<PAGE>
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
For the transition period from to
Commission file number 1-10000
FIRST UNION CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
NORTH CAROLINA 56-0898180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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FIRST UNION CORPORATION
ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(Address of principal executive offices)
(Zip Code)
(704) 374-6565
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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
---- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
568,541,346 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of October 31, 1997.
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FIRST UNION CORPORATION (THE "CORPORATION" OR "FUNC") MAY FROM TIME TO TIME
MAKE WRITTEN OR ORAL "FORWARD-LOOKING STATEMENTS", INCLUDING STATEMENTS
CONTAINED IN THE CORPORATION'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION (INCLUDING THIS QUARTERLY REPORT ON FORM 10-Q AND THE EXHIBITS
THERETO), IN ITS REPORTS TO STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE
CORPORATION, WHICH ARE MADE IN GOOD FAITH BY THE CORPORATION PURSUANT TO THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE CORPORATION'S PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS, THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE CORPORATION'S CONTROL). THE FOLLOWING FACTORS, AMONG
OTHERS, COULD CAUSE THE CORPORATION'S FINANCIAL PERFORMANCE TO DIFFER MATERIALLY
FROM THE PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND INTENTIONS EXPRESSED IN
SUCH FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN
GENERAL AND THE STRENGTH OF THE LOCAL ECONOMIES IN WHICH THE CORPORATION
CONDUCTS OPERATIONS; THE EFFECTS OF, AND CHANGES IN, TRADE, MONETARY AND FISCAL
POLICIES AND LAWS, INCLUDING INTEREST RATE POLICIES OF THE BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM; INFLATION, INTEREST RATE, MARKET AND MONETARY
FLUCTUATIONS; THE TIMELY DEVELOPMENT OF AND ACCEPTANCE OF NEW PRODUCTS AND
SERVICES OF THE CORPORATION AND THE PERCEIVED OVERALL VALUE OF THESE PRODUCTS
AND SERVICES BY USERS, INCLUDING THE FEATURES, PRICING AND QUALITY COMPARED TO
COMPETITORS' PRODUCTS AND SERVICES; THE WILLINGNESS OF USERS TO SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE CORPORATION'S PRODUCTS AND SERVICES;
THE SUCCESS OF THE CORPORATION IN GAINING REGULATORY APPROVAL OF ITS PRODUCTS
AND SERVICES, WHEN REQUIRED; THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS
AND REGULATIONS (INCLUDING LAWS CONCERNING TAXES, BANKING, SECURITIES AND
INSURANCE); TECHNOLOGICAL CHANGES; ACQUISITIONS; CHANGES IN CONSUMER SPENDING
AND SAVING HABITS; AND THE SUCCESS OF THE CORPORATION AT MANAGING THE RISKS
INVOLVED IN THE FOREGOING.
THE CORPORATION CAUTIONS THAT THE FOREGOING LIST OF IMPORTANT FACTORS IS
NOT EXCLUSIVE. THE CORPORATION INCORPORATES BY REFERENCE THOSE FACTORS INCLUDED
IN THE CORPORATION'S CURRENT REPORTS ON FORM 8-K DATED JULY 21, 1997, AND AUGUST
20, 1997, RELATED TO THE CORPORATION'S PENDING ACQUISITIONS OF SIGNET BANKING
CORPORATION AND WHEAT FIRST BUTCHER SINGER, INC., RESPECTIVELY. THE CORPORATION
DOES NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENT, WHETHER WRITTEN OR
ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON BEHALF OF THE CORPORATION.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements of the
Corporation within Item 1 include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for fair
presentation of such consolidated financial statements for the periods
indicated.
1
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FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Balance Sheets of the Corporation and subsidiaries at
September 30, 1997, September 30, 1996, and December 31, 1996, respectively, set
forth on page T-22 of the Corporation's Third Quarter Financial Supplement for
the nine months ended September 30, 1997 (the "Financial Supplement"), are
incorporated herein by reference.
The Consolidated Statements of Income of the Corporation and subsidiaries
for the three and nine months ended September 30, 1997 and 1996, set forth on
pages T-23 and T-24, respectively, of the Financial Supplement, are incorporated
herein by reference.
The Consolidated Statements of Cash Flows of the Corporation and
subsidiaries for the nine months ended September 30, 1997 and 1996, set forth on
page T-25 of the Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting policies and other information related to derivatives and other
financial instruments can be found in Exhibit 13(b) of the Corporation's 1996
Annual Report on Form 10-K in Notes to Consolidated Financial Statements, Note
1: "Summary of Significant Accounting Policies" on pages C-8 and C-9 and Note
17: "Off-Balance Sheet Risk, Commitments and Contingent Liabilities" on pages
C-35 through C-37, and is incorporated herein by reference.
Additionally, with respect to interest rate swaps, floors and caps, the
fair value of the swaps, floors and cap agreements, and changes in fair value as
a result of changes in market interest rates are not recognized in the financial
statements. These hedges are designed to be effective hedges of the cash flows
of the hedged items, and if determined to be ineffective, they are accounted for
on a mark-to-market basis. The interest rate indices specified in the caps and
floors have been, and they are expected to be, highly correlated with the
interest rates of the hedged items.
With respect to interest rate futures, forward and option contracts,
interest rate futures and forwards that are designated as hedges are expected to
reduce overall interest rate risk, and they have been, and they are expected to
be, highly correlated with the interest rate risk of the hedged items. Interest
rate futures and forwards that do not reduce overall interest rate risk or that
are not highly correlated are accounted for on a mark-to-market basis.
Information related to the Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures can be found in
Exhibit 13(b) of the Corporation's 1996 Annual Report on Form 10-K in Notes to
Consolidated Financial Statements in Note 11 on page C-23, and is incorporated
herein by reference.
2
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PART II. OTHER INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 2 through 20 and T-1 through T-25 of the Financial
Supplement and is incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
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EXHIBIT NO. DESCRIPTION
<C> <S>
(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Third Quarter 1997 Financial Supplement.
(27) The Corporation's Financial Data Schedule.**
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* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders of
the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1997, Current Reports on Form 8-K,
dated July 21, 1997, and August 20, 1997, were filed with the Commission by the
Corporation.
3
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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 hereunto duly authorized.
FIRST UNION CORPORATION
Date: November 14, 1997
By: /s/JAMES H. HATCH
JAMES H. HATCH
SENIOR VICE PRESIDENT AND CORPORATE
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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EXHIBIT INDEX
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EXHIBIT NO. DESCRIPTION
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(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Third Quarter 1997 Financial Supplement.
(27) The Corporation's Financial Data Schedule.**
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* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders of
the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
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<PAGE>
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EXHIBIT (12)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
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NINE
MONTHS
ENDED
SEPT. 30, YEARS ENDED DECEMBER 31,
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(IN MILLIONS) 1997 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 2,253 2,310 2,219 2,088 1,795 977
Fixed charges, excluding capitalized
interest 1,428 1,739 1,266 816 608 570
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Earnings (A) $ 3,681 4,049 3,485 2,904 2,403 1,547
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Interest, excluding interest on deposits $ 1,326 1,672 1,198 747 538 502
Distributions on guaranteed preferred
beneficial interests 50 - - - - -
One-third of rents 52 67 68 69 70 68
Capitalized interest - 4 3 1 - -
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Fixed charges (B) $ 1,428 1,743 1,269 817 608 570
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Consolidated ratios of earnings to fixed
charges, excluding interest on deposits (A)/(B) 2.58X 2.32 2.75 3.55 3.95 2.71
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INCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 2,253 2,310 2,219 2,088 1,795 977
Fixed charges, excluding capitalized
interest 3,688 4,699 4,120 2,862 2,552 3,010
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Earnings (C) $ 5,941 7,009 6,339 4,950 4,347 3,987
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Interest, including interest on deposits $ 3,586 4,632 4,052 2,793 2,482 2,942
Distributions on guaranteed preferred
beneficial interests 50 - - - - -
One-third of rents 52 67 68 69 70 68
Capitalized interest - 4 3 1 - -
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Fixed charges (D) $ 3,688 4,703 4,123 2,863 2,552 3,010
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Consolidated ratios of earnings to fixed
charges, including interest on deposits (C)/(D) 1.61X 1.49 1.54 1.73 1.70 1.32
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<PAGE>
THIRD QUARTER 1997
FIRST UNION CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATIONS
QUARTERLY FINANCIAL SUPPLEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1997
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FIRST UNION CORPORATION AND SUBSIDIARIES
THIRD QUARTER FINANCIAL SUPPLEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
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PAGE
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Financial Highlights 1
Manangement's Analysis of Operations 2
Consolidated Summaries of Income, Per Common Share and Balance
Sheet Data T-1
Business Segments T-2
Internal Capital Growth and Dividend Payout Ratios T-4
Selected Quarterly Data T-4
Securities Available for Sale T-5
Investment Securities T-6
Loans T-7
Allowance for Loan Losses and Nonperforming Assets T-8
Intangible Assets T-9
Foreclosed Properties T-9
Deposits T-10
Time Deposits in Amounts of $100,000 or More T-10
Long-Term Debt T-11
Changes in Stockholders' Equity T-12
Capital Ratios T-13
Off-Balance Sheet Derivative Financial Instruments T-14
Off-Balance Sheet Derivatives - Expected Maturities T-16
Off-Balance Sheet Derivatives Activity T-17
Net Interest Income Summaries
Five Quarters Ended September 30, 1997 T-18
Year-to-Date September 30, and June 30, 1997; December 31, and
September 30, 1996 T-20
Consolidated Balance Sheets T-22
Consolidated Statements of Income
Five Quarters Ended September 30, 1997 T-23
Year-to-Date September 30, 1997 and 1996; June 30, 1997 and 1996 T-24
Consolidated Statements of Cash Flows T-25
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FINANCIAL HIGHLIGHTS
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
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FINANCIAL HIGHLIGHTS
Net income $ 505 357 1,461 1,039
Dividends on preferred stock -- 1 -- 8
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Net income applicable to common stockholders after merger-related
restructuring charges and SAIF special assessment 505 356 1,461 1,031
After tax restructuring charges and SAIF special assessment -- 86 -- 267
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Net income applicable to common stockholders before merger-related
restructuring charges and SAIF special assessment $ 505 442 1,461 1,298
--------- ------ ------ -------
PER COMMON SHARE DATA (A)
Net income after merger-related restructuring charges and SAIF
special assessment $ 0.90 0.65 2.60 1.85
Net income before merger-related restructuring charges and SAIF
special assessment 0.90 0.81 2.60 2.33
Cash dividends 0.32 0.29 0.90 0.81
Book value 18.86 15.97 18.86 15.97
Period-end price $50.0625 33.375 50.0625 33.375
Average common shares (IN THOUSANDS) 561,595 548,002 562,534 557,968
Actual common shares (IN THOUSANDS) 568,296 541,015 568,296 541,015
Dividend payout ratios (based on operating earnings) 35.56% 35.80 34.62 34.76
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PERFORMANCE HIGHLIGHTS
Before merger-related restructuring charges and SAIF special assessment
Return on average assets (b) (c) 1.43% 1.32 1.41 1.30
Return on average common equity (b) (d) 19.78 19.17 19.75 18.81
Overhead efficiency ratio (excludes expenses on trust capital securities) (e) 55 57 56 57
Net charge-offs to
Average loans, net (b) 0.66 0.64 0.65 0.58
Average loans, net, excluding Bankcard (b) 0.23 0.28 0.22 0.30
Nonperforming assets to loans, net and foreclosed properties 0.74 0.89 0.74 0.89
Net interest margin (b) 4.36% 4.27 4.36 4.21
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CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION)
Before merger-related restructuring charges and SAIF special assessment
Net income applicable to common stockholders $ 574 489 1,634 1,448
Net income per common share $ 1.02 0.89 2.91 2.59
Return on average tangible assets (b) 1.66% 1.48 1.61 1.48
Return on average tangible common equity (b) (d) 30.80 27.52 30.80 27.46
Overhead efficiency ratio (excludes expenses on trust capital securities) (e) 52 % 54 52 54
--------- ------ ------ -------
PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 16,690 13,729
Investment securities 2,268 2,566
Loans, net of unearned income 94,904 92,520
Earning assets 127,621 119,294
Total assets 143,904 133,882
Noninterest-bearing deposits 18,963 18,008
Interest-bearing deposits 72,727 73,436
Long-term debt 7,819 7,332
Guaranteed preferred beneficial interests 990 --
Common stockholders' equity 10,720 8,641
Total stockholders' equity $ 10,720 8,689
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(a) Per common share data has been restated for a two-for-one stock split
declared on June 17, 1997, which was paid on July 31, 1997, to holders
of record as of July 1, 1997.
(b) Quarterly amounts annualized.
(c) Based on net income.
(d) Based on net income applicable to common stockholders and average common
stockholders' equity excluding average net unrealized gains or losses on
debt and equity securities.
(e) The overhead efficiency ratio is equal to noninterest expense divided by
net operating revenue. Net operating revenue is equal to the sum of
tax-equivalent net interest income and noninterest income, including
investment securities transactions.
MANAGEMENT'S ANALYSIS OF OPERATIONS
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EARNINGS HIGHLIGHTS
First Union earned a record $1.5 billion in net income applicable to common
stockholders in the first nine months of 1997, a 13 percent increase from
operating earnings of $1.3 billion in the first nine months of 1996. On a per
common share basis, first nine months 1997 earnings were $2.60, compared with
operating earnings of $2.33 in the first nine months of 1996. Operating earnings
represent net income before merger-related, after-tax restructuring charges of
$181 million and an after-tax Savings Association Insurance Fund (SAIF) special
assessment of $86 million.
In the third quarter of 1997, First Union's net income applicable to common
stockholders was a record $505 million, a 14 percent increase from operating
earnings of $442 million in the third quarter of 1996. On a per common share
basis, third quarter 1997 earnings were 90 cents per share compared with 81
cents in the third quarter of 1996. Operating earnings in the third quarter of
1996 do not include the $86 million related to SAIF.
Key factors in the first nine months 1997 earnings growth compared with the
first nine months of 1996 were:
(bullet) 6 percent growth in tax-equivalent net interest income;
(bullet) 37 percent growth in noninterest, or fee, income (excluding investment
securities transactions); and
(bullet) An improved overhead efficiency ratio of 56 percent.
Also included in the first nine months of 1997 were the results of six
bank-related purchase accounting acquisitions, which closed in the fourth
quarter of 1996, with combined assets, net loans and deposits of $5.8 billion,
$3.3 billion and $3.4 billion, respectively.
Tax-equivalent net interest income was $4.0 billion in the first nine months of
1997 compared with $3.8 billion in the first nine months of 1996. Average net
loans in the first nine months of 1997 were $94.6 billion compared with $89.9
billion in the first nine months of 1996. Loan growth was largely related to the
fourth quarter 1996 purchase accounting acquisitions and increases in both our
consumer and Capital Markets portfolios.
First Union's strategic decision to allocate more resources to lines of business
that produce fee income was apparent in the 37 percent increase in noninterest,
or fee, income (excluding investment securities transactions) to $2.3 billion in
the first nine months of 1997 from $1.6 billion in the first nine months of
1996.
Nonperforming assets at September 30, 1997, improved to $704 million, or 0.74
percent of net loans and foreclosed properties, compared with $763 million, or
0.80 percent, at December 31, 1996, and $825 million, or 0.89 percent, at
September 30, 1996. Annualized net charge-offs as a percentage of average net
loans were 0.65 percent in the first nine months of 1997 compared with 0.58
percent in the first nine months of 1996. Annualized net charge-offs were 0.66
percent in the third quarter of 1997 compared with 0.68 percent in the second
quarter of 1997, 0.61 percent in the first quarter of 1997 and 0.64 percent in
the third quarter of 1996. Excluding net charge-offs related to the credit card
portfolio, third quarter 1997 annualized net charge-offs were 0.23 percent
compared with 0.23 percent in the second quarter of 1997, 0.20 percent in the
first quarter of 1997 and 0.28 percent in the third quarter of 1996. At
September 30, 1997, the owned credit card portfolio represented 5 percent of the
loan portfolio.
Other key highlights during the third quarter of 1997 included:
(bullet) A stock offering of 52.2 million shares of First Union common stock,
which consisted of a secondary offering of 44.7 million shares owned
by Banco Santander, Spain's leading fi-
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nancial group, and a primary offering of 7.5 million shares by First
Union. Banco Santander indicated it would use the proceeds to
reinforce its provisions and capital position. First Union's primary
offering was required to enable us to account for our pending
acquisitions of Signet Banking Corporation and the securities
brokerage firm, Wheat First Butcher Singer Inc., both of Richmond,
Virginia, as pooling of interests. First Union used the proceeds for
general corporate purposes.
(bullet) Announcements of the pending acquisitions of Signet, Wheat, and
Covenant Bancorp, Inc., of Haddonfield, N.J., all of which are
discussed below.
OUTLOOK
The Signet acquisition has received Federal Reserve Board, Comptroller of the
Currency and Signet stockholder approval and is scheduled to be consummated at
the close of business on November 28, 1997, subject to other conditions of
closing. Signet, with assets of $11 billion, net loans of $7 billion, deposits
of $8 billion, stockholders' equity of $990 million and net income of $73
million for the nine months ended September 30, 1997, is expected to move First
Union into the leading deposit share position in Virginia.
We currently estimate that approximately 67.0 million shares of First Union's
common stock will be issued in this pooling of interests accounting transaction.
The merger agreement provides for the issuance of 1.10 shares of First Union
common stock for each share of Signet common stock. Based on First Union's
closing price of $48.6875 on July 18, 1997, the last business day before public
announcement of the merger, the transaction would be valued at approximately
$3.25 billion.
First Union expects to take an after-tax, merger-related restructuring charge of
$135 million in 1997 in connection with the Signet merger. In addition, two
directors of Signet are expected to be elected or nominated for election to the
First Union board of directors following consummation of the merger. More
information is available in a Current Report on Form 8-K, which we filed with
the Securities and Exchange Commission on July 21, 1997.
Covenant Bancorp, Inc., based in Haddonfield, New Jersey, had assets of $420
million, net loans of $258 million, deposits of $304 million and stockholders'
equity of $32 million at September 30, 1997. The merger agreement provides for
the issuance of .3813 shares of First Union common stock for each share of
Covenant common stock. Two issues of convertible Covenant preferred stock would
also be exchanged for First Union common stock. Based on First Union's closing
price of $49.50 on August 4, 1997, the last business day prior to public
announcement of the merger, the transaction would be valued at approximately $78
million. The merger, which is to be accounted for as a purchase, is expected to
be completed in early 1998, subject to regulatory and Covenant stockholder
approval and other conditions of closing. We expect that approximately 1.7
million shares of First Union common stock will be issued in connection with the
Covenant acquisition. We have repurchased 1.65 million of such shares at a cost
of $79 million.
The Wheat acquisition is expected to enhance the equity securities business of
First Union's Capital Markets Group, as well as create one of the nation's
largest brokerage networks. The merger is expected to be accounted for as a
pooling of interests. The merger agreement provides for 10.3 million shares of
First Union common stock to be exchanged for Wheat shares, subject to possible
adjustment with respect to a portion of such shares to be held in escrow. Based
on an August 19, 1997, closing price of $46.9375, the indicated purchase price
was $482 million. The agreement also called for the creation of a retention pool
to be paid to selected Wheat First employees consisting of 1.7 million shares of
restricted First Union common stock, which would vest over a three year period.
Consummation is expected to occur in the fourth quarter of 1997 or the first
quarter of 1998. More information is available in a Current Report on Form 8-K,
which we filed with the Securities and Exchange Commission on August 20, 1997.
3
<PAGE>
In addition, First Union is taking advantage of the opportunity afforded by the
Riegle-Neal Interstate Banking and Branching Efficiency Act (discussed further
in ACCOUNTING AND REGULATORY MATTERS) to operate national banks across state
lines by consolidating our banks in phases during this year and during the first
quarter of 1998. In the first nine months of 1997, all banks in the southern
region of First Union and in Connecticut were consolidated into First Union
National Bank, based in Charlotte, North Carolina. The final consolidation in
the rest of the northern region (other than Delaware) is scheduled to occur in
February 1998.
First Union prepared for the challenges of an increasingly competitive
environment by diversifying its business mix. Revenue growth continued to
outpace expense growth in the third quarter of 1997. We have made significant
progress toward our goal of increasing noninterest income as a percentage of
noninterest income and net interest income to 40 percent by the year 2000. In
the first nine months of 1997, this proportion was 36 percent. To help us meet
our revenue goal, we continue to make significant discretionary investments in
revenue-enhancing lines of business, particularly in the Capital Management,
Capital Markets and electronic and remote delivery areas of our company. These
higher growth business lines diversify our revenue streams and complement our
loan, deposit and other products offered through our Consumer Bank and
Commercial Bank. We have redesigned our Consumer Bank and streamlined processes
in our Commercial Bank to improve customer service, increase sales and generate
efficiencies. We expect strong sales momentum in light of demographic trends, a
continued strong economy and our market expansion.
Our primary management attention is focused on leveraging our existing business
base as we invest in new technology and fee income-generating lines of business.
The significant investments we have made in acquisitions, in technology and in
expanded products and services have positioned us to better serve our 12 million
customers in a diverse geographic marketplace and to reduce the impact of
adverse changes in the credit cycle.
We also continue to evaluate acquisition opportunities that will provide access
to customers and markets that we believe complement our long-term goals.
Acquisition opportunities are evaluated as a part of our ongoing capital
allocation decision-making process. Decisions to pursue acquisitions will be
measured against our financial performance guidelines adopted in 1996 and other
financial objectives. Acquisition discussions and in some cases negotiations may
take place from time to time, and future acquisitions involving cash, debt or
equity securities may be expected.
The ACCOUNTING AND REGULATORY MATTERS section provides information about
legislative, accounting and regulatory matters that have recently been adopted
or proposed.
BUSINESS SEGMENTS
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BUSINESS FOCUS
First Union's operations are divided into four primary business segments
encompassing more than 40 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank and Capital
Markets. Additional information can be found in Table 2.
We have developed a new internal performance reporting model to measure the
results of these four business segments and the Treasury/Nonbank segment.
Because of the complexity of the corporation and the interrelationships of these
business segments, we have used various estimates and allocation methodologies
in the preparation of the BUSINESS SEGMENTS financial information. Restatements
of various periods may occasionally be expected because these estimates and
methodologies could be refined over time.
Our management structure combines this internal performance reporting with a
matrix management approach, which integrates product management with our various
distribution channels. Additionally First Union's management structure and
internal reporting methodologies will pro-
4
<PAGE>
duce business segment results that are not necessarily comparable to
presentations by other bank holding companies or standalone entities in similar
industry segments.
The new internal performance reporting model was implemented in 1997, and prior
periods have not been reported to reflect the new model because of practical
limitations. Under our new model we isolate the net income contribution and
measure the return on capital for each business segment by allocating equity,
funding credit and expense and corporate expenses to each segment. We use a
risk-based methodology to allocate equity to the segments based on the credit,
market and operational risks associated with each business. Credit risk
allocations are developed to provide sufficient equity to cover both expected
and unexpected losses for each asset portfolio. Operational capital is allocated
based on the level of noninterest expense for each segment. In addition capital
is allocated to segments with deposit products to reflect the risk of
unanticipated disintermediation. Through this process, the aggregate amount of
equity allocated to all business segments may be more or less than the
corporation's book equity. All unallocated equity is retained by the
Treasury/Nonbank segment. This mismatch in book versus allocated equity may
result in an unexpectedly high or low return on equity for the Treasury/Nonbank
segment for extended periods of time.
Exposure to market risk is managed centrally within the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment our
model employs a funds transfer pricing (FTP) system. The FTP system matches the
duration of the funding provided to each segment to the duration of the assets
and liabilities contained in each segment. This matching of duration, or
effective term until an instrument can be repriced, allocates interest income
and/or expense to each segment so its resulting net interest income is not under
or overstated due to exposure to interest rate risk. All interest rate risk
resulting from the mismatch in durations of assets and liabilities held by the
business segments resides in the Treasury/Nonbank segment. The Treasury/Nonbank
segment also holds the corporation's investment portfolio and off-balance sheet
portfolio, which are used to enhance corporate earnings and to manage exposure
to interest rate risk. Because all market risk is held in the Treasury/Nonbank
segment, the profitability of this segment is expected to be more volatile than
for the other business segments.
General corporate expenses, with the exception of goodwill amortization, are
allocated to each segment in a pro rata manner based on the direct and
attributable indirect expenses for each segment. Residual corporate expense
remaining in the Treasury/Nonbank segment reflects the costs of portfolio
management activities and goodwill amortization. In general this approach should
not result in significant volatility to business segment returns.
CONSUMER BANK
The Consumer Bank, our primary deposit-taking entity, provides an attractive
source of funding for our lending activities. The Consumer Bank also originates
secured and unsecured consumer loans, first and second residential mortgages,
installment loans, credit cards, auto loans and leases and student loans.
A new model for our Consumer Bank has been implemented initially in Atlanta,
Georgia, where the "Future Bank" is designed to increase service options and
access for customers, to improve sales capacity for employees and to reduce
costs. This initiative focuses on four delivery channels: enhanced financial
centers; direct access by telephone; an external sales force; and self-service
options such as automated teller machines, personal computers and interactive
video kiosks. In 1998 we will implement the Future Bank model throughout our
full-service branch network in 12 states and Washington, D.C.
The Consumer Bank also includes the Customer Direct Access Division (CDAD),
which manages our card products, telephone, Internet and financial
software-based distribution channels. CDAD also includes our centralized
customer information centers, which, in addition to sales, manages the majority
of customer servicing and administrative tasks that have been removed from
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branches as part of the Future Bank redesign. The Consumer Bank also includes
Consumer Credit; First Union Auto Finance; First Union Direct Bank, N.A.; First
Union Home Equity Bank, N.A. (FUHEB); and First Union Mortgage Corporation.
The Consumer Bank also is a major distribution or referral mechanism for
products from other business segments, including Capital Management products and
small business loans. Our full-service retail branch network is located in
Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North
Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C.
Consumer lending through our full-service bank branches is managed using an
automated underwriting system that combines statistical predictors of risk and
industry standards for acceptable levels of customer debt capacity and
collateral valuation. These guidelines are continually monitored for overall
effectiveness and for compliance with fair lending practices.
The Consumer Bank generated 58 percent of the corporation's net interest income
in the first nine months of 1997.The Consumer Bank's net interest income was
$2.3 billion in the first nine months of 1997, with noninterest income of $869
million, which was generated primarily through service charges on deposit
accounts and income related to asset securitizations. Forty-nine percent of the
corporation's noninterest expense in the first nine months of 1997 was
attributable to the Consumer Bank. Fifty-five percent of the corporation's
average net loans, or $51.7 billion, and 71 percent of average deposits, or
$66.0 billion, in the first nine months of 1997 were managed by the Consumer
Bank.
Average consumer loans in the first nine months of 1997 exclude the
securitization and sale of certain adjustable rate mortgages (ARMs) and student
loans. Key growth areas in the consumer portfolio continue to be direct and home
equity loans. With respect to the credit card portfolio, and consistent with the
rest of the industry, we experienced an increase in personal bankruptcies, which
was partially offset by a decrease in contractually past due accounts.
Owned charge-offs, net of securitized credit cards, attributable to the Consumer
Bank in the first nine months of 1997 amounted to $430 million, or 1.11 percent
of average net loans on an annualized basis. Seventy-three percent of these were
related to the owned credit card portfolio.
CDAD incorporates a range of customer access and distribution channels,
including those mentioned above as well as centralized, sophisticated customer
call centers. CDAD also includes card products such as credit cards, debit cards
and automated teller machine cards. The managed credit card portfolio was $6.4
billion at September 30, 1997. This amount includes $1.5 billion of securitized
credit cards.
First Union's network of mortgage origination and home equity offices across the
nation also are included in the Consumer Bank. First Union Mortgage Corporation
was the nation's 13th largest mortgage servicer, with a mortgage servicing
portfolio of $52.0 billion at September 30, 1997. On a segment basis, mortgage
banking noninterest income was $195 million in the first nine months of 1997.
FUHEB had loans of $4.1 billion at September 30, 1997, and originated $1.1
billion in home equity loans in the first nine months of 1997. In addition,
FUHEB is a major participant in both the "A" credit quality market as well as in
the sub-prime market. In the first nine months of 1997, FUHEB securitized and
sold $234 million in sub-prime originations through our Capital Markets Group.
CAPITAL MANAGEMENT
Our Capital Management Group provides investment products and services that
primarily produce fee-based income. This includes mutual funds; insurance and
annuities; brokerage services; personal, institutional and corporate trust;
Individual Retirement Accounts (IRAs); and 401(k) employee
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benefit plans. Other products under the Capital Management Group such as CAP
accounts, Private Client and Women's Financial Advisory Services combine
investment products into a package that enables customers to move easily within
our multiple product groups.
The Capital Management Group contributed 28 percent, or $637 million, of the
corporation's noninterest income and 3 percent, or $111 million, of the
corporation's net interest income in the first nine months of 1997. Capital
Management results in the first nine months of 1997 included the operating
results related to the December 1996 purchase accounting acquisition of Keystone
Investments, Inc., the Boston, Mass.-based investment adviser to the Keystone
family of mutual funds.
Capital Management assets under management derived from trust services and
mutual funds were $69.9 billion at September 30, 1997.
The Capital Management Group exhibited broad-based strength across all of its
lines of business in the first nine months of 1997. In particular, the Evergreen
Keystone families of mutual funds continued to increase to $32.7 billion
in assets under management at September 30, 1997. The Evergreen Keystone fund
family was renamed the Evergreen Funds on October 31, 1997. The Evergreen Funds
is the nation's 28th largest mutual fund family. Twenty-three Evergreen Funds
were rated "4" star or "5" star by the Morningstar rating service at September
30, 1997.
Brokerage services and insurance also contributed substantial growth. In
particular, annuity sales reached $1.1 billion in the first nine months of 1997.
We anticipate increased growth in these business lines as we introduce new
insurance and annuity products throughout our multistate network.
Our asset management product, called the CAP account, increased assets to $24.4
billion at September 30, 1997, and accounts to 280,000, from $22.7 billion and
271,000 at June 30, 1997.
The Private Client Group, previously named the Private Banking Group, provides a
single point of access to First Union's products and services including
investments, mortgages, personal loans, trusts, financial planning and brokerage
services. Growth in these products and services in the first nine months of 1997
demonstrated the success of combining banking and investments. At September 30,
1997, the Private Client Group managed $1.9 billion of loans and $2.1 billion of
deposits.
Average net loans of $2.0 billion and average deposits of $3.2 billion in the
first nine months of 1997 were managed by the Capital Management Group,
primarily in our Private Client Group. The Capital Management Group accounted
for $587 million, or 17 percent, of the corporation's noninterest expense in the
first nine months of 1997.
COMMERCIAL BANK
The Commercial Bank offers a variety of lending, commercial deposit and cash
management products and services to corporate, middle-market, commercial and
small business customers. The commercial loan portfolio includes general
commercial loans, both secured and unsecured, and commercial real estate loans.
Commercial loans are typically either working capital loans, which are used to
finance the inventory, receivables and other working capital needs of commercial
borrowers, or term loans, which are typically used to finance fixed assets or
acquisitions. Commercial real estate loans typically are used to finance the
construction or purchase of commercial real estate.
Our commercial lenders focus principally on middle-market companies, which we
believe reduces the risk of credit loss from any single borrower or group of
borrowers. A majority of our commercial loans are for less than $10 million.
Consistent with our longtime standard, we generally look for two repayment
sources for commercial real estate loans: cash flows from the project and other
resources of the borrower.
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The Commercial Bank generated $1.1 billion, or 27 percent, of the corporation's
net interest income in the first nine months of 1997. The Commercial Bank had
noninterest income of $199 million in the first nine months of 1997, of which 80
percent was generated from cash management products and services. Cash
management fee income was $162 million in the first nine months of 1997.
Nineteen percent of the corporation's noninterest expense in the first nine
months of 1997 was attributable to the Commercial Bank.
Twenty-eight percent of the corporation's average net loans, or $26.9 billion,
and 19 percent of the corporation's average deposits, or $17.3 billion, were
managed by the Commercial Bank in the first nine months of 1997. Net charge-offs
attributable to the Commercial Bank in the first nine months of 1997 amounted to
$25 million, or 0.12 percent of average net loans on an annualized basis.
Small Business Banking continues to be a growth line in the commercial bank.
Small Business Banking loan volumes in the first nine months of 1997 were $919
million and outstandings were $1.4 billion at September 30, 1997.
CAPITAL MARKETS
Our Capital Markets Group provides a full range of investment banking products
and services integrated with our wholesale delivery strategy. Our primary goal
is to provide our middle-market customers with a complete selection of capital
markets products. Capital Markets products and services are a natural extension
of our commercial products such as deposit accounts and cash management
services. Capital Markets segments encompass Traditional Banking (including
international, leveraged finance, specialized industries, specialty finance and
diversified industries); Investment Banking (including asset securitization;
Capital Partners; fixed income sales and trading; high yield debt; investment
grade debt; merger and acquisition advisory services; money market sales and
trading; municipal finance; par and discount loan trading; private finance; loan
syndications; and whole loan conduit); Real Estate Finance (including commercial
real estate securitizations; affordable housing investments; commercial real
estate finance; home equity loan securitizations; income property; and master
servicing); Commercial Leasing and Rail; and Risk Management (including interest
rate derivatives and foreign exchange options).
Key Capital Markets growth areas in the first nine months of 1997 were asset
securitizations, loan syndications, risk management products and international
trade finance. The Capital Markets Group generated 7 percent of the
corporation's net interest income, or $281 million, in the first nine months of
1997. Capital Markets activities contributed noninterest income of $539 million
in the first nine months of 1997. Substantially all of Capital Markets-related
noninterest income was included in sundry income. The Capital Markets Group
accounted for $434 million, or 12 percent, of the corporation's noninterest
expense in the first nine months of 1997. Average net loans were $12.8 billion
and average deposits were $3.7 billion in the first nine months of 1997.
TREASURY/NONBANK SEGMENT
The Treasury/Nonbank segment includes First Union's Central Money Book (CMB) and
certain expenses that are not allocated to the business segments including
goodwill amortization. The CMB is responsible for the management of our
securities portfolios, our overall funding requirements and our asset and
liability management functions. THE SECURITIES AVAILABLE FOR SALE, INVESTMENT
SECURITIES, LIQUIDITY AND FUNDING SOURCES and INTEREST RATE RISK MANAGEMENT
sections provide information about our securities portfolios, funding sources
and asset and liability management functions.
Additionally the Treasury/Nonbank segment includes amortization expense and
capital not allocated to business segments related to other intangible assets
(excluding deposit base premium and mortgage and other servicing assets) and
charges that are unusual and infrequent, including merger-related restructuring
charges. Other intangibles amortization in the first nine months of 1997
(excluding deposit base premium and mortgage servicing assets) was $110 million.
Intangibles amortization relates to goodwill and other intangibles that result
from purchase accounting acquisitions.
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RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
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NET INTEREST INCOME
Tax-equivalent net interest income increased 6 percent to $4.0 billion in the
first nine months of 1997 from $3.8 billion in the first nine months of 1996.
The increase in tax-equivalent net interest income was primarily the result of
loan activity, increased securities holdings and the previously mentioned fourth
quarter 1996 purchase accounting acquisitions.
Nonperforming loans reduce interest income because the contribution from these
loans is eliminated or sharply reduced. In the first nine months of 1997, $33
million in gross interest income would have been recorded if all nonaccrual and
restructured loans had been current in accordance with their original terms and
if they had been outstanding throughout the period (or since origination if held
for part of the period). The amount of interest income related to these assets
and included in income in the first nine months of 1997 was $6 million.
NET INTEREST MARGIN
The net interest margin, which is the difference between the tax-equivalent
yield on earning assets and the rate paid on funds to support those assets, was
4.36 percent in the first nine months of 1997 compared with 4.21 percent in the
first nine months of 1996. The margin increase in the first nine months of 1997
was primarily a result of an increase in higher-yielding assets. The average
rate earned on earning assets was 8.25 percent in the first nine months of 1997
and 8.03 percent in the first nine months of 1996. The average rate paid on
interest-bearing liabilities was 4.48 percent in the first nine months of 1997
and 4.37 percent in the first nine months of 1996. It should be noted that the
margin is not our primary management focus or goal. Our goal is to increase net
interest income.
We use securities and off-balance sheet transactions to manage interest rate
sensitivity. More information on these transactions is included in the INTEREST
RATE RISK MANAGEMENT section.
NONINTEREST INCOME
We are meeting the challenges of increasing competition, changing customer
demands and demographic shifts by making discretionary investments to enhance
revenue growth. We have significantly broadened our product lines, particularly
in the Capital Markets and Capital Management Groups, to provide additional
sources of fee income that complement our long-standing banking products and
services. These investments were reflected in a 37 percent increase in
noninterest income, excluding investment securities transactions, to $2.3
billion in the first nine months of 1997 from $1.6 billion in the first nine
months of 1996.
Virtually all categories of noninterest income increased in the first nine
months of 1997 from the first nine months a year ago. Fee income from Capital
Management and Capital Markets activities made up more than half of total
noninterest income in the first nine months of 1997. These two groups are
discussed further in the BUSINESS SEGMENTS section. Gains of $98 million from
the sale of ARMs and student loans also were reflected in the first nine months
of 1997. Service charges on deposit accounts increased 18 percent from the first
nine months of 1996, reflecting the fourth quarter 1996 purchase accounting
acquisitions.
TRADING ACTIVITIES
Our Capital Markets Group also makes a key contribution to noninterest income
through trading profits. Trading activities are undertaken primarily to satisfy
the investment and risk management needs of our customers and secondarily to
enhance our earnings through profitable trading for the corporation's own
account. Market making and position taking activities across a wide array of
financial instruments add to our ability to optimally serve our customers.
Trading profits were
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$96 million in the first nine months of 1997 compared with
$52 million in the first nine months of 1996. The increase was largely related
to asset securitization activity and to increased customer transactions. Trading
account assets were $7.5 billion at September 30, 1997, compared with $3.9
billion at year-end 1996.
NONINTEREST EXPENSE
Noninterest expense was $3.5 billion in the first nine months of 1997 compared
with $3.6 billion in the first nine months of 1996 (which included the
merger-related restructuring charges of $281 million pre-tax and the SAIF
special assessment of $133 million pre-tax). The increase from 1996 largely was
the result of the incremental impact of the fourth quarter 1996 purchase
accounting acquisitions and expenses associated with our capital securities
issues. More information on these capital securities is in the GUARANTEED
PREFERRED BENEFICIAL INTERESTS section.
The increases in various categories of noninterest expense reflect our continued
investments in fee-income generating businesses such as those managed by the
Capital Management and the Capital Markets Groups, in which expenses move more
in tandem with revenues, and in technology and retail branch transformation. Our
overhead efficiency ratio continued to improve even while we increased our
discretionary investments. This ratio was 56 percent in the first nine months of
1997, an improvement from 57 percent in the first nine months of 1996. These
ratios exclude amounts related to the capital securities issues, merger-related
restructuring charges and SAIF.
Amortization of other intangible assets predominantly represents the
amortization of goodwill and deposit base premium related to purchase accounting
acquisitions. These intangibles are amortized over periods ranging from six to
25 years. Amortization is a noncash charge to income; therefore, liquidity and
funds management activities are not affected. We had $2.7 billion in other
intangible assets at September 30, 1997, compared with $2.8 billion at December
31, 1996. Costs related to environmental matters were not material.
First Union currently estimates the cumulative expenses related to adapting its
computer systems to be year 2000 compliant will be between $42 million and $45
million pre-tax (which excludes any such expenses related to potential future
acquisitions.). We expect to have all systems and applications in place and
fully tested by the end of 1998, allowing time in 1999 for any systems
refinements that may be needed. First Union began addressing the issue in
February 1996 by assembling a corporate project team and by engaging a leading
technology firm to begin an initial assessment of the scope of the project. We
determined early on that our common systems platform and the fact that our
Emerald deposit system and essentially all of our Capital Markets systems are
already year 2000 compliant would help minimize expenses related to the year
2000 project. This year, we are analyzing our computer hardware platforms and
software programs; reviewing pre-printed forms, checks and other documents; and
evaluating infrastructure such as phone systems, ATMs, office equipment such as
fax machines, pagers and copiers, and conducting other pilot implementations. We
also are monitoring the efforts of First Union's outside vendors and the needs
of customers.
BALANCE SHEET REVIEW
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SECURITIES AVAILABLE FOR SALE
The available for sale portfolio consists of U.S. Treasury, municipal and
mortgage-backed and asset-backed securities as well as collateralized mortgage
obligations, corporate, foreign and equity securities. Securities available for
sale transactions resulted in gains of $12 million in the first nine months of
1997 and $20 million in the first nine months of 1996.
At September 30, 1997, we had securities available for sale with a market value
of $16.7 billion compared with $14.2 billion at year-end 1996. The market value
of securities available for sale was $235 million above amortized cost at
September 30, 1997. Activity in this portfolio is un-
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dertaken primarily to manage interest rate risk and occasionally to take
advantage of current market conditions that provide returns on these investments
that are more economically attractive than those attainable from alternative
capital allocation choices.
The average rate earned on securities available for sale in the first nine
months of 1997 was 6.89 percent compared with 6.57 percent in the first nine
months of 1996. The average maturity of the portfolio was 6.13 years at
September 30, 1997.
INVESTMENT SECURITIES
The investment securities portfolio consists of U.S. Government agency,
corporate, municipal and mortgage-backed securities, and collateralized mortgage
obligations. Our investment securities amounted to $2.3 billion at September 30,
1997, and $2.5 billion at December 31, 1996.
The average rate earned on investment securities was 8.62 percent in the first
nine months of 1997 and 8.68 percent in the first nine months of 1996. The
average maturity of the portfolio was 5.85 years at September 30, 1997.
LOANS
The loan portfolio, which represents our largest asset class, is a significant
source of interest and fee income. Elements of the loan portfolio are subject to
differing levels of credit and interest rate risk. Our lending strategy stresses
quality growth, diversified by product, geography and industry. A common credit
underwriting structure is in place throughout the corporation.
The loan portfolio at September 30, 1997, was composed of 45 percent in
commercial loans and 55 percent in consumer loans. The portfolio mix did not
change significantly from year-end 1996.
Net loans at September 30, 1997, were $94.9 billion compared with $95.9 billion
at December 31, 1996. Average net loans were $94.6 billion in the first nine
months of 1997 and $89.9 billion in the first nine months of 1996. The increase
in average loans was primarily attributable to the fourth quarter 1996 purchase
accounting acquisitions and growth in both our consumer and Capital Markets
portfolios. These increases were offset by the securitization and sale of ARMs
and student loans in the first nine months of 1997.
At September 30, 1997, unused loan commitments related to commercial and
consumer loans were $33.8 billion and $21.2 billion, respectively. Commercial
and standby letters of credit were $5.7 billion at September 30, 1997. At
September 30, 1997, loan participations sold to other lenders amounted to $903
million. They were recorded as a reduction of gross loans.
The average rate earned on loans was 8.73 percent in the first nine months of
1997 compared with 8.55 percent in the first nine months of 1996. Factors
contributing to the increase in the rate on loans included a reduction in
lower-yielding mortgage loans, the upward repricing of credit cards loans and
growth in high-yielding leveraged leases. The reduction in mortgage loans
resulted from the sale of $1.1 billion of ARMs in the first quarter of 1997 and
$358 million of ARMs in the third quarter of 1997. In addition natural runoff
from our existing mortgage portfolio exceeded the balance of loans we chose to
retain. The improvement in the yield on credit cards reflected the repricing of
loans originated with lower introductory rates and the targeted repricing of
certain accounts to improve overall profitability. The reduction in installment
loans-other was attributable to the securitization and sale of $406 million in
student loans.
The ASSET QUALITY section provides information about geographic exposure in the
loan portfolio.
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COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans amounted to 11 percent of the total portfolio at
September 30, 1997, and 12 percent at December 31, 1996. This portfolio included
commercial real estate mortgage loans of $8.7 billion at September 30, 1997,
compared with $9.5 billion at December 31, 1996.
ASSET QUALITY
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NONPERFORMING ASSETS
At September 30, 1997, nonperforming assets were $704 million, or 0.74 percent
of net loans and foreclosed properties, compared with $763 million, or 0.80
percent, at December 31, 1996.
Loans or properties of less than $5 million each made up 86 percent, or $605
million, of nonperforming assets at September 30, 1997. Of the rest:
Four loans or properties between $5 million and $10 million each
accounted for $33 million; and
Five loans or properties over $10 million each accounted for $66
million.
Fifty-two percent of nonperforming assets were collateralized primarily by real
estate at September 30, 1997, and 54 percent at year-end 1996.
PAST DUE LOANS
Accruing loans 90 days past due were $229 million at September 30, 1997,
compared with $290 million at December 31, 1996. Of the past dues, $16 million
were related to commercial and commercial real estate loans and $213 million
were related to consumer loans. At September 30, 1997, we were closely
monitoring certain loans for which borrowers were experiencing increased levels
of financial stress. None of these loans were included in nonperforming assets
or in accruing loans past due 90 days, and the aggregate amount of these loans
was not significant.
NET CHARGE-OFFS
Net charge-offs amounted to $460 million in the first nine months of 1997
compared with $394 million in the first nine months of 1996, and in the third
quarter of 1997, $155 million compared with $161 million in the second quarter
of 1997 and $144 million in the third quarter of 1996. Annualized net
charge-offs were 0.65 percent of average net loans in the first nine months of
1997 compared with 0.58 percent in the first nine months of 1996, and in the
third quarter of 1997, 0.66 percent compared with 0.68 percent in the second
quarter of 1997 and 0.64 percent in the third quarter of 1996. Excluding net
charge-offs related to the credit card portfolio, annualized third quarter 1997
net charge-offs were 0.23 percent compared with 0.23 percent in the second
quarter of 1997 and 0.28 percent in the third quarter of 1996. At September 30,
1997, the owned credit card portfolio represented 5 percent of the loan
portfolio.
We do not believe that the higher levels of net charge-offs in the credit card
portfolio are indicative of any significant deterioration in the credit quality
of the total loan portfolio. We are carefully monitoring trends in both the
commercial and consumer loan portfolios for signs of credit weakness.
Additionally we have evaluated our credit policies in light of changing economic
trends, and we have taken appropriate steps where necessary. All of these steps
have been taken with the goals of minimizing future credit losses and
deterioration and of allowing for maximum profitability.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The loan loss provision was $465 million in the first nine months of 1997
compared with $255 million in the first nine months of 1996, and in the third
quarter of 1997, $155 million compared with $165 million in the second quarter
of 1997 and $105 million in the third quarter of 1996. The in-
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crease in the loan loss provision was based primarily on current economic
conditions and the increase in net charge-offs related to the level of consumer
bankruptcies, an industry-wide trend that is reflected as well in our credit
card portfolio.
The allowance for loan losses was $1.4 billion at September 30, 1997, and at
December 31, 1996. We establish reserves based on various factors, including the
results of quantitative analyses of the quality of commercial loans and
commercial real estate loans. Reserves for commercial and commercial real estate
loans are based principally on loan grades, historical loss rates, borrowers'
creditworthiness, underlying cash flows from the project and from the borrowers,
and analysis of other less quantifiable factors that might influence the
portfolio. We analyze all loans in excess of $1 million that are being monitored
as potential credit problems to determine whether supplemental, specific
reserves are necessary. Reserves for all consumer loans are based principally on
delinquencies and historical and projected loss rates.
At September 30, 1997, impaired loans, which are included in nonaccrual loans,
amounted to $273 million compared with $347 million at December 31, 1996. A loan
is considered to be impaired when, based on current information, it is probable
that we will not receive all amounts due in accordance with the contractual
terms of a loan agreement. Included in the allowance for loan losses at
September 30, 1997, was $42 million related to $176 million of impaired loans.
The remaining impaired loans were recorded at or below fair value. In the first
nine months of 1997, the average recorded investment in impaired loans was $317
million, and $16 million of interest income was recognized on loans while they
were impaired. All of this income was recognized using a cash-basis method of
accounting.
GEOGRAPHIC EXPOSURE
The loan portfolio in the East Coast region of the United States is spread
primarily across 82 metropolitan statistical areas with diverse economies.
Atlanta, Georgia; Charlotte, North Carolina; Miami and Jacksonville, Florida;
Newark, New Jersey; New York, New York; Philadelphia, Pennsylvania; and
Washington, D.C., are our largest markets. Substantially all of the $11.0
billion commercial real estate portfolio at September 30, 1997, was located in
our East Coast banking region.
LIQUIDITY AND FUNDING SOURCES
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Liquidity planning and management are necessary to ensure we maintain the
ability to fund operations cost-effectively and to meet current and future
obligations such as loan commitments and deposit outflows. In this process we
focus on both assets and liabilities and on the manner in which they combine to
provide adequate liquidity to meet the corporation's needs.
Funding sources primarily include customer-based core deposits but also include
purchased funds and cash flows from operations. First Union is one of the
nation's largest core deposit-funded banking institutions. Our large consumer
deposit base, which is spread across the economically strong South Atlantic
region and high per-capita income Middle Atlantic region, creates considerable
funding diversity and stability.
Asset liquidity is maintained through maturity management and through our
ability to liquidate assets, primarily securities held for sale. Another
significant source of asset liquidity is the ability to securitize assets such
as credit card receivables and auto, home equity, student and mortgage loans.
Other off-balance sheet sources of liquidity exist as well, including a mortgage
servicing portfolio for which the estimated fair value exceeded book value by
$88 million at September 30, 1997.
CORE DEPOSITS
Core deposits are a fundamental and cost-effective source of funding. Core
deposits include savings, negotiable order of withdrawal (NOW), money market,
noninterest-bearing and other consumer time deposits. Core deposits were $87.9
billion at September 30, 1997, compared
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with $90.1 billion at December 31, 1996. The decline largely reflected runoff
that is typical following acquisitions, in addition to customers' movement into
investment products.
The portion of core deposits in higher-rate, other consumer time deposits was 32
percent at September 30, 1997, and 35 percent at year-end 1996. Other consumer
time and other noncore deposits usually pay higher rates than savings and
transaction accounts, but they generally are not available for immediate
withdrawal, and they are less expensive to process.
Average core deposit balances were $87.0 billion in the first nine months of
1997 and $85.8 billion in the first nine months of 1996. In the first nine
months of 1997 and first nine months of 1996, average noninterest-bearing
deposits were 20 percent and 19 percent, respectively, of average core deposits.
Average balances in savings and NOW, and noninterest-bearing deposits were
higher when compared with the first nine months of 1996, while money market and
other consumer time deposits were lower. Deposits can be affected by branch
closings or consolidations, seasonal factors and the rates being offered
compared to other investment opportunities. The NET INTEREST INCOME SUMMARIES
provide additional information about average core deposits.
PURCHASED FUNDS
Purchased funds at September 30, 1997, were $31.4 billion compared with $27.8
billion at year-end 1996, largely reflecting funding needs related to the
increased securities available for sale portfolio, growth in loan balances and
the decrease in core deposits. Average purchased funds in the first nine months
of 1997 were $29.8 billion compared with $28.7 billion in the first nine months
of 1996. Purchased funds are acquired primarily through (i) our large branch
network, consisting principally of $100,000 and over certificates of deposit,
public funds and treasury deposits, and (ii) national market sources, consisting
of relatively short-term funding sources such as federal funds, securities sold
under repurchase agreements, eurodollar time deposits, short-term bank notes and
commercial paper, and longer-term funding sources such as term bank notes,
Federal Home Loan Bank borrowings and corporate notes.
CASH FLOWS
Cash flows from operations are a significant source of liquidity. Net cash
provided from operations primarily results from net income adjusted for the
following noncash accounting items: the provisions for loan losses and
foreclosed properties; and depreciation and amortization. This cash was
available in the first nine months of 1997 to increase earning assets, to
repurchase stock, to make discretionary investments, and to reduce borrowings.
LONG-TERM DEBT
Long-term debt was 73 percent of total stockholders' equity at September 30,
1997, compared with 77 percent at year-end 1996.
Under a shelf registration statement filed with the Securities and Exchange
Commission, we currently have available for issuance $2.4 billion of senior or
subordinated debt securities, common stock or preferred stock. The sale of any
additional debt or equity securities will depend on future market conditions,
funding needs and other factors.
DEBT OBLIGATIONS
We have a $350 million, committed back-up line of credit that expires in
December 1998. This credit facility contains financial covenants that require
First Union to maintain a minimum level of tangible net worth, restrict double
leverage ratios and require capital levels at subsidiary banks to meet
regulatory standards. First Union has not used this line of credit. During the
rest of 1997 $134 million of long-term debt will mature. Funds for the payment
of long-term debt will come from operations or, if necessary, additional
borrowings.
14
<PAGE>
GUARANTEED PREFERRED BENEFICIAL INTERESTS
In January 1997 we issued $495 million of trust capital securities. As a result,
$990 million of capital securities were outstanding as of September 30, 1997. A
subsidiary trust of the corporation issued these capital securities, and the
corporation received the proceeds by issuing junior subordinated debentures to
the trust. These capital securities are considered tier 1 capital for regulatory
purposes. Expenses related to the issuance of capital securities is included in
sundry expense.
STOCKHOLDERS' EQUITY
The management of capital in a regulated banking environment requires a balance
between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Total stockholders' equity was $10.7 billion at September 30, 1997, and $10.0
billion at December 31, 1996. Common shares outstanding amounted to 568 million
at September 30, 1997, compared with 575 million at December 31, 1996. In the
first nine months of 1997, we repurchased 24 million shares of our common stock
at a cost of $1.0 billion, pursuant to a standing board of directors'
authorization to repurchase up to 50 million shares of common stock. The board
of directors authorized the rescinding of this stock buyback upon consummation
of the Signet merger. As previously mentioned, the corporation issued 7.5
million shares of common stock in the third quarter of 1997, which added $358
million to stockholders' equity. The OUTLOOK section provides additional
information about the sale of common stock.
We paid $508 million in dividends to common stockholders in the first nine
months of 1997, compared with $449 million in the first nine months of 1996.
At September 30, 1997, stockholders' equity was increased by a $146 million
unrealized after-tax gain related to debt and equity securities. The SECURITIES
AVAILABLE FOR SALE section provides additional information about debt and equity
securities.
SUBSIDIARY DIVIDENDS
Our banking subsidiaries are the largest source of parent company dividends.
Capital requirements established by regulators limit dividends that these and
certain other of our subsidiaries can pay. Banking regulators generally limit a
bank's dividends in two principal ways: first, dividends cannot exceed the
bank's undivided profits, less statutory bad debt in excess of a bank's
allowance for loan losses; and second, in any year dividends may not exceed a
bank's net profits for that year, plus its retained earnings from the preceding
two years, less any required transfers to surplus. Under these and other
limitations, which include an internal requirement to maintain all
deposit-taking banks at the well capitalized level, our subsidiaries had $880
million available for dividends at September 30, 1997, without prior regulatory
approval. Our subsidiaries paid $896 million in dividends to the parent company
in the first nine months of 1997. In addition the consolidation of our banks in
our southern region and Connecticut into the North Carolina bank resulted in a
reduction of capital of $835 million, which was paid to the parent company.
REGULATORY CAPITAL
Federal banking regulations require that bank holding companies and their
subsidiary banks maintain minimum levels of capital. These banking regulations
measure capital using three formulas relating to tier 1 capital, total capital
and leverage capital. The minimum level for the ratio of total capital to
risk-weighted assets (including certain off-balance sheet financial instruments,
such as standby letters of credit and interest rate swaps) is currently 8
percent. At least half of total capital is to be composed of common equity,
retained earnings and a limited amount of qualifying preferred stock, less
certain intangible assets (tier 1 capital). The rest may consist of a limited
amount of subordinated debt, nonqualifying preferred stock and a limited amount
of the
15
<PAGE>
loan loss allowance (together with tier 1 capital, total capital). At September
30, 1997, the tier 1 and total capital ratios were 8.18 percent and 13.72
percent, respectively, compared with 7.33 percent and 12.33 percent at December
31, 1996.
In addition the Federal Reserve Board has established minimum leverage ratio
requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet specified criteria,
including having the highest regulatory rating. All other bank holding companies
are generally required to maintain a leverage ratio of at least 4 to 5 percent.
The leverage ratio at September 30, 1997, was 6.53 percent and at December 31,
1996, it was 6.13 percent.
The requirements also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve Board has indicated it will
continue to consider a tangible tier 1 leverage ratio (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve Board has not advised us of any specific minimum leverage ratio
applicable to us.
Each subsidiary bank is subject to similar capital requirements. None of our
subsidiary banks has been advised of any specific minimum capital ratios
applicable to it.
The regulatory agencies also have adopted regulations establishing capital tiers
for banks. Banks in the highest capital tier, or well capitalized, must have a
leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a total
capital ratio of 10 percent. At September 30, 1997, our deposit-taking
subsidiary banks met the capital and leverage ratio requirements for well
capitalized banks. We expect to maintain these ratios at the required levels by
the retention of earnings and, if necessary, the issuance of additional capital.
Failure to meet certain capital ratio or leverage ratio requirements could
subject a bank to a variety of enforcement remedies, including termination of
deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union
Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking
banks.
The ACCOUNTING AND REGULATORY MATTERS section provides more information about
proposed changes in risk-based capital standards. The OUTLOOK and the ACCOUNTING
AND REGULATORY MATTERS Sections provide additional information about the
consolidation of our regional banks.
INTEREST RATE RISK MANAGEMENT
- ------------------------------------------------------------------------------
Managing interest rate risk is fundamental to banking. The inherent maturity and
repricing characteristics of our day-to-day lending and deposit-activities
create a naturally asset-sensitive structure. By using a combination of on- and
off-balance sheet financial instruments, we manage the sensitivity of earnings
to changes in interest rates within our established policy guidelines.
The Credit/Market Risk Committee of the corporation's board of directors reviews
overall interest rate risk management activity. The Funds Management Committee
of the corporation oversees the interest rate risk management process and
approves policy guidelines. Balance sheet management and finance personnel
monitor the day-to-day exposure to changes in interest rates in response to loan
and deposit flows. They make adjustments within established policy guidelines.
This year we modified our methodology for measuring exposure to interest rate
risk for policy measurement. This change in methodology is intended to ensure we
include a sufficiently broad range of rate scenarios and pattern of rate
movements that we believe to be reasonably possible. The fundamental difference
between our previous and our new methodologies is in the absolute amount of
change in interest rates we incorporate in our alternative scenarios and the
rapidity with which these rate changes occur. Previously we measured the impact
of which 100 basis point rate changes over a three-month period had on earnings
per share over the subsequent 12 months. Our new methodology uses 200 basis
point changes over a 12-month period. We retained our 5 percent policy limit
described below because our change in methodology was in-
15
<PAGE>
tended to focus on the pattern of rate change rather than on the average amount
of change in rates between the two methodologies.
We use two separate measures that each include three standard scenarios in
analyzing interest rate sensitivity for policy measurement. Each of these
measures compares our forecasted earnings per share in both a "high rate" and
"low rate" scenario to a base-line scenario. The base-line scenario is our
estimated most likely path for future short-term interest rates over the next 24
months. The second base-line scenario holds rates flat at their current level
over our forecast horizon. The "high rate" and "low rate" scenarios assume
gradual 200 basis point increases or decreases in the federal funds rate from
the beginning point of each base-line scenario over the most current 12-month
period. Our policy limit for the maximum negative impact on earnings per share
resulting from high rate or low rate scenarios is 5 percent. The policy limit
applies to both the "most likely" rate scenario and the flat rate scenario. The
policy measurement period is 12 months in length, beginning with the first month
of the forecast.
Our October 1997 estimate for future short-term interest rates includes an
average federal funds rate rising from 5.62 percent in November 1997 to 5.75
percent by September 1998, then declining to 5.66 percent by December 1998. Our
flat rate scenario holds the federal funds rate at 5.50 percent over this same
horizon. Based on the October outlook, if interest rates were to rise 200 basis
points above the estimated "most likely" rate scenario (i.e. follow the high
rate scenario), the model indicates that earnings during the policy measurement
period would be negatively affected by 1.4 percent. Our model indicates that
earnings would benefit by 0.9 percent in our low-rate scenario (i.e., a 200
basis point decline in short-term rates from our "most likely" scenario). Our
model indicates that a 200 basis point rise in rates from a flat rate scenario
is less detrimental than the same rise from our most likely scenario.
In addition to the three standard scenarios used to analyze rate sensitivity
over the policy measurement period, we regularly analyze the potential impact of
other remote, more extreme interest rate scenarios and time periods. These
alternate "what-if" scenarios may include interest rate paths both higher, lower
and more volatile than those used for policy measurement and extend to periods
beyond the policy measurement period.
While our interest rate sensitivity modeling assumes that management takes no
action, we regularly assess the viability of strategies to reduce unacceptable
risks to earnings and implement such strategies when we believe those actions
are prudent. As new monthly outlooks become available, management will continue
to formulate strategies to protect earnings from the potential negative effects
of changes in interest rates.
OFF-BALANCE SHEET DERIVATIVES FOR INTEREST RATE RISK MANAGEMENT
As part of our overall interest rate risk management strategy, for many years we
have used off-balance sheet derivatives as a cost- and capital-efficient way to
modify the repricing or maturity characteristics of on-balance sheet assets and
liabilities. Our off-balance sheet derivative transactions used for interest
rate sensitivity management include interest rate swaps, futures and options
with indices that relate to the pricing of specific financial instruments of the
corporation. We believe we have appropriately controlled the risk so that
derivatives used for rate sensitivity management will not have any significant
unintended effect on corporate earnings. As a matter of policy we do not use
highly leveraged derivative instruments for interest rate risk management. The
impact of derivative products on our earnings and rate sensitivity is fully
incorporated in the earnings simulation model in the same manner as on-balance
sheet instruments.
Our overall goal is to manage our rate sensitivity such that earnings are not
adversely affected materially whether rates go up or down. As a result of
interest rate fluctuations, off-balance sheet transactions (and securities) will
from time to time develop unrealized appreciation or depreciation in market
value when compared with their cost. The impact on net interest income
attributable to these off-balance sheet transactions, all of which are linked to
specific financial instruments as part of our overall interest rate risk
management strategy, will generally be off-
17
<PAGE>
set by net interest income from on-balance sheet assets and liabilities. The
important consideration is not the shifting of unrealized appreciation or
depreciation between and among on- and off-balance sheet instruments, but the
prudent management of interest rate sensitivity so that corporate earnings are
not unduly at risk as interest rates move up or down.
Despite significant year-to-year fluctuations in the market value of both on-
and off-balance sheet positions and related fluctuations in net interest income
contribution from these positions, tax-equivalent net interest income continued
to increase. This is the outcome we strive to achieve in using portfolio
securities and off-balance sheet products to balance the income effects of core
loans and deposits from changing interest rate environments.
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $280 million at
September 30, 1997, compared with fair value appreciation of $188 million at
December 31, 1996.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. The amount of deferred gains and losses was $9 million and $11
million, respectively, at September 30, 1997. Net losses of $11 million will
reduce net interest income in 1997, and gains of $9 million will increase net
interest income in 1998.
Although off-balance sheet derivative financial instruments do not expose the
corporation to credit risk equal to the notional amount, we are exposed to
credit risk equal to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize the credit risk in these instruments by dealing only with high-quality
counterparties. Each transaction is specifically approved for applicable credit
exposure.
In addition our policy is to require that all swaps and options be governed by
an International Swaps and Derivatives Association Master Agreement. Bilateral
collateral arrangements are in place for substantially all dealer counterparties
used in our Asset/Liability Management activities. Derivative collateral
arrangements for dealer transactions and trading activities are based on
established thresholds of acceptable credit risk by counterparty. Thresholds are
determined based on the strength of the individual counterparty, and they are
bilateral. As of September 30, 1997, the total credit risk in excess of
thresholds was $181 million. The fair value of collateral held was 111 percent
of the total credit risk in excess of thresholds. For nondealer transactions the
need for collateral is evaluated on an individual transaction basis, and it is
primarily dependent on the financial strength of the counterparty.
ACCOUNTING AND REGULATORY MATTERS
- ------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," establishes standards and disclosure
requirements for the way companies report information about operating segments,
including related product information, both in annual and interim reports issued
to stockholders. Operating segments are components of a company about which
separate financial information is available and which are used in determining
resource allocations and performance results. Information such as segment net
earnings, appropriate revenue and expense items and certain balance sheet items
are required to be presented, and such amounts are required to be reconciled to
the company's combined financial information. Certain information related to
this Standard is included in the BUSINESS SEGMENTS section. The corporation will
assess the methodologies and reporting for compliance with the Standard. This
Standard is effective for financial statements issued for periods ending after
December 31, 1997, including interim periods.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for the reporting and the presentation of
comprehensive income, which is divided into net income and other comprehensive
income. Other comprehensive income items are to be classified by their nature
and by their related accumulated balances in the appropriate financial
18
<PAGE>
statements of a company. Generally, other comprehensive income includes
transactions not typically recorded as a component of net income such as foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain debt and equity securities. This Standard requires that such
items be presented with equal prominence on a comparative basis in the
appropriate financial statements for fiscal years beginning after December 15,
1997.
Statement of Financial Accounting Standards No. 128,"Earnings per Share,"
establishes standards for computing and presenting earnings per share ("EPS").
This Standard replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the statement of income for entities with complex capital structures,
and it requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution, and it is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
This Standard is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Standard requires restatement of all prior-period EPS data
presented. Currently, the difference between the Corporation's basic and fully
diluted EPS is less than three percent.
Statement of Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," as
amended, (i) sets forth the criteria for (a) determining when to recognize
financial and servicing assets and liabilities; and (b) accounting for transfers
of financial assets as sales or borrowings; and (ii) requires (a) liabilities
and derivatives related to a transfer of financial assets to be recorded at fair
value; (b) servicing assets and retained interests in transferred assets
carrying amounts be determined by allocating carrying amounts based on fair
value; (c) amortization of servicing assets and liabilities be in proportion to
net servicing income; (d) impairment measurement be based on fair value; and
(e) pledged financial assets be classified as collateral. This Standard
provides implementation guidance for assessing isolation of transferred assets
and for accounting for transfers of partial interests, servicing of financial
assets, securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements including
dollar rolls, wash sales, loan syndications and participations, risk
participations in banker's acceptances, factoring arrangements, transfers of
receivables with recourse and extinguishments of liabilities.
This Standard is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, except that
the Standard will be effective for transfers of financial assets and
transactions related to repurchase agreements, dollar rolls, securities lending
and the like, occurring after December 31, 1997, and it is to be applied
prospectively. The corporation adopted the appropriate provisions of the
Standard on January 1, 1997, and they have not been material. The effect of the
adoption of the remainder of the provisions on January 1, 1998, is not expected
to be material to the corporation.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA), among other provisions, imposes liability on a bank insured by the
FDIC for certain obligations to the FDIC incurred in connection with other
insured banks under common control with such bank.
The Federal Deposit Insurance Corporation Improvement Act, among other things,
requires a revision of risk-based capital standards. The new standards are
required to incorporate interest rate risk, concentration of credit risk and the
risks of nontraditional activities and to reflect the actual performance and
expected risk of loss of multifamily mortgages. The RISK-BASED CAPITAL section
provides information on risk assessment classifications.
19
<PAGE>
Legislation has been enacted providing that deposits and certain claims for
administrative expenses and employee compensation against an insured depository
institution would be afforded a priority over other general unsecured claims
against such an institution, including federal funds and letters of credit, in
the liquidation or other resolution of such an institution by any receiver.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA)
authorized interstate acquisitions of banks and bank holding companies without
geographic limitation beginning September 27, 1995. Beginning June 1, 1997, a
bank may merge with a bank in another state as long as neither of the states opt
out of interstate branching between the date of enactment of IBBEA and May 31,
1997. IBBEA further provides that a state may enact laws permitting interstate
merger transactions before June 1, 1997. Certain states in which First Union
conducts banking operations have enacted such legislation. Information about
First Union's consolidation under this legislation is in the OUTLOOK section.
Various other legislative and accounting proposals concerning the banking
industry are pending in Congress and with the Financial Accounting Standards
Board, respectively. Given the uncertainty of the proposal process, we cannot
assess the impact of any such proposals on our financial condition or results of
operations.
20
<PAGE>
TABLE 1
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWELVE 1997 1996
MONTHS ---------------------------- ----------------
ENDED
SEPT. 30, THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income $ 9,991 2,579 2,559 2,418 2,435 2,423
------- ------ ------- -------- ------ -------
Interest income (a) $ 10,057 2,595 2,576 2,434 2,452 2,440
Interest expense 4,766 1,236 1,219 1,131 1,180 1,158
------- ------------------------------------------------
Net interest income (a) 5,291 1,359 1,357 1,303 1,272 1,282
Provision for loan losses 585 155 165 145 120 105
------- ----------------------------------------------
Net interest income after provision for loan losses (a) 4,706 1,204 1,192 1,158 1,152 1,177
Securities available for sale transactions 23 3 5 4 11 2
Investment security transactions 4 2 1 -- 1 --
Noninterest income 2,935 764 749 749 673 598
SAIF special assessment (b) -- -- -- -- -- 133
Noninterest expense 4,642 1,178 1,182 1,169 1,113 1,078
--------- ------------------------------------------------
Income before income taxes (a) 3,026 795 765 742 724 566
Income taxes 1,039 274 263 255 247 192
Tax-equivalent adjustment 66 16 17 16 17 17
-------- ------------------------------------------------
Net income 1,921 505 485 471 460 357
Dividends on preferred stock 1 -- -- -- 1 1
-------------------------------------------------------------
Net income applicable to common stockholders $ 1,920 505 485 471 459 356
-------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 3.42 0.90 0.87 0.83 0.82 0.65
Cash dividends $ 1.19 0.32 0.29 0.29 0.29 0.29
Average common shares (IN THOUSANDS) -- 561,595 560,900 565,106 556,595 548,002
Average common stockholders' equity (c)
Quarter-to-date $ -- 10,128 9,773 9,761 9,314 8,905
Year-to-date -- 9,889 9,767 9,761 9,079 9,000
Common stock price
High 50 11/16 50 11/16 47 7/8 47 3/4 38 1/2 33 7/8
Low 45 7/8 45 7/8 39 1/8 36 5/8 33 1/2 30 1/2
Period-end $50 1/16 50 1/16 46 1/4 40 1/2 37 33 3/8
To earnings ratio (d) 14.64 X 14.64 14.59 13.21 13.86 13.62
To book value 265 % 265 260 240 213 209
Book value $ 18.86 18.86 17.79 16.93 17.41 15.97
BALANCE SHEET DATA
Assets 143,904 143,904 142,942 136,730 140,127 133,882
Long-term debt $ 7,819 7,819 7,258 7,604 7,660 7,332
--------- -------- --------- --------- -------- -------
</TABLE>
(a) Tax-equivalent
(b) The SAIF special assessment amounted to $86 million after tax in the third
quarter of 1996
(c) Quarter-to-date and year-to-date average common stockholders' equity
excludes average net unrealized gains or losses on debt and equity
securities
(d) Based on net income applicable to common stockholders
T-1
<PAGE>
TABLE 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------
1997
-------
THIRD SECOND FIRST
(IN MILLIONS) QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 797 760 734
Provision for loan losses 141 153 136
Noninterest income 296 263 310
Noninterest expense 575 572 567
Income tax expense 137 109 124
------- ------- -------
Net income applicable to common stockholders $ 240 189 217
------- ------- -------
Performance and other data
Return on average attributed common equity (a) 35.79% 28.48 33.21
Average loans, net $51,125 51,711 52,306
Average deposits 66,110 65,726 66,182
Average attributed common equity $ 2,651 2,668 2,645
------- ------- -------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 38 36 37
Provision for loan losses -- -- --
Noninterest income 216 212 209
Noninterest expense 193 197 197
Income tax expense 22 19 18
------- ------- -------
Net income applicable to common stockholders $ 39 32 31
------- ------- -------
Performance and other data
Return on average attributed common equity (a) 32.48% 27.64 26.54
Average loans, net $ 2,151 2,025 1,934
Average deposits 3,189 3,206 3,294
Average attributed common equity $ 471 471 470
------- ------- -------
COMMERCIAL BANK
Income statement data
Net interest income $ 346 360 350
Provision for loan losses 9 8 8
Noninterest income 73 62 64
Noninterest expense 229 228 226
Income tax expense 66 68 66
------- ------- -------
Net income applicable to common stockholders $ 115 118 114
------- ------- -------
Performance and other data
Return on average attributed common equity (a) 20.51% 20.94 20.24
Average loans, net $26,278 27,001 27,281
Average deposits 16,771 17,241 17,776
Average attributed common equity $ 2,226 2,272 2,297
------- ------- -------
(Continued)
T-2
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------
1997
---------------------------------------
THIRD SECOND FIRST
(IN MILLIONS) QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 94 104 83
Provision for loan losses 4 (1) (2)
Noninterest income 167 214 158
Noninterest expense 147 147 140
Income tax expense 40 63 38
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 70 109 65
- ------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 21.40% 34.05 22.73
Average loans, net $ 13,565 13,416 11,525
Average deposits 3,650 3,902 3,557
Average attributed common equity $ 1,298 1,291 1,165
- ------------------------------------------------------------------------------------------------------------
TREASURY/NONBANK
Income statement data
Net interest income $ 68 80 83
Provision for loan losses 1 5 3
Noninterest income 17 4 12
Noninterest expense 34 38 39
Income tax expense 9 4 9
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 41 37 44
- ------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 4.67% 4.83 5.60
Average loans, net $ 883 1,143 1,572
Average deposits 1,597 2,901 1,887
Average attributed common equity $ 3,482 3,071 3,184
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 1,343 1,340 1,287
Provision for loan losses 155 165 145
Noninterest income 769 755 753
Noninterest expense 1,178 1,182 1,169
Income tax expense 274 263 255
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 505 485 471
- ------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 19.78% 19.90 19.58
Average loans, net $ 94,002 95,296 94,618
Average deposits 91,317 92,976 92,696
Average attributed common equity $ 10,128 9,773 9,761
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized. Average attributed common equity excludes average net unrealized
gains or losses on debt and equity securities.
T-3
<PAGE>
TABLE 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 1996
------------------ -------------------------- ------------------
THIRD SECOND FIRST FOURTH THIRD
1997 1996 QUARTER QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 14.00 X 14.69 13.71 14.41 13.90 14.60 15.08
X
Return on assets 1.41 % 1.04 1.43 1.39 1.42 1.35 1.06
------- ----- ----- ----- ----- ----- ------
Return on total stockholders' equity (b) 19.75 % 15.19 19.78 19.90 19.58 19.59 15.83
X
Earnings retained 65.38 % 55.93 64.44 66.67 65.06 64.61 55.78
------- ----- ----- ----- ----- ----- ------
Internal capital growth (b) 12.92 % 8.50 12.75 13.27 12.74 12.66 8.83
------- ----- ----- ----- ----- ----- ------
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 34.62 % 34.76 35.56 33.33 34.94 35.37 35.80
Preferred and common shares 34.62 % 35.06 35.56 33.33 34.94 35.39 35.65
Net income
Common shares 34.62 % 43.78 35.56 33.33 34.94 35.37 44.62
Preferred and common shares 34.62 % 44.07 35.56 33.33 34.94 35.39 44.22
------- ----- ----- ----- ----- ----- ------
Return on common stockholders'
equity (b) (c) 19.75 % 15.30 19.78 19.90 19.58 19.63 15.91
------- ----- ----- ----- ----- ----- ------
</TABLE>
(a) Based on average balances and net income.
(b) The determination of these ratios exclude average net unrealized gains or
losses on debt and equity securities.
(c) Based on average balances and net
income applicable to common stockholders.
TABLE 4
SELECTED QUARTERLY DATA
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---------------------------- -------------------
THIRD SECOND FIRST FOURTH THIRD
(DOLLARS IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 1,043 1,039 838 855 883
Wholesale 981 691 780 356 --
------- ------- ------ ----- --------
Total $ 2,024 1,730 1,618 1,211 883
------- ------- ------ ----- --------
VOLUME OF RESIDENTIAL
LOANS SERVICED $52,032 52,123 51,561 50,762 46,370
------- ------- ------ ----- --------
FIRST UNION CORPORATION
OTHER DATA
ATMs 2,492 2,479 2,441 2,429 2,313
Employees 43,738 43,869 44,450 44,333 45,116
------- ------- ------ ----- --------
</TABLE>
(a) Includes originations of affiliated banks.
T-4
<PAGE>
TABLE 5
SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------------------------
GROSS UNREALIZED AVERAGE
1 YEAR 1-5 5-10 AFTER 10 -----------------AMORTIZED MATURITY
(IN MILLIONS) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES COST IN YEARS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 157 655 1,382 119 2,313 (64) 1 2,250 7.98
U.S. Government agencies 1 2,068 8,995 4 11,068 (150) 4 10,922 6.17
CMOs 17 1,161 -- -- 1,178 (9) 8 1,177 3.51
State, county and municipal -- 1 18 62 81 -- -- 81 17.47
Other 50 1,116 128 756 2,050 (35) 10 2,025 4.30
----- ------ ----- ------ ------ ----- ------ ----- -----
Total $ 225 5,001 10,523 941 16,690 (258) 23 16,455 6.13
----- ------ ----- ------ ------ ----- ------ ----- -------
MARKET VALUE
Debt securities $ 225 5,001 10,523 237 15,986 (240) 22 15,768
Sundry securities -- -- -- 704 704 (18) 1 687
----- ------ ----- ------ ------ ----- ------ ------
Total $ 225 5,001 10,523 941 16,690 (258) 23 16,455
----- ------ ----- ------ ------ ----- ------ -------
AMORTIZED COST
Debt securities $ 225 4,953 10,351 239 15,768
Sundry securities -- -- -- 687 687
----- ------ ----- ------ ------
Total $ 225 4,953 10,351 926 16,455
----- ------ ----- ------ ------
WEIGHTED AVERAGE YIELD
U.S. Treasury 6.02 % 6.16 7.02 7.00 6.70
U.S. Government agencies 4.71 7.12 7.13 6.67 7.13
CMOs 10.90 7.43 -- -- 7.48
State, county and municipal 6.58 6.59 6.46 6.49
Other 6.91 6.06 7.30 6.21 6.21
Consolidated 6.59 % 6.83 7.12 6.33 6.98
----- ------ ----- ------ ------
</TABLE>
Included in "U.S. Government agencies" and "Other" at September 30, 1997, are
$1.2 billion of securities that are denominated in currencies other than the
U.S. dollar. The currency exchange rates were hedged utilizing both on- and
off-balance sheet instruments to minimize the exposure to currency revaluation
risks. At September 30, 1997, these securities had a weighted average maturity
of 3.31 years and a weighted average yield of 5.58 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 7.35
percent based on a weighted average funding cost differential of (1.77) percent.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at September 30, 1997. Average maturity in years
excludes preferred and common stocks and money market funds.
Yields related to securities exempt from both federal and state income taxes,
federal income taxes only or state income taxes only are stated on a fully
tax-equivalent basis. They are reduced by the nondeductible portion of interest
expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent
in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6
percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in
Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5
percent in Connecticut. There were commitments to purchase securities at a cost
of $274 million that had a market value of $274 million at September 30, 1997.
There were commitments to sell securities at a cost of $448 million that had a
market value of $449 million at September 30, 1997. Gross gains and losses from
sales are accounted for on a trade date basis. Gross gains and losses realized
on the sale of debt securities for the nine months ended September 30, 1997,
were $31 million and $38 million, respectively. Gross gains realized on the sale
of sundry securities were $19 million.
T-5
<PAGE>
TABLE 6
INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------------------------------------
AVERAGE
1 YEAR 1-5 5-10 AFTER 10 GROSS UNREALIZED MARKET MATURITY
(IN MILLIONS) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES VALUE IN YEARS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Government agencies $ -- 642 425 1 1,068 26 (1) 1,093 4.99
CMOs 39 358 -- -- 397 9 -- 406 2.90
State, county and municipal 55 188 160 336 739 108 -- 847 8.45
Other -- 17 3 44 64 2 -- 66 9.55
------ ----- ---- ---- ------ ----- ----- ----- -------
Total $ 94 1,205 588 381 2,268 145 (1) 2,412 5.85
------ ----- ---- ---- ------ ----- ----- ----- -------
CARRYING VALUE
Debt securities $ 94 1,205 588 364 2,251 145 (1) 2,395
Sundry securities -- -- -- 17 17 -- -- 17
------ ----- ---- ---- ------ ----- ----- -----
Total $ 94 1,205 588 381 2,268 145 (1) 2,412
------ ----- ---- ---- ------ ----- ----- -----
MARKET VALUE
Debt securities $ 96 1,242 622 435 2,395
Sundry securities -- -- -- 17 17
----- ------- ----- ---- -----
Total $ 96 1,242 622 452 2,412
----- ------ ---- ---- -----
WEIGHTED AVERAGE YIELD
U.S. Government agencies - % 7.80 7.08 8.19 7.51
CMOs 7.52 7.65 -- -- 7.64
State, county and municipal 10.70 10.77 11.74 11.82 11.46
Other - 7.50 8.93 8.19 8.04
Consolidated 9.38% 8.21 8.35 11.39 8.83
------ ----- ---- ---- ------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at September 30, 1997.
Yields related to securities exempt from both federal and state income taxes,
federal income taxes only or state income taxes only are stated on a fully
tax-equivalent basis. They are reduced by the nondeductible portion of interest
expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent
in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina;
6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in
Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5
percent in Connecticut.
There were no commitments to purchase or sell investment securities at September
30, 1997. Gross gains from sales are accounted for on a trade date basis. Gross
gains realized on the sale of sundry securities for the nine months ended
September 30, 1997, were $3 million. There were no gains or losses on debt
securities.
T-6
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
LOANS
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 24,856 25,018 24,357 23,639 23,791
Real estate - construction and other 2,303 2,460 2,600 2,674 2,832
Real estate - mortgage 8,735 8,980 9,245 9,504 9,456
Lease financing 6,839 6,724 5,464 4,852 4,255
Foreign 1,305 1,393 1,089 1,085 925
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 44,038 44,575 42,755 41,754 41,259
- ----------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 25,837 26,400 27,144 28,683 26,603
Installment loans - Bankcard (a) 5,062 5,418 5,387 5,551 5,450
Installment loans - other 19,052 19,275 19,001 18,596 17,964
Vehicle leasing 4,005 3,858 3,704 3,480 3,118
- ----------------------------------------------------------------------------------------------------------------------
Total retail 53,956 54,951 55,236 56,310 53,135
- ----------------------------------------------------------------------------------------------------------------------
Total loans 97,994 99,526 97,991 98,064 94,394
- ----------------------------------------------------------------------------------------------------------------------
UNEARNED INCOME
Loans 540 528 511 488 440
Lease financing 2,550 2,587 1,993 1,718 1,434
- ----------------------------------------------------------------------------------------------------------------------
Total unearned income 3,090 3,115 2,504 2,206 1,874
- ----------------------------------------------------------------------------------------------------------------------
Loans, net $ 94,904 96,411 95,487 95,858 92,520
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-7
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------- ---------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
<S> <C> <C> <C> <C> <C>
Balance, beginning of quarter $ 1,370 1,366 1,365 1,377 1,416
Provision for loan losses 155 165 145 120 105
Allowance of loans acquired or sold, net - - - 42 -
Loan losses, net (155) (161) (144) (174) (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of quarter $ 1,370 1,370 1,366 1,365 1,377
- ------------------------------------------------------------------------------------------------------------------------------------
(as a % of loans, net) 1.44% 1.42 1.43 1.42 1.49
- ------------------------------------------------------------------------------------------------------------------------------------
(as a % of nonaccrual and restructured loans) 224% 223 199 204 188
- ------------------------------------------------------------------------------------------------------------------------------------
(as a % of nonperforming assets) 194% 194 175 179 167
- ------------------------------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 18 13 13 31 25
Real estate - commercial construction and mortgage 7 6 7 7 11
Real estate - residential mortgage 7 13 8 6 5
Installment loans - Bankcard 113 117 105 93 97
Installment loans - Bankcard special adjustment (a) - - - 34 -
Installment loans - other and Vehicle leasing 37 38 36 41 38
- ------------------------------------------------------------------------------------------------------------------------------------
Total 182 187 169 212 176
- ------------------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 9 8 11 12 9
Real estate - commercial construction and mortgage 2 3 1 3 2
Real estate - residential mortgage - - - 1 -
Installment loans - Bankcard 9 7 6 15 13
Installment loans - other and Vehicle leasing 7 8 7 7 8
- ------------------------------------------------------------------------------------------------------------------------------------
Total 27 26 25 38 32
- ------------------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 155 161 144 174 144
- ------------------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net) (b) 0.66% 0.68 0.61 0.75 0.64
- ------------------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net, excluding Bankcard) (b) 0.23% 0.23 0.20 0.29 0.28
- ------------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 198 202 221 218 294
Commercial real estate loans 85 98 111 118 137
Consumer real estate loans 186 181 214 199 186
Installment loans 140 133 128 120 110
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 609 614 674 655 727
Restructured loans 1 2 11 14 3
Foreclosed properties 94 92 93 94 95
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 704 708 778 763 825
- ------------------------------------------------------------------------------------------------------------------------------------
(as % of loans, net and foreclosed properties) 0.74% 0.73 0.81 0.80 0.89
- ------------------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 229 249 283 290 291
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard includes a fourth quarter 1996 one-time
charge-off related to an anticipated regulatory change which would reduce
the period delinquent loans could be held before charge-off.
(b) Annualized.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed herein or under the "Loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
T-8
<PAGE>
<TABLE>
<CAPTION>
TABLE 9
INTANGIBLE ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE AND OTHER SERVICING ASSETS $ 280 263 234 199 134
- ----------------------------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 26 29 32 35 38
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 2,243 2,278 2,308 2,359 1,867
Deposit base premium 450 480 510 479 500
Other 8 7 9 11 12
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 2,701 2,765 2,827 2,849 2,379
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TABLE 10
FORECLOSED PROPERTIES
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreclosed properties $ 110 109 110 111 112
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of quarter 17 17 17 17 20
Provision for foreclosed properties - 1 - 2 -
Dispositions, net (1) (1) - (2) (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of quarter 16 17 17 17 17
- -----------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 94 92 93 94 95
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-9
<PAGE>
<TABLE>
<CAPTION>
TABLE 11
DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
<S> <C> <C> <C> <C> <C>
Noninterest-bearing $ 18,963 19,033 18,275 18,632 18,008
Savings and NOW accounts 27,066 27,040 27,097 26,693 25,009
Money market accounts 13,434 12,917 13,061 13,468 13,019
Other consumer time 28,408 29,235 30,114 31,284 30,086
- ----------------------------------------------------------------------------------------------------------------------
Total core deposits 87,871 88,225 88,547 90,077 86,122
Foreign 728 1,683 866 1,854 2,303
Other time 3,091 3,026 2,990 2,884 3,019
- ----------------------------------------------------------------------------------------------------------------------
Total deposits $ 91,690 92,934 92,403 94,815 91,444
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE 12
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- --------------------------------------------------------------------------------
SEPTEMBER 30, 1997
------------------------
TIME OTHER
(IN MILLIONS) CERTIFICATES TIME
- --------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 2,941 -
Over 3 months through 6 months 1,233 -
Over 6 months through 12 months 1,018 -
Over 12 months 1,661 -
- -------------------------------------------------------------------------------
Total $ 6,853 -
- -------------------------------------------------------------------------------
T-10
<PAGE>
<TABLE>
<CAPTION>
TABLE 13
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY
<S> <C> <C> <C> <C> <C> <C>
7-1/2% debentures, due December 1, 2002 $ - 16 16 16 16
Notes
Floating rate extendible, due June 15, 2005 10 10 10 10 10
6.60%, due June 15, 2000 249 249 - - -
Floating rate, due February 24, 1998 300 300 300 300 300
6-3/4%, due January 15, 1998 250 250 250 250 249
Subordinated notes
7.18%, due April 15, 2011 59 59 59 59 59
8%, due August 15, 2009 149 149 149 149 149
6-3/8%, due January 15, 2009 148 148 148 148 148
6%, due October 30, 2008 198 198 198 197 197
7-1/2%, due July 15, 2006 298 298 297 297 297
7%, due March 15, 2006 199 198 198 198 198
6-7/8%, due September 15, 2005 249 249 249 249 249
7.05%, due August 1, 2005 248 248 248 248 248
6-5/8%, due July 15, 2005 248 248 248 248 248
8.77%, due November 15, 2004 149 149 149 149 149
Floating rate, due July 22, 2003 149 149 149 149 149
7-1/4%, due February 15, 2003 149 149 149 149 149
8%, due November 15, 2002 224 224 224 224 223
8-1/8%, due June 24, 2002 249 249 249 249 249
9.45%, due August 15, 2001 149 148 148 148 148
Fixed rate medium-term, varying rates and terms to June 5, 2001 54 54 54 54 54
9.45%, due June 15, 1999 249 249 249 249 249
8-1/8% - - - - 100
Subordinated debentures
6.55%, due October 15, 2035 249 249 249 249 249
7-1/2%, due April 15, 2035 246 246 246 246 246
6.824%/7.574%, due August 1, 2026 298 298 298 298 298
- --------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,770 4,784 4,534 4,533 4,631
- --------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4%, due September 1, 2003 121 122 156 158 -
Varying rates and terms to November 1, 2002 56 52 64 65 39
Subordinated notes
Bank, varying rates and terms to December 15, 2036 823 725 1,222 1,247 997
6.80%, due June 15, 2003 149 149 149 149 149
9-5/8%, due August 15, 1999 150 150 149 149 150
Floating rate - - - 25 25
Subordinated capital notes
9-5/8%, due June 15, 1999 75 75 74 74 75
9-7/8%, due May 15, 1999 75 75 75 75 75
8-1/2%, due April 1, 1998 149 149 149 149 149
10-1/2% collateralized mortgage obligations due November 1, 2014 31 33 35 37 40
- --------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 1,629 1,530 2,073 2,128 1,699
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,385 880 930 930 933
Mortgage notes and other debt 12 41 43 44 45
Capitalized leases 23 23 24 25 24
- --------------------------------------------------------------------------------------------------------------------------------
Total other debt 1,420 944 997 999 1,002
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 7,819 7,258 7,604 7,660 7,332
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-11
<PAGE>
<TABLE>
<CAPTION>
TABLE 14
CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
TWELVE 1997 1996
MONTHS --------------------------------------- -----------------------
ENDED
SEPT. 30, THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS) 1997 QUARTER QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 8,689 9,980 9,474 10,008 8,689 9,316
Net income 1,921 505 485 471 460 357
Redemption of preferred stock - - - - - (109)
Purchase of common stock (1,060) (83) (105) (836) (36) (816)
Common stock issued for stock options exercised 338 33 117 101 87 41
Common stock issued through dividend
reinvestment plan 12 - - 11 1 11
Common stock issued through public offerings 358 358 - - - -
Common stock issued for purchase accounting
acquisitions 888 - - 4 884 -
Cash dividends paid on
Preferred stock (1) - - - (1) (1)
Common stock (670) (179) (163) (166) (162) (157)
Unrealized gain (loss) on debt and
equity securities 245 106 172 (119) 86 47
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 10,720 10,720 9,980 9,474 10,008 8,689
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-12
<PAGE>
<TABLE>
<CAPTION>
Table 15
CAPITAL RATIOS
- -------------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 8,986 8,135 7,752 7,633 6,414
Total capital 15,073 13,614 13,027 12,842 10,996
Adjusted risk-based assets 109,851 107,726 106,451 104,126 100,508
Adjusted leverage ratio assets $137,516 130,666 126,465 124,419 122,759
Ratios
Tier 1 capital 8.18% 7.55 7.28 7.33 6.38
Total capital 13.72 12.64 12.24 12.33 10.94
Leverage 6.53 6.23 6.13 6.13 5.23
Stockholders' equity to assets
Quarter-end 7.45 6.98 6.93 7.14 6.49
Average 7.29% 6.94 7.20 6.85 6.63
- --------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank of North Carolina 7.13% 6.75 6.51 6.43 6.32
First Union National Bank 9.25 9.11 9.45 8.98 11.75
First Union Bank of Delaware 13.72 14.16 13.86 13.61 15.39
First Union Home Equity Bank 10.23 9.68 8.27 8.40 8.02
Total capital
First Union National Bank of North Carolina 10.83 10.73 10.11 10.20 10.03
First Union National Bank 12.22 12.08 12.45 12.22 13.56
First Union Bank of Delaware 14.97 15.42 15.11 14.87 16.65
First Union Home Equity Bank 12.39 11.94 10.87 10.77 10.47
Leverage
First Union National Bank of North Carolina 5.88 5.48 6.15 5.95 5.98
First Union National Bank 7.11 7.18 7.59 7.06 9.04
First Union Bank of Delaware 8.31 11.29 11.43 10.60 12.07
First Union Home Equity Bank 9.12% 8.44 7.42 7.84 7.14
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and a minimum ratio of
total capital to risk-weighted assets of 8.00 percent. The minimum
leverage ratio of tier 1 capital to adjusted average quarterly assets is
from 3.00 to 5.00 percent.
(b) By the end of 1997, it is anticipated that all First Union bank
affiliates will be merged into First Union National Bank of North
Carolina, except those included herein. Accordingly, historical
information related to such affiliates is not presented, and historical
ratios for First Union National Bank of North Carolina are not restated.
T-13
<PAGE>
<TABLE>
<CAPTION>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------- --------------------
September 30, 1997 Notional Maturity In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Interest rate swaps $ 14,727 6.26% 5.68% 1.60 Converts floating rate loans to fixed
Carrying amount $ 71 rate. Adds to liability sensitivity.
Unrealized gross gain 86 Similar characteristics to a fixed
Unrealized gross loss (9) income security funded with
variable rate liabilities.
------
Total 148
- ----------------------------------------------- ------
Total asset rate conversions$ 14,727 6.26% 5.68% 1.60 148
- ---------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Interest rate swaps $ 6,705 7.02% 5.97% 9.77 Converts $4.2 billion of fixed rate
Carrying amount $ 11 long-term debt to floating rate by
Unrealized gross gain 151 matching the terms of the swap
Unrealized gross loss (29) to the debt issue. Rate sensitivity
remains unchanged due to the direct
linkage of the swap to the debt issue.
Also converts $570 million of fixed
rate CDs to variable rate, $900
million of fixed rate bank notes to
floating rate and $1.0 billion of
fixed rate mezzanine debt to variable
rate.
---------
Total 133
---------
Interest rate floors 150 4.00 - 5.81 $150 million floor offsets a
Carrying amount 1 corresponding rate floor in long-
Unrealized gross gain - term debt.
Unrealized gross loss (1)
---------
Total -
- ----------------------------------------------- ---------
Total liability rate conversions $6,855 6.95% 5.97% 9.68 $133
- -------------------------------------------------------------------------------------------
</TABLE>
T-14
<PAGE>
<TABLE>
<CAPTION>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------- --------------------
September 30, 1997 Notional Maturity In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- ------------------------------------------------------------------------ ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVITY HEDGES
Interest rate caps $ 158 5.73% 7.03% 2.11 Paid a premium for the right to
Carrying amount $ 1 lock in 3 month LIBOR reset rates
Unrealized gross gain - on pay variable rate swaps.
Unrealized gross loss (1)
---------
Total -
---------
Short Eurodollar futures 11,068 - 6.22 0.59 Locks in 3 month LIBOR reset
Carrying amount - rates on pay variable rate swaps.
Unrealized gross gain - $2.8 billion effective December
Unrealized gross loss (7) 1997, March 1998, June 1998 and
September 1998.
---------
Total (7)
---------
Long Eurodollar futures 2,000 6.62 - 1.58 Converts floating rate LIBOR-
Carrying amount - based loans to fixed rate. Adds
Unrealized gross gain 2 to liability sensitivity.
Unrealized gross loss - Similar characteristics to
fixed income security funded with
variable rate liabilities.
$500 million effective December
1998, March 1999, June 1999 and
September 1999.
---------
Total 2
---------
Call options on Eurodollar futures 1,024 6.72 - 0.59 Paid a premium for the right to
Carrying amount 1 buy Eurodollar futures which
Unrealized gross gain 1 convert floating rate LIBOR-based
Unrealized gross loss - loans to fixed rate. Interest
rate risk limited to
premium paid. $256 million
effective December 1997, March
1998, June 1998 and September
1998.
---------
Total 2
---------
CMT floor 100 6.42 -- 3.59 First Union Mortgage Corporation
Carrying amount 1 paid a premium for a CMT floor in
Unrealized gross gain 1 order to offset the decline in
Unrealized gross loss - value of mortgage servicing in a
falling rate environment.
---------
Total 2
- ------------------------------------------------- ---------
Total rate sensitivity hedges $ 14,350 6.60% 6.23% 0.76 $ (1)
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Estimated maturity approximates duration except for long eurodollar
futures, average duration of .25 years. London Interbank Offered Rates
(LIBOR) - The average of interbank offered rates on dollar deposits in the
London market, based on quotations at five major banks. Weighted average
pay rates are generally based on one to six month LIBOR. Pay rates related
to forward interest rate swaps are set on the future effective date.
Pay rates reset at predetermined reset dates over the life of the
contract. Rates shown are the rates in effect as of September 30, 1997.
Weighted average receive rates were set at the time the contract was
transacted. Carrying amount includes accrued interest receivable/
payable, unamortized premiums paid/received and any related margin
accounts.
T-15
<PAGE>
<TABLE>
<CAPTION>
Table 17
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
September 30, 1997 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- --------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 6,057 985 7,685 - - 14,727
Weighted average receive rate 5.95% 5.28 6.63 - - 6.26
Estimated fair value $ 31 4 113 - - 148
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 765 205 800 3,525 1,560 6,855
Weighted average receive rate 6.22% 6.53 7.42 6.86 7.34 6.95
Estimated fair value $ 1 2 31 76 23 133
- ---------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 12,122 2,060 168 - - 14,350
Weighted average receive rate 6.69% 6.59 6.14 - - 6.60
Estimated fair value $ (5) 2 2 - - (1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related
to interest rate risk management activities. Pay rates are generally based
on one to six month LIBOR and reset at predetermined reset dates. Current
pay rates are not necessarily indicative of future pay rates, and
therefore, they have been excluded from the above table. Weighted average
pay rates are indicated in Table 16.
T-16
<PAGE>
<TABLE>
<CAPTION>
Table 18
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- ---------------------------------------------
Asset Liability Rate
Rate Rate Asset Sensitivity
(In millions) Conversions Conversions Hedges Hedges Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $19,796 6,430 662 42,558 69,446
Additions - 1,250 - 33,149 34,399
Maturities/Amortizations (5,069) (825) (662) (47,371) (53,927)
Terminations - - - (13,986) (13,986)
- ---------------------------------------------------------------------------------------------
Balance, September 30, 1997 $14,727 6,855 - 14,350 35,932
- ----------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-17
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES
- ---------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1997 SECOND QUARTER 1997
------------------------------------- ------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 282 3 4.08% $ 249 4 5.68%
Federal funds sold and securities
purchased under resale agreements 6,828 94 5.43 6,171 85 5.52
Trading account assets (a) 4,954 82 6.55 3,825 64 6.77
Securities available for sale (a) 16,249 283 6.98 16,854 296 7.01
Investment securities (a)
U.S. Government and other 1,532 29 7.42 1,531 29 7.59
State, county and municipal 742 20 10.99 766 21 11.18
- ------------------------------------------------ -------------------- ------------------------
Total investment securities 2,274 49 8.58 2,297 50 8.78
- ---------------------------------------------------------------------- ------------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 24,226 459 7.53 24,338 465 7.65
Real estate - construction and other 2,399 53 8.62 2,557 54 8.54
Real estate - mortgage 8,928 197 8.77 9,083 196 8.66
Lease financing 3,186 92 11.58 3,013 85 11.24
Foreign 1,293 21 6.27 1,288 20 6.14
- ------------------------------------------------ -------------------- ------------------------
Total commercial 40,032 822 8.15 40,279 820 8.16
- ---------------------------------------------------------------------- ------------------------
Retail
Real estate - mortgage 26,133 514 7.87 27,054 529 7.83
Installment loans - Bankcard (c) 5,249 211 16.07 5,446 200 14.70
Installment loans - other and Vehicle leasing 22,588 537 9.45 22,517 528 9.40
- ------------------------------------------------ -------------------- ------------------------
Total retail 53,970 1,262 9.33 55,017 1,257 9.15
- ---------------------------------------------------------------------- ------------------------
Total loans 94,002 2,084 8.83 95,296 2,077 8.73
- ---------------------------------------------------------------------- ------------------------
Total earning assets 124,589 2,595 8.29 124,692 2,576 8.27
----------------------- ----------------------
Cash and due from banks 5,334 5,428
Other assets 10,172 9,738
- ------------------------------------------------ -------- -----------
Total assets $140,095 $ 139,858
- ---------------------------------------------------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 27,190 201 2.94 27,276 192 2.82
Money market accounts 13,285 106 3.15 12,733 92 2.92
Other consumer time 28,804 381 5.25 29,522 384 5.22
Foreign 1,227 17 5.48 3,012 41 5.39
Other time 3,191 52 6.49 3,240 51 6.29
- ---------------------------------------------------------------------- ------------------------
Total interest-bearing deposits 73,697 757 4.07 75,783 760 4.02
Federal funds purchased and securities
sold under repurchase agreements 19,956 256 5.09 19,878 250 5.03
Commercial paper 1,089 14 5.36 1,280 18 5.40
Other short-term borrowings 5,603 85 5.99 4,630 71 6.21
Long-term debt 7,504 124 6.55 7,333 120 6.58
- ---------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities 107,849 1,236 4.55 108,904 1,219 4.49
----------------------- ----------------------
Noninterest-bearing deposits 17,620 17,193
Other liabilities 3,421 3,068
Guaranteed preferred beneficial interests 990 990
Stockholders' equity 10,215 9,703
- ------------------------------------------------- ------- -----------
Total liabilities and stockholders'
equity $140,095 $ 139,858
- ---------------------------------------------------------- -----------
Interest income and rate earned $ 2,595 8.29% $ 2,576 8.27%
Interest expense and equivalent rate paid 1,236 3.93 1,219 3.91
- ------------------------------------------------------------------------------------ ------------ --------------
Net interest income and margin $ 1,359 4.36% $ 1,357 4.36%
- ----------------------------------------------------------------------------------- ---------------------------
</TABLE>
(a) Yields related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are
stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of
35 percent; and tax rates of 7.50 percent in North Carolina; 5.5 percent
in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and
Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87
percent in Delaware; 6.5 percent in New Jersey; and 10.50 percent in
Connecticut. Lease financing amounts include related deferred income
taxes.
T-18
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 1997 FOURTH QUARTER 1996 THIRD QUARTER 1996
- ------------------------------------- ---------------------------------------------- --------------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid Balances Expense Paid
- ------------------------------------- ---------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 229 2 4.18% $ 127 2 5.83% $ 65 1 8.73%
5,297 73 5.61 6,947 92 5.32 5,760 77 5.26
3,107 50 6.51 4,190 73 6.87 5,359 88 6.58
14,019 232 6.64 14,257 238 6.68 15,657 260 6.62
1,646 30 7.37 1,668 33 7.70 1,693 31 7.57
787 22 10.87 823 22 10.67 894 24 10.67
--------------------- ------------------------- ------------------------
2,433 52 8.50 2,491 55 8.68 2,587 55 8.64
--------------------- ------------------------- ------------------------
23,391 437 7.57 23,326 445 7.59 22,825 446 7.78
2,642 55 8.44 2,723 57 8.33 2,846 60 8.35
9,393 195 8.40 9,522 202 8.41 9,480 200 8.41
2,502 68 10.87 2,071 51 10.01 2,063 48 9.37
1,022 15 6.16 907 14 6.16 721 12 6.36
--------------------- ------------------------- ------------------------
38,950 770 8.01 38,549 769 7.94 37,935 766 8.04
--------------------- ------------------------- ------------------------
28,268 549 7.77 27,664 534 7.73 26,855 529 7.88
5,448 190 13.92 5,521 184 13.34 5,257 173 13.16
21,952 516 9.51 21,294 505 9.44 20,445 491 9.55
--------------------- ------------------------- ------------------------
55,668 1,255 9.06 54,479 1,223 8.97 52,557 1,193 9.06
--------------------- ------------------------- ------------------------
94,618 2,025 8.63 93,028 1,992 8.54 90,492 1,959 8.63
--------------------- ------------------------- ------------------------
119,703 2,434 8.19 121,040 2,452 8.08 119,920 2,440 8.12
----------------------- ------------------------- ------------------------
5,530 5,660 5,333
9,661 9,171 8,178
-------- ----------- -----------
$134,894 $ 135,871 $ 133,431
-------- ----------- -----------
26,675 182 2.76 25,742 172 2.67 25,126 173 2.73
13,190 93 2.85 13,304 100 2.99 13,239 93 2.79
30,684 395 5.22 30,675 401 5.20 30,467 398 5.20
1,741 22 5.27 1,999 27 5.30 1,856 24 5.24
3,481 51 5.95 3,166 51 6.44 3,195 46 5.67
--------------------- ------------------------- ------------------------
75,771 743 3.98 74,886 751 3.99 73,883 734 3.95
16,724 206 5.00 19,148 241 4.99 19,038 234 4.91
905 11 5.05 954 12 5.10 830 11 5.03
3,296 47 5.73 3,820 55 5.75 3,841 56 5.78
7,632 124 6.49 7,550 121 6.41 7,849 123 6.27
--------------------- ------------------------- ------------------------
104,328 1,131 4.39 106,358 1,180 4.42 105,441 1,158 4.37
------------------------- --------------------------- -----------------------
16,925 17,193 16,585
3,022 2,824 2,556
913 188 -
9,706 9,308 8,849
-------- ----------- -----------
$134,894 $ 135,871 $ 133,431
-------- ----------- -----------
$ 2,434 8.19% $ 2,452 8.08% $ 2,440 8.12%
1,131 3.82 1,180 3.88 1,158 3.85
------------------------- ---------------------------- ------------------------
$ 1,303 4.37% $ 1,272 4.20% $ 1,282 4.27%
------------------------- ------------------------- -----------------------
</TABLE>
(b) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(c) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-19
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED 1997 SIX MONTHS ENDED 1997
-------------------------------------- ----------------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
(IN MILLIONS) BALANCES EXPENSE PAID BALANCES EXPENSE PAID
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 253 9 4.64% $ 239 6 4.97%
Federal funds sold and securities
purchased under resale agreements 6,104 252 5.51 5,736 158 5.56
Trading account assets (a) 3,969 196 6.61 3,468 114 6.65
Securities available for sale (a) 15,716 811 6.89 15,445 528 6.84
Investment securities (a)
U.S. Government and other 1,569 88 7.46 1,588 59 7.48
State, county and municipal 765 63 11.01 777 43 11.02
- -------------------------------------------------------------------- -----------------------
Total investment securities 2,334 151 8.62 2,365 102 8.64
- -------------------------------------------------------------------- -----------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 23,988 1,361 7.59 23,867 902 7.62
Real estate - construction and other 2,532 162 8.53 2,599 109 8.49
Real estate - mortgage 9,133 588 8.61 9,237 391 8.53
Lease financing 2,903 245 11.25 2,759 153 11.07
Foreign 1,202 56 6.19 1,156 35 6.15
- -------------------------------------------------------------------- -----------------------
Total commercial 39,758 2,412 8.11 39,618 1,590 8.08
- -------------------------------------------------------------------- -----------------------
Retail
Real estate - mortgage 27,144 1,592 7.82 27,658 1,078 7.80
Installment loans - Bankcard (c) 5,380 601 14.88 5,447 390 14.31
Installment loans - other and
Vehicle leasing 22,354 1,581 9.45 22,236 1,044 9.45
- -------------------------------------------------------------------- -----------------------
Total retail 54,878 3,774 9.18 55,341 2,512 9.10
- -------------------------------------------------------------------- -----------------------
Total loans 94,636 6,186 8.73 94,959 4,102 8.68
- -------------------------------------------------------------------- -----------------------
Total earning assets 123,012 7,605 8.25 122,212 5,010 8.23
------------------------ --------------------------
Cash and due from banks 5,430 5,479
Other assets 9,859 9,699
- -------------------------------------------------------- ----------
Total assets $ 138,301 $ 137,390
- -------------------------------------------------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 27,049 575 2.84 26,977 374 2.79
Money market accounts 13,069 291 2.97 12,960 185 2.88
Other consumer time 29,663 1,160 5.23 30,100 779 5.22
Foreign 1,992 80 5.37 2,380 63 5.34
Other time 3,303 154 6.24 3,360 102 6.12
- -------------------------------------------------------------------- -----------------------
Total interest-bearing deposits 75,076 2,260 4.02 75,777 1,503 4.00
Federal funds purchased and securities
sold under repurchase agreements 18,865 712 5.05 18,310 456 5.02
Commercial paper 1,092 43 5.29 1,093 29 5.25
Other short-term borrowings 4,518 203 6.00 3,967 118 6.01
Long-term debt 7,489 368 6.54 7,482 244 6.53
- -------------------------------------------------------------------- -----------------------
Total interest-bearing liabilities 107,040 3,586 4.48 106,629 2,350 4.44
------------------------ ---------------------------
Noninterest-bearing deposits 17,249 17,060
Other liabilities 3,171 3,045
Guaranteed preferred beneficial interests 964 951
Stockholders' equity 9,877 9,705
- -------------------------------------------------------- ----------
Total liabilities and
stockholders' equity $ 138,301 $ 137,390
- -------------------------------------------------------- ----------
Interest income and rate earned $ 7,605 8.25% $ 5,010 8.23%
Interest expense and equivalent rate paid 3,586 3.89 2,350 3.87
- ---------------------------------------------------------------------------------- ----------------------------
Net interest income and margin $ 4,019 4.36% $ 2,660 4.36%
- ---------------------------------------------------------------------------------- ----------------------------
</TABLE>
(a) Yields related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are
stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of
35 percent; and tax rates of 7.50 percent in North Carolina; 5.5 percent
in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and
Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87
percent in Delaware; 6.5 percent in New Jersey; and 10.50 percent in
Connecticut. Lease financing amounts include related deferred income
taxes.
T-20
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
YEAR ENDED 1996 NINE MONTHS ENDED 1996
- ------------------------------------------- -----------------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCES EXPENSE PAID BALANCES EXPENSE PAID
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 125 7 5.69% $ 125 5 5.64%
6,135 323 5.27 5,862 231 5.26
4,186 280 6.67 4,185 207 6.61
16,946 1,117 6.59 17,849 879 6.57
1,754 132 7.51 1,783 99 7.45
960 104 10.81 1,006 82 10.85
----------------------- ----------------------
2,714 236 8.68 2,789 181 8.68
----------------------- ----------------------
23,065 1,781 7.72 22,977 1,336 7.77
2,724 231 8.47 2,724 174 8.52
9,612 814 8.47 9,641 612 8.49
1,965 190 9.70 1,930 139 9.59
753 47 6.24 702 33 6.28
----------------------- ----------------------
38,119 3,063 8.04 37,974 2,294 8.07
----------------------- ----------------------
27,293 2,115 7.75 27,168 1,581 7.76
4,863 657 13.52 4,642 473 13.59
20,385 1,914 9.39 20,080 1,409 9.37
----------------------- ----------------------
52,541 4,686 8.92 51,890 3,463 8.90
----------------------- ----------------------
90,660 7,749 8.55 89,864 5,757 8.55
----------------------- ----------------------
120,766 9,712 8.04 120,674 7,260 8.03
-------------------------- --------------------------
5,278 5,150
8,083 7,717
---------- ----------
$ 134,127 $ 133,541
---------- ----------
25,214 669 2.65 25,037 497 2.65
13,228 375 2.83 13,202 275 2.78
30,992 1,629 5.26 31,099 1,228 5.27
2,122 111 5.24 2,163 84 5.22
3,090 176 5.69 3,064 125 5.43
----------------------- ----------------------
74,646 2,960 3.97 74,565 2,209 3.96
18,808 936 4.98 18,694 695 4.97
903 46 5.08 886 34 5.08
3,853 215 5.58 3,865 160 5.53
7,565 475 6.28 7,570 354 6.24
----------------------- ----------------------
105,775 4,632 4.38 105,580 3,452 4.37
-------------------------- --------------------------
16,674 16,499
2,486 2,372
47 -
9,145 9,090
---------- ----------
$ 134,127 $ 133,541
---------- ----------
$ 9,712 8.04% $ 7,260 8.03%
4,632 3.83 3,452 3.82
-------------------------- --------------------------
$ 5,080 4.21% $ 3,808 4.21%
-------------------------- --------------------------
</TABLE>
(b) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(c) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-21
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,200 6,428 5,998 6,509 6,101
Interest-bearing bank balances 200 276 230 316 40
Federal funds sold and securities
purchased under resale agreements 6,011 6,440 5,019 7,024 5,660
- ----------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,411 13,144 11,247 13,849 11,801
- ----------------------------------------------------------------------------------------------------------------------------
Trading account assets 7,548 4,863 3,579 3,934 4,779
Securities available for sale 16,690 16,396 14,411 14,182 13,729
Investment securities 2,268 2,285 2,408 2,501 2,566
Loans, net of unearned income 94,904 96,411 95,487 95,858 92,520
Allowance for loan losses (1,370) (1,370) (1,366) (1,365) (1,377)
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net 93,534 95,041 94,121 94,493 91,143
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,056 4,052 4,127 4,073 3,811
Due from customers on acceptances 837 728 634 763 571
Other intangible assets 2,701 2,765 2,827 2,849 2,379
Other assets 3,859 3,668 3,376 3,483 3,103
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 143,904 142,942 136,730 140,127 133,882
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 18,963 19,033 18,275 18,632 18,008
Interest-bearing deposits 72,727 73,901 74,128 76,183 73,436
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 91,690 92,934 92,403 94,815 91,444
Short-term borrowings 27,623 27,349 22,335 23,024 22,910
Bank acceptances outstanding 837 728 634 764 571
Other liabilities 4,225 3,703 3,290 3,361 2,936
Long-term debt 7,819 7,258 7,604 7,660 7,332
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 132,194 131,972 126,266 129,624 125,193
- ----------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 990 990 990 495 -
- ----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - 48
Common stock, $3.33-1/3 par value;
authorized 750,000,000 shares 1,894 1,870 1,866 1,916 1,803
Paid-in capital 999 715 708 1,378 506
Retained earnings 7,681 7,355 7,032 6,727 6,431
Unrealized gain (loss) on debt and equity securities, net 146 40 (132) (13) (99)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 10,720 9,980 9,474 10,008 8,689
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 143,904 142,942 136,730 140,127 133,882
- ----------------------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale-amortized cost $ 16,455 16,324 14,607 14,194 13,871
Investment securities-market value 2,412 2,417 2,522 2,636 2,691
Common stockholders' equity, net of unrealized
gain (loss) on debt and equity securities $ 10,720 9,980 9,474 10,008 8,641
Preferred shares outstanding (IN THOUSANDS) - - - - 1,911
Common shares outstanding (IN THOUSANDS) 568,296 560,977 559,665 574,697 541,015
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-22
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
-------------------------------------- ------------------------
THIRD SECOND FIRST FOURTH THIRD
(IN MILLIONS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER QUARTER
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,077 2,071 2,019 1,986 1,953
Interest and dividends on securities available for sale 281 292 230 236 258
Interest and dividends on investment securities
Taxable income 28 29 30 32 31
Nontaxable income 14 14 15 15 16
Trading account interest 82 64 49 72 87
Other interest income 97 89 75 94 78
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,579 2,559 2,418 2,435 2,423
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 757 760 743 751 734
Interest on short-term borrowings 355 339 264 308 301
Interest on long-term debt 124 120 124 121 123
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,236 1,219 1,131 1,180 1,158
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,343 1,340 1,287 1,255 1,265
Provision for loan losses 155 165 145 120 105
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,188 1,175 1,142 1,135 1,160
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 16 54 26 50 23
Service charges on deposit accounts 197 191 193 174 165
Mortgage banking income 55 54 50 40 38
Capital management income 212 209 203 157 145
Securities available for sale transactions 3 5 4 11 2
Investment security transactions 2 1 - 1 -
Fees for other banking services 32 36 41 39 41
Sundry income 252 205 236 213 186
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 769 755 753 685 600
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 495 506 480 490 454
Other benefits 104 114 125 102 99
- -----------------------------------------------------------------------------------------------------------------------------------
Personnel expense 599 620 605 592 553
Occupancy 93 91 91 93 82
Equipment 129 117 121 118 108
Advertising 22 22 22 10 10
Telecommunications 28 27 27 25 27
Travel 26 25 21 20 23
Postage, printing and supplies 37 37 41 37 43
FDIC assessment 6 6 5 - 15
Professional fees 24 21 20 30 23
External data processing 16 14 15 16 24
Other intangible amortization 67 67 67 60 60
SAIF special assessment - - - - 133
Sundry expense 131 135 134 112 110
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,178 1,182 1,169 1,113 1,211
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 779 748 726 707 549
Income taxes 274 263 255 247 192
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 505 485 471 460 357
Dividends on preferred stock - - - 1 1
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 505 485 471 459 356
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 0.90 0.87 0.83 0.82 0.65
Cash dividends $ 0.32 0.29 0.29 0.29 0.29
AVERAGE COMMON SHARES (IN THOUSANDS) 561,595 560,900 565,106 556,595 548,002
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-23
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------- --------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 6,167 5,738 4,090 3,785
Interest and dividends on securities available for sale 803 868 522 610
Interest and dividends on investment securities
Taxable income 87 98 59 67
Nontaxable income 43 55 29 39
Trading account interest 195 198 113 111
Other interest income 261 236 164 158
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 7,556 7,193 4,977 4,770
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,260 2,209 1,503 1,475
Interest on short-term borrowings 958 889 603 588
Interest on long-term debt 368 354 244 231
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,586 3,452 2,350 2,294
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 3,970 3,741 2,627 2,476
Provision for loan losses 465 255 310 150
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,505 3,486 2,317 2,326
- -----------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 96 52 80 29
Service charges on deposit accounts 581 492 384 327
Mortgage banking income 159 115 104 77
Capital management income 624 409 412 264
Securities available for sale transactions 12 20 9 18
Investment security transactions 3 3 1 3
Fees for other banking services 109 118 77 77
Sundry income 693 463 441 277
- -----------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,277 1,672 1,508 1,072
- -----------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 1,481 1,291 986 837
Other benefits 343 313 239 214
- -----------------------------------------------------------------------------------------------------------------------------
Personnel expense 1,824 1,604 1,225 1,051
Occupancy 275 258 182 176
Equipment 367 299 238 191
Advertising 66 31 44 21
Telecommunications 82 77 54 50
Travel 72 72 46 49
Postage, printing and supplies 115 125 78 82
FDIC assessment 17 41 11 26
Professional fees 65 58 41 35
External data processing 45 98 29 74
Other intangible amortization 201 183 134 123
Merger-related restructuring charges - 281 - 281
SAIF special assessment - 133 - -
Sundry expense 400 295 269 185
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,529 3,555 2,351 2,344
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,253 1,603 1,474 1,054
Income taxes 792 564 518 372
- -----------------------------------------------------------------------------------------------------------------------------
Net income 1,461 1,039 956 682
Dividends on preferred stock - 8 - 7
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,461 1,031 956 675
- -----------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 2.60 1.85 1.70 1.20
Cash dividends $ 0.90 0.81 0.58 0.52
AVERAGE COMMON SHARES (IN THOUSANDS) 562,534 557,968 563,003 562,950
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-24
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
(IN MILLIONS) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,461 1,039
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 18 33
Provision for loan losses 465 255
Provision for foreclosed properties 1 (3)
Securities available for sale transactions (12) (20)
Investment security transactions (3) (3)
Depreciation and amortization 550 456
Trading account assets, net (3,614) (2,898)
Gain on sale of adjustable rate mortgages (80) -
Mortgage loans held for resale (352) (29)
Gain on sale of premises and equipment - (2)
Gain on sale of segregated assets (5) (6)
Other assets, net (582) 511
Other liabilities, net 864 (156)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (1,289) (823)
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 7,642 15,664
Maturities of securities available for sale 749 2,789
Purchases of securities available for sale (10,644) (14,107)
Sales and underdeliveries of investment securities 4 8
Maturities of investment securities 398 667
Purchases of investment securities (174) (99)
Sale of loans 1,452 -
Origination of loans, net (512) (851)
Sales of premises and equipment 121 32
Purchases of premises and equipment (412) (679)
Sales of mortgage servicing rights - 15
Purchases of mortgage servicing rights - (34)
Other intangible assets, net 32 22
Purchases of banking organizations, net of acquired cash equivalents 6 (658)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,338) 2,769
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net (3,152) (2,840)
Securities sold under repurchase agreements and other short-term borrowings, net 4,599 3,352
Issuances of guaranteed preferred beneficial interests 495 -
Issuances of long-term debt 1,292 1,416
Payments of long-term debt (1,133) (1,310)
Sales of common stock 620 191
Purchases of preferred stock - (109)
Purchases of common stock (1,024) (932)
Cash dividends paid (508) (457)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,189 (689)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,438) 1,257
Cash and cash equivalents, beginning of year 13,849 10,544
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 12,411 11,801
- ----------------------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 1 23
Conversion of preferred stock to common stock - 26
Issuance of common stock for purchase accounting acquisitions 4 124
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale 247 (342)
Other assets (deferred income taxes) $ 88 (132)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,200
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 6,011
<TRADING-ASSETS> 7,548
<INVESTMENTS-HELD-FOR-SALE> 16,690
<INVESTMENTS-CARRYING> 2,268
<INVESTMENTS-MARKET> 2,412
<LOANS> 97,994
<ALLOWANCE> (1,370)
<TOTAL-ASSETS> 143,904
<DEPOSITS> 91,690
<SHORT-TERM> 27,623
<LIABILITIES-OTHER> 4,225
<LONG-TERM> 7,819
0
0
<COMMON> 1,894
<OTHER-SE> 8,826
<TOTAL-LIABILITIES-AND-EQUITY> 143,904
<INTEREST-LOAN> 6,167
<INTEREST-INVEST> 933
<INTEREST-OTHER> 261
<INTEREST-TOTAL> 7,556
<INTEREST-DEPOSIT> 2,260
<INTEREST-EXPENSE> 3,586
<INTEREST-INCOME-NET> 3,970
<LOAN-LOSSES> 465
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 3,529
<INCOME-PRETAX> 2,253
<INCOME-PRE-EXTRAORDINARY> 2,253
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,461
<EPS-PRIMARY> 2.60
<EPS-DILUTED> 2.60
<YIELD-ACTUAL> 4.36
<LOANS-NON> 609
<LOANS-PAST> 229
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,365
<CHARGE-OFFS> 538
<RECOVERIES> 78
<ALLOWANCE-CLOSE> 1,370
<ALLOWANCE-DOMESTIC> 947
<ALLOWANCE-FOREIGN> 5
<ALLOWANCE-UNALLOCATED> 418
</TABLE>
