-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BS1EU5nI6Qkqs/lT8r7cClFkGbAU+st+McY+YFPXWbnbeG4nBSjZ2yjGdgDBUvUw ER7h95A2EOyk6b63TBgnZw== 0000929624-97-001414.txt : 19971117 0000929624-97-001414.hdr.sgml : 19971117 ACCESSION NUMBER: 0000929624-97-001414 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: CSX SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKAMERICA CORP CENTRAL INDEX KEY: 0000009672 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 941681731 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07377 FILM NUMBER: 97720820 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 FORM 10-Q 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, 1997 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 ----- 693,467,827 shares outstanding on September 30, 1997.* *In addition, 81,173,357 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 BankAmerica Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, including the consolidated financial statements and notes thereto. BANKAMERICA CORPORATION ANALYTICAL REVIEW AND FORM 10-Q [BANK AMERICA CORPORATION LOGO APPEARS HERE] 1997 3RD Q U A R T E R 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............................................................................... 21 Business Sectors......................................................................... 24 Operating Leverage and Capital Management................................................ 27 Results of Operations: Net Interest Income.................................................................... 29 Noninterest Income..................................................................... 32 Noninterest Expense.................................................................... 35 Income Taxes........................................................................... 36 Balance Sheet Review:.................................................................... 37 Credit Card Securitization............................................................. 38 Credit Risk Management: Loan Portfolio Management.............................................................. 40 Domestic Consumer Loans.............................................................. 41 Domestic Commercial Loans............................................................ 42 Foreign Loans........................................................................ 42 Regional Foreign Exposures............................................................. 43 Allowance for Credit Losses............................................................ 45 Nonperforming Assets................................................................... 48 Interest Rate, Foreign Exchange and Commodity Derivative Financial Instruments........................................................ 51 Interest Rate Risk Management............................................................ 52 Funding and Capital: Liquidity Review....................................................................... 54 Capital Management..................................................................... 54 Forward-Looking Statements............................................................... 57 - ------------------------------------------------------------------------------------------------------------------------- Part II Item 6. Other Information Exhibits and Reports on Form 8-K............................................................. 58 Signatures................................................................................... 59 =========================================================================================================================
1 FINANCIAL STATEMENTS BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
==================================================================================================================================== 1997 1996 NINE MONTHS ENDED -------------------------------- ----------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ----------------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Loans, including fees $3,522 $3,497 $3,423 $3,388 $3,371 $10,442 $9,975 Interest-bearing deposits in banks 107 105 99 145 95 311 308 Federal funds sold 14 9 8 7 9 31 22 Securities purchased under resale agreements 208 180 155 144 178 543 509 Trading account assets 323 298 269 270 268 890 731 Available-for-sale and held-to-maturity securities 277 270 286 284 285 833 876 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 4,451 4,359 4,240 4,238 4,206 13,050 12,421 INTEREST EXPENSE Deposits 1,502 1,424 1,366 1,406 1,332 4,292 3,953 Federal funds purchased 11 19 13 20 17 43 59 Securities sold under repurchase agreements 227 178 149 155 201 554 540 Other short-term borrowings 268 287 275 254 243 830 629 Long-term debt 249 257 263 273 261 769 783 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 2,257 2,165 2,066 2,108 2,054 6,488 5,964 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 2,194 2,194 2,174 2,130 2,152 6,562 6,457 PROVISION FOR CREDIT LOSSES 260 250 220 220 235 730 665 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 1,934 1,944 1,954 1,910 1,917 5,832 5,792 NONINTEREST INCOME Deposit account fees 364 361 360 364 345 1,085 1,035 Credit card fees 96 93 87 94 92 276 261 Trust fees 62 61 57 57 53 180 172 Other fees and commissions 424 417 375 370 360 1,216 1,013 Trading income 223 218 188 134 153 629 496 Private equity investment activities 140 83 99 108 97 322 319 Net gain on sales of subsidiaries and operations 139 27 13 5 41 179 175 Net gain on sales of loans 53 44 59 20 25 156 69 Net gain on available-for-sale securities 33 14 20 20 7 67 41 Gain on issuance of subsidiary's stock - - - 147 - - - Other income 136 124 127 180 146 387 332 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST INCOME 1,670 1,442 1,385 1,499 1,319 4,497 3,913 NONINTEREST EXPENSE Salaries 892 873 839 834 822 2,604 2,457 Employee benefits 177 189 189 167 191 555 606 Occupancy 192 183 186 193 188 561 564 Equipment 182 173 182 184 180 537 518 Communications 95 96 93 92 89 284 271 Amortization of intangibles 88 89 91 92 93 268 281 Professional services 107 82 75 95 87 264 248 Regulatory fees and related expenses 10 10 10 2 95 30 121 Restructuring charges - - - 280 - - - Other expense 489 352 368 311 336 1,209 1,025 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSE 2,232 2,047 2,033 2,250 2,081 6,312 6,091 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 1,372 1,339 1,306 1,159 1,155 4,017 3,614 PROVISION FOR INCOME TAXES 553 540 526 412 472 1,619 1,488 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 819 $ 799 $ 780 $ 747 $ 683 $2,398 $2,126 - ----------------------------------------------------------========================================================================== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $1.11 $1.07 $1.03 $0.96 $0.87 $3.20 $2.69 EARNINGS PER COMMON SHARE--ASSUMING FULL DILUTION 1.11 1.07 1.03 0.96 0.87 3.20 2.69 DIVIDENDS DECLARED PER COMMON SHARE 0.305 0.305 0.305 0.27 0.27 0.915 0.81 ====================================================================================================================================
See notes to consolidated financial statements. 2 BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
=================================================================================================================================== 1997 1996 ------------------------------------------ ----------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 13,854 $ 14,884 $ 13,561 $ 16,223 $ 13,619 Interest-bearing deposits in banks 5,368 7,037 6,390 5,708 5,829 Federal funds sold 48 270 153 134 306 Securities purchased under resale agreements 10,076 7,272 7,730 7,275 6,287 Trading account assets 16,351 16,765 12,931 12,205 14,000 Available-for-sale securities 12,408 11,959 11,532 12,113 11,717 Held-to-maturity securities 3,689 3,858 3,972 4,138 4,200 Loans 166,986 168,806 167,338 165,415 161,833 Less: Allowance for credit losses 3,504 3,563 3,538 3,523 3,511 - ----------------------------------------------------------------------------------------------------------------------------------- Net loans 163,482 165,243 163,800 161,892 158,322 Customers' acceptance liability 3,154 3,230 3,229 2,861 3,165 Accrued interest receivable 1,593 1,567 1,441 1,441 1,435 Goodwill, net 3,727 3,842 3,888 3,938 4,017 Identifiable intangibles, net 1,459 1,499 1,554 1,616 1,664 Unrealized gains on off-balance-sheet instruments 7,892 7,319 7,813 7,682 6,598 Premises and equipment, net 3,909 3,944 3,985 3,987 3,968 Other assets 10,510 9,674 7,925 9,540 7,826 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $257,520 $258,363 $249,904 $250,753 $242,953 - --------------------------------------------------------=========================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits in domestic offices: Interest-bearing $ 94,074 $ 83,308 $ 84,071 $ 84,133 $ 83,779 Noninterest-bearing 31,206 41,434 39,561 39,694 37,589 Deposits in foreign offices: Interest-bearing 44,450 46,667 43,854 42,732 42,035 Noninterest-bearing 1,683 1,759 1,513 1,456 1,498 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 171,413 173,168 168,999 168,015 164,901 Federal funds purchased 1,349 1,730 730 2,176 1,093 Securities sold under repurchase agreements 11,024 9,699 7,124 7,644 8,489 Other short-term borrowings 18,701 18,327 18,883 17,566 16,263 Acceptances outstanding 3,154 3,230 3,229 2,861 3,165 Accrued interest payable 1,023 958 921 879 868 Unrealized losses on off-balance-sheet instruments 7,541 7,157 7,473 7,633 6,458 Other liabilities 7,318 7,117 5,850 6,004 5,750 Long-term debt 14,198 14,736 14,725 15,785 15,454 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 235,721 236,122 227,934 228,563 222,441 - ----------------------------------------------------------------------------------------------------------------------------------- Corporation obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of the corporation (trust preferred securities) 1,873 1,873 1,873 1,477 - STOCKHOLDERS' EQUITY Preferred stock 848 1,596 1,596 2,242 2,242 Common stock 1,210 1,210 605 605 605 Additional paid-in capital 7,947 7,872 8,473 8,467 8,458 Retained earnings 13,168 12,598 12,029 11,500 10,989 Net unrealized gain (loss) on available-for-sale securities 108 13 (90) 32 (27) Common stock in treasury, at cost (3,355) (2,921) (2,516) (2,133) (1,755) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 19,926 20,368 20,097 20,713 20,512 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,520 $258,363 $249,904 $250,753 $242,953 - -------------------------------------------------------============================================================================
See notes to consolidated financial statements. 3 BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
=================================================================================================================================== NINE MONTHS ENDED SEPTEMBER 30 ------------------------------ (IN MILLIONS) 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,398 $ 2,126 Adjustments to net income to arrive at net cash used by operating activities: Provision for credit losses 730 665 Net gain on sales of loans and subsidiaries and operations (335) (244) Depreciation and amortization 656 665 Provision for deferred income taxes 293 466 Change in assets and liabilities net of effects from acquisitions and pending dispositions: (Increase) decrease in accrued interest receivable (152) 22 Increase in accrued interest payable 144 22 Increase in trading account assets (4,146) (4,484) Increase in current income taxes payable 454 71 Deferred fees received from lending activities 121 187 Net cash used by loans held for sale (879) (553) Other, net (557) (1,305) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used by operating activities (1,273) (2,362) CASH FLOWS FROM INVESTING ACTIVITIES Activity in available-for-sale securities: Sales proceeds 1,447 1,127 Maturities, prepayments, and calls 4,146 4,483 Purchases (5,811) (5,205) Activity in held-to-maturity securities: Maturities, prepayments, and calls 687 934 Purchases (240) (515) Proceeds from loan sales and securitizations 5,882 3,194 Purchases of loans (357) (2,407) Purchases of premises and equipment (427) (479) Proceeds from sales of other real estate owned 356 392 Net cash provided (used) by: Loan originations and principal collections (7,514) (8,735) Interest-bearing deposits in banks 520 (71) Federal funds sold 86 415 Securities purchased under resale agreements (2,801) (1,325) Other, net 90 198 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (3,936) (7,994) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 1,244 2,864 Principal payments and retirements of long-term debt (2,419) (2,442) Net proceeds from issuance of trust preferred securities 396 - Proceeds from issuance of common stock - 83 Proceeds from issuance of treasury stock 156 46 Preferred stock redeemed (1,394) (391) Treasury stock purchased (1,487) (901) Common stock dividends (642) (587) Preferred stock dividends (86) (141) Net cash provided (used) by: Deposits 3,398 4,466 Federal funds purchased (827) (4,067) Securities sold under repurchase agreements 3,380 2,106 Other short-term borrowings 1,135 8,636 Other, net (69) (18) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 2,785 9,654 Effect of exchange rate changes on cash and due from banks 55 9 - ----------------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and due from banks (2,369) (693) Cash and due from banks at beginning of period 16,223 14,312 - ----------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $13,854 $13,619 - -------------------------------------------------------------------------------------------------------============================
See notes to consolidated financial statements. 4 BANKAMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================================================================= 1997 1996 ------------------------------------ --------------------- THIRD SECOND FIRST FOURTH THIRD (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of quarter $ 1,596 $ 1,596 $ 2,242 $ 2,242 $ 2,242 Preferred stock redeemed (748) - (646) - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter 848 1,596 1,596 2,242 2,242 COMMON STOCK Balance, beginning of quarter 1,210 605 605 605 605 Issuance of 387,314,462 shares of common stock to effect a two-for-one common stock split - 605 - - - - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter 1,210 1,210 605 605 605 ADDITIONAL PAID-IN CAPITAL Balance, beginning of quarter 7,872 8,473 8,467 8,458 8,439 Common stock issued 18 1 - 5 8 Issuance of 387,314,462 shares of common stock to effect a two-for-one common stock split - (605) - - - Treasury stock issued 57 3 6 4 11 - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter 7,947 7,872 8,473 8,467 8,458 RETAINED EARNINGS Balance, beginning of quarter 12,598 12,029 11,500 10,989 10,544 Net income 819 799 780 747 683 Common stock dividends (212) (214) (216) (193) (194) Preferred stock dividends (22) (30) (34) (44) (43) Foreign currency translation adjustments, net of related income taxes (15) 14 (1) 1 (1) - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter 13,168 12,598 12,029 11,500 10,989 NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES Balance, beginning of quarter 13 (90) 32 (27) (79) Valuation adjustments, net of related income taxes 95 103 (122) 59 52 - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter 108 13 (90) 32 (27) COMMON STOCK IN TREASURY, AT COST Balance, beginning of quarter (2,921) (2,516) (2,133) (1,755) (1,643) Treasury stock purchased (525) (475) (475) (450) (200) Treasury stock issued 112 71 94 74 98 Other (21) (1) (2) (2) (10) - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter (3,355) (2,921) (2,516) (2,133) (1,755) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $19,926 $20,368 $20,097 $20,713 $20,512 - -----------------------------------------------------------======================================================================
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 (BAC) are PRESENTATION 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, 1996. The unaudited consolidated financial statements of BAC 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), 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. In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). The FASB subsequently amended SFAS No. 125 in December 1996. As amended, SFAS No. 125 applies to securities lending, repurchase agreements, dollar rolls, and other similar secured financing transactions occurring after December 31, 1997 and to all other transfers and servicing of financial assets occurring after December 31, 1996. The adoption of SFAS No. 125 did not and is not expected to have a material effect on BAC's financial position or results of operations. On May 22, 1997, the stockholders of BAC approved a two- for-one stock split, along with a proposal to increase the authorized number of shares of common stock from 700 million to 1.4 billion shares. The stock split was effective for stockholders of record at the close of business on June 2, 1997. The stock split did not cause any changes in the stated par value per share of $1.5625 or total stockholders' equity. A total of 387,314,462 shares of common stock were issued in connection with the split, including 37,364,985 shares held in treasury. As a result of the stock split, $605 million was reclassified from additional paid-in capital to common stock. All references to the number of common shares and per common share amounts have been restated to reflect the effects of the stock split. Certain amounts in prior periods have been reclassified to conform to the current presentation. DERIVATIVE FINANCIAL INSTRUMENTS BAC uses foreign exchange and interest rate derivative financial instruments in both its trading and asset and liability management activities. BAC uses derivative commodity instruments solely in its trading activities. 6 ================================================================================ Trading Activities Interest rate derivative financial instruments used in BAC's trading activities are primarily swaps and options. Foreign exchange financial instruments include spot, futures, forward, swap, and option contracts. Derivative commodity instruments include commodity futures, forwards, swaps, and options. All of these derivative instruments are carried at market value. Market value for these instruments is determined based on readily available market prices or by using pricing models where no market price is available. Any realized and unrealized gains and losses resulting from marking these instruments to market are recognized immediately in trading income. Interest rate, foreign exchange, and commodity derivative financial instruments, and their related gains and losses, used for trading activities are reported in the consolidated balance sheet in unrealized gains (losses) on off-balance-sheet instruments, in the consolidated statement of operations in trading income, and in the consolidated statement of cash flows in cash flows from operating activities. Asset and Liability Management Activities BAC uses various types of derivative financial instruments to manage its interest rate and foreign currency exposures. When these instruments meet certain criteria, they qualify for hedge accounting treatment and are accounted for on either a deferral, accrual, or mark-to-market basis, depending on the nature of BAC's hedge strategy and on the method used to account for the hedged item. Hedge criteria include demonstrating how the hedge will reduce risk, identifying the specific asset, liability, firm commitment, or anticipated transaction being hedged, and citing the time horizon being hedged. For hedge accounting to continue, hedge effectiveness tests are performed on an ongoing basis to determine if the instrument continues to meet the objectives of the hedge strategy. Derivative financial instruments used for asset and liability management activities are reported in the consolidated balance sheet and consolidated statement of operations as described below. For the consolidated statement of cash flows, the cash flows from hedging transactions are classified in the same category as the cash flows from the items being hedged. Deferral Accounting--BAC accounts for derivative financial instruments on a deferral basis when the market value of the hedging instrument fulfills the objectives of the hedge strategy, and the carrying value of the hedged item is other than fair value. 7 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ Interest Rate Contracts--BAC accounts for futures and forward rate agreements used as hedges on a deferral basis. Under deferral accounting, risk reduction is assessed at the enterprise level. Hedge effectiveness must be expected at the inception of the hedge and on an ongoing basis. For interest rate futures, hedge effectiveness at the inception of the hedge is assessed through the probability that changes in the fair value of the futures contract will offset the changes in the fair value of the hedged item. There must be a clear economic relationship between the price of the hedged item and the futures contract and a high level of correlation between these prices during the relevant prior periods. On an ongoing basis, the ratio of the cumulative changes in the fair value of the futures contract and the cumulative changes in the fair value of the hedged item is monitored. If a high level of correlation is not being achieved, hedge accounting will be terminated. For forward rate agreements, hedge effectiveness at the inception of the hedge and on an ongoing basis is assessed by matching the basis and terms of the hedging instruments with those of the underlying exposure. For hedges of existing assets or liabilities, realized gains and losses on the hedging instrument are recorded as an adjustment to the carrying value of the hedged item and amortized to the interest income or expense account related to the hedged item. BAC hedges anticipated transactions involving the replacement of deposits with interest-bearing deposits. Realized and unrealized gains and losses on these transactions are deferred and included in the measurement of the subsequent transaction. For hedges of an anticipated transaction to qualify for hedge accounting, it must be probable that the transaction will occur and the significant characteristics and expected terms of the transaction must be identified. Deferred gains and losses on interest rate contracts used for hedging are reported as adjustments to the carrying values of the hedged loans, deposits, and long- term debt. The amortization of deferred gains and losses is reported in the corresponding interest income and interest expense accounts. Initial margin deposits related to exchange-traded instruments are reported in other assets. Fees and commissions received or paid are deferred and recognized as an adjustment to the carrying value of the hedged item, consistent with the recognition of gains and losses on the hedging instruments. Foreign Exchange Contracts--To qualify for hedge accounting, the foreign exchange contract must reduce risk at the level of the specific transaction. Realized and unrealized gains and losses on instruments that hedge firm commitments are deferred and included in the measurement of the subsequent transaction; however, losses are deferred only to the extent of expected gains on the future commitment. Fees and commissions received or paid related to firm commitments are included in the measurement of the transaction when it occurs. Realized and unrealized gains and losses on instruments that hedge net capital exposure are recorded in stockholders' equity as foreign currency translation adjustments. 8 ================================================================================ Accrual Accounting--BAC accounts for derivative financial instruments on an accrual basis when the cash flows generated from the hedging instruments fulfill the objective of the hedge strategy. Under accrual accounting, interest income or expense on the hedging instrument is accrued and recorded as an adjustment to the interest income or expense related to the hedged item. BAC accounts for certain interest rate swaps and purchased interest rate option contracts (caps and floors) used as hedges on an accrual basis. Both interest rate swaps and purchased interest rate option contracts must reduce risk at the level of the specific transaction with effectiveness expected at the inception of the hedge and on an ongoing basis. Hedge effectiveness at the inception of the hedge and on an ongoing basis for interest rate swaps is assessed by matching the basis and terms of the hedging instruments with those of the underlying exposure. Hedge effectiveness at the inception of the hedge for purchased interest rate option contracts is assessed through the probability that changes in the fair value of the purchased interest rate contract will offset the changes in the fair value of the hedged item. There must be a clear economic relationship between the reference index of the purchased interest rate option contract and the reference index of the hedged item as well as a high level of correlation between these indexes during the relevant prior periods. On an ongoing basis, the ratio of the cumulative change in the price or interest rate movements on the index of the hedged item and the cumulative change in the price or interest rate movements on the index of the purchased interest rate option contract is monitored. If a high level of correlation is not being achieved, hedge accounting will be terminated. Interest income or expense on derivative financial instruments accounted for using accrual accounting is reported in interest income--loans, interest expense-- deposits, and interest expense--long-term debt. Fees and commissions received or paid on interest rate swaps are deferred and amortized as an adjustment to the interest income or expense related to the hedged item over the term of the swap. Premiums paid for interest rate options are deferred as a prepaid expense and are amortized to interest income or expense over the term of the option. Mark-to-Market Accounting--BAC accounts for derivative financial instruments on a mark-to-market basis when the market value of the hedging instrument fulfills the objectives of the hedge strategy, and the carrying value of the hedged item is fair value. Market value for these instruments is determined based on readily available market prices or by using pricing models where no market price is available. Under mark-to-market accounting, realized and unrealized gains and losses on the hedging instrument are reflected in the line items being hedged and recorded in income when they occur in conjunction with the gains and losses on the hedged item. BAC accounts for certain interest rate swaps designated as hedges of available-for-sale securities on a mark-to- market basis. These interest rate swaps must reduce risk at the level of the specific transaction, with effectiveness expected at the inception of the hedge and on an ongoing basis. Hedge effectiveness at the inception of the hedge is assessed through the probability that changes in the fair value of the interest rate swap will offset the changes in the fair value of the available-for-sale security. There must be a clear economic relationship between the price of the available-for-sale security and the interest rate swap as well as a high level of correlation between these prices during the relevant prior periods. On an ongoing basis, the ratio of the cumulative change in the 9 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ fair value of the interest rate swap and the cumulative change in the fair value of the available-for-sale security is monitored. If a high level of correlation is not being achieved, hedge accounting will be terminated. The accrual of interest payable and interest receivable on these interest rate swaps is reported in interest income--available-for-sale securities. Changes in the market values of these interest rate swaps, exclusive of net interest accruals, are reported in stockholders' equity on a net-of-tax basis. If at any time a derivative financial instrument no longer qualifies for hedge accounting treatment, it is marked to market on a prospective basis and any deferred gain or loss associated with the hedging instrument is amortized over the original hedge period. When an anticipated transaction is no longer likely to occur, any deferred gain or loss associated with the hedging instrument is recognized immediately in the interest income or expense account related to the hedged item. If the item being hedged is sold, extinguished, terminated, or matures, hedge accounting is terminated. In this situation, any deferred gain or loss associated with the hedging instrument is treated as part of the carrying value of the item being hedged and, therefore, considered in calculating the gain or loss on the sold, extinguished, terminated, or matured item. If the related derivative contract is not terminated, it is marked to market on a prospective basis. - ------------------------------------------------------------------------------- NOTE 2. During the nine-month periods ended September 30, 1997 SUPPLEMENTAL and 1996, BAC made interest payments on deposits and DISCLOSURE OF CASH other interest-bearing liabilities of $6,343 million and FLOW INFORMATION $5,942 million, respectively, and made net income tax payments of $939 million and $951 million, respectively. In addition, during the same periods foreclosures took place on loans with carrying values of $242 million and $358 million, respectively. During the nine-month period ended September 30, 1997, BAC made payments on accrued liabilities of $18 million related to common stock repurchased during 1996. At September 30, 1997, BAC accrued a $6 million liability related to common stock repurchased during the nine- month period ended September 30, 1997. - -------------------------------------------------------------------------------- NOTE 3. During the nine-month period ended September 30, 1997, AVAILABLE-FOR-SALE BAC sold available-for-sale securities for aggregate AND HELD-TO-MATURITY proceeds of $1,447 million, resulting in gross SECURITIES AND realized gains of $80 million and gross realized TRADING ACTIVITIES losses of $13 million. During the nine-month period ended September 30, 1996, BAC sold available-for-sale securities for aggregate proceeds of $1,127 million, resulting in gross realized gains of $63 million and gross realized losses of $22 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, 1997 $12,408 $12,251 $3,759 $3,689 June 30, 1997 11,959 11,959 3,655 3,858 March 31, 1997 11,532 11,701 3,666 3,972 December 31, 1996 12,113 12,059 3,920 4,138 September 30, 1996 11,717 11,765 3,892 4,200
10 ================================================================================ The net unrealized gain on available-for-sale securities at September 30, 1997 included a $14 million unrealized gain on excess servicing assets primarily associated with credit card securitizations, which are included in other assets. During the nine-month periods ended September 30, 1997 and 1996, trading income included net unrealized holding gains on trading securities of $10 million and $28 million, respectively. These amounts exclude the net unrealized trading results of the Parent's securities broker and dealer subsidiaries. - -------------------------------------------------------------------------------- NOTE 4. The trust preferred securities are issued by trusts all TRUST PREFERRED of whose outstanding common securities are owned by the SECURITIES Parent. Such common securities represent an aggregate liquidation amount equal to 3 percent of the total capital of each trust. The sole assets of the trusts are junior subordinated deferrable interest debentures of the Parent. During the first quarter of 1997, BankAmerica Capital III, a trust, all of whose outstanding common securities ($12 million liquidation amount) are owned by the Parent, issued trust preferred securities (the Series 3 preferred securities) with an aggregate liquidation amount of $400 million. The sole assets of the trust are junior subordinated deferrable interest debentures issued by the Parent having an aggregate principal amount of $412 million (the Series 3 debentures). In addition, the Parent has entered into an expense agreement with the trust obligating the Parent to pay any costs, expenses or liabilities of the trust, other than obligations of the trust to pay amounts due pursuant to the terms of the Series 3 preferred securities. The distribution rate for the Series 3 preferred securities corresponds to the interest rate on the Series 3 debentures, which is a floating rate adjusted quarterly based on the three-month London Interbank Offered Rate (LIBOR) for U.S. dollar deposits plus 0.57%. The interest payment dates are January 15, April 15, July 15, and October 15. The Parent has the right to defer payment of interest on the Series 3 debentures at any time or from time to time for an extension period not exceeding 20 quarters. During any such extension period, distributions on the Series 3 preferred securities will also be deferred and the Parent's ability to pay dividends on its common and preferred stock will be restricted. The Series 3 debentures have a stated maturity of January 15, 2027, although the Parent may redeem the Series 3 debentures prior to stated maturity (i) on or after January 15, 2002 or (ii) prior to January 15, 2002 upon the occurrence of certain events relating to the tax treatment of the trust or the Series 3 debentures or relating to the capital treatment of the Series 3 preferred securities, in each case, at a redemption price of 100% of the principal amount plus accrued interest. The Series 3 preferred securities are subject to mandatory redemption upon repayment of the Series 3 debentures at their stated maturity date or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption. The Parent has issued a guarantee for the payment of distributions and payments on liquidation or redemption of the Series 3 preferred securities, but only to the extent of funds held by the trust. The guarantee is a junior subordinated obligation of the Parent. 11 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ In the third quarter and nine months ended September 30, 1997, distributions and amortization of deferred issuance costs on all of the trust preferred securities totaling $36 million and $107 million, respectively, were included in noninterest expense in the consolidated statement of operations. For specific details on other trust preferred securities, refer to Note 15 on page 64 of BAC's 1996 Annual Report to Shareholders. - ------------------------------------------------------------------------------- NOTE 5. During the first quarter of 1997, BAC's Board of STOCK REPURCHASE Directors authorized an amendment to its existing PROGRAM stock repurchase program. The amended program enables the Parent to buy back up to an additional $3.0 billion of its common stock by the end of 1998 and to buy back or redeem up to an additional $1.0 billion of its preferred stock by the end of 1998. During the nine months ended September 30, 1997, the Parent repurchased 24.3 million shares of its common stock under the amended and prior stock repurchase programs at an average per-share price of $60.79. These transactions reduced stockholders' equity by $1,475 million. On January 15, 1997, the Parent redeemed all 11,250,000 outstanding shares of its 9% Cumulative Preferred Stock, Series H, reducing stockholders' equity by $281 million. The redemption price was equal to the stated value of $25.00 per share, plus accrued and unpaid dividends to the redemption date of $0.28125 per share. On February 15, 1997, the Parent redeemed all 14,600,000 outstanding shares of its 8 3/8% Cumulative Preferred Stock, Series K, reducing stockholders' equity by $365 million. The redemption price was equal to the stated value of $25.00 per share, plus accrued and unpaid dividends to the redemption date of $0.44201 per share. On July 13, 1997, the Parent redeemed all 798,020 outstanding shares of its 8.16% Cumulative Preferred Stock, Series L (Preferred Stock, Series L) reducing stockholders' equity by $399 million. The shares were represented by 15,960,392 depositary shares, each corresponding to a one-twentieth interest in a share of Preferred Stock, Series L. The redemption price was $25.00 per depositary share, plus accrued and unpaid dividends to the redemption date of $0.238 per depositary share. On September 30, 1997, the Parent redeemed all 696,847 outstanding shares of its 7 7/8% Cumulative Preferred Stock, Series M (Preferred Stock, Series M) reducing stockholders' equity by $349 million. The shares were represented by 13,936,930 depositary shares, each corresponding to a one-twentieth interest in a share of Preferred Stock, Series M. The redemption price was $25.00 per depositary share, plus accrued and unpaid dividends to the redemption date of $0.15859 per depositary share. In October 1997, the Parent announced that it will redeem all outstanding shares of its 8 1/2% Cumulative Preferred Stock, Series N on December 15, 1997, which will reduce stockholders' equity in the fourth quarter of 1997 by $234 million. The remaining buyback and redemption authorities for common stock and preferred stock under the current amended program totaled $2.3 billion and $0.4 billion, respectively, at September 30, 1997. 12 =============================================================================== NOTE 6. The following is a summary of the components of income INCOME TAXES tax expense:
1997 1996 NINE MONTHS ENDED ------------------------- ---------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ------------------ (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER 1997 1996 - --------------------------------------------------------------------------------------------------------- Provision for income taxes Federal $382 $ 359 $370 $265 $301 $1,111 $1,024 State and local 91 86 84 58 90 261 278 Foreign 80 95 72 89 81 247 186 - --------------------------------------------------------------------------------------------------------- $553 $ 540 $526 $412 $472 $1,619 $1,488 - --------------------------------------------=============================================================
BAC's estimated annual effective income tax rates for the nine-month periods ended September 30, 1997 and 1996 were 40.3 percent and 41.2 percent, respectively. These rates are higher than the federal statutory tax rate of 35.0 percent due principally to state income taxes. - -------------------------------------------------------------------------------- NOTE 7. Earnings per common share have been computed based on EARNINGS PER the following: COMMON SHARE
1997 1996 NINE MONTHS ENDED ------------------------------- ----------------------- SEPTEMBER 30 (DOLLAR AMOUNTS IN MILLIONS, THIRD SECOND FIRST FOURTH THIRD -------------------- SHARE AMOUNTS IN THOUSANDS) QUARTER QUARTER QUARTER QUARTER QUARTER 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $797 $769 $746 $703 $640 $2,312 $1,985 Average number of common shares outstanding 695,835 701,458 708,585/a/ 715,609/a/ 718,035/a/ 701,959 724,628/a/ Average number of common and common equivalent shares outstanding 718,384 719,514 726,800/a/ 731,022/a/ 731,343/a/ 721,566 737,733/a/ Average number of common shares outstanding-- assuming full dilution 719,532 722,179 726,800/a/ 732,416/a/ 731,770/a/ 722,837 738,683/a/ - ---------------------------------------------------------------------------------------------------------------------------------
/a/ Restated to reflect a two-for-one stock split effective June 2, 1997. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which is effective for periods ending after December 15, 1997. BAC expects to adopt SFAS No. 128 in the fourth quarter of 1997. At that time, BAC will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. SFAS No. 128 eliminates primary earnings per share and earnings per common share, assuming full dilution, and requires the presentation of basic and diluted earnings per share. As a result, under the new requirements, BAC's computation of earnings per common and common equivalent share will be replaced by earnings per common share, which excludes any dilutive effects of outstanding stock options and warrants. Also, BAC's computation of earnings per common share, assuming full dilution, will be replaced with diluted earnings per share and will be based on the average market price of BAC's common stock for the period. Had SFAS No. 128 been in effect, it would have resulted in an increase in earnings per common share of $0.03 for the third quarter of 1997, $0.03 for the second quarter of 1997, $0.02 for the first quarter of 1997, $0.02 for the fourth quarter of 1996, and $0.02 for the third quarter of 1996 as well as an increase of $0.09 and $0.05 for the nine months ended September 30, 1997 and 1996, respectively. Per share amounts for prior periods reflect a two-for-one stock split effective June 2, 1997. The impact of SFAS No. 128 on converting earnings per common share, assuming full dilution, to diluted earnings per share for the aforementioned periods is not material. 13 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ NOTE 8. In the ordinary course of business, BAC enters into OFF-BALANCE-SHEET various types of transactions that involve TRANSACTIONS credit-related financial instruments and derivative financial instruments that contain off-balance-sheet risk. Credit-related financial instruments are typically customer-driven, while derivative financial instruments are entered into both on behalf of customers and for BAC's own account in managing interest rate and foreign exchange risk. CREDIT-RELATED FINANCIAL INSTRUMENTS A summary of the contractual amounts of each significant class of credit-related financial instruments outstanding appears in the table below. The contractual amounts of these instruments are not recorded as assets or liabilities on the balance sheet. These amounts represent the amounts at risk should the contract be fully drawn upon, the client default, and the value of any existing collateral become worthless.
1997 1996 ------------------------------ ------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ------------------------------------------------------------------------------------------------------ Commitments to extend credit: Unutilized credit card lines $ 37,222 $ 38,028 $ 37,917 $ 36,897 $37,271 Other commitments to extend credit/a/ 109,971 106,590 101,128 100,234 92,965 Standby letters of credit/b/ 18,305 18,680 18,954 17,092 16,486 Commercial letters of credit 3,354 4,186 3,677 4,064 3,833 - ------------------------------------------------------------------------------------------------------
/a/ Represents agreements to extend credit to customers for which BAC may have received fees. These commitments have specified interest rates and generally have fixed expiration dates and may be terminated by BAC if certain conditions of the contract are violated. /b/ Net of participations sold of $3,306 million at September 30, 1997, $2,907 million at June 30, 1997, $3,102 million at March 31, 1997, $2,999 million at December 31, 1996, and $2,940 million at September 30, 1996. INTEREST RATE, FOREIGN EXCHANGE, AND COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS The tables on page 15 summarize the notional and credit risk amounts for each significant class of interest rate, foreign exchange and commodity derivative financial instruments outstanding in BAC's trading and asset and liability management portfolios. These tables should be read in conjunction with the descriptions of such products and their risks included on pages 38 through 44 and 72 through 78 of BAC's 1996 Annual Report to Shareholders. 14 ================================================================================
NOTIONAL AND CREDIT RISK AMOUNTS FOR DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES - ------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------------- -------------------------- NOTIONAL CREDIT NOTIONAL CREDIT (IN MILLIONS) AMOUNT RISK/a/ AMOUNT RISK/a/ - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE CONTRACTS Interest rate swaps $ 456,784 $1,973/b/ $ 442,160 $2,968/b/ Futures and forward rate contracts: Commitments to purchase 146,063 36 138,381 34 Commitments to sell 147,597 88 182,065 280 Written options 30,562 -/c/ 32,679 -/c/ Purchased options 40,358 294 40,805 373 - ------------------------------------------------------------------------------------------------------------------------------- 821,364 2,391 836,090 3,655 FOREIGN EXCHANGE CONTRACTS Spot, forward, and futures contracts 597,299 4,083 612,767 2,670 Written options 40,789 -/c/ 24,840 -/c/ Purchased options 37,823 428 23,272 319 Currency swaps 29,418 871 27,589 951 - ------------------------------------------------------------------------------------------------------------------------------- 705,329 5,382 688,468 3,940 Stock index options and commodity contracts 4,192 119 1,561 87 - ------------------------------------------------------------------------------------------------------------------------------- $1,530,885/d/ $7,892 $1,526,119/e/ $7,682 - --------------------------------------------------------------=================================================================
NOTIONAL AND CREDIT RISK AMOUNTS FOR DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES - ------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 DECEMBER 31, 1996 --------------------------- --------------------------- NOTIONAL CREDIT NOTIONAL CREDIT (IN MILLIONS) AMOUNT RISK/a/ AMOUNT RISK/a/ - -------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE CONTRACTS Interest rate swaps $ 50,030 $ 96 $ 46,445 $128 Futures and forward rate contracts 74,094 - 58,467 - Purchased options 16,642 49 10,957 81 - -------------------------------------------------------------------------------------------------------------------------------- 140,766 145 115,869 209 FOREIGN EXCHANGE CONTRACTS Spot, forward, and futures contracts 1,810 - 1,746 - Currency swaps 780 - 673 - - -------------------------------------------------------------------------------------------------------------------------------- 2,590 - 2,419 - - -------------------------------------------------------------------------------------------------------------------------------- $143,356/d/ $145 $118,288/e/ $209 - ----------------------------------------------------------------================================================================
/a/ Credit risk represents current replacement cost after the effects of master netting agreements. /b/ Includes the effects of cross product netting of certain interest rate derivatives and currency swaps. /c/ Interest rate and foreign exchange options written have no credit risk. /d/ Interest rate swaps and interest rate options in both the trading and asset and liability management portfolios include $14.2 billion and $0.7 billion, respectively, of intercompany hedging-related contracts. Foreign exchange contracts in both the trading and asset and liability management portfolios include $2.4 billion of intercompany hedging-related contracts. /e/ Interest rate swaps and interest rate options in both the trading and asset and liability management portfolios include $13.9 billion and $0.7 billion, respectively, of intercompany hedging-related contracts. Foreign exchange contracts in both the trading and asset and liability management portfolios include $2.4 billion of intercompany hedging-related contracts. 15 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued ================================================================================ For most contracts, notional amounts are used solely to determine cash flows to be exchanged. However, certain foreign exchange contracts are designed for principal amounts to be exchanged on a common settlement date. The notional or contract amounts associated with interest rate, foreign exchange and commodity derivative financial instruments are not recorded as assets or liabilities on the balance sheet and do not represent the potential for gain or loss associated with such transactions. Credit risk represents unrealized gains on foreign exchange and derivatives contracts. It is the amount of loss that BAC would suffer 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 period after the effects of master netting agreements. The tables on page 17 summarize the average and period- end fair values of each significant class of interest rate, foreign exchange and commodity derivative financial instruments outstanding in BAC's trading portfolio and the period-end fair values for each significant class of interest rate and foreign exchange derivative financial instruments outstanding in BAC's asset and liability management portfolio. Fair value amounts consist of unrealized gains and losses, accrued interest receivable and payable, and premiums paid or received, and take into account master netting agreements. The fair value amounts for the trading portfolio are disaggregated by gross unrealized gains (assets) and gross unrealized losses (liabilities), while the fair value amounts for the asset and liability management portfolio are shown on a net basis. Fair value amounts were generally calculated using discounted cash flow models based on current market yields for similar instruments and the maturity of each instrument. 16 ================================================================================
FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES ----------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------------------- ---------------------------- AVERAGE AVERAGE FAIR VALUE FAIR VALUE FOR THE PERIOD-END FOR THE YEAR-END (IN MILLIONS) PERIOD ENDED/a/ FAIR VALUE YEAR ENDED/a/ FAIR VALUE ---------------------------------------------------------------------------------------------------------- INTEREST RATE CONTRACTS Interest rate swaps: Assets $ 2,338 $ 1,973 $ 2,956 $ 2,968 Liabilities (2,080) (1,867) (2,661) (2,820) Futures and forward rate contracts: Assets 158 124 335 314 Liabilities (147) (106) (331) (329) Written options (279) (279) (221) (300) Purchased options 311 294 307 373 ---------------------------------------------------------------------------------------------------------- 301 139 385 206 FOREIGN EXCHANGE CONTRACTS Spot, forward, and futures contracts: Assets 4,172 4,083 2,358 2,670 Liabilities (4,127) (3,863) (2,709) (2,842) Written options (642) (554) (333) (369) Purchased options 510 428 283 319 Currency swaps: Assets 1,094 871 1,137 951 Liabilities (910) (756) (1,308) (937) ---------------------------------------------------------------------------------------------------------- 97 209 (572) (208) STOCK INDEX OPTIONS AND COMMODITY CONTRACTS Assets 58 119 58 87 Liabilities (54) (116) (25) (36) ---------------------------------------------------------------------------------------------------------- 4 3 33 51 ---------------------------------------------------------------------------------------------------------- $ 402 $ 351 $ (154) $ 49 --------------------------------------------============================================================== /a/ Average fair value amounts are calculated based on monthly balances.
FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR ASSET AND LIABILITY MANAGEMENT PURPOSES ---------------------------------------------------------------------------------------------------------- (IN MILLIONS) SEPTEMBER 30, 1997 DECEMBER 31, 1996 ---------------------------------------------------------------------------------------------------------- INTEREST RATE CONTRACTS/a/ Interest rate swaps $(542) $(369) Futures and forward rate contracts (16) (26) Purchased options (11) (4) ---------------------------------------------------------------------------------------------------------- (569) (399) FOREIGN EXCHANGE CONTRACTS/a/ Spot, forward, and futures contracts - - Currency swaps (97) (63) ---------------------------------------------------------------------------------------------------------- (97) (63) ---------------------------------------------------------------------------------------------------------- $(666) $(462) -------------------------------------------------------------------------================================= /a/ Bracketed amounts reflect net liability positions.
17 BANKAMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED ================================================================================ Trading Activities Trading income represents the net amount earned from BAC's trading activities, which include entering into transactions to meet customer demand and taking positions for BAC's own account in a diverse range of financial instruments and markets. The profitability of these trading activities depends largely on the volume and diversity of the transactions BAC executes, the level of risk it is willing to assume, and the volatility of price and rate movements. Trading income, as disclosed in BAC's consolidated statement of operations, does not include the net interest income derived from interest rate, foreign exchange, and commodity derivative financial instruments associated with trading activities. However, the trading-related net interest income amounts are presented in the table below as they are considered in evaluating the overall profitability of those activities.
TRADING-RELATED INCOME - ------------------------------------------------------------------------------------------------------------ 1997 1996 NINE MONTHS ENDED ------------------------------- ------------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ----------------- (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER 1997 1996 - ------------------------------------------------------------------------------------------------------------ TRADING INCOME Interest rate $ 24 $ 17 $ 12 $ 19 $ 17 $ 53 $ 37 Foreign exchange 106 107 92 64 64 305 252 Debt instruments 93 94 84 51 72 271 207 - ------------------------------------------------------------------------------------------------------------ $223 $218 $188 $134 $153 $629 $496 - ---------------------------------=========================================================================== OTHER TRADING-RELATED INCOME/a/ Interest rate $ 6 $ 12 $ 10 $ 13 $ 5 $ 28 18 Foreign exchange 1 2 4 3 4 7 17 Debt instruments 49 47 50 53 52 146 155 - ------------------------------------------------------------------------------------------------------------ $ 56 $ 61 $ 64 $ 69 $ 61 $181 $190 - ---------------------------------===========================================================================
/a/ Primarily includes the net interest revenue and expense associated with these contracts. To reflect the business purpose and use of the financial contracts into which BAC enters, trading income and the related net interest revenue or expense associated with such contracts have been allocated into three broad functional categories: interest rate trading, foreign exchange trading, and debt instruments trading. Trading- related income from interest rate instruments primarily includes the results from transactions using interest rate and currency swaps, interest rate futures, option contracts, and forward rate agreements, as well as cash instruments used in the management of this function. Foreign exchange trading-related income primarily includes the results from transactions using foreign exchange spot, forward, futures, and option contracts. Trading-related income from debt instruments primarily represents the results from trading activities in various debt securities, including U.S. government and government agency securities, foreign government securities, mortgage-backed securities, municipal bonds, and corporate debt. ASSET AND LIABILITY MANAGEMENT ACTIVITIES BAC uses interest rate and foreign exchange derivative financial instruments to manage interest rate risk related to specific assets and liabilities, primarily fixed rate and adjustable rate residential mortgages, long-term debt, and deposits. Foreign exchange derivative financial instruments are used to hedge net capital exposure and 18 ================================================================================ foreign currency exposures. For a detailed description of BAC's asset and liability management objectives and strategies used to achieve those objectives, refer to pages 76 through 78 of BAC's 1996 Annual Report to Shareholders. The expected maturities and weighted average interest rates associated with BAC's asset and liability management interest rate swap portfolio at September 30, 1997 were not significantly different from those at year-end 1996. - -------------------------------------------------------------------------------- NOTE 9. BAC recorded a pre-tax restructuring charge of $280 RESTRUCTURING million in the fourth quarter of 1996 as a result of CHARGES decisions to implement a number of restructurings of its business activities. The charge covered approximately $196 million for severance payments, approximately $72 million for premises, primarily reflecting the planned closure of 120 branches, and approximately $12 million for other costs affected by the actions. Management expects that the projects relating to these restructurings will be implemented in 1997 and completed by the end of 1998. The severance payments will reflect an estimated reduction of 3,700 positions due to the restructuring of BAC's business activities. During 1997, 522 positions, 723 positions, and 364 positions were reduced during the first, second, and third quarters, respectively, reflecting a remaining balance of 2,091 positions at September 30, 1997. Following is a summary of changes in restructuring charges through the third quarter of 1997:
(IN MILLIONS) SEVERANCE PREMISES OTHER/a/ TOTAL - ------------------------------------------------------------------------------------------- Balance at January 1, 1997 $196 $72 $12 $280 Payments 34 6 1 41 - ------------------------------------------------------------------------------------------- Balance at March 31, 1997 162 66 11 239 Payments 24 9 1 34 - ------------------------------------------------------------------------------------------- Balance at June 30, 1997 138 57 10 205 Payments 18 16 1 35 - ------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1997 $120 $41 $ 9 $170 - ------------------------------------------------===========================================
/a/ Includes equipment write-offs and other miscellaneous costs. 19 =============================================================================== [THIS PAGE INTENTIONALLY LEFT BLANK] 20 MANAGEMENT'S DISCUSSION AND ANALYSIS HIGHLIGHTS =============================================================================== The following is a summary of third-quarter 1997 financial information for BankAmerica Corporation and subsidiaries (BAC). . BAC reported third-quarter 1997 earnings per share of $1.11, an increase of 28 percent from $0.87 for the same period a year ago. The per share results include the effects of a two-for-one stock split which was effective June 2, 1997. Net income for the third quarter of 1997 was $819 million, up 20 percent from $683 million for the third quarter of 1996. . The return on average common equity was 16.82 percent, an increase of 266 basis points from the amount reported in the third quarter of 1996. . BAC continued to effectively manage its capital through the following activities since the end of the second quarter: - Completed the sale of the consumer finance subsidiary, Security Pacific Financial Services Inc. (SPFS); - Completed the Robertson Stephens and Company acquisition on October 1; - Decisions to exit Midwest retail facilities and to sell BA Housing Services, both of which were formally announced on October 15; - Securitized $750 million of credit card receivables; - Sold $3.2 billion of residential first mortgages; - Redeemed its Series L and M preferred stock; and also announced in October that it will redeem Series N preferred stock which will reduce stockholders' equity by $234 million. . Net interest income was up $42 million from the third quarter of 1996. BAC's net interest margin for the third quarter of 1997 was 4.06 percent, down 11 basis points from the comparable period a year ago. . Noninterest income increased $351 million from the third quarter of 1996. Included in noninterest income for the third quarter of 1997 was a $246 million gain associated with the previously announced sale of SPFS. The effect of this gain was partially offset by charges of approximately $112 million for asset dispositions, personnel expenses, and other costs associated primarily with the decision to exit Midwest retail facilities. Excluding the effects of these items, noninterest income would have been $1,536 million, or an increase of $217 million over the same period in 1996. 21 =============================================================================== . Noninterest expense was $2,232 million, an increase of $151 million from the third quarter of 1996. Included in noninterest expense for the third quarter of 1997 were charges associated with multiple legal matters, writedowns on corporate real estate, and contributions to the BA Foundation. Included in noninterest expense for the third quarter of 1996 was a one-time assessment of $82 million associated with the recapitalization of the Savings Association Insurance Fund (SAIF). Without these items, noninterest expense would have been $2,092 million for the third quarter of 1997 compared to $1,999 million for the third quarter of last year, or an increase of $93 million. . Nonaccrual assets were $930 million at September 30, 1997, an increase of $69 million, or 8 percent, from their June 30, 1997 level, but decreased $189 million, or 17 percent, from their September 30, 1996 level. . The provision for credit losses was $260 million, up $10 million from the previous quarter and $25 million from the third quarter of 1996. Net credit losses were $259 million for the third quarter of 1997, an increase of $35 million and $33 million from the second quarter of 1997 and the third quarter of 1996, respectively. . In connection with BAC's ongoing efforts to effectively manage capital, BAC repurchased 7.5 million shares of its common stock during the third quarter of 1997 at an average per-share price of $70.22, which reduced stockholders' equity by $525 million. . On July 14, 1997, BAC redeemed all outstanding shares of its 8.16% Cumulative Preferred Stock, Series L, which reduced stockholders' equity by $399 million. In addition, on September 30, 1997, BAC redeemed all outstanding shares of its 7 7/8% Cumulative Preferred Stock, Series M, which reduced stockholders' equity by $349 million. 22
FINANCIAL HIGHLIGHTS ==================================================================================================================================== 1997 1996 NINE MONTHS ENDED -------------------------------- --------------------- SEPTEMBER 30 (DOLLAR AMOUNTS IN MILLIONS, THIRD SECOND FIRST FOURTH THIRD ------------------- EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER/a/ QUARTER/a,b/ QUARTER/a,c/ 1997 1996/a,c/ - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Interest income $ 4,451 $ 4,359 $ 4,240 $ 4,238 $ 4,206 $13,050 $ 12,421 Interest expense 2,257 2,165 2,066 2,108 2,054 6,488 5,964 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 2,194 2,194 2,174 2,130 2,152 6,562 6,457 Provision for credit losses 260 250 220 220 235 730 665 Noninterest income 1,670 1,442 1,385 1,499 1,319 4,497 3,913 Noninterest expense 2,232 2,047 2,033 2,250 2,081 6,312 6,091 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,372 1,339 1,306 1,159 1,155 4,017 3,614 Provision for income taxes 553 540 526 412 472 1,619 1,488 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 819 $ 799 $ 780 $ 747 $ 683 $ 2,398 $ 2,126 - ----------------------------------------------------=============================================================================== PER SHARE DATA Earnings per common and common equivalent share $ 1.11 $ 1.07 $ 1.03 $ 0.96 $ 0.87 $ 3.20 $ 2.69 Earnings per common share -- assuming full dilution 1.11 1.07 1.03 0.96 0.87 3.20 2.69 Dividends declared per common share 0.305 0.305 0.305 0.27 0.27 0.915 0.81 - ----------------------------------------------------------------------------------------------------------------------------------- STOCK DATA Book value per common share at period end $ 27.51 $ 26.88 $ 26.25 $ 26.00 $ 25.46 $ 27.51 $ 25.46 Common stock price range: High 77-7/8 69 61-7/8 51-15/16 42-5/8 77-7/8 42-5/8 Low 64-9/16 49-9/16 47-11/16 41-1/16 36 47-11/16 29-3/8 Closing common stock price 73-5/16 64-9/16 50-7/16 49-7/8 41-1/16 73-5/16 41-1/16 Average number of common and common equivalent shares outstanding (in thousands) 718,384 719,514 726,800 731,022 731,343 721,566 737,733 Average number of common shares outstanding -- assuming full dilution (in thousands) 719,532 722,179 726,800 732,416 731,770 722,837 738,683 Number of common shares outstanding at period end (in thousands) 693,468 698,407 704,708 710,534 717,651 693,468 717,651 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AT PERIOD END Loans $166,986 $168,806 $167,338 $165,415 $161,833 $166,986 $161,833 Total assets 257,520 258,363 249,904 250,753 242,953 257,520 242,953 Deposits 171,413 173,168 168,999 168,015 164,901 171,413 164,901 Long-term debt 14,198 14,736 14,725 15,785 15,454 14,198 15,454 Common equity 19,078 18,772 18,501 18,471 18,270 19,078 18,270 Total equity 19,926 20,368 20,097 20,713 20,512 19,926 20,512 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS Expense to revenue/d/ 52.79% 52.93% 53.53% 54.01% 54.47% 53.08% 55.13% Rate of return (based on net income) on: Average common equity 16.82 16.73 16.50 15.24 14.16 16.69 14.92 Average total equity 16.23 15.99 15.70 14.42 13.44 15.98 14.09 Average total assets 1.26 1.26 1.25 1.21 1.12 1.26 1.18 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Ratio of common equity to total assets 7.41% 7.27% 7.40% 7.37% 7.52% 7.41% 7.52% Ratio of total equity to total assets 7.74 7.88 8.04 8.26 8.44 7.74 8.44 Ratio of average total equity to average total assets 7.78 7.86 7.99 8.40 8.29 7.88 8.39 - -----------------------------------------------------------------------------------------------------------------------------------
/a/ Share and per share amounts and stock prices have been restated to reflect a two-for-one stock split effective June 2, 1997. /b/ Includes the income statement effect of a $147 million nontaxable gain from the initial public offering of BA Merchant Services, Inc. (BAMS) common stock and a $280 million pre-tax restructuring charge. /c/ Includes the income statement effect of a one-time SAIF assessment that increased noninterest expense by $82 million. /d/ Excludes net other real estate owned expense, amortization of intangibles, expenses associated with trust preferred securities, the effects of a one- time assessment for SAIF in the third quarter of 1996, a restructuring charge and gain on the initial public offering of BAMS common stock incurred in the fourth quarter of 1996, a third-quarter 1997 gain on the sale of SPFS, and charges incurred in the third quarter of 1997 associated with the decision to exit Midwest retail facilities and with multiple legal matters, writedowns on corporate real estate, and contributions to the BA Foundation. 23 BUSINESS SECTORS ===============================================================================
SELECTED BUSINESS SECTOR DATA - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30/a/ ------------------------------------------------------------------------------------------ U.S. CORPORATE AND TOTAL CONSUMER BANKING/c/ INTERNATIONAL BANKING MIDDLE MARKET BANKING ----------------- ------------------ --------------------- --------------------- (DOLLAR AMOUNTS IN MILLIONS) 1997 1996 1997 1996 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net interest income $6,562 $6,457 $4,154 $4,117 $1,147 $1,066 $ 663 $617 Noninterest income 4,497 3,913 2,184 1,777 1,762 1,625 167 156 Noninterest expense 6,312 6,091 3,827 3,784 1,552 1,467 381 373 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE THE PROVISIONS FOR CREDIT LOSSES AND INCOME TAXES 4,747 4,279 2,511 2,110 1,357 1,224 449 400 Provision for credit losses 730 665 677 716 121 (20) (5) (21) Provision for income taxes 1,619 1,488 783 633 473 498 192 172 - ----------------------------------------------------------------------------------------------------------------------------------- Net Income 2,398 2,126 1,051 761 763 746 262 249 Preferred stock dividends 86 141 40 65 27 44 10 16 - ----------------------------------------------------------------------------------------------------------------------------------- Net income attributable to common equity $2,312 $1,985 $1,011 $ 696 $ 736 $ 702 $ 252 $233 - ---------------------------------------============================================================================================ SELECTED AVERAGE BALANCE SHEET COMPONENTS Loans 166,112 $157,421 $84,137 $82,007 $45,521 $41,697 $21,451 $19,101 Earning assets 213,725 202,303 85,001 82,801 78,365 72,008 21,513 19,154 Total assets 254,872 240,636 94,262 93,359 104,183 93,798 24,862 22,373 Deposits 168,588 161,123 99,219 96,180 48,418 44,622 7,526 6,899 Common equity 18,523 17,777 8,526 8,189 5,792 5,492 2,129 1,994 SELECTED FINANCIAL RATIOS Return on average common equity 16.69% 14.92% 15.85% 11.35% 17.00% 17.09% 15.82% 15.60% Expense to revenue/b/ 53.08 55.13 56.92 58.95 49.80 52.90 42.00 45.85 - ------------------------------------------------------------------------------------------------------------------------------------
For management reporting purposes, BAC segregates its operations into five primary business or operating sectors. BAC determines its business sector results based on an internal management reporting system that allocates certain revenues, expenses, assets, and liabilities to each business. Furthermore, for internal business sector monitoring, the unallocated allowance for credit losses and related provision for credit losses are assigned to the businesses. Equity is assigned to each business on a risk-adjusted basis taking into account goodwill and tax-effected identifiable intangibles. While BAC manages its interest-rate risk hedging activities centrally, the effects of hedging are generally allocated to the businesses through a transfer pricing process. As a result, the effects of hedging interest rate risk are reflected in the appropriate business sectors. The information set forth in the tables on pages 24 and 25 reflects the condensed income statements and selected average balance sheet line items and financial ratios by business sector. The information presented does not necessarily represent the business sectors' financial condition and results of operations as if they were independent entities. Results from prior periods are restated for changes in sector composition and in allocation and assignment methodologies to provide comparability. For a detailed discussion of the composition of each business sector, refer to pages 19 through 22 of BAC's 1996 Annual Report to Shareholders. Consumer Banking--Consumer Banking's net income for the first nine months of 1997 was up $290 million, or 38 percent, from the amount for the same period last year. Net interest income increased primarily due to higher volumes on consumer installment and consumer lease financing loans. Partially offsetting these volume increases were reductions in 24
==================================================================================================================================== NINE MONTHS ENDED SEPTEMBER 30/a/ ----------------------------------------------------------------------- COMMERCIAL REAL ESTATE WEALTH MANAGEMENT ALL OTHER ---------------------- ----------------- ---------------- (DOLLAR AMOUNTS IN MILLIONS) 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Net interest income $336 $ 298 $138 $129 $124 $230 Noninterest income 27 25 290 275 67 55 Noninterest expense 85 80 343 322 124 65 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE THE PROVISIONS FOR CREDIT LOSSES AND INCOME TAXES 278 243 85 82 67 220 Provision for credit losses (64) (13) - 1 1 2 Provision for income taxes 150 100 34 37 (13) 48 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income 192 156 51 44 79 170 Preferred stock dividends 3 7 3 4 3 5 - ------------------------------------------------------------------------------------------------------------------------------------ Net income attributable to common equity $189 $149 $ 48 $ 40 $ 76 $165 - -----------------------------------------------------------------================================================================= SELECTED AVERAGE BALANCE SHEET COMPONENTS Loans $9,224 $ 9,795 $4,724 $4,222 $ 1,055 $ 599 Earning assets 9,253 9,809 4,850 4,323 14,743 14,208 Total assets 9,615 10,203 5,654 5,073 16,296 15,830 Deposits 2,292 2,067 7,298 6,962 3,835 4,393 Common equity 746 845 579 555 751 702 Selected Financial Ratios Return on average common equity 33.94% 23.63% 11.00% 9.61% NM NM Expense to revenue/b/ 25.86 29.18 75.59 75.98 NM NM - ------------------------------------------------------------------------------------------------------------------------------------
/a/ For comparability purposes, both 1997 and 1996 amounts reflect BAC's business-sector allocation methodologies at September 30, 1997. /b/ Excludes net other real estate owned expense, amortization of intangibles, expenses associated with trust preferred securities, the effects of a one- time assessment for SAIF in the third quarter of 1996, a third-quarter 1997 gain on the sale of SPFS, and charges incurred in the third quarter of 1997 associated with the decision to exit Midwest retail facilities and with multiple legal matters, writedowns on corporate real estate, and contributions to the BA Foundation. /c/ Includes the income statement effect of the previously discussed one-time SAIF assessment. NM - Not meaningful. residential real estate and credit card loans as a result of continued sales of residential mortgages and securitizations of credit card receivables. Noninterest income increased due to higher revenues from service charges on deposit accounts and from ATM fees in California, larger gains on the sales of residential first mortgages, and higher loan servicing revenue. The increase in loan servicing revenue resulted primarily from the effects of Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). Also contributing to the increase in noninterest income was a $246 million gain associated with the previously announced sale of SPFS, which was partially offset by charges of approximately $112 million primarily associated with the decision to exit Midwest retail facilities. Noninterest income for the first nine months of 1996 included an $82 million gain from the sale of a Hong Kong consumer and commercial finance subsidiary. Noninterest expense for 1997 included charges connected with writedowns on corporate real estate and contributions to the BA Foundation, while 1996's noninterest expense included a one-time assessment of $82 million for the recapitalization of the SAIF. The increases in net interest income and noninterest income, coupled with BAC's efforts to keep noninterest expense at targeted levels, resulted in an expense-to-revenue ratio of 56.92 percent, a 203 basis point improvement from the same 25 ================================================================================ period a year ago. Average loan outstandings grew $2 billion, or 3 percent, from September 30, 1996, reflecting growth in manufactured housing loans, consumer auto loans, and lease financing, while a reduction in residential real estate loans partly offset this increase. U.S. Corporate and International Banking--U.S. Corporate and International Banking's net income for the first nine months of 1997 increased $17 million, or 2 percent, from the amount reported for the same period a year ago. Higher net interest and noninterest income levels were offset by increases in noninterest expense and the provision for credit losses. The increase in net interest income resulted from higher earning asset balances. Noninterest income was up $137 million predominantly due to improved foreign exchange and trading account profits, higher securities gains and lower foreign exchange hedging losses, and increased gains on the sales of loans and other assets. Lower commitment fees partially offset the increases in noninterest income. In addition, noninterest income in 1996 included a $43 million gain on the liquidation of an Australian subsidiary and a $39 million gain that resulted from a reduction of BAC's equity interest in KorAm Bank, an Asian investment. The increase in the provision for credit losses was primarily related to an increase in loans placed on nonaccrual status and to the currency devaluation in Southeast Asia. The increases in net interest income and noninterest income, coupled with BAC's effort to keep noninterest expense at targeted levels, resulted in an expense-to-revenue ratio of 49.80 percent, a 310 basis point improvement from the same period a year ago. Middle Market Banking--Middle Market Banking's net income for the first nine months of 1997 increased $13 million, or 5 percent, from the same period a year ago. Net interest income was up due to higher loan volumes and included a $9 million interest recovery during 1997. Commercial Real Estate--Net income in the commercial real estate sector increased $36 million, or 23 percent, from the first nine months of 1996, largely due to an increase in net interest income coupled with a reduction in the provision for credit losses. Included in net interest income for 1997 was an interest recovery of $22 million. Improved credit quality of commercial real estate loans caused the decrease in the provision for credit losses. Wealth Management--Wealth Management's net income was $51 million for the first nine months of 1997, an increase of $7 million, or 16 percent, from the same period a year ago. Noninterest income increased primarily due to higher trust fees, which were partially offset by lower mutual fund and annuity income. Noninterest expense was up during the first nine months of 1997 due to higher compensation and consultant expenses. All Other--This sector includes the results from corporate asset and liability management activities (investment securities, federal funds purchased and sold, institutional and brokered deposits and intermediate debt), along with any residual differences between actual centrally managed external hedging results and the transfer of interest rate risk hedging to the appropriate business sectors. Also included in this sector are the residual income and expenses related to BAC's Institutional Trust and Securities Services (ITSS) business, which the corporation had substantially divested by the end of the first quarter of 1996. This sector's net income for the first nine months of 1997 decreased $91 million from the amount reported for the comparable period a year ago. Net interest income decreased $106 million due to lower results from corporate liquidity management activities. Noninterest income for the first nine months of 1996 included a $50 million pre-tax gain associated with the divestiture of the ITSS business. The increase in noninterest expense was primarily related to charges associated with multiple legal matters in 1997. In addition, noninterest expense in 1996 included expenses associated with the ITSS business. 26 OPERATING LEVERAGE AND CAPITAL MANAGEMENT ================================================================================ BAC continued to demonstrate effective management of operating leverage in the third quarter and nine months ended September 30, 1997. Operating leverage is achieved when the rate of revenue growth exceeds that of expenses. As shown in the table on page 28, revenue for the third quarter and nine months ended September 30, 1997 increased 11 percent and 7 percent, respectively, while noninterest expense increased 7 percent and 4 percent, respectively, from the same periods in 1996. For a detailed discussion of the increases in net interest income, noninterest income and expense, refer to pages 29 and 32 through 36. Capital management objectives are achieved when the rates of growth in common shares outstanding and preferred stock dividends are below that of net income. As a result of BAC's stock repurchase program, the average number of common shares outstanding, assuming full dilution, decreased 2 percent in the third quarter and nine months ended September 30, 1997 from the comparable periods in the prior year. Additionally, preferred stock dividends decreased 49 percent and 39 percent for the third quarter and nine months ended September 30, 1997, respectively, compared to the same periods in 1996. However, the decrease in preferred stock dividends is partially offset by the after-tax effect of noninterest expense related to expenses on trust preferred securities. By increasing revenues, effectively managing expenses, and taking strategic capital management steps, BAC reported increases in net income for the third quarter and nine months ended September 30, 1997 of 20 percent and 13 percent, respectively, from the comparable periods last year. In addition, the rate of return on average common equity increased 266 basis points and 177 basis points for the third quarter and nine months ended September 30, 1997, respectively, from the same periods in 1996. 27
==================================================================================================================================== OPERATING LEVERAGE AND CAPITAL MANAGEMENT - ------------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED THIRD QUARTER SEPTEMBER 30 (DOLLAR AMOUNTS IN MILLIONS, ------------------ PERCENTAGE ------------------ PERCENTAGE EXCEPT PER SHARE DATA) 1997 1996 CHANGE 1997 1996 CHANGE - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING LEVERAGE COMPONENTS Net interest income $2,194 $2,152 2% $ 6,562 $6,457 2% Noninterest income 1,670 1,319 27 4,497 3,913 15 Total revenue 3,864 3,471 11 11,059 10,370 7 Noninterest expense 2,232 2,081 7 6,312 6,091 4 Operating income/a/ 1,632 1,390 17 4,747 4,279 11 Provision for credit losses 260 235 11 730 665 10 Provision for income taxes 553 472 17 1,619 1,488 9 CAPITAL MANAGEMENT COMPONENTS Net income 819 683 20 2,398 2,126 13 Preferred stock dividends 22 43 (49) 86 141 (39) Net income applicable to common stock 797 640 25 2,312 1,985 16 Average number of common shares outstanding -- assuming full dilution (in thousands) 719,532 731,770/b/ (2) 722,837 738,683/b/ (2) Earnings per common share -- assuming full dilution $ 1.11 $ 0.87/b/ 28 $ 3.20 $ 2.69/b/ 19 Average common equity 18,787 17,963 5 18,523 17,777 4 Rate of return on average common equity 16.82% 14.16% 266bp 16.69% 14.92% 177bp - ------------------------------------------------------------------------------------------------------------------------------------
/a/ Represents net income before the provisions for credit losses and income taxes. /b/ Restated to reflect a two-for-one stock split effective June 2, 1997. bp - Basis points. 28 RESULTS OF OPERATIONS ================================================================================ NET INTEREST Taxable-equivalent net interest income for the third INCOME quarter and the first nine months of 1997 was $2,203 million and $6,583 million, respectively, up $46 million and $115 million from the corresponding periods of 1996. The increases primarily resulted from growth in earning assets, partially offset by an increase in the cost of funds. Excluding the effects of credit card securitizations, taxable-equivalent net interest income would have increased $93 million and $237 million in the third quarter and first nine months of 1997, respectively, from the comparable 1996 periods. Average earning assets totaled $216.2 billion and $213.7 billion in the third quarter and first nine months of 1997, respectively, up $9.5 billion and $11.4 billion from the same periods in 1996. The increases were largely attributable to growth in most segments of the loan portfolio as average loans increased $6.1 billion and $8.7 billion from the third quarter and first nine months of 1996, respectively. In addition, trading account assets rose $4.0 billion and $3.1 billion from the third quarter and first nine months of 1996, respectively. BAC's net interest margin for the third quarter and first nine months of 1997 was 4.06 percent and 4.11 percent, respectively, down 11 and 15 basis points from the comparable periods a year ago. The yield on average earning assets for the third quarter of 1997 increased 9 basis points from the third quarter of 1996. This increase reflects higher yields on: securities purchased under resale agreements due to the netting of certain positions with securities sold under repurchase agreements; construction and development loans secured by real estate due to a higher level of interest recoveries; and loans for purchasing or carrying securities due to an increase in fees. The yield on average earning assets for the first nine months of 1997 decreased 3 basis points from the comparable period a year ago. This decrease was primarily due to lower prevailing market rates and an increase in lower yielding trading portfolio assets, partially offset by the above items that increased the yield for the third quarter of 1997. The cost of funds for the third quarter and first nine months of 1997 increased from the third quarter and first nine months of 1996 primarily due to increased rates on domestic interest-bearing deposits, the largest component of interest-bearing liabilities. In addition, BAC has experienced a shift in the mix of liabilities toward wholesale funding sources, including foreign interest-bearing deposits and domestic purchased funds, which are more costly than traditional core deposits. BAC's net interest income and margin include the recognition of hedging with certain on- and off-balance sheet financial instruments. The recognition of hedging with derivative financial instruments reduced BAC's net interest income results by approximately $30 million and $65 million in the third quarter and first nine months of 1997, compared with an approximate decrease of $5 million and an approximate increase of $25 million, respectively, in the corresponding periods of 1996. 29
==================================================================================================================================== AVERAGE BALANCES, INTEREST, AND AVERAGE RATES - ------------------------------------------------------------------------------------------------------------------------------------ THIRD QUARTER 1997 THIRD QUARTER 1996 --------------------------------- -------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - ----------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits in banks $ 6,282 $ 107 6.79% $ 5,518 $ 95 6.86% Federal funds sold 1,037 14 5.65 664 9 5.38 Securities purchased under resale agreements 9,930 208 8.29/f/ 11,793 178 6.01 Trading account assets 17,316 325 7.44 13,270 269 8.06 Available-for-sale securities/c,d/ 11,984 209 6.95 11,373 210 7.34 Held-to-maturity securities/d/ 3,753 69 7.35 4,221 78 7.40 Domestic loans: Consumer-residential first mortgages 34,935 643 7.36 38,291 715 7.46 Consumer-residential junior mortgages 14,955 318 8.44 14,469 311 8.56 Consumer-credit card 7,635 283 14.80 8,967 324 14.43 Other consumer 20,642 493 9.47 17,635 438 9.88 Commercial and industrial 33,627 683 8.05 32,790 636 7.73 Commercial loans secured by real estate 12,743 298 9.36 11,696 254 8.69 Financial institutions 3,171 39 4.93 2,742 31 4.51 Lease financing 2,699 38 5.58 2,106 32 5.92 Construction and development loans secured by real estate 2,280 82 14.21/g/ 2,649 82 12.25 Loans for purchasing or carrying securities 2,035 59 11.45/h/ 1,167 19 6.51 Agricultural 1,834 40 8.72 1,574 34 8.50 Other 1,562 26 6.54 1,141 19 6.91 ------- ----- ------- ------ Total domestic loans 138,118 3,002 8.65 135,227 2,895 8.54 Foreign loans 27,734 526 7.52 24,552 477 7.73 ------- ----- ------- ------ Total loans/c/ 165,852 3,528 8.46 159,779 3,372 8.41 ------- ----- ------- ------ Total earning assets 216,154 $4,460 8.21 206,618 $4,211 8.12 ====== ====== Nonearning assets 44,758 40,684 Less: Allowance for credit losses 3,532 3,533 ------- ------- TOTAL ASSETS $257,380 $243,769 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Domestic interest-bearing deposits: Transaction $ 5,110 $ 22 1.70% $ 13,091 $ 40 1.20% Savings 11,726 61 2.08 12,903 66 2.04 Money market 40,343 289 2.84 27,732 225 3.24 Time 30,388 437 5.71 30,367 392 5.13 ------- ----- ------- ------ Total domestic interest-bearing deposits 87,567 809 3.67 84,093 723 3.42 Foreign interest-bearing deposits: Banks located in foreign countries 13,308 207 6.18 12,120 173 5.68 Governments and official institutions 11,475 160 5.52 10,630 139 5.20 Time, savings, and other 21,229 326 6.09 18,992 297 6.22 ------- ----- ------- ------ Total foreign interest-bearing deposits 46,012 693 5.87 41,742 609 5.80 ------- ----- ------- ------ Total interest-bearing deposits 133,579 1,502 4.40 125,835 1,332 4.21 Federal funds purchased 795 11 5.40 1,225 17 5.33 Securities sold under repurchase agreements 12,435 227 7.25/f/ 13,471 201 5.92 Other short-term borrowings 17,941 268 5.91 16,104 243 6.01 Long-term debt 14,183 249 6.96 15,174 261 6.84 ------- ----- ------- ------ TOTAL INTEREST-BEARING LIABILITIES 178,933 $2,257 5.00 171,809 $2,054 4.76 ====== ====== Domestic noninterest-bearing deposits 35,040 34,081 Foreign noninterest-bearing deposits 1,660 1,598 Other noninterest-bearing liabilities 19,851 16,076 ------- ------- Total liabilities 235,484 223,564 Trust preferred securities/e/ 1,873 - Stockholders' equity 20,023 20,205 ------- ------- Total Liabilities and Stockholders' Equity $257,380 $243,769 ======= ======= Interest income as a percentage of average earning assets 8.21% 8.12% Interest expense as a percentage of average earning assets (4.15) (3.95) ----- ----- NET INTEREST MARGIN 4.06% 4.17% ===== ===== - ------------------------------------------------------------------------------------------------------------------------------------
30
================================================================================================================================= - --------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 ----------------------------------------------------------------------------- 1997 1996 --------------------------------- --------------------------------- BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits in banks $ 6,326 $ 311 6.58% $ 5,662 $ 308 7.26% Federal funds sold 753 31 5.55 545 22 5.39 Securities purchased under resale agreements 9,674 543 7.50/f/ 10,753 509 6.33 Trading account assets 15,315 895 7.81 12,257 733 7.99 Available-for-sale securities/c,d/ 11,619 612 7.02 11,256 638 7.56 Held-to-maturity securities/d/ 3,926 228 7.74 4,409 246 7.44 Domestic loans: Consumer-residential first mortgages 35,961 1,995 7.40 37,666 2,111 7.47 Consumer-residential junior mortgages 14,909 947 8.49 14,143 913 8.62 Consumer-credit card 8,084 887 14.62 9,003 988 14.62 Other consumer 20,325 1,470 9.67 17,043 1,263 9.90 Commercial and industrial 33,964 2,007 7.90 32,775 1,912 7.80 Commercial loans secured by real estate 12,574 846 8.97 11,282 749 8.85 Financial institutions 3,104 115 4.94 2,856 95 4.44 Lease financing 2,741 115 5.63 2,000 96 6.40 Construction and development loans secured by real estate 2,263 226 13.35/g/ 2,955 240 10.85 Loans for purchasing or carrying securities 1,905 132 9.28/h/ 1,171 58 6.64 Agricultural 1,637 107 8.73 1,599 105 8.76 Other 1,433 67 6.24 1,153 58 6.77 -------- ------- -------- ------- Total domestic loans 138,900 8,914 8.57 133,646 8,588 8.58 Foreign loans 27,212 1,537 7.55 23,775 1,388 7.80 -------- ------- -------- ------- Total loans/c/ 166,112 10,451 8.40 157,421 9,976 8.46 -------- ------- -------- ------- Total earning assets 213,725 $13,071 8.17 202,303 $12,432 8.20 ======= ======= Nonearning assets 44,691 41,858 Less: Allowance for credit losses 3,544 3,525 -------- -------- TOTAL ASSETS $254,872 $240,636 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Domestic interest-bearing deposits: Transaction $ 5,797 $ 67 1.54% $ 13,178 $ 119 1.20% Savings 11,942 184 2.06 13,003 199 2.05 Money market 37,232 816 2.93 27,796 662 3.18 Time 30,125 1,235 5.48 30,057 1,130 5.02 -------- ------- -------- ------- Total domestic interest-bearing deposits 85,096 2,302 3.62 84,034 2,110 3.36 Foreign interest-bearing deposits: Banks located in foreign countries 13,234 583 5.89 13,169 581 5.89 Governments and official institutions 11,152 451 5.40 9,440 372 5.26 Time, savings, and other 21,115 956 6.06 18,858 890 6.31 -------- ------- -------- ------- Total foreign interest-bearing deposits 45,501 1,990 5.85 41,467 1,843 5.94 -------- ------- -------- ------- Total interest-bearing deposits 130,597 4,292 4.39 125,501 3,953 4.21 Federal funds purchased 1,070 43 5.38 1,472 59 5.32 Securities sold under repurchase agreements 11,046 554 6.71/f/ 12,117 540 5.95 Other short-term borrowings 18,405 830 6.03 13,780 629 6.10 Long-term debt 14,836 769 6.93 15,265 783 6.86 -------- ------- -------- ------- Total interest-bearing liabilities 175,954 $ 6,488 4.93 168,135 $ 5,964 4.74 ======= ======= Domestic noninterest-bearing deposits 36,289 34,025 Foreign noninterest-bearing deposits 1,702 1,597 Other noninterest-bearing liabilities 19,003 16,725 -------- -------- Total liabilities 232,948 220,482 Trust preferred securities/e/ 1,852 - Stockholders' equity 20,072 20,154 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $254,872 $240,636 ======== ======== Interest income as a percentage of average earning assets 8.17% 8.20% Interest expense as a percentage of average earning assets (4.06) (3.94) ----- ----- Net Interest Margin 4.11% 4.26% ===== ===== - ------------------------------------------------------------------------------------------------------------------------------------
/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 40 percent. /c/ Average balances include nonaccrual assets. /d/ Refer to the table on page 39 of the Balance Sheet Review section for more detail on available-for-sale and held-to-maturity securities. /e/ Trust preferred securities represent corporation obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of the corporation. Related expenses are included in noninterest expense. /f/ Rates reflect a higher level of offsetting average balances between securities purchased under resale agreements and securities sold under repurchase agreements during the third quarter and first nine months of 1997 as compared to the same periods in 1996. /g/ Rates reflect a higher level of interest recoveries on nonaccrual loans during the third quarter and first nine months of 1997 as compared to the same periods in 1996. /h/ Rates reflect an increase in fees during the third quarter and first nine months of 1997 as compared to the same periods in 1996. 31 ================================================================================ NONINTEREST Noninterest income for the third quarter and first nine INCOME months of 1997 was $1,670 million and $4,497 million, respectively, representing increases of $351 million and $584 million from the comparable periods in 1996. Noninterest income for the third quarter of 1997 included a $246 million pre-tax gain associated with the previously announced sale of SPFS. The effect of this gain was partially offset by charges of approximately $112 million for asset dispositions, personnel expenses, and other costs associated primarily with the decision to exit Midwest retail facilities. In addition, noninterest income for the second quarter of 1996 included an $82 million pre-tax gain from the sale of a Hong Kong consumer and commercial finance subsidiary. Furthermore, noninterest income for the first quarter of 1996 included a $50 million pre-tax gain associated with the divestiture of BAC's ITSS business. Excluding the above items, noninterest income would have increased $217 million, or 16 percent, and $582 million, or 15 percent, in the third quarter and first nine months of 1997, respectively, from the comparable periods last year. The increase reflected growth in fees and commissions, trading income, and other noninterest income. Fees and commissions, the largest component of noninterest income, for the third quarter and first nine months of 1997 increased by $96 million and $276 million, respectively, from the same periods a year ago. The growth in fees and commissions of 11 percent during both the current quarter and first nine months of 1997 over last year reflects BAC's continued focus on expanding its fee-generating activities. Revenues earned from retail deposit account fees rose $12 million and $46 million for the third quarter and first nine months of 1997, respectively, compared with the corresponding periods in 1996, primarily due to an increase in the volume of fee-generating accounts. Other fees and commissions rose $64 million and $203 million for the third quarter and first nine months of 1997, respectively, from the comparable periods in the prior year. These increases were primarily attributable to increased revenues from loan fees and charges as well as ATM fees. Loan fees and charges are reported net of amortization expense and valuation adjustments on mortgage servicing assets and, commencing the first quarter of 1997, other consumer loan servicing assets, which are recognized in connection with the requirements of SFAS No. 125. The increase in loan fees and charges resulted primarily from the effects of SFAS No. 125 as well as higher revenues from late payment and overlimit charges on credit card accounts. These increases were partially offset by an increase in the amortization expense and valuation adjustments on servicing assets. The growth in ATM fees was largely attributable to expanded transaction volume as well as surcharges levied on nonbank customers. Trading income increased $70 million, or 46 percent, and $133 million, or 27 percent, in the third quarter and first nine months of 1997, respectively, from the comparable periods a year ago. The improved performance for the first nine months of 1997 was largely attributable to BAC's trading activities in foreign exchange and emerging market debt securities in the second and third quarters of 1997, in addition to investments in domestic debt securities in the first quarter of 1997. For more information on the functional components of trading income, refer to Note 8 of the Notes to Consolidated Financial Statements on pages 14 through 19. 32
============================================================================================================================== NONINTEREST INCOME - ------------------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED THIRD QUARTER SEPTEMBER 30 -------------------- ------------------ (IN MILLIONS) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ FEES AND COMMISSIONS Deposit account fees: Retail $ 273 $ 261 $ 816 $ 770 Commercial 91 84 269 265 Credit card fees: Membership 5 6 16 23 Other 91 86 260 238 Trust fees: Corporate and employee benefit 2 2 7 15 Personal and other 60 51 173 157 Other fees and commissions: Loan fees and charges 162 92 448 258 Off-balance-sheet credit-related instrument fees 78 91 230 264 Financial services fees 57 64 150 152 Mutual fund and annuity commissions 17 23 69 75 Other 110 90 319 264 - ------------------------------------------------------------------------------------------------------------------------------ 946 850 2,757 2,481 - ------------------------------------------------------------------------------------------------------------------------------ TRADING INCOME 223 153 629 496 - ------------------------------------------------------------------------------------------------------------------------------ OTHER NONINTEREST INCOME Private equity investment activities 140 97 322 319 Net gain on sales of subsidiaries and operations 139 41 179 175 Net gain on sales of loans 53 25 156 69 Net gain on available-for-sale securities 33 7 67 41 Other income 136 146 387 332 - ------------------------------------------------------------------------------------------------------------------------------ 501 316 1,111 936 - ------------------------------------------------------------------------------------------------------------------------------ $1,670 $1,319 $4,497 $3,913 - -----------------------------------------------------------------------=======================================================
Other noninterest income totaled $501 million and $1,111 million in the third quarter and first nine months of 1997, respectively, representing increases of $185 million from the third quarter of last year and $175 million from the first nine months of 1996. Excluding the items discussed on the previous page, other noninterest income would have increased $51 million, or 16 percent, in the third quarter of 1997, and would have increased $173 million, or 22 percent, in the first nine months of 1997 compared to the same periods last year. These increases included higher income related to private equity investment activities, net gain on sales of loans, and net gain on available-for-sale securities, partially offset by a third quarter 1997 decrease in net gain on sales of subsidiaries and operations. Income related to private equity investment activities increased $43 million and $3 million in the third quarter and first nine months of 1997, respectively, from the same periods in the previous year. The increases reflected higher realized capital gains which were mainly related to the sale of an investment from the venture capital portfolio during the third quarter of 1997. 33 =============================================================================== Net gain on sales of loans was higher by $28 million and $87 million for the third quarter and first nine months of 1997, respectively, compared to the same periods in 1996. The increases were largely due to growth in the sales of residential mortgages and commercial and industrial loans. Net gain on available-for-sale securities grew $26 million in the third quarter and first nine months of 1997 in comparison to the corresponding periods last year. The growth in each period primarily reflected improved venture capital results in the third quarter of 1997 compared to the same quarter last year. Other income declined $10 million in the third quarter of 1997 and increased $55 million in the first nine months of 1997 from the amounts reported a year ago. Other income for the third quarter of 1996 included a $43 million gain on the liquidation of an Australian subsidiary. The growth in the first nine months of 1997 included higher income related to equity investments in affiliates and joint ventures, and other earnings. Net gain on sales of subsidiaries and operations increased $98 million in the third quarter of 1997 from the corresponding period in 1996. Excluding the SPFS transaction and the Midwest retail decision discussed on page 32, net gain on sales of subsidiaries and operations would have decreased $36 million in the third quarter of 1997 from the comparable period last year. The decline in the current quarter was mainly due to a $39 million gain in the third quarter of 1996 that resulted from a reduction of BAC's equity interest in KorAm Bank, an Asian investment. 34 =============================================================================== NONINTEREST Noninterest expense for the third quarter and first EXPENSE nine months of 1997 was $2,232 million and $6,312 million, respectively, representing increases of $151 million and $221 million, respectively, from the corresponding periods in 1996. Noninterest expense in the third quarter and first nine months of 1997 included expenses associated with trust preferred securities of $36 million and $107 million, respectively. Noninterest expense for third quarter 1997 included charges associated with multiple legal matters, writedowns on corporate real estate, and contributions to the BA Foundation. Included in noninterest expense for the third quarter of 1996 was a one-time assessment of $82 million associated with the recapitalization of the SAIF. Excluding these items, noninterest expense would have increased $57 million, or 3 percent, and $56 million, or less than one percent, in the third quarter and first nine months of 1997, respectively, from the comparable periods in 1996. The increases mainly reflect higher personnel expense, partially offset by a decline in other noninterest expense compared to the same periods a year ago. Personnel expense, the largest component of noninterest expense, was $1,069 million in the third quarter of 1997, up $56 million, or 6 percent, from the same quarter last year. Personnel expense was $3,159 million in the first nine months of 1997, up $96 million, or approximately 3 percent, from the comparable period last year. The increases from the corresponding periods in 1996 were primarily associated with variable pay related to incentive plans and other compensation. BAC's staff level on a full-time-equivalent (FTE) basis was approximately 76,000 at September 30, 1997, down from approximately 78,200 at September 30, 1996. FTE is a measurement equal to one full-time employee working a standard day. BAC had approximately 89,500 employees, both full-time and part-time, at September 30, 1997, down from approximately 92,700 at September 30, 1996. Other noninterest expense was $789 million and $2,055 million in the third quarter and first nine months of 1997, respectively. Excluding the expenses described above, other noninterest expense would have been $613 million in the third quarter of 1997, a decrease of $5 million over the same quarter last year, mainly reflecting a decline in other real estate owned, advertising, and other expenses which was partially offset by higher professional service fees as well as an increase in other expenses. Excluding the expenses described above, other noninterest expense would have been $1,808 million in the first nine months of 1997, down $55 million over the comparable period in 1996. The decrease in the first nine months of 1997 was mainly due to a decline in advertising expenditures and other expenses compared to the corresponding period in the prior year. BAC's noninterest expense for the third quarter of 1997 and for several preceding quarters has included charges incurred in connection with making its computer systems year 2000 compliant. BAC expects to continue incurring charges related to this project through the year 2000, however, none of these costs are expected to materially impact its results of operations in any one period. In addition, a significant portion of these costs are not expected to be incremental to BAC but instead will constitute a reassignment of existing internal systems technology resources. BAC believes that its plans for dealing with the year 2000 issue will result in timely and adequate modifications of its systems and technology. Ultimately, the potential impact of the year 2000 issue will depend not only on the corrective measures BAC undertakes, but also on the way in which the year 2000 issue is addressed by governmental agencies, businesses, and other entities who provide data to, or receive data from, BAC, or whose financial condition or operational capability is important to BAC as borrowers, suppliers, or customers. Therefore, BAC is communicating with these parties to ensure they are aware of the year 2000 issue, to learn how they are addressing it, and to evaluate any likely impact on BAC. 35
================================================================================================================================ NONINTEREST EXPENSE - -------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED THIRD QUARTER SEPTEMBER 30 ----------------------- ------------------------ (IN MILLIONS) 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- PERSONNEL Salaries $ 892 $ 822 $2,604 $2,457 Employee benefits 177 191 555 606 - -------------------------------------------------------------------------------------------------------------------------------- 1,069 1,013 3,159 3,063 - -------------------------------------------------------------------------------------------------------------------------------- OCCUPANCY AND EQUIPMENT Occupancy 192 188 561 564 Equipment 182 180 537 518 - -------------------------------------------------------------------------------------------------------------------------------- 374 368 1,098 1,082 - -------------------------------------------------------------------------------------------------------------------------------- OTHER NONINTEREST EXPENSE Communications 95 89 284 271 Amortization of intangibles 88 93 268 281 Professional services 107 87 264 248 Regulatory fees and related expenses 10 95 30 121 Other expense 489 336 1,209 1,025 - -------------------------------------------------------------------------------------------------------------------------------- 789 700 2,055 1,946 - -------------------------------------------------------------------------------------------------------------------------------- $2,232 $2,081 $6,312 $6,091 - --------------------------------------------------------------================================================================== Full-time-equivalent staff at period end 76,000 78,200 Employees at period end 89,500 92,700 - --------------------------------------------------------------------------------------------------------------------------------
INCOME The provision for income taxes was $553 million and TAXES $1,619 million for the third quarter and first nine months of 1997, respectively, reflecting a forecasted annual effective income tax rate of 40.3 percent. The provision for income taxes for the third quarter and first nine months of 1996 was $472 million and $1,488 million, respectively, which had reflected a forecasted annual effective income tax rate of 41.2 percent. For further information concerning BAC's provision for federal, state, and foreign income taxes for the most recent five quarters, refer to Note 6 of the Notes to Consolidated Financial Statements on page 13. 36 BALANCE SHEET REVIEW =============================================================================== Interest-earning assets totaled $215 billion at September 30, 1997, up $8 billion, or 4 percent, from year-end 1996. Growth in interest-earning assets, primarily trading account assets, securities purchased under resale agreements, and loans, was funded primarily by increases in securities sold under repurchase agreements, and other short-term borrowings. Total deposits at September 30, 1997 was $171.4 billion, an increase of $3.4 billion from December 31, 1996. The growth was partially attributable to a $1.7 billion increase in foreign interest-bearing deposits that resulted from BAC's continued participation in selected global markets. Also contributing to the growth was a $1.5 billion increase in total domestic deposits due to an increase in money market accounts. Interest-bearing domestic deposits increased and noninterest-bearing domestic deposits decreased by approximately $9 billion, respectively, at September 30, 1997 from year-end 1996 due to a transfer from noninterest-bearing domestic deposits. The transfer occurred as part of an initiative to reduce reserve requirements on noninterest-bearing deposits at the Federal Reserve Bank. Excluding this transfer, the balances of the interest-bearing and noninterest-bearing domestic deposits would have been approximately $85 billion and $40 billion, respectively, at September 30, 1997. In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125. The FASB subsequently amended SFAS No. 125 in December 1996. As amended, SFAS No. 125 applies to securities lending, repurchase agreements, dollar rolls, and other similar secured financing transactions occurring after December 31, 1997 and to all other transfers and servicing of financial assets occurring after December 31, 1996. The adoption of SFAS No. 125 did not and is not expected to have a material effect on BAC's financial position or results of operations. 37 =============================================================================== CREDIT CARD BAC securitized and sold $2,971 million in credit card SECURITIZATION receivables since mid-1996. The securitizations affect, among other things, the manner and time period in which revenue is reported in the statement of operations. The amounts that would otherwise be included in net interest revenue are instead included in noninterest income as fees and commissions, net of any credit losses on the securitized portion of the credit card portfolio. The table below shows the impact of the securitization of credit card receivables on BAC's results of operations and financial position as of September 30, 1997. The table includes the effects of the adoption of SFAS No. 125, which requires the recognition of gains and amortized cost resulting from the securitization transactions.
=================================================================================================================================== IMPACT OF CREDIT CARD SECURITIZATION - ---------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997/a/ -------------------------------------------------------------- BEFORE CREDIT CARD CREDIT CARD (DOLLAR AMOUNTS IN MILLIONS) SECURITIZATION SECURITIZATION REPORTED - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net interest income $ 6,694 $ (132) $ 6,562 Credit card fees 301 (25) 276 Other noninterest income 4,100 121/b/ 4,221 - ---------------------------------------------------------------------------------------------------------------------------------- Total revenue 11,095 (36) 11,059 Noninterest expense 6,312 - 6,312 - ---------------------------------------------------------------------------------------------------------------------------------- Income before provision for credit losses and income taxes 4,783 (36) 4,747 Provision for credit losses 817 (87)/c/ 730 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 3,966 $ 51 $ 4,017 - --------------------------------------------------------------------------======================================================== Net interest margin 4.16% (0.05)% 4.11% - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AT PERIOD END Credit card loans outstanding $ 10,021 $(2,971) $ 7,050 Total assets 260,491 (2,971) 257,520 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET DATA Credit card loans 9,860 (1,776) 8,084 Earning assets 215,501 (1,776) 213,725 Total assets 256,648 (1,776) 254,872 - ---------------------------------------------------------------------------------------------------------------------------------- Net credit losses - credit card portfolio 448 (87) 361 - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS Annualized ratio of net credit losses on credit card loan to average credit card loans outstanding 6.07% (0.09)% 5.98% Delinquent credit card loan ratio/d/ 2.76 (0.04) 2.72 - ----------------------------------------------------------------------------------------------------------------------------------
/a/ Includes the impact of credit card securitization transactions since mid-1996. There were credit card securitizations of $750 million during the third quarter of 1997, $750 million during the second quarter of 1997, and $1,471 million during the last half of 1996. /b/ Includes a $51 million gain, net of amortized cost, associated with the continued application of SFAS No. 125. /c/ Represents the investors' share of charge-offs. /d/ 60 days or more past due. 38
================================================================================================================================ AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES - AVERAGE BALANCES, INTEREST, AND AVERAGE RATES - -------------------------------------------------------------------------------------------------------------------------------- THIRD QUARTER 1997 -------------------------------------------------------------------- RATE RATE BASED ON BASED ON AMORTIZED (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ FAIR VALUE/b/ COST/b/ - -------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Treasury and other government agency securities $ 1,383 $ 22 6.41% 6.40% Mortgage-backed securities 7,360 126 6.82 6.88 Other domestic securities 864 12 5.30 5.89 Foreign securities 2,377/c/ 49 8.25/d/ 7.97/d/ - -------------------------------------------------------------------------------------------------------------------------------- $11,984 $209 6.95% 6.98% - -------------------------------------------------------------=================================================================== THIRD QUARTER 1996 - -------------------------------------------------------------------------------------------------------------------------------- RATE RATE BASED ON BASED ON AMORTIZED (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ FAIR VALUE/b/ COST/b/ - -------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Treasury and other government agency securities $ 1,559 $ 26 6.69% 6.59% Mortgage-backed securities 5,995 103 6.91 6.82 Other domestic securities 753 11 5.64 6.57 Foreign securities 3,066/c/ 70 8.96/d/ 8.54/d/ - -------------------------------------------------------------------------------------------------------------------------------- $11,373 $210 7.34% 7.25% - ----------------------------------------------------------------================================================================ THIRD QUARTER 1997 THIRD QUARTER 1996 ---------------------------------- --------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - -------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES U.S. Treasury and other government agency securities $ 12 $ -/e/ 2.18% $ 16 $ -/e/ 4.65% Mortgage-backed securities 1,989 37 7.45 2,262 43 7.59 State, county, and municipal securities 324 6 7.97 408 7 7.33 Other domestic securities 54 1 6.88 66 1 6.75 Foreign securities 1,374 25 7.13 1,469 27 7.18 - -------------------------------------------------------------------------------------------------------------------------------- $3,753 $69 7.35% $4,221 $78 7.40% - --------------------------------------------------============================================================================== NINE MONTHS ENDED SEPTEMBER 30 -------------------------------------------------------------------- 1997 -------------------------------------------------------------------- RATE RATE BASED ON BASED ON AMORTIZED (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ FAIR VALUE/b/ COST/b/ - -------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Treasury and other government agency securities $ 1,418 $ 70 6.61% 6.52% Mortgage-backed securities 6,771 347 6.84 6.85 Other domestic securities 890 38 5.66 6.32 Foreign securities 2,540/c/ 157 8.23/d/ 7.92/d/ - -------------------------------------------------------------------------------------------------------------------------------- $11,619 $612 7.02% 7.01% - -------------------------------------------------------------===================================================================
NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------------------------- 1996 ------------------------------------------------------------------- RATE RATE BASED ON BASED ON AMORTIZED (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ FAIR VALUE/b/ COST/b/ - ------------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Treasury and other government agency securities $ 1,471 $ 74 6.72% 6.69% Mortgage-backed securities 6,217 317 6.81 6.79 Other domestic securities 740 32 5.72 6.69 Foreign securities 2,828/c/ 215 10.14/d/ 9.58/d/ - -------------------------------------------------------------------------------------------------------------------------------- $11,256 $638 7.56% 7.51% - -------------------------------------------------------------================================================================== NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------------------------------------------ 1997 1996 ----------------------------------- ------------------------------- (DOLLAR AMOUNTS IN MILLIONS) BALANCE/a/ INTEREST/b/ RATE/b/ BALANCE/a/ INTEREST/b/ RATE/b/ - ------------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES U.S. Treasury and other government agency securities $ 12 $ 1 5.67% $ 38 $ 1 4.86% Mortgage-backed securities 2,059 115 7.46 2,347 134 7.60 State, county, and municipal securities 367 21 7.62 421 24 7.58 Other domestic securities 55 3 6.85 112 6 7.31 Foreign securities 1,433 88 8.22 1,491 81 7.23 - ------------------------------------------------------------------------------------------------------------------------------- $3,926 $228 7.74% $ 4,409 $246 7.44% - --------------------------------------------------=============================================================================
/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 40 percent. /c/ Average balances include nonaccrual assets. /d/ Rates reflect interest received on nonaccrual debt-restructuring par bonds. /e/ Amount rounds to less than $0.5 million. 39 CREDIT RISK MANAGEMENT =============================================================================== LOAN PORTFOLIO Total loans at September 30, 1997 were up $1.6 MANAGEMENT billion, or 1 percent, from year-end 1996. This growth occurred in the domestic commercial and foreign portfolios.
========================================================================================================================== LOAN OUTSTANDINGS - -------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ------------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - -------------------------------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages $ 34,279 $ 35,709 $ 35,881 $ 37,459 $ 37,445 Residential junior mortgages 14,915 15,154 14,857 14,743 14,525 Other installment 18,432 18,410 17,863 16,979 15,998 Credit card 7,050/a/ 7,624/a/ 8,365/a/ 8,707/a/ 9,021/a/ Other individual lines of credit 1,939 1,961 1,939 1,948 1,845 Other 442 413 391 401 303 - -------------------------------------------------------------------------------------------------------------------------- 77,057 79,271 79,296 80,237 79,137 Commercial: Commercial and industrial 34,082 34,266 34,554 33,404 33,076 Loans secured by real estate 12,833 12,669 12,445 12,488 12,062 Financial institutions 3,452 2,947 3,232 3,109 2,537 Lease financing 2,700 2,809 2,790 2,542 2,682 Construction and development loans secured by real estate 2,257 2,262 2,261 2,252 2,530 Loans for purchasing or carrying securities 2,000 2,616 2,447 1,941 1,328 Agricultural 1,774 1,560 1,475 1,696 1,561 Other 1,745 1,738 1,450 1,270 1,253 - -------------------------------------------------------------------------------------------------------------------------- 60,843 60,867 60,654 58,702 57,029 - -------------------------------------------------------------------------------------------------------------------------- 137,900 140,138 139,950 138,939 136,166 Foreign Commercial and industrial 18,260 17,762 17,540 16,394 16,257 Banks and other financial institutions 4,295 4,818 3,526 3,958 3,480 Governments and official institutions 861 851 1,008 970 943 Other 5,670 5,237 5,314 5,154 4,987 - -------------------------------------------------------------------------------------------------------------------------- 29,086 28,668 27,388 26,476 25,667 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LOANS 166,986 168,806 167,338 165,415 161,833 Less: Allowance for credit losses 3,504 3,563 3,538 3,523 3,511 - -------------------------------------------------------------------------------------------------------------------------- $163,482 $165,243 $163,800 $161,892 $158,322 - -------------------------------------------------=========================================================================
/a/ Excludes outstanding securitized credit card receivables of $2,971 million at September 30, 1997, $2,221 million at June 30, 1997, $1,471 million at March 31, 1997 and December 31, 1996, and $500 million at September 30, 1996. There were credit card securitizations of $750 million during the third quarter of 1997, $750 million during the second quarter of 1997, and $1,471 million during the last half of 1996. Domestic Consumer Loans--During the nine months ended September 30, 1997, domestic consumer loans decreased by $3.2 billion. This decrease reflected a decline of $3.2 billion in residential first mortgages and a decline of $1.7 billion in credit card receivables, partially offset by an increase in other installment loans of $1.5 billion. Growth in residential first mortgages was more than offset by the sale of $8.3 billion of mortgages from the portfolio, resulting in a net decrease of $3.2 billion for the nine months ended September 30, 1997. 40 ================================================================================ Credit card receivables decreased $1.7 billion during the nine months ended September 30, 1997, mainly due to securitizations of credit card receivables. Other installment loans increased $2.1 billion due to continued growth in manufactured housing in the 13 states in the southeastern region of the U.S. and auto loans and leases in California during the nine months ended September 30, 1997. This increase was partially offset by a decrease in installment loans due to the sale of SPFS, resulting in a net increase of $1.5 billion for the nine months ended September 30, 1997.
================================================================================================================================= DOMESTIC CONSUMER LOANS BY GEOGRAPHIC AREA AND LOAN TYPE AS OF SEPTEMBER 30, 1997 - --------------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL RESIDENTIAL FIRST JUNIOR CREDIT MANUFACTURED OTHER TOTAL (IN MILLIONS) MORTGAGES MORTGAGES CARD HOUSING AUTO CONSUMER CONSUMER - --------------------------------------------------------------------------------------------------------------------------------- California $24,714 $ 9,972 $2,495 $ 926 $2,848 $2,199 $43,154 Washington 1,246 1,971 1,249 356 1,591 700 7,113 Arizona 892 1,001 278 263 579 128 3,141 Texas 771 111 316 708 821 319 3,046 Oregon 936 561 228 154 263 94 2,236 Other/a/ 5,720 1,299 2,484 6,746 1,157 961 18,367 - --------------------------------------------------------------------------------------------------------------------------------- $34,279 $14,915 $7,050 $9,153 $7,259 $4,401 $77,057 - ---------------------------------------==========================================================================================
/a/ No other state individually exceeded 2 percent of total domestic consumer loans. Delinquent domestic consumer loans that are 60 days or more past due totaled $801 million at September 30, 1997, a decrease of $73 million from the December 31, 1996 level. The decrease was a result of a lower level of delinquencies in most loan categories, primarily in residential first mortgages and residential junior mortgages. Partially offsetting this decrease was an increase in delinquencies related to manufactured housing. At September 30, 1997, the delinquency ratio for credit cards increased 5 basis points to 2.72 percent from the June 30, 1997 ratio. This increase reflected the decline in credit card outstandings as a result of credit card securitizations.
================================================================================================================================== DOMESTIC CONSUMER LOAN DELINQUENCY INFORMATION/a/ - ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ------------------------ (DOLLAR AMOUNTS IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - ---------------------------------------------------------------------------------------------------------------------------------- DELINQUENT CONSUMER LOANS Residential first mortgages $431 $422 $463 $477 $518 Residential junior mortgages 44 59 61 62 64 Credit card 192 204 216 206 207 Other 134 126 122 129 113 - ---------------------------------------------------------------------------------------------------------------------------------- $801 $811 $862 $874 $902 - -------------------------------------------------------------===================================================================== DELINQUENT CONSUMER LOAN RATIOS/b/ Residential first mortgages 1.26% 1.18% 1.29% 1.27% 1.38% Residential junior mortgages 0.29 0.39 0.41 0.42 0.44 Credit card 2.72 2.67 2.58 2.36 2.29 Other 0.65 0.61 0.60 0.67 0.63 Total 1.04 1.02 1.09 1.09 1.14 - ----------------------------------------------------------------------------------------------------------------------------------
/a/ 60 days or more past due. /b/ Ratios represent delinquent balances expressed as a percentage of total loans for that loan category. 41 =============================================================================== Domestic Commercial Loans--Domestic commercial loans increased $2.1 billion, or 3.6 percent, during the nine months ended September 30, 1997, reflecting growth in all commercial loan categories. Commercial and industrial loans increased $0.7 billion, loans secured by real estate increased $0.3 billion, and loans to financial institutions increased $0.3 billion. The growth in commercial and industrial loans primarily reflected BAC's efforts to diversify its market share as well as to increased loan demand from large corporate and middle market borrowers in various industries throughout the United States.
=================================================================================================================================== DOMESTIC COMMERCIAL LOANS SECURED BY REAL ESTATE BY GEOGRAPHIC AREA AND PROJECT TYPE AT SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- LIGHT APARTMENT & (IN MILLIONS) OFFICE INDUSTRY CONDOMINIUM RETAIL HOTEL OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- California $1,548 $1,468 $ 984 $1,354 $156 $ 810 $ 6,320 Washington 747 358 410 374 144 518 2,551 Nevada 159 89 243 122 99 198 910 Oregon 98 64 198 119 22 76 577 Arizona 87 60 144 92 48 98 529 Texas 24 54 122 13 - 59 272 Illinois 55 36 95 29 - 45 260 Other/a/ 570 237 166 191 75 175 1,414 - ---------------------------------------------------------------------------------------------------------------------------------- $3,288 $2,366 $2,362 $2,294 $544 $1,979 $12,833 - --------------------------------------------------------==========================================================================
/a/ 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, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ APARTMENT & LIGHT (IN MILLIONS) SUBDIVISION CONDOMINIUM RETAIL OFFICE INDUSTRY HOTEL OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ California $201 $100 $179 $ 85 $ 43 $ 17 $ 35 $ 660 Washington 203 85 46 71 16 23 50 494 Nevada 74 99 13 20 60 51 31 348 Arizona 52 50 19 7 18 1 30 177 Texas 44 61 27 6 10 1 3 152 Oregon 16 30 32 11 6 4 7 106 Illinois 10 24 11 10 7 - 2 64 Florida - - 59 - 1 - - 60 New York - - 12 - - - 41 53 Other/a/ 5 33 53 7 14 17 14 143 - ------------------------------------------------------------------------------------------------------------------------------------ $605 $482 $451 $217 $175 $114 $213 $2,257 - --------------------------------------------========================================================================================
/a/ No other state individually exceeded 2 percent of total domestic construction and development loans. Foreign Loans--BAC has selectively expanded its lending activities in the Pacific Rim as well as in certain countries in Latin America. As a result, total foreign loans increased $2.6 billion, or 10 percent, between year-end 1996 and September 30, 1997, primarily reflecting an increase in commercial and industrial loans of $1.9 billion, an increase in loans to banks and other financial institutions of $0.3 billion, and an increase in other loans of $0.5 billion. 42 ================================================================================ REGIONAL FOREIGN In connection with its efforts to maintain a diversified EXPOSURES portfolio, BAC limits its exposure to any one geographic region or country and monitors this exposure on a continuous basis. The table on page 44 sets forth selected cross-border regional exposures of BAC as of September 30, 1997, including net local currency assets. Exposure represents loans, securities including restructured debt, and other monetary assets, and also includes net local currency monetary assets that have not been funded through local currency borrowings. The table is different than previous quarters' disclosures, which were limited to emerging market exposures. This new table was adopted to portray a more comprehensive picture of BAC's foreign exposures in selected regions. As part of its efforts to monitor these regional exposures, BAC manages its currency risks, including its local currency activities in these foreign countries. The result of this foreign currency management is that BAC's net unhedged position in any given foreign currency is typically significantly smaller than the amounts set forth as net local currency outstandings in the table. For additional information concerning risk management, refer to pages 39 through page 44 of BAC's 1996 Annual Report to Shareholders. 43
REGIONAL FOREIGN EXPOSURES - ------------------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) SEPTEMBER 30, 1997 ------------------------------------------------------------------------------------------------------- CROSS-BORDER LOANS OTHER TOTAL --------------------- NET LOCAL -------------------------- CROSS-BORDER MEDIUM- AND CURRENCY MEDIUM- AND REGION/COUNTRY OUTSTANDINGS/a/ SHORT-TERM LONG-TERM OUTSTANDINGS/b/ SECURITIES/c/ SHORT-TERM/d/ LONG-TERM - ------------------------------------------------------------------------------------------------------------------------------------ ASIA China $ 703 $ 398 $ 53 $ 1 $ - $ 234 $ 17 Hong Kong 2,237 461 184 1,279 - 178 135 India 1,227 172 230 504 - 298 23 Indonesia 685 201 219 56 - 209 - Japan 3,219 413 214 1,462 - 1,120 10 Korea 3,208 613 96 317 - 2,054 128 Malaysia 732 183 75 434 - 22 18 Pakistan 348 3 7 313 - 25 - Philippines 520 215 63 - 54 172 16 Singapore 1,105 371 28 547 - 116 43 Taiwan 1,224 519 171 415 - 116 3 Thailand 1,000 452 197 209 - 138 4 Other 55 37 9 5 - 4 - - ------------------------------------------------------------------------------------------------------------------------------------ Total 16,263 4,038 1,546 5,542 54 4,686 397 CENTRAL AND EASTERN EUROPE Russia Federation 540 9 5 - - 526 - Other 440 101 59 10 - 269 1 - ------------------------------------------------------------------------------------------------------------------------------------ Total 980 110 64 10 - 795 1 LATIN AMERICA Argentina 1,234 225 147 70 91 672 29 Brazil 2,081 694 183 780 14 365 45 Chile 1,098 157 513 417 - 7 4 Colombia 667 206 284 144 19 7 7 Mexico 3,188 453 884/e/ 144 1,213 414 80 Venezuela 335 23 - - 255 40 17 Other 155 1 4 - 89 59 2 - ------------------------------------------------------------------------------------------------------------------------------------ Total 8,758 1,759 2,015 1,555 1,681 1,564 184 - ------------------------------------------------------------------------------------------------------------------------------------ Total $26,001 $5,907/f/ $3,625/f/ $7,107 $1,735 $7,045 $582 - ----------------------------------==================================================================================================
/a/ Includes the following assets with borrowers in a foreign country: loans, accrued interest, acceptances, interest-bearing deposits in banks, trading account assets, available-for-sale and held-to-maturity securities, other interest-earning investments and other monetary assets. Amounts also include local currency outstandings that are not funded by local currency borrowings, and available-for-sale and held-to-maturity securities that are collateralized by U.S. Treasury securities. /b/ Represents local currency assets in a foreign country that are not funded by local currency borrowings. These amounts do not necessarily reflect the results of BAC's foreign currency management activities and therefore, BAC's net foreign exchange exposures in the respective currencies are typically significantly smaller. /c/ Amounts represent available-for-sale and held-to-maturity securities and include securities that are collateralized by U.S. Treasury securities as follows: Mexico - $1,020 million; Venezuela - $232 million; Philippines - $22 million; and Latin America Other - $89 million. Held-to-maturity securities amounted to $1,082 million with a fair value of $1,102 million. /d/ Includes the following assets with borrowers in a foreign country; accrued interest receivable, acceptances, interest-bearing deposits in banks, trading account assets, other interest-earning investments and other short- term monetary assets. /e/ Includes a $30 million loan that is collateralized by zero-coupon U.S. Treasury securities. /f/ Total loans include nonaccrual loans of $58 million. 44 ================================================================================ ALLOWANCE FOR The allowance for credit losses at September 30, 1997 CREDIT LOSSES was $3,504 million, or 2.10 percent of loans outstanding, compared with $3,523 million, or 2.13 percent, at December 31, 1996. The ratio of the allowance for credit losses to total nonaccrual assets was 377 percent at September 30, 1997, up from 315 percent at December 31, 1996. Management develops the allowance for credit losses using a "building block approach" for various portfolio segments. Significant loans, particularly those considered to be impaired, are individually analyzed, while other loans are analyzed by portfolio segment. In establishing the allowance for the portfolio segments, credit officers include results obtained from statistical models using historical loan performance data. While management has allocated the allowance to various portfolio segments, it is general in nature and is available for the loan portfolio in its entirety.
================================================================================================================================= COMPOSITION OF ALLOWANCE FOR CREDIT LOSSES - --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ----------------------------------------- ----------------------- (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - --------------------------------------------------------------------------------------------------------------------------------- Special mention and classified: Historical loss experience component $ 318 $ 316 $ 334 $ 349 $ 393 Credit management allocated component 398 370 404 426 375 - --------------------------------------------------------------------------------------------------------------------------------- Total special mention and classified 716 686 738 775 768 Other: Domestic consumer 1,469 1,523 1,475 1,414 1,366 Domestic commercial 279 262 240 252 255 Foreign 388 310 309 300 288 - --------------------------------------------------------------------------------------------------------------------------------- Total allocated 2,852 2,781 2,762 2,741 2,677 Unallocated 652 782 776 782 834 - --------------------------------------------------------------------------------------------------------------------------------- $3,504 $3,563 $3,538 $3,523 $3,511 - ---------------------------------------------------------========================================================================
Net credit losses for the third quarter of 1997 amounted to $259 million, an increase of $33 million from the same period a year ago. Net credit losses for the first nine months of 1997 amounted to $687 million, a decrease of $24 million from the comparable period in 1996. These changes were largely in the domestic consumer and commercial portfolios. Domestic consumer net credit losses for the third quarter and first nine months of 1997 increased $22 million and $61 million, respectively, from the comparable periods in 1996. This increase was primarily in the credit card and consumer installment portfolios. The growth in the consumer portfolio, primarily manufactured housing loans, resulted in higher charge- offs in the consumer installment category. Higher levels of personal bankruptcy filings contributed to the increased charge-offs in the credit card portfolio. Partially offsetting these increases were decreases in net credit losses on residential first and junior mortgages. 45 ================================================================================ Domestic commercial net credit losses for the third quarter of 1997 totaled $44 million, an increase of $17 million from the amount reported in the third quarter of 1996. This increase was primarily attributable to higher net credit losses on commercial and industrial loans, partially offset by lower net credit losses related to construction and development loans. Domestic commercial net credit losses for the first nine months of 1997 totaled $49 million, a decrease of $99 million from the comparable period in 1996. This decrease was primarily related to significantly lower net charge-offs on loans to financial institutions as well as construction and development loans, partially offset by higher net charge-offs on commercial and industrial loans. In the foreign portfolio, there were net credit recoveries for the third quarter of 1997 compared to a net credit loss in the same period a year ago. Net credit recoveries for the first nine months of 1997 were lower by $14 million from the comparable period in 1996. 46
==================================================================================================================================== QUARTERLY CREDIT LOSS EXPERIENCE - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 NINE MONTHS ENDED ------------------------------ ------------------- SEPTEMBER 30 THIRD SECOND FIRST FOURTH THIRD ----------------- (DOLLAR AMOUNTS IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES Balance, beginning of period $3,563 $3,538 $3,523 $3,511 $3,495 $3,523 $3,554 Credit losses Domestic consumer: Residential first mortgages 4 7 7 7 12 18 35 Residential junior mortgages 10 13 13 17 17 36 53 Credit card 132 134 124 114 119 390 349 Other installment 99 85 104 108 90 288 246 Other individual lines of credit 21 22 21 20 20 64 59 Other 6 5 5 4 4 16 11 Domestic commercial: Commercial and industrial 52 24 16 20 20 92 110 Loans secured by real estate 3 2 1 3 5 6 19 Financial institutions - - - - - - 46 Lease financing 1 - - - 1 1 1 Construction and development loans secured by real estate 5 - 1 2 17 6 59 Loans for purchasing or carrying securities - - - - - - - Agricultural - - - 2 - - 1 Foreign 4 9 2 15 18 15 24 - --------------------------------------------------------------------------------------------------------------------------------- Total credit losses 337 301 294 312 323 932 1,013 CREDIT LOSS RECOVERIES Domestic consumer: Residential first mortgages - - - - 1 - 1 Residential junior mortgages 3 5 4 5 4 12 12 Credit card 10 10 9 10 8 29 27 Other installment 36 36 45 44 48 117 119 Other individual lines of credit 2 2 2 3 2 6 7 Other 1 1 1 - 1 3 3 Domestic commercial: Commercial and industrial 6 5 16 20 11 27 60 Loans secured by real estate 1 2 2 6 3 5 9 Financial institutions - - - - - - 2 Lease financing 1 - 1 - 1 2 3 Construction and development loans secured by real estate 4 8 3 1 1 15 10 Loans for purchasing or carrying securities 4 - - - - 4 1 Agricultural 1 1 1 1 - 3 3 Foreign 9 7 6 15 17 22 45 - --------------------------------------------------------------------------------------------------------------------------------- Total credit loss recoveries 78 77 90 105 97 245 302 - --------------------------------------------------------------------------------------------------------------------------------- Total net credit losses 259 224 204 207 226 687 711 Provision for credit losses 260 250 220 220 235 730 665 Other net additions (deductions) (60)/a/ (1) (1) (1) 7 (62)/a/ 3 - --------------------------------------------------------------------------------------------------------------------------------- Balance, End of Period $3,504 $3,563 $3,538 $3,523 $3,511 $3,504 $3,511 - --------------------------------------------------------========================================================================= ANNUALIZED RATIO OF NET CREDIT LOSSES (RECOVERIES) TO AVERAGE LOAN OUTSTANDINGS Domestic consumer: Residential first mortgages 0.05% 0.08% 0.08% 0.07% 0.12% 0.07% 0.12% Residential junior mortgages 0.20 0.23 0.27 0.35 0.35 0.23 0.38 Credit card 6.32 6.07 5.57 4.95 4.95 5.98 4.78 Other installment 1.35 1.08 1.36 1.54 1.08 1.26 1.14 Other individual lines of credit 3.99 3.98 3.89 3.67 3.81 3.95 3.77 Other 4.77 3.64 3.91 3.58 3.28 4.13 3.54 Domestic commercial: Commercial and industrial 0.54 0.23 - - 0.11 0.26 0.20 Loans secured by real estate 0.07 - (0.05) (0.04) 0.07 0.01 0.12 Financial institutions - - - - - - 2.08 Lease financing - - (0.09) - - (0.02) (0.12) Construction and development loans secured by real estate 0.20 (1.47) (0.38) 0.24 2.34 (0.55) 2.20 Loans for purchasing or carrying securities (0.71) - - - - (0.30) (0.12) Agricultural (0.24) (0.12) (0.28) 0.03 - (0.22) (0.18) Total domestic 0.76 0.64 0.61 0.60 0.66 0.67 0.73 Foreign (0.08) 0.04 (0.06) - 0.01 (0.03) (0.12) Total 0.62 0.54 0.50 0.51 0.56 0.55 0.60 Ratio of Allowance to Loans at Quarter End 2.10 2.11 2.11 2.13 2.17 2.10 2.17 Earnings Coverage of Net Credit Losses/b/ 6.30x 7.08x 7.49x 6.65x 6.15x 6.91x 6.02x - ---------------------------------------------------------------------------------------------------------------------------------
/a/ Represents the deduction in the provision for credit losses related to the sale of SPFS. /b/ 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. 47 ================================================================================ NONPERFORMING Total nonaccrual assets increased $69 million, or 8 ASSETS percent, from their June 30, 1997 level, but decreased $188 million, or 17 percent, between year-end 1996 and September 30, 1997. The increase for the quarter resulted from loans being placed on nonaccrual status, primarily domestic commercial loans and foreign loans. These foreign loans were mainly with borrowers in Southeast Asia. The year-to-date decrease occurred primarily in commercial and construction loans secured by real estate and commercial and industrial loans. These decreases resulted primarily from full or partial payments, sales of nonaccrual loans, and the restoration of nonaccrual loans to accrual status. BAC's nonperforming asset ratios reflected improvement in the credit quality of its portfolios during the first nine months of 1997. At September 30, 1997, the ratio of nonaccrual loans to total loans was 0.56 percent, down from 0.66 percent at December 31, 1996. In addition, the ratio of nonperforming assets (comprised of nonaccrual assets and other real estate owned) to total assets declined 15 basis points from year-end 1996 to 0.44 percent at September 30, 1997. For further information concerning nonaccrual assets, refer to the tables below and on pages 48 and 49.
==================================================================================================================================== ANALYSIS OF CHANGE IN NONACCRUAL ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 ------------------------------------------ -------------------------- THIRD SECOND FIRST FOURTH THIRD (IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of quarter $861 $1,030 $1,118 $1,119 $1,488 Additions: Loans placed on nonaccrual status 244 103 108 119 66 Leases acquired - - - - 34 Other/a/ - - - 144 - Deductions: Sales (26) (103) (3) (33) (4) Restored to accrual status (31) (38) (75) (34) (229) Foreclosures - (1) (8) (3) (5) Charge-offs (47) (20) (10) (19) (51) Other, primarily payments (71) (110) (100) (175) (180) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF QUARTER $930 $ 861 $1,030 $1,118 $1,119 - -----------------------------------------------------------=========================================================================
/a/ Reflects the effect of a change in the past due period on nonaccrual loans. During the fourth quarter of 1996, BAC changed the past due period for nonaccrual residential real estate loans and consumer loans that were collateralized by junior mortgages on residential real estate. The maximum period loans can be past due before being placed on nonaccrual status was reduced from 180 days to 90 days. 48
================================================================================================================================= NONACCRUAL ASSETS, RESTRUCTURED LOANS, AND LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST - --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ---------------------------------------- ------------------------ (IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - --------------------------------------------------------------------------------------------------------------------------------- NONACCRUAL ASSETS Domestic consumer loans: Residential first mortgages/a/ $ 335 $318 $ 347 $ 354 $ 233 Residential junior mortgages/a/ 41 54 60 59 55 Other consumer 2 1 2 2 3 Domestic commercial loans: Commercial and industrial 188 203 251 241 323 Loans secured by real estate 136 120 147 206 229 Financial institutions 45 - - - 5 Lease financing 8 2 2 1 1 Construction and development loans secured by real estate 39 59 104 95 119 Agricultural 22 23 23 28 28 - --------------------------------------------------------------------------------------------------------------------------------- 816 780 936 986 996 Foreign loans, primarily commercial 114 81 89 109 122 Other interest-bearing assets - - 5 23 1 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 930 $861 $1,030 $1,118/b/ $1,119/b/ - ------------------------------------------------------------===================================================================== RESTRUCTURED LOANS Domestic commercial: Commercial and industrial $ 5 $ 18 $ 21 $ 25 $ 21 Loans secured by real estate 268 268 257 255 236 Construction and development loans secured by real estate 11 15 16 16 16 Agricultural 1 1 1 1 - - --------------------------------------------------------------------------------------------------------------------------------- 285 302 295 297 273 Foreign/c/ - - - 5 1 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 285 $302 $ 295 $ 302 $ 274 - ------------------------------------------------------------===================================================================== LOANS PAST DUE 90 DAYS OR MORE AND STILL ACCRUING INTEREST Domestic consumer: Residential first mortgages/a/ $ - $ - $ - $ - $ 145 Residential junior mortgages/a/ - - - - 8 Other consumer 177 190 189 186 179 Domestic commercial: Commercial and industrial 12 15 13 29 11 Loans secured by real estate 4 7 12 5 9 Construction and development loans secured by real estate 1 1 1 12 4 Agricultural - - 1 1 4 - --------------------------------------------------------------------------------------------------------------------------------- 194 213 216 233 360 Foreign 3 1 2 2 3 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 197 $214 $ 218 $ 235 $ 363 - ------------------------------------------------------------=====================================================================
/a/ Reflects the effect of a change in the past due period on nonaccrual loans. During the fourth quarter of 1996, BAC changed the past due period for nonaccrual residential real estate loans and consumer loans that were collateralized by junior mortgages on residential real estate. The maximum period loans can be past due before being placed on nonaccrual status was reduced from 180 days to 90 days. /b/ Excludes certain nonaccrual debt-restructuring par bonds and other instruments that were included in available-for-sale and held-to-maturity securities of $67 million at December 31, 1996, and $62 million at September 30, 1996. There were no such amounts in 1997. /c/ Excludes debt restructurings with countries that have experienced liquidity problems of $1.4 billion at September 30, 1997, $1.5 billion at June 30, 1997, $1.5 billion at March 31, 1997, and $1.6 billion at each quarter ended in 1996. The majority of these instruments was classified as either available-for-sale or held-to-maturity securities. 49
=================================================================================================================================== INTEREST INCOME FOREGONE ON NONACCRUAL ASSETS - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED (IN MILLIONS) SEPTEMBER 30, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Interest income that would have been recognized had the assets performed in accordance with their original terms $136 Less: Interest income included in the results of operations 42 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic interest income foregone 94 FOREIGN Interest income that would have been recognized had the assets performed in accordance with their original terms 13 Less: Interest income included in the results of operations 3 - ----------------------------------------------------------------------------------------------------------------------------------- Foreign interest income foregone 10 - ----------------------------------------------------------------------------------------------------------------------------------- $104 - -------------------------------------------------------------------------------------------------------------------------------====
=================================================================================================================================== CASH INTEREST PAYMENTS ON NONACCRUAL ASSETS BY LOAN TYPE/a/ - ----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 --------------------------------------------------------------------------------- CUMULATIVE BOOK AS A CONTRACTUAL INTEREST NONACCRUAL PERCENTAGE PRINCIPAL CUMULATIVE APPLIED BOOK OF (DOLLAR AMOUNTS IN MILLIONS) BALANCE CHARGE-OFFS TO PRINCIPAL BALANCE CONTRACTUAL - ----------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages $ 336 $ 1 $ - $335 100% Residential junior mortgages 41 - - 41 100 Other consumer 5 2 1 2 40 Commercial: Commercial and industrial 515 282 45 188 37 Loans secured by real estate 241 83 22 136 56 Financial institutions 97 51 1 45 46 Lease financing 8 - - 8 100 Construction and development loans secured by real estate 66 20 7 39 59 Agricultural 36 7 7 22 61 - ----------------------------------------------------------------------------------------------------------------------------------- 1,345 446 83 816 61 FOREIGN, PRIMARILY COMMERCIAL 211 83 14 114 54 Other interest-bearing assets - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- $1,556 $529 $97 $930 60% - -------------------------------------------------------============================================================================ Cash yield on average total nonaccrual book balance - ---------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1997 --------------------------------------------- CASH INTEREST AVERAGE PAYMENTS APPLIED NONACCRUAL ------------------------------- BOOK AS INTEREST (DOLLAR AMOUNTS IN MILLIONS) BALANCE INCOME OTHER/b/ TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- DOMESTIC Consumer: Residential first mortgages $338 $ 12 $ - $ 12 Residential junior mortgages 51 1 - 1 Other consumer 2 - - - Commercial: Commercial and industrial 203 9 8 17 Loans secured by real estate 149 12 4 16 Financial institutions 5 - - - Lease financing 4 - - - Construction and development loans secured by real estate 70 6 1 7 Agricultural 23 2 2 4 - ---------------------------------------------------------------------------------------------------------------------------------- 845 42 15 57 FOREIGN, PRIMARILY COMMERCIAL 92 3 3 6 Other interest-bearing assets 6 - - - - ---------------------------------------------------------------------------------------------------------------------------------- $943 $45 $18 $63 - -------------------------------------------------------------------------------------------======================================= Cash yield on average total nonaccrual book balance 8.96% - ----------------------------------------------------------------------------------------------------------------------------------
/a/ Includes information related to all nonaccrual loans including those that are fully charged off or otherwise have a book balance of zero. /b/ Primarily represents cash interest payments applied to principal. Also includes cash interest payments accounted for as credit loss recoveries, which are recorded as increases to the allowance for credit losses. 50 INTEREST RATE, FOREIGN EXCHANGE AND COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS ================================================================================ BAC uses interest rate and foreign exchange derivative financial instruments in both its trading and its asset and liability management activities. BAC uses commodity derivative financial instruments solely in its trading activities. Interest rate, foreign exchange and commodity derivative financial instruments include swaps, futures, forwards, and option contracts, all of which derive their value from underlying interest rates, foreign exchange rates, commodity values, or equity instruments. Certain transactions involve standardized contracts executed on organized exchanges, while others are negotiated over the counter, with the terms tailored to meet the needs of BAC and its customers. In meeting the needs of its global customers, BAC uses its expertise to execute transactions to aid these customers in managing their risk exposures to interest rates, exchange rates, prices of securities, and financial or commodity indexes. Counterparties to BAC's interest rate, foreign exchange and commodity derivative transactions generally include U.S. and foreign banks, nonbank financial institutions, corporations, domestic and foreign governments, and asset managers. BAC generates trading revenue by executing transactions to support customers' risk management needs, by efficiently managing the positions that result from these transactions, and by making markets in a wide variety of products. As an end user, BAC employs foreign exchange derivative financial instruments to hedge foreign exchange risk and interest rate derivative financial instruments to hedge interest rate risk and foreign exchange risk in connection with its own asset and liability management activities. More specifically, BAC primarily uses interest rate derivative financial instruments to manage the interest rate risk associated with its assets and liabilities, primarily residential loans, long-term debt, and deposits. Similar to on-balance-sheet financial instruments, such as loans and investment securities, off-balance-sheet financial instruments expose BAC to various types of risk. These risks include credit risk (the possibility of loss from the failure of a borrower or counterparty to fully perform under the terms of a credit-related contract), operational risk (the possibility of unexpected losses attributable to human error, systems failures, fraud, or inadequate internal controls and procedures), market risk (the possibility of loss arising from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates), and liquidity risk (the possibility that BAC's cash flows may not be adequate to fund operations and meet commitments on a timely and cost-effective basis). For a detailed discussion of these risks and how they are managed, refer to pages 38 through 44 of BAC's 1996 Annual Report to Shareholders. For additional information concerning interest rate, foreign exchange and commodity derivative financial instruments, including their respective notional, credit risk, and fair value amounts, refer to Note 8 of the Notes to Consolidated Financial Statements on pages 13 through 18. 51 INTEREST RATE RISK MANAGEMENT ================================================================================ BAC's banking activities other than trading include lending, accepting deposits, investing in securities, and issuing debt as needed to fund assets. BAC's governing objective in interest rate risk management for these activities is to minimize the potential for significant loss as a result of changes in market conditions. BAC measures interest rate risk in terms of potential impact on both its economic value and reported earnings. Economic value calculations measure the changes in the present value of net future cash flows. BAC measures its exposure to reported earnings variability by estimating the potential effect of changes in interest rates on projected net interest income over a three-year period. There are three sources of interest rate risk. These are gap mismatches, options mismatches, and index mismatches. To minimize exposure to declines in economic value due to gap mismatches, BAC's policy is to minimize the duration difference between its assets and liabilities. This asset and liability management policy protects against losses of economic value in the event of major upward and downward yield curve shifts. BAC uses an internally developed model to translate the mismatch in each repricing period (i.e., the "gap") into a one-year mismatch with the same economic risk. [INTEREST RATE RISK GRAPHIC GOES HERE]
Net Interest Rate Risk Position (plot point graph in non-Edgar version) (in billions of dollars) 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 9/30/97 Net Interest Rate Risk Position $(6.9) $1.0 $(2.8) $0.0 $(1.9) $(1.6)
Graph indicates the composite net asset (+) or net liability (-) repricing position measured across the entire maturity mismatch profile and expressed as a one- year mismatch position bearing the same aggregate level of risk. For example, a six-month gap of $200 million is treated as having approximately the same economic risk as a one- year gap of $100 million. As shown in the graph above, BAC's net one-year position has been essentially balanced throughout the last five years. Gap mismatches result from timing differences in the repricing of assets, liabilities, and off-balance-sheet instruments. Expected interest rate sensitivity of individual categories of assets and liabilities as of September 30, 1997 is shown in the table on page 52. 52
================================================================================================================================= INTEREST RATE SENSITIVITY BY REPRICING OR MATURITY DATES - --------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, 1997 -------------------------------------------------------------------------- OVER (IN BILLIONS) 0-6 MONTHS >6-12 MONTHS >1-5 YEARS 5 YEARS TOTAL - --------------------------------------------------------------------------------------------------------------------------------- DOMESTIC ASSETS Federal funds sold and securities purchased under resale agreements $2.0 $ - $ - $ - $ 2.0 Trading account securities 1.8 - - - 1.8 Loans: Prime indexed 15.7 - - - 15.7 Adjustable rate residential first mortgages 7.3 4.1 8.8 3.9 24.1 Other loans, net 46.0 7.5 20.3 11.1 84.9 Other assets 16.1 0.7 16.0 8.4 41.2 - --------------------------------------------------------------------------------------------------------------------------------- Domestic Assets 88.9 12.3 45.1 23.4 169.7 - --------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LIABILITIES AND STOCKHOLDERS' EQUITY Domestic deposits (65.3) (9.0) (20.2) (19.5) (114.0) Other short-term borrowings (11.4) (1.0) (0.4) (0.1) (12.9) Long-term debt and subordinated capital notes (10.5) (0.2) (3.7) (5.4) (19.8) Other liabilities and stockholders' equity (8.4) (0.2) (12.5) (14.5) (35.6) - --------------------------------------------------------------------------------------------------------------------------------- Domestic Liabilities and Stockholders' Equity (95.6) (10.4) (36.8) (39.5) (182.3) Offshore Funding Books, net (1.1) 0.7 (0.2) 0.6 - - --------------------------------------------------------------------------------------------------------------------------------- Core Gap Before Risk Management Positions (7.8) 2.6 8.1 (15.5) (12.6) - --------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE RISK MANAGEMENT POSITIONS Investment securities/a/ 1.5 1.0 4.1 6.0 12.6 Off-balance-sheet financial instruments/b/ 3.0 (5.4) (5.4) 7.8 - - --------------------------------------------------------------------------------------------------------------------------------- Total Interest Rate Risk Management Positions 4.5 (4.4) (1.3) 13.8 12.6 - --------------------------------------------------------------------------------------------------------------------------------- Net Gap (3.3) (1.8) 6.8 (1.7) - - --------------------------------------------------------------------------------------------------------------------------------- Cumulative Gap $(3.3) $(5.1) $1.7 $ - $ - - ------------------------------------------------------------=====================================================================
/a/ Available-for-sale and held-to-maturity securities. /b/ Represents the repricing effect of off-balance-sheet positions, which include interest rate swaps, futures contracts, and similar agreements. At September 30, 1997, BAC had a "core" imbalance before risk management positions as liabilities and equity exceeded assets by approximately $13 billion. BAC's risk management activities eliminated this imbalance while containing the size of net gap mismatches in individual repricing periods. Investment securities and "receive fixed" swaps essentially neutralized core gaps beyond five years. For additional information concerning gap, options, and index mismatches, refer to pages 43 through 44 of BAC's 1996 Annual Report to Shareholders. 53 FUNDING AND CAPITAL ================================================================================ LIQUIDITY BAC's liquid assets consist of cash and due from banks, REVIEW interest-bearing deposits in banks, federal funds sold, securities purchased under resale agreements, trading account assets, and available-for-sale securities. Liquid assets totaled $58.1 billion at September 30, 1997, up $4.4 billion, or 8 percent, from year-end 1996. The increase in liquid assets was primarily attributable to increases in trading account assets and securities purchased under resale agreements, which were offset primarily by a decrease in cash and due from banks. The ongoing operations of BAC resulted in cash inflows of $4.5 billion and $13.1 billion for the first nine months of 1997 and 1996, from deposits and short-term borrowings. During the same periods, BAC's liquidity was enhanced by proceeds from sales of loans, totaling $5.9 billion and $3.2 billion, respectively. In addition, total sales, maturities, prepayments, and calls of securities exceeded total purchases, resulting in cash inflows of $0.2 billion and $0.8 billion, respectively. Total loan originations and purchases exceeded total principal collections, resulting in cash outflows of $7.9 billion and $11.1 billion for the first nine months of 1997 and 1996. In addition, for the first nine months of 1997 and 1996, BankAmerica Corporation (the Parent) paid dividends of $728 million, to its preferred and common stockholders. During the same periods of 1997 and 1996, the Parent repurchased common and redeemed preferred stock for a total of $2,881 million and $1,292 million, respectively. - -------------------------------------------------------------------------------- CAPITAL In May 1997, BAC's shareholders approved a two-for-one MANAGEMENT stock split of its common stock effective June 2, 1997. As a result of the stock split, each shareholder of record at close of business on June 2, 1997 received one additional share of common stock for each share of common stock then owned. In addition, the number of authorized shares of common stock was increased from 700 million to 1.4 billion common shares, par value $1.5625 per share. For additional information regarding the common stock split, refer to Note 1 of the Notes to Consolidated Financial Statements on page 6. At September 30, 1997, total stockholders' equity amounted to $19.9 billion, a decrease of $0.8 billion from year-end 1996 primarily due to a decline in preferred stock of $1.4 billion offset by an increase in common equity of $0.6 billion. The decline in BAC's preferred stock of $1.4 billion resulted from the redemptions of all 11,250,000 outstanding shares of its 9% Cumulative Preferred Stock, Series H, on January 15, 1997; all 14,600,000 shares of its 8 3/8% Cumulative Preferred Stock, Series K (Preferred Stock, Series K) on February 15, 1997; all 798,020 outstanding shares of its 8.16% Cumulative Preferred Stock, Series L (Preferred Stock, Series L) on July 14, 1997; and all 696,847 outstanding shares of its 7 7/8% Cumulative Preferred Stock, Series M (Preferred Stock, Series M) on September 30, 1997. Remaining redemption authority for preferred stock under the current amended repurchase program totaled $0.4 billion at September 30, 1997. For additional information regarding the preferred stock component of the stock repurchase program, refer to Note 5 of the Notes to Consolidated Financial Statements on page 12. 54 ================================================================================ Common equity increased $0.6 billion during the first nine months of 1997 due to earnings in excess of common and preferred stock dividends of $1.7 billion and to shares issued in connection with restricted stock bonus plans and other employee benefit related plans of $0.3 billion. Partially offsetting these increases was a reduction of $1.5 billion due to repurchases of common stock. During the first nine months of 1997, BAC repurchased 24.3 million shares of its common stock at an average price per share of $60.79 reflecting the corporation's ongoing efforts to effectively manage capital. This included the repurchase of 7.5 million shares during the third quarter of 1997 at an average price per share of $70.22, which reduced third-quarter equity by $0.5 billion. The shares were repurchased on the open market over 60 trading days and represented approximately 7 percent of the total volume of BAC common stock traded on those days. Remaining buyback authority for common stock under the current amended repurchase program totaled $2.3 billion at September 30, 1997. For additional information regarding the stock repurchase program, refer to Note 5 of the Notes to Consolidated Financial Statements on page 12. On May 19, 1997, employees were granted their second option awards through BAC's employee stock option program introduced in 1996. Under the program, employees will be granted additional options every six months for the next two years. BAC is authorized to grant options to its employees for up to 70,200,000 shares of common stock. All options granted have been included in the calculation of earnings per share. The Federal Reserve has announced that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank holding companies. Such Tier 1 capital treatment, together with the Parent's ability to deduct, for federal income tax purposes, interest payable on the related debentures, provide the Parent with a more cost- effective means of obtaining capital for bank regulatory purposes than if the Parent were to issue preferred stock. Proceeds from trust preferred securities have been used to redeem preferred stock, thereby reducing preferred dividends and resulting in an increase in net income available to common shareholders. During the first quarter of 1997, BAC issued trust preferred securities totaling $396 million, net of $4 million of deferred debt issuance costs. For additional information regarding trust preferred securities, refer to Note 4 of the Notes to Consolidated Financial Statements on pages 11 and 12. BAC's risk-based capital ratios continued to exceed regulatory guidelines for "well-capitalized" status. BAC's Tier 1 and total risk-based capital ratios at September 30, 1997 decreased 13 basis points and 19 basis points, respectively, from year-end 1996. These decreases are primarily due to a 5.2 billion increase in risk-weighted assets combined with the redemption of the Preferred Stock, Series K, of $365 million, the redemption of the Preferred Stock, Series L, of $399 million, and the redemption of the Preferred Stock, Series M, of $349 million. These were partially offset by an increase in retained earnings and the increase of $396 million of trust preferred securities. The ratios at year-end 1996 represented a temporary increase from targeted levels due to the issuance of trust preferred securities. BAC's Tier 1 leverage ratio was 7.17 percent at September 30, 1997, 27 basis points lower than 7.44 percent at December 31, 1996, primarily due to an increase in BAC's quarterly average total assets. 55
================================================================================================================================= RISK-BASED CAPITAL, RISK-WEIGHTED ASSETS, AND RISK-BASED CAPITAL RATIOS - --------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ----------------------------------------- ----------------------- (DOLLAR AMOUNTS IN MILLIONS) SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 - --------------------------------------------------------------------------------------------------------------------------------- RISK-BASED CAPITAL Common stockholders' equity $ 18,970 $ 18,759 $ 18,591 $ 18,439 $ 18,297 Qualified perpetual preferred stock 848 1,197 1,596 1,961 2,242 Minority interest/a/ 1,975 1,967 1,964 1,566 - Less: Goodwill, nongrandfathered core deposit and other identifiable intangibles, and other deductions/b/ (4,632) (4,778) (4,832) (4,922) (5,007) - --------------------------------------------------------------------------------------------------------------------------------- Tier 1 risk-based capital 17,161 17,145 17,319 17,044 15,532 Eligible portion of the allowance for credit losses 2,822 2,791 2,778 2,758 2,673 Hybrid capital instruments 71 71 142 142 142 Subordinated notes and debentures 6,270 6,140 6,248 6,169 6,001 Less: Other deductions (205) (196) (188) (184) (174) - --------------------------------------------------------------------------------------------------------------------------------- Tier 2 risk-based capital 8,958 8,806 8,980 8,885 8,642 - --------------------------------------------------------------------------------------------------------------------------------- Total 26,119 25,951 26,299 25,929 24,174 Less: Investments in unconsolidated banking and finance subsidiaries (48) (50) (48) (49) (49) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RISK-BASED CAPITAL $ 26,071 $ 25,901 $ 26,251 $ 25,880 $ 24,125 - ---------------------------------------------------------======================================================================== RISK-WEIGHTED ASSETS Balance sheet assets: Trading account assets $ 6,821 $ 6,846 $ 6,653 $ 6,022 $ 5,257 Available-for-sale and held-to-maturity securities 4,703 3,358 4,953 5,121 4,812 Loans 140,158 139,457 141,317 139,412 137,360 Other assets 19,673 19,887 17,221 18,711 17,435 - --------------------------------------------------------------------------------------------------------------------------------- Total balance sheet assets 171,355 169,548 170,144 169,266 164,864 - --------------------------------------------------------------------------------------------------------------------------------- Off-balance-sheet items: Unused commitments 31,070 30,089 28,455 28,368 26,721 Standby letters of credit 15,061 15,414 15,613 15,021 14,518 Foreign exchange and derivatives contracts 4,911 4,885 4,669 4,662 4,535 Other 2,260 2,213 2,190 2,166 1,990 - --------------------------------------------------------------------------------------------------------------------------------- Total off-balance-sheet items 53,302 52,601 50,927 50,217 47,764 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL RISK-WEIGHTED ASSETS $224,657 $222,149 $221,071 $219,483 $212,628 - ---------------------------------------------------------======================================================================== Risk-Based Capital Ratios Tier 1 Capital Ratio 7.64%/c/ 7.72% 7.83% 7.77% 7.30% Total Capital Ratio 11.60/c/ 11.66 11.87 11.79 11.35 Tier 1 Leverage Ratio 7.17/c/ 7.22 7.36 7.44 6.90 - ---------------------------------------------------------------------------------------------------------------------------------
/a/ Represents trust preferred securities and BAMS minority interest of $1,873 million and $102 million, respectively, at September 30, 1997, $1,873 million and $94 million, respectively, at June 30, 1997, $1,873 million and $91 million, respectively, at March 31, 1997, and $1,477 million and $89 million, respectively, at December 31, 1996. /b/ Includes nongrandfathered core deposit and other identifiable intangibles acquired after February 19, 1992 of $688 million and $59 million, respectively, at September 30, 1997, $705 million and $63 million, respectively, at June 30, 1997, $739 million and $65 million, respectively, at March 31, 1997, $772 million and $67 million, respectively, at December 31, 1996, and $795 million and $69 million, respectively, at September 30, 1996. Also includes $18 million at June 30, 1997 and $8 million at December 31, 1996 of the excess of the net book value over 90 percent of the fair value of mortgage servicing assets. There were no such excess amounts at September 30, 1997, March 31, 1997 and September 30, 1996. /c/ Current FRB regulations regarding bank holding companies engaged in securities underwriting and dealing activities through Section 20 subsidiaries require that these ratios exclude Section 20 subsidiary activities. Effective October 31, 1997, this restriction will no longer apply. If Section 20 subsidiary activities were included, BAC's Tier 1 risk- based capital ratio, total risk-based capital ratio, and Tier 1 leverage ratio would be 7.65%, 11.68%, and 6.85%, respectively, at September 30, 1997. 56 FORWARD-LOOKING STATEMENTS ================================================================================ This report contains forward-looking statements, usually consisting of the words "estimate," "project," "expect," or similar expressions. These statements are subject to uncertainties that could cause actual results to differ materially. The uncertainties include those discussed in this report, particularly in "Noninterest Expense" on pages 35 and 36, as well as those discussed in "Forward- Looking Statements" on pages 20 and 21 of BAC's report on Form 10-K for the year ended December 31, 1996. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. 57 OTHER INFORMATION ================================================================================ ITEM 6. (a) Exhibits: EXHIBITS AND REPORTS ON EXHIBIT FORM 8-K NUMBER EXHIBIT ------- ------- 10 Description of BankAmerica Corporation's confidential voting policy (incorporated by reference to paragraph entitled "Confidential Voting" on page 40 of BankAmerica Corporation's Proxy Statement dated March 24, 1997, File No. 1-7377). 12.a Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 12.b Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule -------------------------------------------------------- (b) Reports on Form 8-K: During the third quarter of 1997, the Parent filed a report on Form 8-K dated July 16, 1997. The report filed, pursuant to Items 5 and 7 of the report, a copy of the Parent's press release titled "BankAmerica Second Quarter Earnings." After the third quarter of 1997, the Parent filed reports on Form 8-K dated October 1, 1997 and October 15, 1997. The October 1 report disclosed, pursuant to Item 5 of the report, the closing of the previously announced acquisition by BankAmerica Corporation of Robertson Stephens & Company. The October 15 report filed, pursuant to Items 5 and 7 of the report, a copy of the Parent's press release titled "BankAmerica Third Quarter Earnings." 58 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/ MICHAEL E. O'NEILL ------------------------------------ MICHAEL E. O'NEILL Vice Chairman and Chief Financial Officer November 13, 1997 By Chief Accounting Officer and Duly Authorized Signatory: /s/ JOHN J. HIGGINS ------------------------------------ JOHN J. HIGGINS Executive Vice President and Chief Accounting Officer November 13, 1997 59 [BankAmerica Logo appears here] BankAmerica Other information about BankAmerica Corporation may be found in its Annual Report to Shareholders. This report, as well as additional copies of this Analytical Review and Form 10-Q, may be obtained from: Bank of America Corporate Secretary's Office #13018 P. O. Box 37000 San Francisco, CA 94137 Information Online -- To keep current online via the Internet, visit BankAmerica Corporation's home page on the World Wide Web (http://www.bankamerica.com) to view the latest information about the corporation and its products and services, or apply for a loan or credit card. Corporate disclosure documents filed with the Securities and Exchange Commission by BankAmerica Corporation and other companies can be obtained from the Securities and Exchange Commission's home page on the World Wide Web (http://www.sec.gov). NL-9 11/97 [Recycled Recycled Paper Paper logo appears here] GRAPHICS APPENDIX INDEX
BankAmerica Corporation Third Quarter 1997 10-Q page reference Description of omitted graphic - ----------------------- ----------------------------------------------- 52 Net Interest Rate Risk Position (Plot point graph in non-EDGAR version)
EXHIBIT INDEX Exhibit Reference Description - --------- ----------- 10 Description of BankAmerica Corporation's confidential voting policy (incorporated by reference to paragraph entitled "Confidential Voting" on page 40 of BankAmerica Corporation's Proxy Statement dated March 24, 1997, File No. 1-7377). 12.a Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 12.b Ratio of Earnings to Fixed Charges. 27 Financial Data Schedule EX-12.A 2 RATIO OF EARNINGS TO FIXED CHARGES & PREFERRED DIV EXHIBIT 12(A) Page 1 of 2 BankAmerica Corporation Ratio of Earnings to Fixed Charges
Nine Months Ended September 30 Year Ended December 31 -------------------- --------------------------------------------------- (dollar amounts in millions) 1997 1996 1996 1995 1994 1993 1992 EXCLUDING INTEREST ON DEPOSITS Fixed charges: Interest expense (other than interest on deposits) $2,196 $2,011 $2,713 $2,455 $1,505 $1,215 $1,126 Interest payments on trust preferred securities (see footnote /a/) 107 - 7 - - - - Interest factor in rent expense 91 95 125 120 109 112 95 Other 1 - - - 3 2 1 ==================== =================================================== $2,395 $2,106 $2,845 $2,575 $1,617 $1,329 $1,222 ==================== =================================================== Earnings: Income from operations $2,398 $2,126 $2,873 $2,664 $2,176 $1,954 $1,492 Applicable income taxes 1,619 1,488 1,900 1,903 1,541 1,474 1,190 Fixed charges 2,395 2,106 2,845 2,575 1,617 1,329 1,222 Other (43) - (9) (12) (55) (39) (14) ==================== =================================================== $6,369 $5,720 $7,609 $7,130 $5,279 $4,718 $3,890 ==================== =================================================== RATIO OF EARNINGS TO FIXED CHARGES, EXCLUDING INTEREST ON DEPOSITS 2.66 2.72 2.67 2.77 3.26 3.55 3.18 INCLUDING INTEREST ON DEPOSITS Fixed charges: Interest expense $6,488 $5,964 $8,072 $7,378 $4,842 $4,186 $4,895 Interest payments on trust preferred securities (see footnote /a/) 107 - 7 - - - - Interest factor in rent expense 91 95 125 120 109 112 95 Other 1 - - - 3 2 1 ==================== =================================================== $6,687 $6,059 $8,204 $7,498 $4,954 $4,300 $4,991 ==================== =================================================== Earnings: Income from operations $2,398 $2,126 $2,873 $2,664 $2,176 $1,954 $1,492 Applicable income taxes 1,619 1,488 1,900 1,903 1,541 1,474 1,190 Fixed charges 6,687 6,059 8,204 7,498 4,954 4,300 4,991 Other (43) - (9) (12) (55) (39) (14) ==================== =================================================== $10,661 $9,673 $12,968 $12,053 $8,616 $7,689 $7,659 ==================== =================================================== RATIO OF EARNINGS TO FIXED CHARGES, INCLUDING INTEREST ON DEPOSITS 1.59 1.60 1.58 1.61 1.74 1.79 1.53
/a/ Trust preferred securities represent corporation obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of the corporation. EXHIBIT 12(A) Page 2 of 2 BankAmerica Corporation Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
Nine Months Ended September 30 Year Ended December 31 ---------------------- -------------------------------------------------- (dollar amounts in millions) 1997 1996 1996 1995 1994 1993 1992 EXCLUDING INTEREST ON DEPOSITS Fixed charges and preferred dividends: Interest expense (other than interest on deposits) $2,196 $2,011 $2,713 $2,455 $1,505 $1,215 $1,126 Interest payments on trust preferred securities (see footnote /a/) 107 - 7 - - - - Interest factor in rent expense 91 95 125 120 109 112 95 Preferred dividend requirements (see footnote /b/) 144 240 307 389 424 423 304 Other 1 - - - 3 2 1 ---------------------- -------------------------------------------------- $2,539 $2,346 $3,152 $2,964 $2,041 $1,752 $1,526 ====================== ================================================== Earnings: Income from operations $2,398 $2,126 $2,873 $2,664 $2,176 $1,954 $1,492 Applicable income taxes 1,619 1,488 1,900 1,903 1,541 1,474 1,190 Fixed charges, excluding preferred dividend requirements 2,395 2,106 2,845 2,575 1,617 1,329 1,222 Other (43) - (9) (12) (55) (39) (14) ---------------------- -------------------------------------------------- $6,369 $5,720 $7,609 $7,130 $5,279 $4,718 $3,890 ====================== ================================================== RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS, EXCLUDING INTEREST ON DEPOSITS 2.51 2.44 2.41 2.41 2.59 2.69 2.55 INCLUDING INTEREST ON DEPOSITS Fixed charges and preferred dividends: Interest expense $6,488 $5,964 $8,072 $7,378 $4,842 $4,186 $4,895 Interest payments on trust preferred securities (see footnote /a/) 107 - 7 - - - - Interest factor in rent expense 91 95 125 120 109 112 95 Preferred dividend requirements (see footnote /b/) 144 240 307 389 424 423 304 Other 1 - - - 3 2 1 ---------------------- -------------------------------------------------- $6,831 $6,299 $8,511 $7,887 $5,378 $4,723 $5,295 ====================== ================================================== Earnings: Income from operations $2,398 $2,126 $2,873 $2,664 $2,176 $1,954 $1,492 Applicable income taxes 1,619 1,488 1,900 1,903 1,541 1,474 1,190 Fixed charges, excluding preferred dividend requirements 6,687 6,059 8,204 7,498 4,954 4,300 4,991 Other (43) - (9) (12) (55) (39) (14) ====================== ================================================== $10,661 $9,673 $12,968 $12,053 $8,616 $7,689 $7,659 ====================== ================================================== RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS, INCLUDING INTEREST ON DEPOSITS 1.56 1.54 1.52 1.53 1.60 1.63 1.45
/a/ Trust preferred securities represent corporation obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of the corporation. /b/ Preferred stock dividend requirements represent pretax earnings necessary to cover preferred stock dividends declared during the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993, and 1992 of $86 million, $141 million, $185 million, $227 million, $248 million, $241 million, and $169 million, respectively. 2 EX-12.B 3 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12(B) Page 1 of 2 BankAmerica Corporation Historical and Pro Forma Combined Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. The ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings by the sum of fixed charges and preferred stock dividend requirements. Earnings consist primarily of income (loss) before income taxes adjusted for fixed charges. Fixed charges consist primarily of interest expense on short- and long-term borrowings and one-third (the portion deemed representative of the interest factor) of net rents under long-term leases. The following table sets forth (i) the historical ratios of earnings to fixed charges and the ratios of earnings to combined fixed charges and preferred stock dividends for the year ended December 31, 1992 for BankAmerica Corporation and its consolidated subsidiaries (BAC) and for Security Pacific Corporation and its consolidated subsidiaries (SPC) and (ii) the pro forma combined ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends for the year ended December 31, 1992, giving effect to the April 22, 1992 merger between BAC and SPC (the Merger) as if it had been consummated on January 1, 1991. The pro forma combined ratio has been calculated using the pro forma combined financial information for the year ended December 31, 1992, and should be read in conjunction with and is qualified in its entirety by such pro forma combined information included in the 1994 Annual Report to Shareholders. Pro forma adjustments made to arrive at the pro forma combined ratio are based on the purchase method of accounting and are based upon actual amounts recorded by BAC subsequent to the effective time of the Merger. EXHIBIT 12(B) Page 2 of 2 Year Ended December 31, 1992 ------------------------- Historical Pro Forma ------------ --------- BAC/a/ SPC Combined ------- --- --------- RATIO OF EARNINGS TO FIXED CHARGES Excluding interest on deposits 3.18 /b/ 2.05 Including interest on deposits 1.53 /b/ 1.27 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS Excluding interest on deposits 2.55 /b/ 1.87 Including interest on deposits 1.45 /b/ 1.26 /a/ This financial information reflects the effects of the Merger subsequent to the Merger's consummation on April 22, 1992. /b/ Because the Merger was consummated on April 22, 1992, there is no year-to-date data for SPC. These pro forma combined ratios are intended for informational purposes and are not necessarily indicative of the future ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends of the combined company or the ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends of the combined company that would have actually occurred had the Merger been effective on January 1, 1991. EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS FINANCIAL DATA SCHEDULE ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 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 10-Q FILING. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 13,854 5,368 10,124 16,351 12,408 3,689 3,759 166,986 3,504 257,520 171,413 31,074 20,909 14,198 1,210 0 848 17,868 257,520 10,442 833 1,775 13,050 4,292 6,488 6,562 730 67 6,312 4,017 4,017 0 0 2,398 3.20 3.20 4.11 930 197 285 0 3,523 932 245 3,504 0 0 652 INCLUDES TRUST PREFERRED SECURITIES OF $1,873 MILLION. INCLUDES SUBORDINATED CAPITAL NOTES OF $353 MILLION. INCLUDES INTEREST INCOME ON TRADING ACOUNT ASSETS OF $890 MILLION. THESE AMOUNTS ARE NOT REPORTED IN OUR INTERIM FILING.
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