Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, for BankAmerica Corporation (formerly NationsBank Corporation). The reporting period is defined by the completion of the merger with the former BankAmerica Corporation on September 30, 1998, and the earlier merger with Barnett Banks, Inc. on January 9, 1998. Both transactions were accounted for as a pooling of interests. The filing reflects the combined operations of the merged entity.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1997 |
|---|---|---|---|
| Net Income | $374 million | $4,003 million | $5,083 million |
| Net Income (Excl. Merger/Restructuring) | $893 million | $4,887 million | $5,127 million |
| Earnings Per Share (Diluted) | $0.21 | $2.24 | $2.80 |
| Net Interest Income | $4,444 million | $13,689 million | $13,874 million |
| Provision for Credit Losses | $1,405 million | $2,410 million | $1,406 million |
| Total Assets | $594.7 billion (Period End) | ||
| Total Deposits | $345.8 billion (Period End) | ||
| Long-Term Debt | $47.6 billion (Period End) | ||
| Cash and Cash Equivalents | $24.7 billion (Period End) | ||
| Return on Average Assets | 0.26% | 0.93% | 1.26% |
| Efficiency Ratio (Excl. Merger) | 66.44% | 60.02% | 57.12% |
Material Changes vs. Prior Period
- Significant Earnings Decline: Net income for the third quarter dropped to $374 million from $1.73 billion in the prior year. Operating net income (excluding merger items) fell to $893 million from $1.77 billion.
- Provision for Credit Losses: The provision surged to $1.405 billion in Q3 1998 (up from $489 million in Q3 1997). This increase was driven by a $372 million write-down of a credit to DE Shaw Securities Group, Inc., and a $500 million reserve established for global economic uncertainties.
- Merger and Restructuring Costs: The quarter included a pre-tax charge of $725 million related to the BankAmerica merger (severance, contract terminations, and legal costs). For the nine months ended September 30, 1998, total merger and restructuring items were $1.195 billion, partially offset by a $430 million gain on the divestiture of Florida branches related to the Barnett merger.
- Noninterest Income Volatility: Trading account profits turned into a loss of $529 million in Q3 1998 (compared to a $281 million profit in Q3 1997) due to write-downs of Russian securities and losses in corporate bonds. Mortgage servicing income also turned negative ($176 million loss) due to a $250 million write-down of servicing rights.
- Expense Growth: Other noninterest expense increased 4% in Q3 and 9% for the nine-month period, primarily due to personnel and data processing costs associated with recent acquisitions (Montgomery, Robertson Stephens, NationsBanc Auto Leasing).
Guidance, Outlook, and Risks
- DE Shaw Exposure: On October 13, 1998, the Corporation entered an agreement with DE Shaw to purchase approximately $20 billion of fixed-income securities and modify loan terms. Management anticipates recognizing additional losses in the fourth quarter as these positions are marked-to-market in volatile markets.
- Global Economic Conditions: Management cites continued volatility in overseas economies and U.S. financial markets as a risk factor, potentially impacting credit and trading portfolios in the fourth quarter.
- Year 2000 Compliance: The Corporation estimates total Year 2000 project costs at $550 million, with $353 million incurred through September 30, 1998. Remediation is approximately 95% complete for systems, but infrastructure remediation is only 64% complete. Risks remain regarding third-party vendors and borrowers.
- Legal Proceedings: A settlement of $187.5 million was reached regarding a suit by the State of California over unclaimed bond funds. Additionally, approximately 24 uncertified class actions are pending regarding the disclosure of DE Shaw losses and the merger terms; management believes these lack merit.
- Capital Position: As of September 30, 1998, the Corporation was "well-capitalized" with a Tier 1 Capital ratio of 7.29% and a Total Capital ratio of 11.25%.
Investor Verification Checklist
- DE Shaw Loss Trajectory: Verify the magnitude of mark-to-market losses expected in Q4 1998 related to the $20 billion purchased portfolio and outstanding credit balances.
- Merger Integration Costs: Confirm the timeline and total expected costs for remaining merger and restructuring items anticipated in Q4 1998 and 1999.
- Credit Quality Trends: Monitor the allowance for credit losses (currently 2.05% of loans) against net charge-offs, specifically regarding the commercial domestic portfolio and the DE Shaw exposure.
- Year 2000 Readiness: Assess the status of "at risk" mission-critical vendors and the completion of infrastructure remediation before the end of 1998.
- Trading Portfolio Volatility: Review the impact of widening spreads and global market conditions on the trading account, which swung from profit to significant loss in Q3.