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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 June 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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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.
561,374,603 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of July 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 REPORT ON FORM 8-K DATED JULY 21, 1997, RELATED TO
THE CORPORATION'S PENDING ACQUISITION OF SIGNET BANKING CORPORATION. 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 June
30, 1997, June 30, 1996, and December 31, 1996, respectively, set forth on page
T-22 of the Corporation's Second Quarter Financial Supplement for the six months
ended June 30, 1997 (the "Financial Supplement"), are incorporated herein by
reference.
The Consolidated Statements of Income of the Corporation and subsidiaries
for the three and six months ended June 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 six months ended June 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.
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 19 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Information relating to certain proposals voted on at the annual meeting of
the stockholders of the Corporation held on April 15, 1997, is set forth under
Item 4 in the Corporation's 1997 First Quarter Report on Form 10-Q and
incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
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EXHIBIT NO. DESCRIPTION
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(4) Instruments defining the rights of security holders, including indentures.*
(10) Management Restricted Stock Award Agreement.
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Second 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 June 30, 1997, no Current Reports on Form 8-K 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: August 13, 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.*
(10) Management Restricted Stock Award Agreement.
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Second 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.
Exhibit 10
SPECIAL RESTRICTED STOCK AWARD
AGREEMENT
THIS AGREEMENT is made and entered as of April 15, 1997, by and between FIRST
UNION CORPORATION (the "Corporation") and EDWARD E. CRUTCHFIELD (the
"Executive");
W I T N E S S E T H:
WHEREAS, the Executive has been the Chief Executive Officer of the Corporation
since April 1984, the second longest tenure among the chief executive officers
of the ten largest bank holding companies in the nation; and
WHEREAS, under the leadership of the Executive, (i) total stockholder return
increased at an annual compound rate of 17% over the past ten years, 24% over
the past five years and 26% over the past three years, (ii) dividends per share
grew at an annual compound rate of 13% over the past ten years, which ranks
second among the ten largest bank holding companies, (iii) book value per share
grew at an annual compound rate of 9% over the past ten years, (iv) return on
stockholder equity has averaged 16% over the past ten years, (v) the Corporation
has had the highest annual growth rate in total assets among the ten largest
bank holding companies over the past 12 years, with growth in total assets from
$7.3 billion as of December 31, 1984, to $140.1 billion as of December 31, 1996,
(vi) the Corporation has successfully integrated over 70 acquired financial
institutions over the past ten years, which equates to approximately one
acquisition every 60 days, and (vii) market capitalization has grown from $2.7
billion to $20.6 billion over the past ten years, a 1,000% increase; and
WHEREAS, the Board of Directors of the Corporation, in recognition of such
leadership and in order to better assure itself of the continued leadership of
the Executive over the next several years, has granted to the Executive a
special restricted stock award on and subject to the terms herein set forth,
which award is in addition to, and not in lieu of, any of the Executive's past
or future compensation, including, without limitation, future restricted stock
awards, stock options or any other stock-based compensation, which future
compensation is to be determined without consideration of such special
restricted stock award;
NOW, THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and adequacy of which being hereby acknowledged, the
parties hereto hereby agree as follows:
1. Number of Shares. The Executive is hereby granted a special restricted stock
award (the "Special RSA") consisting of the number of shares of common stock of
the Corporation ("Common Stock") equal to the result obtained by dividing
$13,000,000 by the last reported sale price per share of the Common Stock on the
New York Stock Exchange on the Effective Date (as hereinafter defined), rounded
up to the nearest one hundred shares.
1
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2. Effective Date. The Special RSA shall be made on, and the effective date of
the Special RSA (the "Effective Date") shall be, the expiration date of the
waiting period following the filing of the required notifications under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the Special
RSA.
3. Restrictions on Transferability. The shares of Common Stock included in the
Special RSA may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated (the "Transfer Restrictions"), except in accordance
with the schedule set forth below or as otherwise provided in this Agreement.
The term "Restricted Shares" as used hereunder means the shares of Common Stock
included in the Special RSA which have not been forfeited and as to which the
Transfer Restrictions have not lapsed.
No. of Shares Date Transfer Restrictions Lapse
------------- --------------------------------
16.67% of the total award* April 15, 1998
16.67% of the total award* April 15, 1999
16.67% of the total award* April 15, 2000
16.67% of the total award* April 15, 2001
16.67% of the total award* April 15, 2002
Remainder of total award April 15, 2003
-----------------------------
*Rounded to the nearest whole share.
4. Certificates. Certificates for the Restricted Shares will be issued in the
Executive's name and held by the Corporation. Such certificates shall bear the
following legend:
The sale or other transfer of the shares of stock represented
by this certificate, whether voluntary, involuntary, or by
operation of law, is subject to certain restrictions on
transfer set forth in a Special Restricted Stock Award
Agreement dated April 15, 1997. A copy of such Special
Restricted Stock Award Agreement may be obtained from the
Secretary of First Union Corporation.
As soon as practicable after the Transfer Restrictions relating to any of the
shares of Common Stock included in the Special RSA lapse, a certificate for the
number of shares of Common Stock to which the Executive may be entitled in
accordance with this Agreement shall be delivered to the Executive without the
foregoing legend. Such shares shall be subject to such restrictions under
applicable federal or state securities laws as may be determined by the Human
Resources Committee of the Board of Directors of the Corporation (the
"Committee"). The certificate for such shares shall bear such legend with
respect to such restrictions as may be determined by the Committee.
5. Voting Rights. During the period the Transfer Restrictions remain in effect
(the "Period of Restriction"), the Executive may exercise full voting rights
with respect to the Restricted Shares.
6. Dividends and Other Distributions. During the Period of Restriction, the
Executive shall be entitled to receive all dividends and other distributions
paid with respect to the Restricted Shares. Cash dividends paid on the
Restricted Shares are treated as compensation income to the Executive and are
2
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subject to applicable payroll tax withholding, except as may otherwise be the
case as a result of certain elections which may be made by the Executive. If any
such dividends or distributions are paid in shares of Common Stock, such shares
shall be subject to the same restrictions on transferability as the Restricted
Shares.
7. Termination of Employment Due to Death. In the event that the Executives's
employment with the Corporation terminates prior to the end of the Period of
Restriction because of death, the Transfer Restrictions applicable to the
Restricted Shares shall automatically lapse.
8. Termination of Employment for Reasons Other than Death. In the event that the
Executives's employment with the Corporation terminates for any reason other
than death prior to the end of the Period of Restriction, then all shares of
Restricted Stock granted hereby and as to which the Transfer Restrictions have
not lapsed shall automatically be forfeited; provided, however, that, in the
event the Executive's employment with the Corporation terminates because of
Early Retirement or in the event of involuntary termination of employment by the
Corporation, the Committee may, in its sole discretion, waive the automatic
forfeiture of any or all such shares and/or may add such new restrictions to
such shares of Restricted Stock as it deems appropriate. The term "Early
Retirement" shall have the same meaning as set forth in the Corporation's
Pension Plan.
9. Adjustment in Capitalization. In the event of any change in the outstanding
shares of Common Stock that occurs during the Period of Restriction by reason of
a stock dividend or stock split, recapitalization, combination, exchange of
shares, or other similar corporate change, such adjustments to the Restricted
Shares shall be made that are made to all outstanding shares of restricted stock
that have been granted under the Corporation's Master Compensation Plans.
10. Merger or Consolidation. Prior to the end of the Period of Restriction, if
(i) the liquidation or dissolution of the Corporation occurs, (ii) a merger or
consolidation occurs in which the Corporation is not the surviving Corporation
or in which the Corporation survives but in which the Common Stock is exchanged
for cash or securities of another entity, or (iii) a change in control of the
Corporation occurs, the Transfer Restrictions on the Restricted Shares shall
automatically lapse. The term "change in control" means a change in control of
the Corporation of a nature that would be required to be reported in response to
Item 6 (e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended from time to time (the "Exchange Act");
provided, however, that, without limitation, such a change in control shall be
deemed to have occurred if (i) any one person, or more than one person acting as
a group, acquires ownership of Common Stock that, together with Common Stock
held by such person or group, possesses more than 50 percent of the total market
value or total voting power of the Common Stock, (ii) any one person, or more
than one person acting as a group, acquires (or has acquired during the 12-month
period ending on the date of the most recent acquisition by such person or
persons) ownership of Common Stock possessing 15 percent or more of the total
voting power of the Common Stock, or (iii) a majority of members of the Board of
Directors of the Corporation is replaced during any 12-month period by directors
whose appointment or election is not endorsed by a majority of the members of
the Board of Directors prior to the date of such appointment or election.
11. Taxes. The Corporation shall have the right to require the Executive to
remit to the Corporation an amount sufficient to satisfy any federal, state, and
local withholding tax requirements
3
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relating to the shares of Common Stock included in the Special RSA, prior to the
delivery of any of such shares to the Executive. The Executive may elect to
satisfy such requirements by delivering shares of previously owned Common Stock
or having the Corporation withhold shares of Common Stock from the shares of
Common Stock included in the Special RSA.
12. The Committee. The Committee, by majority action thereof, is authorized to
interpret this Agreement and make all determinations necessary or advisable for
the administration of this Agreement, but only to the extent not contrary to the
express provisions of this Agreement. Such determinations, interpretations, or
other actions made or taken by the Committee shall be final and binding, and
conclusive for all purposes and upon all persons whomsoever.
13. Beneficiary Designation. The Executive may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under this Agreement is to be paid in case of the Executive's
death before the Executive receives any or all of such benefits. Each
designation will revoke all prior designations, shall be in a form prescribed by
the Committee, and will be effective only when filed by the Executive in writing
with the Committee during the Executive's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Executive's death shall be paid to
the Executive's estate.
14. Amendment; Termination. No amendment, modification or termination of this
Agreement may be made without the Executive's prior written consent.
15. Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of North Carolina.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
as of the day and year first above written.
FIRST UNION CORPORATION
By: /s/ Don R. Johnson
Name: Don R. Johnson
Title: Senior Vice President
/s/ Edward E. Crutchfield
Edward E. Crutchfield
4
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Exhibit (12)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
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Six
Months
Ended
June 30, Years Ended December 31,
--------- ---------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
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EXCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 1,474 2,310 2,219 2,088 1,795 977
Fixed charges, excluding capitalized
interest 916 1,739 1,266 816 608 570
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Earnings (A) $ 2,390 4,049 3,485 2,904 2,403 1,547
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Interest, excluding interest on deposits $ 847 1,672 1,198 747 538 502
Distributions on guaranteed preferred
beneficial interests 34 - - - - -
One-third of rents 35 67 68 69 70 68
Capitalized interest - 4 3 1 - -
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Fixed charges (B) $ 916 1,743 1,269 817 608 570
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Consolidated ratios of earnings to fixed
charges, excluding interest on deposits (A)/(B) 2.61 X 2.32 2.75 3.55 3.95 2.71
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INCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 1,474 2,310 2,219 2,088 1,795 977
Fixed charges, excluding capitalized
interest 2,419 4,699 4,120 2,862 2,552 3,010
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Earnings (C) $ 3,893 7,009 6,339 4,950 4,347 3,987
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Interest, including interest on deposits $ 2,350 4,632 4,052 2,793 2,482 2,942
Distributions on guaranteed preferred
beneficial interests 34 - - - - -
One-third of rents 35 67 68 69 70 68
Capitalized interest - 4 3 1 - -
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Fixed charges (D) $ 2,419 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) 1.61 X 1.49 1.54 1.73 1.70 1.32
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SECOND QUARTER 1997
FIRST UNION CORPORATION
AND SUBSIDIARIES
Management's Analysis of Operations
Quarterly Financial Supplement
Six Months Ended June 30, 1997
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FIRST UNION CORPORATION AND SUBSIDIARIES
SECOND QUARTER FINANCIAL SUPPLEMENT
SIX MONTHS ENDED JUNE 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 June 30, 1997 T-18
Year-to-Date June 30, 1997; June 30, September 30, and December 31, 1996 T-20
Consolidated Balance Sheets T-22
Consolidated Statements of Income
Five Quarters Ended June 30, 1997 T-23
Year-to-Date June 30, 1997and 1996 T-24
Consolidated Statements of Cash Flows T-25
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FINANCIAL HIGHLIGHTS
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Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
(Dollars in millions, except per share data) 1997 1996 1997 1996
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FINANCIAL HIGHLIGHTS
Net income $ 485 439 956 682
Dividends on preferred stock - 3 - 7
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders after merger-related
restructuring charges 485 436 956 675
After tax restructuring charges - - - 181
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Net income applicable to common stockholders before merger-related
restructuring charges $ 485 436 956 856
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PER COMMON SHARE DATA (a)
Net income after merger-related restructuring charges $ 0.87 0.77 1.70 1.20
Net income before merger-related restructuring charges 0.87 0.77 1.70 1.52
Cash dividends 0.29 0.26 0.58 0.52
Book value 17.79 16.23 17.79 16.23
Period-end price $ 46.250 30.375 46.250 30.375
Average common shares (In thousands) 560,900 565,152 563,003 562,950
Actual common shares (In thousands) 560,977 563,895 560,977 563,895
Dividend payout ratios (based on operating earnings) 33.33% 33.77 34.12 34.21
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PERFORMANCE HIGHLIGHTS
Before merger-related restructuring charges
Return on average assets (b) (c) 1.39% 1.29 1.40 1.30
Return on average common equity (b) (d) 19.90 18.60 19.74 18.64
Overhead efficiency ratio (excludes expenses on trust capital securities) (e) 56 57 56 57
Net charge-offs to
Average loans, net (b) 0.68 0.45 0.64 0.56
Average loans, net, excluding Bankcard (b) 0.23 0.17 0.21 0.31
Nonperforming assets to loans, net and foreclosed properties 0.73 0.91 0.73 0.91
Net interest margin (b) 4.36% 4.17 4.36 4.18
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CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION)
Before merger-related restructuring charges
Net income applicable to common stockholders $ 536 487 1,060 960
Net income per common share $ 0.95 0.86 1.88 1.70
Return on average tangible assets (b) 1.57% 1.47 1.59 1.48
Return on average tangible common equity (b) (d) 30.84 27.03 30.79 27.42
Overhead efficiency ratio (excludes expenses on trust capital securities) (e) 52% 54 53 54
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PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 16,396 21,835
Investment securities 2,285 2,681
Loans, net of unearned income 96,411 91,339
Earning assets 126,671 126,918
Total assets 142,942 139,886
Noninterest-bearing deposits 19,033 16,831
Interest-bearing deposits 73,901 74,622
Long-term debt 7,258 7,807
Guaranteed preferred beneficial interests 990 -
Common stockholders' equity 9,980 9,153
Total stockholders' equity $ 9,980 9,316
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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 is payable 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.
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MANAGEMENT'S ANALYSIS OF OPERATIONS
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EARNINGS HIGHLIGHTS
First Union earned $956 million in net income applicable to common stockholders
in the first half of 1997, a 12 percent increase from operating earnings of $856
million in the first half of 1996. On a per common share basis, first half 1997
earnings were $1.70 (or $3.40 before a two-for-one stock split announced in the
second quarter of 1997), compared with operating earnings of $1.52 ($3.04 before
the stock split) in the first half of 1996. Operating earnings represent net
income before merger-related restructuring charges.
On June 17, 1997, First Union announced a two-for-one stock split payable July
31, 1997, to holders of record as of July 1, 1997. As a result, all common stock
and per share data has been restated for the stock split. The company also
increased its quarterly dividend 10 percent to 32 cents per common share (64
cents before the stock split) payable in the third quarter of 1997.
In the second quarter of 1997, First Union's net income applicable to common
stockholders was $485 million, an 11 percent increase from $436 million in the
second quarter of 1996 and 3 percent from operating earnings of $471 million in
the first quarter of 1997. Adjusted for the stock split, second quarter 1997
earnings were 87 cents per share ($1.73 before the stock split), compared with
77 cents ($1.55 before the stock split) in the second quarter of 1996.
Key factors in the first half 1997 earnings growth compared with the first half
of 1996 were:
(bullet) 5 percent growth in tax-equivalent net interest income;
(bullet) 43 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 half 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.
Tax-equivalent net interest income was $2.7 billion in the first half of 1997
compared with $2.5 billion in the first half of 1996 as a result of an increase
in earnings assets, primarily the loan and securities held for sale portfolios.
Average net loans in the first half of 1997 were $95.0 billion compared with
$89.5 billion in the first half of 1996. Loan growth was related to the fourth
quarter 1996 purchase accounting acquisitions and increases in both our consumer
and Capital Markets portfolios. The increase in securities reflected actions
taken to benefit from current market conditions.
First Union's strategic decision to allocate more resources to lines of business
that produce fee income was apparent in the increase in noninterest, or fee,
income (excluding investment securities transactions) to $1.5 billion in the
first half of 1997 from $1.1 billion in the first half of 1996.
Nonperforming assets at June 30, 1997, improved to $708 million, or 0.73 percent
of net loans and foreclosed properties, compared with $763 million, or 0.80
percent, at December 31, 1996, and $836 million, or 0.91 percent, at June 30,
1996. Annualized net charge-offs were 0.64 percent in the first half of 1997
compared with 0.56 percent in the first half of 1996. Annualized net charge-offs
were 0.68 percent in the second quarter of 1997 compared with 0.61 percent in
the first quarter of 1997 and 0.45 percent in the second quarter of 1996.
Excluding net charge-offs related to the credit card portfolio, second quarter
1997 annualized net charge-offs were 0.23 percent compared with 0.20 percent in
the first quarter of 1997 and 0.17 percent in the second quarter of 1996. At
June 30, 1997, the owned credit card portfolio represented 5 percent of the loan
portfolio.
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OUTLOOK
On July 21, 1997, First Union announced a pending merger with Signet Banking
Corporation, of Richmond, Virginia, which had assets of $11.9 billion, deposits
of $8.1 billion, loans of $6.3 billion and total stockholders' equity of $936
million at June 30, 1997. The merger is expected to increase First Union's
deposit share to first in the attractive Virginia market. The merger is expected
to be consummated by December 31, 1997, pending regulatory approval, approval by
Signet stockholders, and other conditions of closing.
We currently estimate that approximately 66.4 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 $48.72 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.
On August 5, 1997, we announced an agreement to acquire Covenant Bancorp, Inc.,
based in Haddonfield, New Jersey, which had assets of $454 million, net loans of
$263 million, deposits of $302 million and stockholders' equity of $31 million
at June 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 intend to repurchase common stock in an amount equal to the
aggregate shares issued in connection with the Covenant acquisition.
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. After consolidation, First Union National Bank, based in
Charlotte, North Carolina, will conduct commercial banking operations throughout
our regional marketplace. We believe this consolidation of banking entities will
increase liquidity and create a more efficient use of capital. The first phase,
completed in June 1997, merged our banks in Georgia, Florida and North Carolina.
The second phase, completed in July 1997, continued the consolidation with the
South Carolina, Tennessee, Virginia, Maryland, Washington, D.C., and Connecticut
bank mergers into First Union National Bank. The final consolidation in the rest
of the northern part of our company (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 second 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 half 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
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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, including a minimum 18-month cumulative positive impact to
earnings per share (excluding restructuring charges). 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 the use of various estimates
and allocation methodologies will produce 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 it is not
practicable. Under our new model we isolate the net income contribution and
measure the return on capital for each business segment by allocating equity,
funding expense and corporate allocations based on the risk characteristics for
each segment. We use a risk-based methodology to allocate equity to the segments
based on the credit 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.
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Exposure to interest rate risk is managed centrally by the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment our
model relies on 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 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 interest rate risk is held in the Treasury/Nonbank segment,
the profitability of this segment is expected to be more volatile than for 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.
Intercompany transfers may arise when one segment provides services to another
segment and records revenue for these services. Over the first six months of
1997 Capital Management recorded $14 million in revenue for brokerage services
provided to the Capital Markets segment. Under our model these revenues
contribute to the profitability of the segment providing the service and are
recorded as an expense for the segment receiving the service.
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. The
Consumer Bank encompasses the full-service branch network in 12 states and
Washington, D.C.; the Customer Direct Access Division (CDAD); 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. CDAD includes card,
telephone and personal computer-based distribution channels as well as
centralized customer service centers.
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.
The Consumer Bank also encompasses remote and electronic distribution methods,
including direct access over the Internet, by telephone or by card product.
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 57 percent of the corporation's net interest income
in the first half of 1997.The Consumer Bank's net interest income was $1.5
billion in the first half of 1997, with noninterest income of $573 million,
which was generated primarily through service charges on deposit accounts and
income related to asset securitizations. Forty-eight percent of the
corporation's noninterest expense in the first half of 1997 was attributable to
the Consumer Bank. Fifty-five percent of the corporation's average net loans, or
$52.0 billion, and 71 percent of average deposits, or $66.0 billion, in the
first half of 1997 were managed by the Consumer Bank.
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Average consumer loans in the first half of 1997 exclude the securitization and
sale of certain adjustable rate mortgages (ARMs). 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.
Net charge-offs attributable to the Consumer Bank in the first half of 1997
amounted to $289 million, or 1.11 percent of average net loans on an annualized
basis. Seventy-two percent of these were related to the 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 $6.7
billion at June 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 12th largest mortgage servicer, with a mortgage servicing
portfolio of $52.1 billion at June 30, 1997. On a segment basis, mortgage
banking noninterest income was $139 million in the first six months of 1997.
FUHEB had $4.0 billion in outstandings at June 30, 1997 and originated $749
million in home equity loans in the first half of 1997. In addition, FUHEB is a
major participant in both the "A" credit quality market as well as the sub-prime
market. In the first six months of 1997, FUHEB securitized and sold $234 million
in sub-prime originations through our Capital Markets Group.
CAPITAL MANAGEMENT
Our Capital Management Group includes mutual funds; brokerage services;
personal, institutional and corporate trust; insurance; private banking;
financial and estate planning; Individual Retirement Accounts (IRAs) and other
asset management products and services for both corporate and individual
customers.
The Capital Management Group generated three percent of the corporation's net
interest income, or $73 million, in the first half of 1997. Capital Management
results in the first half 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 contributed $421 million, or 28 percent of the corporation's
noninterest income in the first half of 1997. Trust and investment advisory
fees, which were $283 million in the first half of 1997, were the largest
components of Capital Management fee income. Brokerage revenues were $108
million in the first half of 1997. Insurance commissions, which include
annuities, were $30 million in the first half of 1997.
Capital Management assets under management derived from trust services and
mutual funds were $66.8 billion at June 30, 1997.
The Evergreen Keystone families of mutual funds amounted to $30.5 billion in
assets under management at June 30, 1997. The Evergreen Keystone funds are now
the nation's 25th largest mutual fund family.
Average net loans of $2.0 billion and average deposits of $3.3 billion in the
first half of 1997 were managed by the Capital Management Group, primarily in
our Private Banking Group. The Capital Management Group accounted for $394
million, or 17 percent, of the corporation's noninterest expense in the first
half of 1997.
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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.
The Commercial Bank generated $710 million, or 27 percent, of the corporation's
net interest income in the first half of 1997. The Commercial Bank had
noninterest income of $126 million in the first half of 1997, more than 80
percent of which was generated from cash management products and services.
Nineteen percent of the corporation's noninterest expense in the first half of
1997 was attributable to the Commercial Bank.
Twenty-nine percent of the corporation's average net loans, or $27.1 billion,
and 19 percent of the corporation's average deposits, or $17.5 billion, were
managed by the Commercial Bank in the first half of 1997. Net charge-offs
attributable to the Commercial Bank in the first half of 1997 amounted to $16
million, or 0.12 percent of average net loans on an annualized basis.
CAPITAL MARKETS
Our Capital Markets Group provides investment banking products and services
including loan syndications, real estate securitizations, international trade
finance, affordable housing investments, fixed income sales and trading, and
debt and equity underwriting. Our primary focus is on serving our middle-market
customers with a complete selection of capital markets products. In addition
Capital Markets manages the lending activities of our U.S. Corporate Banking
Group, Specialized Industries Group, (including communications, health care and
insurance), leveraged finance and commercial leasing. Also included is the
International Division, which primarily provides traditional trade finance and
commercial banking services to our customer base and capital markets products to
U.S. subsidiaries of foreign corporations. Our Section 20 subsidiary, First
Union Capital Markets Corp., conducts securities-related activities.
Key Capital Markets growth areas in the first half 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 $187 million, in the first half of 1997.
Capital Markets activities contributed noninterest income of $372 million in the
first half of 1997. Substantially all of Capital Markets-related noninterest
income was included in sundry income. The Capital Markets Group accounted for
$287 million, or 12 percent, of the corporation's noninterest expense in the
first half of 1997. Average net loans were $12.5 billion and average deposits
were $3.7 billion in the first half 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
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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 servicing assets) and charges that
are unusual and infrequent, including merger-related restructuring charges.
Other intangibles amortization in the first half of 1997 (excluding deposit base
premium and mortgage servicing assets) was $73 million. Intangibles amortization
relates to goodwill and other intangibles that result from purchase accounting
acquisitions.
RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
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NET INTEREST INCOME
Tax-equivalent net interest income increased 5 percent to $2.7 billion in the
first half of 1997 from $2.5 billion in the first half of 1996. The increase in
net interest income was primarily the result of loan growth, 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 half of 1997, $21 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 half of 1997 was $3 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 half of 1997 compared with 4.18 percent in the first
half of 1996. The margin increase in the first half of 1997 was primarily a
result of an increase in higher-yielding assets. The average rate earned on
earning assets was 8.23 percent in the first half of 1997 and 7.99 percent in
the first half of 1996. The average rate paid on interest-bearing liabilities
was 4.44 percent in the first half of 1997 and 4.37 percent in the first half 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 divisions, to provide additional
sources of fee income that complement our long-standing banking products and
services. These investments were reflected in 43 percent growth in noninterest
income, excluding investment securities transactions, to $1.5 billion in the
first half of 1997 from $1.1 billion in the first half of 1996.
Virtually all categories of noninterest income increased in the first half of
1997 from the first half a year ago. Fee income from Capital Management and
Capital Markets activities made up more than half of total noninterest income in
the first half of 1997. These two groups are discussed further in the BUSINESS
SEGMENTS section. A $60 million gain from the sale of ARMs
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also was reflected in the first half of 1997. Service charges on deposit
accounts increased 17 percent from the first half of 1996, reflecting the fourth
quarter 1996 purchase accounting acquisitions and some seasonality.
TRADING ACTIVITIES
Our Capital Markets Group also makes a key contribution to noninterest income
through trading profits. Trading activities are undertaken to both satisfy the
investment and risk management needs of our customers and to enhance our
earnings through profitable trading in the corporation's own proprietary
account. Proprietary trading activities across a wide array of financial
instruments add to our ability to optimally serve our customers. Trading profits
were $80 million in the first half of 1997 compared with $29 million in the
first half of 1996. The increase was largely related to asset securitization
activity and to increased customer transactions. Trading account assets were
$4.9 billion at June 30, 1997, compared with $3.9 billion at year-end 1996.
NONINTEREST EXPENSE
Noninterest expense was $2.4 billion in the first half of 1997 compared with
$2.3 billion in the first half of 1996 (which included the merger-related
restructuring charges of $281 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 as we increased our
discretionary investments. This ratio was 56 percent in the first half of 1997,
an improvement from 57 percent in the first half of 1996. These ratios exclude
amounts related to the capital securities issues and the merger-related
restructuring charges.
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 $2.8 billion in other
intangible assets at June 30, 1997, and at December 31, 1996. Costs related to
environmental matters were not material.
First Union estimates that costs related to adapting its computer systems to
reflect the year 2000 will not have a material adverse effect on results of
operations. First Union's single systems platform, in place for more than a
decade, provides an advantage in executing changes to applications. An
Automation & Operations team began planning for the changes in 1996, and we
expect conversion to be complete by the end of 1998, leaving 1999 for any system
refinements that may be needed.
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 $9 million in the first half of 1997, and
$18 million in the first half of 1996.
At June 30, 1997, we had securities available for sale with a market value of
$16.4 billion compared with $14.2 billion at year-end 1996. The market value of
securities available for sale was $72 million above amortized cost at June 30,
1997. Activity in this portfolio is undertaken pri-
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marily 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 half of
1997 was 6.84 percent compared with 6.54 percent in the first half of 1996. The
average maturity of the portfolio was 6.22 years at June 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 June 30,
1997, and $2.5 billion at December 31, 1996.
The average rate earned on investment securities was 8.64 percent in the first
half of 1997 and 8.69 percent in the first half of 1996. The average maturity of
the portfolio was 6.14 years at June 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 company.
The loan portfolio at June 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 June 30, 1997, were $96.4 billion compared with $95.9 billion at
December 31, 1996. Average net loans were $95.0 billion in the first half of
1997 and $89.5 billion in the first half 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 partially offset by the securitization and sale of ARMs in
the first quarter of 1997.
At June 30, 1997, unused loan commitments related to commercial and consumer
loans were $29.8 billion and $22.6 billion, respectively. Commercial and standby
letters of credit were $5.6 billion at June 30, 1997. At June 30, 1997, loan
participations sold to other lenders amounted to $944 million. They were
recorded as a reduction of gross loans.
The average rate earned on loans was 8.68 percent in the first half of 1997
compared with 8.51 percent in the first half 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. 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 ASSET QUALITY section provides information about geographic exposure in the
loan portfolio.
COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans amounted to 11 percent of the total portfolio at
June 30, 1997, and 12 percent at December 31, 1996. This portfolio included
commercial real estate mortgage loans of $9.0 billion at June 30, 1997, compared
with $9.5 billion at December 31, 1996.
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ASSET QUALITY
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NONPERFORMING ASSETS
At June 30, 1997, nonperforming assets were $708 million, or 0.73 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 87 percent, or $613
million, of nonperforming assets at June 30, 1997. Of the rest:
(bullet) Four loans or properties between $5 million and $10 million each
accounted for $28 million; and
(bullet) Three loans or properties over $10 million each accounted for $67
million.
Fifty-two percent of nonperforming assets were collateralized primarily by real
estate at June 30, 1997, and 54 percent at year-end 1996.
PAST DUE LOANS
Accruing loans 90 days past due were $249 million at June 30, 1997, compared
with $290 million at December 31, 1996. Of the past dues, $7 million were
related to commercial and commercial real estate loans and $242 million were
related to consumer loans. At June 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 $305 million in the first half of 1997 compared with
$250 million in the first half of 1996, and in the second quarter of 1997, $161
million compared with $102 million in the second quarter of 1996 and $144
million in the first quarter of 1997. Annualized net charge-offs were 0.64
percent of average net loans in the first half of 1997 compared with 0.56
percent in the first half of 1996, and in the second quarter of 1997, 0.68
percent compared with 0.45 percent in the second quarter of 1996 and 0.61
percent in the first quarter of 1997. Excluding net charge-offs related to the
credit card portfolio, annualized second quarter 1997 net charge-offs were 0.23
percent compared with 0.17 percent in the second quarter of 1996 and 0.20
percent in the first quarter of 1997. At June 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 $310 million in the first half of 1997 compared with
$150 million in the first half of 1996, and in the second quarter of 1997, $165
million compared with $80 million in the second quarter of 1996 and $145 million
in the first quarter of 1997. The increase 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
experienced in our credit card portfolio.
The allowance for loan losses was $1.4 billion at June 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
11
<PAGE>
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 June 30, 1997, impaired loans, which are included in nonaccrual loans,
amounted to $295 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 June 30,
1997, was $28 million related to $202 million of impaired loans. The remaining
impaired loans were recorded at or below fair value. In the first half of 1997
the average recorded investment in impaired loans was $330 million, and $10
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 $11.4
billion commercial real estate portfolio at June 30, 1997, was located in our
East Coast banking region.
LIQUIDITY AND FUNDING SOURCES
- ------------------------------------------------------------------------------
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
$207 million at June 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 $88.2
billion at June 30, 1997, compared with $90.1 billion at December 31, 1996. The
decline largely reflected runoff that is typical following acquisitions and
customers' movement into investment products.
The portion of core deposits in higher-rate, other consumer time deposits was 33
percent at June 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.
12
<PAGE>
Average core deposit balances were $87.1 billion in the first half of 1997 and
$86.1 billion in the first half of 1996. In the first half of 1997 and first
half 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
six 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 June 30, 1997, were $32.1 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 half of 1997
were $29.1 billion compared with $28.6 billion in the first half 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 half 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 June 30, 1997,
compared with 77 percent at year-end 1996. In the second quarter of 1997, we
issued $250 million of 6.60 percent, three-year senior notes.
Under a shelf registration statement filed with the Securities and Exchange
Commission, we currently have available for issuance $390 million of senior or
subordinated debt securities. The sale of any additional debt 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 $214 million of long-term debt will mature, including bank notes of
$75 million. Funds for the payment of long-term debt will come from operations
or, if necessary, additional borrowings.
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 June 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.
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<PAGE>
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 $10.0 billion at June 30, 1997, and at December
31, 1996. Common shares outstanding, adjusted for the stock split, amounted to
561 million at June 30, 1997, (280 million before the stock split) compared with
575 million (287 million before the stock split) at December 31, 1996. In the
first half of 1997, we repurchased 22 million shares of our common stock at a
cost of $924 million, pursuant to a standing board of directors' authorization
to repurchase up to 50 million shares (25 million before the stock split) of
common stock. The board of directors authorized the rescinding of this stock
buyback authorization upon consummation of the Signet merger.
We paid $329 million in dividends to common stockholders in the first half of
1997.
At June 30, 1997, stockholders' equity was increased by a $40 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 $717
million available for dividends at June 30, 1997, without prior regulatory
approval. Our subsidiaries paid $603 million in dividends to the parent
corporation in the first half of 1997. In addition the consolidation of our
banks in Georgia and Florida into the North Carolina bank resulted in a
reduction of capital of $400 million, which was paid to the parent corporation.
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 loan loss allowance (together with tier 1 capital, total capital). At
June 30, 1997, the tier 1 and total capital ratios were 7.55 percent and 12.64
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 June 30, 1997, was 6.23 percent and at December 31, 1996,
it was 6.13 percent.
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<PAGE>
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 June 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 state 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.
In June 1997 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, an increase of 17 basis points per month.
We retained our 5 percent policy limit described below because our change in
methodology was intended to focus on the pattern of rate change rather than 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
15
<PAGE>
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 July 1997 estimate for future short-term interest rates includes an average
federal funds rate rising from 5.54 percent in August 1997 to 5.89 percent by
December 1997, then declining to 5.63 percent by December 1998. Our flat-rate
scenario holds the federal funds rate at 5.50 percent over this same horizon.
Based on the July 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 1.9 percent. Our model indicates that earnings would
benefit by .2 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 offset 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.
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<PAGE>
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $69 million at June
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 $15
million, respectively, at June 30, 1997. Net losses of $14 million will reduce
net interest income in 1997, and gains of $8 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 June 30, 1997, the total credit risk in excess of thresholds
was $76 million. The fair value of collateral held was 112 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
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.
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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 agreement, 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.
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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.
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<TABLE>
<CAPTION>
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Twelve
Months 1997 1996
Ended -------------------- ----------------------------------
June 30, SECOND First Fourth Third Second
(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 $ 9,835 2,559 2,418 2,435 2,423 2,431
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income (a) $ 9,902 2,576 2,434 2,452 2,440 2,456
Interest expense 4,688 1,219 1,131 1,180 1,158 1,167
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 5,214 1,357 1,303 1,272 1,282 1,289
Provision for loan losses 535 165 145 120 105 80
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 4,679 1,192 1,158 1,152 1,177 1,209
Securities available for sale transactions 22 5 4 11 2 3
Investment security transactions 2 1 - 1 - 2
Noninterest income 2,769 749 749 673 598 541
SAIF special assessment (b) 133 - - - 133 -
Noninterest expense 4,542 1,182 1,169 1,113 1,078 1,052
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 2,797 765 742 724 566 703
Income taxes 957 263 255 247 192 239
Tax-equivalent adjustment 67 17 16 17 17 25
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,773 485 471 460 357 439
Dividends on preferred stock 2 - - 1 1 3
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,771 485 471 459 356 436
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 3.17 0.87 0.83 0.82 0.65 0.77
Cash dividends $ 1.16 0.29 0.29 0.29 0.29 0.26
Average common shares (In thousands) - 560,900 565,106 556,595 548,002 565,152
Average common stockholders' equity (c)
Quarter-to-date $ - 9,773 9,761 9,314 8,905 9,167
Year-to-date - 9,767 9,761 9,079 9,000 9,049
Common stock price
High 47 7/8 47 7/8 47 3/4 38 1/2 33 7/8 32 1/4
Low 28 3/4 39 1/8 36 5/8 33 1/2 30 1/2 28 3/4
Period-end $ 46 1/4 46 1/4 40 1/2 37 33 3/8 30 3/8
To earnings ratio (d) 14.59 X 14.59 13.21 13.86 13.62 12.27
To book value 260% 260 240 213 209 188
Book value $ 17.79 17.79 16.93 17.41 15.97 16.23
BALANCE SHEET DATA
Assets 142,942 142,942 136,730 140,127 133,882 139,886
Long-term debt $ 7,258 7,258 7,604 7,660 7,332 7,807
- ------------------------------------------------------------------------------------------------------------------------------------
</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>
<CAPTION>
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------
1997
------------------------
SECOND First
(In millions) QUARTER Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER BANK
Income statement data
Net interest income $ 760 734
Provision for loan losses 153 136
Noninterest income 263 310
Noninterest expense 572 567
Income tax expense 109 124
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 189 217
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 28.48% 33.21
Average loans, net $ 51,711 52,306
Average deposits 65,726 66,182
Average attributed common equity $ 2,668 2,645
- -------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 36 37
Provision for loan losses - -
Noninterest income 212 209
Noninterest expense 197 197
Income tax expense 19 18
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 32 31
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 27.64% 26.54
Average loans, net $ 2,025 1,934
Average deposits 3,206 3,294
Average attributed common equity $ 471 470
- -------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 360 350
Provision for loan losses 8 8
Noninterest income 62 64
Noninterest expense 228 226
Income tax expense 68 66
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 118 114
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 20.94% 20.24
Average loans, net $ 27,001 27,281
Average deposits 17,241 17,776
Average attributed common equity $ 2,272 2,297
- -------------------------------------------------------------------------------------------
(Continued)
</TABLE>
T-2
<PAGE>
<TABLE>
<CAPTION>
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------
1997
------------------------
SECOND First
(In millions) QUARTER Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 104 83
Provision for loan losses (1) (2)
Noninterest income 214 158
Noninterest expense 147 140
Income tax expense 63 38
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 109 65
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 34.05% 22.73
Average loans, net $ 13,416 11,525
Average deposits 3,902 3,557
Average attributed common equity $ 1,291 1,165
- -------------------------------------------------------------------------------------------
TREASURY/NONBANK
Income statement data
Net interest income $ 80 83
Provision for loan losses 5 3
Noninterest income 4 12
Noninterest expense 38 39
Income tax expense 4 9
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 37 44
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 4.83% 5.60
Average loans, net $ 1,143 1,572
Average deposits 2,901 1,887
Average attributed common equity $ 3,071 3,184
- -------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 1,340 1,287
Provision for loan losses 165 145
Noninterest income 755 753
Noninterest expense 1,182 1,169
Income tax expense 263 255
- -------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 485 471
- -------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed common equity (a) 19.90% 19.58
Average loans, net $ 95,296 94,618
Average deposits 92,976 92,696
Average attributed common equity $ 9,773 9,761
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
T-3
<PAGE>
<TABLE>
<CAPTION>
Table 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 1997 1996
----------------- ------------------------ ------------------------------------
SECOND First Fourth Third Second
1997 1996 QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 14.16 X 14.50 14.41 13.90 14.60 15.08 14.80
X
Return on assets 1.40 % 1.03 1.39 1.42 1.35 1.06 1.30
- -------------------------------------------------------------------------------------------------------------------------------
Return on total stockholders' equity (b) 19.74% 14.88 19.90 19.58 19.59 15.83 18.94
X
Earnings retained 65.88% 56.00 66.67 65.06 64.61 55.78 65.91
- -------------------------------------------------------------------------------------------------------------------------------
Internal capital growth (b) 13.00% 8.33 13.27 12.74 12.66 8.83 12.48
- -------------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 34.12% 34.21 33.33 34.94 35.37 35.80 33.77
Preferred and common shares 34.12% 34.77 33.33 34.94 35.39 35.65 34.09
Net income
Common shares 34.12% 43.33 33.33 34.94 35.37 44.62 33.77
Preferred and common shares 34.12% 44.00 33.33 34.94 35.39 44.22 34.09
- -------------------------------------------------------------------------------------------------------------------------------
Return on common stockholders'
equity (b) (c) 19.74% 14.99 19.90 19.58 19.63 15.91 19.11
- -------------------------------------------------------------------------------------------------------------------------------
</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>
<CAPTION>
Table 4
SELECTED QUARTERLY DATA
- --------------------------------------------------------------------------------------------------------
1997 1996
------------------------ -------------------------------------
SECOND First Fourth Third Second
(Dollars in millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 1,039 838 855 883 1,296
Wholesale 691 780 356 - 1
- ----------------------------------------------------------------------------------------------------------------
Total $ 1,730 1,618 1,211 883 1,297
- ----------------------------------------------------------------------------------------------------------------
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 52,123 51,561 50,762 46,370 49,321
- ----------------------------------------------------------------------------------------------------------------
FIRST UNION CORPORATION
OTHER DATA
ATMs 2,479 2,441 2,429 2,313 2,119
Employees 43,869 44,450 44,333 45,116 45,353
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes originations of affiliated banks.
T-4
<PAGE>
<TABLE>
<CAPTION>
Table 5
SECURITIES AVAILABLE FOR SALE
- ---------------------------------------------------------------------------------------------------------------------------
June 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 $ 14 918 1,345 51 2,328 (24) 7 2,311 7.26
U.S. Government agencies 1 1,330 9,704 29 11,064 (66) 28 11,026 6.24
CMOs 13 992 - - 1,005 (7) 6 1,004 3.77
State, county and municipal - - 13 68 81 - - 81 17.64
Other 49 972 136 761 1,918 (29) 13 1,902 5.22
- ---------------------------------------------------------------------------------------------------------------
Total $ 77 4,212 11,198 909 16,396 (126) 54 16,324 6.22
- ---------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 77 4,212 11,198 198 15,685 (115) 52 15,622
Sundry securities - - - 711 711 (11) 2 702
- -------------------------------------------------------------------------------------------------------------
Total $ 77 4,212 11,198 909 16,396 (126) 54 16,324
- -------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 76 4,182 11,159 205 15,622
Sundry securities - - - 702 702
- -------------------------------------------------------------------------------
Total $ 76 4,182 11,159 907 16,324
- -------------------------------------------------------------------------------
WEIGHTED AVERAGE YIELD
U.S. Treasury 5.74% 6.30 7.03 7.39 6.74
U.S. Government agencies 4.57 6.90 7.01 7.83 7.00
CMOs 5.46 7.37 - - 7.35
State, county and municipal - - 6.85 6.65 6.69
Other 7.29 6.21 8.04 4.73 5.78
Consolidated 6.68% 6.72 7.03 5.12 6.84
- -------------------------------------------------------------------------------
Included in "U.S. Government agencies" and "Other" at June 30, 1997, are $1.1
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 June 30, 1997, these securities had a weighted average maturity of
3.20 years and a weighted average yield of 5.65 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 7.64
percent based on a weighted average funding cost differential of (1.99) 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 June 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 $1.9 billion that had
a market value of $1.9 billion at June 30, 1997. There were commitments to sell
securities at a cost of $2.1 billion that had a market value of $2.1 billion at
June 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 six months ended June 30, 1997, were $23 million and $32 million,
respectively. Gross gains realized on the sale of sundry securities were $18
million.
T-5
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Table 6
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------------
June 30, 1997
-------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- 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 $ - 632 392 - 1,024 20 (2) 1,042 5.23
CMOs 11 418 - - 429 8 - 437 3.24
State, county and municipal 54 193 166 343 756 103 (1) 858 8.61
Other 1 15 5 55 76 4 - 80 10.97
- -------------------------------------------------------------------------------------------------------------
Total $ 66 1,258 563 398 2,285 135 (3) 2,417 6.14
- -------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 66 1,258 563 387 2,274 135 (3) 2,406
Sundry securities - - - 11 11 - - 11
- -------------------------------------------------------------------------------------------------------------
Total $ 66 1,258 563 398 2,285 135 (3) 2,417
- -------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 67 1,290 594 455 2,406
Sundry securities - - - 11 11
- -------------------------------------------------------------------------------
Total $ 67 1,290 594 466 2,417
- -------------------------------------------------------------------------------
WEIGHTED AVERAGE YIELD
U.S. Government agencies -% 7.73 7.49 - 7.64
CMOs 7.28 7.63 - - 7.62
State, county and municipal 10.95 10.94 11.93 12.02 11.65
Other 7.88 7.58 8.12 9.53 9.03
Consolidated 10.29% 8.19 8.80 11.68 9.01
- -------------------------------------------------------------------------------
</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 June 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 June 30,
1997. Gross gains from sales are accounted for on a trade date basis. Gross
gains realized on the sale of debt securities for the six months ended June 30,
1997, were $1 million. There were no gains or losses on sundry securities.
T-6
<PAGE>
<TABLE>
<CAPTION>
Table 7
LOANS
- ------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 25,018 24,357 23,639 23,791 23,267
Real estate - construction and other 2,460 2,600 2,674 2,832 2,860
Real estate - mortgage 8,980 9,245 9,504 9,456 9,534
Lease financing 6,724 5,464 4,852 4,255 3,954
Foreign 1,393 1,089 1,085 925 713
- -------------------------------------------------------------------------------------------------------------------------
Total commercial 44,575 42,755 41,754 41,259 40,328
- -------------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 26,400 27,144 28,683 26,603 27,229
Installment loans - Bankcard (a) 5,418 5,387 5,551 5,450 5,000
Installment loans - other 19,275 19,001 18,596 17,964 17,625
Vehicle leasing 3,858 3,704 3,480 3,118 2,939
- -------------------------------------------------------------------------------------------------------------------------
Total retail 54,951 55,236 56,310 53,135 52,793
- -------------------------------------------------------------------------------------------------------------------------
Total loans 99,526 97,991 98,064 94,394 93,121
- -------------------------------------------------------------------------------------------------------------------------
UNEARNED INCOME
Loans 528 511 488 440 432
Lease financing 2,587 1,993 1,718 1,434 1,350
- -------------------------------------------------------------------------------------------------------------------------
Total unearned income 3,115 2,504 2,206 1,874 1,782
- -------------------------------------------------------------------------------------------------------------------------
Loans, net $ 96,411 95,487 95,858 92,520 91,339
- -------------------------------------------------------------------------------------------------------------------------
</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
------------------------ ------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of quarter $ 1,366 1,365 1,377 1,416 1,436
Provision for loan losses 165 145 120 105 80
Allowance of loans acquired or sold, net - - 42 - 2
Loan losses, net (161) (144) (174) (144) (102)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of quarter $ 1,370 1,366 1,365 1,377 1,416
- ----------------------------------------------------------------------------------------------------------------------------
(as a % of loans, net) 1.42% 1.43 1.42 1.49 1.55
- ----------------------------------------------------------------------------------------------------------------------------
(as a % of nonaccrual and restructured loans) 223% 199 204 188 195
- ----------------------------------------------------------------------------------------------------------------------------
(as a % of nonperforming assets) 194% 175 179 167 169
- ----------------------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 13 13 31 25 23
Real estate - commercial construction and mortgage 6 7 7 11 25
Real estate - residential mortgage 13 8 6 5 8
Installment loans - Bankcard 117 105 93 97 68
Installment loans - Bankcard special adjustment (a) - - 34 - -
Installment loans - other and Vehicle leasing 38 36 41 38 38
- ----------------------------------------------------------------------------------------------------------------------------
Total 187 169 212 176 162
- ----------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 8 11 12 9 42
Real estate - commercial construction and mortgage 3 1 3 2 7
Real estate - residential mortgage - - 1 - -
Installment loans - Bankcard 7 6 15 13 3
Installment loans - other and Vehicle leasing 8 7 7 8 8
- ----------------------------------------------------------------------------------------------------------------------------
Total 26 25 38 32 60
- ----------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 161 144 174 144 102
- ----------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net) (b) 0.68% 0.61 0.75 0.64 0.45
- ----------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net, excluding Bankcard) (b) 0.23% 0.20 0.29 0.28 0.17
- ----------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 202 221 218 294 311
Commercial real estate loans 98 111 118 137 156
Consumer real estate loans 181 214 199 186 163
Installment loans 133 128 120 110 92
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 614 674 655 727 722
Restructured loans 2 11 14 3 4
Foreclosed properties 92 93 94 95 110
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 708 778 763 825 836
- ----------------------------------------------------------------------------------------------------------------------------
(as % of loans, net and foreclosed properties) 0.73% 0.81 0.80 0.89 0.91
- ----------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 249 283 290 291 272
- ----------------------------------------------------------------------------------------------------------------------------
</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
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE SERVICING ASSETS $ 263 234 199 134 150
- -----------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 29 32 35 38 42
- -----------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 2,278 2,308 2,359 1,867 1,919
Deposit base premium 480 510 479 500 530
Other 7 9 11 12 12
- -----------------------------------------------------------------------------------------------------------
Total $ 2,765 2,827 2,849 2,379 2,461
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Table 10
FORECLOSED PROPERTIES
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreclosed properties $ 109 110 111 112 130
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of quarter 17 17 17 20 22
Provision for foreclosed properties 1 - 2 - (2)
Dispositions, net (1) - (2) (3) -
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of quarter 17 17 17 17 20
- ---------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 92 93 94 95 110
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-9
<PAGE>
<TABLE>
<CAPTION>
Table 11
DEPOSITS
- ----------------------------------------------------------------------------------------------------
1997 1996
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORE DEPOSITS
Noninterest-bearing $ 19,033 18,275 18,632 18,008 16,831
Savings and NOW accounts 27,040 27,097 26,693 25,009 25,492
Money market accounts 12,917 13,061 13,468 13,019 12,843
Other consumer time 29,235 30,114 31,284 30,086 31,079
- -----------------------------------------------------------------------------------------------------
Total core deposits 88,225 88,547 90,077 86,122 86,245
Foreign 1,683 866 1,854 2,303 2,232
Other time 3,026 2,990 2,884 3,019 2,976
- -----------------------------------------------------------------------------------------------------
Total deposits $ 92,934 92,403 94,815 91,444 91,453
- -----------------------------------------------------------------------------------------------------
<CAPTION>
Table 12
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ----------------------------------------------------------------------------------------------------
JUNE 30, 1997
------------------------
TIME OTHER
(In millions) CERTIFICATES TIME
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
MATURITY OF
3 months or less $ 3,303 -
Over 3 months through 6 months 1,212 -
Over 6 months through 12 months 1,111 -
Over 12 months 1,406 -
- ----------------------------------------------------------------------------------------------------
Total $ 7,032 -
- ----------------------------------------------------------------------------------------------------
</TABLE>
T-10
<PAGE>
<TABLE>
<CAPTION>
Table 13
LONG-TERM DEBT
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996
----------------------- ----------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY
7-1/2% debentures, due December 1, 2002 $ 16 16 16 16 16
Notes
Floating rate extendible, due June 15, 2005 10 10 10 10 10
6.60%, due June 15, 2000 249 - - - -
Floating rate, due February 24, 1998 300 300 300 300 300
6-3/4%, due January 15, 1998 250 250 250 249 249
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 198 198 197 197 197
7-1/2%, due July 15, 2006 298 297 297 297 -
7%, due March 15, 2006 198 198 198 198 198
6-7/8%, due September 15, 2005 249 249 249 249 248
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 224 224 224 223 223
8-1/8%, due June 24, 2002 249 249 249 249 249
9.45%, due August 15, 2001 148 148 148 148 148
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% - - - 100 100
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 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,784 4,534 4,533 4,631 4,035
- -----------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4%, due September 1, 2003 122 156 158 - -
Varying rates and terms to November 1, 2002 52 64 65 39 41
Floating rate - - - - 200
Subordinated notes
Bank, varying rates and terms to December 15, 2036 725 1,222 1,247 997 1,537
6.80%, due June 15, 2003 149 149 149 149 149
9-5/8%, due August 15, 1999 150 149 149 150 150
Floating rate - - 25 25 25
Subordinated capital notes
9-5/8%, due June 15, 1999 75 74 74 75 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 33 35 37 40 46
- -----------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 1,530 2,073 2,128 1,699 2,447
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 880 930 930 933 1,208
Mortgage notes and other debt 41 43 44 45 45
Capitalized leases 23 24 25 24 25
Notes payable to FDIC - - - - 47
- -----------------------------------------------------------------------------------------------------------------------------------
Total other debt 944 997 999 1,002 1,325
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 7,258 7,604 7,660 7,332 7,807
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-11
<PAGE>
<TABLE>
<CAPTION>
Table 14
CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Twelve
Months 1997 1996
Ended -------------------- --------------------------------
June 30, SECOND First Fourth Third Second
(In millions) 1997 QUARTER Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 9,316 9,474 10,008 8,689 9,316 9,110
Net income 1,773 485 471 460 357 439
Redemption of preferred stock (109) - - - (109) -
Purchase of common stock (1,793) (105) (836) (36) (816) (79)
Common stock issued for stock options exercised 346 117 101 87 41 94
Common stock issued through dividend
reinvestment plan 23 - 11 1 11 9
Common stock issued for purchase accounting
acquisitions 888 - 4 884 - -
Cash dividends paid on
Preferred stock (2) - - (1) (1) (3)
Common stock (648) (163) (166) (162) (157) (147)
Unrealized gain (loss) on debt and
equity securities 186 172 (119) 86 47 (107)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 9,980 9,980 9,474 10,008 8,689 9,316
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-12
<PAGE>
<TABLE>
<CAPTION>
Table 15
CAPITAL RATIOS
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------ ------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 8,135 7,752 7,633 6,414 7,020
Total capital 13,614 13,027 12,842 10,996 11,792
Adjusted risk-based assets 107,726 106,451 104,126 100,508 98,786
Adjusted leverage ratio assets $ 130,666 126,465 124,419 122,759 125,440
Ratios
Tier 1 capital 7.55% 7.28 7.33 6.38 7.11
Total capital 12.64 12.24 12.33 10.94 11.94
Leverage 6.23 6.13 6.13 5.23 5.60
Stockholders' equity to assets
Quarter-end 6.98 6.93 7.14 6.49 6.66
Average 6.94% 7.20 6.85 6.63 6.76
- -------------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank of North Carolina 6.75% 6.51 6.43 6.32 6.66
First Union National Bank 9.11 9.45 8.98 11.75 10.69
First Union Bank of Delaware 14.16 13.86 13.61 15.39 13.98
First Union Home Equity Bank 9.68 8.27 8.40 8.02 7.61
Total capital
First Union National Bank of North Carolina 10.73 10.11 10.20 10.03 10.71
First Union National Bank 12.08 12.45 12.22 13.56 12.56
First Union Bank of Delaware 15.42 15.11 14.87 16.65 15.28
First Union Home Equity Bank 11.94 10.87 10.77 10.47 9.91
Leverage
First Union National Bank of North Carolina 5.48 6.15 5.95 5.98 5.80
First Union National Bank 7.18 7.59 7.06 9.04 8.09
First Union Bank of Delaware 11.29 11.43 10.60 12.07 11.02
First Union Home Equity Bank 8.44% 7.42 7.84 7.14 6.71
- -------------------------------------------------------------------------------------------------------------------------
</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
--------------- ----------------------
JUNE 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 $ 18,330 6.39% 5.75% 1.53 Converts floating rate loans to fixed
Carrying amount $ 13 rate. Adds to liability sensitivity.
Unrealized gross gain 50 Similar characteristics to a fixed
Unrealized gross loss (15) income security funded with
variable rate liabilities. Includes
$3.5 billion of indexed amortizing
swaps, expected to mature by
September 30, 1997.
-------
Total 48
- --------------------------------------------- -------
Total asset rate conversions $ 18,330 6.39% 5.75% 1.53 $ 48
- -----------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Interest rate swaps $ 6,789 7.02% 5.92% 9.90 Converts $4.2 billion of fixed rate
Carrying amount $ 14 long-term debt to floating rate by
Unrealized gross gain 75 matching the terms of the swap
Unrealized gross loss (71) to the debt issue. Rate sensitivity
remains unchanged due to the
direct linkage of the swap to the
debt issue. Also converts $654
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 18
-------
Interest rate floors 150 4.00 - 6.06 $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 $ 6,939 6.95% 5.92% 9.81 $ 18
- -----------------------------------------------------------------------------------------
(Continued)
T-14
<PAGE>
<CAPTION>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE RATE ESTIMATED
--------------- ---------------------
JUNE 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 5.82% 7.03% 2.36 Paid a premium for the right to lock
Carrying amount $ 1 in 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps.
Unrealized gross loss -
-------
Total 1
-------
Short Eurodollar futures 19,091 - 6.11 0.58 Locks in 3 month LIBOR reset rates
Carrying amount - on pay variable rate swaps. $8.0
Unrealized gross gain 1 billion effective September 1997;
Unrealized gross loss (1) $2.8 billion effective December
1997, March 1998, June 1998 and
September 1998.
-------
Total -
-------
Long Eurodollar futures 2,000 6.62 - 1.84 Converts floating rate LIBOR-based
Carrying amount - loans to fixed rate. Adds to liability
Unrealized gross gain - sensitivity. Similar characteristics
Unrealized gross loss - to fixed income security funded with
variable rate liabilities. $500
million effective December 1998, March
1999, June 1999 and September 1999.
-------
Total -
-------
Call options on Eurodollar futures 1,024 6.72 - 0.84 Paid a premium for the right to buy
Carrying amount 1 Eurodollar futures which convert
Unrealized gross gain - floating rate LIBOR-based loans to
Unrealized gross loss - fixed rate. Interest rate risk limited
to premium paid. $256 million
effective December 1997, March
1998, June 1998 and September 1998.
-------
Total 1
-------
CMT floor 100 6.42 6.72 3.84 First Union Mortgage Corporation
Carrying amount 1 paid a premium for a CMT floor in
Unrealized gross gain - order to offset the decline in value of
Unrealized gross loss - mortgage servicing in a falling rate
environment.
-------
Total 1
- ---------------------------------------------- -------
Total rate sensitivity hedges $22,373 6.60% 6.12% 0.73 $ 3
- ------------------------------------------------------------------------------------------
</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 June 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)
- -----------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997 1 YEAR 1-2 2-5 5-10 After 10
(In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Notional amount $ 9,657 985 7,688 - - 18,330
Weighted average receive rate 6.31% 5.28 6.63 - - 6.39
Estimated fair value $ 9 (14) 53 - - 48
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 814 179 861 3,525 1,560 6,939
Weighted average receive rate 6.34% 6.08 7.40 6.86 7.34 6.95
Estimated fair value $ 3 - 26 11 (22) 18
- -----------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 17,122 4,573 678 - - 22,373
Weighted average receive rate 6.63% 6.61 6.55 - - 6.60
Estimated fair value $ - 1 2 - - 3
- -----------------------------------------------------------------------------------------------------------------------------
</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 (1,466) (741) (662) (39,348) (42,217)
Terminations - - - (13,986) (13,986)
- --------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $ 18,330 6,939 - 22,373 47,642
- --------------------------------------------------------------------------------------------------------------
</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
- -----------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1997 FIRST 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 $ 249 4 5.68% $ 229 2 4.18%
Federal funds sold and securities
purchased under resale agreements 6,171 85 5.52 5,297 73 5.61
Trading account assets (a) 3,825 64 6.77 3,107 50 6.51
Securities available for sale (a) 16,854 296 7.01 14,019 232 6.64
Investment securities (a)
U.S. Government and other 1,531 29 7.59 1,646 30 7.37
State, county and municipal 766 21 11.18 787 22 10.87
- ------------------------------------------------------------------------- -----------------------
Total investment securities 2,297 50 8.78 2,433 52 8.50
- ------------------------------------------------------------------------- -----------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 24,338 465 7.65 23,391 437 7.57
Real estate - construction and other 2,557 54 8.54 2,642 55 8.44
Real estate - mortgage 9,083 196 8.66 9,393 195 8.40
Lease financing 3,013 85 11.24 2,502 68 10.87
Foreign 1,288 20 6.14 1,022 15 6.16
- ------------------------------------------------------------------------- -----------------------
Total commercial 40,279 820 8.16 38,950 770 8.01
- ------------------------------------------------------------------------- -----------------------
Retail
Real estate - mortgage 27,054 529 7.83 28,268 549 7.77
Installment loans - Bankcard (c) 5,446 200 14.70 5,448 190 13.92
Installment loans - other and Vehicle leasing 22,517 528 9.40 21,952 516 9.51
- ------------------------------------------------------------------------- -----------------------
Total retail 55,017 1,257 9.15 55,668 1,255 9.06
- ------------------------------------------------------------------------- -----------------------
Total loans 95,296 2,077 8.73 94,618 2,025 8.63
- ------------------------------------------------------------------------- -----------------------
Total earning assets 124,692 2,576 8.27 119,703 2,434 8.19
-------------------- ---------------------
Cash and due from banks 5,428 5,530
Other assets 9,738 9,661
- ------------------------------------------------------------- ----------
Total assets $ 139,858 $134,894
- ------------------------------------------------------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 27,276 192 2.82 26,675 182 2.76
Money market accounts 12,733 92 2.92 13,190 93 2.85
Other consumer time 29,522 384 5.22 30,684 395 5.22
Foreign 3,012 41 5.39 1,741 22 5.27
Other time 3,240 51 6.29 3,481 51 5.95
- ------------------------------------------------------------------------- -----------------------
Total interest-bearing deposits 75,783 760 4.02 75,771 743 3.98
Federal funds purchased and securities
sold under repurchase agreements 19,878 250 5.03 16,724 206 5.00
Commercial paper 1,280 18 5.40 905 11 5.05
Other short-term borrowings 4,630 71 6.21 3,296 47 5.73
Long-term debt 7,333 120 6.58 7,632 124 6.49
- ------------------------------------------------------------------------- -----------------------
Total interest-bearing liabilities 108,904 1,219 4.49 104,328 1,131 4.39
------------------ ----------------------
Noninterest-bearing deposits 17,193 16,925
Other liabilities 3,068 3,022
Guaranteed preferred beneficial interests 990 913
Stockholders' equity 9,703 9,706
- ------------------------------------------------------------- ----------
Total liabilities and stockholders' equity $ 139,858 $134,894
- ------------------------------------------------------------- ----------
Interest income and rate earned $ 2,576 8.27% $ 2,434 8.19%
Interest expense and equivalent rate paid 1,219 3.91 1,131 3.82
- ------------------------------------------------------------------------------------ -----------------------------
Net interest income and margin $ 1,357 4.36% $ 1,303 4.37%
- ------------------------------------------------------------------------------------ -----------------------------
</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>
- -----------------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER 1996 THIRD QUARTER 1996
--------------------------------- -----------------------------------
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 $ 127 2 5.83% $ 65 1 8.73%
Federal funds sold and securities
purchased under resale agreements 6,947 92 5.32 5,760 77 5.26
Trading account assets (a) 4,190 73 6.87 5,359 88 6.58
Securities available for sale (a) 14,257 238 6.68 15,657 260 6.62
Investment securities (a)
U.S. Government and other 1,668 33 7.70 1,693 31 7.57
State, county and municipal 823 22 10.67 894 24 10.67
- -------------------------------------------------------------------------- ----------------------
Total investment securities 2,491 55 8.68 2,587 55 8.64
- -------------------------------------------------------------------------- ----------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 23,326 445 7.59 22,825 446 7.78
Real estate - construction and other 2,723 57 8.33 2,846 60 8.35
Real estate - mortgage 9,522 202 8.41 9,480 200 8.41
Lease financing 2,071 51 10.01 2,063 48 9.37
Foreign 907 14 6.16 721 12 6.36
- ------------------------------------------------------------------------- ----------------------
Total commercial 38,549 769 7.94 37,935 766 8.04
- ------------------------------------------------------------------------- ----------------------
Retail
Real estate - mortgage 27,664 534 7.73 26,855 529 7.88
Installment loans - Bankcard (c) 5,521 184 13.34 5,257 173 13.16
Installment loans - other and Vehicle leasing 21,294 505 9.44 20,445 491 9.55
- ------------------------------------------------------------------------- ----------------------
Total retail 54,479 1,223 8.97 52,557 1,193 9.06
- ------------------------------------------------------------------------- ----------------------
Total loans 93,028 1,992 8.54 90,492 1,959 8.63
- ------------------------------------------------------------------------- ----------------------
Total earning assets 121,040 2,452 8.08 119,920 2,440 8.12
------------------ --------------------
Cash and due from banks 5,660 5,333
Other assets 9,171 8,178
- ------------------------------------------------------------ ----------
Total assets $ 135,871 $133,431
- ------------------------------------------------------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 25,742 172 2.67 25,126 173 2.73
Money market accounts 13,304 100 2.99 13,239 93 2.79
Other consumer time 30,675 401 5.20 30,467 398 5.20
Foreign 1,999 27 5.30 1,856 24 5.24
Other time 3,166 51 6.44 3,195 46 5.67
- ------------------------------------------------------------------------- --------------------
Total interest-bearing deposits 74,886 751 3.99 73,883 734 3.95
Federal funds purchased and securities
sold under repurchase agreements 19,148 241 4.99 19,038 234 4.91
Commercial papar 954 12 5.10 830 11 5.03
Other short-term borrowings 3,820 55 5.75 3,841 56 5.78
Long-term debt 7,550 121 6.41 7,849 123 6.27
--------------------- -------------------
Total interest-bearing liabilities 106,358 1,180 4.42 105,441 1,158 4.37
------------------ --------------------
Noninterest-bearing deposits 17,193 16,585
Other liabilities 2,824 2,556
Guaranteed preferred beneficial interests 188 -
Stockholders' equity 9,308 8,849
- ------------------------------------------------------------- ----------
Total liabilities and stockholders' equity $ 135,871 $133,431
- ------------------------------------------------------------ ----------
Interest income and rate earned $ 2,452 8.08% $ 2,440 8.12%
Interest expense and equivalent rate paid 1,180 3.88 1,158 3.85
--------------------- ----------------------
Net interest income and margin $ 1,272 4.20% $ 1,282 4.27%
- ------------------------------------------------------------------------------------ -----------------------
<CAPTION>
- ---------------------------------------------------------------------------------------
SECOND QUARTER 1996
-----------------------------------
Average
Interest Rates
Average Income/ Earned/
(In millions) Balances Expense Paid
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 183 1 3.21%
Federal funds sold and securities
purchased under resale agreements 6,100 79 5.22
Trading account assets (a) 4,101 72 6.98
Securities available for sale (a) 20,907 341 6.54
Investment securities (a)
U.S. Government and other 1,767 34 7.41
State, county and municipal 1,001 28 11.01
- -------------------------------------------------------------------------
Total investment securities 2,768 62 8.71
- -------------------------------------------------------------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 23,070 447 7.78
Real estate - construction and other 2,779 59 8.51
Real estate - mortgage 9,615 202 8.48
Lease financing 1,914 48 9.90
Foreign 696 10 6.26
- -------------------------------------------------------------------------
Total commercial 38,074 766 8.09
- -------------------------------------------------------------------------
Retail
Real estate - mortgage 27,236 526 7.72
Installment loans - Bankcard (c) 4,527 151 13.41
Installment loans - other and Vehicle leasing 19,982 458 9.22
- -------------------------------------------------------------------------
Total retail 51,745 1,135 8.80
- -------------------------------------------------------------------------
Total loans 89,819 1,901 8.50
- -------------------------------------------------------------------------
Total earning assets 123,878 2,456 7.95
-----------------
Cash and due from banks 5,063
Other assets 7,517
- --------------------------------------------------------------
Total assets $136,458
- --------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 25,359 164 2.61
Money market accounts 13,100 90 2.77
Other consumer time 30,975 408 5.30
Foreign 2,364 29 4.92
Other time 3,173 38 4.79
- --------------------------------------------------------------------------
Total interest-bearing deposits 74,971 729 3.92
Federal funds purchased and securities
sold under repurchase agreements 20,719 254 4.93
Commercial paper 841 10 5.00
Other short-term borrowings 4,102 56 5.42
Long-term debt 7,615 118 6.18
- --------------------------------------------------------------------------
Total interest-bearing liabilities 108,248 1,167 4.33
----------------
Noninterest-bearing deposits 16,628
Other liabilities 2,364
Guaranteed preferred beneficial interests -
Stockholders' equity 9,218
- -------------------------------------------------------------
Total liabilities and stockholders' equity $ 136,458
- -------------------------------------------------------------
Interest income and rate earned $ 2,456 7.95%
Interest expense and equivalent rate paid 1,167 3.78
- -------------------------------------------------------------------------------------
Net interest income and margin $ 1,289 4.17%
- -------------------------------------------------------------------------------------
</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>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED 1997 SIX MONTHS ENDED 1996
---------------------------------- ----------------------------------
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 $ 239 6 4.97% $ 156 4 5.00%
Federal funds sold and securities
purchased under resale agreements 5,736 158 5.56 5,914 154 5.25
Trading account assets (a) 3,468 114 6.65 3,591 119 6.64
Securities available for sale (a) 15,445 528 6.84 18,957 619 6.54
Investment securities (a)
U.S. Government and other 1,588 59 7.48 1,829 68 7.39
State, county and municipal 777 43 11.02 1,063 58 10.92
- ------------------------------------------------------------------------- ----------------------
Total investment securities 2,365 102 8.64 2,892 126 8.69
- ------------------------------------------------------------------------- ----------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 23,867 902 7.62 23,053 890 7.76
Real estate - construction and other 2,599 109 8.49 2,663 114 8.62
Real estate - mortgage 9,237 391 8.53 9,724 412 8.53
Lease financing 2,759 153 11.07 1,862 91 9.72
Foreign 1,156 35 6.15 692 21 6.24
- ------------------------------------------------- ----------------------
Total commercial 39,618 1,590 8.08 37,994 1,528 8.08
- ------------------------------------------------------------------------- ----------------------
Retail
Real estate - mortgage 27,658 1,078 7.80 27,327 1,052 7.70
Installment loans - Bankcard (c) 5,447 390 14.31 4,330 300 13.87
Installment loans - other and Vehicle leasing 22,236 1,044 9.45 19,895 918 9.28
- ------------------------------------------------------------------------- ----------------------
Total retail 55,341 2,512 9.10 51,552 2,270 8.83
- ------------------------------------------------------------------------- ----------------------
Total loans 94,959 4,102 8.68 89,546 3,798 8.51
- ------------------------------------------------------------------------- ----------------------
Total earning assets 122,212 5,010 8.23 121,056 4,820 7.99
--------------------- ---------------------------
Cash and due from banks 5,479 5,057
Other assets 9,699 7,484
- ------------------------------------------------------------- ----------
Total assets $ 137,390 $ 133,597
- ------------------------------------------------------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 26,977 374 2.79 24,993 324 2.61
Money market accounts 12,960 185 2.88 13,183 182 2.78
Other consumer time 30,100 779 5.22 31,418 830 5.31
Foreign 2,380 63 5.34 2,318 60 5.21
Other time 3,360 102 6.12 2,998 79 5.30
- ------------------------------------------------------------------------- ----------------------
Total interest-bearing deposits 75,777 1,503 4.00 74,910 1,475 3.96
Federal funds purchased and securities
sold under repurchase agreements 18,310 456 5.02 18,520 461 5.00
Commercial paper 1,093 29 5.25 914 23 5.10
Other short-term borrowings 3,967 118 6.01 3,877 104 5.40
Long-term debt 7,482 244 6.53 7,429 231 6.22
- ------------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 106,629 2,350 4.44 105,650 2,294 4.37
--------------------- ---------------------------
Noninterest-bearing deposits 17,060 16,457
Other liabilities 3,045 2,278
Guaranteed preferred beneficial interests 951 -
Stockholders' equity 9,705 9,212
- -------------------------------------------------
Total liabilities and stockholders' equity $137,390 $ 133,597
- ------------------------------------------------------------- ----------
Interest income and rate earned $ 5,010 8.23% $ 4,820 7.99%
Interest expense and equivalent rate paid 2,350 3.87 2,294 3.81
- ---------------------------------------------------------------------------------------- -------------------------
Net interest income and margin $ 2,660 4.36% $ 2,526 4.18%
- ---------------------------------------------------------------------------------------- -------------------------
</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/
(In millions) Balances Expense Paid Balances Expense Paid
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 125 7 5.69% $ 125 5 5.64%
Federal funds sold and securities
purchased under resale agreements 6,135 323 5.27 5,862 231 5.26
Trading account assets (a) 4,186 280 6.67 4,185 207 6.61
Securities available for sale (a) 16,946 1,117 6.59 17,849 879 6.57
Investment securities (a)
U.S. Government and other 1,754 132 7.51 1,783 99 7.45
State, county and municipal 960 104 10.81 1,006 82 10.85
- ------------------------------------------------ ----------------------- -------------------
Total investment securities 2,714 236 8.68 2,789 181 8.68
- ------------------------------------------------ ----------------------- -------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 23,065 1,781 7.72 22,977 1,336 7.77
Real estate - construction and other 2,724 231 8.47 2,724 174 8.52
Real estate - mortgage 9,612 814 8.47 9,641 612 8.49
Lease financing 1,965 190 9.70 1,930 139 9.59
Foreign 753 47 6.24 702 33 6.28
- -------------------------------------------------- ---------------------- -------------------
Total commercial 38,119 3,063 8.04 37,974 2,294 8.07
- -------------------------------------------------- ---------------------- -------------------
Retail
Real estate - mortgage 27,293 2,115 7.75 27,168 1,581 7.76
Installment loans - Bankcard (c) 4,863 657 13.52 4,642 473 13.59
Installment loans - other and Vehicle leasing 20,385 1,914 9.39 20,080 1,409 9.37
- -------------------------------------------------- ---------------------- -------------------
Total retail 52,541 4,686 8.92 51,890 3,463 8.90
- -------------------------------------------------- ---------------------- -------------------
Total loans 90,660 7,749 8.55 89,864 5,757 8.55
- -------------------------------------------------- ---------------------- -------------------
Total earning assets 120,766 9,712 8.04 120,674 7,260 8.03
--------------------- -------------------------------
Cash and due from banks 5,278 5,150
Other assets 8,083 7,717
- -------------------------------------------------- ---------- ---------
Total assets $ 134,127 $ 133,541
- -------------------------------------------------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 25,214 669 2.65 25,037 497 2.65
Money market accounts 13,228 375 2.83 13,202 275 2.78
Other consumer time 30,992 1,629 5.26 31,099 1,228 5.27
Foreign 2,122 111 5.24 2,163 84 5.22
Other time 3,090 176 5.69 3,064 125 5.43
- -------------------------------------------------- ---------------------- -------------------
Total interest-bearing deposits 74,646 2,960 3.97 74,565 2,209 3.96
Federal funds purchased and securities
sold under repurchase agreements 18,808 936 4.98 18,694 695 4.97
Commercial paper 903 46 5.08 886 34 5.08
Other short-term borrowings 3,853 215 5.58 3,865 160 5.53
Long-term debt 7,565 475 6.28 7,570 354 6.24
- -------------------------------------------------- --------------------- -------------------
Total interest-bearing liabilities 105,775 4,632 4.38 105,580 3,452 4.37
-------------------- --------------------------------
Noninterest-bearing deposits 16,674 16,499
Other liabilities 2,486 2,372
Guaranteed preferred beneficial interests 47 -
Stockholders' equity 9,145 9,090
- -------------------------------------------------- ---------- ----------
Total liabilities and stockholders' equity $ 134,127 $ 133,541
- -------------------------------------------------- ---------- ----------
Interest income and rate earned $ 9,712 8.04% $ 7,260 8.03%
Interest expense and equivalent rate paid 4,632 3.83 3,452 3.82
- -------------------------------------------------- ------------------- -----------------
Net interest income and margin $ 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
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,428 5,998 6,509 6,101 5,456
Interest-bearing bank balances 276 230 316 40 73
Federal funds sold and securities
purchased under resale agreements 6,440 5,019 7,024 5,660 6,197
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,144 11,247 13,849 11,801 11,726
- ---------------------------------------------------------------------------------------------------------------------------
Trading account assets 4,863 3,579 3,934 4,779 4,793
Securities available for sale 16,396 14,411 14,182 13,729 21,835
Investment securities 2,285 2,408 2,501 2,566 2,681
Loans, net of unearned income 96,411 95,487 95,858 92,520 91,339
Allowance for loan losses (1,370) (1,366) (1,365) (1,377) (1,416)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net 95,041 94,121 94,493 91,143 89,923
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,052 4,127 4,073 3,811 2,863
Due from customers on acceptances 728 634 763 571 518
Other intangible assets 2,765 2,827 2,849 2,379 2,461
Other assets 3,668 3,376 3,483 3,103 3,086
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 142,942 136,730 140,127 133,882 139,886
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 19,033 18,275 18,632 18,008 16,831
Interest-bearing deposits 73,901 74,128 76,183 73,436 74,622
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 92,934 92,403 94,815 91,444 91,453
Short-term borrowings 27,349 22,335 23,024 22,910 27,895
Bank acceptances outstanding 728 634 764 571 516
Other liabilities 3,703 3,290 3,361 2,936 2,899
Long-term debt 7,258 7,604 7,660 7,332 7,807
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 131,972 126,266 129,624 125,193 130,570
- ---------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 990 990 495 - -
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - 48 163
Common stock, $3.33-1/3 par value;
authorized 750,000,000 shares 1,870 1,866 1,916 1,803 1,880
Paid-in capital 715 708 1,378 506 1,188
Retained earnings 7,355 7,032 6,727 6,431 6,231
Unrealized gain (loss) on debt and equity securities, net 40 (132) (13) (99) (146)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,980 9,474 10,008 8,689 9,316
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 142,942 136,730 140,127 133,882 139,886
- ---------------------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale-amortized cost $ 16,324 14,607 14,194 13,871 22,051
Investment securities-market value 2,417 2,522 2,636 2,691 2,797
Common stockholders' equity, net of unrealized
gain (loss) on debt and equity securities $ 9,980 9,474 10,008 8,641 9,153
Preferred shares outstanding (In thousands) - - - 1,911 2,599
Common shares outstanding (In thousands) 560,977 559,665 574,697 541,015 563,895
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-22
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------ -------------------------------------
SECOND First Fourth Third Second
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,071 2,019 1,986 1,953 1,896
Interest and dividends on securities available for sale 292 230 236 258 336
Interest and dividends on investment securities
Taxable income 29 30 32 31 33
Nontaxable income 14 15 15 16 19
Trading account interest 64 49 72 87 67
Other interest income 89 75 94 78 80
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 2,559 2,418 2,435 2,423 2,431
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 760 743 751 734 729
Interest on short-term borrowings 339 264 308 301 320
Interest on long-term debt 120 124 121 123 118
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,219 1,131 1,180 1,158 1,167
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 1,340 1,287 1,255 1,265 1,264
Provision for loan losses 165 145 120 105 80
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,175 1,142 1,135 1,160 1,184
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 54 26 50 23 8
Service charges on deposit accounts 191 193 174 165 166
Mortgage banking income 54 50 40 38 40
Capital management income 209 203 157 145 138
Securities available for sale transactions 5 4 11 2 3
Investment security transactions 1 - 1 - 2
Fees for other banking services 36 41 39 41 44
Sundry income 205 236 213 186 145
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 755 753 685 600 546
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 506 480 490 454 425
Other benefits 114 125 102 99 101
- --------------------------------------------------------------------------------------------------------------------------
Personnel expense 620 605 592 553 526
Occupancy 91 91 93 82 83
Equipment 117 121 118 108 98
Advertising 22 22 10 10 10
Telecommunications 27 27 25 27 25
Travel 25 21 20 23 27
Postage, printing and supplies 37 41 37 43 40
FDIC assessment 6 5 - 15 14
Professional fees 21 20 30 23 29
External data processing 14 15 16 24 38
Other intangible amortization 67 67 60 60 61
SAIF special assessment - - - 133 -
Sundry expense 135 134 112 110 101
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,182 1,169 1,113 1,211 1,052
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 748 726 707 549 678
Income taxes 263 255 247 192 239
- --------------------------------------------------------------------------------------------------------------------------
Net income 485 471 460 357 439
Dividends on preferred stock - - 1 1 3
- --------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 485 471 459 356 436
- --------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 0.87 0.83 0.82 0.65 0.77
Cash dividends $ 0.29 0.29 0.29 0.29 0.26
AVERAGE COMMON SHARES (In thousands) 560,900 565,106 556,595 548,002 565,152
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-23
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------
(In millions, except per share data) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 4,090 3,785
Interest and dividends on securities available for sale 522 610
Interest and dividends on investment securities
Taxable income 59 67
Nontaxable income 29 39
Trading account interest 113 111
Other interest income 164 158
- -------------------------------------------------------------------------------
Total interest income 4,977 4,770
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,503 1,475
Interest on short-term borrowings 603 588
Interest on long-term debt 244 231
- -------------------------------------------------------------------------------
Total interest expense 2,350 2,294
- -------------------------------------------------------------------------------
Net interest income 2,627 2,476
Provision for loan losses 310 150
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,317 2,326
- -------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 80 29
Service charges on deposit accounts 384 327
Mortgage banking income 104 77
Capital management income 412 264
Securities available for sale transactions 9 18
Investment security transactions 1 3
Fees for other banking services 77 77
Sundry income 441 277
- -------------------------------------------------------------------------------
Total noninterest income 1,508 1,072
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 986 837
Other benefits 239 214
- -------------------------------------------------------------------------------
Personnel expense 1,225 1,051
Occupancy 182 176
Equipment 238 191
Advertising 44 21
Telecommunications 54 50
Travel 46 49
Postage, printing and supplies 78 82
FDIC assessment 11 26
Professional fees 41 35
External data processing 29 74
Other intangible amortization 134 123
Merger-related restructuring charges - 281
Sundry expense 269 185
- -------------------------------------------------------------------------------
Total noninterest expense 2,351 2,344
- -------------------------------------------------------------------------------
Income before income taxes 1,474 1,054
Income taxes 518 372
- -------------------------------------------------------------------------------
Net income 956 682
Dividends on preferred stock - 7
- -------------------------------------------------------------------------------
Net income applicable to common stockholders $ 956 675
- -------------------------------------------------------------------------------
PER COMMON SHARE DATA
Net income $ 1.70 1.20
Cash dividends $ 0.58 0.52
AVERAGE COMMON SHARES (In thousands) 563,003 562,950
- -------------------------------------------------------------------------------
</TABLE>
T-24
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-------------------------
(In millions) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 956 682
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 11 23
Provision for loan losses 310 150
Provision for foreclosed properties 1 (3)
Securities available for sale transactions (9) (18)
Investment security transactions (1) (3)
Depreciation and amortization 362 294
Trading account assets, net (929) (2,912)
Gain on sale of adjustable rate mortgages (60) -
Mortgage loans held for resale (12) (23)
Gain on sale of premises and equipment (1) (3)
Gain on sale of segregated assets (5) (2)
Other assets, net (299) 546
Other liabilities, net 342 (189)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 666 (1,458)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 4,395 7,307
Maturities of securities available for sale 523 2,469
Purchases of securities available for sale (7,041) (13,605)
Sales and underdeliveries of investment securities 1 6
Maturities of investment securities 275 502
Purchases of investment securities (64) (46)
Sale of loans 1,094 -
Origination of loans, net (1,866) 344
Sales of premises and equipment 96 19
Purchases of premises and equipment (276) (426)
Sales of mortgage servicing rights - 1
Purchases of mortgage servicing rights - (22)
Other intangible assets, net 17 17
Purchases of banking organizations, net of acquired cash equivalents 6 264
- ----------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (2,840) (3,170)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net (1,908) (2,832)
Securities sold under repurchase agreements and other short-term borrowings, net 4,325 8,337
Issuances of guaranteed preferred beneficial interests 495 -
Issuances of long-term debt 605 850
Payments of long-term debt (1,007) (269)
Sales of common stock 229 139
Purchases of common stock (941) (116)
Cash dividends paid (329) (299)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,469 5,810
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (705) 1,182
Cash and cash equivalents, beginning of year 13,849 10,544
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 13,144 11,726
- ----------------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 1 15
Conversion of preferred stock to common stock - 20
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 82 (417)
Other assets (deferred income taxes) $ 29 (159)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
T-25
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,428
<INT-BEARING-DEPOSITS> 276
<FED-FUNDS-SOLD> 6,440
<TRADING-ASSETS> 4,863
<INVESTMENTS-HELD-FOR-SALE> 16,396
<INVESTMENTS-CARRYING> 2,285
<INVESTMENTS-MARKET> 2,417
<LOANS> 99,526
<ALLOWANCE> (1,370)
<TOTAL-ASSETS> 142,942
<DEPOSITS> 92,934
<SHORT-TERM> 27,349
<LIABILITIES-OTHER> 3,703
<LONG-TERM> 7,258
0
0
<COMMON> 1,870
<OTHER-SE> 8,110
<TOTAL-LIABILITIES-AND-EQUITY> 142,942
<INTEREST-LOAN> 4,090
<INTEREST-INVEST> 610
<INTEREST-OTHER> 164
<INTEREST-TOTAL> 4,977
<INTEREST-DEPOSIT> 1,503
<INTEREST-EXPENSE> 2,350
<INTEREST-INCOME-NET> 2,627
<LOAN-LOSSES> 310
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 2,351
<INCOME-PRETAX> 1,474
<INCOME-PRE-EXTRAORDINARY> 1,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 956
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.36
<LOANS-NON> 614
<LOANS-PAST> 249
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,365
<CHARGE-OFFS> 356
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,370
<ALLOWANCE-DOMESTIC> 912
<ALLOWANCE-FOREIGN> 3
<ALLOWANCE-UNALLOCATED> 455
</TABLE>
