-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, M8hfHQFJ/FW/md0T10LbrJ9GuNA3qTNThPRLlEO7SnG/H9EmEgcfwPnhDhklersc +vSOGgFzo26U+AmYr3+j7A== 0000898430-94-000833.txt : 19941111 0000898430-94-000833.hdr.sgml : 19941111 ACCESSION NUMBER: 0000898430-94-000833 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941110 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKAMERICA CORP CENTRAL INDEX KEY: 0000009672 STANDARD INDUSTRIAL CLASSIFICATION: 6021 IRS NUMBER: 941681731 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07377 FILM NUMBER: 94558811 BUSINESS ADDRESS: STREET 1: BANK OF AMERICA CTR STREET 2: 555 CALIFORNIA ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156223530 MAIL ADDRESS: STREET 1: 555 CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 THIRD QUARTER 1994 10-Q BankAmerica Corporation Analytical Review and Form 10-Q [BANKAMERICA CORPORATION LOGO APPEARS HERE] 1994 3rd Quarter SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1994 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-7377 EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER: BankAmerica Corporation STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION: Delaware I.R.S. EMPLOYER IDENTIFICATION NUMBER: 94-1681731 ADDRESS OF PRINCIPAL EXECUTIVE OFFICES: Bank of America Center San Francisco, California 94104 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 415-622-3530 FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $1.5625 par value ------ 370,206,155 shares outstanding on September 30, 1994.* *In addition, 696,911 shares were held in treasury. - -------------------------------------------------------------------------------- This document serves both as an analytical review for analysts, shareholders, and other interested persons, and as the quarterly report on Form 10-Q of BankAmerica Corporation to the Securities and Exchange Commission, which has taken no action to approve or disapprove the report or to pass upon its accuracy or adequacy. Additionally, this document is to be read in conjunction with the consolidated financial statements and notes thereto included in BankAmerica Corporation's Annual Report on Form 10-K for the year ended December 31, 1993. CONTENTS ================================================================================================================== PART I Item 1. FINANCIAL Financial Statements: INFORMATION Consolidated Statement of Operations............................................... 2 Consolidated Balance Sheet......................................................... 3 Consolidated Statement of Cash Flows............................................... 4 Consolidated Statement of Changes in Stockholders' Equity.......................... 5 Notes to Consolidated Financial Statements......................................... 6 Item 2. Management's Discussion and Analysis: Highlights......................................................................... 15 Business Sectors................................................................... 17 Results of Operations: Net Interest Income.............................................................. 20 Noninterest Income............................................................... 20 Noninterest Expense.............................................................. 22 Income Taxes..................................................................... 23 Balance Sheet Analysis............................................................. 24 Overview of Loan Portfolio....................................................... 26 Domestic Consumer Loans........................................................ 26 Domestic Commercial Loans...................................................... 28 Foreign Loans.................................................................. 29 Restructuring Country Debt....................................................... 30 Credit Risk Management: Allowance for Credit Losses...................................................... 32 Nonaccrual Assets, Restructured Loans, and Loans Past Due 90 Days or More and Still Accruing Interest...................... 34 Foreign Exchange and Other Derivatives............................................. 38 Funding and Capital: Liquidity........................................................................ 40 Capital.......................................................................... 40 Interest Rate Risk Management.................................................... 42 - ------------------------------------------------------------------------------------------------------------------ PART II Item 6. OTHER INFORMATION Exhibits and Reports on Form 8-K...................................................... 44 Signatures............................................................................ 45 ==================================================================================================================
1
FINANCIAL STATEMENTS BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS ============================================================================================================================== 1994 1993 NINE MONTHS ENDED -------------------------- ---------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ----------------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans, including fees $2,510 $2,294 $2,206 $2,329 $2,345 $7,010 $7,134 Interest-bearing deposits in banks 87 74 56 54 49 217 140 Federal funds sold 16 15 13 6 12 44 29 Securities purchased under resale agreements 84 89 72 54 51 245 120 Trading account assets 116 122 111 102 111 349 270 Available-for-sale and held-to-maturity securities 340 345 355 331 377 1,040 1,058 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 3,153 2,939 2,813 2,876 2,945 8,905 8,751 INTEREST EXPENSE Deposits 868 753 697 715 732 2,318 2,256 Federal funds purchased 6 3 3 4 3 12 12 Securities sold under repurchase agreements 82 97 79 46 55 258 112 Other short-term borrowings 71 59 61 56 51 191 145 Long-term debt 211 185 169 177 184 565 550 Subordinated capital notes 11 10 10 13 39 31 100 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 1,249 1,107 1,019 1,011 1,064 3,375 3,175 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 1,904 1,832 1,794 1,865 1,881 5,530 5,576 Provision for credit losses 110 125 125 150 178 360 653 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,794 1,707 1,669 1,715 1,703 5,170 4,923 NONINTEREST INCOME Deposit account fees 301 290 294 302 306 885 896 Credit card fees 86 85 82 95 88 253 259 Trust fees 69 66 67 72 74 202 222 Other fees and commissions 279 262 266 268 275 807 815 Net trading account related 57 36 16 46 56 109 198 Foreign exchange trading related 63 73 58 55 76 194 270 Net gain (loss) on available-for-sale securities (2) 7 20 16 14 25 45 Net gain on sales of assets 33 20 45 45 17 98 61 Venture capital activities 33 32 31 53 24 96 76 Other income 156 147 124 167 77 427 312 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST INCOME 1,075 1,018 1,003 1,119 1,007 3,096 3,154 NONINTEREST EXPENSE Salaries 741 700 710 729 744 2,151 2,157 Employee benefits 186 180 158 138 140 524 435 Occupancy 171 167 165 182 172 503 502 Equipment 145 138 146 174 145 429 436 Amortization of intangibles 100 99 105 115 100 304 306 Communications 79 80 78 81 82 237 249 Regulatory fees and related expenses 72 72 70 74 72 214 235 Professional services 54 53 58 73 63 165 195 Other expense 390 332 294 408 330 1,016 994 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSE 1,938 1,821 1,784 1,974 1,848 5,543 5,509 - ------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 931 904 888 860 862 2,723 2,568 Provision for income taxes 384 379 375 364 376 1,138 1,110 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 547 $ 525 $ 513 $ 496 $ 486 $ 1,585 $ 1,458 - ---------------------------------------------------------===================================================================== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 1.36 $ 1.33 $ 1.27 $ 1.21 $ 1.19 $ 3.95 $ 3.58 EARNINGS PER COMMON SHARE -- ASSUMING FULL DILUTION $ 1.35 $ 1.32 $ 1.26 $ 1.21 $ 1.18 $ 3.93 $ 3.56 - ------------------------------------------------------------------------------------------------------------------------------ DIVIDENDS DECLARED PER COMMON SHARE $ 0.40 $ 0.40 $ 0.40 $ 0.35 $ 0.35 $ 1.20 $ 1.05 ==============================================================================================================================
See notes to consolidated financial statements. 2
BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ============================================================================================================== 1994 1993 ------------------------------ ------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 12,493 $ 10,137 $ 10,455 $ 10,482 $ 10,410 Interest-bearing deposits in banks 4,884 4,707 3,978 2,988 2,646 Federal funds sold 570 2,758 2,549 2,050 2,036 Securities purchased under resale agreements 4,474 4,933 5,995 3,549 2,393 Trading account assets 7,103 5,714 6,648 6,866 7,845 Available-for-sale securities 11,166 8,938 9,413 3,282 3,515 Held-to-maturity securities 8,700 11,734 11,979 16,415 16,810 Loans 138,691 124,874 123,544 126,556 125,976 Less: Allowance for credit losses 3,625 3,414 3,445 3,508 3,715 - -------------------------------------------------------------------------------------------------------------- Net loans 135,066 121,460 120,099 123,048 122,261 Premises and equipment, net 3,935 3,705 3,664 3,631 3,584 Customers' acceptance liability 833 935 801 851 847 Accrued interest receivable 1,221 1,097 1,030 982 1,020 Other real estate owned 570 472 553 517 589 Goodwill, net 4,394 3,886 3,931 3,973 4,097 Identifiable intangibles, net 2,213 2,078 2,133 2,191 2,249 Unrealized gains on off-balance-sheet instruments 7,783 8,650 7,441 -- -- Other assets 8,825 6,339 6,543 6,108 6,807 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $214,230 $197,543 $197,212 $186,933 $187,109 - ----------------------------------------------------------==================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest-bearing $ 91,872 $ 86,568 $ 88,139 $ 89,134 $ 90,774 Noninterest-bearing 33,006 31,009 30,920 31,578 31,560 Deposits in foreign offices: Interest-bearing 25,981 22,898 22,034 19,608 17,272 Noninterest-bearing 1,807 1,560 1,496 1,298 1,363 - -------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 152,666 142,035 142,589 141,618 140,969 Federal funds purchased 1,690 223 270 220 602 Securities sold under repurchase agreements 5,278 6,332 6,910 4,229 3,465 Other short-term borrowings 5,796 3,537 3,628 3,523 3,083 Acceptances outstanding 833 935 801 851 847 Accrued interest payable 719 550 529 505 548 Unrealized losses on off-balance-sheet instruments 8,007 8,727 7,129 -- -- Other liabilities 5,202 3,894 4,059 4,728 5,849 Long-term debt 14,504 13,611 13,828 13,508 14,008 Subordinated capital notes 605 606 606 607 933 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 195,300 180,450 180,349 169,789 170,304 STOCKHOLDERS' EQUITY Preferred stock 3,368 2,979 2,979 2,979 2,979 Common stock 580 561 561 560 559 Additional paid-in capital 7,732 7,150 7,130 7,118 7,094 Retained earnings 7,480 7,131 6,807 6,502 6,187 Net unrealized losses on available-for-sale securities (201) (210) (252) -- -- Common stock in treasury, at cost (29) (518) (362) (15) (14) - -------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 18,930 17,093 16,863 17,144 16,805 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $214,230 $197,543 $197,212 $186,933 $187,109 - ----------------------------------------------------------====================================================
See notes to consolidated financial statements. 3
BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ============================================================================================================== NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ (IN MILLIONS) 1994 1993 - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,585 $ 1,458 Adjustments to net income to arrive at net cash provided by operating activities: Provision for credit losses 360 653 Net gain on sales of assets (98) (61) Net amortization of loan fees and discounts (31) (105) Depreciation and amortization of premises and equipment 361 337 Amortization of intangibles 304 306 Provision for deferred income taxes 405 567 Change in assets and liabilities net of effects from acquisitions, consolidations, divestitures, and pending dispositions: (Increase) decrease in accrued interest receivable (97) 7 Increase in accrued interest payable 214 25 Increase in trading account assets (197) (4,370) Increase in current income taxes payable 268 428 Deferred fees received from lending activities 69 142 Other, net (820) 328 - -------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 2,323 (285) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales proceeds 2,357 1,658 Maturities, prepayments, and calls 4,487 5,431 Purchases (4,329) (3,537) Activity in held-to-maturity securities: Maturities, prepayments, and calls 2,122 3,587 Purchases (1,234) (6,171) Proceeds from sales of loans 1,122 1,071 Purchases of loans (549) (547) Purchases of premises and equipment (460) (634) Proceeds from sales of other real estate owned 442 348 Net cash provided (used) by: Loan originations and principal collections (4,805) 236 Interest-bearing deposits in banks (1,054) (453) Federal funds sold 2,011 (548) Securities purchased under resale agreements (323) 433 Cash used by acquisitions (1,062) (25) Cash provided by acquisitions 1,762 131 Proceeds from liquidations of assets identified for disposition 254 1,371 Other, net (186) 473 - -------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 555 2,824 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 2,067 2,911 Principal payments and retirements of long-term debt and subordinated capital notes (2,312) (4,343) Proceeds from issuance of common stock 46 246 Treasury stock acquired (503) (5) Common stock dividends (422) (372) Preferred stock dividends (181) (181) Net cash provided (used) by: Deposits (1,130) (5,237) Federal funds purchased 1,084 185 Securities sold under repurchase agreements 529 2,539 Other short-term borrowings 106 995 Cash used by disposition of liabilities of deconsolidated subsidiaries and operations (59) (193) Other, net (107) (508) - -------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (882) (3,963) Effect of exchange rate changes on cash and due from banks 15 (14) - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and due from banks 2,011 (1,438) Cash and due from banks at beginning of period 10,482 11,848 - -------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $12,493 $10,410 - -----------------------------------------------------------------------------------------=====================
See notes to consolidated financial statements. 4
BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY ================================================================================================================== 1994 1993 --------------------------- ----------------- THIRD SECOND FIRST FOURTH THIRD (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------------------ PREFERRED STOCK Balance, beginning of quarter $ 2,979 $ 2,979 $ 2,979 $ 2,979 $ 2,979 Preferred stock issued 389 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter 3,368 2,979 2,979 2,979 2,979 COMMON STOCK Balance, beginning of quarter 561 561 560 559 556 Common stock issued 19 -- 1 1 3 - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter 580 561 561 560 559 ADDITIONAL PAID-IN CAPITAL Balance, beginning of quarter 7,150 7,130 7,118 7,094 7,025 Common stock issued 556 20 12 24 69 Preferred stock issued 26 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter 7,732 7,150 7,130 7,118 7,094 RETAINED EARNINGS Balance, beginning of quarter 7,131 6,807 6,502 6,187 5,888 Net income 547 525 513 496 486 Common stock dividends (140) (139) (143) (125) (124) Preferred stock dividends (60) (61) (60) (60) (61) Foreign currency translation adjustments, net of related income taxes 2 (1) (5) 4 (2) - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter 7,480 7,131 6,807 6,502 6,187 NET UNREALIZED LOSSES ON AVAILABLE-FOR-SALE SECURITIES Balance, beginning of quarter (210) (252) -- -- -- Effect of adoption of SFAS No. 115, net of related income taxes -- -- (15) -- -- Valuation adjustments, net of related income taxes 9 42 (237) -- -- - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter (201) (210) (252) -- -- COMMON STOCK IN TREASURY, AT COST Balance, beginning of quarter (518) (362) (15) (14) (14) Treasury stock purchased -- (156) (347) (1) -- Treasury stock issued 489 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Balance, end of quarter (29) (518) (362) (15) (14) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $18,930 $17,093 $16,863 $17,144 $16,805 - -------------------------------------------------------------------===============================================
See notes to consolidated financial statements. 5 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NOTE 1. The unaudited consolidated financial statements of FINANCIAL STATEMENT BankAmerica Corporation and subsidiaries (the PRESENTATION Corporation) are prepared in conformity with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All such adjustments are of a normal recurring nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in BankAmerica Corporation's (the Parent) Annual Report on Form 10-K for the year ended December 31, 1993, the audited consolidated financial statements included in Continental Bank Corporation's (Continental) Annual Report on Form 10-K for the year ended December 31, 1993 that were incorporated by reference and filed on the Parent's Form 8-K dated March 21, 1994, and the unaudited consolidated financial statements included in Continental's Forms 10-Q for the quarters ended March 31, 1994 and June 30, 1994 that were incorporated by reference and filed on the Parent's Forms 8-K dated May 12, 1994 and August 11, 1994, respectively. The unaudited consolidated financial statements of the Corporation include the accounts of the Parent and companies in which more than 50 percent of the voting stock is owned directly or indirectly by the Parent, including Bank of America NT&SA (the Bank), Bank of America Illinois, Seafirst Corporation, and other banking and nonbanking subsidiaries. The revenues, expenses, assets, and liabilities of the subsidiaries are included in the respective line items in the unaudited consolidated financial statements after elimination of intercompany accounts and transactions. Effective January 1, 1994, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and Financial Accounting Standards Board Interpretation No. 39 (FIN 39), "Offsetting of Amounts Related to Certain Contracts." For information on the adoption of this Statement and Interpretation, refer to Notes 4 and 5 on pages 9 and 10 of the Notes to Consolidated Financial Statements. The Corporation's results of operations and financial position reflect the effects of the merger of Continental with and into the Parent subsequent to its consummation on August 31, 1994. Certain amounts in prior periods have been reclassified to conform to the current presentation. - -------------------------------------------------------------------------------- NOTE 2. On August 31, 1994, Continental was merged with and into MERGER WITH the Parent and Continental's principal subsidiary, CONTINENTAL BANK Continental Bank, was renamed Bank of America Illinois. CORPORATION Each outstanding share of Continental's common stock was converted into either 0.7993 of a share of the Parent's common stock or $38.297 in cash. The total amount of the Parent's common stock issued in connection with the Continental merger was 21.5 million shares, valued as of January 27, 1994 at $985 million, which included 11.8 million shares of treasury stock purchased in anticipation of the merger at an average per-share price of $42.43. In addition, an aggregate amount of approximately $950 million was paid in cash to Continental common stockholders. 6 ================================================================================ In addition, each outstanding share of Continental's Adjustable Rate Preferred Stock, Series 1 and Adjustable Rate Cumulative Preferred Stock, Series 2 was converted upon consummation of the Continental merger, into one share of the Parent's Adjustable Rate Preferred Stock, Series 1 (Preferred Stock, Series 1) and Adjustable Rate Cumulative Preferred Stock, Series 2 (Preferred Stock, Series 2), respectively, having substantially the same terms. The Parent's preferred stock issued in connection with the Continental merger was valued at $415 million, based on market factors as of January 27, 1994. Continental was a Delaware corporation organized in 1968 and was registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and the Illinois Bank Holding Company Act of 1957. Continental provided an extensive range of commercial banking services, primarily in the Midwest, but also throughout the United States and in various overseas markets. Through its subsidiaries, Continental provided business financing, specialized financial and operating services, and private banking services. Continental also engaged in equity finance and investing, as both principal and arranger, and international trading. The Continental merger was recorded during the third quarter of 1994 by the Parent using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." Under this method of accounting, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values at consummation. At September 30, 1994, goodwill (net of accumulated amortization) recorded in connection with the Continental merger, which represents the excess of the purchase price over the estimated fair value of identifiable net assets, amounted to approximately $633 million. Identifiable intangibles (net of accumulated amortization) related to the Continental merger totaled approximately $86 million at September 30, 1994. Goodwill is being amortized on a straight-line basis over 25 years. Identifiable intangibles are being amortized using accelerated methods over their estimated periods of benefit. Merger-related expenses of $50 million have been accrued to reflect management's best estimate of separation and benefits costs related to pre-merger BankAmerica Corporation and subsidiaries' (BAC) employees, employment assistance costs for separated employees of BAC, and other expenses of BAC associated with the Continental merger. The following table presents a condensed pro forma combined summary of operations of BAC and Continental and its subsidiaries for the nine months ended September 30, 1994 and 1993. This information is intended for informational purposes only and is not necessarily indicative of the future results of operations of the Corporation, or of the results of operations of the Corporation that would have occurred had the Continental merger been in effect for the periods presented. 7 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ The condensed pro forma combined summary of operations is as follows:
PRO FORMA COMBINED FOR THE NINE MONTHS ENDED SEPTEMBER 30 (DOLLAR AMOUNTS IN MILLIONS, ------------------------------ EXCEPT PER SHARE DATA) 1994 1993 -------------------------------------------------------------------------------- SUMMARY OF OPERATIONS/ab/ Interest income $9,673 $9,605 Interest expense 3,831 3,642 -------------------------------------------------------------------------------- NET INTEREST INCOME 5,842 5,963 Provision for credit losses 420 789 -------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 5,422 5,174 Noninterest income 3,434 3,611 Noninterest expense 5,982/c/ 6,011 -------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 2,874 2,774 Provision for income taxes 1,200 1,194 -------------------------------------------------------------------------------- NET INCOME $1,674 $1,580 ---------------------------------------------------------======================= EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE/d/ $ 3.94 $ 3.62 EARNINGS PER COMMON SHARE -- ASSUMING FULL DILUTION/d/ $ 3.91 $ 3.59 ================================================================================
/a/ The condensed pro forma combined summary of operations is presented as if the Continental merger had been effective January 1, 1993. This information combines the historical results of operations of BAC and Continental after giving effect to amortization of purchase accounting adjustments (see note b). This summary excludes the $80 million cumulative effect of accounting change for income taxes recognized by Continental for the nine months ended September 30, 1993. The condensed pro forma combined summary of operations was based on BAC's historical results of operations for the nine months ended September 30, 1994, which included combined operations from the Continental merger date forward, and Continental's historical results of operations for the period January 1, 1994 through August 31, 1994. Accordingly, BAC's earnings for the month ended September 30, 1994 included revenues and expenses related to former Continental operations, as well as the amortization of purchase accounting adjustments, such as fair value adjustments, goodwill, and identifiable intangibles. /b/ The combined historical results of operations of BAC and Continental were adjusted to reflect the amortization of the estimated fair value adjustments and other purchase accounting adjustments recorded in connection with the Continental merger, including those related to available- for-sale securities, loans, goodwill, identifiable intangibles, deposits, and long-term debt. Amortization was calculated based on the methods and estimated periods of benefit determined appropriate by management. BAC's historical results of operations for the nine months ended September 30, 1994 included amortization of purchase accounting adjustments from the consummation of the Continental merger forward. Accordingly, for the purposes of this condensed pro forma combined summary of operations, historical results for 1994 were adjusted to bring the actual amortization of purchase accounting adjustments to the amounts that would have been recorded if the Continental merger had been consummated on January 1, 1993. The historical income statement information for the nine months ended September 30, 1993 was adjusted to include amortization for the full period. /c/ Merger-related expenses, as described on page 7, of $50 million have been eliminated from the combined historical results of operations, as these expenses do not represent ongoing expenses of the Corporation. /d/ Primary and fully diluted pro forma combined earnings per common share for the nine months ended September 30, 1994 and 1993 were calculated based on pro forma combined net income, less the sum of actual preferred dividends paid by BAC and Continental during each of the periods. Actual average common and common equivalent shares outstanding and average common shares outstanding assuming full dilution for the month of September 1994 were used to approximate the same information for the full nine months ended September 30, 1994 as if the Continental merger had taken place on January 1, 1993. The share amounts used to calculate primary and fully diluted pro forma combined earnings per common share for the nine months ended September 30, 1993 were determined as follows:
(in millions) Primary Fully Diluted ------------------------------------------------------------------------------------ Actual average number of common and common equivalent shares outstanding for BAC for the nine months ended September 30, 1993 357 363 Common shares issued in connection with the Continental merger 21 21 Continental's common stock equivalents for the nine months ended September 30, 1993 2 2 ------------------------------------------------------------------------------------ 380 386 ------------------------------------------------------------========================
8 ================================================================================ NOTE 3. During the nine-month periods ended September 30, 1994 SUPPLEMENTAL and 1993, the Corporation made interest payments on DISCLOSURE OF CASH deposits and other interest-bearing liabilities of FLOW INFORMATION $3,162 million and $3,131 million, respectively, and made net income tax payments of $474 million and $115 million, respectively. During the nine months ended September 30, 1993, the Corporation securitized residential first mortgages of $132 million and reclassified them to available-for-sale securities. No residential first mortgages were securitized during the nine months ended September 30, 1994. Foreclosures totaled $371 million and $589 million for the nine-month periods ended September 30, 1994 and 1993, respectively. During the second quarter of 1994, assets that were previously reported as assets pending disposition were reclassified to either other assets or loans. Prior periods have been adjusted for this reclassification. At September 30, 1994 and 1993, such assets recorded in other assets totaled $1,160 million and $1,290 million, respectively and included commercial and industrial loans held for sale in the normal course of business that were originated with the intent to sell of $930 million and $622 million. Assets reclassified to loans consisted of residential first mortgages held for sale in the normal course of business of $52 million and $316 million at September 30, 1994 and 1993, respectively. During the first quarter of 1993, management determined that certain subsidiaries that were held for disposition as of year-end 1992, including Bank of America (Asia) Limited, formerly Security Pacific Asia Bank, Ltd, a former subsidiary of Security Pacific Corporation, would not be sold. Accordingly, assets and liabilities of these subsidiaries that were previously recorded in other assets, including $329 million of available-for- sale securities, $1,950 million of loans, and $1,249 million of deposits, were consolidated in the Corporation's financial statements effective January 1, 1993. - -------------------------------------------------------------------------------- NOTE 4. SFAS No. 115 was adopted by the Corporation effective CERTAIN INVESTMENTS January 1, 1994. SFAS No. 115 requires debt securities IN DEBT AND for which the Corporation has the positive intent and EQUITY SECURITIES ability to hold to maturity to be classified as held- to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term will continue to be classified as trading account assets and reported at their fair values with unrealized gains and losses included in earnings. Other debt and equity securities that the Corporation may not hold to maturity and that are not considered to be part of trading-related activities are classified as available- for-sale securities and reported at their fair values, with unrealized gains and losses reported on a net-of- tax basis as a separate component of stockholders' equity. Prior-period amounts have not been restated since SFAS No. 115 does not allow retroactive application. Upon adoption of SFAS No. 115, $5.6 billion of securities previously classified as held-to-maturity securities with a market value of $5.7 billion were transferred to available-for-sale securities. In addition, certain debt-restructuring par bonds and other instruments issued by the governments of certain countries, most notably Mexico and Venezuela, were reclassified from loans to either available-for-sale or held-to-maturity securities. Debt-restructuring par bonds and other instruments with a carrying value of $1.2 billion and a market value of $1.0 billion at December 31, 1993 were reclassified to held-to-maturity securities, and debt-restructuring par bonds and other instruments with a carrying value of $1.3 billion and a market value of $1.0 billion at December 31, 1993 were reclassified to available-for-sale securities. 9 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ In connection with the Continental merger, $1.2 billion of investment securities were obtained and classified as available-for-sale securities. Approximately $0.4 billion of these securities were classified as held-to- maturity by Continental prior to the merger. As a result of the Continental merger, $2.5 billion of the Corporation's held-to-maturity securities were transferred to available-for-sale securities to enable the Corporation to maintain its pre-merger interest rate risk position. This transfer resulted in gross unrealized losses of $145 million and gross unrealized gains of $22 million. At September 30, 1994, certain nonaccrual debt- restructuring par bonds and other instruments issued by the governments of Brazil and Argentina with an aggregate face value of $645 million were included in available-for-sale securities at their fair value of $393 million, including net unrealized gains of $253 million. The fair values and amortized costs of available-for- sale and held-to-maturity securities were as follows:
AVAILABLE-FOR-SALE HELD-TO-MATURITY SECURITIES SECURITIES --------------------- --------------------- FAIR AMORTIZED FAIR AMORTIZED (IN MILLIONS) VALUE COST VALUE COST --------------------------------------------------------------------------- SEPTEMBER 30, 1994 $11,166 $11,505 $ 8,018 $ 8,700 June 30, 1994 8,938 9,288 11,544 11,734 March 31, 1994 9,413 9,849 11,976 11,979 December 31, 1993 3,405 3,282 16,802 16,415 September 30, 1993 3,688 3,515 17,357 16,810
During the nine-month period ended September 30, 1994, the Corporation sold available-for-sale securities for aggregate proceeds of $2,357 million resulting in gross realized gains of $91 million and gross realized losses of $66 million. During the nine-month period ended September 30, 1993, the Corporation sold available-for- sale securities for aggregate proceeds of $1,658 million, resulting in gross realized gains of $36 million and no gross realized losses. There were no sales of held-to-maturity securities during the nine- month periods ended September 30, 1994 and 1993. During the nine-month period ended September 30, 1994, trading income included a net unrealized holding loss on trading securities of $47 million, excluding the net unrealized trading results of the Parent's securities broker and dealer subsidiaries, which are not subject to the requirements of SFAS No. 115. - -------------------------------------------------------------------------------- NOTE 5. FIN 39 was prospectively adopted by the Corporation OFFSETTING OF effective January 1, 1994. FIN 39 requires unrealized AMOUNTS RELATED TO gains on forward, swap, option, and other conditional CERTAIN CONTRACTS or exchange contracts to be recorded as assets and unrealized losses on these contracts to be recorded as liabilities. However, unrealized gains and losses may be netted where right of set-off criteria are met or contracts are executed under legally enforceable master netting agreements with counterparties. To the extent allowed by FIN 39, the Corporation nets unrealized gains and losses on certain off-balance-sheet instruments. Prior to January 1, 1994, unrealized gains and losses were recorded on the consolidated balance sheet on a net basis for most products, primarily in trading account assets and other liabilities. At December 31, 1993, net unrealized gains and net unrealized losses were $0.9 billion and $0.7 billion, respectively. Upon adoption of FIN 39, the unrealized gains and unrealized losses included in these amounts, which were netted where appropriate, were reclassified to unrealized gains on off-balance-sheet instruments and unrealized losses on off-balance-sheet instruments, respectively. 10 =============================================================================== NOTE 6. In connection with the Continental merger, on August 31, PREFERRED STOCK 1994, the Parent issued 1,788,000 shares of Preferred Stock, Series 1, $50 stated value. Preferred Stock, Series 1 shares are nonvoting except in certain limited circumstances, while dividends are cumulative and payable quarterly, at an adjustable rate determined each quarter that is not less than 7.50% or greater than 13.50%. The liquidation preference price is $50.00 per preferred share plus accrued and unpaid dividends to the final distribution date. The Preferred Stock, Series 1, may be redeemed at the option of the Parent at a redemption price of $50.00 per share, plus dividends accrued and unpaid to the redemption date. In connection with the Continental merger, on August 31, 1994, the Parent issued 3,000,000 shares of Preferred Stock, Series 2, $100 stated value, represented by 12,000,000 depositary shares, each corresponding to a one-fourth interest in a share of preferred stock. Preferred Stock, Series 2 shares are nonvoting except in certain limited circumstances, while dividends are cumulative and payable quarterly at 9.00%. On November 1, 1994, the Parent announced that it will redeem all of the outstanding shares of Preferred Stock, Series 2 on December 5, 1994 at $108.00 per share, or $27.00 per depositary share, plus dividends accrued and unpaid to the redemption date. - ------------------------------------------------------------------------------- NOTE 7. The following is a summary of the components of income INCOME TAXES tax expense:
1994 1993 NINE MONTHS ENDED --------------------------- ----------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD -------------------- (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993 ------------------------------------------------------------------------------------------------- PROVISION FOR INCOME TAXES Federal $269 $278 $269 $260 $261 $ 816 $ 763 State and local 72 67 72 75 77 211 230 Foreign 43 34 34 29 38 111 117 ------------------------------------------------------------------------------------------------- $ 384 $379 $375 $364 $376 $1,138 $1,110 ------------------------------===================================================================
The income tax provision for the third quarter of 1994 reflected the Corporation's estimated annual effective income tax rate of 41.8 percent, compared to the annual effective income tax rate of 43.2 percent for 1993. These effective income tax rates are higher than the federal statutory tax rate of 35.0 percent due principally to state income taxes and the amortization of nondeductible goodwill. - ------------------------------------------------------------------------------- NOTE 8. Earnings per common share have been computed based on EARNINGS PER the following: COMMON SHARE
1994 1993 NINE MONTHS ENDED --------------------------- ----------------- SEPTEMBER 30 (DOLLAR AMOUNTS IN MILLIONS, THIRD SECOND FIRST FOURTH THIRD ------------------- NUMBER OF SHARES IN THOUSANDS) QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993 -------------------------------------------------------------------------------------------------------- Net income applicable to common stock $487 $464 $453 $436 $425 $1,404 $1,277 Average number of common shares outstanding 355,012 347,791 355,749 357,629 356,567 352,851 354,266 Average number of common and common equivalent shares outstanding 357,962 349,721 357,569 359,547 358,835 355,084 357,057 Average number of common shares outstanding-assum- ing full dilution 363,442 355,201 363,049 365,360 364,315 360,564 362,539
11 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ NOTE 9. In the ordinary course of business, the Corporation OFF-BALANCE-SHEET enters into various types of transactions that involve TRANSACTIONS financial instruments with off-balance-sheet risk. The following table is a summary of the aggregate contractual amounts for each significant class of credit-related financial instrument outstanding. The contractual amounts of these instruments represent the amounts at risk should the contract be fully drawn upon, the client defaults, and the value of any existing collateral become worthless.
1994 1993 -------------------------------- ------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 ---------------------------------------------------------------------------------------------------- Commitments to extend credit: Unutilized credit card lines $26,141 $24,647 $24,110 $23,437 $24,069 Other commitments to extend credit/a/ 85,688 60,368 60,690 57,227 57,233 Standby letters of credit and financial guarantees/b/ 15,669 12,550 11,640 13,323 11,605 Commercial letters of credit 4,228 4,238 3,438 3,124 2,902 ----------------------------------------------------------------------------------------------------
/a/ Represents agreements to extend credit to a customer for which the Corporation may have received fees. These commitments have specified interest rates, generally have fixed expiration dates, and may be terminated by the Corporation if certain conditions of the contract are violated. /b/ Net of participations sold of $2,483 million at September 30, 1994, $4,020 million at June 30, 1994, $4,032 million at March 31, 1994, $2,076 million at December 31, 1993, and $1,980 million at September 30, 1993. The following table summarizes the credit risk and notional or contract amounts associated with the Corporation's off- balance-sheet trading and asset and liability management activities for each significant class of foreign exchange contracts and derivative contracts outstanding. The credit risk amounts represent the Corporation's exposure to potential loss on these transactions if all counterparties failed to perform according to the terms of the contract and the value of any existing collateral became worthless, based on then-current currency exchange and interest rates at each respective date. The notional or contract amounts of these transactions represent the face or principal value upon which calculations of amounts to be exchanged are based. They do not represent the potential for gain or loss associated with the market risk or credit risk of such transactions.
1994 1993 ---------------------------------- --------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 ---------------------------------------------------------------------------------------------------- CREDIT RISK AMOUNTS/a/ Foreign exchange contracts $ 10,390 $ 13,071 $ 6,441 $ 4,633 $ 6,056 Interest rate swaps 5,307 5,038 5,646 6,848 7,270 Currency swaps 1,859 1,847 1,988 1,841 1,987 Futures and forward contracts- commitments to purchase 171 148 104 8 12 Futures and forward contracts- commitments to sell 31 16 40 36 54 Interest rate options written/b/ - - - - - Interest rate options purchased 411 283 307 358 379 NATIONAL OR CONTRACT AMOUNTS Foreign exchange contracts 745,611 691,703 571,849 443,298 475,041 Interest rate swaps 350,195 295,514 268,390 233,359 232,261 Currency swaps 24,668 22,507 22,859 22,866 24,150 Futures and forward contracts- commitments to purchase 121,968 80,526 85,891 75,413 83,130 Futures and forward contracts- commitments to sell 110,452 98,424 97,084 81,986 84,131 Interest rate options written 30,981 22,968 27,528 29,576 26,672 Interest rate options purchased 49,507 33,983 35,327 35,466 39,794 ----------------------------------------------------------------------------------------------------
/a/ Without regard to legally enforceable master netting agreements. /b/ Interest rate options written have no credit risk. 12 ================================================================================ The Corporation conducts securities lending transactions for certain customers and, at times, indemnifies these customers against various losses. All securities lending transactions are collateralized by U.S. government or federal agency securities, cash, or letters of credit with total market value equal to or in excess of the market value of the securities loaned. In the event of customer default combined with a decline in the value of the associated collateral, the Corporation may be exposed to risk of loss. The following summarizes indemnified securities lending transactions and the associated collateral:
1994 1993 ------------------------------- ------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 ------------------------------------------------------------------------------------- Indemnified securities lent $6,241 $5,185 $6,691 $5,133 $2,562 Associated collateral 6,613 5,328 6,825 5,185 2,604
13 ================================================================================ [THIS PAGE INTENTIONALLY LEFT BLANK] 14 MANAGEMENT'S DISCUSSION AND ANALYSIS Highlights ================================================================================ The following is a summary of third-quarter 1994 financial information for BankAmerica Corporation and subsidiaries (the Corporation). . The Corporation reported third-quarter 1994 earnings per share of $1.36, an increase of 14 percent from $1.19 for the same period a year ago. Net income for the third quarter of 1994 was $547 million, up 13 percent from $486 million for the third quarter of 1993. Earnings for the third quarter of 1994 reflect the effects of the Corporation's merger with Continental Bank Corporation (Continental) subsequent to its consummation on August 31, 1994. . The Continental merger gives the Corporation improved access to wholesale and other customers, particularly in the Midwest. The Corporation has designated Chicago as the headquarters of its U.S corporate banking business and has established Bank of America Illinois, which will be responsible for its private banking and middle-market services in the midwestern U.S. . The Corporation's results of operations demonstrated the value of its diverse franchise. The three business sectors that contributed the largest amounts to the Corporation's third- quarter 1994 earnings were Consumer Banking, Large Corporate and Foreign Banking, and Seafirst. For more information on the Corporation's business sectors, refer to the Business Sectors section on page 17. . Total loan outstandings at September 30, 1994 were up $13.8 billion from the previous quarter -- $11.2 billion of this coming from the addition of Continental's loans to the Corporation's portfolio and the remainder from continued portfolio growth. Excluding the loans obtained from Continental, total loans at September 30, 1994 increased 2 percent from their June 30, 1994 level, with growth occurring in a number of loan categories. . The credit quality in the Corporation's loan portfolios continued to improve. During the third quarter of 1994, total nonaccrual assets decreased $138 million, bringing the decline since year-end 1993 to $802 million, or 28 percent. In addition, net credit losses for the third quarter of 1994 decreased $130 million, or 55 percent, from the amount reported in the third quarter last year. This continued improvement in credit quality allowed the Corporation to reduce its third- quarter 1994 provision for credit losses by $68 million from the amount reported in the same period last year. For more information on the Corporation's nonaccrual assets, refer to Nonaccrual Assets, Restructured Loans, and Loans Past Due 90 Days or More and Still Accruing Interest section on pages 34- 37. . The Corporation's net interest margin for the third quarter of 1994 was 4.51 percent compared with 4.72 percent for the same period last year. If current economic conditions persist and the Federal Reserve further tightens monetary policy, and if deposit interest rates rise in response to this action, the Corporation's net interest margin may be negatively impacted in the short term. NOTE: THE INFORMATION CONTAINED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION REFLECTS THE EFFECTS OF THE CONTINENTAL MERGER SUBSEQUENT TO ITS CONSUMMATION ON AUGUST 31, 1994. 15
==================================================================================================================================== FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------------------ 1994 1993 NINE MONTHS ENDED (DOLLAR AMOUNTS IN MILLIONS, -------------------------------- -------------------- SEPTEMBER 30 EXCEPT PER SHARE DATA) THIRD SECOND FIRST FOURTH THIRD ------------------------ QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Interest income $ 3,153 $ 2,939 $ 2,813 $ 2,876 $ 2,945 $ 8,905 $ 8,751 Interest expense 1,249 1,107 1,019 1,011 1,064 3,375 3,175 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income 1,904 1,832 1,794 1,865 1,881 5,530 5,576 Provision for credit losses 110 125 125 150 178 360 653 Noninterest income 1,075 1,018 1,003 1,119 1,007 3,096 3,154 Noninterest expense 1,938 1,821 1,784 1,974 1,848 5,543 5,509 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 931 904 888 860 862 2,723 2,568 Provision for income taxes 384 379 375 364 376 1,138 $ 1,110 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 547 $ 525 $ 513 $ 496 $ 486 1,585 $ 1,458 - -----------------------------------------=========================================================================================== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 1.36 $ 1.33 $ 1.27 $ 1.21 $ 1.19 $ 3.95 $ 3.58 EARNINGS PER COMMON SHARE -- ASSUMING FULL DILUTION $ 1.35 $ 1.32 $ 1.26 $ 1.21 $ 1.18 $ 3.93 $ 3.56 - ------------------------------------------------------------------------------------------------------------------------------------ STOCK DATA Dividends declared per common share $ 0.40 $ 0.40 $ 0.40 $ 0.35 $ 0.35 $ 1.20 $ 1.05 Book value per common share at period end 42.02 40.69 39.67 39.58 38.69 42.02 38.69 Common stock price range: High 49 5/8 50 1/4 48 7/8 47 3/8 49 1/8 50 1/4 55 1/2 Low 44 38 3/8 38 3/4 40 3/8 43 3/8 38 3/8 40 1/2 Closing common stock price 44 1/8 45 3/4 39 3/8 46 3/8 44 44 1/8 44 Average number of common and common equivalent shares outstanding (in thousands) 357,962 349,721 357,569 359,547 358,835 355,084 357,057 Number of common shares outstanding at period end (in thousands) 370,206 346,909 350,029 357,912 357,343 370,206 357,343 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL CONDITION AND CAPITAL AT PERIOD END Loans $138,691 $124,874 $123,544 $126,556 $125,976 $138,691 $125,976 Total assets 214,230 197,543 197,212 186,933 187,109 214,230 187,109 Deposits 152,666 142,035 142,589 141,618 140,969 152,666 140,969 Long-term debt and subordinated capital notes 15,109 14,217 14,434 14,115 14,941 15,109 14,941 Common stockholders' equity 15,562 14,114 13,884 14,165 13,826 15,562 13,826 Total stockholders' equity 18,930 17,093 16,863 17,144 16,805 18,930 16,805 - ------------------------------------------------------------------------------------------------------------------------------------ SELECTED FINANCIAL RATIOS Rate of return (based on net income) on: Average total assets 1.07% 1.08% 1.07% 1.06% 1.04% 1.07% 1.05% Average common stockholders' equity 13.12 13.32 13.00 12.48 12.46 13.18 13.02 Average total stockholders' equity 12.17 12.41 12.17 11.69 11.66 12.28 12.11 Ratio of common stockholders' equity to total assets 7.26 7.14 7.04 7.58 7.39 7.26 7.39 Ratio of total stockholders' equity to total assets 8.83 8.65 8.55 9.17 8.98 8.33 8.98 Ratio of average stockholders' equity to average total assets 8.77 8.67 8.78 9.03 8.93 8.72 8.71 Risk-based capital ratios:/a/ Total risk-based capital ratio 11.59 12.11 12.21 12.00 11.60 11.59 11.60 Tier 1 risk-based capital ratio 7.24 7.56 7.64 7.61 7.19 7.24 7.19 Tier 1 leverage ratio 6.64 6.55 6.37 6.64 6.42 6.64 6.42 - ------------------------------------------------------------------------------------------------------------------------------------
/a/ Refer to the table on page 41 of the Funding and Capital section for information on the calculation of risk-based capital ratios. 16 BUSINESS SECTORS ================================================================================ The Corporation manages its operations by customer and market sectors. Since the Corporation's operations are highly integrated, certain non-sector-specific income, expense, assets, and liabilities must be allocated to these customer and market sectors. Domestic sources of funds, equity, overhead, and federal and state taxes are allocated in this process. Additionally, the unallocated allowance for credit losses and related provision for credit losses are allocated to the business sectors. The information set forth in the following table reflects the Corporation's net income, average total assets, average total deposits, and return on assets by customer and market sectors and does not necessarily represent their financial condition and results of operations if managed as independent entities. - -------------------------------------------------------------------------------- SELECTED BUSINESS SECTOR DATA /a/ - --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1994 ----------------------------------------------- AVERAGE AVERAGE RETURN (DOLLAR AMOUNTS IN BILLIONS, EXCEPT FOR NET TOTAL TOTAL ON NET INCOME WHICH IS IN MILLIONS) INCOME ASSETS DEPOSITS ASSETS - ---------------------------------------------------------------------------------------------------------------------------- Large corporate and foreign banking $ 533 $ 66 $ 25 1.09% Consumer banking 532 54 67 1.31 Seafirst Corporation 218 15 12 1.94 Commercial real estate 171 8 2 2.78 Middle market banking 141 10 5 1.86 Other non-California banks 33 23 24 0.19 Private banking 27 2 4 1.62 Other (70) 20 4 (0.48) - ---------------------------------------------------------------------------------------------------------------------------- $1,585 $198 $143 1.07% - -----------------------------------------------------------------------------===============================================
/a/ Amounts reflect 1994 changes in the Corporation's organizational structure and in its business-sector allocation methodologies. 17 RESULTS OF OPERATIONS =================================================================================================================================== AVERAGE BALANCES, INTEREST, AND AVERAGE RATES - -----------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1994 THIRD QUARTER 1993 --------------------------------- ---------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits in banks $ 5,285 $ 87 6.56% $ 2,638/d/ $ 49 7.42% Federal funds sold 1,380 16 4.58 1,386 12 3.11 Securities purchased under resale agreements 5,759 84 5.80 4,688 51 4.36 Trading account assets 6,412 118 7.29 7,469 112 5.97 Available-for-sale securities/c/ 9,171/d/ 134 5.81/e/ 3,620 67 7.41 Held-to-maturity securities/c/ 11,253 208 7.41 16,379 313 7.62 Domestic loans: Consumer-residential first mortgages 32,417 484 5.97 29,460 456 6.18 Consumer-credit card 7,221 283 15.67 7,350 298 16.22 Other consumer 25,128 564 8.91 24,182 547 8.97 Commercial and industrial 24,385 436 7.09 19,811 323 6.48 Commercial loans secured by real estate 9,435 196 8.32 9,508 182 7.64 Construction and development loans secured by real estate 3,811 82 8.51 5,468 74 5.39 Loans for purchasing or carrying securities 1,478 21 5.53 1,485 15 4.10 Financial institutions 2,184 29 5.27 1,948 17 3.45 Lease financing 1,662 28 6.73 1,766 56 12.54 Agricultural 1,687 34 8.08 1,606 33 8.19 Other 1,231 19 5.96 1,095 14 5.16 ------- ------ -------- ------ Total domestic loans 110,639 2,176 7.83 103,679 2,015 7.74 Foreign loans 18,860 336 7.07 19,609 332 6.71 -------- ------ -------- ------ Total loans/d/ 129,499 2,512 7.72 123,288 2,347 7.58 -------- ------ -------- ------ Total earning assets 168,759 $3,159 7.45 159,468 $2,951 7.37 ====== ====== Nonearning assets 37,980 29,285 Less: Allowance for credit losses 3,507 3,751 -------- -------- TOTAL ASSETS $203,232 $185,002 ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY Domestic interest-bearing deposits: Transaction $ 13,773 $ 40 1.16% $ 13,480 $ 43 1.26% Savings 14,682 76 2.05 14,179 76 2.13 Money market 32,155 207 2.55 34,222 210 2.43 Time 28,179 225 3.17 30,253 193 2.53 -------- ------ -------- ------ Total domestic interest-bearing deposits 88,789 548 2.45 92,134 522 2.25 Foreign interest-bearing deposits: Banks located in foreign countries 6,940 113 6.43 3,290 57 6.84 Governments and official institutions 5,207 63 4.77 1,951 20 4.08 Time, savings, and other 11,730 144 4.89 10,152 133 5.21 -------- ------ -------- ------ Total foreign interest-bearing deposits 23,877 320 5.31 15,393 210 5.41 -------- ------ -------- ------ Total interest-bearing deposits 112,666 868 3.06 107,527 732 2.70 Federal funds purchased 580 6 4.26 501 3 2.82 Securities sold under repurchase agreements 6,066 82 5.40 3,656 55 5.98 Other short-term borrowings 4,341 71 6.49 3,014 51 6.77 Long-term debt 13,990 211 5.99 14,295 184 5.10 Subordinated capital notes 606 11 6.81 1,108 39 13.71 -------- ------ -------- ------ Total interest-bearing liabilities 138,249 $1,249 3.58 130,101 $1,064 3.24 Domestic noninterest-bearing deposits 31,825 ====== 30,670 ====== Foreign noninterest-bearing deposits 1,451 1,356 Other noninterest-bearing liabilities 13,880 6,349 -------- -------- Total liabilities 185,405 168,476 Stockholders' equity 17,827 16,526 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $203,232 $185,002 ======== ======== Interest income as a percentage of average earning assets 7.45% 7.37% Interest expense as a percentage of average earning assets (2.94) (2.65) ----- ------ NET INTEREST MARGIN 4.51% 4.72% ===== ====== - ----------------------------------------------------------------------------------------------------------------------------------
/a/ Average balances are obtained from the best available daily, weekly, or monthly data. /b/ Interest income and average rates are presented on a taxable-equivalent basis. The taxable-equivalent adjustments are based on a marginal tax rate of 35 percent. /c/ Refer to the table on page 25 of the Balance Sheet Analysis section for more detail on available-for-sale and held-to-maturity securities. /d/ Average balances include nonaccrual assets. /e/ Due to the first-quarter 1994 adoption of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," available-for-sale securities are recorded at their fair values. Without regard to net unrealized losses, the rates would have been 5.64% and 5.68% for the third quarter of 1994 and the nine months ended September 30, 1994, respectively. 18
========================================================================================================================== Nine Months Ended September 30 - -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Balance/a/ Interest/b/ Rate/b/ Balance/a/ Interest/b/ Rate/b/ - -------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits in banks $ 4,596 $ 217 6.31% $ 2,475/d/ $ 140 7.58% Federal funds sold 1,478 44 3.93 1,216 29 3.13 Securities purchased under resale agreements 6,185 245 5.30 3,594 120 4.47 Trading account assets 6,695 351 7.01 6,023 272 6.05 Available-for-sale securities/c/ 9,436/d/ 412 5.83/e/ 4,362 217 6.66 Held-to-maturity securities/c/ 11,598 638 7.33 15,556 851 7.29 Domestic loans: Consumer-residential first mortgages 31,549 1,389 5.87 29,224 1,402 6.39 Consumer-credit card 7,173 850 15.80 7,589 928 16.29 Other consumer 24,694 1,629 8.82 24,851 1,697 9.13 Commercial and industrial 22,016 1,089 6.61 20,708 953 6.16 Commercial loans secured by real estate 9,203 545 7.89 9,838 552 7.48 Construction and development loans secured by real estate 3,979 223 7.48 5,999 222 4.95 Loans for purchasing or carrying securities 1,889 66 4.66 1,173 37 4.18 Financial institutions 1,936 71 4.92 1,843 47 3.44 Lease financing 1,659 103 8.29 1,785 175 13.11 Agricultural 1,632 93 7.61 1,616 91 7.51 Other 1,207 55 6.08 1,073 41 5.11 -------- ------ -------- ------ Total domestic loans 106,937 6,113 7.63 105,699 6,145 7.76 Foreign loans 18,099 902 6.67 19,375 993 6.86 -------- ------ -------- ------ Total loans/d/ 125,036 7,015 7.49 125,074 7,138 7.62 -------- ------ -------- ------ Total earning assets 165,024 $8,922 7.22 158,300 $8,767 7.39 ====== ====== Nonearning assets 36,328 30,445 Less: Allowance for credit losses 3,478 3,872 -------- -------- TOTAL ASSETS $197,874 $184,873 ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY Domestic interest-bearing deposits: Transaction $ 13,789 $ 119 1.16% $ 13,397 $ 141 1.41% Savings 14,506 221 2.04 13,926 240 2.30 Money market 32,817 603 2.45 34,241 647 2.53 Time 27,208 554 2.72 31,802 587 2.47 -------- ------ -------- ------ Total domestic interest-bearing deposits 88,320 1,497 2.27 93,366 1,615 2.31 Foreign interest-bearing deposits: Banks located in foreign countries 6,115 284 6.20 3,084 164 7.09 Governments and official institutions 4,468 148 4.43 1,713 53 4.10 Time, savings, and other 11,057 389 4.71 10,254 424 5.53 -------- ------ -------- ------ Total foreign interest-bearing deposits 21,640 821 5.07 15,051 641 5.69 -------- ------ -------- ------ Total interest-bearing deposits 109,960 2,318 2.82 108,417 2,256 2.78 Federal funds purchased 426 12 3.77 589 12 2.77 Securities sold under repurchase agreements 6,399 258 5.39 2,601 112 5.77 Other short-term borrowings 3,943 191 6.48 2,939 145 6.61 Long-term debt 13,637 565 5.54 14,163 550 5.19 Subordinated capital notes 606 31 6.75 1,726 100 7.73 -------- ------ -------- ------ Total interest-bearing liabilities 134,971 $3,375 3.34 130,435 $3,175 3.25 Domestic noninterest-bearing deposits 31,273 ====== 30,156 ====== Foreign noninterest-bearing deposits 1,453 1,410 Other noninterest-bearing liabilities 12,916 6,777 -------- -------- Total liabilities 180,613 168,778 Stockholders' equity 17,261 16,095 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $197,874 $184,873 ======== ======== Interest income as a percentage of average earning assets 7.22% 7.39% Interest expense as a percentage of average earning assets (2.73) (2.68) ----- ----- NET INTEREST MARGIN 4.49 4.71% ===== ===== - --------------------------------------------------------------------------------------------------------------------------
/a/ Average balances are obtained from the best available daily, weekly, or monthly data. /b/ Interest income and average rates are presented on a taxable-equivalent basis. The taxable-equivalent adjustments are based on a marginal tax rate of 35 percent. /c/ Refer to the table on page 25 of the Balance Sheet Analysis section for more detail on available-for-sale and held-to-maturity securities. /d/ Average balances include nonaccrual assets. /e/ Due to the first-quarter 1994 adoption of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," available-for-sale securities are recorded at their fair values. Without regard to net unrealized losses, the rates would have been 5.64% and 5.68% for the third quarter of 1994 and the nine months ended September 30, 1994, respectively. 19 =============================================================================== NET INTEREST Taxable-equivalent net interest income was $1,910 million INCOME for the third quarter of 1994, up $23 million from the amount reported in the third quarter of last year. Taxable-equivalent net interest income totaled $5,547 million for the first nine months of 1994 and $5,592 million during the same period in 1993. Net interest income in the third quarter of 1994 increased modestly over the third quarter of 1993 primarily due to the Continental merger, which contributed $40 million to net interest income. The Corporation's net interest margin was 4.51 percent for the quarter ended September 30, 1994, down 21 basis points from the comparable period in 1993, while the net interest margin for the first nine months of 1994 was 4.49 percent, compared with 4.71 percent for the same period last year. The Corporation's net interest margin includes the results of hedging with certain off-balance-sheet financial instruments. Hedging transactions are generally entered into to modify the interest rate characteristics of assets and liabilities in an effort to reduce the Corporation's sensitivity to interest rate movements. As a result, management does not consider it meaningful to separate the results of hedging from the net interest income arising from the hedged assets and liabilities. Management accomplishes hedging primarily through the use of off-balance-sheet instruments and also manages interest rate risk using on-balance-sheet instruments. Since management defines the amounts and nature of the risks it is willing to assume prior to identifying the hedging method, it believes the Corporation's net interest income and results of operations would have been substantially the same had instruments other than off-balance-sheet products been used for interest rate risk management purposes. In the third quarter and first nine months of 1994, the Corporation's net interest income included approximately $75 million and $330 million, respectively, attributable to hedging with derivative instruments, compared with approximately $165 million and $545 million, respectively, in the comparable periods of 1993. The derivative hedging amounts for the third quarter and the first nine months of 1994 accounted for approximately 20 basis points and 25 basis points, respectively, of the net interest margins for those periods, while the derivative hedging amounts for the comparable periods of 1993 accounted for approximately 40 basis points and 45 basis points, respectively. - ------------------------------------------------------------------------------- NONINTEREST Noninterest income for the third quarter of 1994, which INCOME included $39 million related to Continental, increased $68 million from the amount reported the same period last year. Noninterest income for the first nine months of 1994 decreased $58 million from the comparable period in 1993. Included in noninterest income for the first nine months of 1993 was $38 million of nonrecurring income representing previously unrecognized post Security Pacific Corporation merger 1992 earnings of Bank of America (Asia) Limited, formerly Security Pacific Asia Bank, Ltd. (SPABL). Excluding this nonrecurring item, noninterest income for the first nine months of 1994 decreased $20 million over the first nine months of 1993. 20
===================================================================================================================== NONINTEREST INCOME - --------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED THIRD QUARTER SEPTEMBER 30 ------------------- --------------------- (IN MILLIONS) 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------- FEES AND COMMISSIONS Deposit account fees $ 301 $ 306 $ 885 $ 896 Credit card fees 86 88 253 259 Trust fees 69 74 202 222 Other fees and commissions: Loan fees and charges 75 78 211 237 Off-balance-sheet credit-related instrument fees 72 67 205 188 Mutual fund and annuity commissions 22 24 68 71 Other 110 106 323 319 - --------------------------------------------------------------------------------------------------------------------- 279 275 807 815 - --------------------------------------------------------------------------------------------------------------------- 735 743 2,147 2,192 - --------------------------------------------------------------------------------------------------------------------- TRADING INCOME Net trading account related 57 56 109 198 Foreign exchange trading related 63 76 194 270 - --------------------------------------------------------------------------------------------------------------------- 120 132 303 468 - --------------------------------------------------------------------------------------------------------------------- OTHER NONINTEREST INCOME Income from assets pending disposition 22 27 142 87 Net gain on sales of assets/a/ 33 17 98 61 Venture capital activities 33 24 96 76 Net gain (loss) on available-for-sale securities (2) 14 25 45 Other income 134 50 285 225 - --------------------------------------------------------------------------------------------------------------------- 220 132 646 494 - --------------------------------------------------------------------------------------------------------------------- $1,075 $1,007 $3,096 $3,154 - --------------------------------------------------------=============================================================
/a/ Net gain on sales of assets includes gains and losses from the disposition of loans, premises and equipment, and certain other assets. Excluding Continental's contribution of $27 million, total fees and commissions for the third quarter and first nine months of 1994 decreased $35 million and $72 million, respectively, from the amounts reported in the corresponding periods of 1993. This decrease was primarily due to declines in trust fees and loan fees and charges. The decline in trust fees was primarily due to a decline in the institutional trust customer base and market-driven price reductions in the corporate trust segment. Loan fees and charges for the first nine months of both 1994 and 1993 were affected by adjustments to excess servicing assets. Other noninterest income for the third quarter of 1994 increased $88 million from the third quarter of 1993 primarily due to the sales of a twenty-six percent equity interest in Burns-Fry Holdings Corporation and a Malaysian branch. These sales resulted in gains of $36 million and $34 million, respectively. Other noninterest income for the first nine months of 1994 increased $190 million from the amount reported in the same period last year excluding the 1993 nonrecurring income related to SPABL, as discussed on page 20. This growth was largely attributable to the previously mentioned gains and increases in income from assets pending disposition and venture capital activities. The increase in income from assets pending disposition was primarily due to certain asset sales in improved markets, while the increase in venture capital activities was largely attributable to higher realized gains. 21 ================================================================================ Trading income represents the net amount earned from the Corporation's trading activities, which include facilitating transactions for customers and entering into transactions for the Corporation's own account in a diverse range of financial instruments and markets. Trading income, as disclosed in the Corporation's consolidated statement of operations, does not include the net interest income associated with trading activities. However, the net interest income amounts are presented in the table below as they should be considered in evaluating the overall profitability of those activities. To reflect the business purpose and use of the financial contracts into which the Corporation enters, trading income and the net interest revenue or expense associated with such contracts has been allocated into three broad functional categories: interest rate trading, foreign exchange trading, and debt instruments trading. ================================================================================ TRADING INCOME AND TRADING-RELATED NET INTEREST INCOME BY FUNCTION - --------------------------------------------------------------------------------
1994 ---------------------------------------------------------------------------------------------------------- THIRD QUARTER NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------ --------------------------------------------------- INTEREST FOREIGN DEBT INTEREST FOREIGN DEBT (IN MILLIONS) RATE/A/ EXCHANGE/B/ INSTRUMENTS/C/ TOTAL RATE/A/ EXCHANGE/B/ INSTRUMENTS/C/ TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Trading income $20 $68 $32 $120 $48 $198 $57 $303 Net interest income 2 3 25 30 - 6 63 69 - ------------------------------------------------------------------------------------------------------------------------------------ $22 $71 $ 57 $150 $48 $204 $120 $372 - ------------------------------======================================================================================================
/a/ Includes income from interest rate and currency swaps, interest rate futures and option contracts, and forward rate agreements. /b/ Includes income from foreign exchange spot, forward, futures, and option contracts. /c/ Includes income from debt securities and debt-related derivatives. Trading income for the third quarter and first nine months of 1994 decreased $12 million and $165 million, respectively, from the amounts reported in the corresponding periods of 1993. These declines were primarily due to less favorable market conditions. - -------------------------------------------------------------------------------- NONINTEREST Noninterest expense for the third quarter and first EXPENSE nine months of 1994 increased $90 million and $34 million, respectively, from the amounts reported in the corresponding periods of 1993. Noninterest expense in the third quarter and first nine months of 1994 included $51 million related to Continental's ongoing operations, as well as an additional $50 million of merger-related expenses recorded in connection with the Continental merger. In addition, noninterest expense for the first nine months of 1994 included $83 million of capital additions to two of the Pacific Horizon money market mutual funds, for which Bank of America NT&SA serves as investment advisor. Noninterest expense for the third quarter and first nine months of 1993 included $26 million of nonrecurring additional salary expense related to a special recognition award given to employees. Excluding the above items, noninterest expense for the third quarter of 1994 remained essentially unchanged from the third quarter of 1993, while noninterest expense for the first nine months of 1994 was down $124 million from the first nine months of 1993. 22 ================================================================================================================================ NONINTEREST EXPENSE - --------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED THIRD QUARTER SEPTEMBER 30 ----------------------- ----------------------- (IN MILLIONS) 1994 1993 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- Salaries $ 741 $ 744 $2,151 $2,157 Employee benefits 186 140 524 435 Occupancy 171 172 503 502 Equipment 145 145 429 436 Amortization of intangibles 100 100 304 306 Communications 79 82 237 249 Regulatory fees and related expenses 72 72 214 235 Professional services 54 63 165 195 Merger-related expenses 50 - 50 9 Net other real estate owned expense 15 38 21 100 Other expense 325 292 945 885 - -------------------------------------------------------------------------------------------------------------------------------- $1,938 $1,848 $5,543 $5,509 - ---------------------------------------------------------------=================================================================
Excluding the nonrecurring employee recognition award discussed on page 22, personnel expense (comprised of salaries and employee benefits) for the third quarter and first nine months of 1994 increased $69 million and $109 million, respectively, from the amounts reported in the same periods last year. This increase was largely due to increases in severance-related benefits and incentive-based pay, and also to higher staff levels resulting from the consummation of the Continental merger. The Corporation's staff level on a full-time-equivalent (FTE) basis was approximately 81,900 in September 1994, up from approximately 80,200 in September 1993. The Corporation had approximately 98,600 employees in September 1994, up slightly from approximately 98,000 a year earlier. FTEs and employees in September included approximately 4,200 and 4,600, respectively, related to the Continental merger. Net other real estate owned expense for the third quarter and first nine months of 1994 decreased $23 million and $79 million, respectively from the amounts reported in the comparable periods of 1993. These decreases can be primarily attributed to increased gains on sales of other real estate owned and declines in writedowns on foreclosed properties. - -------------------------------------------------------------------------------- INCOME The provision for income taxes was $384 million and $376 TAXES million for the quarters ended September 30, 1994 and 1993, respectively, reflecting forecasted annual effective income tax rates of 41.8 percent and 43.2 percent, respectively. For further information concerning the Corporation's provision for federal, state and foreign income taxes for the most recent five quarters, refer to Note 7 on page 11 of the Notes to Consolidated Financial Statements. 23 BALANCE SHEET ANALYSIS ================================================================================ The increases in most categories of the Corporation's balance sheet between the amounts reported at September 30, 1994 and those amounts reported at December 31, 1993 primarily resulted from the Continental merger. The amounts related to Continental and other significant factors affecting the Corporation's financial position at September 30, 1994 are described in the applicable sections below. Total assets increased $27.3 billion between December 31, 1993 and September 30, 1994 primarily due to $20.5 billion of assets obtained in connection with the Continental merger. In addition, $6.9 billion of the increase in total assets was due to the recording of unrealized gains on forward, swap, option, and other conditional exchange contracts as assets and unrealized losses on these contracts as liabilities, as required under Financial Accounting Standards Board Interpretation (FIN) No. 39, "Offsetting of Amounts Related to Certain Contracts," which was adopted in the first quarter of 1994. For further information concerning the adoption of FIN No. 39, refer to Note 5 of the Notes to Consolidated Financial Statements on page 10. Earning assets totaled $175.6 billion at September 30, 1994, up $13.9 billion from $161.7 billion at year-end 1993. The Continental merger increased loans by $11.2 billion, available- for-sale securities by $1.2 billion, interest-bearing deposits in banks by $0.8 billion, and securities purchased under resale agreements by $0.6 billion. Reclassifications made in connection with the first-quarter 1994 adoption of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and the Continental merger caused a shift in the Corporation's earning assets mix, but did not affect the total earning assets between year-end 1993 and September 30, 1994. Although earning assets increased between December 31, 1993 and September 30, 1994, they decreased as a percentage of total assets from 87 percent at year-end 1993 to 82 percent at September 30, 1994, primarily due to the first-quarter 1994 adoption of FIN 39. For further information concerning reclassifications made in connection with the adoption of SFAS No. 115 and the Continental merger, refer to Note 4 of the Notes to Consolidated Financial Statements on pages 9 and 10. The increase in total goodwill and identifiable intangibles between December 31, 1993 and September 30, 1994 was primarly due to the Continental merger. This increase in goodwill and identifiable intangibles was partially offset by amortization recorded during the first nine months of 1994. 24
==================================================================================================================================== AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES - AVERAGE BALANCES, INTEREST, AND AVERAGE RATES - ------------------------------------------------------------------------------------------------------------------------------------ THIRD QUARTER 1994 THIRD QUARTER 1993 ----------------------------------------- ---------------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - ------------------------------------------------------------------------------------------------------------------------------------ Available-for-sale securities: U.S. Treasury and other government agency securities $ 2,820 $ 40 5.57% $ 922 $ 16 7.04% Mortgage-backed securities 3,997 58 5.78 1,871 31 6.68 State, county, and municipal securities 9 - 5.93 - - - Other domestic securities 480 5 4.46 49 1 10.21 Foreign securities 1,865/c/ 31 6.60 778 19 9.43 ------- ---- ------- ---- TOTAL AVAILABLE-FOR-SALE SECURITIES $ 9,171 $ 134 5.81/d/ $ 3,620 $ 67 7.41 ======= ==== ======= ==== Held-to-maturity securities: U.S. Treasury and other government agency securities $ 712 $ 12 6.91% $ 3,360 $ 45 5.35% Mortgage-backed securities 7,255 130 7.19 11,687 209 7.14 State, county, and municipal securities 472 10 8.04 540 11 8.13 Other domestic securities 213 4 7.13 696 46 26.39/e/ Foreign securities 2,601 52 8.00 96 2 6.89 ------- ----- ------- ---- TOTAL HELD-TO-MATURITY SECURITIES $11,253 $ 208 7.41 $16,379 $313 7.62 ======= ===== ======= ==== - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------- ---------------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - ------------------------------------------------------------------------------------------------------------------------------------ Available-for-sale securities: U.S. Treasury and other government agency securities $ 3,266 $ 134 5.46% $ 1,944 $ 71 4.88% Mortgage-backed securities 3,988 165 5.52 1,543 90 7.83 State, country and municipal 8 - 6.38 - - - Other domestic securities 398 14 4.62 34 2 8.13 Foreign securities 1,776/c/ 99 7.44 841 54 8.56 ------- ----- ------- ---- Total Available-for-Sale Securities $ 9,436 $ 412 5.83/d/ $ 4,362 $217 6.66 ======= ===== ======= ==== Held-to-maturity securities U.S. Treasury and other government agency securities $ 758 $ 38 6.66% $ 3,564 $138 5.19% Mortgage-backed securities 7,719 418 7.21 10,543 588 7.43 State, county, and municipal securities 486 29 8.11 562 34 8.04 Other domestic securities 234 13 7.15 801 86 14.29/e/ Foreign securities 2,401 140 7.82 86 5 7.20 ------- ----- -------- ---- TOTAL HELD-TO-MATURITY SECURITIES $11,598 $ 638 7.33 $15,556 $851 7.29 ======= ===== ======= ==== - ------------------------------------------------------------------------------------------------------------------------------------
/a/ Average balances are obtained from the best available daily, weekly, or monthly data. /b/ Interest income and average rates are presented on a taxable-equivalent basis. The taxable-equivalent adjustments are based on a marginal tax rate of 35 percent. /c/ Average balances include nonaccrual assets. /d/ Due to the first-quarter 1994 adoption of SFAS No. 115, available-for-sale securities are recorded at their fair values. Without regard to net unrealized losses, the rates would have been 5.64% and 5.68% for the third quarter of 1994 and the nine months ended September 30, 1994, respectively. /e/ Rates reflect income recognized on call premiums received and unamortized discounts related to debentures called prior to maturity. 25 ================================================================================ During the first nine months of 1994, total deposits increased $11.0 billion. The Continental merger contributed $11.9 billion to total deposits, but this contribution was partially offset by a reduction in time deposit and money market balances in association with the low interest rate environment in early 1994. Other short-term borrowings and securities sold under repurchase agreements increased $2.3 billion and $1.0 billion, respectively, during the first nine months of 1994. The Continental merger increased other short term-borrowings by $2.2 billion and securities sold under repurchase agreements by $0.5 billion. The remaining increase in securities sold under repurchase agreements was primarily used to fund the trading positions of BA Securities, Inc. - -------------------------------------------------------------------------------- OVERVIEW OF Total loans at September 30, 1994 were up $12.1 billion LOAN PORTFOLIO from year-end 1993, resulting from $11.2 billion of loans obtained in connection with the Continental merger, as well as from continued portfolio growth. Excluding the newly acquired Continental loans and certain reclassifications made in connection with the first-quarter 1994 adoption of SFAS No. 115 (as discussed in Note 4 of the Notes to Consolidated Financial Statements on pages 9 and 10), total loans grew by $3.4 billion between December 31, 1993 and September 30, 1994. The Continental merger caused a slight shift in the risk profile of the credit portfolio, as the majority of loans obtained from Continental were commercial loans. At September 30, 1994, domestic consumer loans remained the largest component of the portfolio, but accounted for 48 percent of total loans compared with 49 percent at year-end 1993. Domestic commercial loans accounted for 37 percent of total loans at September 30, 1994, up from 35 percent at year-end 1993. Foreign loans accounted for 15 percent of total loan outstandings at September 30, 1994, down from 16 percent at year-end 1993. Domestic Consumer Loans -- The growth in domestic consumer loans during the first nine months of 1994 included increases in residential first mortgages and installment loans of $2.6 billion and $1.6 billion, respectively. The increase in residential first mortgages was primarily due to growth in mortgage originations for the purchase of homes and, to a lesser extent, a decline in the level of prepayments. In addition, the level of first residential mortgage originations for the third quarter of 1994 increased in other western states from the same period last year. The increase in installment loan outstandings between year-end 1993 and September 30, 1994 was primarily attributable to increases in junior mortgages nationwide and manufactured housing loans in affiliate states. 26
================================================================================================================================== LOAN OUTSTANDINGS - ---------------------------------------------------------------------------------------------------------------------------------- 1994 1993 ------------------------------------------ ------------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ---------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages/a/ $ 33,033 $ 31,784 $ 30,993 $ 30,483 $ 30,021 Installment/b/ 16,890 16,229 15,809 15,332 15,115 Credit card 7,420 7,169 7,162 7,474 7,334 Individual lines of credit/b/ 8,367 8,235 8,268 8,486 8,749 Other/b/ 539 285 289 274 278 - ---------------------------------------------------------------------------------------------------------------------------------- 66,249 63,702 62,521 62,049 61,497 Commercial: Commercial and industrial/c/ 29,021 21,815 20,954 20,486 20,124 Loans secured by real estate 9,823 9,131 9,050 9,251 9,381 Construction and development loans secured by real estate 3,929 3,742 3,991 4,418 5,085 Loans for purchasing or carrying securities 1,495 1,683 2,934 3,090 3,308 Financial institutions 2,601 1,340 1,751 2,170 2,099 Lease financing 1,694 1,678 1,665 1,715 1,753 Agricultural 1,721 1,605 1,614 1,679 1,625 Other 1,642 1,465 1,332 1,478 1,361 - ---------------------------------------------------------------------------------------------------------------------------------- 51,926 42,459 43,291 44,287 44,736 - ---------------------------------------------------------------------------------------------------------------------------------- 118,175 106,161 105,812 106,336 106,233 FOREIGN Commercial and industrial 13,331 12,388 11,748 11,448 11,395 Governments and official institutions 1,220 862 787 3,429 3,527 Banks and other financial institutions 2,629 2,206 1,955 2,279 1,902 Other 3,336 3,257 3,242 3,064 2,919 - ---------------------------------------------------------------------------------------------------------------------------------- 20,516 18,713 17,732 20,220 19,743 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LOANS 138,691 124,874 123,544 126,556 125,976 Less: Allowance for credit losses 3,625 3,414 3,445 3,508 3,715 - ---------------------------------------------------------------------------------------------------------------------------------- $135,066 $121,460 $120,099 $123,048 $122,261 - ------------------------------------------------------============================================================================
/a/ Includes loans held for sale in the normal course of business of $52 million, $38 million, $138 million, $177 million, and $316 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, respectively. /b/ Installment loans, individual lines of credit, and other consumer loans included the following aggregate amounts that were collateralized by junior mortgages on residential real estate: $13,658 million at September 30, 1994, $13,280 million at June 30, 1994, $12,927 million at March 31, 1994, $12,847 million at December 31, 1993, and $13,117 million at September 30, 1993. /c/ Excludes loans held for sale in the normal course of business that were originated with the intent to sell and are included in other assets of $930 million, $760 million, $487 million, $554 million, and $622 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, respectively. 27 ============================================================================== During the first nine months of 1994, the Corporation's consumer loan delinquency ratios (the percentage of loan outstandings in each portfolio that are past due 60 days or more) decreased in every loan category. The delinquency ratio on residential first mortgages has declined each quarter since September 30, 1993, and fell to 1.71 percent at September 30, 1994 from 2.25 percent at December 31, 1993. In addition, the delinquency ratio on credit card loans has decreased each quarter since December 31, 1992, declining to 2.07 percent at September 30, 1994 from 2.39 percent at year-end 1993. Domestic Commercial Loans -- Commercial and industrial loans, the largest sector of the Corporation's domestic commercial loan portfolio, grew $8.5 billion between December 31, 1993 and September 30, 1994. Continental contributed $7.1 billion to this growth. Excluding Continental loans, the increase in commercial and industrial loans was due to growth in loans to large corporate borrowers. Partially offsetting this growth were declines in loans for purchasing or carrying securities and construction real estate, which decreased $1.6 billion and $0.5 billion, respectively, during the first nine months of 1994. The decline in loans for purchasing or carrying securities largely reflected lower demand among brokers and dealers. The decline in construction real estate loans was primarily due to paydowns and bulk loan sales. For information regarding the geographic concentrations included in the Corporation's portfolios of domestic commercial loans secured by real estate, as well as the geographic concentrations and project types included in the construction and development loan portfolio, refer to the tables on page 29. 28
=================================================================================================================================== DOMESTIC COMMERCIAL LOANS SECURED BY REAL ESTATE BY GEOGRAPHIC AREA - ----------------------------------------------------------------------------------------------------------------------------------- 1994 1993 ------------------------------------------- ------------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ---------------------------------------------------------------------------------------------------------------------------- California/a/ $5,040 $5,090 $4,971 $5,117 $5,131 Washington 2,210 2,138 2,037 2,061 2,077 Nevada 501 346 364 394 385 Arizona 323 325 340 334 347 Oregon 361 325 295 281 295 Other/b/ 1,388 907 1,043 1,064 1,146 - ---------------------------------------------------------------------------------------------------------------------------- $9,823 $9,131 $9,050 $9,251 $9,381 - ---------------------------------------------------=========================================================================
/a/ Approximately 50 percent of domestic commercial loans secured by real estate in California at September 30, 1994 and June 30, 1994, approximately 55 percent at March 31,1994 and December 31, 1993 and approximately 50 percent at September 30, 1993 were secured by properties in the following Southern California counties: Los Angeles, Orange, San Bernardino, San Diego, Riverside and Ventura. /b/ For each period presented, no other state individually exceeded 2 percent of total domestic commercial loans secured by real estate.
==================================================================================================================================== DOMESTIC CONSTRUCTION AND DEVELOPMENT LOANS BY GEOGRAPHIC AREA AND PROJECT TYPE AT SEPTEMBER 30, 1994 - ------------------------------------------------------------------------------------------------------------------------------------ APARTMENT & LIGHT (IN MILLIONS) OFFICE SUBDIVISION RETAIL CONDOMINIUM HOTEL INDUSTRY OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ California $ 590 $497 $363 $214 $131 $ 66 $144 $2,005/a/ Washington 236 185 175 75 32 27 52 782 Pennsylvania 201 - - - - - - 201 Illinois 49 34 47 - - - - 130 Arizona 3 52 45 6 2 3 9 120 Texas 7 23 55 25 - 6 1 117 Georgia 15 7 49 14 - 15 - 100 Other/b/ 109 59 121 58 10 10 107 474 - ------------------------------------------------------------------------------------------------------------------------------------ $1,210 $857 $855 $392 $175 $127 $313 $ 3,929 - --------------------------==========================================================================================================
/a/ Approximately 65 percent of domestic construction and development loans in California at September 30, 1994 were secured by properties in the following Southern California counties: Los Angeles, Orange, San Bernardino, San Diego, Riverside, and Ventura. /b/ No other state individually exceeded 2 percent of total domestic construction and development loans. Foreign Loans -- Foreign loans increased $0.3 billion between December 31, 1993 and September 30, 1994, primarily due to $0.9 billion of foreign loans obtained in connection with the Continental merger. Excluding Continental loans, foreign loans decreased $0.6 billion between year-end 1993 and September 30, 1994 primarily due to the $2.5 billion reclassification of debt-restructuring par bonds and other instruments issued by foreign governments to the securities portfolios in connection with the first-quarter adoption of SFAS No. 115, as discussed in Note 4 of the Notes to Consolidated Financial Statements on pages 9 and 10. Partially offsetting this decrease was a $1.4 billion increase in foreign commercial and industrial loans, primarily attributable to Asian borrowers. 29 ================================================================================ RESTRUCTURING At September 30, 1994, total public and private sector cross- COUNTRY DEBT border outstandings owed to the Corporation by borrowers in restructuring countries amounted to $1,840 million, of which $660 million was related to Continental. Of the total cross- border outstandings amount, $651 million was medium- and long- term debt and $227 million was local currency outstandings which were neither hedged nor funded by local currency borrowings. Total cross-border outstandings at September 30, 1994 excluded $901 million in par bonds and other instruments issued by certain restructuring countries that are collateralized by zero-coupon U.S. Treasury securities, which, at maturity, will have redemption values equal to the aggregate face amounts of the related par bonds and other instruments. Under SFAS No. 115, these par bonds and other instruments were classified as either available-for-sale securities or held-to-maturity securities at September 30, 1994. On April 15, 1994, the government of Brazil concluded a debt exchange in connection with a plan to restructure its medium- and long-term debt. The Corporation exchanged debt with an aggregate carrying value of $139 million and an aggregate face value of $692 million and past due accrued interest for 30-year bonds with an aggregate face value of $727 million. Of these bonds, approximately half are collateralized by zero-coupon U.S. Treasury securities, which, at maturity, will have redemption values equal to the aggregate face amounts of the related bonds. Upon receipt, these bonds were recorded in available-for-sale securities at their fair values. At September 30, 1994, cross-border outstandings owed to the Corporation by borrowers in Brazil totaled $951 million, of which $228 million was related to Continental. Of the total cross-border outstandings owed to the Corporation by borrowers in Brazil, $313 million was medium- and long-term debt. During the third quarter of 1994 and first nine months of 1994, the Corporation received $2 million and $21 million, respectively, of cash payments from the government of Brazil on its medium- and long-term outstandings. The majority of these payments were recorded in income, since the recorded investment of the related debt is considered to be realizable. 30 ==================================================================================================================================== CROSS-BORDER OUTSTANDINGS EXCEEDING ONE PERCENT OF TOTAL ASSETS - ------------------------------------------------------------------------------------------------------------------------------------
Cross-Border Total Outstanding Public Private Cross-Border as a Percentage (DOLLAR AMOUNTS IN MILLIONS)/abcd/ Date Reported Sector/e/ Banks/e/ Sector/e/ Outstandings of Total Assets - ------------------------------------------------------------------------------------------------------------------------------------ Japan SEPTEMBER 30, 1994 $ 18 $1,339 $2,215 $3,572 1.67% June 30, 1994 17 1,529 2,049 3,595 1.82 March 31, 1994 17 1,596 1,712 3,325 1.69 December 31, 1993 10 1,490 2,054 3,554 1.90 September 30, 1993 10 1,466 1,807 3,283 1.75 Spain SEPTEMBER 30, 1994 108 196 1,784 2,088 0.97 June 30, 1994 61 110 3,026 3,197 1.62 March 31, 1994 117 85 3,045 3,247 1.65 December 31, 1993 56 105 1,941 2,102 1.12 September 30, 1993 47 29 1,603 1,679 0.90 Hong Kong SEPTEMBER 30, 1994 5 192 1,488 1,685 0.79 June 30, 1994 - 101 2,328 2,429 1.23 March 31, 1994 - 106 2,202 2,308 1.17 December 31, 1993 - 110 2,181 2,291 1.23 September 30, 1993 - 84 2,008 2,092 1.12 - ------------------------------------------------------------------------------------------------------------------------------------
/a/ Cross-border outstandings include the following assets, primarily in U.S. dollars, with borrowers or customers in a foreign country: loans, accrued interest, acceptances, interest-bearing deposits with other banks, trading account assets, available-for-sale securities, held-to-maturity securities, other interest-earning investments, and other monetary assets. Local currency outstandings which are neither hedged nor funded by local currency borrowings are included in cross-border outstandings. Guarantees of outstandings of borrowers of other countries are considered outstandings of the guarantor. Loans made to, or deposits placed with, a branch of a foreign bank located outside the foreign bank's home country are considered loans or deposits with the country in which the foreign bank is headquartered. Outstandings of a country do not include amounts of principal or interest which are supported by written, legally enforceable guarantees by guarantors from other countries or the amount of outstandings to the extent that they are secured by tangible, liquid collateral held and realizable by the Corporation outside the country. /b/ At September 30, 1994, total unfunded commitments of the above countries, whose unfunded commitments exceeded 10 percent of their respective cross- border outstandings, were as follows: Japan, $1,171 million and Hong Kong, $426 million. /c/ Included in the cross-border outstandings of the countries listed are loans and other interest-bearing assets on nonaccrual status at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, respectively, as follows: $17 million, $17 million, $16 million, $16 million, and $17 million for Japan; $4 million, $6 million, $6 million, $7 million, and $5 million for Hong Kong; and $3 million, $6 million, $6 million, and $6 million at September 30, 1994, June 30, 1994, March 31, 1994, and December 31, 1993 for Spain. Also included in cross-border outstandings are restructured loans of $2 million for Hong Kong at June 30, 1993 and loans past due 90 days or more and still accruing interest of $1 million for Hong Kong at June 30, 1994 and December 31, 1993. /d/ No country excluded from this table had cross-border outstandings between 0.75 percent and 1.00 percent of total assets for any of the periods presented except $1,816 million and $1,738 million for Italy at September 30, 1994 and June 30, 1994, respectively; $1,690 million and $1,522 million for South Korea at September 30, 1994 and June 30, 1994, respectively; and $1,489 million for the United Kingdom at September 30, 1993. Not included in cross-border outstandings with Mexico were par bonds issued by the government of Mexico with face values of $1,341 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993. The par bonds had a carrying value of $1,162 million at September 30, 1994, $1,153 million at June 30, 1994, $1,178 million at March 31, 1994, and $1,297 million at December 31, 1993, and September 30, 1993. At September 30, 1994, the par bonds had a total fair value of approximately $910 million. Due to the first-quarter 1994 adoption of SFAS No. 115, certain of these par bonds were recorded in available-for-sale securities and carried at their fair value of $304 million at September 30, 1994, while the remainder of these par bonds were recorded in held-to-maturity securities at their amortized cost. Principal repayment of these par bonds is collateralized by zero-coupon U.S. Treasury securities which, at maturity in 2008 and 2019, will have a redemption value equal to the face value of the par bonds. At September 30, 1994, this collateral had a fair value of approximately $200 million. Future interest payments for a rolling eighteen- month period are also collateralized by additional U.S. dollar-denominated securities permitted by the agreement. The details of the transaction in which the majority of these par bonds were acquired were reported in the Parent's Annual Report on Form 10-K for the year ended December 31, 1990. Mexico's cross-border outstandings also excluded additional loans of $30 million at September 30, 1994, and $45 million at June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, which are fully collateralized at maturity by separate zero-coupon U.S. Treasury securities. Had these par bonds and other instruments been included, total cross-border outstandings with Mexico would have exceeded 0.75 percent of total assets for all periods presented. /e/ Sector definitions are based on Federal Financial Institutions Examination Council Instructions for preparing the Country Exposure Report. 31 CREDIT RISK MANAGEMENT =============================================================================== ALLOWANCE FOR The allowance for credit losses at September 30, 1994 was CREDIT LOSSES $3,625 million, or 2.61 percent of loan outstandings, compared with $3,508 million, or 2.77 percent, at December 31, 1993. Excluding outstandings in the residential first mortgage portfolio and the portion of the allowance associated with these outstandings, the ratios were 3.34 percent and 3.59 percent of loans at September 30, 1994 and December 31, 1993, respectively. In addition, the Corporation's ratio of the allowance for credit losses to total nonaccrual assets was 174 percent at September 30, 1994, up from 122 percent at December 31, 1993. Although the allowance is general in nature and is available for the credit portfolio in its entirety, management develops the allowance using a "building block approach" for various portfolio segments. The allowance is established by credit officers for each portfolio segment. Significant credits, particularly those classified as "doubtful," are individually analyzed, while other credits are analyzed by portfolio segment. In establishing the allowance for the portfolio segments, credit officers initially employ results obtained from statistical models using historical loan performance data. These models have been developed and refined for various portfolio segments over the last nine years. In addition to the allowance amounts that would be required based on historical loss experience, the credit officer responsible for each portfolio segment makes adjustments based on qualitative evaluations of individual classified assets, knowledge of portfolio segment conditions, or on the officer's judgment of factors that are expected to influence the future performance of the portfolio. These factors include geographic and portfolio concentrations, new products or markets, evaluations of the changes in the historical loss experience component, and projections of this component into the current and future periods. The Composition of Allowance for Credit Losses table below displays how the allowance for credit losses related to special mention and classified assets is determined by combining the historical loss experience component with the credit management allocated component. After an allowance has been established for the portfolio segments, the final step in this building block approach occurs. Credit management establishes an unallocated portion of the allowance for credit losses, which is attributable to factors that cannot be associated with a particular portfolio segment. These factors include general economic conditions, recognition of specific regional and international geographic concerns, trends in portfolio growth, new business volume, and the level of the allowance in relation to total loans and nonaccrual assets. =============================================================================== COMPOSITION OF ALLOWANCE FOR CREDIT LOSSES - -------------------------------------------------------------------------------
1994 1993 ----------------------------------------- ----------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ------------------------------------------------------------------------------------------------------------------------------ Special mention and classified:/a/ Historical loss experience component $ 292 $ 311 $ 401 $ 475 $ 590 Credit management allocated component 626 579 653 770 777 - ------------------------------------------------------------------------------------------------------------------------------ Total special mention and classified 918 890 1,054 1,245 1,367 Domestic consumer/b/ 1,048 1,042 1,079 1,072 1,099 Domestic commercial/b/ 225 166 148 151 160 Foreign/b/ 189 149 144 165 297 - ------------------------------------------------------------------------------------------------------------------------------ Total allocated 2,380 2,247 2,425 2,633 2,923 Unallocated 1,245 1,167 1,020 875 792 - ------------------------------------------------------------------------------------------------------------------------------ $3,625 $3,414 $3,445 $3,508 $3,715 - ------------------------------------------------------========================================================================
/a/ Includes all loans regardless of type that have been internally risk rated as "special mention," "substandard," or "doubtful." The Corporation's actual historical loss experience indicates ultimate loss rates for all periods presented for "special mention," "substandard," and "doubtful" loans of approximately 2 percent, 6 percent, and 37 percent, respectively. /b/ Excludes "special mention" and "classified". 32 ================================================================================================================================== QUARTERLY CREDIT LOSS EXPERIENCE - ----------------------------------------------------------------------------------------------------------------------------------
1994 1993 NINE MONTHS ENDED ---------------------------- ----------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ----------------------- (DOLLAR AMOUNTS IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES Balance, beginning of period $3,414 $3,445 $3,508 $3,715 $3,781 $3,508 $3,921 CREDIT LOSSES Domestic consumer: Residential first mortgages 14 13 7 10 6 34 13 Credit card 93 96 102 108 115 291 380 Other consumer 73 81 90 94 96 244 310 Domestic commercial: Commercial and industrial 9 18 11 54 49 38 176 Loans secured by restate 9 21 15 23 29 45 68 Construction and development loans secured by real estate 42 12 23 65 61 77 226 Loans for purchasing or carrying securities - - - - - - 2 Financial institutions - 1 - - 10 1 18 Lease financing - - - 1 1 - 8 Agricultural - 1 1 2 1 2 5 Foreign 7 9 24 13 10 40 23 - ---------------------------------------------------------------------------------------------------------------------------------- Total credit losses 247 252 273 370 378 772 1,229 CREDIT LOSS RECOVERIES Domestic consumer: Residential first mortgages 1 - - - 1 1 1 Credit card 19 11 12 13 13 42 40 Other consumer 30 27 25 27 30 82 87 Domestic commercial: Commercial and industrial 34 21 20 45 24 75 66 Loans secured by real estate 6 7 4 16 8 17 17 Construction and development loans secured by real estate 22 18 24 45 21 64 42 Loans for purchasing or carrying securities - - - - - - 1 Financial institutions 2 2 2 - 1 6 2 Lease financing 1 1 2 2 1 4 4 Agricultural 2 2 2 1 2 6 9 Foreign 24 9 8 9 41 41 57 - ---------------------------------------------------------------------------------------------------------------------------------- Total credit loss recoveries 141 98 99 158 142 338 326 - ---------------------------------------------------------------------------------------------------------------------------------- Total net credit losses 106 154 174 212 236 434 903 Provision for credit losses 110 125 125 150 178 360 653 Allowance related to acquisitions 241/a/ - - - - 241/a/ 12/b/ Other net additions (deductions) (34)/c/ (2) (14)/d/ (145)/e/ (8) (50)/cd/ 32/f/ - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD/g/ $3,625 $3,414 $3,445 $3,508 $3,715 $3,625 $3,715 - ----------------------------------------------------------======================================================================== ANNUALIZED RATIO OF NET CREDIT LOSSES (RECOVERIES) TO AVERAGE LOAN OUTSTANDINGS Domestic consumer: Residential first mortgages 0.16% 0.16% 0.10% 0.12% 0.07% 0.14% 0.06% Credit card 4.05 4.82 5.07 5.23 5.50 4.64 5.99 Other consumer 0.68 0.88 1.08 1.12 1.09 0.88 1.20 Domestic commercial: Commercial and industrial (0.40) (0.05) (0.19) 0.20 0.50 (0.22) 0.70 Loans secured by real estate 0.11 0.63 0.50 0.29 0.84 0.41 0.69 Construction and development loans secured by real estate 2.07 (0.62) (0.14) 1.64 2.93 0.42 4.10 Loans for purchasing or carrying securities - - - - - - 0.19 Financial institutions (0.26) (0.37) (0.47) - 1.71 (0.36) 1.14 Lease financing (0.31) (0.32) (0.31) (0.19) - (0.31) 0.32 Agricultural (0.37) (0.14) (0.33) 0.09 (0.23) (0.28) (0.34) Total domestic 0.44 0.59 0.61 0.79 1.02 0.54 1.18 Foreign (0.37) - 0.37 0.06 (0.62) (0.01) (0.23) TOTAL 0.32 0.50 0.58 0.67 0.76 0.46 0.97 RATIO OF ALLOWANCE TO LOANS AT QUARTER END 2.61 2.73 2.79 2.77 2.95 2.61 2.95 EARNINGS COVERAGE OF NET CREDIT LOSSES/h/ 9.82x 6.66x 5.83x 4.77x 4.41x 7.10x 3.57x - ----------------------------------------------------------------------------------------------------------------------------------
/a/ Represents the addition of consummation date allowances for credit losses of Continental and Liberty Bank of $238 million and $3 million, respectively. /b/ Represents the addition of consummation date allowance for credit losses of First Gibraltar Bank, FSB. /c/ This amount includes a $33 million reduction of the allowance related to the sale of certain loans, primarily commercial and construction and development loans secured by real estate, net of their allowance. /d/ Primarily represents a reduction of the allowance due to the transfer of certain debt-restructuring par bonds and other instruments issued by foreign governments net of their related allowance to available-for-sale securities. /e/ Due to the transfer of certain assets net of their related allowance to other assets, the allowance for credit losses was reduced by $128 million, which included $88 million of regulatory-related allocated transfer risk reserve (ATRR). This amount also includes $16 million related to the sale of commercial real estate loans net of their allowance. /f/ Includes $36 million related to the consolidation of subsidiaries and operations that were held for disposition at December 31, 1992. /g/ Includes ATRR of $81 million and $80 million at September 30, 1993 and June 30, 1993, respectively. Due to the transfer of certain assets net of their related allowance to other assets during the fourth quarter of 1993, the allowance for credit losses does not include any ATRR subsequent to the transfer. /h/ Earnings coverage of net credit losses is calculated as income before income taxes plus the provision for credit losses as a multiple of net credit losses. 33 =============================================================================== Net credit losses for the third quarter and first nine months of 1994 declined $130 million and $469 million, respectively, from the amounts reported in the same periods last year. These declines reflected continued improvement in various sectors of the Corporation's credit portfolio, most notably in construction and development loans, commercial and industrial loans, and credit card outstandings. These decreases in net credit losses were partially offset by higher charge-offs related to residential first mortgages and foreign loans. - ------------------------------------------------------------------------------- NONACCRUAL Total nonaccrual assets decreased $802 million, or 28 ASSETS, RESTRUC- percent, between year-end 1993 and September 30, 1994. TURED LOANS, AND Excluding $245 million of nonaccrual assets obtained in LOANS PAST DUE connection with the Continental merger, total nonaccrual 90 DAYS OR MORE assets at September 30, 1994 decreased $1,047 million, or AND STILL ACCURING 36 percent, from their year-end 1993 level. This decrease INTEREST was largely the result of full or partial payments and loans restored to accrual status, which reflects improve- ments in most segments of the credit portfolio, particularly in the construction and development, commercial and industrial, and loans secured by real estate portfolios. In addition, $162 million of this decrease was due to the sale of selected real-estate-related assets. The improvement in the Corporation's credit quality during the first nine months of 1994 was also reflected in the Corporation's nonperforming asset ratios. At September 30, 1994, the ratio of nonaccrual loans to total loans was 1.49 percent, down from 2.28 percent at December 31, 1993. In addition, the ratio of total nonperforming assets (comprised of nonaccrual assets and other real estate owned) to total assets declined 58 basis points since year- end 1993 to 1.24 percent. For further information concerning nonaccrual assets, refer to the table below and the tables on pages 35-37. ============================================================================================================================== ANALYSIS OF CHANGE IN NONACCRUAL ASSETS - ------------------------------------------------------------------------------------------------------------------------------
1994 1993 ---------------------------------------- ----------------------- THIRD SECOND FIRST FOURTH THIRD (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of quarter $2,222 $2,498 $2,886 $3,928 $4,618 ADDITIONS Loans placed on nonaccrual status 200 269 227 284 256 Acquired in the Continental merger 245 - - - - DEDUCTIONS Sales (167) (4) (30) (116) - Restored to accrual status (145) (169) (195) (317) (326) Foreclosures (19) (32) (72) (100) (196) Charge-offs (47) (37) (40) (123) (99) Restructuring-country-related assets transferred to other assets - - - (310) - Other, primarily payments (205) (303) (278) (360) (325) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF QUARTER $2,084 $2,222 $2,498 $2,886 $3,928 - ------------------------------------------------------========================================================================
34 =============================================================================================================================== NONACCRUAL ASSETS, RESTRUCTURED LOANS, AND LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST - --------------------------------------------------------------------------------------------------------------------------------
1994 1993 ----------------------------------- ----------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - -------------------------------------------------------------------------------------------------------------------------------- NONACCRUAL ASSETS Domestic consumer loans: Residential first mortgages $ 359 $ 383 $ 426 $ 406 $ 359 Other consumer 49 41 45 53 52 Domestic commercial loans: Commercial and industrial 352 236 372 457 539 Loans secured by real estate 412 588 553 570 742 Construction and development loans secured by real estate 672 724 819 1,037 1,545 Financial institutions 12 18 22 64 59 Lease financing 13 13 13 18 22 Agricultural 45 44 41 49 56 - -------------------------------------------------------------------------------------------------------------------------------- 1,914 2,047 2,291 2,654 3,374 Foreign loans: Commercial and industrial 95 97 119 139 356 Governments and official institutions 17 17 16 42 45 Banks and other financial institutions 10 8 9 11 64 Other 30 46 36 40 77 - -------------------------------------------------------------------------------------------------------------------------------- 152 168 180 232 542 Other interest-bearing assets 18 7 27 - 12 - -------------------------------------------------------------------------------------------------------------------------------- $2,084/a/ $2,222/a/ $2,498/a/ $2,886/a/ $3,928 - ------------------------------------------------------------------============================================================== RESTRUCTURED LOANS Domestic commercial: Commercial and industrial $ 79 $ 86 $ 86 $ 66 $ 79 Loans secured by real estate 11 13 12 21 6 Construction and development loans secured by real estate 2 2 6 10 16 Lease financing 1 1 1 1 1 Agricultural 1 1 1 - - - -------------------------------------------------------------------------------------------------------------------------------- 94 103 106 98 102 Foreign/b/ 36 36 36 36 36 - -------------------------------------------------------------------------------------------------------------------------------- $ 130 $ 139 $ 142 $ 134 $ 138 - ------------------------------------------------------------------============================================================== LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST Domestic consumer: Residential first mortgages $ 91 $ 108 $ 121 $ 153 $ 220 Other consumer 147 152 169 175 185 Domestic commercial: Commercial and industrial 76 19 3 20 51 Loans secured by real estate 70 122 64 138 125 Construction and development loans secured by real estate 34 96 113 86 67 Agricultural - - 7 - - - -------------------------------------------------------------------------------------------------------------------------------- 418 497 477 572 648 Foreign 2 1 5 6 13 - -------------------------------------------------------------------------------------------------------------------------------- $ 420 $ 498 $ 482 $ 578 $ 661 - ------------------------------------------------------------------==============================================================
/a/ Excludes certain nonaccrual debt-restructuring par bonds and other instruments issued by the governments of Brazil and Argentina that were included in available-for-sale securities at their market value of $393 million at September 30, 1994 and $367 million at June 30, 1994. Also excludes certain other nonaccrual loans and other instruments issued by various governments of $44 million at September 30, 1994 and June 30, 1994, $181 million at March 31, 1994, and $196 million at December 31, 1993 that were included in other assets at the lower of cost or fair value. /b/ Excludes debt restructurings with countries that have experienced liquidity problems of $1.9 billion at September 30, 1994, June 30, 1994, and March 31, 1994, $2.4 billion at December 31, 1993, and $2.3 billion at September 30, 1993. Beginning in the first quarter of 1994, the majority of these instruments were classified as either available-for-sale or held-to-maturity securities. Prior to January 1, 1994, these instruments were classified as loans. 35 =============================================================================================================================== INTEREST INCOME FOREGONE ON NONACCRUAL ASSETS - -------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED (IN MILLIONS) SEPTEMBER 30, 1994 - ------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Interest income that would have been recognized had the assets performed in accordance with their original terms $115 Less: Interest income included in the results of operations/a/ 35 - ------------------------------------------------------------------------------------------------------------------------------- Domestic interest income foregone 80 FOREIGN Interest income that would have been recognized had the assets performed in accordance with their original terms 10 Less: Interest income included in the results of operations/b/ 3 - ------------------------------------------------------------------------------------------------------------------------------- Foreign interest income foregone 7 - ------------------------------------------------------------------------------------------------------------------------------- $87 - ----------------------------------------------------------------------------------------------------------------------------===
/a/ Interest income included in the results of domestic operations represents interest payments recognized in interest income that related to domestic nonaccrual assets with carrying values totaling $386 million at September 30, 1994. Not included in interest income for the nine months ended September 30, 1994 were interest payments of $35 million which, for accounting purposes, were used to offset the principal balance of domestic nonaccrual assets with carrying values totaling $632 million at September 30, 1994. /b/ Interest income included in the results of foreign operations represents interest payments recognized in interest income that related to foreign nonaccrual assets with carrying values totaling $34 million at September 30, 1994. Not included in interest income for the nine months ended September 30, 1994 were interest payments of $4 million which, for accounting purposes, were used to offset the principal balance of foreign nonaccrual assets with carrying values totaling $63 million at September 30, 1994. 36 ================================================================================================================ CASH INTEREST PAYMENTS ON NONACCRUAL ASSETS BY LOAN TYPE - ----------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 1994 --------------------------------------------------------------------------------- CUMULATIVE CASH BOOK AS A CONTRACTUAL INTEREST NONACCRUAL PERCENTAGE PRINCIPAL CUMULATIVE APPLIED BOOK OF (IN MILLIONS) BALANCE CHARGE-OFFS TO PRINCIPAL BALANCE/a/ CONTRACTUAL - ---------------------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages $ 359 $ - $ - $ 359 100% Other consumer 51 2 - 49 96 Commercial: Commercial and industrial 599 188 55 356 59 Loans secured by real estate 578 74 92 412 71 Construction and development loans secured by real estate 1,164 270 222 672 58 Financial institutions 29 14 3 12 41 Lease financing 20 6 1 13 65 Agricultural 61 13 3 45 74 - -------------------------------------------------------------------------------------------------------------- 2,861 567 376 1,918 67 FOREIGN, EXCLUDING RESTRUCTURING- COUNTRY-RELATED ASSETS Commercial and industrial 162 45 22 95 59 Governments and official institutions 17 - - 17 100 Banks and other financial institutions 3 - - 3 100 Other 52 17 4 31 60 - -------------------------------------------------------------------------------------------------------------- 234 62 26 146 62 - -------------------------------------------------------------------------------------------------------------- Total, excluding restructuring- country-related assets 3,095 629 402 2,064 67 RESTRUCTURING-COUNTRY-RELATED ASSETS 49 26 3 20 41 - -------------------------------------------------------------------------------------------------------------- $3,144 $655 $405 $2,084 66% - -----------------------------------=========================================================================== - -------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1994 - -------------------------------------------------------------------------------------------------------------- CASH INTEREST PAYMENTS APPLIED ------------------------------------------------------- AS INTEREST AS REDUCTION INCOME OF PRINCIPAL TOTAL - -------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages $ 9 $ - $ 9 Other consumer 1 - 1 Commercial: Commercial and industrial 5 6 11 Loans secured by real estate 11 6 17 Construction and development loans secured by real estate 7 22 29 Financial institutions - - - Lease financing - 1 1 Agricultural 2 - 2 - -------------------------------------------------------------------------------------------------- 35 35 70 FOREIGN, EXCLUDING RESTRUCTURING- COUNTRY-RELATED ASSETS Commercial and industrial 2 3 5 Governments and official institutions - - - Banks and other financial institutions - - - Other - 1 1 - -------------------------------------------------------------------------------------------------- 2 4 6 - -------------------------------------------------------------------------------------------------- Total, excluding restructuring- country-related assets 37 39 76 RESTRUCTURING-COUNTRY-RELATED ASSETS 1 - 1 - -------------------------------------------------------------------------------------------------- $38 $39 $77 - -----------------------------------------------=================================================== CASH YIELD ON TOTAL NONACCRUAL ASSETS 4.94% __________________________________________________________________________________________________
/a/Nonaccrual book balance is equal to the contractual principal balance less charge-offs and cash interest payments applied as a reduction of principal since inception of the loan. 37 FOREIGN EXCHANGE AND OTHER DERIVATIVES ================================================================================ In the ordinary course of business, the Corporation enters into various types of transactions that involve foreign exchange and other derivative products with off-balance-sheet risk. Foreign exchange and other derivative products include futures, forwards, swaps, and option contracts, and are principally linked to interest rates, foreign exchange rates, or the prices of securities. Foreign exchange and other derivative transactions are conducted with various types of counterparties, including U.S. and foreign banks, nonbank financial institutions, corporations, and middle market customers. The following table is a summary of the notional or contractual amounts, credit exposure amounts, and fair value amounts associated with the Corporation's off-balance-sheet trading and asset and liability management activities at September 30, 1994. As illustrated below, the Corporation's off-balance-sheet credit exposure with regard to foreign exchange and other derivative products is a small fraction of the respective notional or contractual amounts. ================================================================================ FOREIGN EXCHANGE AND OTHER DERIVATIVE PRODUCTS AT SEPTEMBER 30,1994 - --------------------------------------------------------------------------------
NOTIONAL CREDIT FAIR OR CONTRACT EXPOSURE VALUE (IN BILLIONS) AMOUNT AMOUNT AMOUNT/a/ - -------------------------------------------------------------------------------------------------------------- TRADING Foreign exchange contracts/b/ $ 771.2/c/ $ 5.3/d/ $ (0.7) Interest rate swaps 340.9/c/ 1.9/de/ 0.6 Interest rate futures and forward contracts 204.0/c/ 0.2/d/ - Interest rate options 72.7/c/ 0.2/d/ - - -------------------------------------------------------------------------------------------------------------- $ 1,388.8/f/ $ 7.6 $ (0.1) - --------------------------------------------------------====================================================== ASSET AND LIABILITY MANAGEMENT Interest rate swaps $ 34.3/c/ $ 0.4 $ (0.5) Interest rate futures and forward contracts 29.5/c/ - -/g/ Interest rate options 8.8/c/ - 0.1/g/ Other/h/ 1.6/c/ - 0.1 - -------------------------------------------------------------------------------------------------------------- $ 74.2/f/ $ 0.4 $ (0.3) - --------------------------------------------------------======================================================
/a/ Fair value amounts consist of net unrealized gains and losses, accrued interest receivable or payable, and premiums paid or received. Such amounts represent the net fair value of contracts with all counterparties. The fair value amounts were generally calculated using discounted cash flow models based on current market yields for similar types of instruments and the maturity of each instrument. /b/ Includes amounts related to foreign exchange spot, forward, future, and option contracts and currency swaps. /c/ Interest rate swaps, interest rate futures and forward contracts, and interest rate options in both the trading and asset and liability management portfolios include $12.5 billion, $0.6 billion, and $0.5 billion, respectively, of intercompany hedging-related contracts. Both trading foreign exchange contracts and other asset and liability management contracts include $1.2 billion of intercompany hedging-related foreign exchange forward contracts and currency swaps. /d/ Amounts represent net unrealized gains on contracts with counterparties for whom legally enforceable master netting agreements were in place and effective at September 30, 1994 and gross unrealized gains on contracts with other counterparties. Credit risk amounts in Note 9 of the Notes to Consolidated Financial Statements on pages 12 and 13 do not give effect to netting under legally enforceable master netting agreements. Accordingly, these credit risk amounts differ from the credit exposure amounts detailed above. /e/ Includes the results of cross product netting of certain interest rate derivatives and currency swaps. /f/ Including intercompany hedging-related contracts of $18.3 billion in both the trading and asset and liability management portfolios, the aggregate notional or contract amounts of foreign exchange and other derivative contracts outstanding at December 31, 1993 were $894.1 billion for the trading portfolio and $64.5 billion for the asset and liability management portfolio. /g/ The fair value amounts for interest rate futures and forward contracts in the asset and liability management portfolio include no gross unrealized gains and gross unrealized losses of $11.4 million. The fair value amounts for interest rate options in the asset and liability management portfolio include gross unrealized gains of $64.8 million and no gross unrealized losses. /h/ Includes amounts related to foreign exchange forward contracts and currency swaps. The table on page 39 summarizes expected maturities and weighted average interest rates associated with amounts to be received or paid on asset and liability management interest rate swaps at September 30, 1994. These swaps are designated as accounting hedges and are used to modify the interest rate characteristics of assets and liabilities. Excluding the effects of the Continental merger, expected maturities and weighted average interest rates associated with the Corporation's asset and liability management interest rate swap portfolio at September 30, 1994 were not significantly different from those at year-end 1993. The table on page 39 reflects the combined post-Continental merger asset and liability management interest rate swap portfolio at September 30, 1994. 38 ================================================================================================================= ASSET AND LIABILITY MANAGEMENT INTEREST RATE SWAPS AT SEPTEMBER 30, 1994/a/ - -----------------------------------------------------------------------------------------------------------------
More than More than More than More than More than More than (IN BILLIONS) 0-1 1-2 2-3 3-4 4-5 5-10 10 Total year years years years years years years - ----------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS RECEIVE FIXED:/b/ Notional amount $ 4.8 $ 2.2 $ 1.2 $ 0.8 $ 1.1 $ 8.4 $ 2.2 $20.7/c/ Weighted average receive rate 7.19% 6.69% 6.41% 7.65% 7.62% 6.22% 6.75% 6.69% PAY FIXED:/b/ Notional amount 3.0 3.5 1.7 0.2 0.2 1.5 0.5 10.6 Weighted average pay rate 5.44% 4.68% 6.18% 6.61% 6.23% 4.95% 7.18% 5.36% FORWARD RECEIVE FIXED:/d/ Notional amount - - 0.2 - - 0.7 0.2 1.1 Weighted average receive rate - - 5.93% - - 6.90% 6.66% 6.68% FORWARD PAY FIXED:/d/ Notional amount - - 0.3 - - 0.8 - 1.1 Weighted average pay rate - - 6.28% - - 7.66% - 7.29% BASIS SWAPS:/e/ Notional amount $ 0.4 $ 0.1 - - - $ 0.3 - $ 0.8 - ----------------------------------------------------------------------------------------------------------------- TOTAL NOTIONAL AMOUNT $34.3/f/ - ------------------------------------------------------------------------------------------------------------=====
/a/ Includes intercompany hedging swaps. /b/ The floating side of substantially all receive fixed and pay fixed swaps is based on the one-, three-, or six-month London InterBank Offered Rate (LIBOR). At September 30, 1994, the one-, three-, and six-month LIBOR rates were 5.06 percent, 5.50 percent, and 5.75 percent, respectively. /c/ Includes $0.6 billion of amortizing swaps. /d/ Accrual of interest on forward swaps starts at a predetermined future date. The majority of the forward swaps start accruing interest one to three years after September 30, 1994. /e/ Basis swaps are interest rate swaps in which both amounts paid and received are based on floating rates. The Corporation's pay rates are primarily based on a LIBOR or Prime index and its receive rates are primarily based on LIBOR. /f/ Includes $6.0 billion of interest rate swaps related to Continental. Approximately 60 percent of the Corporation's hedging-related interest rate futures and forward rate agreements outstanding at September 30, 1994 mature within one year, while approximately 85 percent of its hedging-related option contracts mature within three years. Excluding Continental, approximately 70 percent of the Corporation's hedging-related interest rate futures and forward rate agreements outstanding at September 30, 1994 mature within one year, while approximately 85 percent of its hedging-related option contracts mature within three years. Excluding Continental, the above maturity distributions at September 30, 1994 were not significantly different from those at year-end 1993. With respect to the maturity distribution of Continental's hedging-related interest rate futures contracts at September 30, 1994, approximately 30 percent mature within one year, approximately 40 percent mature between one and two years, approximately 20 percent mature between two and three years, and approximately 10 percent mature after three years. All of the Corporation's hedging-related foreign exchange forward contracts outstanding at September 30, 1994 mature within 60 days. At September 30, 1994, the maturity distribution of the Corporation's hedging-related foreign exchange forward contracts was substantially the same as at December 31, 1993. At both September 30, 1994 and December 31, 1993, the Corporation's hedging-related foreign exchange forward contracts were denominated in various currencies, most notably Hong Kong dollars and Spanish pesetas. The Corporation's hedging-related currency swaps were not significant at either September 30, 1994 or December 31, 1993. For additional information concerning foreign exchange and other derivative transactions and their associated credit risk amounts, refer to Note 9 of the Notes to Consolidated Financial Statements on pages 12 and 13. 39 FUNDING AND CAPITAL =============================================================================== LIQUIDITY Liquid assets consist of cash and due from banks, interest-bearing deposits in banks, federal funds sold, securities purchased under resale agreements, trading account assets, and available-for-sale securities. At September 30, 1994, liquid assets totaled $40.7 billion, up $11.5 billion from $29.2 billion at December 31, 1993. This growth in liquid assets can be primarily attributed to a $7.9 billion increase in available-for-sale-securities, largely as a result of asset transfers made in connection with the previously discussed first-quarter 1994 adoption of SFAS No. 115 and the Continental merger. In addition, cash and due from banks and interest-bearing deposits in banks increased $2.0 billion, and $1.9 billion, respectively. - ------------------------------------------------------------------------------- CAPITAL At September 30, 1994, stockholders' equity totaled $18.9 billion, up from $17.1 billion at December 31, 1993. Of this increase, $1.0 billion was due to year-to-date 1994 earnings net of preferred and common stock dividends. In addition, common stockholders' equity and preferred stock increased $0.6 billion and $0.4 billion, respectively, primarily due to stock issuances in connection with the Continental merger. These increases were partially offset by the adoption of SFAS No. 115, which resulted in $201 million of net unrealized losses on available-for-sale securities (net of related income taxes) at September 30, 1994. Upon consummation of the Continental merger on August 31, 1994, each outstanding share of Continental's common stock was converted into either BankAmerica Corporation's common stock or cash. The total amount of common stock issued in connection with the Continental merger was 21.5 million shares, valued at $985 million as of January 27, 1994, which included 11.8 million shares of treasury stock purchased in anticipation of the merger at an average per-share price of $42.43. In addition, an aggregate amount of approximately $950 million was paid in cash to Continental common stockholders. The Corporation's total and Tier 1 risk-based capital ratios decreased 41 basis points and 37 basis points, respectively, between December 31, 1993 and September 30, 1994. These declines were primarily due to the increase in total risk weighted assets in connection with the Continental merger. The Corporation's Tier 1 leverage ratio was 6.64 percent at both September 30, 1994 and December 31, 1994. 40 =================================================================================================================================== RISK-BASED CAPITAL AND RISK-BASED CAPITAL RATIOS - -----------------------------------------------------------------------------------------------------------------------------------
1994 1993 ------------------------------------------- ----------------------------- (DOLLAR AMOUNTS IN MILLIONS)/a/ SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ----------------------------------------------------------------------------------------------------------------------------------- RISK-BASED CAPITAL Common stockholders' equity $ 15,763/b/ $ 14,324/b/ $ 14,136/b/ $ 14,165 $ 13,826 Perpetual preferred stock 3,368 2,979 2,979 2,979 2,979 Less: Goodwill, nongrandfathered core deposit and other identifiable intangibles, and other deductions/c/ (5,589) (5,028) (5,060) (5,125) (5,291) - ----------------------------------------------------------------------------------------------------------------------------------- TIER 1 CAPITAL 13,542 12,275 12,055 12,019 11,514 Eligible portion of the allowance for credit losses (exclusive of allocated transfer risk reserve)/d/ 2,356 2,048 1,990 1,995 2,022 Hybrid capital instruments/e/ 337 478 562 568 582 Subordinated notes and debentures/f/ 5,558 4,946 4,699 4,422 4,477 Less: Other deductions (104) (91) (47) (37) (24) - ----------------------------------------------------------------------------------------------------------------------------------- TIER 2 CAPITAL 8,147 7,381 7,204 6,948 7,057 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL $ 21,689 $ 19,656 $ 19,259 $ 18,967 $ 18,571 - -----------------------------------------------------------======================================================================== RISK WEIGHTED ASSETS $187,071 $162,372 $157,704 $158,015 $160,035 - -----------------------------------------------------------======================================================================== RISK-BASED CAPITAL RATIOS Tier 1 capital 7.24% 7.56% 7.64% 7.61% 7.19% Tier 2 capital 4.35 4.55 4.57 4.39 4.41 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL RATIO 11.59% 12.11% 12.21% 12.00% 11.60% - -----------------------------------------------------------======================================================================== TIER 1 LEVERAGE RATIO/g/ 6.64%/h/ 6.55% 6.37% 6.64% 6.42% ===================================================================================================================================
/a/ Due to the first-quarter 1993 adoption of SFAS No. 109, "Accounting for Income Taxes," core deposit intangibles (CDI) and other identifiable intangibles that are normally deducted from Tier 1 capital under the current guidelines of the federal banking regulators were $518 million, $489 million, $500 million, $510 million, and $516 million higher at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, respectively, with corresponding increases in deferred taxes. The federal banking regulators have not issued final capital regulations on the adoption of SFAS No. 109 and are currently considering whether such increased intangibles should be deducted from capital. Management believes that the increased amounts of CDI and other identifiable intangibles resulting from the adoption of SFAS No. 109 do not pose a risk to the Corporation's capital and should not be deducted from capital in determining capital ratios. Pending final resolution of this issue by the banking regulators, such amounts have not been deducted from capital in determining the capital ratios shown above. /b/ Excludes net unrealized losses on available-for-sale securities of $201 million, $210 million, and $252 million at September 30, 1994, June 30, 1994, and March 31, 1994, respectively, resulting from the adoption of SFAS No. 115. /c/ Includes nongrandfathered CDI and other identifiable intangibles acquired after February 19, 1992 of $953 million and $110 million, respectively, at September 30, 1994, $965 million and $63 million, respectively, at June 30, 1994, $985 million and $67 million, respectively, at March 31, 1994, $1,008 million and $71 million, respectively, at December 31, 1993, and $1,034 million and $84 million, respectively, at September 30, 1993, excluding tax gross-ups due to the adoption of SFAS N0. 109. Also includes $28 million, $24 million, $30 million, $35 million, and $51 million at September 30, 1994, June 30, 1994, March 31, 1994, December 31, 1993, and September 30, 1993, respectively, of the excess of the net book value over 90 percent of the fair value of purchased mortgages servicing rights and credit card intangibles. /d/ Limited to 1.25% of risk-weighted assets. /e/ Represents subordinated capital notes adjusted for certain limitations. /f/ Limited to 50% of core capital, and reduced by 20% per year during an instrument's last five years before maturity. /g/ Based on Tier 1 capital before other deductions of $104 million at September 30, 1994, $91 million at June 30, 1994, $47 million at March 31, 1994, $37 million at December 31, 1993, and $25 million at September 30, 1993. /h/ The leverage ratio is based on period-end total assets rather than average total assets as this ratio is more indicative of future leverage ratios. The ratio using Tier 1 capital based on average total assets was 7.02% at September 30, 1994. 41 =============================================================================== INTEREST Because of the interest rate sensitivity of financial products, RATE RISK fluctuations in interest rates expose the Corporation to potential MANAGEMENT gains and losses. In an effort to limit its exposure to such losses, the Corporation strives to manage the repricing characteristics of its assets and liabilities. The Corporation evaluates its interest rate risk exposure by analyzing the repricing characteristics of its on- and off-balance-sheet positions. A summary of these characteristics is shown on page 43 in the Accrual Book Risk Positions table at September 30, 1994. The table shows that, at September 30, 1994, in the one-year-or-less categories, aggregate U.S. dollar-denominated liabilities exceeded assets by $1 billion. While the Corporation strives to limit current earnings sensitivity to interest rate movements, managers are allowed, within approved limits, to take short-term tactical positions for purposes of generating earnings that can result from the relative repricing positions of primarily short-term assets and liabilities. In the over-one-year categories at September 30, 1994, U.S. dollar- denominated assets exceeded liabilities and equity by $1 billion. The Corporation manages this term risk to preserve ongoing earnings competitiveness and promote market price stability of its common equity. The Corporation also attempts to maintain an approximately neutral overall strategic position to possible interest rate movements while recognizing common equity as a long term source of funds. Both on- balance-sheet securities and off-balance-sheet instruments are used to manage exposure to interest rate risk. Selected off-balance-sheet instruments, including futures, forward rate agreements, and swaps, are designated as hedges by the Corporation to manage repricing mismatches. At September 30, 1994, off-balance-sheet instruments acquired for hedging purposes containing a short embedded option component were insignificant. At September 30, 1994, the Corporation held interest rate swap contracts with a gross notional value of $34 billion in support of these accrual book risk management activities. The amount of fixed indexed amortizing swaps held at September 30, 1994 was less than two percent of the total asset and liability management interest rate swaps portfolio. At September 30, 1994, an imbalance in customer business, primarily more deposit balances than loan assets, caused liabilities and equity to exceed customer-related assets by $16 billion. This structural imbalance and its related repricing mismatch effects were mitigated by the Corporation's risk management activities. As shown in the table on page 43, under-one-year securities and off-balance- sheet risk management positions modified a $4 billion structural gap mismatch exposure to ($1) billion. Over-one-year risk management positions reduced the structural gap mismatch of $(20) billion by $21 billion. While the Accrual Book Risk Positions table on page 43 provides an indication of the potential impact on the Corporation of a change in interest rates, it does not fully depict the Corporation's exposure to risks resulting from interest rate fluctuations. Certain assets and liabilities have option-like characteristics that can affect the Corporation's income through the exercise of these options as interest rates change. The Corporation's exposure from these option- like characteristics is separately evaluated and contained with net purchased interest rate options in an effort to manage the magnitude of potential gains or losses from changes in interest rates. 42 =================================================================================================================================== ACCRUAL BOOK RISK POSITIONS AT SEPTEMBER 30, 1994/a/ - -----------------------------------------------------------------------------------------------------------------------------------
More than More than SUBTOTAL More than More than SUBTOTAL 0-3 3-6 6-12 less than 1-5 5 more than (IN BILLIONS) months months months 1 YEAR years years 1 YEAR TOTAL ____________________________________________________________________________________________________________________________________ STRUCTURAL GAP POSITION/b/ $ 7 $ 2 $(5) $ 4 $(7) $(13) $(20) $(16) RISK MANAGEMENT POSITIONS/c/ Securities/d/ 2 1 2 5 5 6 11 16 Off-balance-sheet hedging instruments (9) (4) 3 (10) 1 9 10 - - ----------------------------------------------------------------------------------------------------------------------------------- Total risk management positions (7) (3) 5 (5) 6 15 21 16 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL GAP POSITION $ - $(1) $ - $ (1) $(1) $ 2 $ 1 $ - - --------------------------------------=============================================================================================
/a/ Net U.S. dollar-denominated interest-rate-sensitive financial instruments. /b/ Gap positions primarily attributable to loan assets and deposit liabilities. /c/ Excludes trading-related products and restructuring-country-related par bonds. /d/ Includes available-for-sale and held-to-maturity securities. Gap positions with maturities less than one year are actively managed, and as such, vary continuously and appreciably. As a consequence, positions in place at quarter end are not necessarily indicative of positions held throughout a quarter. Gap mismatches with maturities in excess of one year (Term Book gaps) are more stable. Management of these positions is focused on reducing structural gap mismatches. At inception, off-balance-sheet transactions reduce term mismatch risk. Occasionally, new customer business reduces longer maturity structural mismatches, leaving an excess of previously executed hedge contracts in a particular maturity range. These management positions may be reversed depending on the overall risk characteristics of the Term Book. 43 OTHER INFORMATION =============================================================================== ITEM 6. (a) Exhibits: EXHIBITS AND REPORTS ON Exhibit FORM 8-K Number Exhibit ------ ------- 10 BankAmerica Corporation Retirement Plan for Nonofficer Directors, as amended* 27 Financial Data Schedule -------------------------------------------------------------- *Management contract or compensatory plan, contract, or arrangement. (b) Reports on Form 8-K: During the third quarter of 1994, the Parent filed reports on Form 8-K dated July 18, 1994, July 20, 1994, August 11, 1994, August 22, 1994 and August 31, 1994. The July 18, 1994 report disclosed, pursuant to Item 5 of the report, certain information on the approval by the Board of Governors of the Federal Reserve System of the pending Continental acquisition. The July 20, 1994 report filed, pursuant to Items 5 and 7 of the report, a copy of the Parent's press release titled "BankAmerica Second Quarter Earnings." The August 11, 1994 report filed, pursuant to Items 5 and 7 of the report, certain historical and unaudited historical and pro forma combined financial information for the Parent and Continental. The August 22, 1994 report filed, pursuant to Items 5 and 7 of the report, copies of certain documents relating to offerings of the Parent's debt securities and a tax opinion relating to the shelf registration for such debt securities. The August 31, 1994 report disclosed, pursuant to Items 2 and 7 of the report, certain financial and other information in connection with the consummation of the merger of Continental with and into the Parent. After the third quarter of 1994, the Parent filed a report on Form 8-K dated October 19, 1994. The October 19, 1994 report filed, pursuant to Items 5 and 7 of the report, a copy of the Parent's press release titled "BankAmerica Third Quarter Earnings." 44 SIGNATURES =============================================================================== Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BANKAMERICA CORPORATION Registrant By Principal Financial Officer and Duly Authorized Signatory: /s/ Lewis W. Coleman --------------------- LEWIS W. COLEMAN Vice Chairman of the Board, Chief Financial Officer and Treasurer November 10, 1994 By Principal Accounting Officer and Duly Authorized Signatory: /s/ James H. Williams --------------------- JAMES H. WILLIAMS Executive Vice President November 10, 1994 45 [BankAmerica Corporation Logo Appears Here] Other information about BankAmerica Corporation may be found in its Quarterly Report to Shareholders and its Annual Report to Shareholders. These reports, as well as additional copies of this Analytical Review and Form 10-Q, may be obtained from: Corporate Public Relations #3124 Bank of America P.O. Box 37000 San Francisco, CA 94137 (Recycled paper logo appears here.) EXHIBIT INDEX Exhibit Number Exhibit - ------ ------- 10 BankAmerica Corporation Retirement Plan for Nonofficer Directors, as amended* 27 Financial Data Schedule - -------------------------------------------------------------------- *Management contract or compensatory plan, contract, or arrangement. EX-10 2 RETIREMENT PLAN FOR NONOFFICER DIRECTORS EXHIBIT 10 Effective August 1, 1994 THE AMENDED AND RESTATED BANKAMERICA CORPORATION RETIREMENT PLAN FOR NONOFFICER DIRECTORS 1. Purpose and Effective Date. The purpose of the BankAmerica -------------------------- Corporation Retirement Plan for Nonofficer Directors is to promote the interests of BankAmerica Corporation and its shareholders by providing retirement benefits to nonofficer directors of BankAmerica Corporation in order to encourage their continued service on the Board of Directors of BankAmerica Corporation. The Plan was effective August 7, 1989. The Plan was amended March 2, 1992 and August 1, 1994. 2. Definitions. The following terms shall have the meanings set ----------- forth below, if capitalized: (a) "Annual Retainer" means (i) for Eligible Directors whose Retirement occurred prior to August 1, 1994, the current annual retainer paid to Board members for service on the Board as adjusted from time to time; (ii) for Eligible Directors whose Retirement occurs on or after August 1, 1994, the annual retainer paid to Board members for service on the Board as in effect at the time of the Eligible Director's Retirement. In either case, the definition does not include any additional amount paid for service on a Board committee or as Board committee chairman or any amount specifically paid for attendance at Board or at Board committee Meetings. (b) "Board" means the Board of Directors of BankAmerica Corporation. (c) "Eligible Director" means a member of the Board (including an advisory director) who is not, and has not been, an officer of BankAmerica Corporation or any of its subsidiaries while serving on the Board or during the ten years prior to election to the Board. In order to be eligible, a director must also be a member of the Board on or after the effective date of the Plan. (d) "Plan" means the BankAmerica Corporation Retirement Plan for Nonofficer Directors, as amended from time to time. (e) "Retirement" occurs when an Eligible Director (i) does not stand for reelection because of the Board's mandatory retirement policy after serving on the Board for sixty months or more; (ii) ceases to be a member of the Board after serving on the Board for 120 or more months. 3. Retirement Payments. Upon his or her Retirement, an Eligible ------------------- Director shall be paid each quarter an amount equal to one-fourth of the Annual Retainer. The initial payment shall be made as of the last day of the calendar quarter in which Retirement occurs and the payments shall continue each quarter thereafter for a period equal to the number of years of service by the Eligible Director on the Board prior to Retirement, not to exceed ten years. If an Eligible Director dies after completing the service requirement for Retirement, but prior to receiving all retirement payments, any remaining payments shall be made to such deceased director's surviving spouse. If the deceased director has no surviving spouse, no further payments shall be made. 4. Disability. If an Eligible Director ceases to serve on the Board ---------- as a result of disability, the Board in its sole discretion, may waive the minimum service requirements or permit the commencement of retirement benefits prior to age 65. 5. Gross Misconduct. If an Eligible Director ceases to serve on the ---------------- Board as a result of gross misconduct, as determined by the Board in its sole discretion, any retirement benefits payable under the Plan to such Eligible Director shall be immediately and irrevocably cancelled. 6. Amendment and Termination. The Board reserves the right to amend, ------------------------- suspend or terminate this Plan at any time. However no such amendment, suspension or termination shall adversely affect retirement payments to be made to an Eligible Director who retires prior to such amendment, suspension or termination. 7. Prohibition or Alienation. No director shall have the right to ------------------------- alienate, assign, encumber, hypothecate, or pledge his or her interest in any payments to be made under the Plan, voluntarily or involuntarily, and any attempt to so dispose of any such interest shall be void. BankAmerica Corporation shall have the right to set off against retirement payments under the Plan any amounts due and owing from the Eligible Director to BankAmerica Corporation and its subsidiaries or affiliates, to the extent permitted by law. 8. Unfunded Plan. The Plan is unfunded and BankAmerica Corporation ------------- shall not be required to physically segregate any cash or establish any separate account or accounts to fund any retirement payment to be made under the Plan. 9. Entire Plan. This document is a complete statement of the Plan ----------- and as of its effective date supersedes all prior plans, proposals, representations, promises, inducements, written or oral, relating to its subject matter. BankAmerica Corporation shall not be bound by or liable to-any director for any representation, promise, or inducement made by any person which is not embodied in this document or in any authorized written amendment to the Plan. 10. Applicable Law. The Plan will be construed and enforced in -------------- accordance with the laws of California. EX-27 3 ART. 9 FDS FOR 3RD QUARTER 1994 10-Q
9 THIS FINANCIAL DATA SCHEDULE ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994 CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS, AVERAGE BALANCES, INTEREST, AND AVERAGE RATES, NONACCRUAL ASSETS, RESTRUCTURED LOANS, AND LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST, QUARTERLY CREDIT LOSS EXPERIENCE, AND COMPOSITION OF ALLOWANCE FOR CREDIT LOSSES, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING. Any item provided in the schedule, in accordance with the rules governing the schedule, will not be subject to liability under the federal securities laws, except to the extent that the financial statements and other information from which the data were extracted violate the federal securities laws. Also, pursuant to Item 601(c)(1)(iv) of Regulation S-K promulgated by the Securities and Exchange Commission (SEC), the schedule shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, Section 18 of the Exchange Act of 1934 and Section 323 of the Trust Indenture Act, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates. 1,000,000 9-MOS DEC-31-1994 JAN-01-1994 SEP-30-1994 12,493 4,884 5,044 7,103 11,166 8,700 8,018 138,691 3,625 214,230 152,666 12,764 14,761 15,109 0 3,368 580 14,982 214,230 7,010 1,040 855 8,905 2,318 3,375 5,530 360 25 5,543 2,723 2,723 0 0 1,585 3.95 3.93 4.49 2,066 420 130 0 3,508 772 338 3,625 0 0 1,246 Includes subordinated capital notes of $605 million. Includes interest income on trading account assets of $349 million. These amounts are not reported in our interim filing.
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