction was also accounted for as a pooling of interests.
In connection with the Barnett merger, the Corporation incurred a pre-tax
merger-related charge during the first quarter of 1998 of approximately $900
million ($642 million after-tax), which consisted of approximately $375 million
primarily in severance and change in control payments, $300 million of
conversion and related costs and occupancy and equipment expenses (primarily
lease exit costs and the elimination of duplicate facilities and other
capitalized assets), $125 million in exit costs related to contract
terminations and $100 million in other merger costs (including legal,
investment banking and filing fees). In the second quarter of 1998, the
Corporation recognized a $430 million gain resulting from the regulatory
required divestitures of certain Barnett branches.
The Corporation recorded a pre-tax charge of $280 million in 1996 as a
result of decisions to close and/or sell certain of its business activities.
The charge covered approximately $196 million for severance payments, $72
million for occupancy expense, primarily reflecting the planned closure of 120
branches, and $12 million for other costs.
On October 1, 1997, the Corporation completed the acquisition of
Montgomery Securities, Inc., an investment banking and institutional brokerage
firm. The purchase price consisted of $840 million in cash and approximately
5.3 million unregistered shares of the Corporation's common stock for an
aggregate amount of approximately $1.1 billion. The Corporation accounted for
this acquisition as a purchase.
On October 1, 1997, the Corporation also acquired Robertson, Stephens &
Company Group, L.L.C. (Robertson Stephens), an investment banking and
investment management firm. The acquisition was accounted for by the purchase
method of accounting. The Corporation sold the investment banking operations of
Robertson Stephens on August 31, 1998 and sold the investment management
operations in 1999.
As previously disclosed, NationsBank, BankAmerica and Barnett merged in
separate transactions accounted for as pooling of interests. The following
table summarizes the impact of the BankAmerica and Barnett mergers on the
Corporation's net interest income, noninterest income and net income for
periods prior to the respective mergers.
Net Interest Noninterest Net
(Dollars in Millions) Income Income Income
- ----------------------- -------------- ------------- ---------
1997
NationsBank ........... $ 7,898 $ 5,002 $3,077
BankAmerica ........... 8,669 6,012 3,210
Barnett ............... 1,840 971 255
------- ------- ------
Total ................ $18,407 $11,985 $6,542
======= ======= ======
1996
NationsBank ........... $ 6,329 $ 3,646 $2,375
BankAmerica ........... 8,587 5,351 2,874
Barnett ............... 1,869 791 564
------- ------- ------
Total ................ $16,785 $ 9,788 $5,813
======= ======= ======
The amounts presented above represent results of operations of the
previously separate companies and do not reflect reclassifications of certain
revenue and expense items which were made to conform to the reporting policies
of the Corporation.
On January 7, 1997, the Corporation completed the acquisition of Boatmen's
Bancshares, Inc. (Boatmen's), headquartered in St. Louis, Missouri, resulting
in the issuance of approximately 195 million shares of the Corporation's common
stock valued at $9.4 billion on the date of the acquisition and aggregate cash
payments of
62
$371 million to Boatmen's shareholders. On the date of the acquisition,
Boatmen's total assets and total deposits were approximately $41.2 billion and
$32.0 billion, respectively. The Corporation accounted for this acquisition as
a purchase.
In 1996, the Corporation completed the initial public offering (IPO) of
16.1 million shares of Class A Common Stock of BA Merchant Services, Inc.
(BAMS) (ticker symbol "BPI" on the New York Stock Exchange), a subsidiary of
the Corporation. On December 22, 1998, the Corporation and BAMS announced the
signing of a definitive merger agreement on which the Corporation agreed to buy
BAMS outstanding shares of Class A common stock. At closing, each outstanding
share of BAMS common stock other than the shares owned by the Corporation will
be converted into the right to receive a cash payment equal to $20.50 per share
without interest, or approximately $330 million. BAMS will then become a wholly
owned subsidiary of Bank of America NT&SA. The transaction is expected to be
completed during the second quarter of 1999.
The following tables summarize the activity in the merger-related reserves
recorded in connection with the BankAmerica and Barnett mergers during 1998:
BankAmerica Merger
Merger-Related Reserves
Non-Cash
Balance on Amount Cash Payments Reductions Balance on
January 1, Included in Applied to Applied to December 31,
(Dollars in Millions) 1998 Expense Reserve Reserve 1998
- ---------------------------------------- ------------ ------------- --------------- ------------ -------------
Severance, change in control
and other employee-related costs ..... $-- $ 740 $(155) $ (98) $487
Conversion and related costs ........... -- 150 (3) (4) 143
Exit and related costs ................. -- 300 (62) (44) 194
Other merger costs ..................... -- 135 (117) -- 18
--- ------ ------- ------- ----
$-- $1,325 $(337) $(146) $842
=== ====== ======= ======= ====
Barnett Merger
Merger-Related Reserves
Non-Cash
Balance on Amount Cash Payments Reductions Balance on
January 1, Included in Applied to Applied to December 31,
(Dollars in Millions) 1998 Expense Reserve Reserve 1998
- ---------------------------------------- ------------ ------------- --------------- ------------ -------------
Severance, change in control
and other employee-related costs ..... $-- $375 $ (318) $ (55) $ 2
Conversion and related costs ........... -- 300 (8) (192) 100
Exit and related costs ................. -- 125 (101) -- 24
Other merger costs ..................... -- 100 (99) -- 1
--- ---- ------ ------ ----
$-- $900 $ (526) $ (247) $127
=== ==== ====== ====== ====
Total severance, change in control and other employee-related costs for
both mergers included amounts related to job eliminations, primarily in areas
of overlapping operations and duplicate functions. Through December 31, 1998,
approximately 1,700 employees have entered the severance process as result of
the Barnett merger. For the BankAmerica merger, 5,000 to 8,000 positions after
attrition, are estimated to be eliminated and through December 31, 1998,
approximately 1,800 associates have entered the severance process.
The only significant portion of the Barnett merger-related charge
remaining at December 31, 1998 relates to conversion and related costs,
primarily abandoned owned and leased facilities and branch closure costs.
Exit costs primarily relate to contract termination payments, business
realignment and other related costs. Remaining exit and related costs balances
included in the Barnett merger reserve on December 31, 1998 are expected to be
used during the first half of 1999.
Primarily all reserves established in 1996 associated with the Bank South
acquisition and restructuring activities were fully utilized as of December 31,
1998. There were no additional provisions during 1998.
63
Note Three - Securities
The amortized cost, gross unrealized gains and losses, and fair value of
securities held for investment and securities available for sale on December 31
were (dollars in millions):
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Held for Investment Cost Gains Losses Value
- ----------------------------------------------- ------------ ------------- ------------- -----------
1998
U.S. Treasury securities and agency debentures $ 478 $ 1 $ -- $ 479
Foreign sovereign securities .................. 914 1 168 747
Mortgage-backed securities..................... 203 -- -- 203
Other taxable securities ...................... 29 2 -- 31
---------- ----------- ----------- --------
Total taxable ................................ 1,624 4 168 1,460
Tax-exempt securities ......................... 373 20 -- 393
---------- ----------- ----------- --------
Total ........................................ $ 1,997 $ 24 $ 168 $ 1,853
========== =========== =========== ========
1997
U.S. Treasury securities and agency debentures $ 516 $ 1 $ 1 $ 516
Foreign sovereign securities .................. 1,448 61 39 1,470
Mortgage-backed securities .................... 2,408 43 3 2,448
Other taxable securities ...................... 56 9 4 61
---------- ----------- ----------- --------
Total taxable ................................ 4,428 114 47 4,495
Tax-exempt securities ......................... 394 17 1 410
---------- ----------- ----------- --------
Total ........................................ $ 4,822 $ 131 $ 48 $ 4,905
========== =========== =========== ========
1996
U.S. Treasury securities and agency debentures $ 880 $ -- $ 3 $ 877
Foreign sovereign securities .................. 1,525 15 285 1,255
Mortgage-backed securities..................... 3,264 34 19 3,279
Other taxable securities ...................... 64 25 -- 89
---------- ----------- ----------- --------
Total taxable ................................ 5,733 74 307 5,500
Tax-exempt securities ......................... 516 18 4 530
---------- ----------- ----------- --------
Total ........................................ $ 6,249 $ 92 $ 311 $ 6,030
========== =========== =========== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available for Sale Cost Gains Losses Value
- ----------------------------------------------- ---------- ----------- ----------- --------
1998
U.S. Treasury securities and agency debentures $ 17,355 $ 52 $ 157 $ 17,250
Foreign sovereign securities .................. 5,693 25 138 5,580
Mortgage-backed securities .................... 51,259 567 36 51,790
Other taxable securities ...................... 2,293 76 32 2,337
---------- ----------- ----------- --------
Total taxable ................................ 76,600 720 363 76,957
Tax-exempt securities ......................... 1,636 68 71 1,633
---------- ----------- ----------- --------
Total ........................................ $ 78,236 $ 788 $ 434 $ 78,590
========== =========== =========== ========
1997
U.S. Treasury securities and agency debentures $ 10,614 $ 268 $ 6 $ 10,876
Foreign sovereign securities .................. 10,797 43 96 10,744
Mortgage-backed securities .................... 36,256 363 30 36,589
Other taxable securities ...................... 2,271 13 3 2,281
---------- ----------- ----------- --------
Total taxable ................................ 59,938 687 135 60,490
Tax-exempt securities ......................... 1,661 58 -- 1,719
---------- ----------- ----------- --------
Total ........................................ $ 61,599 $ 745 $ 135 $ 62,209
========== =========== =========== ========
1996
U.S. Treasury securities and agency debentures $ 5,298 $ 61 $ 46 $ 5,313
Foreign sovereign securities .................. 4,129 52 153 4,028
Mortgage-backed securities .................... 17,256 95 88 17,263
Other taxable securities ...................... 2,150 8 10 2,148
---------- ----------- ----------- --------
Total taxable ................................ 28,833 216 297 28,752
Tax-exempt securities ......................... 746 21 2 765
---------- ----------- ----------- --------
Total ........................................ $ 29,579 $ 237 $ 299 $ 29,517
========== =========== =========== ========
64
The expected maturity distribution and yields (computed on a
taxable-equivalent basis) of the Corporation's securities portfolio on December
31, 1998 are summarized below. Actual maturities may differ from contractual
maturities or maturities shown below since borrowers may have the right to
prepay obligations with or without prepayment penalties.
Due after 1 Due after 5
Due in 1 year through 5 through 10
or less years years
(Dollars in Millions) ------------------- -------------------- ---------------------
Amount Yield Amount Yield Amount Yield
-------- ---------- ---------- --------- ---------- ----------
Amortized cost of securities held
for investment
U.S. Treasury securities
and agency debentures ................ $ 477 5.92% $ -- --% $ 1 4.53%
Foreign sovereign securities ........... 205 6.88 334 6.96 313 6.89
Mortgage-backed securities ............. 149 6.08 51 6.77 3 6.82
Other taxable securities ............... 2 9.52 -- -- -- --
----- ----- -------- ----- -------- ----
Total taxable ........................ 833 6.19 385 6.93 317 6.88
Tax-exempt securities .................. 55 7.95 123 7.75 100 6.80
----- ----- -------- ----- -------- ----
Total ................................ $ 888 6.30% $ 508 7.13% $ 417 6.86%
===== ===== ======== ===== ======== ====
Fair value of securities
held for investment ..................... $ 868 $ 445 $ 356
===== ======== ========
Fair value of securities available for
sale
U.S. Treasury securities and
agency debentures .................... $ 478 6.32% $ 7,193 4.87% $ 8,952 4.88%
Foreign sovereign securities ........... 12 7.66 1,188 3.88 2,199 4.52
Mortgage-backed securities ............. 357 6.79 15,224 6.85 21,579 6.29
Other taxable securities ............... 43 9.55 675 11.38 902 6.24
----- ----- -------- ----- -------- ----
Total taxable ........................ 890 6.68 24,280 6.25 33,632 5.80
Tax-exempt securities .................. 41 6.52 216 6.79 534 7.34
----- ----- -------- ----- -------- ----
Total ................................ $ 931 6.68% $ 24,496 6.25% $ 34,166 5.82%
===== ===== ======== ===== ======== ====
Amortized cost of securities
available for sale ...................... $ 921 $ 24,149 $ 34,458
===== ======== ========
Due after
10 years Total
(Dollars in Millions) --------------------- ---------------------
Amount Yield Amount Yield
----------- --------- ---------- ----------
Amortized cost of securities held
for investment
U.S. Treasury securities
and agency debentures ................ $ -- --% $ 478 5.91%
Foreign sovereign securities ........... 62 6.93 914 6.91
Mortgage-backed securities ............. -- -- 203 6.27
Other taxable securities ............... 27 6.63 29 6.85
-------- ---- -------- ----
Total taxable ........................ 89 6.84 1,624 6.54
Tax-exempt securities .................. 95 5.71 373 7.00
-------- ---- -------- ----
Total ................................ $ 184 6.26% $ 1,997 6.62%
======== ==== ======== ====
Fair value of securities
held for investment ..................... $ 184 $ 1,853
======== ========
Fair value of securities available for
sale
U.S. Treasury securities and
agency debentures .................... $ 627 6.37% $ 17,250 4.96%
Foreign sovereign securities ........... 2,181 6.59 5,580 5.20
Mortgage-backed securities ............. 14,630 6.21 51,790 6.44
Other taxable securities ............... 717 5.77 2,337 7.65
-------- ---- -------- ----
Total taxable ........................ 18,155 6.24 76,957 6.05
Tax-exempt securities .................. 842 7.80 1,633 7.37
-------- ---- -------- ----
Total ................................ $ 18,997 6.32% $ 78,590 6.08%
======== ==== ======== ====
Amortized cost of securities
available for sale ...................... $ 18,708 $ 78,236
======== ========
The components of gains and losses on sales of securities for the years
ended December 31 were (dollars in millions):
1998 1997 1996
---------- ------ --------
Gross gains on sales of securities .......... $ 1,039 $289 $ 310
Gross losses on sales of securities ......... 22 18 163
------- ---- -----
Net gains on sales of securities ............ $ 1,017 $271 $ 147
======= ==== =====
During 1998, the Corporation sold $19.5 million of securities held for
investment, resulting in net gains of approximately $2.0 million included
above. The sale resulted from a realignment of the securities portfolio in
connection with the Barnett merger. There were no sales of securities held for
investment in 1997 or 1996.
Excluding securities issued by the U.S. government and its agencies and
corporations, there were no investments in securities from one issuer that
exceeded 10 percent of consolidated shareholders' equity on December 31, 1998
or 1997.
The income tax expense attributable to realized net gains on securities
sales was $363 million, $101 million and $54 million in 1998, 1997 and 1996,
respectively.
Securities are pledged or assigned to secure borrowed funds, government
and trust deposits and for other purposes. The carrying value of pledged
securities was $65.6 billion and $57.3 billion on December 31, 1998 and 1997,
respectively.
On December 31, 1998, the valuation allowance for securities available for
sale and marketable equity securities included in shareholders' equity was $292
million, primarily reflecting $354 million of pre-tax appreciation on
securities available for sale and $165 million of pre-tax appreciation on
marketable equity securities.
65
Note Four - Trading Account Assets and Liabilities
The fair values of the components of trading account assets and
liabilities on December 31 and the average fair values for the years ended
December 31 were (dollars in millions):
Ending Balance Average Balance
---------------------- ----------------------
1998 1997 1998 1997
---------- ----------- ---------- -----------
Securities owned
U.S. Treasury securities ......................................... $ 7,854 $ 10,537 $ 9,802 $ 12,625
Securities of other U.S. Government agencies and corporations .... 524 2,392 841 2,473
Certificates of deposit, bankers' acceptances and commercial
paper .......................................................... 2,723 1,867 2,746 2,240
Corporate debt ................................................... 1,666 3,439 2,428 2,703
Foreign sovereign debt ........................................... 11,774 12,650 13,241 14,102
Mortgage-backed securities ....................................... 7,489 3,277 4,802 2,324
Other securities ................................................. 7,572 1,775 5,914 1,817
-------- -------- -------- --------
Total trading account assets ................................... $ 39,602 $ 35,937 $ 39,774 $ 38,284
======== ======== ======== ========
Short sales
U.S. Treasury securities ......................................... $ 8,534 $ 13,087 $ 8,538 $ 12,034
Corporate debt ................................................... 82 217 833 276
Foreign sovereign debt ........................................... 3,166 2,983 3,192 2,148
Other securities ................................................. 2,388 1,013 4,909 827
-------- -------- -------- --------
Total trading account liabilities .............................. $ 14,170 $ 17,300 $ 17,472 $ 15,285
======== ======== ======== ========
The net change in the unrealized gain or loss on trading securities held
on December 31, 1998 and 1997 was included in trading account profits and fees
and amounted to a gain of $1,692 million for 1998 and a loss of $143 million
for 1997.
Foreign exchange contract and securities trading activities generated most
of the Corporation's trading account profits and fees.
See Note Eleven of the consolidated financial statements on page 74 for
additional information on derivatives-dealer positions, including credit risk.
The average fair values of derivative-dealer assets on December 31, 1998 and
1997 was $14.3 billion and $12.6 billion, respectively. The average fair values
of derivative-dealer liabilities on December 31, 1998 and 1997 were $13.3
billion and $11.5 billion, respectively.
The fair value of derivative-dealer assets at December 31, 1998 and 1997,
was $16.4 billion and $14.8 billion, respectively. The fair value of
derivative-dealer liabilities at December 31, 1998 and 1997 was $16.8 billion
and $13.6 billion, respectively.
66
Note Five - Loans and Leases
Loans and leases on December 31 were (dollars in millions):
1998 1997
--------------------- -----------------------
Amount Percent Amount Percent
----------- --------- ------------ ----------
Commercial - domestic ..................... $ 137,422 38.5 % $ 122,463 35.8%
Commercial - foreign ...................... 31,495 8.8 30,080 8.8
Commercial real estate - domestic ......... 26,912 7.5 28,567 8.3
Commercial real estate - foreign .......... 301 .1 324 .1
--------- ---- --------- -----
Total commercial ......................... 196,130 54.9 181,434 53.0
--------- ---- --------- -----
Residential mortgage ...................... 73,608 20.6 71,540 20.9
Home equity lines ......................... 15,653 4.4 16,536 4.8
Direct/Indirect consumer .................. 40,510 11.3 40,058 11.7
Consumer finance .......................... 15,400 4.3 14,566 4.3
Bankcard .................................. 12,425 3.5 14,908 4.4
Foreign consumer .......................... 3,602 1.0 3,098 .9
--------- ---- --------- -----
Total consumer ........................... 161,198 45.1 160,706 47.0
--------- ---- --------- -----
Total loans and leases .................. $ 357,328 100.0 % $ 342,140 100.0%
========= ======= ========= =====
The following table presents the recorded investment in loans that were
considered to be impaired on December 31 (1) (dollars in millions):
1998 1997
-------- ----------
Commercial - domestic .............. $ 796 $ 538
Commercial - foreign ............... 314 158
Commercial real estate-domestic .... 554 327
Commercial real estate-foreign ..... -- 1
------ -------
Total commercial ................... $1,664 $ 1,024
====== =======
(1) The Corporation's consumer loan portfolio generally consists of large
groups of relatively smaller balance homogeneous loans that are
collectively evaluated for impairment and, therefore, are not included in
this table.
The average recorded investment in certain impaired loans for the years
ended December 31, 1998, 1997 and 1996 was approximately $1.6 billion, $1.4
billion and $1.8 billion, respectively. As of December 31, 1998 and 1997, the
recorded investment on impaired loans requiring an allowance for credit losses
was $876 million and $885 million, and the related allowance for credit losses
was $326 million and $145 million, respectively. For the years ended December
31, 1998, 1997 and 1996, interest income recognized on impaired loans totaled
$50 million, $80 million and $83 million, respectively, all of which was
recognized on a cash basis.
On December 31, 1998, 1997 and 1996, nonperforming loans, including
certain loans which are considered impaired, totaled $2.5 billion, $2.1 billion
and $2.2 billion, respectively. The net amount of interest recorded during each
year on loans that were classified as nonperforming or restructured on December
31, 1998, 1997 and 1996 was $130 million in each of the three years. If these
loans had been accruing interest at their originally contracted rates, related
income would have been $367 million, $349 million and $388 million in 1998,
1997 and 1996, respectively.
Foreclosed properties amounted to $282 million, $309 million and $511
million on December 31, 1998, 1997 and 1996, respectively. The cost of carrying
foreclosed properties amounted to $16 million, $26 million and $35 million in
1998, 1997 and 1996, respectively.
67
Note Six - Allowance for Credit Losses
The table below summarizes the changes in the allowance for credit losses
on loans and leases (dollars in millions):
1998 1997 1996
----------- ----------- -----------
Balance on January 1 ............................... $ 6,778 $ 6,316 $ 6,222
------- ------- -------
Loans and leases charged off ....................... (3,050) (2,603) (2,369)
Recoveries of loans and leases previously charged off 583 751 702
------- ------- -------
Net charge-offs .................................. (2,467) (1,852) (1,667)
Provision for credit losses ........................ 2,920 1,904 1,645
Other, net ......................................... (109) 410 116
---------- ------- -------
Balance on December 31 ........................... $ 7,122 $ 6,778 $ 6,316
======= ======= =======
Note Seven - Deposits
On December 31, 1998, the Corporation had domestic certificates of deposit
of $100 thousand or greater totaling $27.3 billion, with $14.0 billion maturing
within three months, $5.9 billion maturing within three to six months, $4.9
billion maturing within six to twelve months and $2.5 billion maturing after
twelve months. Additionally, on December 31, 1998, the Corporation had other
domestic time deposits of $100 thousand or greater totaling $887 million, with
$208 million maturing within three months, $96 million maturing within three to
six months, $164 million maturing within six to twelve months and $419 million
maturing after twelve months. Foreign office certificates of deposit and other
time deposits of $100 thousand or greater totaled $40.8 billion and $48.7
billion on December 31, 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities for time deposits were as
follows (dollars in millons):
Due in 1999 ............... $ 126,193
Due in 2000 ............... 7,972
Due in 2001 ............... 2,124
Due in 2002 ............... 1,423
Due in 2003 ............... 750
Thereafter ................ 952
---------
Total ..................... $ 139,414
=========
68
Note Eight - Short-Term Borrowings and Long-Term Debt
The contractual maturities of long-term debt on December 31 were:
1998
-------------------------------------------------
Various Various
Fixed-Rate Floating-Rate 1997
Debt Debt Amount Amount
(Dollars in Millions) Obligations (1) Obligations (1) Outstanding Outstanding
- ------------------------------------------------ ----------------- ----------------- ------------- ------------
Parent company
Senior debt
Due in 1998 ................................. $ -- $ -- $ -- $ 2,792
Due in 1999 ................................. 341 2,287 2,628 2,381
Due in 2000 ................................. 488 1,725 2,213 3,186
Due in 2001 ................................. 671 3,330 4,001 3,252
Due in 2002 ................................. 130 2,155 2,285 2,290
Due in 2003 ................................. 499 2,079 2,578 1,245
Thereafter .................................. 357 3,708 4,065 1,715
-------- -------- ------- --------
2,486 15,284 17,770 16,861
-------- -------- ------- --------
Subordinated debt
Due in 1998 ................................. -- -- -- 52
Due in 1999 ................................. 361 319 680 683
Due in 2000 ................................. 411 -- 411 417
Due in 2001 ................................. 1,312 30 1,342 1,355
Due in 2002 ................................. 2,199 26 2,225 2,213
Due in 2003 ................................. 1,711 323 2,034 1,974
Thereafter .................................. 5,984 3,265 9,249 7,776
-------- -------- ------- --------
11,978 3,963 15,941 14,470
-------- -------- ------- --------
Total parent company long-term debt ......... 14,464 19,247 33,711 31,331
-------- -------- ------- --------
Banking and nonbanking subsidiaries
Senior debt
Due in 1998 ................................. -- -- -- 3,902
Due in 1999 ................................. 221 3,790 4,011 1,512
Due in 2000 ................................. 3 4,555 4,558 3,365
Due in 2001 ................................. 34 1,263 1,297 455
Due in 2002 ................................. 109 284 393 443
Due in 2003 ................................. 441 261 702 252
Thereafter .................................. 87 90 177 120
-------- -------- ------- --------
895 10,243 11,138 10,049
-------- -------- ------- --------
Subordinated debt
Due in 1998 ................................. -- -- -- 10
Due in 1999 ................................. -- -- -- 11
Due in 2000 ................................. -- -- -- 12
Due in 2001 ................................. 227 -- 227 308
Due in 2002 ................................. -- -- -- --
Due in 2003 ................................. 104 -- 104 100
Thereafter .................................. 300 8 308 308
-------- -------- ------- --------
631 8 639 749
-------- -------- ------- --------
Total banking and nonbanking
subsidiaries long-term debt ................ 1,526 10,251 11,777 10,798
-------- -------- ------- --------
Total parent, banking and nonbanking
subsidiaries long-term-debt ................ $ 15,990 $ 29,498 45,488 42,129
Notes payable to finance the purchase of leased
vehicles ...................................... 279 625
Obligations under capital leases ............... 121 133
------- --------
Total long-term debt ........................ $45,888 $ 42,887
======= ========
(1) Fixed rate and floating rate classifications of long-term debt include the
effect of interest rate swap contracts.
69
The majority of the floating rates are based on three- and six-month
London InterBank Offer Rates (LIBOR). At December 31, 1998, the interest rates
on floating-rate long-term debt, as classified in the table on the preceding
page, ranged from 4.75 percent to 7.07 percent. These obligations were
denominated primarily in U.S. dollars. The interest rate on fixed-rate
long-term debt, as classified in the table on the preceding page, ranged from
4.50 percent to 12.50 percent at December 31, 1998.
At December 31, 1998, the Corporation had commercial paper back-up lines
of credit totaling $1.1 billion, of which $669 million expires in October 1999
and $479 million expires in October 2002. In addition, the Corporation had a
$1.6 billion line of credit which expires in May 2001. At December 31, 1998,
there were no amounts outstanding under these credit facilities. These lines
were supported by fees paid to unaffiliated banks.
As of December 31, 1998, the Corporation has the authority to issue
approximately $9.4 billion of corporate debt and other securities under its
existing shelf registration statements.
Under a joint Euro medium-term note program, the Corporation and
NationsBank, N.A. may offer an aggregate of $8.5 billion of senior or, in the
case of the Corporation, subordinated notes exclusively to non-United States
residents. The notes bear interest at fixed or floating rates and may be
denominated in U.S. dollars or foreign currencies. The Corporation uses foreign
currency contracts to convert certain foreign-denominated debt into U.S.
dollars. On December 31, 1998, $3.7 billion of notes were outstanding under
this program. BankAmerica's Euro medium-term note program was cancelled in
September 1998. As of December 31, 1998, the Corporation and NationsBank, N.A.
had the authority to issue approximately $2.8 billion and $2.0 billion,
respectively, of debt securities under this program. On December 31, 1998, $3.5
billion of notes were outstanding under the former BankAmerica program.
NationsBank, N.A. maintains a program to offer up to $25 billion of bank
notes from time to time with fixed or floating rates and maturities ranging
from 7 days or more from date of issue. Prior to the Merger, Bank of America
NT&SA maintained a program to offer up to $12 billion of bank notes from time
to time with fixed or floating rates and maturities ranging from 30 days to 15
years. On December 31, 1998 and 1997, there were short-term bank notes
outstanding under these programs of $14.7 billion and $4.6 billion,
respectively. On December 31, 1998 and 1997 the Corporation's long-term debt
included $7.9 billion and $5.1 billion, respectively, of these notes.
Through a limited purpose subsidiary, the Corporation had $2.5 billion of
mortgage-backed bonds outstanding on December 31, 1998. These bonds are
collateralized by $3.7 billion of mortgage loans.
As part of its interest rate risk management activities, the Corporation
enters into interest rate contracts for certain long-term debt issuances.
Through the use of interest rate swaps, $8.8 billion of fixed-rate debt with
rates ranging from 5.30 percent to 8.57 percent have been effectively converted
to floating rates primarily at spreads to LIBOR.
Through the use of interest rate options, the Corporation has the right to
purchase interest rate caps and floors to hedge its risk on floating-rate debt
against a rise in interest rates. At December 31, 1998, the interest rate
options had a notional amount of approximately $3.4 billion. In addition, the
Corporation has entered into other interest rate contracts, primarily futures,
with notional amounts of approximately $802 million at December 31, 1998 to
reduce its interest rate risk by shortening the repricing profile on
floating-rate debt that reprices within one year.
On December 31, 1998, including the effects of interest rate contracts for
certain long-term debt issuances, the weighted average effective interest rates
for total long-term debt, total fixed-rate debt and total floating-rate debt
(based on the rates in effect on December 31, 1998) were 6.11 percent, 7.73
percent and 5.24 percent, respectively. These obligations were denominated
primarily in U.S. dollars.
70
As described below, certain debt obligations outstanding on December 31,
1998 may be redeemed prior to maturity at the option of the Corporation:
Amount
Outstanding
Year Redeemable Year of Maturities (in millions)
- ------------------------ -------------------- --------------
Currently redeemable 2002 $ 21
1999 2001 -- 2010 919
2000 -- 2001 2001 -- 2028 2,542
2002 -- 2008 2005 -- 2028 853
Note Nine - Trust Preferred Securities
Trust preferred securities are Corporation obligated mandatorily
redeemable preferred securities of subsidiary trusts holding solely junior
subordinated deferrable interest notes of the Corporation.
Since October 1996, the Corporation formed thirteen wholly owned grantor
trusts to issue trust preferred securities and to invest the proceeds of such
trust preferred securities into notes of the Corporation. Certain of the trust
preferred securities were issued at a discount. Such trust preferred securities
may be redeemed prior to maturity at the option of the Corporation. The sole
assets of each of the grantor trusts are the Junior Subordinated Deferrable
Interest Notes of the Corporation (the Notes) held by such grantor trusts. Each
issue of the Notes has an interest rate equal to the corresponding trust
preferred securities distribution rate. The Corporation has the right to defer
payment of interest on the Notes at any time or from time to time for a period
not exceeding five years provided that no extension period may extend beyond
the stated maturity of the relevant Notes. During any such extension period,
distributions on the trust preferred securities will also be deferred and the
Corporation's ability to pay dividends on its common and preferred stock will
be restricted.
The trust preferred securities are subject to mandatory redemption upon
repayment of the related Notes at their stated maturity dates or their earlier
redemption at a redemption price equal to their liquidation amount plus accrued
distributions to the date fixed for redemption and the premium if any, paid by
the Corporation upon concurrent repayment of the related Notes.
Payment of periodic cash distributions and payment upon liquidation or
redemption with respect to trust preferred securities are guaranteed by the
Corporation to the extent of funds held by the grantor trusts (the Preferred
Securities Guarantee). The Preferred Securities Guarantee, when taken together
with the Corporation's other obligations including its obligations under the
Notes, will constitute a full and unconditional guarantee, on a subordinated
basis, by the Corporation of payments due on the trust preferred securities.
The Corporation is required by the FRB to maintain certain levels of
capital for bank regulatory purposes. The FRB has determined that certain
cumulative preferred securities having the characteristics of trust preferred
securities qualify as minority interest, which is included in Tier 1 capital
for bank holding companies. Such Tier 1 capital treatment provides the
Corporation with a more cost-effective means of obtaining capital for bank
regulatory purposes than if the Corporation were to issue preferred stock.
The table on the next page is a summary of the outstanding trust preferred
securities and the Notes at December 31:
71
Aggregate
Principal
Amount of
Trust Preferred
Securities Aggregate
--------------------- Principal
Amount of
(Dollars in Millions) Issued 1998 1997 the Notes
- ----------------------------- ----------- ---------- ---------- -----------
NationsBank
Capital Trust I ............ Dec. 1996 $ 600 $ 600 $ 619
Capital Trust II ........... Dec. 1996 365 365 376
Capital Trust III .......... Feb. 1997 500 500 516
Capital Trust IV ........... Apr. 1997 500 500 516
BankAmerica
Institutional Capital A .... Nov. 1996 450 450 464
Institutional Capital B .... Nov. 1996 300 300 309
Capital I .................. Dec. 1996 300 300 309
Capital II ................. Dec. 1996 450 450 464
Capital III ................ Jan. 1997 400 400 412
Capital IV ................. Feb. 1998 350 -- 361
Barnett
Capital I .................. Nov. 1996 300 300 309
Capital II ................. Dec. 1996 200 200 206
Capital III ................ Jan. 1997 250 250 258
-------
Total ...................... $4,965m $4,615m $ 5,119
======= ======= =======
Per
Annum
Stated Interest Interest
Maturity of Rate of Payment Redemption
(Dollars in Millions) the Notes the Notes Dates Period
- ----------------------------- ------------- ------------- -------------- ------------
NationsBank
Capital Trust I ............ Dec. 2026 7.84% 3/31, 6/30, On or after
9/30, 12/31 12/31/01 a
Capital Trust II ........... Dec. 2026 7.83 6/15, 12/15 On or after
12/15/06 bd
Capital Trust III .......... Jan. 2027 3-mo. LIBOR 1/15, 4/15, On or after
+55 bps 7/15, 10/15 1/15/07 b
Capital Trust IV ........... Apr. 2027 8.25 4/15, 10/15 On or after
4/15/07 bf
BankAmerica
Institutional Capital A..... Dec. 2026 8.07 6/30, 12/31 On or after
12/31/06cg
Institutional Capital B..... Dec. 2026 7.70 6/30, 12/31 On or after
12/31/06 ch
Capital I .................. Dec. 2026 i 7.75 3/31, 6/30, On or after
9/30, 12/31 12/20/01 e
Capital II ................. Dec. 2026 8.00 6/15, 12/15 On or after
12/15/06 cj
Capital III ................ Jan. 2027 3-mo. LIBOR 1/15, 4/15, On or after
+57 bps 7/15, 10/15 1/15/02 c
Capital IV ................. Mar. 2028 7.00 3/31, 6/30, On or after
9/30, 12/31 2/24/03 c
Barnett
Capital I .................. Dec. 2026 8.06 6/1, 12/1 On or after
12/1/06 bk
Capital II ................. Dec. 2026 7.95 6/1, 12/1 On or after
12/1/06 bl
Capital III ................ Feb. 2027 3-mo. LIBOR 2/1, 5/1, On or after
+62.5 bps 8/1, 11/1 2/1/07 b
Total ......................
a The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence of certain events relating to tax treatment of
the related trust or the Notes, at a redemption price at least equal to the
principal amount of the Notes.
b The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence of certain events relating to tax treatment of
the related trust or the Notes or relating to capital treatment of the trust
preferred securities or relating to a change in the treatment of the related
trust under the Investment Company Act of 1940, as amended, at a redemption
price at least equal to the principal amount of the Notes.
c The Corporation may redeem the Notes prior to the indicated redemption
period upon the occurrence of certain events relating to tax treatment of
the related trust or the Notes or relating to capital treatment of the trust
preferred securities at a redemption price at least equal to the principal
amount of the Notes.
d The Notes may be redeemed on or after December 15, 2006 and prior to
December 15, 2007 at 103.915% of the principal amount, and thereafter at
prices declining to 100% on December 15, 2016 and thereafter.
e The Corporation may redeem the Notes (i) during the indicated redemption
period or (ii) upon the occurrence of certain events relating to tax
treatment of the trust or the Notes or relating to capital treatment of the
trust preferred securities, prior to the indicated redemption period, in
each case, at a redemption price of 100% of the principal amount.
f The Notes may be redeemed on or after April 15, 2007 and prior to April 14,
2008 at 103.85% of the principal amount, and thereafter at prices declining
to 100% on April 15, 2017 and thereafter.
g The Notes may be redeemed on or after December 31, 2006 and prior to
December 31, 2007 at 104.0350% of the principal amount, and thereafter at
prices declining to 100% on December 31, 2016 and thereafter.
h The Notes may be redeemed on or after December 31, 2006 and prior to
December 31, 2007 at 103.7785% of the principal amount, and thereafter at
prices declining to 100% on December 31, 2016 and thereafter.
i At the option of the Corporation, the stated maturity may be shortened to a
date not earlier than December 20, 2001 or extended to a date not later than
December 31, 2045, in each case if certain conditions are met.
j The Notes may be redeemed on or after December 15, 2006 and prior to
December 15, 2007 at 103.9690% of the principal amount, and thereafter at
prices declining to 100% on December 15, 2016 and thereafter.
k The Notes may be redeemed on or after December 1, 2006 and prior to December
1, 2007 at 104.030% of the principal amount, and thereafter at prices
declining to 100% on December 1, 2016 and thereafter.
l The Notes may be redeemed on or after December 1, 2006 and prior to December
1, 2007 at 103.975% of the principal amount, and thereafter at prices
declining to 100% on December 1, 2016 and thereafter.
m Excludes $11 and $37 of deferred issuance costs and unamortized discount
at December 31, 1998 and 1997, respectively.
72
Note Ten - Shareholders' Equity and Earnings Per Common Share
On June 29, 1998, the Corporation redeemed all of BankAmerica's remaining
outstanding nonconvertible preferred shares. The Corporation's Preferred Stock
on December 31, 1997, included BankAmerica's outstanding preferred stock of
$614 million. These preferred shares were nonvoting except in certain limited
circumstances. The shares were redeemable at the option of BankAmerica during
the redemption period and at the redemption price per share plus accrued and
unpaid dividends to the redemption date. During 1997 and 1996, BankAmerica
redeemed a portion of its preferred shares for an aggregate of $1,628 million
and $381 million, respectively.
In April 1988, BankAmerica declared a dividend of one preferred share
purchase right (a Right) for each outstanding share of BankAmerica's common
stock pursuant to the Rights Agreement dated April 11, 1988 between BankAmerica
and Manufacturers Hanover Trust Company of California, as rights agent (the
Rights Agreement). Each Right entitled the holder, upon the occurrence of
certain events, to buy from BankAmerica, until the earlier of April 22, 1998 or
the redemption of the Rights, one two-hundredth of a share of Cumulative
Participating Preferred Stock, Series E, at an exercise price of $25.00 per
Right (subject to adjustment). On April 22, 1998, the Rights Agreement expired
in accordance with its terms.
As of December 31, 1998, the Corporation had issued 1.9 million shares of
employee stock ownership plan (ESOP) Convertible Preferred Stock, Series C
(ESOP Preferred Stock). The ESOP Preferred Stock has a stated and liquidation
value of $42.50 per share, provides for an annual cumulative dividend of $3.30
per share and each share is convertible into 1.68 shares of the Corporation's
common stock. ESOP Preferred Stock in the amounts of $11 million, $86 million
and $98 million was converted into the Corporation's common stock in 1998, 1997
and 1996, respectively.
In November 1989, Barnett incorporated ESOP provisions into its existing
401(k) employee benefit plan (Barnett ESOP). The Barnett ESOP acquired $141
million of common stock using the proceeds of a loan from the Corporation. The
terms of the loan include equal monthly payments of principal and interest
through September 2015. Interest is at 9.75 percent and prepayments of
principal are allowed. The loan is generally being repaid from contributions to
the plan by the Corporation and dividends on unallocated shares held by the
Barnett ESOP. Shares held by the Barnett ESOP are allocated to plan
participants as the loan is repaid. As of December 31, 1998, 3.5 million shares
of unallocated common stock remained in the Barnett ESOP. During 1998, 1997 and
1996, the Barnett ESOP released and allocated common stock amounting to $6
million, $8 million and $13 million, respectively.
As consideration in the merger of NationsBank, N.A. (South) and
NationsBank, N.A. during 1997, NationsBank, N.A. exchanged approximately $73
million for preferred stock issued by NationsBank, N.A. (South) in the 1996
acquisition of Citizens Federal Bank, a federal savings bank. Such preferred
stock consisted of approximately 0.5 million shares of NationsBank, N.A.
(South) 8.50% Series H Noncumulative Preferred Stock and approximately 2.4
million shares of NationsBank, N.A. (South) 8.75% Series 1993A Noncumulative
Preferred Stock.
During 1998 and 1997, the Corporation repurchased approximately 29 million
and approximately 150 million shares of common stock, respectively, under
various stock repurchase programs authorized by the Board of Directors. On
September 24, 1998, the Board of Directors of the Corporation approved the
purchase of up to 20 million shares of the Corporation's common stock in the
open market or through private transactions. During the fourth quarter of 1998
all shares authorized under this resolution were repurchased.
Other shareholders' equity consisted of restricted stock award plan
deferred compensation of $74 million and $23 million, as well as a loan to the
ESOP trust of $58 million and $86 million at December 31, 1998 and 1997,
respectively.
73
The calculation of earnings per common share and diluted earnings per
common share is presented below (dollars in millions, except per-share data,
shares in thousands):
1998 1997 1996
------------- ------------- -------------
Earnings per common share computation
Net income ...................................................... $ 5,165 $ 6,542 $ 5,813
Total preferred stock dividends ................................. (25) (111) (202)
---------- ---------- ----------
Income available to common shareholders ......................... $ 5,140 $ 6,431 $ 5,611
---------- ---------- ----------
Average common shares issued and outstanding .................... 1,732,057 1,733,194 1,638,382
---------- ---------- ----------
Earnings per common share ....................................... $ 2.97 $ 3.71 $ 3.42
========== ========== ==========
Diluted earnings per common share computation
Income available to common shareholders ......................... $ 5,140 $ 6,431 $ 5,611
Total preferred stock dividends ................................. 25 111 202
Preferred stock dividends on nonconvertible stock ............... (19) (104) (193)
---------- ---------- ----------
Effect of assumed conversions ................................... 6 7 9
---------- ---------- ----------
Income available to common shareholders and assumed
conversions ................................................... $ 5,146 $ 6,438 $ 5,620
---------- ---------- ----------
Average common shares issued and outstanding .................... 1,732,057 1,733,194 1,638,382
Incremental shares from assumed conversions:
Convertible preferred stock ................................... 3,290 3,736 6,158
Stock options ................................................. 40,413 45,242 26,086
---------- ---------- ----------
Dilutive potential common shares ................................ 43,703 48,978 32,244
---------- ---------- ----------
Total dilutive average common shares issued and outstanding ..... 1,775,760 1,782,172 1,670,626
---------- ---------- ----------
Diluted earnings per common share ............................... $ 2.90 $ 3.61 $ 3.36
========== ========== ==========
Note Eleven - Commitments, Contingencies and Off-Balance Sheet Financial
Instruments
In the normal course of business, the Corporation enters into a number of
off-balance sheet commitments. These commitments expose the Corporation to
varying degrees of credit and market risk and are subject to the same credit
and risk limitation reviews as those recorded on the balance sheet.
Credit Extension Commitments
The Corporation enters into commitments to extend credit, standby letters
of credit and commercial letters of credit to meet the financing needs of its
customers. The commitments shown below have been reduced by amounts
collateralized by cash and amounts participated to other financial
institutions. The following summarizes outstanding commitments to extend credit
on December 31 (dollars in millions):
1998 1997
---------- ----------
Credit card commitments ................................... $ 67,018 $ 69,297
Other loan commitments .................................... 234,453 226,773
Standby letters of credit and financial guarantees ........ 33,311 31,315
Commercial letters of credit .............................. 3,035 3,748
Commitments to extend credit are legally binding, generally have specified
rates and maturities and are for specified purposes. The Corporation manages
the credit risk on these commitments by subjecting these commitments to normal
credit approval and monitoring processes and protecting against deterioration
in the borrowers' ability to pay through adverse-change clauses which require
borrowers to maintain various credit and liquidity measures. As of December 31,
1998 and 1997, there were no unfunded commitments to any industry or country
greater than 10 percent of total unfunded commitments to lend. Credit card
lines are unsecured commitments which are reviewed at least annually by
management. Upon evaluation of the customers' creditworthiness, the Corporation
has the right to terminate or change the terms of the credit card lines. Of the
December 31, 1998 other loan commitments, $107.4 billion is scheduled to expire
in less than one year, $105.8 billion in one to five years and $21.3 billion
after five years.
74
Standby letters of credit (SBLC) and financial guarantees are issued to
support the debt obligations of customers. If a SBLC or financial guarantee is
drawn upon, the Corporation looks to its customer for payment. SBLCs and
financial guarantees are subject to the same approval and collateral policies
as other extensions of credit. Of the December 31, 1998 SBLCs and financial
guarantees, $20.9 billion is scheduled to expire in less than one year, $10.8
billion in one to five years and $1.6 billion after five years.
Commercial letters of credit, issued primarily to facilitate customer
trade finance activities, are collateralized by the underlying goods being
shipped by the customer and are generally short-term.
For each of these types of instruments, the Corporation's maximum exposure
to credit loss is represented by the contractual amount of these instruments.
Many of the commitments are collateralized or are expected to expire without
being drawn upon; therefore, the total commitment amounts do not necessarily
represent risk of loss or future cash requirements.
Derivatives
Derivatives utilized by the Corporation include interest rate swaps,
financial futures and forward settlement contracts and option contracts. A swap
agreement is a contract between two parties to exchange cash flows based on
specified underlying notional amounts and indices. Financial futures and
forward settlement contracts are agreements to buy or sell a quantity of a
financial instrument, currency or commodity at a predetermined future date and
rate or price. An option contract is an agreement that conveys to the purchaser
the right, but not the obligation, to buy or sell a quantity of a financial
instrument, index, currency or commodity at a predetermined rate or price at a
time or during a period in the future. These option agreements can be
transacted on organized exchanges or directly between parties.
Asset and Liability Management Activities
Risk management interest rate contracts are used in the asset and
liability management process. Such contracts, which are generally non-leveraged
generic interest rate and basis swaps, options and futures, allow the
Corporation to effectively manage its interest rate risk position. Generic
interest rate swaps involve the exchange of fixed-rate and variable-rate
interest payments based on the contractual underlying notional amount. Basis
swaps involve the exchange of interest payments based on the contractual
underlying notional amounts, where both the pay rate and the receive rate are
floating rates based on different indices. Interest rate caps and floors are
agreements where, for a fee, the purchaser obtains the right to receive
interest payments when a variable interest rate moves above or below a
specified cap or floor rate, respectively.
The following table outlines the notional and fair values of the
Corporation's ALM contracts on December 31 (dollars in millions):
1998 1997
---------------------- ----------------------
Notional Fair Notional Fair
Amount Value Amount Value
---------- ----------- ---------- -----------
Interest Rate Contracts
Receive fixed swaps ...................... $60,450 $ 1,958 $56,127 $ 877
Pay fixed swaps .......................... 25,770 (1,006) 25,041 (888)
------- -------- ------- -----
Net receive fixed ...................... 34,680 952 31,086 (11)
Basis swaps .............................. 7,736 (10) 2,583 (7)
------- -------- ------- --------
Total net swap position ................ 42,416 942 33,669 (18)
Futures and forward rate contracts ....... 6,348 2 89,650 (16)
Option products .......................... 26,836 (46) 24,113 (60)
------- -------- ------- -------
Total interest rate contracts (1) ...... $ 898 $ (94)
======== =======
(1) Not meaningful to sum notional amounts of different off-balance sheet
products.
75
In addition to the contracts in the preceding table, the Corporation uses
foreign currency contracts to manage the foreign exchange risk associated with
certain foreign-denominated liabilities. Foreign exchange contracts, which
include spot, forward and futures contracts, represent agreements to exchange
the currency of one country for the currency of another country at an
agreed-upon price, on an agreed-upon settlement date. Foreign exchange option
contracts are similar to interest rate option contracts except that they are
based on currencies rather than interest rates. Exposure to loss on these
contracts will increase or decrease over their respective lives as currency
exchange and interest rates fluctuate. The Corporation's credit risk exposure
for exchange-traded instruments is minimal as these instruments conform to
standard terms and are subject to policies set by the exchange involved,
including counterparty approval, margin requirements and security deposit
requirements.
Credit Risk Associated with Derivative Activities
Credit risk associated with derivatives is measured as the net replacement
cost should the counterparties with contracts in a gain position to the
Corporation completely fail to perform under the terms of those contracts and
any collateral underlying the contracts proves to be of no value. In managing
derivatives credit risk, both the current exposure, which is the replacement
cost of contracts on the measurement date, as well as an estimate of the
potential change in value of contracts over their remaining lives are
considered. In managing credit risk associated with its derivatives activities,
the Corporation deals primarily with U.S. and foreign commercial banks,
broker-dealers and corporates.
During 1998, there were $40 million in credit losses associated with
derivative contracts. On December 31, 1998, there were no nonperforming
derivatives positions that were material to the Corporation. To minimize credit
risk, the Corporation enters into legally enforceable master netting
agreements, which reduce risk by permitting the close out and netting of
transactions with the same counterparty upon the occurrence of certain events.
A portion of the derivative-dealer activity involves exchange-traded
instruments. Because exchange-traded instruments conform to standard terms and
are subject to policies set by the exchange involved, including counterparty
approval, margin requirements and security deposit requirements, the credit
risk is minimal.
The following table presents the notional or contract amounts on December
31, 1998 and 1997 and the current credit risk amounts (the net replacement cost
of contracts in a gain position on December 31, 1998 and 1997) of the
Corporation's derivative-dealer positions which are primarily executed in the
over-the-counter market for trading purposes. The notional or contract amounts
indicate the total volume of transactions and significantly exceed the amount
of the Corporation's credit or market risk associated with these instruments.
The credit risk amounts presented in the following table do not consider the
value of any collateral, but generally take into consideration the effects of
legally enforceable master netting agreements.
76
Derivative - Dealer Positions
(Dollars in Millions)
December 31, 1998 December 31, 1997
------------------------ ---------------------
Contract/ Credit Contract/ Credit
Notional Risk (1) Notional Risk (1)
------------- ---------- ----------- ---------
Interest Rate Contracts
Swaps ...................................... $1,539,862 $ 5,470 $868,708 $ 3,759
Futures and forwards ....................... 808,284 290 470,640 120
Written options ............................ 494,608 -- 476,152 --
Purchased options .......................... 615,492 2,125 449,383 1,078
Foreign Exchange Contracts
Swaps ...................................... 37,357 1,403 31,028 1,577
Spot, futures and forwards ................. 623,977 5,136 628,265 7,214
Written options ............................ 56,287 -- 80,438 --
Purchased options .......................... 53,426 703 75,998 970
Commodity and Other Contracts
Swaps ...................................... 5,685 370 2,713 80
Futures and forwards ....................... 5,292 -- 3,147 --
Written options ............................ 22,382 -- 14,159 --
Purchased options .......................... 22,134 989 13,954 403
------- -------
Total before cross product netting ....... 16,486 15,201
------- -------
Cross product netting .................... 1,274 749
------- -------
Net replacement cost ..................... $15,212 $14,452
======= =======
(1) Represents the net replacement cost the Corporation could incur should
counterparties with contracts in a gain position to the Corporation
completely fail to perform under the terms of those contracts. Amounts
include accrued interest.
The table above includes both long and short derivative-dealer positions.
The fair value of dealer positions on December 31, 1998 and 1997, as well as
their average fair values for 1998 and 1997 are disclosed in Note Four of the
consolidated financial statements on page 66.
The Corporation uses credit derivatives to diversify credit risk and lower
its risk portfolio by transferring the exposure of an underlying asset to
another counterparty. Credit default swaps are a type of credit derivatives
which provide protection against credit losses associated with specific events
on an underlying asset. As of December 31, 1998, the Corporation had a notional
value of $16.9 billion in credit derivatives, primarily credit default swaps.
When Issued Securities
When issued securities are commitments to purchase or sell securities
during the time period between the announcement of a securities offering and
the issuance of those securities. On December 31, 1998, the Corporation had
commitments to purchase and sell when issued securities of $1.3 billion and
$2.4 billion, respectively. On December 31, 1997, the Corporation had
commitments to purchase and sell when issued securities of $8.8 billion and
$8.2 billion, respectively.
Litigation
In the ordinary course of business, the Corporation and its subsidiaries
are routinely defendants in or parties to a number of pending and threatened
legal actions and proceedings, including actions brought on behalf of various
classes of claimants. In certain of these actions and proceedings, substantial
money damages are asserted against the Corporation and its subsidiaries and
certain of these actions and proceedings are based on alleged violations of
consumer protection, securities, environmental, banking and other laws.
The Corporation's predecessor, BankAmerica, and certain of its
subsidiaries, including Bank of America NT&SA, were named in one such suit by
the City of San Francisco and several related public entities, and by the State
of California, in an action entitled State of California, etc ex rel Stull v.
Bank of America NT&SA, et al. (No. 968-484). The case was instituted on April
1, 1995 in the Superior Court for the City and County of San Francisco. The
City of San Francisco and related public entities intervened in the case on May
1, 1997, and the
77
State of California took over prosecution of the case on May 5, 1997. The chief
allegation of this suit is that Bank of America NT&SA and its predecessors
retained unclaimed funds related to bonds and coupons that were not presented
by bondholders rather than returning them to certain bond issuers or escheating
such funds to the State. The suit also alleges False Claims Act exposure for
alleged fee overcharges and claims that Bank of America NT&SA and its
predecessors improperly invested bond program funds. On November 12, 1998, the
plaintiffs and the Corporation and its named subsidiaries settled this suit
whereby the Corporation and its named subsidiaries agreed to pay $187.5 million
to the plaintiffs. The settlement is subject to court approval.
The Corporation and certain present and former officers have been named as
defendants in approximately 24 uncertified class actions filed in federal court
alleging, among other things, that the defendants failed to disclose material
facts about BankAmerica's losses relating to D.E. Shaw & Co., L. P. until
mid-October 1998, in violation of various provisions of the federal securities
laws. The uncertified classes consist generally of persons who were entitled to
vote on the merger of NationsBank and BankAmerica, or who purchased or acquired
securities of the Corporation or its predecessors between August 4, 1998 and
October 13, 1998. Similar actions are pending in California state court,
alleging violations of the California Corporations Code and involving factual
allegations essentially the same as the federal actions. In addition, certain
cases filed in California state court have alleged that the proxy
statement-prospectus of August 4, 1998, falsely stated that the Merger would be
one of equals and allege a conspiracy on the part of certain executives to gain
control over the newly merged entity. At least one such complaint seeks recovery
under various state common law theories. The Corporation believes the actions
lack merit and will defend them vigorously. The amount of any ultimate exposure
cannot be determined with certainty at this time.
Management believes that the actions and proceedings and the losses, if
any, resulting from the final outcome thereof, will not be material in the
aggregate to the Corporation's financial position or results of operations.
Note Twelve - Regulatory Requirements and Restrictions
The Corporation's banking subsidiaries are required to maintain average
reserve balances with the FRB based on a percentage of certain deposits.
Average reserve balances held with the FRB to meet these requirements amounted
to $288 million and $403 million for 1998 and 1997, respectively.
The primary source of funds for cash distributions by the Corporation to
its shareholders is dividends received from its banking subsidiaries. The
subsidiary national banks can initiate aggregate dividend payments in 1999,
without prior regulatory approval, of $2.2 billion plus an additional amount
equal to their net profits for 1999, as defined by statute, up to the date of
any such dividend declaration. The amount of dividends that each subsidiary
bank may declare in a calendar year without approval by the Office of the
Comptroller of the Currency (OCC) is the bank's net profits for that year
combined with its net retained profits, as defined, for the preceding two
years.
One of the Corporation's subsidiaries, Bank of America, FSB, is subject to
regulatory restrictions by the Office of Thrift Supervision (OTS) on its
payment of dividends. Under these restrictions, Bank of America, FSB, can
initiate dividend payments in 1999 without prior regulatory approval of $675
million.
Regulations also restrict banking subsidiaries in lending funds to
affiliates. On December 31, 1998, the total amount which could be loaned to the
Corporation by its banking subsidiaries was approximately $5.6 billion. On
December 31, 1998, no loans to the Corporation from its banking subsidiaries
were outstanding.
The FRB, the OCC, the Federal Deposit Insurance Corporation and the OTS
(collectively, the Agencies) have issued regulatory capital guidelines for U.S.
banking organizations. Failure to meet the capital requirements can initiate
certain mandatory and discretionary actions by regulators that could have a
material effect on the Corporation's financial statements. As of December 31,
1998 and 1997, the Corporation and each of its banking subsidiaries were well
capitalized under this regulatory framework. There have been no conditions or
events since December 31, 1998 that management believes have changed either the
Corporation's or its banking subsidiaries' capital classifications.
The regulatory capital guidelines measure capital in relation to the
credit risk of both on- and off-balance sheet items using various risk weights.
Under the regulatory capital guidelines, Total Capital consists of three
78
tiers of capital. Tier 1 Capital includes common shareholders' equity and
qualifying preferred stock, less goodwill and other adjustments. Tier 2 Capital
consists of preferred stock not qualifying as Tier 1 Capital, mandatory
convertible debt, limited amounts of subordinated debt, other qualifying term
debt and the allowance for credit losses up to 1.25 percent of risk-weighted
assets. Tier 3 capital includes subordinated debt that is unsecured, fully
paid, has an original maturity of at least two years, is not redeemable before
maturity without prior approval by the Federal Reserve and includes a lock-in
clause precluding payment of either interest or principal if the payment would
cause the issuing bank's risk-based capital ratio to fall or remain below the
required minimum. At December 31, 1998, the Corporation had no subordinated
debt that qualified as Tier 3 capital.
In accordance with the FRB's amendment to its capital adequacy guidelines
effective for periods beginning after December 31, 1997, the Corporation is now
required to include its broker/dealer subsidiaries, NationsBanc Montgomery
Securities and Robertson Stephens, when calculating regulatory capital ratios.
Previously, the Corporation had been required to exclude the equity, assets and
off-balance sheet exposures of its broker/dealer subsidiary.
To meet minimum adequately capitalized regulatory requirements, an
institution must maintain a Tier 1 Capital ratio of four percent and a Total
Capital ratio of eight percent. A well-capitalized institution must maintain a
Tier 1 Capital ratio of six percent and a Total Capital ratio of ten percent.
The risk-based capital rules have been further supplemented by a leverage
ratio, defined as Tier 1 capital divided by average total assets, after certain
adjustments. The leverage ratio guidelines establish a minimum of 100 to 200
basis points above three percent. Banking organizations must maintain a
leverage capital ratio of at least five percent to be classified as well
capitalized.
On September 12, 1996, the Agencies amended their regulatory capital
guidelines to incorporate a measure for market risk. In accordance with the
amended guidelines, the Corporation and any of its banking subsidiaries with
significant trading activity, as defined in the amendment, must incorporate a
measure for market risk in their regulatory capital calculations effective for
reporting periods after January 1, 1998. The revised guidelines have not had a
material impact on the Corporation or its subsidiaries' regulatory capital
ratios or their well-capitalized status.
The following table presents the actual capital ratios and amounts and
minimum required capital amounts for the Corporation, NationsBank, N.A. and
Bank of America NT&SA on December 31:
1998 1997
----------------------------------- -----------------------------------
Actual Actual
--------------------- Minimum --------------------- Minimum
Ratio Amount Required (1) Ratio Amount Required (1)
---------- ---------- ------------- ---------- ---------- -------------
(Dollars in Millions)
Tier 1 Capital
BankAmerica Corporation ......... 7.06% $36,849 $20,866 6.50% $13,593 $ 8,371
NationsBank, N.A. ............... 7.72 19,317 10,007 7.58 10,537 5,557
Bank of America NT&SA ........... 7.03 15,511 8,832 7.49 15,660 8,361
Total Capital
BankAmerica Corporation ......... 10.94 57,055 41,733 10.89 22,787 16,742
NationsBank, N.A. ............... 10.27 25,691 20,014 10.98 15,256 11,113
Bank of America NT&SA ........... 10.80 23,837 17,664 11.28 23,576 16,722
Leverage Capital
BankAmerica Corporation ......... 6.22 36,849 17,773 5.57 13,593 7,321
NationsBank, N.A. ............... 6.55 19,317 8,854 5.68 10,537 5,568
Bank of America NT&SA ........... 6.15 15,511 7,568 6.93 15,660 6,779
(1) Dollar amount required to meet the Agencies guidelines for adequately
capitalized institutions.
79
During 1998, several subsidiaries including NationsBank of Texas, N.A.,
NationsBank of Tennessee, N.A. and Barnett Banks, N.A., as well as various
other subsidiaries were merged with and into NationsBank, N.A. During 1997,
several subsidiaries including NationsBank, N.A. (South) and various
subsidiaries acquired in the purchase of Boatmen's were merged with and into
NationsBank, N.A.
The Corporation's and NationsBank, N.A.'s ratios and amounts for 1997 have
not been restated to reflect the impact of mergers. BankAmerica, Barnett and
their significant banking subsidiaries were considered "well capitalized" on
December 31, 1997 under the regulatory framework.
Note Thirteen - Employee Benefit Plans
Pension and Postretirement Plans
The Corporation sponsors noncontributory trusteed pension plans that cover
substantially all officers and employees. The plans provide defined benefits
based on an employee's compensation, age and years of service. It is the policy
of the Corporation to fund not less than the minimum funding amount required by
ERISA. Individually, BankAmerica, Barnett Banks and NationsBank each sponsored
defined benefit pension plans prior to each of the respective mergers of these
banks. The BankAmerica plan was a cash balance design plan, providing
participants with an age, service and wage based crediting rate applied at each
pay period and a defined earnings rate on all participant account balances in
the plan. The NationsBank plan was amended to a cash balance plan effective
July 1, 1998 and provides a similar crediting rate for all participants. The
NationsBank plan allows participants to select from various earnings measures,
which are based on the returns of certain funds managed by subsidiaries of the
Corporation. The participant selected earnings measures determine the earnings
rate on the individual participant account balances in the plan. In addition, a
one time opportunity to transfer certain assets from the company's savings plan
to the cash balance plan was extended to NationsBank plan participants. Assets
with an approximate fair value of $1,423 million were transferred by plan
participants. The Barnett plan will be amended to merge into the NationsBank
plan in 1999, providing the cash balance plan design feature to those
participants. The opportunity to transfer certain savings plan assets to the
cash balance plan will be extended to Barnett participants in 1999. The
BankAmerica and NationsBank plans were merged effective December 31, 1998.
However, the participants in each plan will retain the cash balance plan design
followed by their predecessor plans until the plan is amended in 2000.
In addition to retirement pension benefits, substantially all employees
may become eligible for postretirement health care and life insurance benefits.
80
The following tables summarize the balances and changes in fair value of
plan assets and benefit obligations as of and for the years ended December 31,
1998 and 1997:
Postretirement
Pension Plan Health & Life Plan
----------------------- -------------------------
1998 1997 1998 1997
------------ ---------- ------------ ------------
(Dollars in Millions)
Change in Fair Value of Plan Assets (Primarily Listed Stocks,
Fixed Income and Real Estate)
Fair value on January 1 ......................................... $5,725 $4,927 $ 164 $ 137
Actual return on plan assets .................................... 890 770 24 23
Company contributions ........................................... -- -- 65 68
Plan participant contributions .................................. -- -- 28 17
Acquisition/transfer ............................................ 1,429 364 -- --
Benefits paid ................................................... (384) (336) (94) (81)
------ ------ ----- -----
Fair value on December 31 .................................... $7,660 $5,725 $ 187 $ 164
====== ====== ===== =====
(Dollars in Millions)
Change in Benefit Obligation
Benefit obligation on January 1 ................................. $4,692 $4,092 $ 930 $ 800
Service cost .................................................... 144 122 10 9
Interest cost ................................................... 371 320 61 62
Plan participant contributions .................................. -- -- 28 17
Plan amendments ................................................. 95 (125) 16 17
Actuarial loss (gain) ........................................... (66) 354 (67) 48
Acquisition/transfer ............................................ 1,539 265 -- 58
Effect of curtailments .......................................... (14) -- (2) --
Benefits paid ................................................... (384) (336) (94) (81)
------ ------ ------- -----
Benefit obligation on December 31 ............................ $6,377 $4,692 $ 882 $ 930
====== ====== ======= =====
(Dollars in Millions)
Funded Status
Overfunded (unfunded) status on December 31 ..................... $1,283 $1,033 $(695) $(766)
Unrecognized net actuarial loss (gain) .......................... (132) 303 (96) (29)
Unrecognized prior service cost (benefit) ....................... 108 (101) 13 (3)
Unrecognized transition obligation (asset) ...................... (9) (12) 473 507
-------- ------ ------- -------
Prepaid (accrued) benefit cost ............................... $1,250 $1,223 $(305) $(291)
======= ====== ======= =======
The following are the weighted average discount rate, expected return on
plan assets and rate of increase in future compensation assumptions used in
determining the actuarial present value of the benefit obligation.
Pension Plan Retiree Health & Life Plan
--------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------------- ---------- ------------------
Weighted Average Assumptions on December 31
Discount rate ................................. 7.00% 6.50 to 7.50% 7.00% 6.50 to 7.50%
Expected return on plan assets ................ 10.00% 8.25 to 10.00% 10.00% 8.25 to 10.00%
Rate of compensation increase ................. 4.00% 4.00 to 6.50% 4.00% 4.00%
81
Net periodic pension benefit cost (income) for the years ended December 31,
included the following components:
1998 1997 1996
(Dollars in Millions) ----------- ----------- -----------
Components of Net Periodic Pension Benefit Cost (Income)
Service cost .............................................. $ 144 $ 122 $ 119
Interest cost ............................................. 371 320 278
Expected return on plan assets ............................ (552) (434) (372)
Amortization of transition asset .......................... (3) (3) (3)
Amortization of prior service cost ........................ (2) (10) (2)
Recognized net actuarial loss ............................. 16 16 25
Recognized gain due to settlements and curtailments ....... (2) -- --
-------- ------- -------
Net periodic pension benefit cost (income) .............. $ (28) $ 11 $ 45
======= ======= =======
In addition to the trusteed pension plan, the Corporation sponsors a
number of unfunded executive pension plans. The total benefit obligation for
these plans as of December 31, 1998 and 1997 was $386 million and $342 million
respectively. The net periodic pension expense for these plans in 1998 and 1997
totaled $49 million and $46 million, respectively.
For the years ended December 31, net periodic postretirement benefit
expense included the following components:
1998 1997 1996
(Dollars in Millions) ----------- ---------- ----------
Components of Net Periodic Postretirement Benefit Cost
Service cost ............................................. $ 10 $ 9 $ 10
Interest cost ............................................ 61 62 57
Expected return on plan assets ........................... (14) (12) (13)
Amortization of transition obligation .................... 34 34 34
Amortization of prior service cost ....................... (1) (2) (2)
Recognized net actuarial loss (gain) ..................... (10) (4) 2
Recognized gain due to settlements and curtailments ...... (2) -- --
------- ------ ------
Net periodic postretirement benefit cost ................ $ 78 $ 87 $ 88
====== ====== ======
Net periodic postretirement health and life expense was determined using
the "projected unit credit" actuarial method. Gains and losses for all benefits
except postretirement health care are recognized in accordance with the minimum
amortization provisions of the applicable accounting standards. For the
postretirement health care plans, 50 percent of the unrecognized gain or loss
at the beginning of the fiscal year (or at subsequent remeasurement) is
recognized on a level basis during the year.
Assumed health care cost trend rates affect the postretirement benefit
obligation and benefit cost reported for the health care plan. The assumed
health care cost trend rates for the next year used to measure the expected
cost of benefits covered for the postretirement health and life plans was 6
percent for pre-65 benefits and 4.5 percent for post 65 benefits. A one
percentage point increase in assumed health care cost trend rates would have
increased the service and interest costs and the benefit obligation by $6
million and $57 million, respectively. A one-percentage point decrease in
assumed health care cost trends would have lowered the service and interest
costs and the benefit obligation by $5 million and $49 million, respectively.
Defined Contribution Plans
The Corporation maintains several defined contribution savings and profit
sharing plans, two of which feature leveraged ESOP provisions. See Note Ten of
the consolidated financial statements on page 73 for additional information on
the two ESOP provisions.
ESOP Plans
The Corporation contributed approximately $47 million, $45 million and $39
million for 1998, 1997 and 1996, respectively, in cash which was utilized
primarily to purchase the Corporation's common stock under the terms of these
plans. The Corporation also contributed approximately $16 million, $23 million
and $25 million
82
in common stock for 1998, 1997 and 1996, respectively, under the terms of the
Barnett ESOP. On December 31, 1998, an aggregate of 22,997,096 shares of the
Corporation's common stock and 1,937,730 shares of ESOP preferred stock were
held by the Corporation's various savings and profit sharing plans.
During 1998, the Corporation offered the plan participants a one-time
opportunity to transfer certain assets from the savings and profit sharing plan
to the cash balance retirement plan. Assets with an approximate fair value of
$1,423 million were transferred.
Under the terms of the ESOP Preferred Stock provision, payments to the
plan for dividends on the ESOP Preferred Stock were $6 million, $7 million and
$7 million for 1998, 1997 and 1996, respectively. Interest incurred to service
the debt of the ESOP Preferred Stock amounted to $1 million, $2 million and $3
million for 1998, 1997 and 1996, respectively.
The Corporation and the Barnett ESOP were combined effective January 1,
1999.
BankAmerica Plans
The Corporation maintains certain nonqualified defined contribution
retirement plans for certain employees of the former BankAmerica Corporation.
In addition, certain non-U.S. employees within the Corporation are covered
under defined contribution pension plans that are separately administered in
accordance with local laws.
Aggregate contributions for all former BankAmerica related defined
contribution plans were $175 million, $169 million and $175 million in 1998,
1997 and 1996, respectively. Certain employer and employee contributions to the
plans are used to purchase the Corporation's common stock at prices that
approximate market values. Contributions, including dividends, to the plans
were used to purchase 697,741 shares for $44 million in 1998, 598,958 shares
for $34 million in 1997 and 861,254 shares for $30 million in 1996. Sales by
the plans of the Corporation's common stock were 571,058 for $46 million in
1998, 528,829 shares for $32 million in 1997 and 657,625 shares for $26 million
in 1996. The plans held 33,186,515 shares, 34,252,005 shares and 35,460,291
shares of the Corporation's common stock at December 31, 1998, 1997 and 1996,
respectively.
Stock Option and Award Plans
At December 31, 1998, the Corporation had certain stock-based compensation
plans (the Plans) which are described below. The Corporation applies the
provisions of Accounting Principles Board Opinion No. 25 in accounting for its
stock option and award plans and has elected to provide SFAS 123 disclosures as
if the Corporation had adopted the fair-value based method of measuring
outstanding employee stock options in 1998, 1997 and 1996 as indicated below:
As Reported Pro Forma
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
(Dollars in Millions, Except Per-Share Data) ----------- ----------- ----------- ----------- ----------- -----------
Net income .................................... $ 5,165 $ 6,542 $ 5,813 $ 4,838 $ 6,254 $ 5,688
Net income available to common shareholders ... 5,140 6,431 5,611 4,819 6,143 5,487
Earnings per share ............................ 2.97 3.71 3.42 2.78 3.54 3.35
Diluted earnings per share .................... 2.90 3.61 3.36 2.71 3.46 3.29
In determining the pro forma disclosures above, the fair value of options
granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model was developed to estimate the
fair value of traded options, which have different characteristics than
employee stock options, and changes to the subjective assumptions used in the
model can result in materially different fair value estimates. The weighted
average grant-date fair values of the options granted during 1998, 1997 and
1996 were based on the following assumptions:
83
Risk-Free Dividend
Interest Rates Yield
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
1996 Associates Stock Option
Award Plan ......................... N/A 6.31% 6.44% N/A 3.50% 3.55%
Long-Term Incentive Plan ........... N/A 6.33 5.37 N/A 3.50 3.29
Key Employee Stock Option Plan ..... 5.64% 6.29 5.52 3.50% 3.50 3.55
BankAmerica Management Stock
Plan .............................. 5.48 6.23 5.95 2.62 2.96 3.23
BankAmerica PEP Plan ............... N/A 6.23 N/A N/A 2.96 N/A
BankAmerica Take Ownership!
Plan .............................. 5.58 6.23 5.95 1.83 2.96 3.23
Barnett 1997 Associates Stock
Option Award Plan ................. N/A 5.60 N/A N/A 3.50 N/A
Expected
Lives (Years) Volatility
-------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ----------- ---------- ----------
1996 Associates Stock Option
Award Plan ......................... N/A 3 4 N/A 21.4% 20.8%
Long-Term Incentive Plan ........... N/A 6 5 N/A 34.3 36.3
Key Employee Stock Option Plan ..... 7 7 7 22.94% 27.8 24.6
BankAmerica Management Stock
Plan .............................. 4 4 5 28.40 24.5 N/A
BankAmerica PEP Plan ............... N/A 7 N/A N/A 24.5 N/A
BankAmerica Take Ownership!
Plan .............................. 1 3 3 28.80 24.5 20.8
Barnett 1997 Associates Stock
Option Award Plan ................. N/A 1 N/A N/A 24.7 N/A
Compensation expense under the fair-value based method is recognized over
the vesting period of the related stock options. Accordingly, the pro forma
results of applying SFAS 123 in 1998, 1997 and 1996 may not be indicative of
future amounts.
1996 Associates Stock Option Award Plan:
Under the 1996 Associates Stock Option Award Plan (ASOP), as amended, the
Corporation has granted to certain full- and part-time employees options to
purchase an aggregate of approximately 47 million shares of the Corporation's
common stock. All options granted under the ASOP are vested and expire on June
29, 2001. No further awards may be granted under this plan.
Key Employee Stock Plan:
The Key Employee Stock Plan (KEYSOP), as amended and restated, provides
for different types of awards including stock options, restricted stock and
performance shares. Under the KEYSOP, ten-year options to purchase
approximately 27.2 million shares of common stock have been granted through
December 31, 1998 to certain employees at the closing market price on the
respective grant dates. Options granted under the KEYSOP generally vest in
three or four equal annual installments. Additionally, 2.2 million shares of
restricted stock were granted during 1998. These shares generally vest in two
or three equal annual installments beginning one year from the grant date.
On January 4, 1999, ten-year options to purchase approximately 8.5 million
shares of common stock at $60.50 per share were granted to certain employees.
On February 1, 1999, ten-year options to purchase approximately 2 million
shares of common stock at $65.25 per share were granted to certain employees.
For both grants, options vest in three equal annual installments beginning one
year from the grant date. Additionally, on January 4, 1999, approximately 5.6
million shares of restricted stock were granted to certain former BankAmerica
executives in connection with their employment with the Corporation and
approximately 3.9 million shares of restricted stock were granted to certain
former NationsBank executives. These shares of restricted stock generally vest
in two or three equal annual installments beginning one year from the grant
date.
Take Ownership!:
On September 23, 1998, the Board of Directors of the Corporation approved
the Take Ownership! The BankAmerica Global Associate Stock Option Program (Take
Ownership!) which covers all employees below a specified executive grade level.
Under the plan, eligible employees will be eligible to receive an award of a
predetermined number of stock options entitling them to purchase shares of the
Corporation's common stock at the fair market value on the grant date. Options
will be granted on the first business day of 1999, 2000 and 2001 and will vest
25% on the first anniversary date of grant, 25% on the second anniversary date
of grant and 50% on the third anniversary date of grant. These options have a
term of five years after the grant date. On January 4, 1999, options to
purchase approximately 53.1 million shares of common stock at $60.50 per share
were granted under the plan.
BankAmerica Stock Plans:
In connection with the Merger, outstanding BankAmerica stock options were
converted into options to purchase the Corporation's common stock based on the
exchange ratio. BankAmerica offered stock awards under
84
three plans: 1992 Management Stock Plan (the management stock plan),
Performance Equity Program (PEP) and Take Ownership!.
BankAmerica offered stock awards to certain key employees through options
or restricted stock under the management stock plan. Options awarded under the
management stock plan generally vest in three equal annual installments
beginning one year from the grant date and have a term of ten years after the
date of grant. On August 3, 1998, ten-year options to purchase approximately
5.6 million shares of common stock at $79.31 per share were granted to certain
employees. Additionally, on August 3, 1998, BankAmerica granted approximately
1.5 million shares of restricted stock to certain employees. These shares of
restricted stock generally vest in four equal annual installments beginning the
second year from the grant date.
Options awarded before August 5, 1991 to principal officers of BankAmerica
are subject to certain restrictions and also constitute stock appreciation
rights (SARs) equal to the number of shares covered by the options. These SARs
are exercisable for the difference between the option price and the current
market price of the stock at the time of exercise. The difference can be
received in cash or in shares. SARs, which are included in options for purposes
of this disclosure, are exercisable under the same terms as the related stock
options.
Effective May 22, 1997, BankAmerica adopted PEP under which BankAmerica
offers shares of the Corporation's common stock to certain key employees. Two
types of awards can be made under PEP: market price options and premium price
options. The market price options vest in three equal annual installments
beginning one year from the grant date and generally have a term of ten years
after the date the options are granted. The premium price options generally
vest and become exercisable not earlier than three years and not later than ten
years after the date the options are granted. Furthermore, the premium price
options only become exercisable when the Corporation's common stock price
increases significantly to specified threshold levels within given time frames.
Limited SARs may be awarded in conjunction with premium price options and
become exercisable upon a change in control. In connection with the BankAmerica
Merger, all options and SARs issued under PEP to persons who were employees as
of the Merger date vested.
Effective October 1, 1996, BankAmerica adopted The BankAmerica Global
Stock Option Program which covered substantially all of its employees. Options
awarded under this plan vest in three equal annual installments beginning one
year from the grant date and have a term of five years after the date of grant.
On May 19, 1998 options to purchase approximately 12.0 million shares of common
stock at $73.29 per share were granted under this plan.
On September 30, 1998, as a result of the Merger, substantially all of
BankAmerica's stock options and restricted stock granted prior to March 27,
1998 vested. Options and restricted stock granted subsequent to March 27, 1998
retain their original vesting terms. No further awards may be granted under the
BankAmerica stock plans.
Other Plans:
In connection with the Barnett merger on January 9, 1998, outstanding
Barnett stock options were converted into options to purchase the Corporation's
common stock based on the exchange ratio. Barnett has long-term incentive plans
that provide stock based awards, including stock options and time-based and
performance- based restricted stock to certain officers. All options are
granted at current market value for a term of ten years and, subject to limited
exceptions, are not exercisable before the third anniversary of the date of
grant. Time-based awards provide that restrictions lapse beginning on the third
anniversary of the date of the grant. Performance-based awards require that
specific performance criteria be met in order for restrictions to lapse. On
December 19, 1997, as a result of the shareholder approval of the Barnett
merger, all outstanding stock options and restricted stock vested in accordance
with change-in-control provisions.
Additional stock options assumed in connection with various acquisitions
remain outstanding and are included in the tables below. No further awards may
be granted under these plans.
85
The following tables present the status of all plans on December 31, 1998,
1997 and 1996, and changes during the years then ended:
1998 1997 1996
--------------------------- --------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Option) (Option) (Option)
Employee Stock Options Shares Price Shares Price Shares Price
- -------------------------------- --------------- ----------- --------------- ----------- --------------- ----------
Outstanding on January 1 ....... 136,409,218 $ 44.08 106,432,319 $ 30.79 64,125,702 $ 21.84
Shares due to acquisitions ..... -- -- 6,688,329 21.99 1,098,580 17.26
Granted ........................ 25,744,102 72.10 76,963,367 58.42 62,227,398 39.92
Exercised ...................... (28,295,737) 33.62 (44,990,054) 33.34 (15,643,484) 17.12
Forfeited ...................... (7,392,082) 63.04 (8,684,743) 45.23 (5,375,877) 36.83
------------ -------------- --------------
Outstanding on December 31 ..... 126,465,501 51.01 136,409,218 44.18 106,432,319 32.30
============ =========== ============
Options exercisable on
December 31 ................... 99,530,313 46.02 63,927,295 30.90 31,983,859 19.14
============ =========== ============
Weighted-average fair value of
options granted during the
year .......................... $ 15.52 $ 9.35 $ 7.41
======== ======== ========
1998 1997 1996
--------------------------- -------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Restricted Stock Awards Grant Grant Grant
(include KEYSOP) Shares Price Shares Price Shares Price
- -------------------------------- --------------- ----------- -------------- ----------- -------------- ----------
Outstanding unvested grants
on January 1 ................. 5,180,012 $ 38.94 6,459,158 $ 24.68 8,087,399 $ 21.45
Granted ....................... 3,852,739 65.79 2,120,681 57.76 1,302,525 36.55
Vested ........................ (4,896,614) 41.07 (3,112,871) 22.76 (2,570,226) 20.84
Canceled ...................... (354,983) 56.94 (286,956) 32.43 (360,540) 22.51
---------- ------------- --------
Outstanding unvested grants
on December 31 ............... 3,781,154 $ 61.85 5,180,012 $ 38.94 6,459,158 $ 24.68
========== ======== ========== ======== ========== ========
The following table summarizes information about stock options outstanding
on December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at December 31 Contractual Life Exercise Price at December 31 Exercise Price
- ----------------- ---------------- ------------------ ------------------ ---------------- -----------------
$0.00 - $30.00 26,148,328 4.9 years $ 21.35 26,144,828 $ 21.35
$30.01 - $46.50 29,064,517 4.6 years 39.43 27,929,365 39.62
$46.51 - $65.50 44,844,862 5.7 years 59.38 36,907,316 59.24
$65.51 - $99.00 26,407,794 7.1 years 78.87 8,548,804 85.25
---------- -------- ---------- --------
Total 126,465,501 5.6 years $ 51.01 99,530,313 $ 46.02
=========== ======== ========== ========
86
Note Fourteen - Income Taxes
The components of income tax expense for the years ended December 31 were
as follows:
1998 1997 1996
(Dollars in Millions) ------------ ------------ ---------
Current portion - expense
Federal ........................... $2,464 $2,267 $2,015
State ............................. 177 239 239
Foreign ........................... 342 537 279
------ ------ ------
2,983 3,043 2,533
------ ------ ------
Deferred portion - (benefit) expense
Federal ........................... (133) 840 834
State ............................. 40 132 127
Foreign ........................... (7) (1) 4
------ ------ ------
(100) 971 965
------ ------ ------
Total income tax expense ......... $2,883 $4,014 $3,498
====== ====== ======
The preceding table does not reflect the tax effects of unrealized gains
and losses on securities available for sale and marketable securities that are
included in shareholders' equity and certain tax benefits associated with the
Corporation's employee stock plans. As a result of these tax effects,
shareholders' equity increased by $400 million, $161 million and $273 million
in 1998, 1997 and 1996, respectively. The Corporation's current income tax
expense approximates the amounts payable for those years. Deferred income tax
expense represents the change in the deferred tax asset or liability and is
discussed further below.
A reconciliation of the expected federal income tax expense using the
federal statutory rate of 35 percent to the actual income tax expense for each
of the years ended December 31 was as follows:
1998 1997 1996
(Dollars in Millions) ---------- ---------- ----------
Expected federal tax expense ........................ $ 2,817 $ 3,695 $ 3,259
Increase (decrease) in taxes resulting from
Tax-exempt income ................................. (81) (83) (68)
State tax expense, net of federal benefit ......... 155 287 282
Goodwill amortization ............................. 238 228 97
Reorganization of certain subsidiaries ............ (323) -- --
Other ............................................. 77 (113) (72)
------- ------- -------
Total income tax expense ......................... $ 2,883 $ 4,014 $ 3,498
======= ======= =======
87
Significant components of the Corporation's deferred tax (liabilities) assets
on December 31 were as follows:
1998 1997
(Dollars in Millions) ------------ ------------
Deferred tax liabilities
Securities available for sale ......................... $ (227) $ (314)
Equipment lease financing ............................. (4,565) (3,633)
Depreciation .......................................... (340) (379)
Intangibles ........................................... (628) (741)
Employee retirement benefits .......................... (437) (189)
Loan fees and expenses ................................ (111) --
Deferred gains and losses ............................. (217) (167)
Securities valuation .................................. -- (292)
Other ................................................. (584) (646)
-------- --------
Gross deferred tax liabilities ....................... (7,109) (6,361)
-------- --------
Deferred tax assets
Employee benefits ..................................... 578 242
Net operating loss carryforwards ...................... 159 140
Allowance for credit losses ........................... 2,916 2,671
Foreclosed properties ................................. 70 30
Loan fees and expenses ................................ -- 12
General business credit carryforwards ................. 19 20
Accrued expenses ...................................... 729 286
Other ................................................. 529 620
-------- --------
Gross deferred tax assets ............................ 5,000 4,021
Valuation allowance .................................. (134) (87)
-------- --------
Gross deferred tax assets, net of valuation allowance 4,866 3,934
-------- --------
Net deferred tax liabilities ....................... $ (2,243) $ (2,427)
======== ========
The Corporation's deferred tax assets on December 31, 1998 included a
valuation allowance of $134 million primarily representing net operating loss
carryforwards for which it is more likely than not that realization will not
occur. The net change in the valuation allowance for deferred tax assets was an
increase in net operating loss carryovers of foreign subsidiaries where
realization is not expected to occur. In the future, the recognition of
deferred tax assets subject to the valuation allowance may result in a
reduction to goodwill of up to $16 million.
At December 31, 1998, federal income taxes had not been provided on $380
million of undistributed earnings of foreign subsidiaries earned prior to 1987
and during 1998 that have been reinvested for an indefinite period of time. If
the undistributed earnings were distributed, credits for foreign taxes paid on
such earnings and for the related foreign withholding taxes payable upon
remittance would be available to offset $90 million of the $170 million
resulting tax expense.
Note Fifteen - Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of the
estimated fair values of financial instruments. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Quoted market prices, if available, are utilized as estimates
of the fair values of financial instruments. Since no quoted market prices
exist for a significant part of the Corporation's financial instruments, the
fair values of such instruments have been derived based on management's
assumptions, the estimated amount and timing of future cash flows and estimated
discount rates. The estimation methods for individual classifications of
financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable
values could be materially different from the estimates presented below.
In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the combined Corporation.
88
The provisions of SFAS 107 do not require the disclosure of nonfinancial
instruments, including intangible assets such as goodwill, franchise, credit
card and trust relationships and MSR. In addition, the disclosure of fair value
amounts does not include lease financing and factored accounts receivable.
Short-Term Financial Instruments
The carrying values of short-term financial instruments, including cash
and cash equivalents, federal funds sold and purchased, resale and repurchase
agreements, and commercial paper and short-term borrowings, approximate the
fair values of these instruments. These financial instruments generally expose
the Corporation to limited credit risk and have no stated maturities, or have
an average maturity of less than 30 days and carry interest rates which
approximate market.
Financial Instruments Traded in the Secondary Market
Securities held for investment, securities available for sale, trading
account instruments, long-term debt and trust preferred securities traded
actively in the secondary market have been valued using quoted market prices.
The fair value of securities and trading account instruments is reported in
Notes Three and Four of the consolidated financial statements on pages 64 and
66.
Loans
Fair values were estimated for groups of similar loans based upon type of
loan, credit quality and maturity. The fair value of loans was determined by
discounting estimated cash flows using interest rates approximating the
Corporation's December 31 origination rates for similar loans. Where quoted
market prices were available, primarily for certain residential mortgage loans,
such market prices were utilized as estimates for fair values. Contractual cash
flows for residential mortgage loans were adjusted for estimated prepayments
using published industry data. Where credit deterioration has occurred,
estimated cash flows for fixed- and variable-rate loans have been reduced to
incorporate estimated losses.
The fair values of domestic commercial loans that do not reprice or mature
within relatively short time frames were estimated using discounted cash flow
models. The discount rates were based on current market interest rates for
similar types of loans, remaining maturities and credit ratings. For domestic
commercial loans that reprice within relatively short time frames, the carrying
values were assumed to approximate their fair values. Substantially all of the
foreign loans reprice within relatively short time frames. Accordingly, for the
majority of foreign loans, the carrying values were assumed to approximate
their fair values. For purposes of these fair value estimates, the fair values
of nonaccrual loans were computed by deducting an estimated market discount
from their carrying values to reflect the uncertainty of future cash flows. The
fair values of commitments to extend credit were not significant at either
December 31, 1998 or 1997.
Deposits
The fair value for deposits with stated maturities was calculated by
discounting contractual cash flows using current market rates for instruments
with similar maturities. For deposits with no stated maturities, the carrying
amount was considered to approximate fair value and does not take into account
the Corporation's long-term relationships with depositors.
The book and fair values of financial instruments for which book and fair
value differed on December 31 were:
1998 1997
----------------------- -----------------------
Book Fair Book Fair
Value Value Value Value
(Dollars in Millions) ----------- ----------- ----------- -----------
Financial assets
Loans ...................................................... $337,303 $342,936 $328,314 $331,366
Financial liabilities
Deposits ................................................... 357,260 357,915 346,297 346,001
Trust preferred securities ................................. 4,954 5,244 4,578 4,783
Long-term debt (excluding obligations under capital leases). 45,767 47,135 42,754 43,419
For all other financial instruments, book value approximates fair value.
89
Off-Balance Sheet Financial Instruments
See Note Four of the consolidated financial statements on page 66 for
information on the Corporation's average fair values of derivative-dealer
assets and liabilities.
The fair value of the Corporation's ALM contracts is presented in the
Derivatives section of Note Eleven of the consolidated financial statements on
page 74 and the MSR section of Note One of the consolidated financial
statements on page 56.
Note Sixteen - Business Segment Information
On January 1, 1998, the Corporation adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information". Certain noncash disclosure
requirements, such as equity in the net income of investments accounted for by
the equity method and stock-based compensation expense, were not presented due
to their immateriality.
Management reports the results of operations of the Corporation through
four business segments: Consumer Banking, which provides comprehensive retail
banking services to individuals and small businesses through multiple delivery
channels; Commercial Banking, which provides a wide range of commercial banking
services for businesses with annual revenues of up to $500 million; Global
Corporate and Investment Banking, which provides a broad array of financial and
investment banking products such as capital-raising products, trade finance,
treasury management, capital markets and financial advisory services to
domestic and international corporations, financial institutions and government
entities; and Principal Investing and Wealth Management, which includes direct
equity investments in businesses and investments in general partnership funds
and the Private Bank which provides asset management, banking and trust
services for high net worth clients both in the U.S. and internationally.
90
The following table includes revenues, net income and total assets for the
years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and
1997 for each business segment (dollars in millions):
Business Segments
Total Corporation Consumer Banking (2)
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
Net interest income (1) ......... $ 18,461 $ 18,589 $ 17,082 $ 12,043 $ 12,445 $ 11,564
Noninterest income .............. 12,189 11,756 9,604 6,656 6,270 4,995
--------- --------- -------- --------- --------- --------
Total revenue .................. 30,650 30,345 26,686 18,699 18,715 16,559
Provision for credit
losses ......................... 2,920 1,904 1,645 1,252 1,558 1,605
Gains on sales of
securities ..................... 1,017 271 147 10 36 28
Amortization of
intangibles .................... 902 855 544 607 612 393
Depreciation expense ............ 1,096 1,107 989 670 676 652
Merger-related charges,
net ............................ 1,795 374 398 -- -- 122
Other noninterest
expense ........................ 16,743 15,663 13,818 9,856 10,116 8,997
--------- --------- -------- --------- --------- --------
Income before income
taxes ........................ 8,211 10,713 9,439 6,324 5,789 4,818
Income tax expense .............. 3,046 4,171 3,626 2,325 2,266 1,900
--------- --------- -------- --------- --------- --------
Net income ..................... $ 5,165 $ 6,542 $ 5,813 $ 3,999 $ 3,523 $ 2,918
========= ========= ======== ========= ========= ========
Period-end total assets ......... $ 617,679 $ 570,983 $ 269,458 $ 285,686
========= ========= ========= =========
Commercial Banking (2)
--------------------------------
1998 1997 1996
---------- ---------- ----------
Net interest income (1) ......... $ 2,006 $ 2,048 $ 1,792
Noninterest income .............. 699 568 480
-------- -------- -------
Total revenue .................. 2,705 2,616 2,272
Provision for credit
losses ......................... 76 (3) 48
Gains on sales of
securities ..................... 4 -- 3
Amortization of
intangibles .................... 99 100 47
Depreciation expense ............ 70 75 54
Merger-related charges,
net ............................ -- -- 7
Other noninterest
expense ........................ 1,150 1,025 944
-------- --------- -------
Income before income
taxes ........................ 1,314 1,419 1,175
Income tax expense .............. 439 558 446
-------- --------- -------
Net income ..................... $ 875 $ 861 $ 729
======== ========= =======
Period-end total assets ......... $ 67,366 $ 65,243
======== =========
Global Corporate and Principal Investing and
Investment Banking (2) Wealth Management (2)
------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- --------- ---------- ---------- ----------
Net interest income (1) ......... $ 3,716 $ 3,425 $3,137 $ 451 $ 418 $ 325
Noninterest income .............. 2,849 3,083 2,455 1,928 1,935 1,728
-------- -------- ------- ------- ------- --------
Total revenue ................. 6,565 6,508 5,592 2,379 2,353 2,053
Provision for credit
losses ........................ 1,566 342 (24) 26 7 16
Gains (losses) on sales
of securities ................. (5) 10 -- -- 6 --
Amortization of
intangibles ................... 169 119 75 27 24 29
Depreciation expense ............ 291 303 208 65 53 75
Merger-related charges,
net ........................... -- -- 147 -- -- 4
Other noninterest
expense ....................... 4,219 3,145 2,779 1,500 1,367 1,103
-------- -------- -------- ------- ------- --------
Income before income
taxes ........................ 315 2,609 2,407 761 908 826
Income tax expense
(benefit) ..................... 71 977 870 264 348 306
-------- -------- -------- ------- ------- --------
Net income .................... $ 244 $ 1,632 $ 1,537 $ 497 $ 560 $ 520
======== ======== ======== ======= ======= ========
Period-end total assets ......... $248,264 $204,862 $22,246 $18,320
======== ======== ======= =======
Corporate Other
-----------------------------------
1998 1997 1996
---------- ------------ -----------
Net interest income (1) ......... $ 245 $ 253 $ 264
Noninterest income .............. 57 (100) (54)
------- ---------- --------
Total revenue ................. 302 153 210
Provision for credit
losses ........................ -- -- --
Gains (losses) on sales
of securities ................. 1,008 219 116
Amortization of
intangibles ................... -- -- --
Depreciation expense ............ -- -- --
Merger-related charges,
net ........................... 1,795 374 118
Other noninterest
expense ....................... 18 10 (5)
------- ---------- ----------
Income before income
taxes ........................ (503) (12) 213
Income tax expense
(benefit) ..................... (53) 22 104
--------- ---------- ---------
Net income .................... $ (450) $ (34) $ 109
========= ========== =========
Period-end total assets ......... $ 10,345 $(3,128)
========= ==========
(1) Net interest income is presented on a taxable-equivalent basis.
(2) There were no material intersegment revenues between the four business
segments.
91
Following is a reconciliation of the business segments' revenue, net
income and total assets to the consolidated totals for the years ended December
31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997 (dollars in
millions):
1998 1997 1996
------------ ------------- -----------
Segments' revenue ..................................... $ 30,348 $ 30,192 $ 26,476
Adjustments:
Earnings associated with unassigned capital ......... 245 253 264
Gains (losses) on sales of subsidiary companies ..... 57 -- --
Other ............................................... -- (100) (54)
--------- --------- --------
Consolidated revenue ............................... $ 30,650 $ 30,345 $ 26,686
========= ========= ========
Segments' net income .................................. $ 5,615 $ 6,576 $ 5,704
Adjustments, net of tax:
Earnings associated with unassigned capital ......... 157 158 168
Gains on sales of subsidiary companies .............. 37 -- --
Gains on sales of securities ........................ 649 140 75
Merger-related charges, net ......................... (1,325) (264) (246)
Other ............................................... 32 (68) 112
---------- ----------- ---------
Consolidated net income ............................ $ 5,165 $ 6,542 $ 5,813
========== =========== =========
Segments' total assets ................................ $ 607,333 $ 574,111
Adjustments:
Investment securities ............................... 63,301 54,181
Elimination of excess earning asset allocations ..... (43,462) (50,460)
Other, net .......................................... (9,493) (6,849)
----------- -----------
Consolidated total assets .......................... $ 617,679 $ 570,983
========== ===========
The adjustments presented in the table above represent consolidated
income, expense and asset balances not specifically allocated to individual
business segments. In addition, reconciling items also include the effect of
earnings allocations not assigned to specific business segments, as well as the
related earning asset balances.
92
Note Seventeen - BankAmerica Corporation (Parent Company)
The following tables present consolidated Parent Company financial
information:
Condensed Consolidated Statement of Income
(Dollars in Millions)
Year Ended December 31
-------------------------------
1998 1997 1996
--------- ---------- ----------
Income
Dividends from consolidated
Subsidiary banks ................................... $4,795 $ 5,730 $ 4,274
Other subsidiaries ................................. 202 728 670
Interest from consolidated subsidiaries .............. 1,911 1,690 1,540
Other income ......................................... 709 647 753
------ ------- -------
7,617 8,795 7,237
------ ------- -------
Expenses
Interest on borrowed funds ........................... 2,805 2,529 2,146
Noninterest expense .................................. 835 632 625
------ ------- -------
3,640 3,161 2,771
------ ------- -------
Earnings
Income before equity in undistributed earnings of
consolidated subsidiaries and income taxes ......... 3,977 5,634 4,466
------ ------- -------
Equity in undistributed earnings of consolidated
Subsidiary banks ................................... 553 471 1,087
Other subsidiaries ................................. 174 106 92
------ ------- -------
727 577 1,179
------ ------- -------
Income before income taxes 4,704 6,211 5,645
Income tax benefit .................................... (461) (331) (168)
------ ------- -------
Net income ............................................ $5,165 $ 6,542 $ 5,813
====== ======= =======
Net income available to common shareholders ........... $5,140 $ 6,431 $ 5,611
====== ======= =======
Condensed Consolidated Balance Sheet
(Dollars in Millions)
December 31
--------------------
1998 1997
--------- ----------
Assets
Cash held at subsidiary banks ........................ $ 3,069 $ 2,518
Temporary investments ................................ 1,525 1,208
Receivables from consolidated
Subsidiary banks ................................... 10,456 11,309
Other subsidiaries ................................. 15,178 13,933
Investment in consolidated
Subsidiary banks ................................... 54,127 49,445
Other subsidiaries ................................. 5,108 4,243
Other assets ......................................... 4,190 3,117
------- --------
Total assets ....................................... $93,653 $ 85,773
======= ========
Liabilities and Shareholders' Equity
Commercial paper and other notes payable ............. $ 5,289 $ 3,563
Accrued expenses and other liabilities ............... 2,711 2,200
Payables to consolidated subsidiaries ................ 6,004 4,095
Long-term debt ....................................... 33,711 31,331
Shareholders' equity ................................. 45,938 44,584
------- --------
Total liabilities and shareholders' equity ......... $93,653 $ 85,773
======= ========
93
Condensed Consolidated Statement of Cash Flows
(Dollars in Millions)
Year Ended December 31
-------------------------------------
1998 1997 1996
----------- ------------ ------------
Operating Activities
Net income .................................................................. $ 5,165 $ 6,542 $ 5,813
Reconciliation of net income to net cash provided by operating activities
Equity in undistributed earnings of consolidated subsidiaries .............. (653) (610) (1,232)
Other operating activities ................................................. (486) 247 563
-------- -------- --------
Net cash provided by operating activities ................................. 4,026 6,179 5,144
Investing Activities
Net decrease (increase) in temporary investments ............................ 632 4,037 (3,754)
Net increase in receivables from consolidated subsidiaries .................. (1,002) (2,814) (613)
Additional capital investment in subsidiaries ............................... (1,391) 60 (98)
Acquisitions of subsidiaries, net of cash ................................... (822) (194) (726)
Other investing activities .................................................. (747) 191 353
-------- -------- --------
Net cash (used in) provided by investing activities ....................... (3,330) 1,280 (4,838)
-------- -------- --------
Financing Activities
Net increase (decrease) in commercial paper and other notes payable ......... 1,726 (400) 616
Proceeds from issuance of long-term debt .................................... 7,283 4,887 8,804
Retirement of long-term debt ................................................ (4,533) (4,055) (4,423)
Proceeds from issuance of common stock ...................................... 1,367 1,892 573
Common stock repurchased .................................................... (1,751) (8,540) (3,193)
Cash dividends paid ......................................................... (2,604) (2,175) (1,888)
Other financing activities .................................................. (1,633) (1,519) 955
-------- ---------- --------
Net cash (used in) provided by financing activities ....................... (145) (9,910) 1,444
-------- ---------- --------
Net increase (decrease) in cash held at subsidiary banks ...................... 551 (2,451) 1,750
Cash held at subsidiary banks on January 1 .................................... 2,518 4,969 3,219
-------- -------- --------
Cash held at subsidiary banks on December 31 .............................. $ 3,069 $ 2,518 $ 4,969
======== ======== ========
94
Note Eighteen - Performance by Geographic Area
Since the Corporation's operations are highly integrated, certain asset,
liability, income and expense amounts must be allocated to arrive at total
assets and total revenues by geographic area. The Corporation identifies its
geographic performance based upon the business unit in which the assets are
recorded and where the income is earned and the expenses are incurred. In
certain circumstances, units may transact business with customers who are out
of their immediate geographic area. For example, a U.S. domiciled unit may have
made a loan to a borrower who resides in Latin America. In this instance, the
loan and related income would be included in domestic activities. Translation
losses, for those units in hyperinflationary economies, net of hedging, totaled
$12 million, $27 million, and $23 million in 1998, 1997 and 1996, respectively.
These amounts, which are reported in other noninterest income, are included in
the table below:
Total
(Dollars in Millions) Year Total Assets (1) Revenues (2)
- -------------------------------------- ------ ------------------ -------------
Domestic (3) 1998 $ 554,282 $29,605
1997 $ 513,163 $28,494
1996 $ 424,537 $24,804
--------- -------
Asia 1998 21,302 723
1997 25,411 885
1996 22,472 985
Europe, Middle East and Africa 1998 31,128 (75)
1997 26,037 454
1996 26,282 501
Latin America and the Caribbean 1998 10,967 234
1997 6,372 355
1996 4,411 268
--------- -------
Total Foreign 1998 63,397 882
1997 57,820 1,694
1996 53,165 1,754
--------- -------
Total Consolidated 1998 $ 617,679 $30,487
1997 $ 570,983 $30,188
1996 $ 477,702 $26,558
(1) Total assets includes long-lived assets, primarily all of which were
located in the U.S.
(2) Total revenues includes net interest income plus noninterest income. There
were no material intercompany revenues between geographic regions for any
of the periods presented.
(3) Includes the Corporation's Canadian operations, which had total assets of
$1,365, $2,466 and $1,525 and total revenues of $48, $52 and $63 as of and
for the years ended December 31, 1998, 1997 and 1996, respectively.
95
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information set forth under the caption "Election of Directors" on pages 2
through 6 of the definitive 1999 Proxy Statement of the registrant furnished to
stockholders in connection with its Annual Meeting to be held on April 28, 1999
(the "1999 Proxy Statement") with respect to the name of each nominee or
director, that person's age, positions and offices with the registrant,
business experience, directorships in other public companies, service on the
registrant's Board and certain family relationships, and information set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on
page 9 of the 1999 Proxy Statement with respect to Section 16 matters, is
hereby incorporated by reference. In addition, information set forth under the
caption "Special Compensation Arrangements - Employment Agreement with Mr.
Rice" and "Employment Agreements with Messrs. Lewis, Hance and Murray" on page
15 of the 1999 Proxy Statement is hereby incorporated by reference. Additional
information required by Item 10 with respect to executive officers is set forth
in Part I, Item 4A hereof.
Item 11. EXECUTIVE COMPENSATION
Information with respect to current remuneration of executive officers,
certain proposed remuneration to them, their options and certain indebtedness
and other transactions set forth in the 1999 Proxy Statement (i) under the
caption "Board of Directors' Compensation" on page 10 thereof, (ii) under the
caption "Executive Compensation" on pages 11 through 13 thereof, (iii) under
the caption "Retirement Plans" on pages 13 and 14 thereof, (iv) under the
caption "Deferred Compensation Plan" on page 14 thereof, (v) under the caption
"Special Compensation Arrangements" on pages 14 and 15 thereof, (vi) under the
caption "Compensation Committee Interlocks and Insider Participation" on pages
18 and 19 thereof, and (vii) under the caption "Certain Transactions" on page
19 thereof, is, to the extent such information is required by Item 402 of
Regulation S-K, hereby incorporated by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The security ownership information required by Item 403 of Regulation S-K
relating to persons who beneficially own 5 percent or more of the outstanding
shares of Common Stock, ESOP Preferred Stock or 7% Cumulative Redeemable
Preferred Stock, Series B, as well as security ownership information relating
to directors, nominees and named executive officers individually and directors
and executive officers as a group, is hereby incorporated by reference to the
ownership information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" on pages 7 through 9 of the 1999
Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to relationships and related transactions between
the registrant and any director, nominee for director, executive officer,
security holder owning 5 percent or more of the registrant's voting securities
or any member of the immediate family of any of the above, as set forth in the
1999 Proxy Statement under the caption "Compensation Committee Interlocks and
Insider Participation" on pages 18 and 19 and under the caption "Certain
Transactions" on page 19 thereof, is, to the extent such information is
required by Item 404 of Regulation S-K, hereby incorporated by reference.
96
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
Page
-----
(1) Financial Statements:
Report of Independent Accountants .......................................................... 51
Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 ...... 52
Consolidated Balance Sheet at December 31, 1998 and 1997 ................................... 53
Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and
1996 ..................................................................................... 54
Consolidated Statement of Changes in Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 ......................................................... 55
Notes To Consolidated Financial Statements ................................................. 56
(2) All schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
b. The following reports on Form 8-K have been filed by the registrant during
the quarter ended December 31, 1998:
Current Report on Form 8-K dated September 24, 1998 and filed October 9,
1998, Items 2, 5 and 7.
Current Report on Form 8-K dated October 14, 1998 and filed October 19,
1998, Items 5 and 7.
Current Report on Form 8-K dated September 30, 1998 and filed November 16,
1998, Items 5 and 7. The following supplemental consolidated financial
information of the registrant was filed as part of this Current Report on
Form 8-K:
Supplemental Consolidated Statement of Income for the years ended
December 31, 1997, 1996 and 1995;
Supplemental Consolidated Balance Sheet as of December 31, 1997 and
1996;
Supplemental Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995; and
Supplemental Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1997, 1996 and 1995.
Current Report on Form 8-K dated November 16, 1998 and filed November 18,
1998, Items 5 and 7.
Current Report on Form 8-K dated and filed December 16, 1998, Items 5 and
7.
c. The exhibits filed as part of this report and exhibits incorporated
herein by reference to other documents are listed in the Index to
Exhibits to this Annual Report on Form 10-K (pages E-1 through E-6,
including executive compensation plans and arrangements which are
identified separately by asterisk).
With the exception of the information herein expressly incorporated by
reference, the 1999 Proxy Statement is not to be deemed filed as part of this
Annual Report on Form 10-K.
97
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BANKAMERICA CORPORATION
Date: March 22, 1999
By: */s/ HUGH L. MCCOLL, JR.
------------------------------------------
Hugh L. McColl, Jr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------- ----------------------------------- ---------------
*/s/ HUGH L. MCCOLL, JR. Chairman of the Board, Chief March 22, 1999
---------------------------------- Executive Officer and Director
Hugh L. McColl, Jr. (Principal Executive Officer)
*/s/ JAMES H. HANCE, JR. Vice Chairman and Chief Financial March 22, 1999
---------------------------------- Officer (Principal Financial
James H. Hance, Jr. Officer)
*/s/ MARC D. OKEN Executive Vice President and March 22, 1999
---------------------------------- Principal Financial Executive
Marc D. Oken (Principal Accounting Officer)
*/s/ CHARLES W. COKER Director March 22, 1999
----------------------------------
Charles W. Coker
*/s/ TIMM F. CRULL Director March 22, 1999
----------------------------------
Timm F. Crull
*/s/ ALAN T. DICKSON Director March 22, 1999
----------------------------------
Alan T. Dickson
*/s/ KATHLEEN F. FELDSTEIN Director March 22, 1999
----------------------------------
Kathleen F. Feldstein
*/s/ PAUL FULTON Director March 22, 1999
----------------------------------
Paul Fulton
*/s/ DONALD E. GUINN Director March 22, 1999
----------------------------------
Donald E. Guinn
*/s/ C. RAY HOLMAN Director March 22, 1999
----------------------------------
C. Ray Holman
*/s/ W. W. JOHNSON Director March 22, 1999
----------------------------------
W. W. Johnson
98
Signature Title Date
- -------------------------------------------- ---------- ---------------
*/s/ WALTER E. MASSEY Director March 22, 1999
----------------------------------
Walter E. Massey
*/s/ RICHARD M. ROSENBERG Director March 22, 1999
----------------------------------
Richard M. Rosenberg
*/s/ O. TEMPLE SLOAN, JR. Director March 22, 1999
----------------------------------
O. Temple Sloan, Jr.
*/s/ MEREDITH R. SPANGLER Director March 22, 1999
----------------------------------
Meredith R. Spangler
*/s/ A. MICHAEL SPENCE Director March 22, 1999
----------------------------------
A. Michael Spence
*/s/ RONALD TOWNSEND Director March 22, 1999
----------------------------------
Ronald Townsend
*/s/ SOLOMON D. TRUJILLO Director March 22, 1999
----------------------------------
Solomon D. Trujillo
*/s/ JACKIE M. WARD Director March 22, 1999
----------------------------------
Jackie M. Ward
*/s/ VIRGIL R. WILLIAMS Director March 22, 1999
----------------------------------
Virgil R. Williams
*/s/ SHIRLEY YOUNG Director March 22, 1999
----------------------------------
Shirley Young
*By:/s/ CHARLES M. BERGER
----------------------------------
Charles M. Berger, Attorney-in-Fact
99
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INDEX TO EXHIBITS
Exhibit No. Description
- ------------- --------------------------------------------------------------------------------
3(a) Amended and Restated Certificate of Incorporation of registrant, as in effect
on the date hereof, incorporated by reference to Exhibit 3.1 of registrant's
Current Report on Form 8-K filed September 28, 1998.
(b) Amended and Restated Bylaws of registrant, as in effect on the date hereof,
incorporated by reference to Exhibit 3.2 of registrant's Current Report on
Form 8-K filed September 28, 1998.
4(a) Specimen certificate of registrant's Common Stock.
(b) Specimen certificate of registrant's ESOP Convertible Preferred Stock, Series
C, incorporated by reference to Exhibit 4(c) of registrant's Annual Report on
Form 10-K dated March 25, 1992.
(c) Specimen certificate of registrant's 7% Cumulative Redeemable Preferred
Stock, Series B.
(d) Specimen certificate of registrant's $2.50 Cumulative Convertible Preferred
Stock, Series BB.
(e) Indenture dated as of August 1, 1982 between registrant and Morgan
Guaranty Trust Company of New York, pursuant to which registrant issued its
7 3/4% Debentures, due 2002, incorporated by reference to Exhibit 4.2 of
registrant's Registration No. 2-78530; and First Supplemental Indenture
thereto dated as of September 18, 1998.
(f) Indenture dated as of September 1, 1989 between registrant and The Bank of
New York, pursuant to which registrant issued its 9 3/8% Subordinated Notes,
due 2009; its 10.20% Subordinated Notes, due 2015; its 9 1/8% Subordinated
Notes, due 2001; and its 8 1/8% Subordinated Notes, due 2002, incorporated by
reference to Exhibit 4.1 of registrant's Registration No. 33-30717; and First
Supplemental Indenture thereto dated as of August 28, 1998.
(g) Indenture dated as of January 1, 1992 between registrant and BankAmerica
Trust Company of New York, incorporated by reference to Exhibit 4.1 of
registrant's Registration No. 33-54784; and First Supplemental Indenture
thereto dated as of July 1, 1993 between registrant and BankAmerica National
Trust Company (formerly BankAmerica Trust Company of New York),
pursuant to which registrant issued its Senior Medium-Term Notes, Series A,
B and C; and its 5 3/8% Senior Notes, due 2000, incorporated by reference to
Exhibit 4.1 of registrant's Current Report on Form 8-K dated July 6, 1993; and
Second Supplemental Indenture thereto dated as of September 18, 1998.
(h) Indenture dated as of November 1, 1992 between registrant and The Bank of
New York, pursuant to which registrant issued its 6 7/8% Subordinated Notes,
due 2005, incorporated by reference to Exhibit 4.1 of registrant's Amendment
to Application or Report on Form 8 dated March 1, 1993.
(i) First Supplemental Indenture dated as of July 1, 1993 to the Indenture dated
as of November 1, 1992 between registrant and The Bank of New York,
pursuant to which registrant issued its Subordinated Medium-Term Notes,
Series A and B; its 6 1/2% Subordinated Notes, due 2003; and its 7 3/4%
Subordinated Notes, due 2004, incorporated by reference to Exhibit 4.4 of
registrant's Current Report on Form 8-K dated July 6, 1993; and Second
Supplemental Indenture thereto dated as of August 28, 1998.
(j) Indenture dated as of January 1, 1995 between registrant and BankAmerica
National Trust Company, pursuant to which registrant issued its 7% Senior
Notes, due 2003; its 7% Senior Notes, due 2001; its 5 3/4% Senior Notes, due
2001; its 6 3/8% Senior Notes, due 2005; its 6 1/8% Senior Notes, due 2004; and
its Senior Medium-Term Notes, Series D, E, F, G and H, incorporated by
reference to Exhibit 4.1 of registrant's Registration No. 33-57533; and First
Supplemental Indenture thereto dated as of September 18, 1998, incorporated
by reference to Exhibit 4.3 of registrant's Current Report on Form 8-K filed
November 18, 1998.
E-1
Exhibit No. Description
- ------------- --------------------------------------------------------------------------------
(k) Indenture dated as of January 1, 1995 between registrant and The Bank of
New York, pursuant to which registrant issued its 7 5/8% Subordinated Notes,
due 2005; its 7 3/4% Subordinated Notes, due 2015; its 7 1/4% Subordinated
Notes, due 2025; its 6 1/2% Subordinated Notes, due 2006; its 7.80%
Subordinated Notes, due 2016; its 6 3/8% Subordinated Notes, due 2008; its
6.80% Subordinated Notes, due 2028; its 6.60% Subordinated Notes, due 2010;
and its Subordinated Medium-Term Notes, Series D, E, F, G and H,
incorporated by reference to Exhibit 4.8 of registrant's Registration
No. 33-57533; and First Supplemental Indenture thereto dated as of
August 28, 1998, incorporated by reference to Exhibit 4.8 of registrant's
Current Report on Form 8-K filed November 18, 1998.
(l) Fiscal and Paying Agency Agreement dated as of July 5, 1995, between
registrant and The Chase Manhattan Bank, N.A. (London Branch), pursuant
to which registrant issued its Floating Rate Senior Notes, due 2000,
incorporated by reference to Exhibit 4(l) of registrant's Annual Report on
Form 10-K dated March 29, 1996 (the "1995 Form 10-K").
(m) Amended and Restated Agency Agreement dated as of November 16, 1998
between registrant and The Chase Manhattan Bank (London Branch),
pursuant to which registrant issued its Senior Euro Medium-Term Notes.
(n) Issuing and Paying Agency Agreement dated as of May 19, 1998 between
NationsBank, N.A., as Issuer, and Bankers Trust Company, as Issuing and
Paying Agent.
(o) Indenture dated as of November 27, 1996 between registrant and The Bank of
New York, incorporated by reference to Exhibit 4.10 of registrant's
Registration No. 333-15375.
(p) First Supplemental Indenture dated as of December 4, 1996 to the Indenture
dated as of November 27, 1996 between registrant and The Bank of New York
pursuant to which registrant issued its 7.84% Junior Subordinated Deferrable
Interest Notes due 2026, incorporated by reference to Exhibit 4.3 of
registrant's Current Report on Form 8-K dated November 27, 1996.
(q) Second Supplemental Indenture dated as of December 17, 1996 to the
Indenture dated as of November 27, 1996 between the registrant and The
Bank of New York pursuant to which registrant issued its 7.83% Junior
Subordinated Deferrable Interest Notes due 2026, incorporated by reference to
Exhibit 4.3 of registrant's Current Report on Form 8-K dated December 10,
1996.
(r) Third Supplemental Indenture dated as of February 3, 1997 to the Indenture
dated as of November 27, 1996 between registrant and The Bank of New York
pursuant to which registrant issued its Floating Rate Junior Subordinated
Deferrable Interest Notes due 2027, incorporated by reference to Exhibit 4.3 of
registrant's Current Report on Form 8-K dated January 22, 1997.
(s) Fourth Supplemental Indenture dated as of April 22, 1997 to the Indenture
dated as of November 27, 1996 between registrant and The Bank of New York
pursuant to which registrant issued its 8 1/4% Junior Subordinated Deferrable
Interest Notes, due 2027, incorporated by reference to Exhibit 4.3 of
registrant's Current Report on Form 8-K dated April 15, 1997.
(t) Fifth Supplemental Indenture dated as of August 28, 1998 to the Indenture
dated as of November 27, 1996 between registrant and The Bank of New York.
(u) Indenture dated as of November 27, 1996, between Barnett Banks, Inc. and
The First National Bank of Chicago, as Trustee, and First Supplemental
Indenture dated as of January 9, 1998, among registrant, NB Holdings
Corporation, Barnett Banks, Inc. and The First National Bank of Chicago, as
Trustee, pursuant to which registrant (as successor to Barnett Banks, Inc.)
issued its 8.06% Junior Subordinated Debentures, due 2026, incorporated by
reference to Exhibit 4(u) of registrant's Annual Report on Form 10-K dated
March 13, 1998 (the "1997 Form 10-K").
E-2
Exhibit No. Description
- ------------- ------------------------------------------------------------------------------
(v) Indenture dated as of September 1, 1990 between the former BankAmerica
Corporation and Chase Manhattan Bank and Trust Company, N. A. (formerly
Manufacturers Hanover Trust Company of California), pursuant to which
registrant (as successor to the former BankAmerica Corporation) issued its
Subordinated Medium Term Notes, Series E; its 9.375% Subordinated Notes
due 2001; its 10.00% Subordinated Notes due 2003; its 9.625% Subordinated
Notes due 2001; its 9.50% Subordinated Notes due 2001; and its 9.20%
Subordinated Notes due 2003; and First Supplemental Indenture thereto
dated as of September 15, 1998.
(w) Indenture dated as of November 1, 1991 between the former BankAmerica
Corporation and Chase Manhattan Bank and Trust Company, N. A. (formerly
Manufacturers Hanover Trust Company of California), pursuant to which
registrant (as successor to the former BankAmerica Corporation) issued its
8.125% Subordinated Notes due 2002; its 7.75% Subordinated Notes due 2002;
its 8.375% Subordinated Notes due 2002; its 7.50% Subordinated Notes due
2002; its 7.20% Subordinated Notes due 2002; its 7.875% Subordinated Notes
due 2002; its 6.85% Subordinated Notes due 2003; its 6.875% Subordinated
Notes due 2003; its Floating Subordinated Notes due 2003; its 7.20%
Subordinated Notes due 2006; its 7.625% Subordinated Notes due 2004; its
8.125% Subordinated Notes due 2004; its 8.95% Subordinated Notes due 2004;
its 6.75% Subordinated Notes due 2005; its 6.20% Subordinated Notes due
2006; its 7.125% Subordinated Notes due 2006; its 6.625% Subordinated Notes
due 2007; its 6.625% Subordinated Notes due 2007; its 7.125% Subordinated
Notes due 2009; its 7.125% Subordinated Notes due 2011; and its 6.25%
Subordinated Notes due 2008; First Supplemental Indenture thereto dated as
of September 8, 1992; and Second Supplemental Indenture thereto dated as of
September 15, 1998.
(x) Indenture dated as of November 1, 1991 between the former BankAmerica
Corporation and U.S. Bank Trust, N. A. (successor to Bankers Trust Company
of California, National Association, and First Trust of California, National
Association), pursuant to which registrant (as successor to the former
BankAmerica Corporation) issued its Floating Rate Note due 1999; its 6.65%
Note due 2001; its 6.625% Note due 2001; and its Senior Medium-Term Notes,
Series H and I; First Supplemental Indenture thereto dated as of August 1,
1994; and Second Supplemental Indenture thereto dated as of September 30,
1998.
(y) Second Amended and Restated Agency Agreement dated as of November 15,
1996 between the former BankAmerica Corporation and First Trust of New
York, National Association, pursuant to which registrant (as successor to the
former BankAmerica Corporation) issued its Senior and Subordinated Euro
Medium-Term Notes; and Amendment thereto dated as of September 30, 1998.
(z) Junior Subordinated Indenture dated as of November 27, 1996 between the
former BankAmerica Corporation and Bankers Trust Company, pursuant to
which registrant (as successor to the former BankAmerica Corporation) issued
its 8.07% Series A Preferred Securities due 2026; and its 7.70% Series B
Preferred Securities due 2026; and First Supplemental Indenture thereto
dated as of September 15, 1998.
(aa) Junior Subordinated Indenture dated as of December 20, 1996 between the
former BankAmerica Corporation and Bankers Trust Company, pursuant to
which registrant (as successor to the former BankAmerica Corporation) issued
its 7.75% Trust Originated Preferred Securities, Series 1 due 2026; its 8.00%
Cumulative Semi-Annual Income Preferred Securities, Series 2 due 2026; its
Floating Rate Capital Securities, Series 3 due 2027; and its 7.00% Trust
Originated Preferred Securities, Series 4 due 2028; and First Supplemental
Indenture thereto dated as of September 15, 1998.
E-3
Exhibit No. Description
- ------------- ---------------------------------------------------------------------------------
The registrant has other long-term debt agreements, but these are not material in amount. Copies of these
agreements will be furnished to the Commission on request.
10(a) NationsBank Corporation and Designated Subsidiaries Directors' Retirement *
Plan, incorporated by reference to Exhibit 10(f) of registrant's Annual Report
on Form 10-K dated March 27, 1991; Amendment thereto dated as of
September 28, 1994, incorporated by reference to Exhibit 10(i) of registrant's
Annual Report on Form 10-K dated March 30, 1995; and Amendment thereto
dated as of April 24, 1996, incorporated by reference to Exhibit 10(g) of
registrant's Annual Report on Form 10-K dated March 28, 1997 (the "1996
Form 10-K").
(b) NationsBank Corporation and Designated Subsidiaries Supplemental *
Executive Retirement Plan, incorporated by reference to Exhibit 10(j) of
registrant's Annual Report on Form 10-K dated March 30, 1995; Amendment
thereto dated as of June 28, 1989, incorporated by reference to Exhibit 10(g) of
registrant's Annual Report on Form 10-K dated March 28, 1990; Amendment
thereto dated as of June 27, 1990, incorporated by reference to Exhibit 10(g) of
registrant's Annual Report on Form 10-K dated March 27, 1991; Amendment
thereto dated as of July 21, 1991, incorporated by reference to Exhibit 10(bb)
of registrant's Annual Report on Form 10-K dated March 25, 1992;
Amendments thereto dated as of December 3, 1992 and December 15, 1992,
both of which are incorporated by reference to Exhibit 10(l) of registrant's
Annual Report on Form 10-K dated March 24, 1993; Amendment thereto dated
as of September 28, 1994, incorporated by reference to Exhibit 10(j) of
registrant's Annual Report on Form 10-K dated March 30, 1995; Amendments
thereto dated March 27, 1996 and June 25, 1997, incorporated by reference to
Exhibit 10(c) of the 1997 Form 10-K; and Amendments thereto dated April 10,
1998, June 24, 1998 and October 1, 1998.
(c) NationsBank Corporation and Designated Subsidiaries Deferred *
Compensation Plan for Key Employees, incorporated by reference to Exhibit
10(k) of registrant's Annual Report on Form 10-K dated March 30, 1995;
Amendment thereto dated as of June 28, 1989, incorporated by reference to
Exhibit 10(h) of registrant's Annual Report on Form 10-K dated March 28,
1990; Amendment thereto dated as of June 27, 1990, incorporated by reference
to Exhibit 10(h) of registrant's Annual Report on Form 10-K dated March 27,
1991; Amendment thereto dated as of July 21, 1991, incorporated by reference
to Exhibit 10(bb) of registrant's Annual Report on Form 10-K dated March 25,
1992; Amendment thereto dated as of December 3, 1992, incorporated by
reference to Exhibit 10(m) of registrant's Annual Report on Form 10-K dated
March 24, 1993; and Amendments thereto dated April 10, 1998 and October 1,
1998 (filed as Exhibit 10(b) hereto).
(d) NationsBank Corporation and Designated Subsidiaries Supplemental *
Retirement Plan, incorporated by reference to Exhibit 10(o) of registrant's
Annual Report on Form 10-K dated March 30, 1994; Amendment thereto dated
as of June 28, 1989, incorporated by reference to Exhibit 10(k) of registrant's
Annual Report on Form 10-K dated March 28, 1990; Amendment thereto dated
as of June 27, 1990, incorporated by reference to Exhibit 10(k) of registrant's
Annual Report on Form 10-K dated March 27, 1991; Amendment thereto dated
as of July 21, 1991, incorporated by reference to Exhibit 10(bb) of registrant's
Annual Report on Form 10-K dated March 25, 1992; Amendments thereto
dated as of December 3, 1992 and December 4, 1992, both of which are
incorporated by reference to Exhibit 10(p) of registrant's Annual Report on
Form 10-K dated March 24, 1993; Amendment thereto dated as of July 5, 1995,
incorporated by reference to Exhibit 10(l) of the 1995 Form 10-K; and
Amendments thereto dated April 10, 1998 and October 1, 1998 (filed as
Exhibit 10(b) hereto).
(e) Split Dollar Agreement dated as of February 1, 1990 between registrant and *
Hugh L. McColl III, as Trustee for the benefit of Hugh L. McColl, Jr. and Jane
S. McColl, incorporated by reference to Exhibit 10(s) of registrant's Annual
Report on Form 10-K dated March 27, 1991.
E-4
Exhibit No. Description
- ------------- -------------------------------------------------------------------------------
(f) NationsBank Corporation Benefit Security Trust dated as of June 27, 1990, *
incorporated by reference to Exhibit 10(t) of registrant's Annual Report on
Form 10-K dated March 27, 1991; First Supplement thereto dated as of
November 30, 1992, incorporated by reference to Exhibit 10(v) of registrant's
Annual Report on Form 10-K dated March 24, 1993; and Trustee Removal/
Appointment Agreement dated as of December 19, 1995, incorporated by
reference to Exhibit 10(o) of the 1995 Form 10-K.
(g) The NationsBank 401(k) Restoration Plan, as amended and restated effective *
April 1, 1998 and as further amended and restated effective July 1, 1998.
(h) Bank of America Executive Incentive Compensation Plan, as amended and *
restated effective April 1, 1998.
(i) Bank of America Director Deferral Plan, as amended and restated effective *
January 27, 1999.
(j) NationsBank Corporation Directors' Stock Plan, incorporated by reference to *
Exhibit 99.1 of registrant's Registration No. 333-02875.
(k) Amendment to Restricted Stock Award Plan Agreements with Hugh L. McColl, *
Jr. dated December 20, 1996, incorporated by reference to Exhibit 10(x) of the
1996 10-K.
(l) Agreement and Plan of Merger, by and between Barnett Banks, Inc. and
registrant, dated as of August 29, 1997, incorporated by reference to Exhibit
2.1 of registrant's Registration No. 333-40515; and Amendment thereto, dated
as of November 18, 1997, incorporated by reference to Exhibit 2.2 of
registrant's Registration No. 333-40515.
(m) Employment Agreement by and between registrant and Charles E. Rice dated *
October 10, 1997, incorporated by reference to Exhibit 10.1 of registrant's
Registration No. 333-40515.
(n) Barnett Banks, Inc. 1989 Long Term Incentive Plan, incorporated by reference *
to Exhibit 99.2 of Post-Effective Amendment No. 1 to registrant's Registration
No. 333-40515.
(o) Barnett Banks, Inc. Management Deferral Plan, as amended through January *
1, 1996.
(p) Barnett Banks, Inc. Trust Owned Life Insurance Trust for Management and *
Directors Deferral Plans, as adopted effective January 1, 1997.
(q) Barnett Banks, Inc. Trust Under Executive Benefit Plan, dated as of
December 5, 1996.
(r) Trust Agreement dated December 31, 1998 between BankAmerica Corporation *
and NationsBank, N.A.
(s) Bank of America Corporation Key Employee Stock Plan, as amended and *
restated effective September 24, 1998, incorporated by reference to Exhibit
10(a) of registrant's Quarterly Report on Form 10-Q dated November 16, 1998
(the "Third Quarter 1998 Form 10-Q").
(t) BankAmerica Corporation and Bank of America National Trust and Savings *
Association Deferred Compensation Plan for Directors, as amended and
restated, incorporated by reference to Exhibit 10(b) of the Third Quarter 1998
Form 10-Q.
(u) BankAmerica Deferred Compensation Plan as amended and restated, *
incorporated by reference to Exhibit 10(c) of the Third Quarter 1998 Form
10-Q.
(v) BankAmerica Corporation Senior Management Incentive Plan, as amended, *
incorporated by reference to Exhibit 10(d) of the Third Quarter 1998 Form
10-Q.
(w) BankAmerica Supplemental Retirement Plan, as amended and restated, *
incorporated by reference to Exhibit 10(e) of the Third Quarter 1998 Form
10-Q.
(x) BankAmerica Corporation Performance Equity Program, incorporated by *
reference to Exhibit 99.1 of Post-Effective Amendment No. 3 to registrant's
Registration No. 333-60553.
(y) BankAmerica Corporation 1992 Management Stock Plan, incorporated by *
reference to Exhibit 99.2 of Post-Effective Amendment No. 3 to registrant's
Registration No. 333-60553.
E-5
Exhibit No. Description
- ------------- -------------------------------------------------------------------------------
(z) BankAmerica Corporation 1987 Management Stock Plan, incorporated by *
reference to Exhibit 99.3 of Post-Effective Amendment No. 3 to registrant's
Registration No. 333-60553.
(aa) Continental Bank Corporation 1991 Equity Performance Incentive Plan, *
incorporated by reference to Exhibit 99.5 of Post-Effective Amendment No. 3
to registrant's Registration No. 333-60553.
(bb) Continental Bank Corporation 1982 Performance Restricted Stock and Stock *
Option Plan, incorporated by reference to Exhibit 99.1 of Post-Effective
Amendment No. 4 to registrant's Registration No. 333-60553.
(cc) Split Dollar Life Insurance Agreement dated as of October 15, 1998 between *
the registrant and NationsBank, N. A., as Trustee under that certain
Irrevocable Trust Agreement dated October 2, 1998, by and between Hugh L.
McColl, Jr., as Grantor, and NationsBank, N. A., as Trustee.
(dd) Split Dollar Life Insurance Agreement dated as of October 16, 1998 between *
the registrant and NationsBank, N. A., as Trustee under that certain
Irrevocable Trust Agreement No. 2 dated October 1, 1998, by and between
James H. Hance, Jr., as Grantor, and NationsBank, N. A., as Trustee.
(ee) Split Dollar Life Insurance Agreement dated as of September 28, 1998 between *
the registrant and J. Steele Alphin, as Trustee under that certain Irrevocable
Trust Agreement dated June 23, 1998, by and between Kenneth D. Lewis, as
Grantor, and J. Steele Alphin, as Trustee.
(ff) Employment Agreement dated as of April 10, 1998 between the registrant and *
James H. Hance, Jr., incorporated by reference to Exhibit 10.4 of registrant's
Registration No. 333-60553.
(gg) Employment Agreement dated as of April 10, 1998 between the registrant and *
Kenneth D. Lewis, incorporated by reference to Exhibit 10.5 of registrant's
Registration No. 333-60553.
(hh) Employment Agreement dated as of April 10, 1998 between the registrant and *
Michael J. Murray, incorporated by reference to Exhibit 10.2 of registrant's
Registration No. 333-60553.
(ii) Agreement and Plan of Reorganization by and between registrant and the
former BankAmerica Corporation, dated as of April 10, 1998, incorporated by
reference to Exhibit 2.1 of registrant's Registration No. 333-60553.
(jj) Plan of Reincorporation Merger by and between registrant and NationsBank
(DE) Corporation, dated as of August 3, 1998, incorporated by reference to
Exhibit 2.2 of registrant's Registration No. 333-60553.
11 Earnings per share computation.
12 (a) Ratio of Earnings to Fixed Charges.
(b) Ratio of Earnings to Fixed Charges and Preferred Dividends.
21 List of Subsidiaries.
23 Consent of PricewaterhouseCoopers LLP.
24 (a) Power of Attorney.
(b) Corporate Resolution.
27 Financial Data Schedule.
- ---------
* Denotes executive compensation plan or arrangement.
E-6
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