01—Abstract
Summary
Summary of the 10-K filed March 22, 1999. Cited figures are marked; the original filing is the authoritative source.
Bank of America Corporation (formerly NationsBank, renamed after its September 30, 1998 merger with BankAmerica) reported 1998 net income of $5.17 billiona, or $2.97 per share, including $1.80 billion of pre-tax merger-related charges.
Excluding those charges, operating net income was $6.49 billionb ($3.73 per share), down from $6.81 billion in 1997. The company is the largest U.S. banking company by assets, with $618 billion at year-end 1998, and operates four segments: Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Wealth Management. Results were pressured by a weak international environment, a $372 million write-down on a credit agreement with DE Shaw, a $500 million reserve for international economic conditions, and a $250 million mortgage servicing rights write-down.
Provision for credit losses rose to $2.92 billionc from $1.90 billion, and net charge-offs reached 0.71% of average loans. Net interest yield fell to 3.69% from 4.00%, reflecting heavier investment securities holdings funded with short-term borrowings and tighter loan-deposit spreads. Noninterest income rose about 4% to $12.2 billion, helped by investment banking, brokerage, credit card, and gains on divestitures, though trading profits fell sharply to $171 million from $976 million after Russian securities and credit market losses.
Capital remained adequate: the Tier 1 risk-based ratio was 7.06%, the total risk-based ratio 10.94%, and the leverage ratio 6.22%, with all banking subsidiaries rated well capitalized. Shareholders' equity was $45.9 billion, and the dividend rose to $0.45d per quarter in the fourth quarter. For investors, the key items are the merger integration costs (with roughly $400 million more expected in 1999), the credit quality pressure from international and commercial exposures, the compression in core net interest margin, and the Year 2000 readiness program, estimated at about $550 million in total cost with most phases targeted for completion by June 30, 1999.
02—Key points
Key Highlights
- Net income of $5.17 billion ($2.97 per share) in 1998, down from $6.54 billion ($3.71 per share) in 1997, reflecting $1.80 billion of pre-tax merger-related charges; excluding these, operating net income was $6.49 billion ($3.73 per share).
- Provision for credit losses rose to $2.92 billion from $1.90 billion, including a $500 million reserve for international economic conditions and a $372 million DE Shaw credit write-down; net charge-offs were 0.71% of average loans versus 0.54%.
- Net interest yield declined to 3.69% from 4.00%, as securities growth funded by short-term borrowings and narrower loan-deposit spreads offset loan growth; taxable-equivalent net interest income was $18.5 billion, roughly flat.
- Noninterest income grew about 4% to $12.2 billion, supported by investment banking (up 36% to $2.0 billion), brokerage (up 105%), and credit card income (up 18%), though trading profits fell to $171 million from $976 million.
- Capital ratios stayed above well-capitalized thresholds: Tier 1 risk-based 7.06%, total risk-based 10.94%, leverage 6.22%; shareholders' equity was $45.9 billion at year-end 1998.
- Largest U.S. banking company by assets at $618 billion as of December 31, 1998, with a network of about 4,700 banking centers, 14,000 ATMs, and approximately 171,000 full-time equivalent employees.
- Year 2000 program estimated at $550 million total cost ($410 million incurred through 1998), with most phases targeted for completion by June 30, 1999; remaining merger charges of about $400 million are expected in 1999.
03—Questions
Frequently Asked Questions
Why did earnings fall in 1998 compared with 1997?
Reported net income fell 21% to $5.17 billion, mainly because of $1.80 billion of merger-related charges tied to the BankAmerica and Barnett mergers. Excluding those charges, operating net income declined about 5% to $6.49 billion, driven by a higher provision for credit losses, lower net interest yield, and a sharp drop in trading profits.
How exposed is the company to the Asian, Latin American, and Russian crises?
The company recorded a $500 million reserve for international economic conditions and a write-down of Russian securities that cut trading income. Total foreign cross-border exposure fell to $36.7 billion from $46.7 billion, with Mexico, Japan, Brazil, and Korea among the largest country exposures. Management said it reduced exposures in Asia, Latin America, and Eastern Europe during 1998 and expects continued weakness in international credit and trading portfolios in 1999.
Are the dividend and capital position sufficient to support shareholder returns?
Quarterly dividends rose from $0.38 to $0.45 in the fourth quarter of 1998, with total 1998 dividends of $1.59 per share. The company paid out about 50% of earnings, and Tier 1 and total risk-based ratios exceeded the well-capitalized thresholds of 6% and 10%. The company repurchased about 29 million shares for roughly $1.8 billion in 1998. The main constraint is that the subsidiary banks can pay about $2.2 billion of dividends in 1999 without regulatory approval, plus 1999 net profits.
What legal and regulatory risks are disclosed?
The company agreed in November 1998 to pay $187.5 million to settle a California state suit over unclaimed bond funds and related fee and investment allegations, subject to court approval. Roughly 24 uncertified federal and state class actions allege nondisclosure of BankAmerica's losses tied to D.E. Shaw in 1998; the company says these lack merit and that its exposure cannot yet be determined. Management believes the proceedings are not material in aggregate.
What are the main strategic changes resulting from the mergers?
The company completed the BankAmerica merger on September 30, 1998 and the Barnett merger on January 9, 1998, both as poolings of interests, and plans to consolidate its banking subsidiaries into a single bank where permitted. It also divested certain branches in New Mexico and Barnett branches, sold the Robertson Stephens investment banking unit in August 1998, and announced plans to exit the Alaska retail market. It expects to complete the BAMS buyout, which was announced at about $330 million, in the second quarter of 1999.
04—Continue