-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DJBzS95QQUQ3AtTrLEcmes+asBzMYJHUvDqyBVY8Pj86kD6djXvMQfyViD9lW9iE 8DmvxCiJWgCJFi5ccMQC8A== 0000070858-97-000050.txt : 19970329 0000070858-97-000050.hdr.sgml : 19970329 ACCESSION NUMBER: 0000070858-97-000050 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970328 SROS: AMEX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONSBANK CORP CENTRAL INDEX KEY: 0000070858 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560906609 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06523 FILM NUMBER: 97567899 BUSINESS ADDRESS: STREET 1: NATIONSBANK CORPORATE CENTER STREET 2: 100 NORTH TRYON STREET CITY: CHARLOTTE STATE: NC ZIP: 28255 BUSINESS PHONE: 7043865000 MAIL ADDRESS: STREET 1: NATIONALSBANK CORPORATE CENTER STREET 2: NC1007 19 04 CITY: CHARLOTTE STATE: NC ZIP: 28255 FORMER COMPANY: FORMER CONFORMED NAME: NCNB CORP DATE OF NAME CHANGE: 19920107 8-K 1 BODY OF 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED Date of Report (Date of Earliest Event Reported): January 7, 1997 NATIONSBANK CORPORATION ----------------------- (Exact Name of Registrant as Specified in its Charter) North Carolina 1-6523 56-0906609 -------------- ------ ---------- (State of Incorporation) (Commission (IRS Employer File Number) Identification No.) NationsBank Corporate Center, Charlotte, North Carolina 28255 ------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (704) 386-5000 -------------- (Registrant's Telephone Number, including Area Code) ITEM 5. OTHER EVENTS (a) Financial Statements of businesses acquired. The following consolidated financial statements of Boatmen's Bancshares, Inc. ("Boatmen's") and its subsidiaries are incorporated herein by reference to Exhibit 99.1 filed herewith: 1. Consolidated Balance Sheets as of December 31, 1996 and 1995. 2. Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994. 3. Consolidated Statement of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. 4. Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994. 5. Notes to the Consolidated Financial Statements. The information presented in Exhibit 99.1 with respect to the year ended December 31, 1994 is not incorporated herein. The report of Ernst & Young LLP, independent accountants, on the consolidated financial statements of Boatmen's Bancshares, Inc. as of December 31, 1996 and 1995 and for the three years in the period ended December 31, 1996, is filed herewith as Exhibit 99.1 and the related consent is filed herewith as Exhibit 99.2. Both the opinion and consent are incorporated herein by reference. (b) Pro forma financial information. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION The following unaudited Pro Forma Condensed Financial Information and explanatory notes are presented to show the impact on the historical financial position and results of operations of NationsBank Corporation ("NationsBank") of the acquisition of Boatmen's effective January 7, 1997, (the "Merger"). In accordance with the merger agreement, each share of Boatmen's Common Stock outstanding at the Effective Time of the merger (the "Effective Time") was converted in the Merger into the right to receive 1.305 shares of NationsBank common stock (adjusted for 2-for-1 stock split on February 27, 1997) or, at the election of each of the holders of Boatmen's Common Stock, $63.11 in cash (such cash consideration in the aggregate not to exceed 40% of the aggregate consideration paid by NationsBank for Boatmen's Common Stock), and each share of Boatmen's preferred stock was converted into new shares of NationsBank preferred stock having substantially similar terms. The unaudited Pro Forma Condensed Financial Information reflects the Merger using the purchase method of accounting. The cash component of the purchase price is assumed to equal 40% of the purchase price in the unaudited Pro Forma Condensed Financial Information; the cash component of the purchase price was funded by NationsBank through the issuance of additional debt securities included in the NationsBank historical balance sheet. The actual cash election made by the holders of Boatmen's common stock was approximately 4%. However, NationsBank currently expects to and has previously disclosed its intent to repurchase shares of NationsBank common stock from time to time so that the pro forma impact of the Boatmen's acquisition will be the issuance of approximately 60% of the aggregate consideration in NationsBank common stock and 40% of the aggregate consideration in cash. The unaudited Pro Forma Condensed Balance Sheet assumes that the Merger was consummated on December 31, 1996. The unaudited Pro Forma Condensed Statement of Income reflects the consolidation of the results of operation of NationsBank and Boatmen's for the year ended December 31, 1996. The unaudited Pro Forma Condensed Financial Information reflects preliminary purchase accounting adjustments. Estimates relating to fair value of certain assets, liabilities and other items have been made as more fully described in the Notes to the Pro Forma Condensed Financial Information. Actual adjustments, which may include adjustments to additional assets, liabilities and other items, will be made on the basis of appraisals and evaluations as of the Effective Time and, therefore, will differ from those reflected in the unaudited Pro Forma Condensed Financial Information. The combined company expects to achieve substantial merger benefits including operating cost savings and revenue enhancements. The pro forma earnings, which do not reflect any potential savings or revenue enhancements which are expected to result from the consolidation of operations of NationsBank and Boatmen's, are not indicative of the results of future operations. No assurances can be given with respect to the ultimate level of expense savings and revenue enhancements to be realized. The unaudited Pro Forma Condensed Financial Information and explanatory notes presented also show the impact on the historical financial position and results of operations of NationsBank of the acquisitions of Bank South Corporation ("Bank South"), completed January 10, 1996, TAC Bancshares, Inc. and its subsidiary, Chase Federal Bank FSB ("Chase Federal"), completed August 13, 1996, and CSF Holdings, Inc. ("CSF") completed January 10, 1996 (collectively, the "Other Acquisitions"). The Other Acquisitions are reflected net of pro forma adjustments in the Pro Forma Condensed Financial Information and explanatory notes. The Other Acquisitions were all closed prior to December 31, 1996 and are reflected in the December 31, 1996 NationsBank historical balance sheet. The unaudited Pro Forma Condensed Statement of Income reflects the results of operation of the Other Acquisitions for the year ended December 31, 1996 as if the Other Acquisitions had occurred on January 1, 1996. Chase Federal and CFS are reflected in the unaudited Pro Forma Condensed Financial Information using the purchase method of accounting and Bank South is reflected as a pooling of interests. The Other Acquisitions pro forma earnings do not reflect any potential savings or revenue enhancements that may result from the consolidation of operations of the Other Acquisitions and therefore are not indicative of the results of future operations. PRO FORMA BALANCE SHEET (Dollars in Millions) (Unaudited)
At December 31, 1996 ----------------------------------------------------------- NationsBank Boatmen's Pro Forma Boatmen's NationsBank Bancshares Adjustments Combined ----------- ----------- --------------- ----------- ASSETS Cash and cash equivalents............ $ 8,933 $ 2,733 $ (3,926) (1) $ 7,740 Time deposits placed................. 1,843 72 1,915 Investment securities................ 14,387 11,522 41 (1) 19,950 (6,000) (2) Federal funds sold and securities purchased under agreements to resell. 6,959 446 7,405 Trading account assets............... 19,288 28 19,316 Loans, leases and factored accounts receivable, net of unearned income.. 122,630 24,605 147,235 Allowance for credit losses.......... (2,315) (458) (2,773) Premmises, equipment and lease rights, net......................... 2,712 776 3,488 Customers' acceptance liability...... 858 - 858 Other assets......................... 10,499 1,476 6,477 (1) 18,549 97 (1) ---------- ---------- ---------- ---------- Total assets....................... $ 185,794 $ 41,200 $ (3,311) $ 223,683 ========== ========== ========== ========== LIABILITIES Deposits............................. $ 106,498 $ 31,954 $ $ 138,452 Borrowed funds....................... 24,001 4,311 (6,000) (2) 22,312 Trading account liabilities.......... 11,752 - 11,752 Acceptances outstanding.............. 858 - 858 Accrued expenses and other liabilities......................... 5,026 618 390 (1) 6,034 Long-term debt....................... 23,950 646 24,596 ---------- ---------- ---------- ---------- Total liabilities.................. 172,085 37,529 (5,610) 204,004 ---------- ---------- ---------- ---------- SHAREHOLDERS' EQUITY Preferred stock...................... 171 82 253 Common stock......................... 3,855 158 (158) (1) 9,743 5,888 (1) Surplus.............................. - 1,200 (1,200) (1) - Retained earnings.................... 9,673 2,405 (2,405) (1) 9,673 Less: Treasury stock................. - (168) 168 (1) - Other including loan to ESOP trust... 10 (6) 6 (1) 10 ---------- ---------- ---------- ---------- Total shareholders' equity......... 13,709 3,671 2,299 19,679 ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity.............. $ 185,794 $ 41,200 $ (3,311) $ 223,683 ========== ========== ========== ========== See accompanying notes to the pro forma balance sheet.
PRO FORMA CONDENSED STATEMENT OF INCOME (Dollars in Millions, Except Per Share Amounts) (Unaudited)
For the Year Ended December 31, 1996 ---------------------------------------------------------------------------- NationsBank Boatmen's Pro Forma Boatmen's Other Pro Forma NationsBank Bancshares Adjustments Combined Acquisitions Combined ----------- ---------- ----------- --------- ------------ --------- Income from Earning Assets Interest and fees on loans and leases.. $ 10,440 $ 2,110 $ $ 12,550 $ 55 $ 12,605 Interest and dividends on securities... 1,306 737 (4) (3) 1,645 45 1,690 (394) (5) Interest on federal funds sold and securities purchased under agreements to resell................. 666 24 690 - 690 Trading account securities............ 1,225 4 1,229 - 1,229 Other................................. 159 6 165 - 165 ----------- ---------- ----------- --------- ------------ --------- Total income from earning assets.... 13,796 2,881 (398) 16,279 100 16,379 Interest Expense Deposits.............................. 3,322 994 4,316 45 4,361 Borrowed funds........................ 2,155 249 (364) (5) 2,040 9 2,049 Long-term debt........................ 1,337 53 307 (4) 1,697 21 1,718 Other................................. 653 - 653 - 653 ----------- ---------- ----------- --------- ------------ --------- Total interest expense.............. 7,467 1,296 (57) 8,706 75 8,781 ----------- ---------- ----------- --------- ------------ --------- Net interest income..................... 6,329 1,585 (341) 7,573 25 7,598 Provision for credit losses............. 605 85 690 6 696 ----------- ---------- ----------- --------- ------------ --------- Net credit income................... 5,724 1,500 (341) 6,883 19 6,902 Gains on sales of securities............ 67 2 69 2 71 Noninterest income...................... 3,646 839 (6) (3) 4,479 3 4,482 Merger-related charge................... 118 70 188 - 188 Noninterest expense..................... 5,685 1,453 297 (3) 7,435 25 7,460 ----------- ---------- ----------- --------- ------------ --------- Income before taxes..................... 3,634 818 (644) 3,808 (1) 3,807 Income taxes............................ 1,259 295 (125) (7) 1,429 - 1,429 ----------- ---------- ----------- --------- ------------ --------- Net income.............................. 2,375 523 (519) 2,379 (1) 2,378 Preferred dividends..................... 15 7 22 - 22 ----------- ---------- ----------- --------- ------------ --------- Net income available to common shareholders.......................... $ 2,360 $ 516 $ (519) $ 2,357 $ (1) $ 2,356 =========== ========== =========== ========= ============ ========= Primary earnings per common share....... $ 4.00 $ 3.30 $ 3.30 =========== ========= ========= Fully diluted earnings per common share. $ 3.92 $ 3.25 $ 3.25 =========== ========= ========= Average Common Shares - Primary......... 590,214 714,318 714,318 =========== ========= ========= Average Common Shares - Fully Diluted... 603,528 727,632 727,632 =========== ========= =========
NOTES TO THE UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION (Amounts in Millions, Shares in Thousands, Per-Share Amounts Actuals) The unaudited Pro Forma Condensed Financial Information is based upon the following adjustments and related assumptions; the actual purchase accounting adjustments will be made on the basis of appraisals and evaluations as of the date of consummation of the transaction and, therefore, will differ from those reflected in the unaudited Pro Forma Condensed Financial Information. Note 1 The purchase accounting adjustments to record the Merger used in the preparation of the unaudited Pro Forma Condensed Balance Sheet are summarized below: Shares of Boatmen's Common Stock outstanding..................... 155,501 (A) Exchange ratio................................................... 1.305 ------- NationsBank common share equivalents............................. 202,929 Consideration to be paid in NationsBank Common Stock........ 60% (B) ------- NationsBank Common Stock assumed issued..................... 121,757 Assumed NationsBank Share Price............................. $48.3625 (C) -------- Assumed additional shareholders' equity..................... $5,888 ------ Consideration to be paid in cash............................ 40% (B) ------- NationsBank Common Stock assumed issued..................... 81,172 Assumed NationsBank Share Price............................. $48.3625 (C) -------- Assumed cash consideration.................................. $3,926 ------ Purchase price of acquisition (from above)....................... $9,814 Historical net assets acquired................................... $3,671 Less: Boatmen's preferred stock.................................. (82) ------- 3,589 ------- Premium to allocate.............................................. $6,225 ------- Adjustments to fair value of net assets acquired: Investment Securities....................................... 41 (D) Deferred Income Taxes....................................... 97 (E) Other Accrued Expenses...................................... (390)(G) Intangibles................................................. 6,477 (F) ------- $6,225 ------- (A) Represents the number of shares of Boatmen's Common Stock outstanding at the Effective Time. (B) Each share of Boatmen's Common Stock outstanding at the Effective Time was converted in the Merger into the right to receive 1.305 shares of NationsBank common stock or, at the election of each of the holders of Boatmen's Common Stock, an amount in cash in respect of each share of Boatmen's Common Stock that is equal to the Exchange Ratio times the market value of the NationsBank Common Stock during the 10 consecutive trading day period during which the shares of NationsBank Common Stock were traded on the New York Stock Exchange ending on the tenth calendar day immediately prior to the Effective Time (such cash consideration in the aggregate not to exceed 40% of the aggregate consideration paid by NationsBank for Boatmen's Common Stock). An assumed cash election of 40% has been used in the pro forma computations. The unaudited Pro Forma Condensed Financial Information reflects funding of the cash component of the purchase price from issuance of additional debt securities. As indicated above, the actual cash election was approximately 4%. However, NationsBank currently expects to repurchase shares of NationsBank common staock from time to time so that the pro forma impact of the Boatmen's acquisition will be the issuance of approximately 60% of the aggregate consideration in NationsBank common stock and 40% of the aggregate consideration in cash. (C) NationsBank Common Stock price average over the ten consecutive trading day period from December 13, 1996 through December 27, 1996 as explained in (B) above, adjusted to reflect the 2-for-1 stock split on February 27, 1997. (D) Reflects the net appreciation in the securities portfolio at December 31, 1996. (E) Represents the amount of deferred tax associated with adjustments to the carrying value of investments securities, mortgage servicing rights and certain identifiable intangible assets. (F) Includes identifiable intangibles, estimated fair value in excess of carrying value of mortgage servicing rights at December 31, 1996, and goodwill. (G) Includes personnel related items, write-offs of premises and equipment, transition costs and other merger-related expenses. Note 2 Reflects the planned reduction of discretionary investment securities and related paydown of borrowed funds. Note 3 The purchase accounting adjustments related to the Merger reflected in the unaudited Pro Forma Condensed Statement of Income are summarized as follows: Year Ended December 31, 1996 ------------ Interest income Amortization of securities fair value adjustment....... $4 Noninterest income Amortization of mortgage servicing rights ............. $6 Noninterest expense Amortization of intangibles fair value adjustment......$297 Note 4 Purchase accounting adjustments related to NationsBank's funding of the Merger have been reflected in the unaudited Pro Forma Condensed Statement of Income as follows: Year Ended December 31, 1996 ------------ Interest expense Increase in interest expense on debt securities to fund the cash component of the Common Stock Consideration....................................... $307 Note 5 Foregone interest income on discretionary investment security portfolio reduction and related reduction in funding cost. Year Ended December 31, 1996 ------------ Interest income................................. $394 Interest expense................................ $364 ---- $ 30 Note 6 The following assumptions were used in establishing the purchase accounting adjustments related to the Merger in the unaudited Pro Forma Condensed Statement of Income. Securities Amortize the premium into interest income on a straight-line method over the estimated maturities of the affected securities, 3 years. Mortgage Servicing Rights Amortize the excess of fair value over carrying value on a straight-line method over the estimated maturities of the underlying mortgages of 7 years. Intangibles Amortize the identifiable intangible value as noninterest expense over 10 years and goodwill on a straight-line basis over 25 years. Note 7 Income tax expense on pro forma adjustments is reflected using a 36% tax rate. ITEM 7. EXHIBITS The following Exhibits are filed herewith: Exhibit No. Description of Exhibit - ----------- ---------------------- 99.1 Consolidated financial statements of Boatmen's Bancshares, Inc. and Report of Ernst & Young LLP. 99.2 Consent of Ernst & Young LLP. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. NATIONSBANK CORPORATION By: /s/ Marc D. Oken -------------------- Marc D. Oken Chief Accounting Officer Dated: March 28, 1997 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 99.1 Consolidated financial statements of Boatmen's Bancshares, Inc. and Report of Ernst & Young LLP. 99.2 Consent of Ernst & Young LLP. EX-99 2 EX-99.1 BOATMEN'S PRO FORMAS Exhibit 99.1 BOATMEN'S BANCSHARES, INC. 1996 FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Consolidated Balance Sheet
December 31 (dollars in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------------------------------------------ Assets Cash and due from banks $ 2,733,213 $ 2,611,765 Short-term investments 72,091 83,166 Securities: Held to maturity (market value $1,039,622 and $973,801, respectively) 1,003,415 923,130 Available for sale (amortized cost $10,533,815 and $10,330,233, respectively) 10,518,740 10,347,172 Trading 28,364 58,361 Federal funds sold and securities purchased under resale agreements 446,276 1,225,671 Loans (net of unearned income of $78,069, and $86,981, respectively) 24,604,681 24,050,903 Less reserve for loan losses 458,090 452,560 - ------------------------------------------------------------------------------- - ------------------------------------------ Loans, net 24,146,591 23,598,343 - ------------------------------------------------------------------------------- - ------------------------------------------ Property and equipment 775,587 800,502 Other assets 1,476,160 1,475,379 - ------------------------------------------------------------------------------- - ------------------------------------------ Total assets $41,200,437 $41,123,489 =============================================================================== ========================================== Liabilities and Stockholders' Equity Liabilities: Demand deposits $ 7,354,523 $ 6,894,649 Retail savings deposits and interest-bearing transaction accounts 13,450,215 13,510,720 Time deposits 11,149,258 11,572,768 - ------------------------------------------------------------------------------- - ------------------------------------------ Total deposits 31,953,996 31,978,137 - ------------------------------------------------------------------------------- - ------------------------------------------ Federal funds purchased and securities sold under repurchase agreements 3,021,109 2,902,973 Short-term borrowings 1,289,404 1,474,991 Capital lease obligations 36,607 39,076 Long-term debt 609,070 615,129 Other liabilities 617,682 512,436 - ------------------------------------------------------------------------------- - ------------------------------------------ Total liabilities 37,527,868 37,522,742 - ------------------------------------------------------------------------------- - ------------------------------------------ Redeemable preferred stock 934 961 - ------------------------------------------------------------------------------- - ------------------------------------------ Stockholders' Equity: Preferred stock 82,147 99,324 Common stock ($1 par value; 250,000,000 shares authorized; 158,400,356 and 158,067,758 shares issued, respectively) 158,400 158,068 Surplus 1,199,692 1,212,838 Retained earnings 2,405,658 2,137,176 Treasury stock (3,075,610 and 476,519 shares at cost, respectively) (168,131) (18,096) Unrealized net appreciation (depreciation), available for sale securities (6,131) 10,476 - ------------------------------------------------------------------------------- - ------------------------------------------ Total stockholders' equity 3,671,635 3,599,786 - ------------------------------------------------------------------------------- - ------------------------------------------ Total liabilities and stockholders' equity $41,200,437 $41,123,489 =============================================================================== ========================================== See accompanying notes to the consolidated financial statements.
Consolidated Statement of Income
Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ---------------------------------------- Interest income Interest and fees on loans $2,109,806 $2,107,749 $1,748,732 Interest on short-term investments 5,692 4,787 3,569 Interest on Federal funds sold and securities purchased under resale agreements 24,316 40,028 18,047 Interest on held to maturity securities Taxable 357,753 348,264 Tax-exempt 63,471 56,108 60,488 - ------------------------------------------------------------------------------- - ---------------------------------------- Total interest on held to maturity securities 63,471 413,861 408,752 Interest on available for sale securities 673,800 304,816 329,391 Interest on trading securities 3,628 2,049 2,629 - ------------------------------------------------------------------------------- - ---------------------------------------- Total interest income 2,880,713 2,873,290 2,511,120 - ------------------------------------------------------------------------------- - ---------------------------------------- Interest expense Interest on deposits 994,142 1,025,459 768,995 Interest on Federal funds purchased and other short-term borrowings 249,173 304,509 202,506 Interest on capital lease obligations 3,754 3,896 4,016 Interest on long-term debt 49,015 47,454 66,660 - ------------------------------------------------------------------------------- - ---------------------------------------- Total interest expense 1,296,084 1,381,318 1,042,177 - ------------------------------------------------------------------------------- - ---------------------------------------- Net interest income 1,584,629 1,491,972 1,468,943 Provision for loan losses 84,517 59,756 26,176 - ------------------------------------------------------------------------------- - ---------------------------------------- Net interest income after provision for loan losses 1,500,112 1,432,216 1,442,767 - ------------------------------------------------------------------------------- - ---------------------------------------- Noninterest income Trust fees 214,929 200,242 186,081 Service charges 249,931 231,648 225,479 Mortgage banking revenues 86,758 80,702 63,349 Credit card 50,044 61,483 55,499 Investment banking revenues 48,982 42,158 42,318 Securities gains (losses), net 1,994 (7,040) 9,832 Other 188,071 150,437 131,100 - ------------------------------------------------------------------------------- - ---------------------------------------- Total noninterest income 840,709 759,630 713,658 - ------------------------------------------------------------------------------- - ---------------------------------------- Noninterest expense Staff 767,073 726,472 718,592 Net occupancy 101,943 98,777 100,909 Equipment 121,914 116,704 116,187 FDIC insurance 32,613 39,288 65,723 Intangible amortization 40,147 43,755 45,306 Advertising 45,124 42,866 43,005 Merger expense 69,617 25,978 Other 344,007 356,985 321,359 - ------------------------------------------------------------------------------- - ---------------------------------------- Total noninterest expense 1,522,438 1,450,825 1,411,081 - ------------------------------------------------------------------------------- - ---------------------------------------- Income before income tax expense 818,383 741,021 745,344 Income tax expense 295,615 261,010 254,418 - ------------------------------------------------------------------------------- - ---------------------------------------- Net income $ 522,768 $ 480,011 $ 490,926 =============================================================================== ======================================== Net income per share $3.29 $3.02 $3.10 =============================================================================== ======================================== Dividends declared per share $1.58 $1.42 $1.30 =============================================================================== ======================================== See accompanying notes to the consolidated financial statements.
Consolidated Statement of Changes in Stockholders' Equity
Unrealized Net Appreciation, Preferred Stock Common Stock Treasury Stock (Depreciation) ----------------- ----------------- Retained --------------- Available for (in thousands) Shares Amount Shares Amount Surplus Earnings Shares Amount Sale Securities Total - ------------------------------------------------------------------------------- - ---------------------------------------------------- December 31, 1993 250 $100,000 155,496 $155,496 $1,166,797 $1,578,377 -- -- $ 67,400 $3,068,070 Net income -- -- -- -- -- 490,926 -- -- -- 490,926 Cash dividends declared: Common ($1.30 per share) -- -- -- -- -- (135,920) -- -- -- (135,920) Redeemable preferred -- -- -- -- -- (80) -- -- -- (80) By pooled companies prior to merger--common -- -- -- -- -- (40,187) -- -- -- (40,187) By pooled companies prior to merger--preferred -- -- -- -- -- (7,000) -- -- -- (7,000) Acquisition of treasury stock -- -- -- -- -- - -- (538) (15,406) -- (15,406) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 446 446 6,364 - -- 29 890 -- 7,700 Common stock issued upon acquisition of subsidiaries -- -- 481 481 7,712 - -- -- -- -- 8,193 Adjustment for purchase of treasury stock--pooled companies -- -- (358) (358) (9,758) - -- -- -- -- (10,116) Common stock issued upon conversion of convertible subordinated debentures -- -- 19 19 280 - -- -- -- -- 299 Adjustment of available for sale securities to market value -- -- -- -- -- - -- -- -- (201,921) (201,921) Other, net -- -- -- -- (211) 83 -- -- -- (128) - ------------------------------------------------------------------------------- - ---------------------------------------------------- December 31, 1994 250 100,000 156,084 156,084 1,171,184 1,886,199 (509) (14,516) (134,521) 3,164,430 Net income -- -- -- -- -- 480,011 -- -- -- 480,011 Cash dividends declared: Common ($1.42 per share) -- -- -- -- -- (183,063) -- -- -- (183,063) Redeemable preferred -- -- -- -- -- (75) -- -- -- (75) By pooled companies prior to merger--common -- -- -- -- -- (38,808) -- -- -- (38,808) By pooled companies prior to merger--preferred -- -- -- -- -- (6,970) -- -- -- (6,970) Acquisition of treasury stock -- -- -- -- -- - --(2,152) (76,479) -- (76,479) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 1,150 1,150 22,315 - -- 769 24,270 -- 47,735 Common stock issued upon acquisition of subsidiaries -- -- 947 947 24,579 - -- 1,413 48,574 -- 74,100 Adjustment for purchase of treasury stock--pooled companies -- -- (125) (125) (3,921) - -- -- -- -- (4,046) Retirement of preferred stock (1) (500) -- -- 15 (98) -- -- -- (583) Common stock issued upon conversion of preferred stock (1) (176) 6 6 170 - -- -- -- -- -- Common stock issued upon conversion of convertible subordinated debentures -- -- 6 6 52 - -- 2 55 -- 113 Adjustment of available for sale securities to market value -- -- -- -- -- - -- -- -- 144,997 144,997 Other, net -- -- -- -- (1,556) (20) -- -- -- (1,576) - ------------------------------------------------------------------------------- - ---------------------------------------------------- December 31, 1995 248 99,324 158,068 158,068 1,212,838 2,137,176 (477) (18,096) 10,476 3,599,786 Net income -- -- -- -- -- 522,768 -- -- -- 522,768 Cash dividends declared: Common ($1.58 per share) -- -- -- -- -- (247,425) -- -- -- (247,425) Redeemable preferred -- -- -- -- -- (67) -- -- -- (67) Preferred -- -- -- -- -- (6,740) -- -- -- (6,740) Acquisition of treasury stock -- -- -- -- -- - --(5,476) (262,380) -- (262,380) Common stock issued pursuant to employee and shareholder stock issuance plans -- -- 325 325 (6,727) - -- 1,865 72,172 -- 65,770 Common stock issued upon acquisition of subsidiaries -- -- -- -- (465) - -- 431 17,076 -- 16,611 Common stock issued upon conversion of preferred stock (43) (17,177) 8 8 (5,946) - -- 584 23,115 -- -- Common stock issued upon conversion of convertible subordinated debentures -- -- -- -- (197) - -- 9 333 -- 136 Adjustment of available for sale securities to market value -- -- -- -- -- - -- -- -- (16,607) (16,607) Other, net -- -- (1) (1) 189 (54) (12) (351) -- (217) - ------------------------------------------------------------------------------- - ---------------------------------------------------- December 31, 1996 205 $ 82,147 158,400 $158,400 $1,199,692 $2,405,658(3,076)$(168,131) $ (6,131) $3,671,635 =============================================================================== ==================================================== See accompanying notes to the consolidated financial statements.
Consolidated Statement of Cash Flows
Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - -------------------------------------------- Operating Activities: Net income $ 522,768 $ 480,011 $ 490,926 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 84,517 59,756 26,176 Depreciation, amortization and accretion 167,153 174,616 193,533 Decrease in deferred loan fees (1,549) (6,256) (1,080) Realized securities (gains) losses (1,994) 7,040 (9,832) Net (increase) decrease in trading securities 29,997 (25,968) 16,162 (Increase) decrease in interest receivable 18,054 (16,432) (24,528) Increase (decrease) in interest payable (16,803) 23,199 15,889 Increase (decrease) in tax liability (9,894) 57,802 (66,746) Net gain on sales and writedowns of foreclosed property (6,337) (2,629) (9,093) Other, net 76,395 (34,070) 85,969 - ------------------------------------------------------------------------------- - -------------------------------------------- Net cash provided by operating activities 862,307 717,069 717,376 - ------------------------------------------------------------------------------- - -------------------------------------------- Investing Activities: Net (increase) decrease in Federal funds sold and securities purchased under resale agreements 783,920 (76,381) (607,147) Net increase in loans (608,118) (1,301,371) (2,058,258) Proceeds from the maturity of held to maturity securities 137,253 1,101,936 1,569,503 Purchases of held to maturity securities (100,859) (556,268) (2,265,283) Proceeds from the maturity of available for sale securities 2,448,573 1,233,862 1,716,558 Proceeds from the sales of available for sale securities 418,759 706,693 680,318 Purchases of available for sale securities (3,190,539) (876,761) (1,006,994) Net increase (decrease) in short-term investments 11,075 (37,718) (15,821) Increase in property and equipment (73,234) (95,530) (140,214) Proceeds from the sale of foreclosed property 30,679 48,439 87,697 Net cash received from (paid for)purchase acquisitions 4,376 12,720 (87,818) - ------------------------------------------------------------------------------- - -------------------------------------------- Net cash provided (used) by investing activities (138,115) 159,621 (2,127,459) - ------------------------------------------------------------------------------- - -------------------------------------------- Financing Activities: Net increase (decrease) in Federal funds purchased and securities sold under repurchase agreements 118,136 (88,707) 370,569 Net increase (decrease) in deposits (93,037) 409,105 762,453 Net increase (decrease) in short-term borrowings (195,587) (912,514) 877,102 Payments on long-term debt (2,097) (78,024) (20,964) Proceeds from the issuance of long-term debt 6,180 91,287 30,350 Payments on capital lease obligations (2,469) (1,332) (1,101) Decrease in redeemable preferred stock (27) (181) (13) Decrease in preferred stock (583) Cash dividends paid (237,233) (213,741) (179,877) Common stock issued pursuant to various employee and shareholder stock issuance plans 65,770 47,735 7,700 Acquisition of treasury stock (262,380) (76,479) (15,406) - ------------------------------------------------------------------------------- - -------------------------------------------- Net cash provided (used) by financing activities (602,744) (823,434) 1,830,813 - ------------------------------------------------------------------------------- - -------------------------------------------- Increase in cash and due from banks 121,448 53,256 420,730 Cash and due from banks at beginning of year 2,611,765 2,558,509 2,137,779 - ------------------------------------------------------------------------------- - -------------------------------------------- Cash and due from banks at end of year $2,733,213 $2,611,765 $2,558,509 =============================================================================== ============================================ See accompanying notes to the consolidated financial statements. For the years ended December 31, 1996, 1995 and 1994, interest paid totaled $1,312,887, $1,359,404, and $1,020,492, respectively. Income taxes paid totaled $284,559 in 1996, $222,849 in 1995, and $250,456 in 1994. Available for sale securities transferred to held to maturity totaled $95 million in 1996. Securities transferred to available for sale securities totaled approximately $5.7 billion in 1995. Loans transferred to foreclosed property totaled $19 million in 1996, $14 million in 1995, and $23 million in 1994. In 1995, assets and liabilities of purchased subsidiaries at dates of acquisition included investment securities of $185 million, loans of $262 million, other assets of $86 million, deposits of $460 million and other liabilities of $9 million. In 1994, assets and liabilities of purchased subsidiaries at dates of acquisition included investment securities of $269 million, loans of $291 million, other assets of $102 million, deposits of $548 million and other liabilities of $113 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands except per share data and when otherwise indicated) 1 SUMMARY OF PRINCIPAL ACCOUNTING POLICIES BUSINESS Boatmen's Bancshares Inc. ("Corporation"), is a multi-bank holding company, headquartered in St. Louis, Missouri. At December 31, 1996, the Corporation owned substantially all of the capital stock of 54 subsidiary banks, including a federal savings bank, and provides commercial, retail and correspondent banking services from over 650 banking offices and over 1,500 ATM's in Missouri, Arkansas, Illinois, Iowa, Kansas, New Mexico, Oklahoma, Tennessee and Texas. At December 31, 1996, the Corporation had consolidated assets of $41.2 billion. The Corporation's largest banking subsidiary, The Boatmen's National Bank of St. Louis, had total assets of $11.3 billion at December 31, 1996. The Corporation's other businesses include a trust company, a mortgage banking company, a credit life insurance company, a credit card bank and an insurance agency. The Corporation, through its subsidiary, Boatmen's Trust Company, is among the twenty largest providers of personal trust services in the nation, providing personal trust services within its banks' market areas and institutional and pension related trust services on a national scale. The Corporation's mortgage banking activities are conducted through Boatmen's National Mortgage, Inc., a full service mortgage banking company which originates home loans through company operated offices as well as through a network of over 300 correspondents located in the southern and mid-western United States. Boatmen's National Mortgage, Inc. presently services mortgage loans totaling approximately $26 billion. The traditional banking line of business represents the primary source of earnings for the Corporation, followed by the trust and mortgage banking activities. BASIS OF PRESENTATION The accounting and reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles. The preparation of financial statements requires management of the Corporation to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the financial statements reflect management's best estimates and judgment, actual results could differ from estimates. The following is a description of the Corporation's more significant policies. The consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of all material intercompany balances and transactions. Certain amounts for 1995 and 1994 were reclassified to conform with statement presentation for 1996. The reclassifications have no effect on stockholders' equity or net income as previously reported. Prior period financial statements are also restated to include the accounts of companies which are acquired and accounted for as poolings of interests. Results of operations of companies which are acquired and subject to purchase accounting are included from the dates of acquisition. In accordance with the purchase method of accounting, the assets and liabilities of purchased companies are stated at estimated fair values at the date of acquisition, and the excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over periods benefitted. HELD TO MATURITY SECURITIES These securities are purchased with the original intent to hold to maturity and events which may be reasonably anticipated are considered when determining the Corporation's intent and ability to hold to maturity. Securities meeting such criteria at date of purchase and as of the balance sheet date are carried at cost, adjusted for amortization of premiums and accretion of discounts. Gains or losses on the disposition of held to maturity securities, if any, are based on the adjusted book value of the specific security. AVAILABLE FOR SALE SECURITIES Debt and equity securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at market value with net unrealized gains and losses, net of tax, reflected as a component of stockholders' equity until realized. Securities held for indefinite periods of time include securities that may be sold to meet liquidity needs or in response to significant changes in interest rates or prepayment risks as part of the Corporation's overall asset/liability management strategy. TRADING SECURITIES Trading securities, which primarily consist of debt securities, are held for resale within a short period of time and are stated at market value. These securities are held in inventory for sale to institutional and retail customers. Investment banking revenues, a component of noninterest income, include the net realized gain or loss and market value adjustments of the trading securities and commissions on bond dealer and retail brokerage operations. INTEREST AND FEES ON LOANS Interest on loans is accrued based upon the principal amount outstanding. It is the Corporation's policy to discontinue the accrual of interest when full collectibility of principal or interest on any loan is doubtful. Interest income on such loans is subsequently recognized only in the period in which payments are received, and such payments are applied to reduce principal when loans are unsecured or collateral values are deficient. Nonrefundable loan fees are deferred and recognized as income over the life of the loan as an adjustment of the yield. Direct costs associated with originating loans are deferred and amortized as a yield adjustment over the life of the loan. Commitment fees are deferred and recognized as noninterest income over the commitment period. RESERVE FOR LOAN LOSSES The reserve for loan losses represents provisions charged to expense less net loan charge-offs. The provision is based upon economic conditions, historical loss and collection experience, risk characteristics of the portfolio, underlying collateral values, credit concentrations, industry risk, degree of off-balance sheet risk and other factors which, in management's judgment, deserve current recognition. Specific reserves are established for any impaired commercial, commercial real estate, and real estate construction loan for which the recorded investment in the loan exceeds the measured value of the loan. Loans subject to impairment valuation are defined as nonaccrual loans, exclusive of smaller balance homogenous loans such as home equity, credit card, installment and 1-4 family residential loans. The values of loans subject to impairment valuation are determined based on the present value of expected future cash flows, the market price of the loans, or the fair values of the underlying collateral if the loan is collateral dependent. The charge-off policy of the Corporation varies with respect to the category of, and specific circumstances surrounding, each loan under consideration. The Corporation's policy with respect to consumer loans is generally to charge off all such loans when deemed to be uncollectible or 120 days past due, whichever comes first. With respect to commercial, real estate, and other loans, charge-offs are made on the basis of management's ongoing evaluation of nonperforming and criticized loans. FORECLOSED PROPERTY The maximum carrying value for real estate acquired through foreclosure is the lower of the recorded investment in the loan for which the property previously served as collateral or the current appraised value of the foreclosed property, net of the estimated selling costs. Any writedowns required prior to actual foreclosure are charged to the reserve for loan losses. Subsequent to foreclosure, losses on the periodic revaluation of the property are charged to current period earnings as noninterest expense. Gains and losses resulting from the sale of foreclosed property are recognized in current period earnings. Costs of maintaining and operating foreclosed property are expensed as incurred and revenues related to foreclosed property are recorded as an offset to operating expense. Expenditures to complete or improve foreclosed properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. MORTGAGE BANKING REVENUES Mortgage loans held for sale are valued at the lower of cost or aggregate market value. Gains and losses on sales of mortgage loans are recognized at settlement dates and are determined by the difference between sales proceeds and the carrying value of the loans. The Corporation generally sells mortgage loans without recourse. Income from the servicing of mortgage loans is recognized in mortgage banking revenues, a component of noninterest income, concurrent with the receipt of the related mortgage payments on the loans serviced. Prior to 1995, capitalization of mortgage servicing rights was limited to servicing purchased from third parties. Effective with the Corporation's adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" in 1995, the value of purchased and originated mortgage servicing rights is capitalized and amortized in proportion to, and over the period of estimated net servicing income as a reduction of mortgage banking revenues. The value of mortgage servicing rights is determined based on the present value of estimated expected future cash flows, using assumptions as to current market discount rate, prepayment speeds and servicing costs per loan. Mortgage servicing rights are stratified by loan type and interest rate for purposes of impairment measurement. Loan types include government, conventional, private, and adjustable-rate mortgage loans. Impairment losses are recognized to the extent the unamortized mortgage servicing right for each stratum exceeds the current market value, as reductions in the carrying value of the asset, through the use of a valuation allowance, with a corresponding reduction to mortgage banking revenues. The Corporation recognizes gains or losses on the sales of mortgage servicing rights when all risks and rewards have been irrevocably passed to the purchaser. TRUST ASSETS AND FEES The Corporation's trust function manages assets in a fiduciary or agent capacity; accordingly, such assets are not included in the consolidated balance sheet of the Corporation. Fee income derived from managing trust assets is recognized on an accrual basis. SEGREGATED ASSETS Segregated assets represent loans acquired in an FDIC assisted transaction that are covered under a loss sharing arrangement with the FDIC and possess more than the normal risk of collectibility. These assets consist of loans that at acquisition were or have since become classified as nonperforming loans or foreclosed property and are segregated from other performing assets covered under the loss sharing arrangement. The Corporation's primary purpose in managing a portfolio of this nature is to provide ongoing collection and control activities on behalf of the FDIC. Accordingly, these assets do not represent loans made in the ordinary course of business and, due to the underlying nature of this liquidating asset pool, are excluded from the Corporation's nonperforming asset statistics. Income from the segregated asset pool is generally recognized on a cash basis as a component of noninterest income. If collection of the unguaranteed portion of the segregated asset is doubtful, income payments are applied to reduce the principal balance to the extent of the government guarantee. INTEREST RATE CONTRACTS Interest rate contracts are utilized as part of the Corporation's overall asset/liability management strategy to alter the rate sensitivity characteristics of various assets and liabilities. Although the notional amounts of these transactions are not reflected in the financial statements, the interest differentials are recognized on an accrual basis over the terms of the agreements as an adjustment to interest income or interest expense of the related asset or liability. To qualify for accrual accounting, the contracts must be designated to interest-bearing assets or liabilities and alter their interest rate characteristics over the term of the agreements. If an interest rate contract is terminated prior to maturity, any realized gains and losses are deferred and amortized over the remaining life of the contract. In the event the designated asset or liability is sold or extinguished prior to maturity, fair value recognition is required and any gains or losses are recognized in income. Premiums paid to enter into contracts such as interest rate floors are deferred and amortized over the life of the contract as an adjustment to interest income or interest expense of the related asset or liability. Interest rate contracts entered into for trading purposes on the behalf of customers are accounted for on a mark to market basis. Accordingly, realized and unrealized gains and losses associated with this activity are reflected as investment banking revenues, a component of noninterest income. FOREIGN EXCHANGE CONTRACTS The Corporation's banking subsidiaries trade foreign currencies on behalf of their customers and for their own account and, by policy, do not maintain significant open positions. Foreign exchange contracts are valued at the current prevailing rates of exchange and any profit or loss resulting from such valuation is included in current operations as a component of investment banking revenues. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized principally by the straight-line method applied over the estimated useful lives of the assets, which are 10 to 50 years for buildings and 3 to 25 years for fixtures and equipment. Leasehold improvements are generally amortized over the lease term, not to exceed 10 years. INTANGIBLE ASSETS Goodwill arising from acquisitions consummated subsequent to 1985 is being amortized on a straight-line basis over the periods benefitted, ranging from 4-20 years. For acquisitions consummated in 1983 and 1985, goodwill is being amortized on a straight-line basis over 25 years, and goodwill related to acquisitions prior to 1983 is being amortized on a straight-line basis over 40 years. Core deposit intangibles and credit card premiums are amortized over their useful economic lives on an accelerated basis, not to exceed 10 years. INCOME TAXES The Corporation accounts for income taxes under the asset and liability method. Income tax expense is reported as the total of current income taxes payable and the net change in deferred income taxes provided for temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the values used for income tax purposes. Deferred income taxes are recorded at the statutory Federal and state tax rates in effect at the time that the temporary differences are expected to reverse. The Corporation files a consolidated Federal income tax return which includes all its subsidiaries except for the credit life insurance company. Income tax expense is allocated among the parent company and its subsidiaries as if each had filed a separate tax return. NET INCOME PER SHARE Net income per share is calculated by dividing net income (after deducting dividends on preferred stock) by the weighted average number of common shares outstanding. Common stock equivalents have no material dilutive effect. The net income per share calculation for 1996, 1995 and 1994 is summarized as follows:
=============================================================================== ============================== (in thousands except share data) 1996 1995 1994 - ------------------------------------------------------------------------------- - ----------------------------- Net income $522,768 $480,011 $490,926 Less preferred dividends declared 6,807 7,143 7,080 - ------------------------------------------------------------------------------- - ----------------------------- Net income available to common shareholders $515,961 $472,868 $483,846 =============================================================================== ============================== Average shares outstanding 156,673,502 156,663,791 155,881,515 - ------------------------------------------------------------------------------- - ----------------------------- Net income per share $3.29 $3.02 $3.10 =============================================================================== ==============================
2 CHANGES IN ACCOUNTING POLICIES On January 1, 1996 the Corporation adopted Financial Accounting Standard No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets and certain identifiable intangibles to be held and used by a company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such conditions exist, companies must estimate the future cash flows from use of the asset and, if the sum of the undiscounted estimated future cash flows is less than the carrying amount of the asset, an impairment loss would be recognized. Adoption of this standard had no material effect on the Corporation's financial results. On January 1, 1995, The Corporation adopted Financial Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for Impairment of a Loan" and No. 118 (SFAS No. 118), "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." These statements require that certain impaired loans be measured based on either the present value of expected future cash flows discounted at the loan's effective rate, the market price of the loan, or the fair value of the underlying collateral if the loan is collateral dependent. The statements further require that specific reserves be established for any impaired loan for which the recorded investment exceeds the measured value of the loan. SFAS No. 114 and SFAS No. 118 do not apply to smaller balance, homogenous loans, which the Corporation has identified as consumer loans, such as home equity, credit card, installment and 1-4 family residential loans. Adoption of these standards had no material impact on the Corporation's loan quality statistics or reserve levels and had no effect on 1995 earnings. In the second quarter of 1995, the Corporation adopted Statement of Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires capitalization of purchased mortgage servicing rights as well as internally originated mortgage servicing rights. These mortgage servicing rights are amortized in proportion to, and over the period of estimated net servicing income. Adoption of SFAS No. 122 increased mortgage banking revenues in 1995 by approximately $5.8 million, net of amortization, and increased net income by approximately $3.6 million. 3 ACQUISITIONS PURCHASE ACQUISITIONS Results of operations of companies which are acquired and subject to purchase accounting treatment are included from dates of acquisition. Purchase acquisitions consummated in 1996, 1995 and 1994 were insignificant to the Corporation's operations. Disclosure of pro forma condensed results of operations as if these acquisitions were consummated as of the beginning of the period have been omitted due to the immaterial effect on operations. Information regarding purchase acquisitions is summarized as follows:
=============================================================================== ============================= Core Acquired Company Acquisition Purchase Deposit (amounts in millions) Date Price Assets Goodwill Intangible - ------------------------------------------------------------------------------- - ----------------------------- 1996 Tom Green National Bank 3/1/96 $ 9.0 $ 73.6 $ 4.2 Canadian Bancshares, Inc. 7/1/96 7.8 35.6 3.2 - ------------------------------------------------------------------------------- - ----------------------------- Total $16.8 $ 109.2 $ 7.4 =============================================================================== ============================= 1995 Salem Community Bancorp, Inc. 2/28/95 $ 8.4 $ 79.2 $ 4.0 $ .8 West Side Bancshares, Inc. 4/1/95 17.5 142.4 4.5 1.3 Citizens Bancshares Corporation 10/27/95 41.0 224.1 19.5 - ------------------------------------------------------------------------------- - ----------------------------- Total $ 66.9 $ 445.7 $28.0 $ 2.1 =============================================================================== ============================= 1994 Eagle Management and Trust Company 5/6/94 $ 3.4 $ 3.8 $ 2.3 =============================================================================== =============================
POOLING ACQUISITIONS When material, results of operations of companies which are acquired and subject to pooling of interests accounting are reflected on a combined basis from the earliest period presented. On January 31, 1996, the Corporation consummated the acquisition of Fourth Financial Corporation (Fourth Financial), headquartered in Wichita, Kansas, resulting in the issuance of approximately 28.5 million shares of common stock. In addition, the Corporation effectively replaced Fourth Financial's $100 million convertible preferred stock by issuance of an identical new security, resulting in the issuance of approximately 248,000 shares of preferred stock. The preferred stock is convertible into approximately 3.4 million shares of common stock. Fourth Financial is the largest banking company in Kansas, with approximately $7.5 billion in assets, operating 87 retail banking offices in Kansas and 56 in Oklahoma. Nonrecurring after-tax merger expenses related to this acquisition totaled $29.3 million or $.19 per share, comprised primarily of investment banking and other professional fees, severance costs, obsolete equipment write- offs and estimated costs to close duplicate branches, and were recognized in the first quarter of 1996. On January 31, 1995, the Corporation consummated the acquisition of National Mortgage Company and certain affiliates (National Mortgage), resulting in the issuance of approximately 5.0 million shares of common stock. National Mortgage, subsequently renamed Boatmen's National Mortgage, Inc., headquartered in Memphis, Tennessee, is a full-service mortgage banking company and presently services mortgage loans totaling approximately $26 billion. Nonrecurring after-tax merger expenses related to this acquisition totaled $7.0 million or $.04 per share, comprised primarily of investment banking and other professional fees, severance costs and abandonment of equipment and software, and were recognized in the first quarter of 1995. On January 31, 1995, the Corporation consummated the acquisition of Dalhart Bancshares, Inc. (Dalhart), resulting in the issuance of approximately .7 million shares of common stock. Dalhart, with assets of approximately $140 million, is located in north Texas and was merged into the Corporation's Amarillo subsidiary. On February 28, 1995, the Corporation consummated the acquisition of Worthen Banking Corporation (Worthen), headquartered in Little Rock, Arkansas, resulting in the issuance of approximately 17.1 million shares of common stock. Worthen, subsequently renamed Boatmen's Arkansas, Inc., was the second largest banking organization in Arkansas, with approximately $3.5 billion in assets. Nonrecurring after-tax merger expenses related to this acquisition totaled $12.3 million or $.08 per share, comprised primarily of investment banking and other professional fees, severance costs, obsolete equipment write-offs and estimated costs to close duplicate branches, and were recognized in the first quarter of 1995. On May 31, 1995, the Corporation consummated the acquisition of First National Bank in Pampa (Pampa), resulting in the issuance of approximately 1.35 million shares of common stock. At acquisition, Pampa had approximately $166 million in assets and was merged into the Corporation's Amarillo subsidiary. 4 HELD TO MATURITY SECURITIES The amortized cost and approximate market value of held to maturity securities are summarized as follows:
=============================================================================== =============================== Unrealized December 31, 1996 Amortized -------------- - --------------- Market (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- - ------------------------------- State and municipal $ 994,920 $37,983 $(2,035) $1,030,868 Other debt securities 8,495 259 8,754 - ------------------------------------------------------------------------------- - ------------------------------- Total held to maturity securities $1,003,415 $38,242 $(2,035) $1,039,622 =============================================================================== =============================== Unrealized December 31, 1995 Amortized -------------- - --------------- Market (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- - ------------------------------- State and municipal $912,348 $51,606 $(949) $963,005 Other debt securities 10,782 21 (7) 10,796 - ------------------------------------------------------------------------------- - ------------------------------- Total held to maturity securities $923,130 $51,627 $(956) $973,801 =============================================================================== ===============================
Effective December 15, 1995, the Corporation transferred approximately $5.7 billion of held to maturity securities to available for sale as permitted under the Statement of Financial Accounting Standards Board Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," issued in November 1995. The amortized cost of such securities exceeded fair value by approximately $16.8 million, resulting in an after-tax decrease to stockholders' equity of $10.4 million. The transfer had no effect on 1995 earnings. The maturity distribution of held to maturity securities at December 31, 1996 is summarized as follows:
=============================================================================== == (in thousands) Amortized Cost Market Value - ------------------------------------------------------------------------------- - -- Due in one year or less $ 57,548 $ 58,214 Due after one year through five years 216,872 219,964 Due after five years through ten years 419,368 443,370 Due after ten years 309,627 318,074 - ------------------------------------------------------------------------------- - -- Total held to maturity securities $1,003,415 $1,039,622 =============================================================================== ==
5 AVAILABLE FOR SALE SECURITIES The amortized cost and approximate market value of available for sale securities are summarized as follows:
=============================================================================== ======== Unrealized December 31, 1996 Amortized ----------------------- Market (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- - -------- U.S. treasury $ 1,365,142 $ 8,912 $ (1,703) $ 1,372,351 Federal agencies: Mortgage-backed: Collateralized mortgage obligations 2,547,802 8,347 (33,313) 2,522,836 Adjustable-rate mortgages 2,764,646 19,582 (18,537) 2,765,691 Fixed rate pass-through 1,179,926 11,844 (9,489) 1,182,281 - ------------------------------------------------------------------------------- - -------- Total mortgage-backed 6,492,374 39,773 (61,339) 6,470,808 Other agencies 1,311,621 4,082 (6,967) 1,308,736 - ------------------------------------------------------------------------------- - -------- Total U.S. treasury and agencies 9,169,137 52,767 (70,009) 9,151,895 Other debt securities 1,196,499 5,360 (13,302) 1,188,557 - ------------------------------------------------------------------------------- - -------- Total debt securities 10,365,636 58,127 (83,311) 10,340,452 Equity securities 168,179 10,197 (88) 178,288 - ------------------------------------------------------------------------------- - -------- Total available for sale securities $10,533,815 $68,324 $(83,399) $10,518,740 =============================================================================== ======== Unrealized December 31, 1995 Amortized ----------------------- Market (in thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- - -------- U.S. treasury $ 1,504,451 $16,640 $ (2,688) $ 1,518,403 Federal agencies: Mortgage-backed: Collateralized mortgage obligations 2,533,134 8,684 (31,971) 2,509,847 Adjustable-rate mortgages 3,101,001 14,498 (17,287) 3,098,212 Fixed rate pass-through 822,447 12,748 (2,715) 832,480 - ------------------------------------------------------------------------------- - -------- Total mortgage-backed 6,456,582 35,930 (51,973) 6,440,539 Other agencies 1,282,320 10,889 (1,707) 1,291,502 - ------------------------------------------------------------------------------- - -------- Total U.S. treasury and agencies 9,243,353 63,459 (56,368) 9,250,444 State and municipal 98,472 6,224 (97) 104,599 Other debt securities 841,497 7,162 (6,143) 842,516 - ------------------------------------------------------------------------------- - -------- Total debt securities 10,183,322 76,845 (62,608) 10,197,559 Equity securities 146,911 3,314 (612) 149,613 - ------------------------------------------------------------------------------- - -------- Total available for sale securities $10,330,233 $80,159 $(63,220) $10,347,172 =============================================================================== ========
The maturity distribution of available for sale securities at December 31, 1996 is summarized as follows:
=============================================================================== ======= (in thousands) Amortized Cost Market Value - ------------------------------------------------------------------------------- - ------- Due in one year or less $ 682,590 $ 684,413 Due after one year through five years 1,767,356 1,772,617 Due after five years through ten years 381,836 379,614 Due after ten years 578 573 Mortgage-backed securities 7,533,275 7,503,235 - ------------------------------------------------------------------------------- - ------- Total debt securities 10,365,635 10,340,452 Equity securities 168,180 178,288 - ------------------------------------------------------------------------------- - ------- Total available for sale securities $10,533,815 $10,518,740 =============================================================================== =======
Available for sale securities at December 31, 1996 include mortgage-backed government guaranteed agency securities of $6.5 billion and private issue mortgage-backed securities totaling $1.0 billion. Sales and redemptions of available for sale securities resulted in realized gains and losses as follows:
========================================================================== Year ended December 31 (in thousands) 1996 1995 - -------------------------------------------------------------------------- Debt securities: Realized gains $2,432 $ 7,968 Realized losses (655) (23,338) - -------------------------------------------------------------------------- Net realized gains (losses) $1,777 $(15,370) ========================================================================== Equity securities: Realized gains $ 155 $ 8,052 Realized losses (10) - -------------------------------------------------------------------------- Net realized gains $ 155 $ 8,042 ==========================================================================
Held to maturity and available for sale securities with book values totaling $5,707,197 and $5,699,399 at December 31, 1996 and 1995, respectively, were pledged to secure public deposits, trust deposits, and for other purposes required by law. 6 LOANS A summary of loan categories is as follows:
========================================================================== December 31 (in thousands) 1996 1995 - -------------------------------------------------------------------------- Domestic: Commercial $11,845,221 $11,834,507 Real estate-mortgage 4,361,125 4,565,326 Real estate-construction 1,098,535 1,107,692 Consumer 6,965,306 6,284,103 Lease financing 395,029 325,380 - -------------------------------------------------------------------------- Total domestic 24,665,216 24,117,008 Foreign loans 17,534 20,876 - -------------------------------------------------------------------------- Total loans 24,682,750 24,137,884 Less unearned income 78,069 86,981 - -------------------------------------------------------------------------- Total loans, net $24,604,681 $24,050,903 ==========================================================================
Nonperforming assets, consisting of nonperforming loans and foreclosed property, are summarized as follows:
========================================================================== December 31 (in thousands) 1996 1995 - -------------------------------------------------------------------------- Nonaccrual $156,226 $165,440 Restructured 2,355 7,996 Past due 90 days or more 37,224 37,349 - -------------------------------------------------------------------------- Total nonperforming loans 195,805 210,785 Foreclosed property 28,936 35,149 - -------------------------------------------------------------------------- Total nonperforming assets $224,741 $245,934 ==========================================================================
Gross interest income which would have been recorded, if all nonaccrual and restructured loans at year end had been current in accordance with original terms, amounted to $14.3 million in 1996, $14.6 million in 1995, and $15.3 million in 1994. Actual interest recorded amounted to $4.2 million in 1996, $5.7 million in 1995 and $4.0 million in 1994. The recorded investment in loans that are considered to be impaired under SFAS No. 114 and SFAS No. 118 totaled approximately $127.6 million at December 31, 1996 and $138.2 million at December 31, 1995. The reserve for loan losses included approximately $4.5 million allocated to $25.0 million of impaired loans at December 31, 1996, and $7.1 million allocated to $20.9 million of impaired loans at December 31, 1995. Impaired loans averaged $149.9 million in 1996 and $109.7 million in 1995. Cash basis interest recognition on these loans, during the time that they were impaired, totaled less than $1 million in each year. Following is a summary of activity for 1996 regarding loans extended to directors and executive officers of the Corporation and its largest subsidiaries or to enterprises in which said individuals had beneficial interests. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons.
=============================================================================== ========================================== (in thousands) - ------------------------------------------------------------------------------- - ------------------------------------------ Outstanding Net change from changes Outstanding at 12/31/95 Additions Repayments in director status at 12/31/96 - ------------------------------------------------------------------------------- - ------------------------------------------ $234,830 $105,102 $(139,547) $(107,239) $93,146 =============================================================================== ==========================================
The following summarizes activity in the reserve for loan losses:
=============================================================================== =========================================== December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ------------------------------------------- Balance, beginning of year $ 452,560 $ 449,485 $ 444,492 Loans charged off (138,121) (118,639) (86,899) Recoveries on loans previously charged off 57,640 54,152 59,394 - ------------------------------------------------------------------------------- - ------------------------------------------- Net charge-offs (80,481) (64,487) (27,505) Provision for loan losses 84,517 59,756 26,176 Loan reserve from acquisitions 1,494 7,806 6,322 - ------------------------------------------------------------------------------- - ------------------------------------------- Balance, end of year $ 458,090 $ 452,560 $ 449,485 =============================================================================== ===========================================
7 PROPERTY AND EQUIPMENT Property and equipment are summarized as follows:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Land $ 115,759 $ 114,935 Buildings 626,118 625,534 Buildings under capital leases 45,382 48,666 Furniture, fixtures and equipment 678,027 683,545 Leasehold improvements 105,611 103,768 Construction in progress 13,036 13,903 - ------------------------------------------------------------------------------- - ------- Total 1,583,933 1,590,351 Less accumulated depreciation/amortization 808,346 789,849 - ------------------------------------------------------------------------------- - ------- Net property and equipment $ 775,587 $ 800,502 =============================================================================== =======
Depreciation and amortization charged to expense in 1996, 1995 and 1994 amounted to $100,497, $97,340, and $92,481, respectively. Property taxes, insurance, and maintenance expense related to property under lease are principally paid by the Corporation. Total rental expense for all operating leases amounted to $31,073, $33,610, and $35,616 in 1996, 1995, and 1994, respectively. 8 INTANGIBLE ASSETS Intangible assets, net of accumulated amortization are summarized as follows:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Goodwill $261,414 $277,983 Core deposit premium 52,681 69,552 Mortgage servicing rights 89,253 67,461 Credit card premium 16,634 20,601 - ------------------------------------------------------------------------------- - ------- Total intangible assets, net $419,982 $435,597 =============================================================================== =======
Intangible assets amortization charged to noninterest expense in 1996, 1995, and 1994 amounted to $40,147, $43,755, and $45,306, respectively. Amortization of mortgage servicing rights charged to mortgage banking revenues in 1996, 1995, and 1994 totaled $12,820, $9,839, and $17,166, respectively. In 1996 and 1995, the Corporation capitalized mortgage servicing rights of approximately $35 million and $40 million, respectively. The fair value of mortgage servicing rights was approximately $111.5 million at December 31 1996 and $87.1 million at December 31, 1995. No impairment writedowns were required in 1996 or 1995 as the fair value of the mortgage servicing rights exceeded carrying value. 9 SEGREGATED ASSETS Included in other assets at December 31, 1996 are segregated assets totaling $53.8 million net of a valuation allowance of $13.4 million. As part of the regulatory assisted acquisition of Missouri Bridge Bank, N.A. (Bridge Bank), on April 23, 1993, the Corporation entered into a loss-sharing arrangement with the FDIC with respect to approximately $950 million in multi-family residential, commercial real estate, construction and commercial loans. During the first five years, the FDIC will reimburse the Corporation for 80 percent of the first $92.0 million of net charge-offs on these loans, after which the FDIC will increase its reimbursement coverage to 95 percent of additional charge-offs. During this period and for two years thereafter, the Corporation is obligated to pay the FDIC 80 percent of all recoveries on charged off loans. Segregated assets are those loans acquired from the Bridge Bank and covered under the loss-sharing arrangement with the FDIC that possess more than the normal risk of collectibility. These assets consist of loans that at acquisition were or have since become classified as nonperforming loans or foreclosed property. The Corporation's primary purpose in managing a portfolio of this nature is to provide ongoing collection and control activities on behalf of the FDIC. Accordingly, these assets do not represent loans made in the ordinary course of business and, due to the underlying nature of this liquidating asset pool, are excluded from the Corporation's nonperforming asset statistics. A summary of activity regarding the segregated asset pool for the years ended December 31, 1996 and 1995, is provided below.
=============================================================================== ============================== Principal Allowance Principal (in millions) balance for losses balance, net - ------------------------------------------------------------------------------- - ------------------------------ Balance at December 31, 1994 $193.9 $16.7 $177.2 Charge-offs (27.7) (5.5) Recoveries 2.1 Net transfers (17.2) Payments on segregated assets (32.4) - ------------------------------------------------------------------------------- - ------------------------------ Balance at December 31, 1995 116.6 13.3 103.3 Charge-offs (6.0) (1.1) Recoveries 6.1 1.2 Net transfers (14.0) Payments on segregated assets (35.5) - ------------------------------------------------------------------------------- - ------------------------------ Balance at December 31, 1996 $ 67.2 $13.4 $ 53.8 =============================================================================== ==============================
10 DEPOSITS Deposits are summarized as follows:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Demand deposits $ 7,354,523 $ 6,894,649 Savings deposits 1,718,417 1,906,996 Interest-bearing transaction accounts 11,731,798 11,603,724 Time deposits $100,000 and over 2,409,003 1,819,633 Retail time deposits 8,740,255 9,753,135 - ------------------------------------------------------------------------------- - ------- Total deposits $31,953,996 $31,978,137 =============================================================================== =======
11 RESERVES ON DEPOSITS Required reserves on deposits, included in the caption "Cash and due from banks," were $447,321 and $487,835 at December 31, 1996 and 1995, respectively. 12 FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Federal funds purchased and securities sold under repurchase agreements generally represent borrowings with overnight maturities. Information relating to these borrowings is summarized as follows:
=============================================================================== =================== (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ------------------- Balance: Average $3,404,028 $2,912,944 $3,497,345 Year end 3,021,109 2,902,973 2,987,315 Maximum month-end balance during year 3,954,828 3,315,915 4,427,373 =============================================================================== =================== Interest rate: Average 5.10% 5.58% 4.32% =============================================================================== =================== Year end 5.50% 5.31% 5.44% =============================================================================== ===================
13 SHORT-TERM BORROWINGS Short-term borrowings are summarized as follows:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Short-term bank notes $1,000,000 $1,265,000 Commercial paper 47,656 49,497 Other 241,748 160,494 - ------------------------------------------------------------------------------- - ------- Total $1,289,404 $1,474,991 =============================================================================== =======
Information relating to short-term bank notes is summarized as follows:
=============================================================================== ======= (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Average balance $ 927,637 $1,648,178 Maximum month-end balance during year 1,225,000 2,015,000 =============================================================================== ======= Interest rate: Average 5.85% 6.29% =============================================================================== ======= Year end 5.37% 6.10% =============================================================================== =======
In 1995, approximately $.9 million of the short-term bank notes were converted to fixed rate debt through the use of interest rate swaps, which matured in the third quarter of 1996. Commercial paper is issued by the parent company in maturities not to exceed nine months. The short-term bank notes are issued by the Corporation's banking subsidiaries generally with maturities of less than one year. Other short-term funds consisted principally of treasury, tax and loan accounts. 14 LONG-TERM DEBT Long-term debt is summarized as follows:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Parent Company: 7-5/8% notes due 2004 $100,000 $100,000 6-3/4% notes due 2003 100,000 100,000 8-5/8% notes due 2003 50,000 50,000 9-1/4% notes due 2001 150,000 150,000 6-1/4% convertible subordinated debentures due 2011 630 772 12% note due 1998 25,000 25,000 - ------------------------------------------------------------------------------- - ------- Total Parent Company 425,630 425,772 - ------------------------------------------------------------------------------- - ------- Subsidiaries: Senior notes due 1998-2000 43,000 43,000 Federal Home Loan Bank notes due through 2016 115,290 119,867 6.55% mortgage note due through 2009 25,096 26,430 Other 54 60 - ------------------------------------------------------------------------------- - ------- Total subsidiaries 183,440 189,357 - ------------------------------------------------------------------------------- - ------- Total long-term debt $609,070 $615,129 =============================================================================== =======
The 7-5/8% subordinated notes and the 6-3/4% subordinated notes were effectively converted to variable rate debt for a portion of the term through the use of interest rate swaps. In 1996, the interest rate swaps designated to the subordinated notes matured. The average interest rates paid on these notes in 1996 and 1995 were 7.48% and 8.53%, respectively. These notes, and the 8-5/8% and 9-1/4% subordinated notes, are not redeemable by the holders or the Corporation prior to maturity. The 6-1/4% convertible subordinated debentures are redeemable at the option of the holder without payment of premium by the Corporation. Redemption rights are subject to an annual noncumulative principal limitation of $25 thousand per holder and $1.2 million in the aggregate. Prepayments in whole or in part may be made at the option of the Corporation with payment of premium. The debentures are convertible into common stock of the Corporation at a conversion price of $16.71 per share, subject to adjustments under certain circumstances. During 1996, 1995 and 1994, $.1 million, $.1 million and $.3 million of the debentures, respectively, were converted into common stock. The 12% note due in 1998 may not be prepaid at the option of the Corporation. The senior notes due 1998-2000 are unsecured and provide for payment of interest semi-annually with principal payable at maturity. Maturities are $10 million due in 1998 priced to yield 7.21%, $10 million due in 1999 priced to yield 7.56%, and $23 million due in 2000 priced to yield 7.81%. The Federal Home Loan Bank notes may be prepaid at the option of the Corporation with payment of premium. The 6.55% mortgage note requires monthly principal and interest payments of $252 thousand. The Corporation may prepay the note without payment of premium. Several of the note agreements contain various financial covenants pertaining to minimum levels of net worth, limitations on additional indebtedness, and limitations on repurchases of common stock and dividend payments. The Corporation was in compliance with all such covenants at December 31, 1996. Obligations of the parent company included above are unsecured, and to a large extent are subordinated in right of payment to any other indebtedness of the Corporation. The indebtedness of the banking subsidiaries is subordinated to rights of depositors. Scheduled principal payments on total long-term debt in each of the five years subsequent to December 31, 1996 are as follows:
================================================= (in thousands) - ------------------------------------------------- Year Parent Company Consolidated - ------------------------------------------------- 1997 $ 630 $ 3,139 1998 25,000 52,637 1999 42,773 2000 55,890 2001 150,000 182,711 =================================================
15 PREFERRED STOCK At December 31, 1996 and December 31, 1995, there were outstanding 9,341 shares and 9,609 shares, respectively, of 7% Cumulative Redeemable Preferred Stock, Series B, $100 per share stated value. Dividends are payable quarterly. The stock is redeemable at the stated value at the option of the holders and has equal voting rights with each share of common stock. At December 31, 1996 and December 31, 1995, there were outstanding 205,524 shares and 248,310 shares, respectively, of nonvoting Class A Cumulative Convertible Preferred Stock. This preferred stock was issued in the form of 4,000,000 depositary shares, each representing a 1/16 interest in a share of preferred stock. Dividends are payable quarterly at an annual rate of $1.75 per depositary share. The depositary shares are not redeemable by the Corporation prior to March 1, 1997. However, they may be converted at the election of shareholders into shares of the Corporation's common stock at a conversion price of $29 per common share, based on a liquidation preference of $25 per depositary share. At December 31, 1996, there were 3,288,384 depositary shares outstanding which could be converted into 2,834,814 shares of the Corporation's common stock. At December 31, 1995, there were 3,972,960 depositary shares outstanding which could be converted into 3,424,972 shares of the Corporation's common stock. 16 COMMON STOCK The Corporation maintains various stock option plans which provide for the issuance of stock to certain key employees of the Corporation. Under certain plans, stock appreciation rights may be granted. The option price under these plans is equivalent to the fair market value of the common stock at the date of grant. Each plan provides for accelerated exercise rights for holders of options in the event of a change in control, which occurred on January 7, 1997 upon the acquisition of the Corporation by NationsBank Corporation. The Corporation has elected to account for its employee stock options under the accounting guidance set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related Interpretations. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The pro forma net earnings and earnings per share disclosure requirements set forth under FASB Statement No. 123, "Accounting for Stock-Based Compensation," has been omitted due to the immaterial impact on reported earnings. The following table summarizes the status of the various plans. Options may no longer be granted under the plans.
=============================================================================== ======================================== 1996 1995 - ------------------------------------------------------------------------------- - ---------------------------------------- Weighted- average Weighted-average Exercise Price Exercise Price Shares Per Share Shares Per Share - ------------------------------------------------------------------------------- - ---------------------------------------- Options granted 1,118,300 $41.871 1,849,932 $30.910 Options exercised 1,716,106 23.866 1,314,635 22.934 Stock appreciation rights exercised 265,509 19.737 24,726 20.581 Options lapsed 106,556 34.098 313,598 26.959 Options outstanding 4,716,106 29.188 5,685,977 24.564 Options exercisable 2,553,613 23.435 3,795,653 21.861 Weighted-average fair value of options granted during the year $9.09 $8.05 =============================================================================== ========================================
Exercise prices for options outstanding as of December 31, 1996 ranged from $5.76 to $41.88. The weighted-average remaining contractual life of those options is 6.8 years. A summary of the Corporation's common stock related plans is provided below. Compensation expense related to the common stock plans totaled $19.9 million in 1996, $18.2 million in 1995, and $15.0 million in 1994. 1990 Stock Purchase Plan for Employees This Plan was terminated on November 15, 1996. It provided eligible employees of the Corporation and its subsidiaries with the opportunity to purchase, at market value, with the Corporation providing a one-third matching contribution, common stock of the Corporation through regular payroll deductions. Dividend Reinvestment and Stock Purchase Plan This plan was terminated on December 31, 1996. 1,600,000 shares of the Corporation's common stock had been reserved for sale, at market value, pursuant to this plan, to holders of record of shares of common stock who elected to use quarterly dividends or optional cash contributions to purchase additional shares. Thrift Incentive 401(k) Plan This is a savings plan for the benefit of employees of the Corporation and its subsidiaries. Participation by eligible employees is voluntary, and participants may contribute at least 2% and up to 12% of their salary, up to certain limits, by regular payroll deductions. All participants' contributions are invested by the trustee, as directed by the participant, in various investment funds, one of which consists solely of the Corporation's common stock. The Corporation matches the contribution made by the employee, in full, up to 3%, which is invested in a separate fund consisting solely of the Corporation's common stock. Shareholder Rights Plan In 1990, the Board of Directors of the Corporation declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The Rights trade automatically with shares of common stock and become exercisable only under certain circumstances. The Rights are designed to protect the interests of the Corporation and its shareholders against coercive takeover tactics. The purpose of the Rights is to encourage potential acquirers to negotiate with the Corporation's Board of Directors prior to attempting a takeover and to give the Board leverage in negotiating on behalf of all shareholders the terms of any proposed takeover. This plan was amended on August 29, 1996 such that the acquisition of the Corporation by NationsBank Corporation would not result in the Rights becoming exercisable. 17 REGULATORY CAPITAL The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the Federal Reserve Board, (FRB)the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of the Corporation's and its banking subsidiaries' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and its banking subsidiaries' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its banking subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). In order to be considered adequately capitalized, an institution must maintain a ratio of Tier I capital to risk-weighted assets of four percent, a ratio of total capital to risk-weighted assets of eight percent and a ratio of Tier I capital to average assets of four percent. To be considered well capitalized, an institution must maintain a ratio of Tier I capital to risk-weighted assets of six percent, a ratio of total capital to risk weighted assets of ten percent and a ratio of Tier I capital to average assets of five percent. At December 31, 1996, the Corporation and its banking subsidiaries met all capital adequacy requirements to which they are subject. As of December 31, 1996 the most recent notification from the FRB and the OCC categorized the Corporation and its banking subsidiaries, respectively, as well capitalized. There are no conditions or events since that notification that management believes have changed either the Corporation's or its banking subsidiaries' categories. The following table presents the actual capital ratios and amounts and minimum required capital amounts for the Corporation and its significant banking subsidiaries (dollars in millions).
=============================================================================== ============================= Amount Required Capital for Minimum Ratio Amount Capital Adequacy - ------------------------------------------------------------------------------- - ----------------------------- December 31, 1996 Tier I capital Boatmen's Bancshares, Inc. 11.35% $3,364 $1,188 The Boatmen's National Bank of St. Louis 8.99 806 359 Boatmen's Kansas, Inc. 10.95 1,068 390 Boatmen's Sunwest Financial Services, Inc. 16.72 348 83 Total capital Boatmen's Bancshares, Inc. 13.87 4,111 2,375 The Boatmen's National Bank of St. Louis 10.24 918 717 Boatmen's Kansas, Inc. 12.20 1,190 780 Boatmen's Sunwest Financial Services, Inc. 17.98 374 166 Leverage capital Boatmen's Bancshares, Inc. 8.23 3,364 1,635 The Boatmen's National Bank of St. Louis 7.18 806 449 Boatmen's Kansas, Inc. 8.13 1,068 525 Boatmen's Sunwest Financial Services, Inc. 8.74 348 159 - ------------------------------------------------------------------------------- - ----------------------------- December 31, 1995 Tier I capital Boatmen's Bancshares, Inc. 11.29% $3,243 $1,149 The Boatmen's National Bank of St. Louis 9.79 818 334 Boatmen's Kansas, Inc. 10.52 1,036 394 Boatmen's Sunwest Financial Services, Inc. 16.02 340 85 Total capital Boatmen's Bancshares, Inc. 13.97 4,013 2,298 The Boatmen's National Bank of St. Louis 11.04 922 668 Boatmen's Kansas, Inc. 11.77 1,160 789 Boatmen's Sunwest Financial Services, Inc. 17.29 368 170 Leverage capital Boatmen's Bancshares, Inc. 7.95 3,243 1,632 The Boatmen's National Bank of St. Louis 7.43 818 440 Boatmen's Kansas, Inc. 7.82 1,036 530 Boatmen's Sunwest Financial Services, Inc. 8.57 340 85 =============================================================================== =============================
18 RETIREMENT BENEFITS Substantially all employees of the Corporation and its subsidiaries are covered by the Boatmen's Bancshares, Inc. Retirement Plan for Employees, a noncontributory defined benefit plan. Pension benefits are based upon the employee's length of service and compensation during the final years of employment. Normal service costs are funded currently using the projected unit credit method. An amendment was made to the Plan as of December 31, 1995 to standardize credited service, which had the effect of increasing the projected benefit obligation by approximately $22.8 million. Contributions to the Plan totaled $23.7 million in 1996, $7.9 million in 1995, and $8.0 million in 1994. Net pension expense for 1996, 1995 and 1994 was comprised of the following:
=============================================================================== ================== Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ------------------ Service cost $22,819 $17,219 $16,413 Interest cost on projected benefit obligation 25,349 20,787 19,656 (Return) loss on plan assets (39,388) (61,712) 1,022 Net amortization and deferral 14,161 37,376 (24,319) - ------------------------------------------------------------------------------- - ------------------ Net pension expense $22,941 $13,670 $12,772 =============================================================================== ==================
The following table sets forth the retirement plan's funded status and amounts recognized in the Corporation's consolidated financial statements:
December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------ Plan assets at fair value, primarily listed stocks and bonds $356,454 $315,572 - ------------------------------------------------------------------------------- - ------ Actuarial present value of benefit obligation: Vested benefits 238,467 239,324 Non-vested benefits 17,836 16,292 - ------------------------------------------------------------------------------- - ------ Accumulated benefit obligation 256,303 255,616 Effect of projected future salary increases 48,871 77,896 - ------------------------------------------------------------------------------- - ------ Projected benefit obligation 305,174 335,512 - ------------------------------------------------------------------------------- - ------ Plan assets in excess of (lower than) projected benefit obligation $ 51,280 $(17,940) =============================================================================== ====== Comprised of: Unrecognized net asset being amortized over 17 years $ 11,406 $ 13,757 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 66,160 (3,025) Unrecognized prior service loss (19,231) (20,706) Prepaid pension liability (7,055) (7,966) - ------------------------------------------------------------------------------- - ------ $ 51,280 $(17,940) =============================================================================== ======
Assumptions used in computing pension expense were:
=============================================================================== ================================ 1996 1995 1994 - ------------------------------------------------------------------------------- - -------------------------------- Weighted average discount rate 7-1/4% 8-8-1/2% 7-7-1/2% Rate of increase in future compensation levels 5 % 4- 3/4-5-1/2% 4-3/4-5% Expected long-term rate of return on assets 8-3/4% 8-3/4% 8-3/4% =============================================================================== ================================
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.00% and 4.00%, respectively, at December 31, 1996 and 7.25% and 4.70%-5.00%, respectively, at December 31, 1995. The Corporation provides postemployment life and contributory medical benefits to retired employees. The liability for such benefits is unfunded and costs of such benefits are accrued in a manner similar to actual pension costs. The following table presents the status of the plans:
=============================================================================== ======= December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ------- Accumulated postretirement benefit obligation: Retirees $50,384 $52,371 Fully eligible active plan participants 14,558 13,962 Other active plan participants 18,829 19,492 - ------------------------------------------------------------------------------- - ------- Total accumulated postretirement benefit obligation 83,771 85,825 - ------------------------------------------------------------------------------- - ------- Unrecognized net gain 13,260 21,867 Unrecognized transition obligation 38,726 38,289 - ------------------------------------------------------------------------------- - ------- Accrued postretirement benefit cost $31,785 $25,669 =============================================================================== =======
Net postretirement benefit cost included the following components:
Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ------------------------ Service cost $ 1,593 $ 1,230 $ 1,460 Interest cost 6,214 6,049 4,924 Amortization of transition obligation over 20 years 3,686 2,906 4,338 - ------------------------------------------------------------------------------- - ------------------------ Net postretirement benefit cost $11,493 $10,185 $10,722 =============================================================================== ========================
The weighted-average annual assumed rates of increase in the per capita cost of covered benefits for the medical plan are 6.50% for pre-65 benefits and 5.25% for post-65 benefits for 1997 (compared to 9.00% assumed for 1996). The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1996 by $7.0 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $.7 million. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.00% at December 31, 1996 and 7.25% at December 31, 1995. 19 INCOME TAXES Income tax expense is summarized as follows:
=============================================================================== ====================== Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - ---------------------- Current: Federal $262,258 $221,860 $211,920 State 37,393 36,299 34,806 - ------------------------------------------------------------------------------- - ---------------------- Total current 299,651 258,159 246,726 - ------------------------------------------------------------------------------- - ---------------------- Deferred: Federal (5,733) 3,970 10,778 State 1,697 (1,119) (3,086) - ------------------------------------------------------------------------------- - ---------------------- Total deferred (4,036) 2,851 7,692 - ------------------------------------------------------------------------------- - ---------------------- Income tax expense $295,615 $261,010 $254,418 =============================================================================== ======================
A reconciliation of the statutory Federal income tax rate with the effective tax rate is as follows:
=============================================================================== ======================= Percent of pre-tax income - ------------------------------------------------------------------------------- - ----------------------- Year ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------- - ----------------------- Statutory rate 35.0% 35.0% 35.0% Tax-exempt securities interest and other income (3.4) (4.0) (4.1) State taxes, net of Federal benefit 3.1 2.9 2.8 Other, net 1.4 1.3 .4 - ------------------------------------------------------------------------------- - ----------------------- Effective rate 36.1% 35.2% 34.1% =============================================================================== =======================
The Corporation's deferred tax asset account was comprised of the following:
=============================================================================== ==== Year ended December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - ---- Deferred tax liabilities: Lease financing $ (76,878) $ (49,793) Depreciation (36,024) (36,767) Purchase accounting adjustment (13,041) (15,111) Other (16,652) (42,546) - ------------------------------------------------------------------------------- - ---- Total deferred tax liabilities (142,595) (144,217) - ------------------------------------------------------------------------------- - ---- Deferred tax assets: Provision for loan loss 188,044 182,620 Deferred compensation arrangements 16,572 15,313 Intangibles 8,540 18,697 Net operating loss carryforwards 17,976 22,976 Other 67,934 46,207 - ------------------------------------------------------------------------------- - ---- Total deferred tax assets 299,066 285,813 - ------------------------------------------------------------------------------- - ---- Net deferred tax asset $ 156,471 $ 141,596 =============================================================================== ====
At December 31, 1996, the Corporation had net operating loss carryforwards of $43,962, all of which relate to net operating losses of acquired companies. Net operating loss carryforwards expire in years 1999 through 2007. The Corporation has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred asset will be realized through either carryback to taxable income in prior years, future reversals of existing taxable temporary differences or, to a lesser extent, future taxable income. 20 FAIR VALUE OF FINANCIAL INSTRUMENTS The reported fair values of financial instruments are based on a variety of factors. Where possible, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Intangible values assigned to customer relationships are not reflected in the reported fair values. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future. The carrying amounts reported in the balance sheet for cash and due from banks, short-term investments, Federal funds sold and securities purchased under resale agreements approximate fair value. Fair values for held to maturity securities, available for sale securities, and trading securities are based on quoted market prices or dealer quotes. If quoted prices are not available for the specific security, fair values are based on quoted market prices of comparable instruments. The fair values of 1-4 family residential loans, home equity and other homogeneous categories of consumer loans are estimated using quoted market prices for similar traded loans or securities backed by such loans, adjusted for differences between the quoted instruments and the instrument being valued. The fair values for other loans are estimated using a discounted cash flow analysis, based on interest rates currently offered for loans with similar terms to borrowers of similar credit quality or in some situations, due to the variable rate nature of the instrument, carrying value and fair value are considered one and the same. Fair values for nonperforming loans are estimated using assumptions regarding current assessments of collectibility and historical loss experience. By definition fair values of deposits with no stated maturities, such as demand deposits, savings and NOW accounts and money market deposit accounts, are equal to the amounts payable on demand at the reporting date. The fair values of all other fixed rate deposits are based on discounted cash flows using rates currently offered for deposits of similar remaining maturities. The carrying amounts of variable rate deposits approximate fair value at the reporting date. The carrying amounts of Federal funds purchased and other short-term borrowings approximate their fair values as of the reporting date. The fair value of long-term debt is based on quoted market prices for similar issues, or current rates offered to the Corporation for debt of the same remaining maturity. The fair values of interest rate swaps and foreign exchange contracts are estimated using dealer quotes. These values represent the costs to replace all outstanding contracts at current market rates, taking into consideration the current credit worthiness of the counterparties. The fair values of loan commitments, commercial letters of credit and standby letters of credit are determined using estimated fees currently charged to enter into similar agreements. The fair value of loan commitments totaled approximately $2.9 million and $1.9 million at December 31, 1996 and 1995, respectively. The fair value of commercial and standby letters of credit totaled approximately $1.6 million and $1.5 million at December 31, 1996 and 1995, respectively. The estimated fair values of the Corporation's financial instruments were as follows:
=============================================================================== ======= December 31, 1996 (in millions) Carrying amount Fair value - ------------------------------------------------------------------------------- - ------- Financial assets: Cash and due from banks and short-term investments $ 3,251.6 $ 3,251.6 Held to maturity securities 1,003.4 1,039.6 Available for sale securities 10,518.7 10,518.7 Trading securities 28.4 28.4 Loans 24,146.6 24,303.4 Financial liabilities: Deposits 31,954.0 32,019.5 Short-term borrowings 1,289.4 1,289.4 Long-term debt 609.1 616.3 Off-balance sheet financial instruments: Interest rate contracts: Asset/liability management 4.6 3.8 Customer contracts held in trading portfolio 2.5 2.5 Foreign exchange contracts held in trading portfolio .1 .1 =============================================================================== ======= December 31, 1995 (in millions) Carrying amount Fair value - ------------------------------------------------------------------------------- - ------- Financial assets: Cash and due from banks and short-term investments $ 3,920.6 $ 3,920.6 Held to maturity securities 923.1 973.8 Available for sale securities 10,347.2 10,347.2 Trading securities 58.4 58.4 Loans 23,598.3 23,939.7 Financial liabilities: Deposits 31,978.1 32,065.2 Short-term borrowings 4,378.0 4,378.0 Long-term debt 615.1 660.5 Off-balance sheet financial instruments: Interest rate contracts: Asset/liability management (1.1) (5.2) Customer swaps held in trading portfolio 1.6 1.6 Foreign exchange contracts held in trading portfolio .5 .5 =============================================================================== =======
21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Corporation utilizes a variety of off-balance sheet financial instruments to service the financial needs of customers and to manage the Corporation's overall asset/liability position. This activity includes commitments to extend credit, standby and commercial letters of credit, securities lending, interest rate contracts and foreign exchange contracts. Each of these instruments involve varying degrees of risk. As such, the contract or notional amounts of these instruments may or may not be an appropriate indicator of the credit or market risk associated with these instruments. Generally accepted accounting principles recognize these instruments as contingent obligations or off-balance sheet items and accordingly, the contract or notional amounts are not reflected in the consolidated financial statements. A summary of the Corporation's off-balance sheet financial instruments at December 31, 1996 and 1995 is presented as follows.
=============================================================================== ======= Financial instruments held for other than trading purposes whose credit risk is represented by contract amounts - ------------------------------------------------------------------------------- - ------- December 31 (in millions) 1996 1995 - ------------------------------------------------------------------------------- - ------- Commitments to extend credit $10,715.1 $10,742.6 Standby letters of credit 1,239.5 1,162.1 Commercial letters of credit 109.5 111.1 Forward commitments 234.6 86.6 Securities lent 3,797.4 2,719.4 - ------------------------------------------------------------------------------- - ------- Total $16,096.1 $14,821.8 =============================================================================== ======= Financial instruments whose credit risk is represented by other than notional or contract amounts - ------------------------------------------------------------------------------- - ------- December 31 (in millions) 1996 1995 - ------------------------------------------------------------------------------- - ------- Foreign exchange contracts held in trading portfolio: Commitments to purchase $ 554.8 $ 344.3 Commitments to sell 672.6 426.9 Interest rate contracts: Asset/liability management 2,593.0 2,803.6 Customer contracts held in trading portfolio 1,259.8 1,280.7 - ------------------------------------------------------------------------------- - ------- Total $5,080.2 $4,855.5 =============================================================================== =======
A loan commitment represents a contractual agreement to lend up to a specified amount, over a stated period of time as long as there is no violation of any condition established in the contract, and generally requires the payment of a fee. Standby letters of credit are issued to improve a customer's credit standing with third parties, whereby the Corporation agrees to honor a financial commitment by issuing a guarantee to third parties in the event the Corporation's customer fails to perform. Since loan commitment amounts generally exceed actual funding requirements and virtually all of the standby letters of credit are expected to expire unfunded, the total commitment amounts do not represent future cash requirements. The Corporation's exposure to credit loss from loan commitments, standby letters of credit and commercial letters of credit is measured by the contract amount of these instruments. This credit risk is minimized by subjecting these off-balance sheet instruments to the same credit policies and underwriting standards used when making loans. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on such evaluations. Acceptable collateral includes cash or cash equivalents, marketable securities, deeds of trust, receivables, inventory, fixed assets and financial guarantees. Interest rates, in the event funding of the aforementioned commitments are required, are predominantly based on floating rates or prevailing market rates at the time such commitments are funded. Substantially all of these commitments expire in 1-2 years unless renewed by the Corporation. Commercial letters of credit are short-term commitments issued for trade purposes, primarily to finance the movement of goods between a buyer and seller dealing in international markets. The Corporation, through its mortgage banking subsidiary, obtains mandatory forward commitments of up to 120 days to sell mortgage backed securities to hedge the market risk associated with a substantial portion of the mortgage loan commitments that are expected to close (mortgage loan pipeline), and all mortgage loans held for sale. The Company's risk management function closely monitors the mortgage loan pipeline to determine appropriate forward commitment coverage on a daily basis in order to manage the risk inherent in these off-balance-sheet financial instruments. The Corporation, through its trust subsidiary, is involved in off-balance sheet securities lending. In this capacity, the Corporation, acting as agent, lends securities on behalf of its customers to third party borrowers. The Corporation indemnifies its customers against losses in the event of counterparty default, and minimizes this risk through collateral requirements and limiting transactions to pre-approved borrowers. Collateral policies require each borrower to initially deliver cash or securities equal to or exceeding 102% of the market value of the securities lent. Additional collateral is required through the term of the lending agreement to ensure that the value of collateral exceeds the market value of the securities lent. Interest rate risk associated with securities lending activities arises from rate movements affecting the spread between the rebate rate paid to the borrower on his collateral and the rate earned on that collateral. This risk is controlled through policies that limit the level of interest rate risk which can be undertaken. The Corporation enters into interest rate contracts primarily as part of its asset/liability management strategy to manage interest-rate risk. These transactions involve the exchange of interest payments based on a notional amount. The notional amounts of interest rate contracts express the volume of transactions and are not an appropriate indicator of the off-balance sheet market risk or credit risk. The credit risk associated with interest rate contracts arises from the counterparties' failure to meet the terms of the agreements and is limited to the fair value of contracts in a gain (favorable) position. The Corporation manages this risk by maintaining a well-diversified portfolio of highly-rated counterparties in addition to imposing limits as to types, amounts and degree of risk the portfolio can undertake. The limits are approved by senior management and positions are monitored to ensure compliance with such limits. The credit risk exposure at December 31, 1996 is minimal as virtually all contracts were in an unfavorable position. An effective asset/liability management function is required to address the interest rate risk inherent in the Corporation's core banking activities. If no other management action is taken, these core banking activities, which include lending and deposit products, result in an asset-sensitive position. Accordingly, the Corporation utilizes a variety of discretionary on- and off-balance sheet strategies to prudently manage the overall interest rate sensitivity position. The Corporation's interest rate risk exposure is currently limited, by policy, to 5% of projected annual net income. Adherence to these risk limits is controlled and monitored through simulation modeling techniques that consider the impact alternative interest rate scenarios will have on the Corporation's financial results. In 1996, $1.5 billion of interest rate floors were added and $1.7 billion of interest rate swaps matured such that at December 31, 1996, the notional value of interest rate derivative contracts totaled $2.6 billion. The interest rate floors added in 1996 were purchased as a means to offset the potential impact of an implicit floor in the Corporation's administered-rate retail deposits in a low rate environment. The Corporation will receive interest payments on the floor contracts if the 3 year U.S. Treasury rate falls below 5.40%. The contracts are effective from April 1997 until April 1999. Interest rate swaps added in 1995 were executed as a means to convert a portion of the Corporation's variable rate bank notes to fixed rate instruments. Interest rate swaps executed in years prior to 1995 were undertaken to modify the interest rate sensitivity of the Corporation's prime-based loan portfolio, converting a portion of these loans to fixed rate instruments. Additionally, the Corporation has utilized swaps to convert a portion of its long-term fixed rate debt to a floating rate basis. Periodic correlation assessments are performed to ensure that the derivative instruments are effectively modifying the interest rate characteristics of the respective balance sheet items. As summarized in the following table, the swap portfolio is primarily comprised of contracts wherein the Corporation receives a fixed rate of interest while paying a variable rate. As such, the income contribution from the swap portfolio will decrease in a rising rate environment and increase in a falling rate environment. The average rate received at December 31, 1996, was 5.55% compared to an average rate paid of 5.59%, and the average remaining maturity of the total portfolio was less than one year. The variable rate component of the interest rate swaps is based on LIBOR as of the most recent reset date. The interest rate swaps are not leveraged in that they reset in step with rate movements in the underlying index. A summary of the interest rate contracts for the years ended December 31, 1996 and December 31, 1995 is provided below.
=============================================================================== ========================================= Derivative Portfolio Activity Interest Rate Swaps ----------------------------------------------- Receive Pay Basis (in millions) Fixed Fixed Swaps Total Floors Total - ------------------------------------------------------------------------------- - ----------------------------------------- Notional amount, December 31, 1994 $2,151 $131 $250 $2,532 $2,532 Additions 850 850 850 Maturities (323) (102) (153) (578) (578) - ------------------------------------------------------------------------------- - ----------------------------------------- Notional amount, December 31, 1995 1,828 879 97 2,804 2,804 Additions 1,500 1,500 Maturities (744) (879) (88) (1,711) (1,711) - ------------------------------------------------------------------------------- - ----------------------------------------- Notional amount, December 31, 1996 $1,084 $ - $ 9 $1,093 $1,500 $2,593 =============================================================================== ========================================= At December 31, 1996: Average remaining maturity (years) .2 .1 .2 2.3 1.4 Weighted average rate received 5.54% 6.31% 5.55% Weighted average rate paid 5.59 5.54 5.59 =============================================================================== ========================================= At December 31, 1995: Average remaining maturity (years) .9 .5 .2 .7 Weighted average rate received 5.58% 5.88% 6.76% 5.71% Weighted average rate paid 5.99 6.29 6.06 6.09 =============================================================================== =========================================
Summarized below is the unrealized gain (loss) associated with the interest rate contract portfolio at December 31, 1996 and 1995.
=============================================================================== ========================================= December 31, 1996 December 31, 1995 - ------------------------------------------------------------------------------- - ----------------------------------------- Asset/Liability Management Contracts Notional Unrealized Notional Unrealized (in millions) Amount Gain (loss) Amount Gain (loss) - ------------------------------------------------------------------------------- - ----------------------------------------- Interest rate swaps: Prime loan swaps: Receive fixed $1,083 $(.6) $1,505 $(2.0) Basis swaps 9 - - 97 .2 - ------------------------------------------------------------------------------- - ----------------------------------------- Total prime loan swaps 1,092 (.6) 1,602 (1.8) Long-term debt swaps 200 (.7) Bank note liability swaps 850 (2.5) Other 1 - - 152 (.2) - ------------------------------------------------------------------------------- - ----------------------------------------- Total interest rate swaps 1,093 (.6) 2,804 (5.2) Interest rate floors 1,500 (.3) - ------------------------------------------------------------------------------- - ----------------------------------------- Total $2,593 $(.9) $2,804 $(5.2) =============================================================================== =========================================
Interest income and expense on interest rate contracts used to manage the Corporation's overall interest rate sensitivity position is recorded on an accrual basis as an adjustment of the yield of the related asset or liability over the periods covered by the contracts. The derivative portfolio decreased net interest income by approximately $4 million in 1996 and $13 million in 1995, resulting in reductions in the net interest margin of approximately 1 basis point and 4 basis points, respectively. Based on interest rates at December 31, 1996, it is anticipated that the derivative portfolio will reduce net interest income by approximately $2 million in 1997 and 1998. The estimated fair value of the derivative portfolio, based on dealer quotes, was an unrealized loss of $.9 million at December 31, 1996, compared to an unrealized loss of $5.2 million at December 31, 1995. The Corporation's operating and liquidity position is not expected to be materially impacted by the unrealized loss inherent in the derivative portfolio. Approximately 97% of the interest rate swap portfolio is comprised of indexed amortizing swaps, whereby the maturity distribution could lengthen if interest rates increase from current levels. Assuming interest rates were to increase 200 basis points from their current levels, the average maturity distribution of the swap portfolio would extend by approximately two years, but in no event would any component of the swap portfolio extend beyond three years. The decision to use indexed amortizing swaps rather than some other financial instrument is analogous to choices made between using on-balance sheet instruments such as mortgage-backed securities and Treasury securities. While both instruments can be effective at reducing the risk associated with the asset sensitive profile of the core banking activities, the Corporation frequently chooses to assume some modest extension/contraction characteristics associated with investing in a mortgage-backed security. Indexed amortizing swaps and mortgage-backed securities are similar in nature in that the notional or principal values decline over time and changes in market rates impact the degree to which the underlying instrument amortizes. The specific indexed amortizing swaps used by the Corporation have a minimum term which can potentially lengthen to a specified final maturity depending on the level of movement in interest rates. While the underlying characteristics of the specific indexed amortizing swaps used by the Corporation are similar to on-balance sheet mortgage-backed securities, prepayment and other risk factors are more predictable due to the structural features inherent in the swaps. Any future utilization of off-balance sheet financial instruments will be determined based upon the Corporation's overall interest rate sensitivity position and asset/liability management strategies. The Corporation has not terminated any of its interest rate contract positions. Accordingly, there have been no deferred gains/losses associated with this activity. While the Corporation is primarily an end-user of derivative instruments, it does act as an intermediary to meet the financial needs of its customers. In this capacity, the Corporation executes foreign exchange transactions and interest rate contracts to provide customers with capital markets products to meet their financial objectives. All positions are reported at fair value and changes in fair values are reflected in investment banking revenues, a component of noninterest income, as they occur. Interest rate risk associated with the customer derivative portfolio is controlled by entering into offsetting positions with third parties. Including these offsetting positions, the notional amount of the customer interest rate contract portfolio at December 31, 1996 totaled approximately $1.3 billion. Credit risk associated with this activity is minimized by limiting transactions to highly rated counterparties and through collateral agreements. Collateral is required to be delivered when the credit risk exceeds acceptable thresholds, for certain counterparties. Collateral thresholds are established based on the creditworthiness of the counterparty and are bilateral. Acceptable collateral is primarily limited to U.S. Treasury and Federal agency securities. Foreign exchange activity, which is marked to market based on prevailing rates of exchange, can expose the Corporation to market risk, particularly when open positions exist, and, to a lesser extent, credit risk associated with counterparties and their ability to meet the terms of the foreign exchange contracts. The Corporation minimizes market risk associated with foreign exchange activity by establishing limits which prohibit traders from maintaining significant open positions on a daily basis. The Corporation's exposure to credit risk on foreign exchange contracts and customer swap contracts is measured as the cost of replacing the contract in the event of default by the counterparty which is limited to the market value of all contracts in a gain position. The Corporation controls this credit risk by maintaining a well diversified portfolio of highly rated counterparties and imposing counterparty limits and collateral protection which is monitored by a credit committee for compliance. In addition, counterparty credit risk for all derivative activity is managed by subjecting these transactions to credit policies and underwriting standards consistent with that used when making commitments to extend credit. At December 31, 1996, the Corporation's credit exposure from these interest rate and foreign exchange contracts totaled $10.8 million and $21.5 million, respectively. The following summarizes the fair value at period end and the average fair value for the years ended December 31, 1996 and 1995 for derivatives held or issued for trading purposes.
=============================================================================== ======================================= Derivatives Held or Issued for Trading Purposes--Fair Value 1996 1995 - ------------------------------------------------------------------------------- - --------------------------------------- (in millions) Period end Average Period end Average - ------------------------------------------------------------------------------- - --------------------------------------- Interest-rate derivative contracts: Assets $10.8 $ 9.1 $ 8.4 $ 4.9 Liabilities (8.3) (6.8) (6.8) (3.9) Foreign exchange contracts: Assets 21.5 15.7 10.7 19.4 Liabilities (21.4) (15.5) (10.2) (18.2) =============================================================================== =======================================
Net trading gains recognized in earnings on interest rate contracts outstanding totaled $2.9 million in 1996, $1.3 million in 1995 and $.2 million in 1994. Net trading gains from foreign exchange contracts totaled $6.9 million in 1996, $6.9 million in 1995 and $5.9 million in 1994. 22 PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Following are the condensed financial statements of Boatmen's Bancshares, Inc. (Parent Company only) for the periods indicated:
Balance Sheet =============================================================================== ======== December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - -------- Assets: Cash $ 922 $ 834 Short-term investments 1,718 2,398 Investment in subsidiaries: Banks and bank holding companies 3,514,311 3,504,291 Nonbanks 326,604 239,750 - ------------------------------------------------------------------------------- - -------- Total investment in subsidiaries 3,840,915 3,744,041 - ------------------------------------------------------------------------------- - -------- Advances to subsidiaries: Banks 274,112 257,901 Nonbanks 56,884 57,163 - ------------------------------------------------------------------------------- - -------- Total advances to subsidiaries 330,996 315,064 - ------------------------------------------------------------------------------- - -------- Goodwill 78,953 84,413 Other assets 71,785 55,544 - ------------------------------------------------------------------------------- - -------- Total assets 4,325,289 $4,202,294 =============================================================================== ======== Liabilities: Accounts payable and accrued liabilities $ 113,920 $ 78,342 Dividends payable 65,514 47,936 Short-term borrowings 47,656 49,497 Long-term debt 425,630 425,772 - ------------------------------------------------------------------------------- - -------- Total liabilities 652,720 601,547 - ------------------------------------------------------------------------------- - -------- Redeemable preferred stock 934 961 - ------------------------------------------------------------------------------- - -------- Stockholders' equity: Preferred stock 82,147 99,324 Common stock 158,400 158,068 Surplus 1,199,692 1,212,838 Unrealized net appreciation (depreciation), available for sale securities (6,131) 10,476 Retained earnings 2,405,658 2,137,176 Treasury stock (168,131) (18,096) - ------------------------------------------------------------------------------- - -------- Total stockholders' equity 3,671,635 3,599,786 - ------------------------------------------------------------------------------- - -------- Total liabilities and stockholders' equity 4,325,289 $4,202,294 =============================================================================== ========
Statement of Income =============================================================================== ========================== Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - -------------------------- Income: Dividends from subsidiaries: Banks and bank holding companies $575,638 $276,654 $219,676 Nonbanks 29,398 18,118 26,019 - ------------------------------------------------------------------------------- - -------------------------- Total dividends from subsidiaries 605,036 294,772 245,695 - ------------------------------------------------------------------------------- - -------------------------- Fees from subsidiaries 16,419 14,436 15,177 Interest on short-term investments 85 146 829 Interest on advances to subsidiaries 13,142 16,114 11,545 Other 3,319 5,912 760 - ------------------------------------------------------------------------------- - -------------------------- Total income 638,001 331,380 274,006 - ------------------------------------------------------------------------------- - -------------------------- Expense: Interest expense 39,046 41,116 35,924 Staff expense 48,157 40,523 29,691 Other 65,584 34,143 23,971 - ------------------------------------------------------------------------------- - -------------------------- Total expense 152,787 115,782 89,586 - ------------------------------------------------------------------------------- - -------------------------- Income before income tax benefit and equity in undistributed income of subsidiaries 485,214 215,598 184,420 Income tax benefit 37,382 23,499 18,465 - ------------------------------------------------------------------------------- - -------------------------- Income before equity in undistributed income of subsidiaries 522,596 239,097 202,885 Equity in undistributed income of subsidiaries 172 240,914 288,041 - ------------------------------------------------------------------------------- - -------------------------- Net income $522,768 $480,011 $490,926 =============================================================================== ==========================
Retained earnings include $1,887,481 and $1,887,309 of equity in undistributed income of subsidiaries at year-end 1996 and 1995, respectively. Annual dividend distributions to the Corporation from its banking subsidiaries are subject to certain limitations by applicable banking regulatory authorities. In the aggregate, the statutory maximum available dividends which may be paid to the Corporation without prior regulatory approval is $678,245, resulting in $3,137,294 or 82.2% of the total equity of the subsidiaries being potentially restricted as of December 31, 1996.
Statement of Cash Flows =============================================================================== ========================== Year ended December 31 (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------- - -------------------------- Cash flows from operating activities: Net income $ 552,768 $ 480,011 $ 490,926 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,167 4,458 4,435 Equity in undistributed income of subsidiaries (172) (240,914) (288,041) (Gain) loss on sale of assets 474 (5,049) 30 Increase (decrease) in taxes payable (10,545) (5,311) (3,435) Other, net 31,005 26,374 14,452 - ------------------------------------------------------------------------------- - -------------------------- Net cash provided by operating activities 547,697 259,569 218,367 - ------------------------------------------------------------------------------- - -------------------------- Cash flows from investment activities: Purchase of net assets and increase in investment in subsidiaries (90,191) (57,985) (26,524) Net change in advances to subsidiaries (15,932) 9,641 (54,903) Net change in short-term investments 680 1,665 12,340 Net change in property and equipment (68) (183) 50 - ------------------------------------------------------------------------------- - -------------------------- Net cash used for investing activities (105,511) (46,862) (69,037) - ------------------------------------------------------------------------------- - -------------------------- Cash flows from financing activities: Net change in short-term borrowings (1,841) 5,966 (6,103) Repayments of long-term debt (14) (1) Cash dividends paid (236,613) (170,757) (132,690) Common stock issued pursuant to various employee and shareholder stock issuance plans 58,763 29,561 4,530 Acquisition of treasury stock (262,380) (76,479) (15,406) Decrease in redeemable preferred stock (27) (183) (13) - ------------------------------------------------------------------------------- - -------------------------- Net cash used for financing activities (442,098) (211,906) (149,683) - ------------------------------------------------------------------------------- - -------------------------- Increase (decrease) in cash 88 801 (353) Cash at beginning of year 834 33 386 - ------------------------------------------------------------------------------- - -------------------------- Cash at end of year $ 922 $ 834 $ 33 =============================================================================== ==========================
23 LEGAL PROCEEDINGS Various claims and lawsuits, incidental to the ordinary course of business, are pending against the Corporation and its subsidiaries. In the opinion of management, after consultation with legal counsel, resolution of these matters is not expected to have a material effect on the consolidated financial statements. 24 QUARTERLY INFORMATION (Unaudited)
Summary of Fourth Quarter Earnings =============================================================================== ========================== Quarter ended December 31 (in thousands) 1996 1995 - ------------------------------------------------------------------------------- - -------------------------- Net interest income $400,321 $383,934 Provision for loan losses 19,675 26,451 - ------------------------------------------------------------------------------- - -------------------------- Net interest income after provision for loan losses 380,646 357,483 - ------------------------------------------------------------------------------- - -------------------------- Noninterest income 203,497 208,788 Noninterest expense 367,873 368,781 - ------------------------------------------------------------------------------- - -------------------------- Income before income tax expense 216,270 197,490 - ------------------------------------------------------------------------------- - -------------------------- Income tax expense 76,023 69,229 - ------------------------------------------------------------------------------- - -------------------------- Net income $140,247 $128,261 =============================================================================== ========================== Net income per common share $.89 $.81 =============================================================================== ========================== Dividends declared per share $.42 $.37 =============================================================================== ==========================
25 SUBSEQUENT EVENT On January 7, 1997 the Corporation merged into NationsBank Corporation (NationsBank). Under the terms of the agreement, each outstanding share of the Corporation's common stock was converted into the right to receive .6525 shares of NationsBank common stock, or, at the election of the Corporation's common shareholder, an equivalent amount of cash. REPORT OF INDEPENDENT AUDITORS The Board of Directors NB Holdings Corporation (successor to Boatmen's Bancshares, Inc.) We have audited the accompanying consolidated balance sheet of Boatmen's Bancshares, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the management of Boatmen's Bancshares, Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Boatmen's Bancshares, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP St. Louis, Missouri January 13, 1997 EX-99 3 EX-99.2 CONSENT REPORT Exhibit 99.2 Consent of Ernst & Young LLP We consent to the incorporation by reference in the Registration Statements and in the related Prospectuses listed below of NationsBank Corporation of our report dated January 13, 1997, with respect to the consolidated financial statements of Boatmen's Bancshares, Inc. included in this Current Report on Form 8-K for the year ended December 31, 1996. Form Registration Number S-3 33-44826 S-3 33-57533 S-3 33-63097 S-3 333-7229 S-3 333-13811 S-3 333-15375 S-3 333-18273 S-8 2-91958 S-8 2-73761 S-8 2-80406 S-8 33-45279 S-8 33-48883 S-8 33-60695 S-8 333-02875 S-8 333-07105 S-8 Post Effective Amendment No. 1 33-43125 S-8 Post Effective Amendment No. 1 33-55145 S-8 Post Effective Amendment No. 1 33-63351 S-8 Post Effective Amendment No. 1 33-62069 S-8 Post Effective Amendment No. 1 33-62208 S-8 Post Effective Amendment No. 1 333-16189 St. Louis, Missouri /s/ Ernst & Young LLP March 27, 1997 -----END PRIVACY-ENHANCED MESSAGE-----