<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (THE "EXCHANGE ACT")
for the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
for the transition period from to
Commission file number 1-10000
First Union Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
North Carolina 56-0898180
(State of incorporation) (I.R.S. Employer Identification No.)
One First Union Center
Charlotte, North Carolina 28288-0013
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (704) 374-6565
Securities registered pursuant to Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Title of each class Name of exchange on which registered
- -------------------------------------------------------- -------------------------------------------
<S> <C>
Common Stock, $3.33 1/3 par value (including rights New York Stock Exchange, Inc. (the "NYSE")
attached thereto)
</TABLE>
Securities registered pursuant to Section 12(g) of the Exchange Act: None
-----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS 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 Section 12, 13 or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes No
-- --
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
As of January 31, 1998, there were 648,595,299 shares of the registrant's
Common Stock outstanding, $3.33 1/3 par value per share, and based on the last
reported sale price of $47.875 per share on the NYSE on such date, the
aggregate market value of the registrant's Common Stock held by those persons
deemed by the registrant to be nonaffiliates was approximately $31 billion.
-----------
DOCUMENTS INCORPORATED BY REFERENCE IN FORM 10-K
<TABLE>
<CAPTION>
Incorporated Documents Where Incorporated in Form 10-K
--------------------------------------------------- --------------------------------------------------
<S> <C> <C>
1. Certain portions of the Corporation's Annual Part I -- Items 1 and 2; Part II -- Items 5, 6, 7, 7A
Report to Stockholders for the year ended and 8.
December 31, 1997 ("Annual Report").
2. Certain portions of the Corporation's Proxy Part III -- Items 10, 11, 12 and 13.
Statement for the Annual Meeting of Stockholders
to be held on April 21, 1998 ("Proxy Statement").
</TABLE>
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<PAGE>
PART I
First Union Corporation (the "Corporation") 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 Annual Report on Form 10-K and the Exhibits hereto and
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 include statements with respect to the
Corporation's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, that are subject to significant risks and
uncertainties and are subject to change based on various factors (some of which
are beyond the Corporation's control). The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions are intended to identify forward-looking statements. The
following factors, among others, could cause the Corporation's financial
performance to differ materially from that 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, including
interest rate policies of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"); inflation; interest rate, market and monetary
fluctuations; the timely development of competitive new products and services
by the Corporation and the acceptance of such products and services by
customers; the willingness of customers to substitute competitors' products and
services for the Corporation's products and services and vice versa; the impact
of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
future acquisitions; the expense savings and revenue enhancements from the
Signet (as defined below) and CoreStates (as defined below) acquisitions being
less than expected; the growth and profitability of the Corporation's
noninterest or fee income being less than expected; unanticipated regulatory or
judicial proceedings; changes in consumer spending and saving habits; and the
success of the Corporation at managing the risks involved in the foregoing.
The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation incorporates by reference those factors included
in the Corporation's Current Reports on Form 8-K dated July 21, 1997, August
20, 1997, November 18, 1997, November 28, 1997, and December 2, 1997 (the "1997
Current Reports"). 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.
Item 1. Business.
General
The Corporation was incorporated under the laws of North Carolina in 1967
and is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). Pursuant to a corporate reorganization in
1968, First Union National Bank ("FUNB") and First Union Mortgage Corporation,
a mortgage banking firm acquired by FUNB in 1964, became subsidiaries of the
Corporation.
The Corporation provides a wide range of commercial and retail banking and
trust services through full-service banking offices in Connecticut, Delaware,
Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania,
South Carolina, Tennessee, Virginia and Washington, D.C. Such offices are
operated by FUNB in Charlotte, North Carolina, except in Delaware, where such
offices are operated by First Union Bank of Delaware. See "; Interstate Banking
and Branching Legislation". The Corporation also provides various other
financial services, including mortgage banking, credit card, investment
banking, home equity lending, leasing, insurance and securities brokerage
services, through other subsidiaries.
The Corporation's principal executive offices are located at One First
Union Center, Charlotte, North Carolina 28288-0013 (telephone number (704)
374-6565).
Since the 1985 Supreme Court decision upholding regional interstate
banking legislation, the Corporation has concentrated its efforts on building a
large banking organization in the eastern region of the United States. Since
November 1985, the Corporation has completed over 70 banking-related
acquisitions and has three banking-related acquisitions pending, including the
more significant acquisitions (i.e., involving the acquisition of $3.0 billion
or more of assets or deposits) set forth in the following table.
1
<PAGE>
<TABLE>
<CAPTION>
Assets/ Consideration/
Name (1) Headquarters Deposits (2)(3) Accounting Treatment Completion Date
- ----------------------------------------------- ---------------- ----------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Atlantic Bancorporation ....................... Florida $3.8 billion common stock/ November 1985
pooling
Northwestern Financial Corporation ............ North Carolina 3.0 billion common stock/ December 1985
pooling
First Railroad & Banking Company of 3.7 billion common stock/ November 1986
Georgia ..................................... Georgia pooling
Florida National Banks of Florida, Inc. ....... Florida 7.9 billion cash/preferred January 1990
stock/purchase
Southeast Banking Corporation subsidiary 9.9 billion cash/notes/ September 1991
banks ("Southeast") ......................... Florida preferred stock/
purchase
Resolution Trust Corporation ("RTC") 5.3 billion cash/purchase 1991-1994
acquisitions ................................ Florida,
Georgia,
Virginia
Dominion Bankshares Corporation ............... Virginia 8.9 billion common stock/ March 1993
preferred stock/
pooling
Georgia Federal Bank, FSB ..................... Georgia 4.0 billion cash/purchase June 1993
First American Metro Corp. .................... Virginia 4.6 billion cash/purchase June 1993
American Savings of Florida, F.S.B. ........... Florida 3.6 billion common stock/ July 1995
purchase
First Fidelity Bancorporation ("FFB") (1) ..... New Jersey 35.3 billion common stock/ January 1996
preferred stock/
pooling
Center Financial Corporation .................. Connecticut 4.0 billion common stock/ November 1996
purchase
Signet Banking Corporation ("Signet") (1) ..... Virginia 11.3 billion common stock/ November 1997
pooling
CoreStates Financial Corp
("CoreStates") (1) ........................... Pennsylvania 48.5 billion common stock/ Pending
pooling
The Money Store Inc. ("TMSI")(1) .............. New Jersey $3.1 billion common stock/ Pending
preferred stock/
purchase
</TABLE>
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(1) Additional information (i) with respect to the CoreStates acquisition is
set forth on pages P-1 through P-5 in the Annual Report and incorporated
herein by reference, and (ii) with respect to the CoreStates acquisition
and certain other acquisitions is set forth in the Annual Report in Note 2
on pages C-12 and C-13 and incorporated herein by reference. Additional
information with respect to the Signet acquisition, the CoreStates
acquisition, and the acquisitions of Wheat First Butcher Singer, Inc., an
investment banking firm based in Richmond, Virginia, and Covenant Bancorp,
Inc., a bank holding company based in Haddonfield, N.J., which were
acquired in January 1998, is set forth in the 1997 Current Reports. See "
-- THE MONEY STORE INC. PENDING ACQUISITION" for additional information
with respect to the TMSI acquisition.
(2) The dollar amounts indicated represent assets of the related organization
as of the last reporting period prior to acquisition, except (i) the
dollar amount relating to the RTC acquisitions, which represents deposits
acquired from the RTC, (ii) the dollar amount relating to Southeast, which
represents the assets of the two banking subsidiaries of Southeast Banking
Corporation acquired from the Federal Deposit Insurance Corporation (the
"FDIC"), and (iii) the dollar amount relating to CoreStates is as of
December 31, 1997.
(3) In addition, the Corporation acquired (i) Lieber & Company, a mutual fund
advisory company with $3.4 billion in assets under management, in June
1994, and (ii) Keystone Investments, Inc., a mutual fund advisory company
with $11.6 billion in assets under management, in December 1996. The
consideration paid by the Corporation was common stock. The Lieber &
Company acquisition was accounted for as a pooling of interests and the
Keystone Investments, Inc. acquisition was accounted for as a purchase.
2
<PAGE>
The Corporation is continually evaluating acquisition opportunities and
frequently conducts due diligence activities in connection with possible
acquisitions. As a result, acquisition discussions and, in some cases,
negotiations frequently take place and future acquisitions involving cash, debt
or equity securities can be expected. Acquisitions typically involve the
payment of a premium over book and market values, and therefore some dilution
of the Corporation's book value and net income per common share may occur in
connection with future transactions.
Additional information relating to the business of the Corporation and its
subsidiaries is set forth on pages 10 through 15 and in Table 4 on pages T-3
and T-4 in the Annual Report and incorporated herein by reference. Information
relating to the Corporation only is set forth in Note 18 on pages C-36 through
C-39 in the Annual Report and incorporated herein by reference.
The Money Store Inc. Pending Acquisition
On March 4, 1998, the Corporation entered into an Agreement and Plan of
Merger (the "Merger Agreement") with TMSI and FUNB, providing for, among other
things, the merger (the "Merger") of a direct, wholly owned subsidiary of FUNB
with and into TMSI. Pursuant to the Merger Agreement, at the effective time of
the Merger (the "Effective Time"), each outstanding share of TMSI common stock,
no par value (the "TMSI Common Stock"), will be converted into the right to
receive that number of shares of the Corporation's common stock (the "FUNC
Common Stock") equal to the result (the "Exchange Ratio") of dividing $34.00 by
the average of the per share closing sales price of FUNC Common Stock on the
NYSE for each of the five trading days in the period ending on the trading day
prior to the Effective Time. At the Effective Time, each outstanding share of
TMSI $1.72 Mandatory Convertible Preferred Stock (the "TMSI Preferred Stock")
will be converted into the right to receive the number of shares of FUNC Common
Stock equal to the product of the Exchange Ratio and 0.92. If any approval of
the holders of TMSI Preferred Stock that may be required in order to deliver
FUNC Common Stock in exchange therefor shall not be received, then each share
of TMSI Preferred Stock outstanding at the Effective Time shall instead be
converted into the right to receive a share of a new series of the
Corporation's convertible preferred stock containing substantially similar
terms as the TMSI Preferred Stock, as adjusted to reflect the Merger.
The total purchase price is approximately $2.1 billion. In connection with
the transaction, the Corporation expects to repurchase a number of its
outstanding shares of FUNC Common Stock equal to the number of such shares to
be issued in the Merger, which the Corporation currently estimates will be
approximately 41 million shares, based on the recent market price of FUNC
Common Stock. The transaction will be accounted for as a purchase.
In his capacity as a stockholder of TMSI, Marc J. Turtletaub, Chief
Executive Officer of TMSI, entered into a stock option and voting agreement
dated as of March 4, 1998, with the Corporation pursuant to which, among other
things, Mr. Turtletaub granted the Corporation an option, exercisable following
the occurrence of certain contingencies set forth therein, to purchase up to
14,547,261 shares of TMSI Common Stock (approximately 24.9 percent of the
outstanding shares of TMSI Common Stock) owned by him at a price, subject to
certain adjustments, of $34.00 per share, payable in FUNC Common Stock.
Competition
The Corporation's subsidiaries face substantial competition in their
operations from banking and nonbanking institutions, including savings and loan
associations, credit unions, money market funds and other investment vehicles,
mutual fund advisory companies, brokerage firms, insurance companies, leasing
companies, credit card issuers, mortgage banking companies, investment banking
companies, finance companies and other types of financial services providers.
Supervision and Regulation
The following discussion sets forth certain of the material elements of
the regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to the
Corporation. The regulatory framework is intended primarily for the protection
of depositors and the federal deposit insurance funds and not for the
protection of security holders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. A change in
applicable statutes, regulations or regulatory policy may have a material
effect on the business of the Corporation.
3
<PAGE>
General
As a bank holding company, the Corporation is subject to regulation under
the BHCA and its examination and reporting requirements. Under the BHCA, bank
holding companies may not directly or indirectly acquire the ownership or
control of more than five percent of the voting shares or substantially all of
the assets of any company, including a bank, without the prior approval, or a
waiver of the requirement for such approval, by the Federal Reserve Board. In
addition, bank holding companies are generally prohibited under the BHCA from
engaging in nonbanking activities, subject to certain exceptions.
The earnings of the Corporation's subsidiaries, and therefore the earnings
of the Corporation, are affected by general economic conditions, management
policies and the legislative and governmental actions of various regulatory
authorities, including the Federal Reserve Board, the Comptroller of the
Currency (the "Comptroller") and the FDIC. In addition, there are numerous
governmental requirements and regulations which affect the activities of the
Corporation and its subsidiaries.
Payment of Dividends
The Corporation is a legal entity separate and distinct from its banking
and other subsidiaries. A major portion of the revenues of the Corporation
result from amounts paid as dividends to the Corporation by its national bank
subsidiaries. The prior approval of the Comptroller is required if the total of
all dividends declared by a national bank in any calendar year will exceed the
sum of such bank's net profits for that year and its retained net profits for
the preceding two calendar years, less any required transfers to surplus.
Federal law also prohibits national banks from paying dividends which would be
greater than the bank's undivided profits after deducting statutory bad debt in
excess of the bank's allowance for loan losses.
Under the foregoing dividend restrictions and certain restrictions
applicable to certain of the Corporation's nonbanking subsidiaries, as of
December 31, 1997, the Corporation's subsidiaries, without obtaining
affirmative governmental approvals, could pay aggregate dividends of $426
million to the Corporation during 1998. In 1997, the Corporation's subsidiaries
paid $1.3 billion in cash dividends to the Corporation.
In addition, the Corporation and its banking subsidiaries are subject to
various general regulatory policies and requirements relating to the payment of
dividends, including requirements to maintain adequate capital above regulatory
minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a
bank or bank holding company that the payment of dividends would be an unsafe
or unsound practice and to prohibit payment thereof. The appropriate federal
regulatory authorities have indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be an unsound and unsafe
banking practice and that banking organizations should generally pay dividends
only out of current operating earnings.
Borrowings by the Corporation
There are also various legal restrictions on the extent to which the
Corporation and its nonbank subsidiaries can borrow or otherwise obtain credit
from its banking subsidiaries. In general, these restrictions require that any
such extensions of credit must be secured by designated amounts of specified
collateral and are limited, as to any one of the Corporation or such nonbank
subsidiaries, to ten percent of the lending bank's capital stock and surplus,
and as to the Corporation and all such nonbank subsidiaries in the aggregate,
to 20 percent of such lending bank's capital stock and surplus.
Capital Adequacy
Under the risk-based capital requirements for bank holding companies, the
minimum requirement for the ratio of capital to risk-weighted assets (including
certain off-balance-sheet activities, such as standby letters of credit) is
eight percent. At least half of the total capital is to be composed of common
stockholders' equity, retained earnings, a limited amount of qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill and certain intangibles ("tier 1
capital" and together with tier 2 capital "total capital"). The remainder of
total capital may consist of mandatory convertible debt securities and a
limited amount of subordinated debt, qualifying preferred stock and loan loss
allowance ("tier 2 capital"). At December 31, 1997, the Corporation's tier 1
capital and total capital ratios were 8.41 percent and 13.40 percent,
respectively.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
less certain amounts ("leverage ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio
4
<PAGE>
of from at least four to five percent. The Corporation's leverage ratio at
December 31, 1997, was 6.81 percent. The guidelines 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.
Furthermore, the guidelines indicate that the Federal Reserve Board 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 the Corporation of any specific minimum leverage
ratio or tier 1 leverage ratio applicable to it.
Each of the Corporation's subsidiary banks is subject to similar capital
requirements adopted by the Comptroller or other applicable regulatory agency.
Neither the Comptroller nor such applicable regulatory agency has advised any
of the Corporation's subsidiary banks of any specific minimum leverage ratios
applicable to it. The capital ratios of the bank subsidiaries of the
Corporation are set forth in Table 18 on page T-15 in the Annual Report and
incorporated herein by reference.
Support of Subsidiary Banks
The Federal Deposit Insurance Act, as amended ("FDIA"), among other
things, imposes liability on an institution the deposits of which are insured
by the FDIC, such as the Corporation's subsidiary banks, for certain potential
obligations to the FDIC incurred in connection with other FDIC-insured
institutions under common control with such institution.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Comptroller is authorized to require
payment of the deficiency by assessment upon the bank's stockholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
stockholder after three months notice, to sell the stock of such stockholder to
make good the deficiency. Under Federal Reserve Board policy, the Corporation
is expected to act as a source of financial strength to each of its subsidiary
banks and to commit resources to support each of such subsidiaries. This
support may be required at times when, absent such Federal Reserve Board
policy, the Corporation may not find itself able to provide it.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Prompt Corrective Action
The FDIA, among other things, requires the federal banking agencies to
take "prompt corrective action" in respect of depository institutions that do
not meet minimum capital requirements. FDIA establishes five capital tiers:
"well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and "critically undercapitalized". A
depository institution's capital tier will depend upon where its capital levels
compare to various relevant capital measures and certain other factors, as
established by regulation.
Federal regulatory authorities have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to
FDIC-insured banks. The relevant capital measures are the total capital ratio,
the tier 1 capital ratio and the leverage ratio. Under the regulations, an
FDIC-insured bank will be: (i) "well capitalized" if it has a total capital
ratio of ten percent or greater, a tier 1 capital ratio of six percent or
greater and a leverage ratio of five percent or greater and is not subject to
any order or written directive by any such regulatory authority to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total capital ratio of eight percent or greater, a
tier 1 capital ratio of four percent or greater and a leverage ratio of four
percent or greater (three percent in certain circumstances) and is not "well
capitalized"; (iii) "undercapitalized" if it has a total capital ratio of less
than eight percent, a tier 1 capital ratio of less than four percent or a
leverage ratio of less than four percent (three percent in certain
circumstances); (iv) "significantly undercapitalized" if it has a total capital
ratio of less than six percent, a tier 1 capital ratio of less than three
percent or a leverage ratio of less than three percent; and (v) "critically
undercapitalized" if its tangible equity is equal to or less than two percent
of average quarterly tangible assets. An institution may be downgraded to, or
deemed to be in, a capital category that is lower than is indicated by its
capital ratios if it is determined to be in an unsafe or unsound condition or
if it receives an unsatisfactory examination rating with respect to certain
matters. As of December 31, 1997, all of the Corporation's deposit-taking
subsidiary banks had capital levels that qualify them as being "well
capitalized" under such regulations.
The FDIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be "undercapitalized". "Undercapitalized" depository institutions
are subject to growth limitations and are required to submit a capital
restoration plan. The federal banking agencies may not accept a capital plan
without determining, among other
5
<PAGE>
things, that the plan is based on realistic assumptions and is likely to
succeed in restoring the depository institution's capital. In addition, for a
capital restoration plan to be acceptable, the depository institution's parent
holding company must guarantee that the institution will comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of (i) an amount equal to five percent of the
depository institution's total assets at the time it became "undercapitalized",
and (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards applicable with
respect to such institution as of the time it fails to comply with the plan. If
a depository institution fails to submit an acceptable plan, it is treated as
if it is "significantly undercapitalized".
"Significantly undercapitalized" depository institutions may be subject to
a number of requirements and restrictions, including orders to sell sufficient
voting stock to become "adequately capitalized", requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
"Critically undercapitalized" institutions are subject to the appointment of a
receiver or conservator. A bank that is not "well capitalized" is subject to
certain limitations relating to so-called "brokered" deposits.
Depositor Preference Statute
Under federal law, 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.
Interstate Banking and Branching Legislation
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA"), authorized interstate acquisitions of banks and bank holding
companies without geographic limitation beginning one year after enactment. In
addition, it authorized, beginning June 1, 1997, a bank to merge with a bank in
another state as long as neither of the states opted out of interstate
branching between the date of enactment of the IBBEA and May 31, 1997. In
addition, a bank may establish and operate a de novo branch in a state in which
the bank does not maintain a branch if that state expressly permits de novo
branching. It was pursuant to authority from IBBEA that the Corporation
reorganized certain of its subsidiary banks in 1997 and in February 1998, as a
result of which FUNB, based in Charlotte, North Carolina, operates in 11 states
and Washington, D.C.
Additional Information
Additional information related to certain regulatory and accounting
matters is set forth on pages 26 and 27 in the Annual Report and incorporated
herein by reference.
Item 2. Properties.
As of December 31, 1997, the Corporation and its subsidiaries owned or
leased 2,997 locations in 38 states, Washington, D.C., and 7 foreign countries
from which their business is conducted, including a multi-story office complex
in Charlotte, North Carolina, which serves as the administrative headquarters
of the Corporation. Listed below are the number of banking and nonbanking
locations that are leased or owned, as of December 31, 1997.
<TABLE>
<CAPTION>
Leased Owned
-------- --------
<S> <C> <C>
First Union National Bank .............. 1,394 1,406
First Union Bank of Delaware ........... 2 --
First Union Home Equity Bank, N.A. ..... 130 --
Nonbanking locations ................... 63 2
----- -----
Total ................................. 1,589 1,408
===== =====
</TABLE>
Additional information relating to the Corporation's lease commitments is
set forth in Note 16 on page C-33 in the Annual Report and incorporated herein
by reference.
Item 3. Legal Proceedings.
The Corporation and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which varying amounts are claimed. Although the amount of any
ultimate liability with respect to such matters cannot be determined, in the
opinion of management, based upon the opinions of counsel, any such liability
will not have a material effect on the consolidated financial position of the
Corporation and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
6
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters.
FUNC Common Stock is listed on the NYSE. Table 6 on page T-6 in the Annual
Report sets forth information relating to the quarterly prices of, and
quarterly dividends paid on, FUNC Common Stock for the two-year period ended
December 31, 1997, and incorporated herein by reference. Prices shown represent
the high, low and quarter-end sale prices of FUNC Common Stock as reported on
the NYSE Composite Transactions tape for the periods indicated. Such prices
have been adjusted to reflect a two-for-one stock split effected in the form of
a 100 percent common stock dividend paid on July 31, 1997, to stockholders of
record on July 1, 1997. As of December 31, 1997, there were 120,437 holders of
record of FUNC Common Stock.
Subject to the prior rights of holders of any outstanding shares of the
Corporation's Preferred Stock or Class A Preferred Stock, holders of FUNC
Common Stock are entitled to receive such dividends as may be legally declared
by the Board of Directors of the Corporation (the "FUNC Board") and, in the
event of dissolution and liquidation, to receive the net assets of the
Corporation remaining after payment of all liabilities, in proportion to their
respective holdings. Additional information concerning certain limitations on
the payment of dividends by the Corporation and its subsidiaries is set forth
above under "Business -- Supervision and Regulation; Payment of Dividends" and
in Note 18 on page C-36 in the Annual Report and incorporated herein by
reference.
Each outstanding share of FUNC Common Stock currently has attached to it
one right (a "Right") issued pursuant to an Amended and Restated Shareholder
Protection Rights Agreement (the "Rights Agreement"). Each Right entitles its
registered holder to purchase one one-hundredth of a share of a junior
participating series of the Corporation's Class A Preferred Stock designed to
have economic and voting terms similar to those of one share of FUNC Common
Stock, for $105.00, subject to adjustment (the "Rights Exercise Price"), but
only after the earlier to occur (the "Separation Time") of: (i) the tenth
business day (subject to extension) after any person (an "Acquiring Person")
(x) commences a tender or exchange offer, which, if consummated, would result
in such person becoming the beneficial owner of 15 percent or more of the
outstanding shares of FUNC Common Stock, or (y) is determined by the Federal
Reserve Board to "control" the Corporation within the meaning of the BHCA,
subject to certain exceptions; and (ii) the tenth business day after the first
date (the "Flip-in Date") of a public announcement by the Corporation that a
person has become an Acquiring Person. The Rights will not trade separately
from the shares of FUNC Common Stock unless and until the Separation Time
occurs.
The Rights Agreement provides that a person will not become an Acquiring
Person under the BHCA control test described above if either (i) the Federal
Reserve Board's control determination would not have been made but for such
person's failure to make certain customary passivity commitments, or such
person's violation of such commitments made, to the Federal Reserve Board, so
long as the Federal Reserve Board determines that such person no longer
controls the Corporation within 30 days (or 60 days in certain circumstances),
or (ii) the Federal Reserve Board's control determination was not based on such
a failure or violation and such person (x) obtains a noncontrol determination
within three years, and (y) is using its best efforts to allow the Corporation
to make any acquisition or engage in any legally permissible activity
notwithstanding such person's being deemed to control the Corporation for
purposes of the BHCA.
The Rights will not be exercisable until the business day following the
Separation Time. The Rights will expire on the earliest of: (i) the Exchange
Time (as defined below); (ii) the close of business on December 28, 2000; and
(iii) the date on which the Rights are redeemed or terminated as described
below (in any such case, the "Expiration Time"). The Rights Exercise Price and
the number of Rights outstanding, or in certain circumstances the securities
purchasable upon exercise of the Rights, are subject to adjustment upon the
occurrence of certain events.
In the event that prior to the Expiration Time a Flip-in Date occurs, the
Corporation will take such action as shall be necessary to ensure and provide
that each Right (other than Rights beneficially owned by an Acquiring Person or
any affiliate, associate or transferee thereof, which Rights shall become void)
shall constitute the right to purchase, from the Corporation, shares of FUNC
Common Stock having an aggregate market price equal to twice the Rights
Exercise Price for an amount in cash equal to the then current Rights Exercise
Price. In addition, the FUNC Board may, at its option, at any time after a
Flip-in Date, elect to exchange all of the then outstanding Rights for shares
of FUNC Common Stock, at an exchange ratio of two shares of FUNC Common Stock
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the Separation Time (the "Rights Exchange
Rate"). Immediately upon such action by the
7
<PAGE>
FUNC Board (the "Exchange Time"), the right to exercise the Rights will
terminate, and each Right will thereafter represent only the right to receive a
number of shares of FUNC Common Stock equal to the Rights Exchange Rate. If the
Corporation becomes obligated to issue shares of FUNC Common Stock upon
exercise of or in exchange for Rights, the Corporation, at its option, may
substitute therefor shares of junior participating Class A Preferred Stock upon
exercise of each Right at a rate of two one-hundredths of a share of junior
participating Class A Preferred Stock upon the exchange of each Right.
The Rights may be canceled and terminated without any payment to holders
thereof at any time prior to the date they become exercisable and are
redeemable by the Corporation at $0.01 per right, subject to adjustment upon
the occurrence of certain events, at any date between the date on which they
become exercisable and the Flip-in Date. The Rights have no voting rights and
are not entitled to dividends.
The Rights will not prevent a takeover of the Corporation. The Rights,
however, may cause substantial dilution to a person or group that acquires 15
percent or more of FUNC Common Stock (or that acquires "control" of the
Corporation within the meaning of the BHCA) unless the Rights are first
redeemed or terminated by the FUNC Board. Nevertheless, the Rights should not
interfere with a transaction that is in the best interests of the Corporation
and its stockholders because the Rights can be redeemed or terminated, as
hereinabove described, before the consummation of such transaction.
The complete terms of the Rights are set forth in the Rights Agreement.
The foregoing description of the Rights and the Rights Agreement is qualified
in its entirety by reference to such document. A copy of the Rights Agreement
can be obtained upon written request to the Rights Agent, First Union National
Bank, Two First Union Center, Charlotte, North Carolina 28288-1154.
Additional information relating to FUNC Common Stock is set forth in Note
13 on page C-25 in the Annual Report and incorporated herein by reference.
Item 6. Selected Financial Data.
In response to this Item, the information set forth in Table 1 on page T-1
in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In response to this Item, the information set forth on pages 8 through 30,
pages P-1 through P-5 and pages T-1 through T-24 in the Annual Report is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In response to this Item, the information set forth on pages 23 through 26,
pages T-16 through T-21 and pages C-31 through C-33 in the Annual Report is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
In response to this Item, the information set forth in Table 6 on page T-6
and on pages C-1 through C-39 in the Annual Report is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
8
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The executive officers of the Corporation are elected to their offices for
one year terms at the meeting of the FUNC Board in April of each year. The
terms of any executive officers elected after such date expire at the same time
as the terms of the executive officers elected on such date. The names of each
of the executive officers of the Corporation in office on December 31, 1997,
their ages, their positions with the Corporation on such date, and, if
different, their business experience during the past five years, are as
follows:
Edward E. Crutchfield (56). Chairman and Chief Executive Officer. Also, a
director of the Corporation.
John R. Georgius (53). Vice Chairman, since January 1, 1996. President,
from June 1990 to January 1, 1996. Mr. Georgius was elected President of
the Corporation upon the retirement of Mr. Terracciano on December 31,
1997. Also, a director of the Corporation.
Anthony P. Terracciano (59). President, since January 1, 1996. Formerly
Chairman of the Board, President and Chief Executive Officer of FFB. Mr.
Terracciano retired from the Corporation on December 31, 1997. Also, a
director of the Corporation.
B. J. Walker (67). Vice Chairman. Also, a director of the Corporation.
Robert T. Atwood (57). Executive Vice President and Chief Financial
Officer.
Marion A. Cowell, Jr. (63). Executive Vice President, Secretary and
General Counsel.
In addition to the foregoing, the information set forth in the Proxy
Statement under the heading "General Information and Nominees", and under the
subheading "Section 16(a) Beneficial Ownership Reporting Compliance" under the
heading "Other Matters Relating to Executive Officers and Directors " is
incorporated herein by reference.
Item 11. Executive Compensation.
In response to this Item, the information set forth in the Proxy Statement
under the heading "Executive Compensation", excluding the information under the
subheadings "HR Committee Report on Executive Compensation" and "Performance
Graph", is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
In response to this Item, the information set forth in the Proxy Statement
relating to the ownership of Common Stock by the directors, executive officers
and principal stockholders of the Corporation under the headings "Voting
Securities and Principal Holders" and "General Information and Nominees" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
In response to this Item, the information set forth in the Proxy Statement
under the subheadings "General" and "Certain Other Relationships" under the
heading "Other Matters Relating to Executive Officers and Directors" is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Pro forma financial information and the consolidated financial
statements of the Corporation, including the notes thereto and independent
auditors' report thereon, are set forth on pages P-1 through P-5 and pages C-1
through C-39, respectively, of the Annual Report, and are incorporated herein by
reference. In addition, the audited historical financial statements of
CoreStates, including the notes thereto, set forth in Exhibit 99(a) to this Form
10-K, and certain related independent auditors' reports set forth in Exhibits
99(b) and 99(c) to this Form 10-K, are incorporated herein by reference. All
financial statement schedules are omitted since the required information is
either not applicable, is immaterial or is included in the consolidated
financial statements of the Corporation and notes thereto. A list of the
exhibits to this Form 10-K is set forth on the Exhibit Index immediately
preceding such exhibits and is incorporated herein by reference.
(b) During the quarter ended December 31, 1997, Current Reports on Form
8-K, dated November 18, 1997, November 28, 1997, and December 2, 1997, were
filed by the Corporation with the Securities and Exchange Commission.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION CORPORATION
Date: March 23, 1998
By: Marion A. Cowell, Jr.
-------------------------------------
Marion A. Cowell, Jr.
Executive Vice President,
Secretary and General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the date indicated.
<TABLE>
<CAPTION>
Signature Capacity
- ------------------------------------ ----------------------------------------------------------
<S> <C>
EDWARD E. CRUTCHFIELD* Chairman and Chief Executive Officer and Director
- ----------------------------------
Edward E. Crutchfield
ROBERT T. ATWOOD* Executive Vice President and Chief Financial Officer
- ----------------------------------
Robert T. Atwood
JAMES H. HATCH* Senior Vice President and Corporate Controller (Principal
- ---------------------------------- Accounting Officer)
James H. Hatch
- ----------------------------------
Edward E. Barr Director
G. ALEX BERNHARDT* Director
- ----------------------------------
G. Alex Bernhardt
W. WALDO BRADLEY* Director
- ----------------------------------
W. Waldo Bradley
ROBERT J. BROWN* Director
- ----------------------------------
Robert J. Brown
A. DANO DAVIS* Director
- ----------------------------------
A. Dano Davis
R. STUART DICKSON* Director
- ----------------------------------
R. Stuart Dickson
B. F. DOLAN* Director
- ----------------------------------
B. F. Dolan
RODDEY DOWD, SR.* Director
- ----------------------------------
Roddey Dowd, Sr.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- ------------------------------------ ---------
<S> <C>
JOHN R. GEORGIUS* Director
- ----------------------------------
John R. Georgius
Director
- ----------------------------------
Arthur M. Goldberg
WILLIAM H. GOODWIN, JR.* Director
- ----------------------------------
William H. Goodwin, Jr.
HOWARD H. HAWORTH* Director
- ----------------------------------
Howard H. Haworth
FRANK M. HENRY* Director
- ----------------------------------
Frank M. Henry
LEONARD G. HERRING* Director
- ----------------------------------
Leonard G. Herring
JACK A. LAUGHERY* Director
- ----------------------------------
Jack A. Laughery
MAX LENNON* Director
- ----------------------------------
Max Lennon
RADFORD D. LOVETT* Director
- ----------------------------------
Radford D. Lovett
MACKEY J. MCDONALD* Director
- ----------------------------------
Mackey J. McDonald
MALCOLM S. MCDONALD* Director
- ----------------------------------
Malcolm S. McDonald
JOSEPH NEUBAUER* Director
- ----------------------------------
Joseph Neubauer
RANDOLPH N. REYNOLDS* Director
- ----------------------------------
Randolph N. Reynolds
RUTH G. SHAW* Director
- ----------------------------------
Ruth G. Shaw
CHARLES M. SHELTON, SR.* Director
- ----------------------------------
Charles M. Shelton, Sr.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- ---------------------------------------------- ---------
<S> <C>
LANTY L. SMITH* Director
- ----------------------------------
Lanty L. Smith
ANTHONY P. TERRACCIANO* Director
- ----------------------------------
Anthony P. Terracciano
Director
- ----------------------------------
Dewey L. Trogdon
JOHN D. UIBLE* Director
- ----------------------------------
John D. Uible
B. J. WALKER* Director
- ----------------------------------
B. J. Walker
*By Marion A. Cowell, Jr., Attorney-in-Fact
MARION A. COWELL, JR.
- ----------------------------------
Marion A. Cowell, Jr.
</TABLE>
Date: March 23, 1998
12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ------------- ------------------------------------------------------- ------------------------------------------
<S> <C> <C>
(2)(a) CoreStates acquisition agreement. Incorporated by reference to Exhibit (2)
to the Corporation's Current Report on
Form 8-K dated November 28, 1997.
Omitted exhibits to be filed upon request
of the Securities and Exchange Commission.
(2)(b) Signet acquisition agreement. Incorporated by reference to Exhibit (2)
to the Corporation's Current Report on
Form 8-K dated July 21, 1997. Omitted
exhibits to be filed upon request of the
Securities and Exchange Commission.
(3)(a) Articles of Incorporation of the Corporation, as Incorporated by reference to Exhibit (4)
amended. to the Corporation's 1990 First Quarter
Report on Form 10-Q, to Exhibit (99)(a)
to the Corporation's 1993 First Quarter
Report on Form 10-Q, to Exhibit (4) to
the Corporation's Current Report on
Form 8-K dated January 10, 1996, and
to the Articles of Amendment dated
March 4, 1998 filed herewith.
(3)(b) Bylaws of the Corporation, as amended. Incorporated by reference to Exhibit
(3)(b) to the Corporation's 1995 Annual
Report on Form 10-K.
(4)(a) Instruments defining the rights of the holders of the *
Corporation's long-term debt.
(4)(b) The Corporation's Amended and Restated Shareholder Incorporated by reference to Exhibit (4)
Protection Rights Agreement. to the Corporation's Current Report on
Form 8-K dated October 16, 1996.
(10)(a) The Corporation's Amended and Restated Management Incorporated by reference to Exhibit
Incentive Plan. (10)(a) to the Corporation's 1995 Annual
Report on Form 10-K.
(10)(b) The Corporation's Deferred Compensation Plan for Incorporated by reference to Exhibit
Officers. (10)(b) to the Corporation's 1988 Annual
Report on Form 10-K.
(10)(c) The Corporation's Deferred Compensation Plan for Incorporated by reference to Exhibit
Non-Employee Directors. (10)(c) to the Corporation's 1989 Annual
Report on Form 10-K.
(10)(d) The Corporation's Contract Executive Deferred Filed herewith.
Compensation Plan.
(10)(e) The Corporation's Supplemental Executive Long-Term Incorporated by reference to Exhibit
Disability Plan. (10)(d) to the Corporation's 1988 Annual
Report on Form 10-K.
(10)(f) The Corporation's Supplemental Retirement Plan. Incorporated by reference to Exhibit
(10)(f) to the Corporation's 1988 Annual
Report on Form 10-K.
(10)(g) The Corporation's Retirement Plan for Non-Employee Incorporated by reference to Exhibit
Directors. (10)(g) to the Corporation's 1988 Annual
Report on Form 10-K.
(10)(h) The Corporation's 1984 Master Stock Compensation Incorporated by reference to Exhibit (28)
Plan. to the Corporation's Registration
Statement No. 33-47447.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(10)(i) The Corporation's 1988 Master Stock Compensation Incorporated by reference to Exhibit (28)
Plan. to the Corporation's Registration
Statement No. 33-47447.
(10)(j) The Corporation's 1992 Master Stock Compensation Incorporated by reference to Exhibit (28)
Plan. to the Corporation's Registration
Statement No. 33-47447.
(10)(k) Employment Agreement between the Corporation and Incorporated by reference to Exhibit
Edward E. Crutchfield. (10)(k) to the Corporation's 1994 Annual
Report on Form 10-K.
(10)(l) Management Restricted Stock Award Agreement. Incorporated by reference to Exhibit (10)
to the Corporation's 1997 Second Quarter
Report on Form 10-Q.
(10)(m) The Corporation's Management Long-Term Cash Incorporated by reference to Exhibit
Incentive Plan. (10)(m) to the Corporation's 1992 Annual
Report on Form 10-K.
(10)(n) Employment Agreement between the Corporation and Incorporated by reference to Exhibit
Anthony P. Terracciano. (99)(c) to the Corporation's Registration
Statement No. 33-62307.
(10)(o) Employment Agreement between the Corporation and Incorporated by reference to Exhibit (10)
John R. Georgius. to Amendment No. 1 to the Corporation's
Registration Statement No. 33-60835.
(10)(p) The Corporation's Elective Deferral Plan. Incorporated by reference to Exhibit (4)
to the Corporation's Registration
Statement No. 33-60913.
(10)(q) The Corporation's 1996 Master Stock Compensation Incorporated by reference to Exhibit (10)
Plan. to the Corporation's 1996 First Quarter
Report on Form 10-Q.
(10)(r) Employment Agreement between the Corporation and Incorporated by reference to Exhibit
Malcolm S. McDonald. (99)(d) to the Corporation's Registration
Statement No. 333-36839.
(10)(s) Employment Agreement between the Corporation and Incorporated by reference to Exhibit
Terrance A. Larsen. (99)(c) to the Corporation's Registration
Statement No. 333-44015.
(12) Computations of Consolidated Ratios of Earnings to Filed herewith.
Fixed Charges.
(13) The Corporation's 1997 Annual Report to Filed herewith.
Stockholders.**
(21) List of the Corporation's subsidiaries. Filed herewith.
(23)(a) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(b) Consent of Ernst & Young LLP. Filed herewith.
(23)(c) Consent of KPMG Peat Marwick LLP. Filed herewith.
(23)(d) Consent of KPMG Peat Marwick LLP. Filed herewith.
(24) Power of Attorney. Filed herewith.
(27)(a) The Corporation's Financial Data Schedule- 1997.***
(27)(b) The Corporation's Financial Data Schedule- 1996.***
(27)(c) The Corporation's Financial Data Schedule- 1995.***
(99)(a) CoreStates Historical Financial Information. Filed herewith.
(99)(b) Independent Auditors' Report of KPMG Peat Marwick Filed herewith.
LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(99)(c) Independent Auditors' Report of KPMG Peat Filed herewith.
Marwick LLP.
</TABLE>
- ---------
* The Corporation agrees to furnish to the Securities and Exchange 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
subsidiaries.
** Except for those portions of the Annual Report which are expressly
incorporated by reference in this Form 10-K, the Annual Report is furnished
for the information of the Securities and Exchange Commission only and is
not to be deemed "filed" as part of such Form 10-K.
*** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
Exhibit (3)(a)
ARTICLES OF AMENDMENT
OF
FIRST UNION CORPORATION
The undersigned corporation hereby submits these Articles of Amendment
for the purpose of amending its Articles of Incorporation:
1. The name of the corporation is First Union Corporation.
2. The following amendment to the first paragraph of Article 4 of
the Articles of Incorporation of the corporation was adopted
by its stockholders on the 27th day of February, 1998, in the
manner prescribed by law:
"4. The aggregate number of shares which the
corporation shall have authority to issue is Two
Billion, Fifty Million (2,050,000,000) shares,
divided into three (3) classes. The description of
each class, the number of authorized shares of each
class, and the par value of each class, is as
follows:
<TABLE>
<CAPTION>
Class No. of Shares Par Value Per Share
----- ------------- -------------------
<S> <C> <C> <C>
Common Stock 2,000,000,000 $3.33 1/3
Preferred Stock 10,000,000 No-par
Class A Preferred Stock 40,000,000 No-par"
</TABLE>
3. The number of shares of the corporation outstanding and
entitled to be cast thereon was 636,385,071 shares of common
stock, each of such shares being entitled to one vote; and the
number of votes of the holders of common stock indisputably
represented at the meeting of stockholders was 471,275,466.
4. The total number of undisputed votes cast by the holders of
common stock for the amendment was 446,347,497, which number
was sufficient for approval of the amendment.
This the 4th day of March, 1998.
FIRST UNION CORPORATION
By: /s/ Kent S. Hathaway
________________________
Kent S. Hathaway
Senior Vice President
Exhibit (10)(d)
FIRST UNION CORPORATION
CONTRACT EXECUTIVE DEFERRED COMPENSATION PLAN
February 17, 1998
Section 1. Establishment and Purpose
1.1 Establishment. First Union Corporation hereby establishes, effective
as of December 31, 1997, an unfunded deferred Compensation plan for certain of
its or its subsidiaries employees and their beneficiaries as described herein,
known as the "FIRST UNION CORPORATION CONTRACT EXECUTIVE DEFERRED COMPENSATION
PLAN" (hereinafter called the "Plan").
1.2 Purpose. The purpose of this Plan is to provide a means whereby
Compensation payable by the Company or its Subsidiaries to certain selected
Employees may be deferred for a period of not less than five Years.
1.3 Application of Plan. The terms of this Plan are applicable only to
eligible Employees who are in the employ of the Company or a Subsidiary as a
result of a Contract entered into on or after July 1, 1997.
Section 2. Definitions
2.1 Definitions. Whenever used herein, the following terms shall have the
meanings set forth below:
(a) "Account Balance" means an amount equal to the sum of (a) all
Compensation deferred by an Employee pursuant to Section 4.1; and (b)
accumulated Growth Additions.
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the Human Resources Committee of the Board.
(d) "Company" means FIRST UNION CORPORATION.
(e) "Compensation" means the sum of an eligible Employee's (a)
base salary and (b) any bonus, incentive award, or similar payment payable
under a Contract.
(f) "Contract" means an employment agreement by and between the
Company or its Subsidiaries and the Employee.
(g) "Disability" means total Disability as a result of injury or
sickness as defined in "The Long Term Disability Plan for Employees of
First Union Corporation," designated as Plan 502 by First Union
Corporation.
(h) "Employee" means an individual receiving Compensation under a
Contract who is eligible to participate in the Plan.
(i) "Good Reason" means the definition and provisions under an
Employee's Contract of specific events that permit termination of the
employment of the Employee by the Employee and the payment of Compensation
as determined in accordance with the Employee's Contract.
(j) "Growth Addition" means an amount equal to the Employee's
average monthly ending balance in his account during a Year multiplied by
an interest rate equal to (i) the average prime rate of interest charged
on commercial loans as of the last day of each calendar quarter (March 31,
June 30, September 30, and December 31), or (ii) such other interest rate
as the Committee may otherwise determine on an individual participant
basis.
(k) "Retirement" means retirement under the terms of the Company's
Pension Plan.
1
<PAGE>
(l) "Subsidiary" means any corporation (other than the employer
corporation) in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50 percent or more of the total
combined voting power of all classes of stock in all of the other
corporations in such chain.
(m) "Year" means the twelve-month period beginning January 1 and
ending December 31.
2.2 Gender and Number. Except when otherwise indicated by the context, any
masculine terminology when used in the Plan shall also include the feminine
gender, and the definition of any term herein in the singular shall also include
the plural.
Section 3. Eligibility for Participation
3.1 Eligibility. Any Employee of the Company or of any Subsidiary who is
compensated under a Contract, and who is selected to participate by the
Committee will be eligible to participate in this Plan.
Section 4. Election to Defer
4.1 Deferral Election. Prior to December 31 of each Year while the
Employee is employed by the Company or Subsidiary any eligible Employee may
elect to defer for a period of not less than five Years all, or any part of his
Compensation earned in the following Year or Years. Deferral periods that extend
beyond ten Years will be subject to the approval of the Committee. At the time
any deferral election is made pursuant to this Section 4.1, the Employee shall
also elect the manner in which payments are to be made under Section 6.1.
4.2 Deferral Election by New Participant. Any Employee who becomes
eligible to participate in the Plan pursuant to Section 3.1 after the
commencement of a Year may make a deferral election under Section 4.1 at any
time within 30 days after the date such Employee becomes so eligible to
participate in this Plan.
4.3 Deferral Period. Payment of an Employee's Account Balance shall
commence:
(a) On or before 90 days after the last day of the fifth Year
following the payment of the Compensation being deferred, or such
subsequent Year as the Employee shall have designated and the Committee
has approved, if Committee approval is required, or
(b) On or before 90 days after the date of an Employee's
termination by reason of death or Disability, whichever is earlier,
subject to the provisions of Section 6 of this Plan.
Section 5. Deferred Accounts
5.1 Employee Accounts. The Company shall establish and maintain a
bookkeeping account for each Employee to be credited as of the date the amount
of the Compensation that is deferred otherwise would have been payable.
5.2 Growth Additions. Throughout the period of deferral and until the
final distribution is made each Employee's account shall be credited on the last
day of each Year or prior thereto with a Growth Addition.
5.3 Charge Against Accounts. There shall be charged against each
Employee's account any payments and any forfeitures made to the Employee or to
his beneficiary in accordance with Section 6 hereof.
5.4 General Obligation. Payment of Account Balances shall be made out of
the general funds of the Company, or Subsidiary, if applicable.
5.5 Unsecured Interest. No Employee or beneficiary shall have any interest
whatsoever in any specific asset of the Company, or any of its Subsidiaries. To
the extent that any person acquires a right to receive payments under this Plan,
such right shall be no
2
<PAGE>
greater than the right of any unsecured general creditor of the Company, or any
Subsidiary.
Section 6. Method of Payment of Deferred Amounts
6.1 Method of Payment of Deferred Amounts. An Employee's Account Balance
shall be paid in a lump sum payment or in annual installments over a minimum
period of five Years, or such subsequent Year as the Employee shall have
selected pursuant to Section 4.1; provided, however, this election shall be made
on the same date as the Employee's election to defer under Section 4.1 of this
Plan. If an Employee elects the installment method of payment, the amount to be
paid with each installment shall be the Employee's Account Balance as of the
immediately preceding annual crediting date multiplied by a fraction, the
numerator of which is one and the denominator of which shall be the number of
installment payments remaining.
If the Employee elects the installment method of payment and the
deferral period ends by reason of termination, as set forth in Section 4.3(b) of
this Plan, the first installment payment of an Employee's Account Balance shall
be made on or before 90 days following the date on which the deferral period
ends by reason of termination. Payments after the first installment payment
shall be made on or before 90 days following the first day of each Year
subsequent to the Year in which the deferral period ends by reason of
termination; provided, however, that in no event shall more than one installment
payment be made in any one Year.
6.2 Final Installment or Lump Sum Payment. As to the final installment
payment or any lump sum payment made under this Section, such payment shall
include a pro-rata Growth Addition for the period from the immediately preceding
annual crediting date of payment based upon the interest rate applied for the
immediately preceding Year.
6.3 Financial Hardship. If an Employee or beneficiary establishes, to the
satisfaction of the Committee, that he is confronted by a severe financial
hardship, the Committee, in its sole discretion, may alter the timing or manner
of payment of deferred amounts in the manner and subject to the conditions set
forth hereafter:
(a) A severe financial hardship will be deemed to exist only if it
arises out of an emergency caused by circumstances or events which are
beyond the control of the Employee. A severe financial hardship will be
deemed to have occurred in the event of the Employee's impending
bankruptcy, serious illness of the Employee or a dependent of the
Employee, or such other circumstances or events as may be determined by
the Committee to affect severely the financial affairs of the Employee or
his immediate family.
(b) In the event that the Committee determines that the Employee
is confronted by a severe financial hardship, the Committee may provide
that all or a portion of the amounts previously deferred by the Employee
may be paid immediately in a lump sum cash payment, or provide that all or
a portion of the installments payable over a period of time may be paid
immediately in a lump sum cash payment, or provide such other payment
schedule as the Committee deems appropriate under the circumstances.
(c) In no event shall any distribution made by the Committee under
the Subsection be in excess of the amount necessary to alleviate the
Employee's severe financial hardship.
(d) The Committee's decision in passing on the severe financial
hardship of the Employee, and the manner in which, if at all, the payment
of deferred amounts shall be altered or modified shall be final,
conclusive, and not-subject to appeal.
6.4 Payment of Deferred Amounts when Employee Becomes Affiliated with
Competitor. In the event that an Employee ceases to be an Employee of the
Company or any of its Subsidiaries and thereafter becomes a proprietor, officer,
partner, employee, or otherwise becomes affiliated with any business that is in
competition with the Company or any of its Subsidiaries, or becomes an employee
of any federal, state, or municipal agency, office, subdivision, or other
component having jurisdiction over any activity of the Company or any of its
Subsidiaries, the entire balance of such Employee's deferred account shall be
immediately paid to such Employee in a lump sum. In the event that the
affiliation with a competitor described in the preceding sentence is not in
violation of the Employee's Contract the Employee will be allowed to participate
in the Plan as if the Employee had not affiliated with a competitor. The
determination of whether an Employee has been affiliated with a business in
competition with the Company or any of its Subsidiaries, or with a governmental
component having jurisdiction over any activity of the Company or any of its
Subsidiaries shall rest solely with the Committee and such determination shall
be final, conclusive and not subject to appeal.
3
<PAGE>
6.5 Payment of Deferred Amounts when Employee Voluntarily Terminates
Employment with the Company. In the event that an Employee voluntarily
terminates employment with the Company for reasons other than Retirement, death,
Disability, or Good Reason, the entire balance of such Employee's deferred
account shall be immediately paid to such Employee in a lump sum. The
determination of whether an Employee has voluntarily terminated employment with
the Company for reasons other than Retirement, death, Disability, or Good
Reason, shall rest solely with the Committee and such determination shall be
final, conclusive, and not subject to appeal.
6.6 Forfeiture Upon Misconduct or Crime. If an Employee is discharged from
employment by the Company or any of its Subsidiaries for dishonesty, conviction
of a felony, unauthorized disclosure of confidential material information of the
Company or any of its Subsidiaries to a business in competition with the Company
or its Subsidiaries within the meaning and application of Section 6.4 of this
Plan, or other willful, deliberate or gross misconduct of similar magnitude,
such Employee's entire Account Balance shall be immediately paid to him in a
lump sum and further participation in this Plan will be discontinued. The
determination of whether an Employee has been discharged for any of the
foregoing reasons shall rest solely with the Committee and such determination
shall be final, conclusive, and not subject to appeal.
Section 7. Beneficiary
7.1 Beneficiary. An Employee shall designate a beneficiary or
beneficiaries who, upon the Employee's death, are to receive the amounts that
otherwise would have been paid to the Employee. All designations shall be in
writing and shall be effective only if and when delivered to the Committee
during the lifetime of the Employee; provided, however, that a beneficiary
designation shall be effective if the Committee is satisfied that an Employee
made an otherwise valid beneficiary designation except for the failure to
deliver such designation to the Committee during the Employee's lifetime. If an
Employee designates a beneficiary without providing in the designation that a
beneficiary must be living at the time of such payment, the designation shall
vest in the beneficiary the entire Account Balance, whether otherwise payable
before or after the beneficiary's death. Any amounts remaining unpaid upon the
beneficiary's death shall be paid in a lump sum to the beneficiary's estate.
An Employee may from time to time during his lifetime change his
beneficiary or beneficiaries by a written instrument delivered to the Committee.
In the event an Employee shall not designate a beneficiary or beneficiaries
pursuant to this Section, or if for any reason such designation shall be
ineffective, in whole or in part, the payments that otherwise would have been
paid to such Employee shall be paid to the Employee's estate, and in such event,
the term "beneficiary" shall include his estate.
Section 8. Administration
8.1 Administration. This Plan shall be administered by the Committee. The
Committee may from time to time establish rules for the administration of this
Plan that are not inconsistent with the provisions of this Plan.
8.2 Finality of Determination. The determination of the Committee as to
any disputed questions arising under this Plan, including questions of
construction and interpretation, shall be final, binding, and conclusive upon
all persons, except, with respect to an Employee to the extent any such
determination is contrary to the express provisions of the Employee's Contract.
8.3 Expenses. The cost of payment from this plan and the expenses of
administering the plan shall be borne by the Company.
8.4 Tax Withholding. The Company or its Subsidiaries may withhold, or
require the withholding of, from any payment which is required to make any
federal, state, or local taxes required by law to be withheld with respect to
such payment and such sum as the Company or its Subsidiaries may estimate as
necessary to cover any taxes for which the Company or its Subsidiaries may be
liable and which may be assessed with regard to such payment. Upon discharge or
settlement of such tax liability, the Company shall distribute the balance of
such sum, if any, to the Employee from whose payment it was withheld, or if such
Employee is then deceased, to the beneficiary of such Employee. Prior to making
any payment hereunder, the Company may require such documents from any taxing
authority, or may require such indemnities or surety bond as the Company shall
reasonably deem necessary for its protection.
4
<PAGE>
Section 9. Miscellaneous
9.1 Nontransferability. In no event shall the Company make any payment
under this Plan to any assignee or creditor of an Employee or of a beneficiary.
Prior to the time of a payment hereunder, an Employee or a beneficiary shall
have no rights by way of anticipation or otherwise to assign or otherwise
dispose of any interest under this Plan, nor shall rights be assigned or
transferred by operation of law.
9.2 Merger, Consolidation, or Acquisition. In the event of a merger,
consolidation, or acquisition where the Company is not the surviving
corporation, unless the successor or acquiring corporation shall elect to
continue and carry on the Plan, all amounts deferred, plus Growth Additions,
shall become immediately payable in full, subject only to withholding
requirements. The successor or acquiring corporation shall be required to
dispose of this Plan in a manner similar to all other executive deferred
compensation plans of the Company.
9.3 Amendment and Termination. The Company expects the Plan to be
permanent but, since future conditions affecting the Company cannot be
anticipated or foreseen, the Company must necessarily and does hereby reserve
the right to amend, modify, or terminate the Plan at any time by action of the
Board. No amendment or termination shall operate to decrease any existing
Account Balances of Employees.
9.4 Applicable Law. This plan shall be governed and construed in
accordance with the laws of the State of North Carolina.
5
<PAGE>
EXHIBIT (12)
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
- ---------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
(IN MILLIONS) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 2,710 2,499 2,389 2,088 1,795
Fixed charges, excluding capitalized
interest 2,068 1,880 1,426 816 608
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (A) $ 4,778 4,379 3,815 2,904 2,403
- ---------------------------------------------------------------------------------------------------------------------------------
Interest, excluding interest on deposits $ 1,926 1,805 1,349 747 538
Distributions on guaranteed preferred
beneficial interests 66 - - - -
One-third of rents 76 74 76 69 70
Capitalized interest - 5 4 1 -
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed charges (B) $ 2,068 1,884 1,429 817 608
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to fixed
charges, excluding interest on deposits (A)/(B) 2.31 X 2.32 2.67 3.55 3.95
- ---------------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST ON DEPOSITS
Pretax income from continuing operations $ 2,710 2,499 2,389 2,088 1,795
Fixed charges, excluding capitalized
interest 5,332 5,070 4,502 2,862 2,552
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (C) $ 8,042 7,569 6,891 4,950 4,347
- ---------------------------------------------------------------------------------------------------------------------------------
Interest, including interest on deposits $ 5,190 4,995 4,425 2,793 2,482
Distributions on guaranteed preferred
beneficial interests 66 - - - -
One-third of rents 76 74 76 69 70
Capitalized interest - 5 4 1 -
- ---------------------------------------------------------------------------------------------------------------------------------
Fixed charges (D) $ 5,332 5,074 4,505 2,863 2,552
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to fixed
charges, including interest on deposits (C)/(D) 1.51 X 1.49 1.53 1.73 1.70
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1997 ANNUAL REPORT
FIRST UNION
http://www.firstunion.com/
<PAGE>
Customers for Life
Contents
At a Glance.............................................. i
Letter to Our Shareholders............................... 1
Index to Special Topics.................................. 7
Management's Analysis of Operations...................... 8
Glossary of Terms........................................30
Board of Directors.......................................31
Across the Nation........................................32
Pro Forma Financial Information.........................P-1
Financial Tables........................................T-1
Management's Statement of
Financial Responsibility................................C-1
Independent Auditors' Report............................C-2
Audited Financial Statements............................C-3
Stockholder Information...................Inside Back Cover
First Union announced dividend increases twice in 1997. Including its
predecessor, Union National Bank, First Union has paid a dividend every year
since 1914 and has increased the dividend annually for the past 20 consecutive
years.
[GRAPHIC APPEARS HERE]
<PAGE>
(graphic appears here.) At A Glance
First Union Corporation, with headquarters in Charlotte, North
Carolina, is the nation's sixth largest banking company based on assets of $157
billion and fifth largest based on market capitalization of $33 billion at
December 31, 1997. After completion of the CoreStates Financial Corp acquisition
we expect to have assets of $208 billion and the largest domestic deposit share
from Florida to Connecticut. First Union has a nationwide presence as the eighth
largest securities brokerage company, based on 4,300 registered representatives;
18th largest mutual fund provider; 2nd largest home equity lender; and 12th
largest mortgage servicing company. We are among the nation's largest
middle-market commercial lenders. Our goal is to complement our traditional
banking products with a complete selection of fully integrated investment
banking products offered in our Capital Markets Group and a lifetime array of
asset management offerings in our Capital Management Group. We rank among the
Top 10 in several key Capital Markets products and services, including
commercial mortgage securitizations, leveraged finance and loan syndication
transactions. First Union also has sizable small business and cash management
operations, which will rank among the Top 3 when the CoreStates acquisition is
consummated.
First Union serves 14 million customers. Customers may access their
account information and purchase financial products at any of more than 2,000
retail offices (the nation's second largest branch network); nearly 2,800
automated teller machines (the nation's sixth largest ATM network); through the
Internet at www.firstunion.com; or through our Direct Bank at 1-800-413-7898.
Providing the best access
to the best products (picture of man and child
appears here.)
in each customer's best interests.
<PAGE>
Corporate Overview ii
First Union's long-standing commitment to customer service means
that we must be ready to offer our customers the service and products they want
- - when, where and how they want them. More and more of our customers are
demanding quick, technological solutions to their financial service needs. Some
even say they never want to go into a branch office again. Still other customers
require, and will continue to receive, the face-to-face service they prefer, in
a branch setting. One of the key components of our corporate strategy is meeting
the needs of both kinds of customers.
- -------------------------------------------------------------------------------
Strategic Priorities
(bullet) Consistently meet our financial performance objectives and create
unparalleled shareholder value;
(bullet) Build fee-based lines of business that complement our traditional
banking businesses; and
(bullet) Provide the best access to the best products in each customer's best
interests.
- --------------------------------------------------------------------------------
Contributions to Profitability
by Business Segment
(pie chart appears here with plot points.)
Capital Management 10%
Capital Markets 18%
Treasury/Nonbank 1%
Commercial Bank 26%
Consumer Bank 45%
Key Statistical Data
Assets
$157 billion
Loans
$97 billion
Deposits
$103 billion
Total Stockholders' Equity
$12 billion
Market Capitalization
$33 billion
Customer Relationships
14 million
Asset Ranking
6th largest in nation
Corporate Headquarters
Charlotte, North Carolina
WORKING CAPITAL SECURED LOANS
WHOLESALE
RETAIL (picture appears here of (picture appears here
young lady at an ATM machine.) of a pen in hand.)
AUTO LOANS CHECKING SAVINGSS
<PAGE>
iii
(picture of map appears here with plot points.)
Metropolitan Market Share
New Haven, CT 3
Middlesex, County, NJ 1
Newark, NJ 1
Allentown, PA 1
Philadelphia, PA 1
Monmouth County, NJ 2
Washington, D.C. 3
Richmond, VA 1
Roanoke, VA 1
Johnson City, TN 3
Greensboro, NC 3
Charlotte, NC 1
Jacksonville, FL 2
Tampa, FL 2
Orlando, FL 3
Sarasota, FL 3
West Palm Beach, FL 2
Fort Lauderdale, FL 2
Miami, FL 2
(graph appears here with plot points.)
Greatest Concentration of Companies
(with Annual Sales $20mm-$250mm+)
First Union's regions account for 36 percent of the
nation's middle-market companies*
First Union South 19%
First Union Atlantic 17
East North Central 17
Pacific 14
West South Central 11
West North Central 7
Mountain 5
East South Central 4
New England 4%
*First Union is primarily located in the
South Atlantic region (DE, FL, GA, MD,
DC, NC, SC, VA) and Middle Atlantic region
(NJ, NY, PA), as well as Connecticut and
Tennessee, which are in other regions as
defined by the U.S. Statistical
Abstract. Source: Dun & Bradstreet 1997.
Per Capita Income by Metropolitan Area
Seven of the ten metro areas with
highest per capita income are in First
Union's marketplace.
- -------------------------------------------------------------------
Per Capita % of U.S.
Personal Income Average
- -------------------------------------------------------------------
San Francisco, CA $ 36,989 159.46%
West Palm Beach - Boca Raton, FL 36,057 155.44
New Haven - Bridgeport - Stamford -
Danbury - Waterbury, CT 35,400 152.61
Bergen - Passaic, NJ 33,931 146.28
Naples, FL 32,878 141.74
Trenton, NJ 32,633 140.68
Middlesex - Somerset - Hunterdon, NJ 32,507 140.14
Newark, NJ 32,346 139.45
Nassau-Suffolk, NY 32,108 138.42
San Jose, CA $ 31,487 135.74%
Banking Units
Florida
Branches: 634
ATMs: 694
Market Share: 16.20%
Ranking: No. 2
North Carolina
Branches: 235
ATMs: 313
Market Share: 16.68%
Ranking: No. 2 (tie)
Pennsylvania
Branches: 148
ATMs: 157
Market Share: 17.90%
Ranking: No. 1
Virginia
Branches: 266
ATMs: 319
Market Share: 17.23%
Ranking: No. 1
New Jersey
Branches: 315
ATMs: 373
Market Share: 15.14%
Ranking: No. 2
Georgia
Branches: 133
ATMs: 351
Market Share: 9.27%
Ranking: No. 4
Connecticut
Branches: 107
ATMs: 122
Market Share: 7.61%
Ranking: No. 4
Maryland
Branches: 132
ATMs: 164
Market Share: 7.57%
Ranking: No. 5
South Carolina
Branches: 59
ATMs: 76
Market Share: 7.54%
Ranking: No. 4
Tennessee
Branches: 44
ATMs: 59
Market Share: 2.86%
Ranking: No. 7
Washington, D.C.
Branches: 39
ATMs: 65
Market Share: 18.11%
Ranking: No. 2
New York
Branches: 58
ATMs: 73
Market Share: 0.62%
Ranking: No. 22
Delaware
Branches: 2
ATMs: 2
Market Share: 2.10%
Ranking: No. 10
Market share data represents deposits at June 30, 1997, adjusted for
Signet and for the pending CoreStates acquisition.
STRATEGIC ADVICE ASSET-BASED LOANS UNDERWRITING
(picture of HOME FOR SALE (picture of power line.) (picture of graduate and
and family in front of home.) and lady.)
CYBERBANKING INSURANCE FINANCIAL PLANNING
<PAGE>
Business Segments iv
Consumer Bank
Key Statistics
(bullet) No. 1 deposit share in the Connecticut to Florida marketplace
(bullet) Nation's 2nd largest branch network
(bullet) Nation's 6th largest automated teller machine network
(bullet) Nation's 2nd largest home equity lender
(bullet) Nation's 12th largest mortgage servicer
(bullet) Nation's 6th largest debit and ATM card issuer
Products and Services
First Union's Consumer Bank is focused on providing a complete
selection of products and services to meet a lifetime of customers' financial
needs, including deposit and savings accounts; first and second residential
mortgages; installment loans; credit cards; auto loans and leases; and student
loans. The Consumer Bank's approach is fully integrated with our other business
segments, making our retail branches a major distribution point for mutual
funds, insurance and small business loans. The Consumer Bank combines
traditional deposit and lending products with innovative financial solutions all
supported by state-of-the-art technology to provide quality customer service.
Delivery Channels
(bullet) Full-service retail branch network located in Connecticut, Delaware,
Florida, Georgia, Maryland, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C.
(bullet) Direct access 24 hours a day, seven days a week through
technology-based delivery channels including the telephone, personal
computer and automated teller machine (ATM).
(bullet) Card products such as stored value cards, smart cards, ATM cards and
debit cards.
(bullet) Centralized customer information centers in Charlotte, North Carolina;
Jacksonville, Florida; Upper Darby, Pennsylvania; Trapp Falls,
Connecticut; and Roanoke, Virginia. Additional call centers expect to
be fully functional in Allentown, Pennsylvania, and Richmond,
Virginia, in 1998.
Strategy
First Union's retail strategy is based on building lifetime
relationships with customers through an integrated product focus, innovative
teamwork and quality service. Our customers have told us what that looks like:
fast, easy and error-free. Industry observers have remarked that First Union's
strategy is unusual because the focus is on customers' needs and not making the
customer "accept what the bank has to offer."
Initiatives
(bullet) Future Bank implementation
(bullet) Expanded network of enhanced ATMs that split deposits between accounts
and cash checks to the penny
(bullet) Electronic bill payment through popular financial planning computer
software, including First Union's own "Cyberbanking"
(bullet) New chip card partnerships with federal agencies, the military,
corporate campuses and college campuses
(chart appears here with the following information:]
Selected Financial Data
(Dollars in millions)
Net Interest Income $ 3,083
Noninterest Income 1,238
Noninterest Expense 2,452
Net Income $ 854
ROE 30.78%
EQUITY OFFERINGS PRIVATE PLACEMENTS HIGH YIELD
(picture of tall buildings (picture of couple (picture of an oil
and a man in an rig at sea.)
office setting.)
MORTGAGES HOME EQUITY LOANS FUNDING EDUCATION
<PAGE>
v
Capital Management
Key Statistics
(bullet) $50 billion in total trust assets - Top 10 ranking in the First
Union marketplace
(bullet) $52 billion in First Union-advised mutual funds (including Wheat
First)- the nation's 18th largest mutual fund family
(bullet) 35 Evergreen Funds rated "4" or "5" star by Morningstar rating
service
(bullet) $26 billion in CAP account assets; 290,000 accounts
(bullet) $11 billion in total IRA customer assets - 2nd largest bank-based
IRA provider
Products and Services
For First Union's retail and institutional customers, the Capital
Management Group is the primary link between traditional banking and investing.
We are focused on building a major asset management organization with a
comprehensive selection of products and services that anticipates clients'
needs. Banks have traditionally offered customers such products as checking and
savings accounts, auto loans and home mortgages. As life events generate other
needs, our products and services help customers invest and manage their assets;
plan for financial needs such as educating their children; save for and manage
their retirement; and manage their estates and inheritance plans.
We have grown to $80 billion in assets under management, which
encompassed $50 billion in total trust and institutional assets, including $12
billion in mutual funds. Including the mutual funds held in trust, the First
Union - advised mutual funds amounted to $42 billion at December 31, 1997. An
additional $10 billion in mutual fund assets were added with the January 1998
acquisition of the Richmond, Virginia-based brokerage firm Wheat First Butcher
Singer, which expanded our marketing power with a combined sales force of more
than 4,300 registered representatives in 20 states and more than 2,000 brokerage
locations.
For those who have accumulated substantial assets, we provide trust
services, private client services, tax deferment strategies and other services.
For the generation in their 20s and early 30s who are just beginning to focus on
their accumulation plans, we offer systematic investment plans (SIPs) requiring
low minimum balances; self-directed IRAs as well as bank-managed IRAs; and other
services.
First Union is a leading provider of asset management accounts. Our CAP
Account enables customers to move easily between traditional banking and
brokerage products by combining investment products, insured deposits and other
services into one account.
On the institutional side, corporate trust, with $38 billion in
customer assets, was the fourth largest trustee of municipal bonds in 1997.
Strategy
We are capitalizing on our link between innovative retail products and
an extensive delivery network. The Capital Management Group's revenue is
generated primarily through fee income, which has helped to diversify First
Union's earnings stream.
(chart appears here with the following information.)
Selected Financial Data
(Dollars in millions)
Net Interest Income $ 263
Noninterest Income 920
Noninterest Expense 887
Net Income $ 186
ROE 33.25%
DEBT SYNDICATED LOANS ASSET - BACKED SECURITIZATION
(picture of a man, woman and (picture of a train.) (picture of a man and
laptop computer.) woman.)
ACCUMULATING WEALTH INVESTMENT FOR THE FUTURE
<PAGE>
Business Segments vi
Commercial Bank
Key Statistics
(bullet) Top 5 middle-market lender
(bullet) Top 3 small business lender
(bullet) Top 3 cash management bank based on revenue; Top 10 ranking in 8 of
our 10 cash management products (including CoreStates)
Products and Services
As our clients have grown, we have expanded our commercial banking
capabilities in partnership with First Union's Capital Markets Group to meet the
demand for investment banking, advisory services and to provide access to more
complex financing solutions. In addition we have an integrated product approach
to provide property and casualty insurance, pension and retirement planning,
investment products and other services.
Relationship Approach
Our relationship managers are committed to serving the full financial
needs of our nearly 700,000 commercial clients. The relationship managers work
in partnership with commercial underwriters and portfolio managers. These team
members are backed by customer service representatives at regional service
centers. This support allows relationship managers to spend more time finding
new opportunities and bringing new ideas to help our customers expand their
businesses. We have relationships with 21 percent of the commercial businesses
in our marketplace.
(bullet) The Small Business Banking Division is focused primarily on meeting
the loan origination and servicing needs of companies with annual
sales up to $10 million and loan requests for $25,000 to $1 million.
Referrals from our retail financial centers and commercial bankers are
directed to our small business lenders in Charlotte, North Carolina;
Tampa, Florida; and Philadelphia, Pennsylvania. These locations are
staffed by experienced lenders who are committed to providing
responses to customers within 24 hours. The division also has a
centralized telephone sales channel to cross-sell First Union's small
business products and services. The division originated more than $1
billion in loans in 1997.
(bullet) Cash Management offers corporate customers a complete selection of
treasury management services, including electronic commerce,
disbursement and information reporting. This division supports the
relationship sales effort of the Commercial Bank through sales
consultants who are located throughout our marketplace and a sales
team dedicated to Capital Markets clients. First Union has more than
22,000 cash management customers using multiple services. In 1997 Cash
Management revenue growth was three times the industry average and
commanded a 5 percent market share.
Strategy
The Commercial Bank intends to provide its clients with the most
convenient service, with single-view access to their accounts throughout the
entire First Union market area.
(chart appears here with the following information:]
Selected Financial Data
(Dollars in millions)
Net Interest Income $ 1,505
Noninterest Income 338
Noninterest Expense 1,013
Net Income $ 488
ROE 19.87%
INTERNATIONAL BANKING LEVERAGED FINANCE
(picture of a satelite dish.) (picture of a family.) (picture of a boat
and port.)
TRUST MANAGEMENT RETIREMENT ESTATE PLANNING
<PAGE>
vii
Capital Markets
Key Statistics
(bullet) No. 1 in middle-market lead-bank relationships in the First Union
marketplace
(bullet) No. 4 in commercial mortgage securitizations
(bullet) No. 4 in asset securitizations among commercial banks' Section 20
subsidiaries
(bullet) No. 7 in leveraged finance volume ("agent-only")
(bullet) No. 8 in private debt placements
(bullet) No. 10 in number of loan syndication transactions ("agent-only")
Products and Services
Our Capital Markets Group is focused on meeting the specific,
individualized needs of our corporate clients and institutional investors
through fully integrated products and services.
Our client relationships are supported by teams of investment bankers,
industry specialists and capital market professionals. We have in-depth
specialized industry expertise in health care; media and communications;
financial institutions; oil and gas; utilities; forest products; textiles;
carpet and home furnishings; retailing; transportation; leasing; and real estate
investment trusts.
First Union, through First Union Capital Markets Corp. (FUCMC),
received federal approval in May 1997 to underwrite equity securities. We gained
significant momentum with the 1998 addition of Wheat First. This moved us
forward in our business plan at a much faster pace than if we had built this
business internally, and it will allow First Union to continue to grow along
with our client base.
Relationship Approach
Our Capital Markets approach is supported by relationship managers in
our banking states, as well as by specialized industries and diversified finance
specialists nationwide. We are focused on building long-term relationships,
rather than on engaging in one-time transactions. We intend to meet financial
needs at every phase of our clients' corporate life cycle, from raising capital
to operations; corporate liquidity to asset management; risk management to
restructuring; and expansion. As companies grow, their needs become more
complex. A relationship that begins with cash management and bank loans will
evolve into more sophisticated - and increasingly more profitable - financing
solutions ranging from syndicated loans to equity needs and to mergers and
acquisitions advice offered by our Capital Markets Group.
Strategy
Our Capital Markets Group is committed to serving the complete
financial needs of middle-market corporate clients. We recruit and work to
retain top industry talent who share First Union's client focus. Our goals are
to continue to grow and to strengthen existing product capabilities based on
client demand. We intend to distinguish ourselves as the leading full-service
financial company that is ahead of the competition in combining the best of
banking and the best of the securities business.
(chart appears here with the following information:]
Selected Financial Data
(Dollars in millions)
Net Interest Income $ 435
Noninterest Income 793
Noninterest Expense 679
Net Income $ 348
ROE 24.99%
(picture of people.) WE'RE BUILDING CUSTOMERS
FOR LIFE.
<PAGE>
Financial Highlights viii
<TABLE>
<CAPTION>
Years Ended December 31, Percent
- -------------------------------------------------------------------------------------------------------- Increase
(Dollars in millions, except per share data) 1997 1996 (Decrease)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Highlights
Net income $ 1,896 1,624 17%
Dividends on preferred stock - 9 (100)
- --------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders after merger-
related and restructuring charges and SAIF special assessment 1,896 1,615 17
After-tax merger-related and restructuring
charges and SAIF special assessment 194 268 (28)
- -------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders before merger-
related and restructuring charges and SAIF special assessment $ 2,090 1,883 11%
==========================================================================================================================
Per Common Share Data
Basic earnings per share
Net income after merger-related and restructuring
charges and SAIF special assessment $ 3.03 2.61 16%
Net income before merger-related and restructuring
charges and SAIF special assessment 3.34 3.04 10
Diluted earnings per share
Net income after merger-related and restructuring
charges and SAIF special assessment 2.99 2.58 16
Net income before merger-related and restructuring
charges and SAIF special assessment 3.30 3.01 10
Cash dividends 1.22 1.10 11
Book value 18.91 17.06 11
Period-end price $ 51.25 37.00 39
Average common shares (In thousands)
Basic 625,649 619,237 1
Diluted 633,772 625,224 1
Actual common shares (In thousands) 636,394 640,782 (1)
Dividend payout ratio (based on operating earnings) 35.86% 35.06 -%
===============================================================================================================================
Performance Highlights
Before merger-related and restructuring charges
and SAIF special assessment
Return on average assets 1.39% 1.30 -
Return on average common equity 18.90 18.50 -
Overhead efficiency ratio 57 58 -
Net charge-offs as a percentage of
Average loans, net 0.63 0.65 -
Average loans, net, excluding Bankcard 0.28 0.35 -
Nonperforming assets to loans, net and foreclosed properties 0.75 0.78 -
Net interest margin 4.36% 4.25 -
================================================================================================================================
Cash Earnings (Excluding Other Intangible Amortization)
Before merger-related and restructuring charges
and SAIF special assessment
Net income applicable to common stockholders $ 2,320 2,084 11%
Net income per common share - basic $ 3.71 3.37 10
Return on average tangible assets 1.57% 1.46 -
Return on average tangible common equity 28.14 27.17 -
Overhead efficiency ratio 54% 55 -%
==================================================================================================================================
Year-End Balance Sheet Items
Securities available for sale $ 21,415 16,805 27%
Investment securities 2,175 2,501 (13)
Loans, net of unearned income 96,873 102,316 (5)
Earning assets 134,370 134,223 -
Total assets 157,274 151,847 4
Noninterest-bearing deposits 21,753 20,383 7
Interest-bearing deposits 81,136 82,319 (1)
Long-term debt 8,042 8,060 -
Guaranteed preferred beneficial interests 991 495 100
Stockholders' equity $ 12,032 10,932 10%
=================================================================================================================================
</TABLE>
<PAGE>
(picture of silver dollar appears in the background)
Dear Shareholders
(Letter to our Shareholders appears 90 degrees on right side of page.)
By almost any measure, the performance of your company was
extraordinary in 1997. We met our financial targets, producing an 11 percent
operating earnings increase, an 18.90 percent return on average common equity
and a 1.39 percent return on average assets. We raised common dividends twice
during the year, and we increased our dividend payout ratio guideline to 40 to
45 percent. In new business initiatives, we gained additional equity
underwriting powers; we implemented new technology-based marketing and sales
development approaches; and we strengthened our market leadership and gained new
customers with new merger partners.
In short, your company was active on a number of fronts in 1997 to
ensure our momentum for the long term. The results reflect the success of our
strategy to offer our customers one of the nation's broadest financial product
lines as we continue to grow the scale of our business.
We earned a record $2.1 billion in operating earnings before special
charges, an 11 percent increase from $1.9 billion in 1996. On a per common share
basis, operating earnings were $3.30 compared with $3.01 in 1996. Special
charges include merger-related and restructuring charges in both years and a
special assessment related to the Savings Association Insurance Fund in 1996.
These special charges are discussed in more detail in the Management's Analysis
of Operations section of this report. Our financial results in 1997, 1996 and
1995 include the November 28, 1997, pooling of interests acquisition of Signet
Banking Corporation.
Our strong performance in 1997 includes the increasing contributions
from our Capital Markets and Capital Management businesses, which generated 28
percent of First Union's net income. These two businesses are natural extensions
of our strong commercial and consumer banking operations. We are committed to
offering our customers everything that Wall Street has to offer. The growth of
our Capital Markets and Capital Management Groups provides strong evidence that
we have correctly anticipated customers' needs and that we have delivered
quality products and services to them.
In 1997 we added to First Union's already strong product line and
advanced technology through strategically and financially attractive
acquisitions in our banking states of Virginia, Pennsylvania, New Jersey,
Maryland, Delaware and Washington, D.C. We also gained critical mass in a key
growth business with the acquisition of the regional brokerage firm Wheat First
Butcher Singer, which was consummated January 31, 1998.
In terms of size, the pending acquisition of Philadelphia,
Pennsylvania-based CoreStates Financial Corp will be our largest, representing
nearly a third of our asset base. Most significantly it will produce critical
mass on the commercial side of our organization. Combined, we will be among the
Top 5 middle-market lenders in the nation.
CoreStates has market leadership in several key lines of business with
depth and expertise in commercial banking operations. This acquisition will
enable us to provide a full selection of Capital Markets and consumer products
to CoreStates' extensive customer base. It will provide First Union with new
opportunities in asset-based lending through CoreStates' Congress Financial
business unit and with additional expertise in the international arena with
CoreStates' strong presence in international trade
(chart appears here with the following plot points.)
Operating Earnings
Per Diluted Common Share
(Dollars)
92 93 94 95 96 97
$1.22 2.09 2.25 2.49* 3.01* $3.30*
* Excluding special charges.
<PAGE>
(This paragraph appears 90 degrees on left side of page.)
Strategic Direction
First Union is creating a new kind of financial services company with
customer-driven products, services, and delivery channels designed to combine
the best aspects of a traditional bank, an investment bank and an asset
management company. First Union operates the nation's second largest branch
delivery system in a marketplace that covers more than a third of the population
of the United States. The branch network is complemented by fast-growing
business that serve individual and institutional investors, as well as capital
markets businesses that are focused on the mid-sized commercial market we have
served for so long.
(picture of John R. Georguis (picture of Edward E. Crutchfield
John R. Georguis.) President Edward E. Chairman and
Crutchfield.) Chief Executive Officer
finance. In addition, CoreStates has a leading position in attractive markets
for First Union's well-developed Capital Management products and services, such
as trust, brokerage, mutual funds, insurance and our popular asset management
product called the CAP Account.
With the Wheat acquisition, we moved far ahead in building the equity
underwriting component of First Union's Capital Markets business. We have
relationships with 42 percent of the middle-market and corporate businesses in
our marketplace, and equity underwriting powers are crucial to simplifying life
for clients who can benefit from "one-stop"financing. This partnership also
provides a new platform for growth in our Capital Management business by
creating one of the nation's largest brokerage networks. This combination
creates a good fit between two companies that share the same geographical
marketplace, customer relationship philosophy and business focus on the
middle-market. In addition, both companies have focused on high-growth
industries such as health care, media and communications, financial institutions
and real estate.
With the acquisition of Signet Banking Corporation of Richmond,
Virginia, we gained the leading market share in Virginia and expanded our
marketing power along the Richmond to Washington to Baltimore corridor. We
believe there is great potential to create cross-selling opportunities by
leveraging Signet's direct marketing technology and First Union's broader
product selection, particularly in Capital Management and Capital Markets.
Maximizing Our Performance
With strong earnings momentum at our back and the pending acquisition
of CoreStates ahead, in December 1997 we again raised our financial performance
targets to higher levels to guide us through the year 2000, as indicated in the
chart to the left.
As we said when we announced new financial performance guidelines in
1996, we have provided a range of performance levels because, while we will
strive to perform within these ranges each year, there may be trade-offs in any
given year. Let me emphasize: our year 2000 goal is to achieve all eight of
these financial performance guidelines consistently.
In fact, we believe our new goals will propel First Union to overall
financial performance that is among the very best in the industry. First Union's
earnings have been strong both over the short and the long term. On an
originally reported basis, First Union's earnings have grown a compounded 11
percent over the past 15 years; 10 percent over the past 10 years; and 12
percent over the past 5 years. Total return (stock price appreciation, dividends
and
(chart appears here with the following plot points.)
Financial Performance Guidelines
- ----------------------------------------------------
Prior New
- ----------------------------------------------------
ROE 18-20% 20-22%
EPS Growth 10-13% 10-14%
ROA 1.30-1.50% 1.60-1.90%
Overhead Efficiency 53-57% 50-54%
Fee Income/Revenue 40% 40-45%
Tier 1 Leverage 6- 7% 6- 7%
NCO/Average Loans 50-65bps 55-70bps
Dividends Payouts 30-35% 40-45%
Note: Exclude special charges.
2
<PAGE>
reinvested dividends) has exceeded the S&P Major Regional Bank Index and the S&P
500 throughout the 1990s. First Union's total return during the decade of the
'90s has been 580 percent - significantly better than the average for the 25
largest banking companies. In fact, First Union's total return has outpaced the
S&P Major Regional Bank Index in five of the last eight years.
While stock price movements can be volatile, with both up and down
years, it was gratifying to see the price of First Union's stock rise above $100
for the first time on July 16, 1997. We issued a two-for-one stock split in
July. At $51.25 per share at year-end 1997, the stock price remained above the
$100 level on a pre-split basis.
Significantly, our two dividend increases in 1997 represented the
seventh fastest growth rate in dividends per common share among the nation's 25
largest banking companies. We increased our guidelines for the dividend payout
ratio to 40 to 45 percent. We expect that will move First Union into the top
tier in the industry in this performance measure while achieving superior
earnings per share growth.
Accelerating Pace of Industry Consolidation
This performance was achieved against a backdrop of an industry in
flux, with continuing consolidation and new competitors on the horizon. In
today's environment, we are competing for customers not only with other banks,
but also with the major mutual fund companies, brokerage houses, credit card
companies and insurers.
In 1997 the blurring of the lines in the financial services industry
began accelerating. Not only did banks join together, but also numerous mergers
of banks and brokerage houses, insurance companies and brokerages, and banks and
credit card companies were announced or completed.
We believe this trend will continue, and ultimately a dozen or so
companies will hold a dominant share of the financial services business. The
leaders in this new financial services industry will be those companies that
find the most innovative ways to help customers (both businesses and
individuals) simplify their financial lives.
In this environment, First Union increased the flexibility of our
company geographically, strategically and functionally through the acquisitions
discussed earlier, which we believe will help build lasting value for
stockholders.
Further discussion of our 1997 transactions is included in the Merger
and Consolidation Activity section of the Management's Analysis of Operations.
However, I'd like to briefly address the strategic reasons behind these
acquisitions.
In the mid-1980s through the mid-1990s, the acquisition trend was about
gaining size in order to survive. Today's acquisitions are being pursued to add
customers and products or to achieve scale in key growth lines of business or
attractive growth markets. Let me explain why achieving scale is important. In
the mutual fund industry, the ten largest companies control 42 percent of the
industry's assets. The ten largest mortgage companies control nearly a third of
that business. The same is true in other industry segments - the dozen or so
largest, best-known companies dominate the business. To be in the game in any of
these businesses requires scale to remain competitive on both costs and pricing.
In this environment, First Union has pursued acquisitions to leverage
our product strengths, to expand our distribution capabilities and to enter
attractive growth markets. To that end, First Union is well on its way to
attaining competitive scale in a broad selection of key businesses that will
help us meet our customers' lifetime needs.
We evaluate acquisitions, like any other capital investment your
company would choose to make, on the basis of their economic return to
stockholders over time.
I would like to point out that even during our heavy acquisition phase
in the mid-1980s to early 1990s, First Union's earnings per share on an
originally reported basis increased at a rate of 9.1 percent compared with a Top
25 average of 8.7 percent. We believe our acquisition strategy has built a
company that is differentiating itself from the competition and that will
outpace the industry's growth rate.
Technology-Based Marketing and Alternative Delivery
One area where your company has distinguished itself in the industry is
in our commitment to operational quality and especially our approach to advanced
technology. In the
(The following graph(s) appear on the right side of page.)
Compound Annual
Growth
Originally Reported Operating
Earnings per Basic Common Share
{Percent)
1982-1997 1987-1997 1992-1997
15 Years 10 Years 5 Years
11 10 12
Total Return
During the 1990s
FTU S & P Banks S & P
--- ----------- -----
1992 143.91 62.54 35.90
1993 138.26 72.15 49.50
1994 148.69 62.82 51.53
1995 248.03 156.06 108.27
1996 378.78 249.59 155.97
1997 580.63 426.31 241.26
Total Return on
Common Stock
Compound Annual Growth Rate
(Assumes Dividends Reinvested)
(Dollars)
94 97 92 97 87 97
3 Year 39% 5 Year 23% 10 Year 23%
$1,000 2,699 1,000 2,766 1,000 $7,695
3
<PAGE>
(The following graph(s) appear on the left side of page.)
Share of
Business Credit
(Percent)
82 85 88 91 94 97
Nonbanks 53.46 56.77 59.52 62.24 64.43 61.51
Commercial Banks 46.54 43.23 40.48 37.76 35.57 38.49
Market Share of
Household Assets
(Percent)
82 85 88 91 94 97
Bank Deposits 49.48 47.30 42.83 34.54 26.90 20.79
Mutual and Money Market Funds 7.06 8.16 10.26 11.65 13.51 17.36
mid-1980s, First Union focused its technology-related investments largely on
creating a "single systems" platform. By that, I mean unlike most other large,
multistate banking companies, we have a single general ledger system, deposit
system, commercial credit system, human resources system, and so on. Banking
analysts have noted our track record in rapidly integrating acquisitions. First
Union's average time from consummation to systems conversion has been less than
three months in the past four years.
Our aggressive approach to technology has given us a distinct marketing
edge because we are able to cost-effectively offer new computer-based options
that may well become the delivery channels of choice in the future. We have
rapidly built a "data warehouse" that we believe will help us more effectively
anticipate which products and services customers want and when they want them.
Our single systems strategy has also provided another clear competitive
advantage as companies address the "Year 2000" computer issue that has received
widespread attention. This issue centers on the inability of today's computer
hardware and software, if left unaltered, to recognize the year 2000. First
Union's single systems infrastructure gives us a strong advantage in addressing
this. We have been recognized by industry experts and others as being
well-prepared for meeting this challenge.
Growing Businesses: Capital Markets and Capital Management
The competitive field and the demographic trends of the past two
decades have not diminished. In fact, they present increasing challenges. We
have new competitors from Wall Street to Cyberspace that are gaining increasing
shares of the market for business credit and household assets once controlled by
the banking industry, as the charts on this page clearly show.
Our strategy to take advantage of these trends has been to build new,
innovative businesses that are less capital-intensive and that generate more fee
income than traditional banking businesses. We are building a company that will
operate about 50 percent like a traditional banking company and 50 percent like
an investment bank/asset management company.
To that end, our Capital Markets Group, which provides corporate
financing solutions, and our Capital Management Group, which provides a host of
asset management products and services, accounted for 50 percent of First
Union's fee income in 1997. We believe we are further ahead in developing these
kinds of new products and nontraditional, fee income - generating businesses
than most of our competitors in the banking industry.
An Actively Engaged Sales Culture
While we have been building new, innovative lines of business, we also
have streamlined and updated our traditional businesses to make sure they are
relevant to today's customer needs. These more mature businesses must operate at
peak efficiency - both for our customers' benefit and for our benefit - in order
to remain competitive.
We have worked hard for several years to rationalize and expand the
capacity of our retail channel, and in 1997 we implemented a model that we are
calling "The Future Bank." Pundits have predicted the demise of the traditional
bank branch for many years, but in the "Future Bank," we are revitalizing and
redefining what happens in branches- which we now call "financial centers."
These financial centers offer a broad array of sales features and products. They
also combine face-to-face customer service with access to electronic and remote
delivery methods such as automated teller machines, personal computer banking,
interactive video and card products.
While we believe we cannot force a change in customer preferences, we
are working in our financial centers to educate and encourage customers to use
less-costly delivery channels. We believe that customers are rational and
discriminating, and they will change how they do business if we offer better
value, such as speed, convenience and pricing incentives. Our philosophy is that
our customers will tell us how they want to do business with us - not the other
way around.
Our retail strategy is based on our vision of becoming "the world's
most innovative financial services company." We intend to differentiate
ourselves by focusing on what that means from the customers' point of
view - not for the sake of back-office productivity. Our customers have
told us what "innovative" feels like to them - and it is service that
4
<PAGE>
(The following graph(s) appear on right side of page.)
Book Value Per Share
(Dollars)
92 93 94 95 96 97
$11.68 13.36 14.10 15.66 17.06 $18.91
First Union Stock
Price vs. Book Value
(Dollars)
92 93 94 95 96 97
Stock Price 21.75 20.625 20.625 27.75 37.00 51.25
Book Value 11.68 13.36 14.10 15.66 17.06 18.91
Stock Price Performance
Since year-end 1996
(Dollars)
12/96 3/97 6/97 9/97 12/97
37.00 40.56 46.25 50.06 51.25
Stock Price Performance
5-year trend
(Dollars)
92 93 94 95 96 97
21.81 20.63 20.69 27.81 37.00 51.25
is fast, easy and error-free. It is convenient from the customers' point of view
- - whenever, wherever and however they want to interact with us.
A lot of people have a similar vision. But we truly believe that First
Union's strategies of the past 12 years have given us a clear and commanding
lead in this arena. We believe that no one else - bank, insurer or brokerage
firm - offers the complete selection of products and services in the
comprehensive, integrated way that First Union does.
On the commercial side of our company, our vision, philosophy and
operating strategies parallel those on our retail side: our goal is to provide a
lifetime of financial solutions to customers' needs. As a company grows, it
requires different products beginning with traditional commercial deposit
accounts, commercial lending and cash management to 401(k) plans and pension
management, to innovative financial solutions and access to the capital markets.
Rather than focusing on finite transactions that end when a loan is repaid, our
approach is to provide value-added advisory services and financing solutions
that are in the client's best interest. We intend to build long-term
relationships with our commercial customers through a fully integrated
relationship approach that grows as the company grows.
Revenue Growth and Expense Control
The result of our strategies and heavy investment spending over the
past five years is a clear differentiation between First Union and the vast
majority of banks in the United States. We have been able to produce strong
revenue growth while we have kept strict control on expenses. The chart below
shows the revenue growth rate of the nation's 10 most efficient banking
companies is about half that of First Union's. In fact, First Union had the
second fastest growth rate in fee income among the nation's 25 largest banking
companies excluding the effects of purchase acquisitions.
We firmly believe that major investments in advanced technology, new
businesses, products and marketing are the best way to enhance our prospects for
the future. Unlike manufacturing companies, banks do not have a line item in
their income statements for research and development. But if you summed up First
Union's research and development investment in 1997, it would amount to more
than $300 million. We believe this ability to invest for the future will keep us
from hitting the "revenue wall" that faces many banking companies today, and
which is a significant factor in the amount of industry consolidation that you
will see in the next few years. These companies are learning a hard truth: You
cannot cost-cut your way to profitability forever.
As for First Union, we will continue to make prudent investments,
disciplined by our Financial Performance Guidelines, to produce continued
revenue growth.
Seeds of the First Union "Culture"
I have discussed in detail the results of our operating strategy and
philosophy. But let me briefly discuss something less tangible, but equally
important in transforming First Union into a company that we believe is uniquely
prepared to continue growing, changing and innovating.
Over the years, First Union as a company has internalized the vision
and philosophies of its key leaders, many of whom have joined us through
acquisition. My immediate predecessor as chairman and chief executive officer,
Cliff Cameron, came to First Union in the mid-1960s when we joined with
Cameron-Brown Company, a mortgage banking firm. Our legacy from Cliff, who
retired in 1985, is an atmosphere of readiness for change. When someone would
say "banks don't do that," he would invariably answer, "Is there any reason we
shouldn't be the first?"
(graph appears here with plot points.)
Revenue Growth and
Expense Control*
First Union
Average Top 10 Most Efficient Banks
(Percent)
Efficiency Revenue
Ratio Growth
First Union 57% 13
Average Top 10 Most Efficient Banks 53 6%
* Excludes merger/restructuring charges, nonrecurring gains/losses, capital
securities expense and investment securities transactions.
5
<PAGE>
The late Ben Craig, who came to First Union with the Northwestern
merger in 1985, was president until his death in 1988. A longtime literacy and
education champion, he is the namesake for our annual Ben Craig Awards to
outstanding local educators. He guided us with words like "Banking is the only
business in which the more you do for the community, the better off you'll be."
Tony Terracciano, who joined First
(picture of Union when we combined with First Fidelity,
Anthony P. Terracciano) likes to say, "Don't ask me whether I want
loan growth or credit quality. Don't ask me
Retiring President whether I want to control expenses or grow
revenues. It doesn't have to be either/or.
I want both."
Tony decided that 1997 was an
appropriate time for him to retire, with the merger of First Fidelity and First
Union having been completed and running exceptionally well. His leadership
contributed immeasurably to the ease with which the consolidation of these two
companies was accomplished and the unleashing of the incredible sales power in
his region. This is a tremendous legacy for him, on which those who follow will
be inspired to build. On a personal level, I will miss Tony on a daily basis for
the deeply intellectual framework that he has instilled in mapping our strategic
direction. But I expect First Union to benefit from Tony's advice, counsel and
friendship for years to come.
These are perfect examples of the wise counsel and stellar guidance
benefiting your company from a committed and active corporate board of
directors. In addition to Tony, Howard H. Haworth, Leonard G. Herring, Jack A.
Laughery, Max Lennon, Dewey L. Trogdon and John D. Uible are also retiring
effective with the April 1998 corporate board meeting. I wholeheartedly thank
each of them for their steadfast service to First Union.
I also want to express sincere appreciation to our customers for their
trust and continuing patronage. And I would especially like to thank the
employees who continue to amaze me with their hard work and dedication, day in
and day out.
First Union is committed to nurturing the talents and honoring the
contributions of our employees. It was, in fact, employees who pushed First
Union to enter nontraditional areas so they could have more products to better
serve their customers.
We are blessed to have a work force that brings the same level of caring
to their relationships with customers as they do to giving back to the
communities we serve. Education and schools are a priority for First Union, and
in 1997, more than 20,000 employees volunteered 656,000 hours of their own time
to their communities' schools. Wherever you find First Union, you will find the
leaders in United Way, Habitat for Humanity, chambers of commerce and other
organizations that work for the betterment of the community. We are proud of our
commitment and record of contributing to the growth of all of the communities we
serve. In 1997, the Office of the Comptroller of the Currency rated all nine of
our national bank subsidiaries as having an "outstanding record of meeting
community credit needs."
These are the values that we will work hard to maintain as we strive to
build the successful model of the financial services company of the future. No
matter how large our company, my hope is that it remains a company that listens
and responds to each individual customer, and one that listens and values each
employee as an individual. That is the best way to ensure our success in the
future and that is the best way to create and increase value for stockholders
for the long term. Thank you for your interest in First Union.
Sincerely,
/s/ Edward E. Crutchfield
Edward E. Crutchfield
Chairman and Chief Executive Officer
February 23, 1998
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Index to Special Topics
General Information
Annual Meeting...............................................................................Inside Back Cover
Description of Business.................................................................................... i
Employees.................................................................................................T-7
Market Share.....................................................................i, iii, iv, v, vi, vii, 1, 2
Capital Resources
Regulatory Capital...................................................................................22, T-15
Stockholders' Equity........................................................viii, 22, P-1, P-2, T-1, C-3, C-5
Common Stock
Book Value.......................................................................................viii, 5, T-1
Dividends..............................................Inside Front Cover, viii, 3, 9, 22, T-6, C-4, C-5, C-7
Market Price........................................................................viii, 3, 5, P-3, T-1, T-6
Shares, Number Outstanding..................................................viii, 22, P-3, T-1, C-3, C-4, C-5
Stockholders, Number of ..................................................................................T-7
Liquidity
Debt Ratings................................................................................ Inside Back Cover
Loans
Average Balances...................................................................... 19, P-1, T-3, T-4, T-23
Commercial Real Estate................................................................................. 18, 19
Consumer Loan Portfolio.................................................................................... 19
Industry Concentrations.................................................................................... 18
Loan Loss Allowance................................................ 20, P-2, T-12, T-13, C-3, C-19, C-34, C-37
Loan Loss Provision............................. 20, P-3, T-1, T-3, T-4, T-6, T-12, C-4, C-7, C-19, C-38, C-39
Mix at Year-End........................................................................................ 18, 19
Net Charge-Offs.................................................................. viii, 8, 20, P-1, T-12, C-19
Nonperforming Assets................................................................... viii, 8, 19, P-1, T-12
Project Type............................................................................................... 18
Profitability
Earnings Performance........................... iv, v, vi, vii, viii, 1, 8, P-3, T-1, T-3, T-4, T-6, C-4, C-38
Income Per Share............................................................ viii, 1, 3, 8, P-3, T-1, T-6, C-4
Net Interest Income........................ iv, v, vi, vii, 16, P-3, T-1, T-3, T-4, T-6, T-22, T-23, C-4, C-38
Net Interest Margin............................................................................ viii, 16, T-23
Noninterest Expense........................................... 16, 17, P-3, T-1, T-2, T-3, T-4, T-6, C-4, C-38
Noninterest Income....................................... 4, 5, 8, 16, P-3, T-1, T-2, T-3, T-4, T-6, C-4, C-38
Results of Operations................................................ viii, 1, 8, 16, P-3, T-1, T-6, C-4, C-38
Return on Average Assets.................................................................... viii, 9, T-5, T-6
Return on Average Stockholders' Equity .......................... iv, v, vi, vii, viii, 9, T-3, T-4, T-5, T-6
Risk Management
Asset Quality.................................................................... viii, 8, 19, P-1, T-12, C-19
Derivative Transactions.......................................... 25, T-16, T-17, T-18, T-19, T-20, T-21, C-31
Market Risk Management............................................................................... 23, C-31
Securities
Available For Sale............. viii, 17, 18, P-1, P-2, T-2, T-8, T-22, T-23, C-3, C-7, C-14, C-34, C-37, C-39
Investment........................ viii, 18, P-1, P-2, T-2, T-10, T-22, T-23, C-3, C-7, C-16, C-34, C-37, C-39
Trading Activities..................................................... 16, 25, P-2, T-2, T-23, C-3, C-7, C-34
</TABLE>
7
<PAGE>
(The following graph(s) appears 90 degrees on left side of page.)
Operating Earnings Per
Basic Common Share
(Dollars)
92 93 94 95 96 97
$1.27 2.15 2.30 2.56* 3.04* $3.34*
* Excluding special charges.
Operating Earnings Per
Diluted Common Share
(Dollars)
92 93 94 95 96 97
$1.22 2.09 2.25 2.49* 3.01* $3.30*
* Excluding special charges.
Net Income
(Dollars in billions)
92 93 94 95 96 97
$.7 1.2 1.4 1.6* 1.9* $2.1*
* Excluding special charges.
Management's Analysis of Operations
The following discussion and other portions of this Annual Report
contain various forward-looking statements. Please refer to our 1997 Annual
Report on Form 10-K for a discussion of various factors that could cause our
actual results to differ materially from those expressed in such forward-looking
statements.
Earnings Highlights
First Union's basic operating earnings in 1997 (which represents
earnings before special charges) were a record $2.1 billion, or $3.34 per common
share compared with $1.9 billion or $3.04 per share in 1996. Diluted operating
earnings per common share were $3.30 in 1997 and $3.01 in 1996. Basic earnings
per common share are calculated by dividing net income applicable to common
stockholders by average common shares outstanding. Diluted earnings per common
share are calculated by dividing net income applicable to common stockholders by
the sum of average common shares outstanding and common stock equivalents
related to employee stock options including restricted stock awards.
Unless otherwise indicated, financial information for 1995, 1996 and
1997 has been restated to reflect the November 28, 1997, pooling of interests
acquisition of Richmond, Virginia-based Signet Banking Corporation. Financial
information related to Signet prior to 1995 is not considered reflective of the
continuing operations of Signet, and accordingly, such information has not been
restated. Additionally, all per common share data has been restated for all
periods to reflect a two-for-one stock split, which was paid on July 31, 1997.
Special charges excluded from operating earnings are after-tax
merger-related and restructuring charges of $194 million, or 31 cents per share,
in 1997 related to the acquisition of Signet, and $181 million, or 29 cents per
share, in 1996 related to the January 1, 1996, acquisition of First Fidelity
Bancorporation. Operating earnings in 1996 also exclude a special charge related
to an after-tax Savings Association Insurance Fund (SAIF) special assessment of
$87 million, or 14 cents per common share. After the special charges, basic
earnings in 1997 were $1.9 billion or $3.03 per common share compared with $1.6
billion or $2.61 per common share in 1996. Diluted earnings per common share
were $2.99 in 1997 and $2.58 in 1996.
In the fourth quarter of 1997, First Union's net income applicable to
common stockholders before restructuring charges was $519 million, or 82 cents
on a basic per common share basis, and after restructuring charges, $362
million, or 57 cents per common share. Related diluted per common share amounts
were 81 cents and 56 cents, respectively. This compares with earnings of $493
million, or 80 cents on a basic per common share basis and 79 cents on a diluted
basis in the fourth quarter of 1996. There were no special charges in the fourth
quarter of 1996.
Growth in 1997 operating earnings was led by a 30 percent increase in
non-interest income (excluding securities transactions), including a 58 percent
increase in Capital Markets fee income and a 45 percent increase in Capital
Management fee income.
Solid expense control resulted in an operating overhead efficiency
ratio (excluding special charges and capital securities expense) of 57 percent
in 1997 and 58 percent in 1996. This efficiency was maintained even with
increased levels of discretionary investments for the future.
In addition, credit quality continued to improve, with nonperforming
assets declining to $723 million, or 0.75 percent of net loans and foreclosed
properties, from $802 million, or 0.78 percent, in 1996. Net charge-offs as a
percentage of average net loans improved to 0.63 percent in 1997 compared with
0.65 percent in 1996.
Outlook
In addition to producing strong financial momentum in 1997, First Union
also took several actions to position itself for 1998.
(bullet) In the fourth quarter of 1997, the unsecured consumer portfolio was
significantly restructured to position the company for higher credit
quality in 1998. This restructuring will result in the sale of $3
billion of credit card receivables and other unsecured loans. The
sales reflect the repositioning of the portfolio in line with our
Consumer Bank's strategy of expanding relationships within our growing
customer base on the East Coast.
(bullet) The investment portfolio was repositioned in the fall of 1997 to
maximize income in the face of declining interest rates and a
flattening yield curve.
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Return on
Average Assets
(Percent)
92 93 94 95 96 97
.77% 1.22 1.29 1.25* 1.30* 1.39%*
* Excluding special charges.
Return on Average
Common Equity
(Percent)
92 93 94 95 96 97
11.28% 17.26 16.38 17.13* 18.50* 18.90%*
* Excluding special charges.
Asset Growth
(Dollars in billion)
92 93 94 95 96 97
$95 105 114 143 152 $157
* Excluding special charges.
(bullet) In addition, we increased the annual dividend 11 percent to $1.22 per
common share, representing the 20th consecutive year of dividend
increases. In December 1997, we again announced a dividend increase of
16 percent to 37 cents on a quarterly basis, or $1.48 on an annualized
basis.
(bullet) Also in 1997, we announced the pending acquisition of CoreStates
Financial Corp as well as the acquisitions of Signet, Wheat First and
Covenant, all of which are discussed below.
First Union continues to diversify its business mix in order to meet
client demands and to decrease the corporation's reliance on interest income,
which can be affected by volatility in economic conditions and movements in
interest rates. First Union's goal is to increase noninterest income in
proportion to total revenue to 40 to 45 percent by the year 2000. We have made
significant progress toward that goal with noninterest income to total revenue
of 37 percent in 1997 compared with 32 percent in 1996. To help us meet this
goal, we continue to invest in high-growth business lines such as the investment
banking, brokerage services and asset management businesses in our Capital
Markets and Capital Management Groups. These nontraditional businesses
complement our loan and deposit activities. We also are applying nontraditional
approaches to our more mature lines of business, primarily by streamlining
processes, by adding electronic and remote banking alternatives and by
implementing our Future Bank retail branch model. The goals are to improve
customer service, increase sales and generate efficiencies. We expect strong
sales momentum in light of demographic trends, a robust 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 14 million customers in a diverse geographic marketplace and to reduce
the impact of adverse changes in the business cycle.
In 1997 First Union leveraged these internal investments through three
significant mergers that will greatly enhance our key businesses and expand our
share of markets that can benefit from our product mix.
Merger and Consolidation Activity
The pending acquisition of CoreStates, of Philadelphia, Pennsylvania,
will create new opportunities to leverage our growing Capital Management and
Capital Markets businesses in states that generate 36 percent of the nation's
gross state product and in attractive consumer markets in which per capita
income is 12 percent above the national average.
We currently estimate that approximately 330 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 1.62 shares of
First Union common stock for each share of CoreStates common stock, subject to
increase under certain circumstances. Using First Union's closing price of
$52.4375 on November 17, 1997, the last business day before public announcement
of the merger, the transaction would have been valued at approximately $17
billion. At December 31, 1997, CoreStates had assets of $48 billion, net loans
of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and
net income of $813 million.
First Union expects to take after-tax, merger-related and restructuring
charges of $795 million in 1998 in connection with the CoreStates merger. In
addition, six directors of CoreStates are expected to be nominated for election
or appointed to the First Union board of directors following consummation of the
merger. More information is available in our Current Reports on Form 8-K, which
we filed with the Securities and Exchange Commission (SEC) dated November 18,
1997, November 28, 1997, and December 2, 1997, and in our registration statement
on Form S-4, filed with the SEC on January 9, 1998. Additionally, pro forma
financial information related to CoreStates is presented elsewhere in this
report. On February 27, 1998, stockholders of First Union and CoreStates
approved the merger agreement and the stockholders of First Union also approved
increasing the authorized shares of First Union common stock from 750 million to
2.0 billion.
The Signet acquisition was consummated on November 28, 1997, and is
included in the combined data, as mentioned
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earlier. Signet, with assets of $11 billion, net loans of $7 billion, deposits
of $8 billion, stockholders' equity of $990 million and net income of $73
million for the nine months ended September 30, 1997, moved First Union into the
leading deposit share position in Virginia. First Union issued 1.10 shares of
its common stock for each share of Signet common stock, or 67 million shares, to
consummate the merger.
In addition, the acquisition of Covenant Bancorp, Inc., based in
Haddonfield, New Jersey, was consummated on January 15, 1998. Covenant had
assets of $415 million, net loans of $254 million, deposits of $294 million and
stockholders' equity of $31 million at December 31, 1997. First Union issued 1.6
million shares in this purchase accounting transaction, substantially all of
which we repurchased in the open market at a cost of $79 million.
The acquisition of Wheat First, based in Richmond, Virginia, was
consummated on January 31, 1998. We expect this partnership will enhance the
equity securities business of First Union's Capital Markets Group, as well as
create one of the nation's largest brokerage networks. The merger was accounted
for as a pooling of interests. However, financial information related to Wheat
First is not considered material to the historical results of First Union, and
such financial statements will not be restated. First Union issued 10.3 million
shares of its common stock in exchange for Wheat First shares. Wheat First had
assets of $1 billion and stockholders' equity of $171 million at December 31,
1997.
We 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 in conjunction with financial performance guidelines adopted in 1997
and other financial objectives. Acquisition discussions and in some cases
negotiations may take place from time to time, and future acquisitions involving
cash, debt or equity securities may be expected.
In addition, First Union is taking advantage of the opportunity
afforded by the Riegle-Neal Interstate Banking and Branching Efficiency Act to
operate national banks across state lines by consolidating our banks. In 1997
all banks in the southern region of First Union and in Connecticut were
consolidated into First Union National Bank, based in Charlotte, North Carolina.
With the exception of Delaware, the final consolidation in the rest of the
northern region occurred in February 1998.
The Accounting and Regulatory Matters section provides more information
about Riegle-Neal and provides information about legislative, accounting and
regulatory matters that have recently been adopted or proposed.
BUSINESS SEGMENTS
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 4.
We have developed an 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 occur because these estimates and
methodologies could be refined over time.
Our management structure combines this internal performance reporting
with a matrix management approach, which integrates product management with our
various distribution channels. Additionally First Union's management structure
and internal reporting methodologies will produce business segment results that
are not necessarily comparable to presentations by other bank holding companies
or stand-alone entities in similar industry segments.
Our internal performance reporting model was implemented in 1997. Prior
periods have not been restated because of practical limitations. The model
isolates the net income contribution and measures the return on capital for each
business segment by allocating equity, funding credit and
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Consumer Bank
Contributions to Group Profitability
Net Income (Percent)
Retail Branch Products 85%
First Union Home Equity 6%
Card Products 5%
First Union Mortgage 4%
expense and corporate expenses to each segment. We use a risk-based methodology
to allocate equity based on the credit, market and operational risks associated
with each business segment. Credit risk allocations 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 differ from 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. Our method of reporting does not allow for discrete
reporting of the profitability or synergies arising from our integrated approach
to product sales. For example, a commercial customer might have loans, deposits
and an interest rate swap. The loan and deposit relationship would be included
in the commercial segment and the interest rate swap would be reflected in the
risk management unit of the Capital Markets segment.
Exposure to market risk is managed centrally within the
Treasury/Nonbank segment. In order to remove interest rate risk from each
business segment our model employs a funds transfer pricing (FTP) system. The
FTP system matches the duration of the funding used by each segment to the
duration of the assets and liabilities contained in each segment. Matching the
duration, or the effective term until an instrument can be repriced, allocates
interest income and/or expense to each segment so its resulting net interest
income is insulated from interest rate risk. The majority of the 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 most market risk is held in the
Treasury/Nonbank segment, the profitability of this segment is expected to be
more volatile than for the other business segments.
General corporate expenses, with the exception of goodwill
amortization, are allocated to each segment in a pro rata manner based on the
direct and attributable indirect expenses for each segment. Residual corporate
expense remaining in the Treasury/ Nonbank segment reflects the costs of
portfolio management activities, goodwill amortization and merger-related
restructuring charges. In general this approach should not result in significant
volatility to business segment returns.
Consumer Bank
The Consumer Bank, our primary deposit-taking entity, provides an
attractive source of funding for our secured and unsecured consumer loans, first
and second residential mortgages, installment loans, credit cards, auto loans
and leases, and student loans.
The Consumer Bank combines traditional deposit and lending products
with innovative financial solutions all supported by state-of-the-art technology
- - including smart cards, electronic banking and Internet access - to provide
quality customer service.
Our new Future Bank retail branch model, rolled out initially in
Atlanta, Georgia, will be implemented in 1998 throughout our full-service branch
network in 12 states and Washington, D.C. The Future Bank model increases
service options and access for our customers, improves sales capacity for
employees and ultimately reduces costs. Through our First Union Direct Bank,
N.A., centralized customer information centers manage the majority of the
servicing and administrative tasks for the branches, freeing the Future Bank
financial consultants to focus on building relationships and tailoring financial
solutions to meet customer needs. First Union Direct also provides direct
telephone sales and servicing for all our consumer lending products.
First Union's mortgage origination and home equity offices across the
nation also are included in the Consumer Bank through our operating subsidiaries
First Union Mortgage Corporation (FUMC) and First Union Home Equity Bank, N.A.
(FUHEB). Our equity lending business, including FUHEB and branch-based lending,
is the second largest in the nation, while FUMC was the nation's 12th largest
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Capital Management
Contributions to Group Profitability
Net Income (Percent)
Trust/Evergreen Funds 52%
CAP Account 23%
Private Client 15%
Retail Brokerage Services 10%
mortgage servicer, with a mortgage servicing portfolio of $61 billion at
December 31, 1997. In addition, FUHEB is a major participant in both the "A"
credit quality market as well as in the sub-prime market. FUHEB securitized and
sold $914 million in sub-prime originations through our Capital Markets Group in
1997.
Consumer loans in 1997 exclude $5 billion in securitized adjustable
rate mortgages (ARMs), home equity loans, student loans, indirect auto loans and
community reinvestment loans, as well as $3 billion in credit card receivables
and Signet's loan-by-check portfolio, which were transferred to assets held for
sale. Loan originations in the consumer portfolio were led by mortgage and home
equity loans.
The managed credit card portfolio was $7 billion at December 31, 1997.
This amount includes $2 billion of securitized credit cards and $2 billion in
credit card receivables that were transferred to assets held for sale.
Capital Management
The Capital Management Group unites our banking and investment
offerings for retail and institutional customers, providing products and
services that primarily produce fee income. At December 31, 1997, this group had
$80 billion in assets under management, which encompassed $50 billion in total
trust and institutional assets, including $12 billion in mutual funds held in
trust. Including the mutual funds held in trust, the First Union-advised mutual
funds amounted to $42 billion at December 31, 1997. An additional $10 billion in
mutual fund assets were added in 1998 with Wheat First, which expanded our
marketing power with a combined sales force of more than 4,300 registered
representatives in 20 states and more than 2,000 brokerage locations.
The trust unit anticipates continued growth with the addition of new
products and services. On the personal trust side, a Family Trust program was
introduced in September 1997 to assist trust and investment management customers
in providing elder care. Corporate Trust has added structured finance trust
services and an investment holding company subsidiary, Delaware Financial
Services Corporation.
Capital Management results in 1997 reflect the December 1996 purchase
accounting acquisition of Keystone Investments, Inc., the Boston, Mass.-based
investment adviser to the Keystone family of mutual funds, now combined with the
Evergreen Funds. Evergreen manages $42 billion in assets for more than 1 million
shareholders, and offers over 70 mutual funds. Thirty-five Evergreen portfolios
were rated "four" or "five" stars by the Morningstar ratings service at December
31, 1997. We are also introducing a new family of First Union-advised mutual
funds designed for the institutional and corporate marketplace.
Our CAP Accounts are an asset management product that enables customers
to manage their securities trading and banking activities in a single,
consolidated account. Income related to the CAP Account is therefore reflected
in several of our lines of business, including mutual funds and retail brokerage
services. The CAP Account item in Table 4 reflects direct CAP Account fee income
only. At year-end 1997, CAP Account assets were $26 billion and there were
290,000 accounts. CAP customers generally hold balances split evenly between
deposits and securities. Trading activity by customers through their CAP
Accounts also increased in 1997. We also have introduced variations of the CAP
Account designed to appeal to a broader mass of investors and to attract
first-time investors, including the CAP1 Account with a lower minimum balance
and a CAP for Business Account targeted primarily toward small businesses,
professional associations and nonprofit groups.
The Private Client Group (formerly Private Banking) provides high net
worth clients with a single point of access to First Union's investments,
mortgages, personal loans, trusts, financial planning, brokerage services and
other services. At December 31, 1997, the Private Client Group managed $2
billion of average net loans and $2 billion of average deposits, in addition to
a variety of fee-generating capital markets and investment products.
Retail brokerage services are the primary distribution center for
investment and insurance products. This segment does not reflect sales of
credit, life or other insurance products sold in other areas of the corporation.
Retail brokerage revenues were $282 million. Mutual fund sales through the
brokerage unit reached $3 billion and annuity sales exceeded $1 billion.
Brokerage expenses in 1997 largely reflected significant investment in
reengineering our processes to
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Commercial Bank
Deposit Products 55%
Lending 17%
Real Estate Banking 15%
Cash Management 10%
Small Business Banking 3%
implement a new operating system designed to support future growth and to
provide enhanced customer service features, including cost basis investment
reporting and dividend reinvestment. New brokerage products introduced in 1997
include a fee-based account that offers access to Schwab OneSource mutual funds.
The expanded operating system positions retail brokerage to pursue an expanded
Internet sales distribution channel in 1998.
We anticipate increased growth in all of the Capital Management
business lines as we introduce new products and services throughout our
multistate network and with the addition of new customers from our acquisitions.
Commercial Bank
Our Commercial Bank's products and services go beyond traditional
commercial banking to areas such as asset-based financing, risk management
products, property and casualty insurance, leasing, treasury services,
international services, pension plans and 401(k)s.
As a result, the Commercial Bank is increasing its proportion of fee
income along with the rest of the corporation as customers demand more
innovative products and transaction efficiency. The Commercial Bank provides a
comprehensive array of financial products to corporate, middle-market,
commercial and small - business customers. Specialized relationship teams
throughout our region focus on sales and service. In addition, we have an
integrated approach that leverages the capabilities of First Union's Capital
Markets Group for the more complex financing solutions. The increase in
Commercial Bank fee income was led by its Cash Management unit. Service charge
volume has increased as a result of higher sales volume and improved collection
policies and procedures.
In addition, we have streamlined the processes in the Commercial Bank,
which has increased efficiency. Revenue per relationship manager increased in
1997 to $1 million.
Cash Management offers corporate customers a comprehensive selection of
treasury management services, including a full range of electronic commerce,
collection, disbursement and information reporting services. These products are
designed and priced based on the diverse needs of companies of various sizes and
industries.
When combined with CoreStates, First Union will be the nation's third
largest cash management bank based on revenue, ranking in the Top 10 for all
core cash management products, and leading the nation in corporate check
clearing. The pending combination also would add significantly to First Union's
commercial cash management offerings, including Internet-based electronic
commerce services, a nationwide lockbox network and expanded international cash
management capabilities.
Cash management products stimulate the gathering of commercial deposit
balances. Deposit balances and their economic profitability are reflected in
both the Commercial Bank and Capital Markets segments. Cash Management in Table
4 reflects only the direct service charge income from cash management products.
Small Business Banking provides a comprehensive selection of
proprietary and joint venture financial products including insurance, investment
services and retirement planning services as well as loans and commercial
deposit services to entrepreneurs, professionals and companies with annual sales
ranging up to $10 million. Small Business Banking loan volume in 1997 was $1
billion and average net loans were $2 billion in 1997. Small Business Banking
reflects only lending activities.
Capital Markets
In 1997 our Capital Markets Group produced strong momentum with record
transaction volume and earnings, capped by the announcement of our merger with
Wheat First. With this transaction, we are able to provide a crucial product to
First Union's Capital Markets clients. We also have enhanced the competitive
products and service offerings available to Wheat First's more than 950,000
brokerage customers.
Our institutional business has a sales force of more than 100 traders
covering 1,000 institutional clients, and we are a market maker in more than 300
NASDAQ stocks. We have 30 equity research analysts covering more than 300
companies with a focus on key specialized industries: communications and
technology; financial services; consumer; furnishings, textiles and building;
health care; and industrial.
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Capital markets
Contributions to Group Profitability
Net Income (Percent)
Traditional Banking 36%
Real Estate Finance 20%
Commercial Leasing & Rail 20%
Investment Banking 16%
Risk Management 8%
The announcement of the merger with Wheat First followed the May 1997
Federal Reserve Board approval of public equity underwriting through First
Union's Section 20 subsidiary, First Union Capital Markets Corp. (FUCMC),
renamed Wheat First Securities, Inc. Wheat First moved First Union far ahead in
its business plan to make this service available to customers.
With the addition of equity underwriting, sales and trading
capabilities, our Capital Markets Group provides corporate and institutional
clients one-stop shopping for a full range of investment banking products and
services. These products and services are fully integrated with our wholesale
delivery strategy, and they are a natural extension of our Commercial Bank. We
have the capability to help a company grow from its first checking account to
its initial public offering. In the Capital Markets Group, the Commercial Bank
and the bank and nonbank brokerage units, the strategy is the same: the focus is
on providing customized solutions that are in our clients' best interests.
Our primary focus has been to bring a full line of business products to
middle-market customers who have been underserved by other capital markets
providers. We believe this strategy, coupled with new powers, provides a
rewarding platform for long-term growth.
We have relationships with 42 percent of the middle-market and
corporate businesses in our regional marketplace. Our relationship coverage
begins in our East Coast banking markets and extends nationwide through
industry-specific specialization in such areas as health care; financial
institutions; real estate; media and communications; utilities; energy; forest
products; and specialty finance. In addition our International unit continues
to develop strong correspondent banking relationships overseas. The primary
focus of the International unit is to meet the trade finance and foreign
exchange needs of our corporate customers and to provide commercial banking and
capital markets products to the United States subsidiaries of foreign
corporations. This unit is expected to expand significantly following
consummation of the merger with CoreStates, which has been involved in the
international arena for a century.
Capital Markets has five primary units: Investment Banking; Real Estate
Finance; Risk Management; Commercial Leasing and Rail; and Traditional Banking.
The Investment Banking unit provides loan syndications, high-yield debt
and equity underwriting, private finance, merger and acquisition advisory
services, merchant banking and asset securitizations.
Loan syndications are significant contributors to earnings in the
Investment Banking unit. The Loan Syndications unit, which spreads the risk of
large credit facilities among several lenders, served as agent on 63 leveraged
transactions amounting to $12 billion in 1997.
The High-Yield unit, which underwrites below-investment grade debt and
preferred stock securities, completed its first sole-managed high yield
transaction in 1997 - a $100 million offering for a communications company. This
unit completed 18 high-yield bond offerings amounting to $3 billion in 1997.
The Private Finance unit structures and places senior and subordinated
debt, preferred and common stock, and other hybrid securities with institutional
investors. This unit closed 17 transactions in 1997 with transaction volume of
$309 million.
The Mergers and Acquisition Advisory unit offers full advisory services
to companies engaged in corporate sales and divestitures, acquisitions, fairness
opinions and takeover defenses. In 1997 the M&A unit was involved in 21 closed
or announced transactions with an aggregate value of nearly $3 billion.
The Merchant Banking unit, or Capital Partners, was established in 1987
to make equity and subordinated debt investments in growing companies. This unit
currently has committed and funded investments amounting to $625 million in 65
companies.
The Asset Securitization unit undertakes the pooling and underwriting
of corporate receivables and other financial assets, which are then sold in the
form of securities to investors. In 1997 this unit securitized and sold to
investors $6 billion of assets and securities.
The Real Estate Finance unit expanded into a variety of commercial real
estate finance activities in 1997. In addition to its commercial conduit
operations, the Real Estate Finance unit offers credit tenant lease financings,
real estate investment trust (REIT) lending,
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affordable housing debt and equity financings and off-balance sheet lending
products for corporate real estate clients. In 1997 the Commercial Real Estate
Finance unit expanded to the West, Midwest and Southwest by opening offices in
Irvine, California, Chicago and Houston. The unit, which provides loan
origination capabilities for mortgage loans secured by multi-family and
commercial properties, originated $2 billion in loans in 1997. In November 1997
FUCMC and Lehman Bros. completed a $2 billion offering of securities backed by
commercial mortgage loans, representing the industry's largest commercial
mortgage loan securitization. In December 1997 the Mortgage Finance unit priced
a $407 million offering of securities backed by sub-prime home equity loans -
representing First Union's largest lead-managed home equity securitization. This
transaction, coupled with two other securitizations earlier in the year,
underscores the synergies within FUHEB in leveraging our capabilities in the
home equity securities market. The Mortgage Finance unit issued new securities
amounting to $1 billion in 1997.
Our Risk Management unit creates customized solutions to risk
management needs that allow customers to manage a wide variety of market risks,
including interest rate risk, foreign exchange risk and commodity risk. The
derivatives desk makes markets and trades in a large variety of derivative
products and spot and forward exchange markets. The interest rate derivatives
group completed more than 2,100 transactions with a notional principal value of
$58 billion in 1997. The unit contributed $103 million in gross revenues in
1997. The unit expects to introduce equity derivatives for customers in the
first quarter of 1998.
Our Commercial Leasing and Rail unit includes First Union
Rail which, with three major acquisitions in 1996, became the second largest
general railcar leasing company in the United States with a fleet of more than
60,000 rail cars. First Union Rail also has developed innovative fleet
management and logistics services, using the latest computer technologies to
manage programs for customers and to provide insurance coverage and car
accounting systems.
The Traditional Banking unit includes Specialized Industries,
Diversified Finance and International Finance. Specialized Industries delivers
custom-tailored corporate finance advice to customers in six industry segments.
Relationship managers from Diversified Finance, which includes leveraged finance
and asset-based lending, also call on middle-market customers nationally. The
relationship banking areas are the primary source for many of our Investment
Banking products. The unit had $9 billion in average net loans in 1997.
First Union will continue to expand its relationship banking efforts,
including increased industry segment coverage and an expanded international
presence when combined with CoreStates.
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 and corporate restructuring costs. The CMB is
responsible for the management of our securities portfolios, our overall funding
requirements and our asset and liability management functions. The Securities
Available for Sale, Investment Securities, Liquidity and Funding Sources and
Market Risk Management sections provide information about our securities
portfolios, funding sources and asset and liability management functions.
Additionally the Treasury/Nonbank segment includes amortization expense
and capital not allocated to business segments related to other intangible
assets (excluding deposit base premium and mortgage and other servicing assets)
and charges that are unusual and infrequent, including merger-related and
restructuring charges. The Treasury/Nonbank segment includes the income and
expense related to the restructuring of the credit card receivables and other
unsecured loans.
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Net Interest Income
(Tax-equivalent)
(Dollars in billion)
92 93 94 95 96 97
$3.8 4.3 4.6 5.2 5.6 $5.8
Noninterest Income
(Dollars in billions)
92 93 94 95 96 97
$1.4 1.6 1.6 2.2 2.6 $3.4
Components of
Noninterest Income
- ------------------------------------------------
In Millions 1997 1996
- ------------------------------------------------
Trading account
profits $204 131
Service charges on
deposits accounts 854 734
Mortgage banking
income 247 194
Capital management
income 882 607
Securities available 31 36
for sale transactions
Investment security
transactions 3 4
Fees for other
banking services 151 172
Equipment lease
rental income 187 112
Sundry income $ 837 646
Results of Operations
Income Statement Review
Net Interest Income
Tax-equivalent net interest income increased 5 percent to $5.8 billion
in 1997 from $5.6 billion in 1996. The increase in tax-equivalent net interest
income was primarily the result of increased earning assets.
Nonperforming loans reduce interest income because the contribution
from these loans is eliminated or sharply reduced. In 1997, $51 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 1997 was $21 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 1997 compared with 4.25 percent in 1996. The
margin increase in 1997 was partially a result of upward repricing of credit
card loans and an increase in lease financings. The average rate earned on
earning assets was 8.25 percent in 1997 and 8.06 percent in 1996. The average
rate paid on interest-bearing liabilities was 4.49 percent in 1997 and 4.36
percent in 1996. It should be noted that the margin is not our primary
management focus or goal. Our focus is on increasing revenues.
We use securities and off-balance sheet transactions to manage interest
rate sensitivity. More information on these transactions is included in the
Market Risk Management section.
Noninterest Income
We are meeting the challenges of increasing competition, changing
customer demands and demographic shifts by making discretionary investments to
enhance revenue growth. We have significantly broadened our product lines,
particularly in the Capital Markets and Capital Management Groups, to provide
additional sources of fee income that complement our long-standing banking
products and services. These investments were reflected in a 30 percent increase
in noninterest income, excluding investment securities transactions, to $3.4
billion in 1997 from $2.6 billion in 1996.
Almost all categories of noninterest income increased in 1997 from a
year earlier. Fee income from Capital Management and Capital Markets activities
made up one-half of noninterest income in 1997. These two groups are discussed
further in the Business Segments section. Service charges on deposit accounts
increased 16 percent from 1996 and mortgage banking income increased 27 percent,
reflecting primarily purchase accounting acquisitions completed in 1996.
Equipment leasing rental income increased 67 percent primarily reflecting the
full year of railcar leasing activity.
Trading Activities
Our Capital Markets Group also makes a key contribution to noninterest
income through trading profits. Trading activities are undertaken primarily to
satisfy the investment and risk management needs of our customers and
secondarily to enhance our earnings through profitable trading for the
corporation's own account. Market making and position taking activities across a
wide array of financial instruments add to our ability to optimally serve our
customers. Trading profits increased 56 percent to $204 million in 1997 compared
with $131 million in 1996. The increase was largely related to asset
securitization activity and to increased customer transactions. Trading account
assets were $5 billion at December 31, 1997, compared with $4 billion at
year-end 1996.
Noninterest Expense
Noninterest expense was $5.6 billion in 1997 compared with $5.2 billion
in 1996. Noninterest expense in 1997 included $269 million in pre-tax,
merger-related and restructuring charges. Noninterest expense in 1996 included
pre-tax, merger-related and restructuring charges of $281 million and the SAIF
special assessment of $135 million pre-tax. The increase from 1996 also included
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.
16
<PAGE>
(The following graphs appear on right side of page.)
Noninterest Expense
(Dollars in billions)
92 93 94 95 96 97
$3.4 3.5 3.7 4.7 5.2 $5.6
Overhead Efficiency
Ratio
(Percent)
92 93 94 95 96 97
66% 61 61 61* 58* 57%*
*Excluding special charges
Year-End Earning Assets
(Dollars in billions)
92 93 94 95 96 97
-- -- -- -- -- --
Year-End Earning Assets $84 $93 101 127 134 $134
Loans, net 60 68 78 97 102 97
Investment Securities 12 8 8 3 2 2
Securities Available for Sale 6 14 12 21 17 21
Other 6 3 4 7 13 14
------------------------------------------
The increases in various categories of noninterest expense reflect our
continued investments in fee-income generating businesses such as those managed
by the Capital Management and the Capital Markets Groups, in which expenses move
more in tandem with revenues, and in technology and retail branch
transformation. Our overhead efficiency ratio continued to improve even while we
increased our discretionary investments. This ratio was 57 percent in 1997, an
improvement from 58 percent in 1996. These ratios exclude amounts related to the
capital securities issues, merger-related and restructuring charges, and SAIF.
Amortization of other intangible assets predominantly represents the
amortization of goodwill and deposit base premium related to purchase accounting
acquisitions. These intangibles are amortized over periods ranging from six to
25 years. Amortization is a noncash charge to income; therefore, liquidity and
funds management activities are not affected. We had $2.7 billion in other
intangible assets at December 31, 1997, compared with $2.9 billion at December
31, 1996. Costs related to environmental matters were not material.
We are well aware of the ramifications of the change from December 31,
1999, to January 1, 2000. In February 1996 we assembled a corporate project team
and engaged a leading technology firm to begin an initial assessment of the
scope of the project. We determined early on that our single system platform
would help minimize expenses related to the year 2000 project. Also minimizing
the impact is the fact that our Emerald deposit system and essentially all of
our Capital Markets systems are already year 2000 compliant. We have analyzed
our computer hardware platforms and software programs and expect to have
virtually all of the systems and application modifications in place and tested
by the end of 1998, allowing time in 1999 for any system refinements that may be
needed. Our relationship with third-party vendors, counterparties and customers
also present year 2000 challenges, and we are assessing and monitoring their
progress. Our process regarding vendors and counterparties includes direct
access with the entity, surveys and testing procedures to assess whether such
parties will be able to successfully interact with First Union in the year 2000.
In addition we are assessing the needs of our customers and the possible effects
of their inability to become year 2000 compliant. Excluding any such expenses
related to future acquisitions, First Union currently estimates total cumulative
expenses for making its computer systems year 2000 compliant will be between $42
million and $45 million pretax.
Income Taxes
Income taxes were $814 million in 1997 compared with $875 million in
1996. The decrease resulted primarily from an after-tax benefit of $155 million
realized in 1997 from the reorganization of certain corporate and interstate
banking entities. The tax benefit had the result of reducing the corporation's
effective tax rate to 30 percent from 35 percent. This benefit was principally
offset by a higher provision for loan losses related to the restructuring of the
unsecured consumer loan portfolio.
BALANCE SHEET REVIEW
Earning Assets
Earnings from our primary earning assets, securities and loans, are
subject to two principal kinds of risks: interest rate risk and credit risk.
Interest rate risk could result if rate indices related to sources and uses of
funds were mismatched. Our Funds Management Committee manages interest rate
risk, as well as credit risks associated with securities, under specific policy
standards, which are discussed in more detail in the Market Risk Management
section. In addition to certain securities, off-balance sheet transactions such
as interest rate swaps have been used to maintain interest rate risk at
acceptable levels in accordance with our policy standards. The loan portfolio
carries the potential credit risk of past due, nonperforming or, ultimately,
charged-off loans. We manage this risk primarily through credit approval
standards, which are discussed in the Loans section. Average earning assets in
1997 were $134 billion, a 2 percent increase from $131 billion in 1996.
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.
17
<PAGE>
[PIE CHARTS APPEAR WITH THE FOLLOWING INFORMATION:]
Year-End Securities
Available For Sale
(Percent)
U.S. Government Agencies 62%
Other 16
U.S. Treasury Securities 12
Collaterized Mortgage Obligations 10
Year-End Investment
Securities
(Percent)
U.S. Government Agencies 47%
Municipals 33
Collaterized Mortgage Obligations 17
Other 3
Securities available for sale transactions resulted in gains of $31 million in
1997 and $36 million in 1996.
At December 31, 1997, we had securities available for sale with a
market value of $21 billion compared with $17 billion at year-end 1996. The
market value of securities available for sale was $395 million above amortized
cost at December 31, 1997. Activity in this portfolio is undertaken primarily to
manage liquidity and interest rate risk and to take advantage of market
conditions that create more economically attractive returns on these
investments. The average rate earned on securities available for sale in 1997
was 6.94 percent compared with 6.69 percent in 1996. The average maturity of the
portfolio was 5.61 years at December 31, 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 $2.2 billion at
December 31, 1997, and $2.5 billion at December 31, 1996.
The average rate earned on investment securities was 8.63 percent in
1997 and 8.68 percent in 1996. The average maturity of the portfolio was 5.46
years at December 31, 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 and portfolio diversification by product,
geography and industry. A common credit underwriting structure is in place
throughout the corporation.
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. Consis-tent 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.
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 loan portfolio at December 31, 1997, was composed of 48 percent in
commercial loans and 52 percent in consumer loans compared with 44 percent and
56 percent, respectively, in 1996.
Net loans at December 31, 1997, were $97 billion compared with $102
billion
[Two tables appear with the following information:]
YEAR-END COMMERCIAL LOANS
- ---------------------------------------------
Industry Classification In Millions
- ---------------------------------------------
Manufacturing $ 5,767
Retail trade 2,397
Wholesale trade 2,179
Services 6,457
Financial services 4,059
Insurance 579
Real estate-related 1,922
Communication 1,162
Transportation 2,238
Public Utilities 653
Agriculture 419
Construction 582
Mining 515
Individuals 1,298
Public Administration 1,578
Other 5,793
- ---------------------------------------------
Total $ 37,598
- ---------------------------------------------
Year-End Commercial Real Estate Loans
- -----------------------------------------------------
Project Type In Millions Number of Loans
- -----------------------------------------------------
Apartments $ 1,686 1,465
Condominiums 146 185
Land-improved 653 1,053
Land-unimproved 277 473
Lodging 256 166
Office Building 1,812 2,638
Industrial 1,423 2,454
Retail 1,729 1,702
Single Family 473 2,788
Other 2,507 3,990
- -----------------------------------------------------
Total $ 10,962 16,914
- -----------------------------------------------------
18
<PAGE>
[The following charts appear on the right side of the page:]
Year-End Loans
(Percent)
Commerical, Financial
and Agricultural 28%
Real Estate - Mortgage 25
Installment Loans - Other 19
Commercial Real
Estate - Mortage 9
Lease Financing 8
Vehicle Leasing 4
Other 4
Installment Loans - Bankcard 3
Year-End Consumer
Loans
(Percent)
Mortgage Loans to
Individuals 46%
Direct Lending 19
Second Mortgages 19
Vehicle Leasing 7
Bankcard 5
Mortgage Warehouse and
Securitized Mortgages 4
Nonperforming Assets
(Dollars in billions)
92 93 94 95 96 97
$2.0 1.4 .89 .88 .80 $.72
at December 31, 1996. Average net loans were $100 billion in 1997 and $97
billion in 1996. First Union transferred to assets held for sale $3 billion in
loans in 1997 as part of its strategy of balance sheet management to maximize
its return on investment. 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.
At December 31, 1997, unused loan commitments related to commercial and
consumer loans were $40 billion and $24 billion, respectively. Commercial and
standby letters of credit were $6 billion at December 31, 1997. At December 31,
1997, loan participations sold to other lenders amounted to $2 billion. They
were recorded as a reduction of gross loans.
The average rate earned on loans was 8.77 percent in 1997 compared with
8.58 percent in 1996. Factors contributing to the increase in the rate on loans
included a reduction in lower-yielding mortgage loans, the upward repricing of
credit card loans and growth in high-yielding leveraged leases. The 1997
reduction in mortgage loans resulted from the sale of $1 billion of ARMs and
from the natural runoff of our mortgage portfolio. The improvement in the yield
on credit cards reflected the repricing of loans originated with lower
introductory rates and the targeted repricing of certain accounts to improve
overall profitability. The reduction in installment loans-other was primarily
attributable to the securitization of student loans, indirect auto loans and
community reinvestment loans.
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 port-
folio at December 31, 1997, and 12 percent at December 31, 1996. This portfolio
included commercial real estate mortgage loans of $9 billion at December 31,
1997, compared with $10 billion at December 31, 1996.
Asset Quality
Nonperforming Assets
At December 31, 1997, nonperforming assets were $723 million, or 0.75
percent of net loans and foreclosed properties, compared with $802 million, or
0.78 percent, at December 31, 1996.
Loans or properties of less than $5 million each made up 81 percent, or
$585 million, of nonperforming assets at December 31, 1997. Of the rest:
(bullet) Five loans or properties between $5 million and $10 million each
accounted for $41 million; and
(bullet) Four loans or properties over $10 million each accounted for $97
million.
Fifty percent of nonperforming assets were collateralized primarily by
real estate at December 31, 1997, and 55 percent at year-end 1996.
Past Due Loans
Accruing loans 90 days past due were $232 million at December 31, 1997,
compared with $361 million at December 31, 1996. Of the past dues, $11 million
were commercial and commercial real estate loans and $221 million were consumer
loans. At December 31, 1997, we were closely monitoring certain loans for which
borrowers were experiencing
[Two tables appear with the following information:]
YEAR-END NONACCURAL COMMERCIAL LOANS
Excluding commercial loans
- ---------------------------------------------
Industry Classification In Millions
- ---------------------------------------------
Manufacturing $ 16
Retail trade 19
Wholesale trade 5
Services 113
Financial services 13
Real estate-related 7
Transportation 15
Public Utilities 4
Agriculture 11
Construction 6
Individuals 16
Other 11
- ---------------------------------------------
Total $ 236
- ---------------------------------------------
Year-End Nonperforming Assets
- ------------------------------------
Industry Classification In Millions
- ------------------------------------
Apartments $ 5
Condominiums 1
Industrial 15
Land-improved 5
Land-unimproved 16
Lodging 1
Office Building 13
Retail 11
Single Family 329
Other 91
- ------------------------------------
Total $ 487
- ------------------------------------
19
<PAGE>
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 $635 million in both 1997 and 1996. Net
charge-offs were 0.63 percent of average net loans in 1997 compared with 0.65
percent in 1996. Excluding net charge-offs related to the credit card portfolio,
net charge-offs were 0.28 percent compared with 0.35 percent in 1996. At
December 31, 1997, the owned credit card portfolio represented 3 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. The higher credit card-related net
charge-offs were concentrated in certain vintages that were transferred to
assets held for sale. 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 $840 million in 1997 compared with $449
million in 1996. We increased the loan loss provision to facilitate the
restructuring of the unsecured consumer loan portfolio, which will result in the
sale of $3 billion of credit card receivables and other unsecured loans.
The allowance for loan losses was $1.2 billion at December 31, 1997,
and $1.5 billion at December 31, 1996. The decrease was commensurate with the
reduction in the credit card portfolio. We establish reserves based on various
factors, including results of quantitative analyses of the quality of commercial
loans and commercial real estate loans. Reserves for commercial and commercial
real estate loans are based principally on loan grades, historical loss rates,
borrowers' creditworthiness, underlying cash flows from the project and from the
borrowers, and analysis of other less quantifiable factors that might influence
the portfolio. We analyze all loans in excess of $1 million that are being
monitored as potential credit problems to determine whether supplemental,
specific reserves are necessary. Reserves for consumer loans are based
principally on delinquencies and historical and projected loss rates.
At December 31, 1997, impaired loans, which are included in nonaccrual
loans, amounted to $301 million compared with $370 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 December 31, 1997, was $43 million related to $253 million of impaired loans.
The remaining impaired loans were recorded at or below fair value. In 1997 the
average recorded investment in impaired loans was $306 million, and $22 million
of interest income was recognized on loans while they were impaired. 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 106 metropolitan 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 billion commercial real
estate portfolio at December 31, 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
20
<PAGE>
(The following graphs appear on the right side of the page:)
Core Deposits
(Dollars in billions)
92 93 94 95 96 97
$73 78 81 94 98 $97
Comparison of
Funding Sources
(Percent)
95 96 97
Long-Term Debt 6% 6% 6%
Short-Term Borrowings 17% 18% 20%
Deposits 77% 76% 74%
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
$44 million at December 31, 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
$97 billion at December 31, 1997, compared with $98 billion at December 31,
1996. The decline largely reflected runoff that is typical following
acquisitions, in addition to customers' movement into investment products.
The portion of core deposits in higher-rate, other consumer time
deposits was 30 percent at December 31, 1997, and 34 percent at year-end 1996.
Other consumer time and other noncore deposits usually pay higher rates than
savings and transaction accounts, but they generally are not available for
immediate withdrawal, and they are less expensive to process.
Average core deposit balances were $94 billion in 1997 and $93 billion
in 1996. In 1997 and 1996, average noninterest- bearing deposits were 20 percent
of average core deposits. Average balances in savings and NOW, money market and
noninterest-bearing deposits were higher when compared with 1996, while 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 December 31, 1997, were $34 billion compared with
$30 billion at year-end 1996, largely reflecting funding needs related to the
increased securities available for sale portfolio and the decrease in core
deposits. Average purchased funds in 1997 were $32 billion compared with $31
billion in 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; depreciation and amortization; and deferred income taxes
or benefits. This cash was available in 1997 to increase earning assets, to make
discretionary investments and to reduce borrowings.
Long-Term Debt
Long-term debt was 67 percent of total stockholders' equity at December
31, 1997, compared with 74 percent at year-end 1996.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we currently have available for issuance $2.4 billion of
senior or subordinated debt securities, common stock or preferred stock. The
sale of any additional debt or equity securities will depend on future market
conditions, funding needs and other factors.
Debt Obligations
We have a $350 million, committed back-up line of credit that expires
in December 1998. This credit facility contains financial covenants that require
First Union to maintain a minimum level of tangible net
21
<PAGE>
(The following chart appears on left side of page:)
Regulatory Capital
to Assets
(Percent)
Tier 1 Total Capital
1997 Regulatory Minimum 6.00% 10.00
First Union 8.41 13.40%
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. In 1998, $2 billion of long-term debt will mature. 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, $991 million of capital securities were outstanding as of December 31,
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 of $66 million in 1997 related to the issuance of
capital securities are included in sundry expense.
Stockholders' Equity
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Total stockholders' equity was $12 billion at December 31, 1997, and
$11 billion at December 31, 1996. Common shares outstanding amounted to 636
million at December 31, 1997, compared with 641 million at December 31, 1996. In
1997 we repurchased 24 million shares of our common stock at a cost of $1
billion compared with 31 million shares at a cost of $968 million in 1996. In
addition in 1997 we issued 7.5 million shares and received $358 million in
proceeds, which were used for general corporate purposes.
We paid $749 million in dividends to common stockholders in 1997
compared with $660 million in 1996.
At December 31, 1997, stockholders' equity was increased by a $254
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 cannot
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 $426
million available for dividends at December 31, 1997, without prior regulatory
approval. Our subsidiaries paid $1.3 billion in dividends to the parent company
in 1997. In addition the consolidation of our banks in our southern region and
Connecticut into First Union National Bank, based in Charlotte, North Carolina,
resulted in a reduction of capital of $835 million, which was paid to the parent
company.
Regulatory Capital
Federal banking regulations require that bank holding companies and
their subsidiary banks maintain minimum levels of capital. These banking
regulations measure capital using three formulas including 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 December 31, 1997, the tier 1 and total capital ratios were 8.41 percent and
13.40 percent, respectively, compared with 7.33 percent and 12.33 percent at
December 31, 1996. Amounts prior to 1997 are not restated for the Signet
acquisition.
22
<PAGE>
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 December 31, 1997, was 6.81 percent and at December 31,
1996, it was an unrestated 6.13 percent.
The requirements also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. The Federal Reserve Board has
indicated it will continue to consider a tangible tier 1 leverage ratio
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised us of any specific minimum
leverage ratio applicable to us.
Each subsidiary bank is subject to similar capital requirements. None
of our subsidiary banks has been advised of any specific minimum capital ratios
applicable to it.
The regulatory agencies also have adopted regulations establishing
capital tiers for banks. Banks in the highest capital tier, or well capitalized,
must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and
a total capital ratio of 10 percent. At December 31, 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 Merger and
Consolidation Activity and the Accounting and Regulatory Matters sections
provide additional information about the consolidation of our regional banks.
Market Risk Management
Interest Rate Risk Methodology
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 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 that 100 basis point rate changes over a three-month period had on
earnings per share over the subsequent 12 months. Our new methodology uses 200
basis point changes over a 12-month period. We retained our 5 percent policy
limit described below because our change in methodology was intended to focus on
the pattern of rate change rather than on the average amount of change in rates
between the two methodologies.
We believe our earnings simulation model is a more relevant depiction
of interest rate risk than traditional gap tables because it captures multiple
effects excluded in less sophisticated presentations, and it includes
significant variables that we identify
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(The following graph appears on the left side of page:)
Net Interest Income
Growth vs. Unrealized
Gains/Losses
(Dollars in billions)
94 95 96 97
Net Interest Income Growth
(Tax-Equivalent) 4.6 5.2 5.6 5.8
Unrealized Gains/Losses
(On- and Off-balance Sheet) (1.1) .9 .4 1.0
as being affected by interest rates. For example our model captures rate of
change differentials, such as federal funds rates versus savings account rates;
maturity effects, such as calls on securities; and rate barrier effects, such as
caps and floors on loans. It also captures changing balance sheet levels, such
as commercial and consumer loans (both floating and fixed rate); noninterest-
bearing deposits and investment securities. In addition our model considers
leads and lags that occur in long-term rates as short-term rates move away from
current levels; the elasticity in the repricing characteristics of savings and
money market deposits; and the effects of prepayment volatility on various
fixed-rate assets such as residential mortgages, mortgage-backed securities and
consumer loans. These and certain other effects are evaluated in developing the
scenarios from which sensitivity of earnings to changes in interest rates is
determined.
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 short-term rates flat at their
current level over our forecast horizon. The "high rate" and "low rate"
scenarios assume gradual 200 basis point increases or decreases in the federal
funds rate from the beginning point of each base-line scenario over the most
current 12-month period. Our policy limit for the maximum negative impact on
earnings per share resulting from "high rate" or "low rate" scenarios is 5
percent. The policy limit applies to both the "most likely rate" scenario and
the "flat rate" scenario. The policy measurement period is 12 months in length,
beginning with the first month of the forecast.
Earnings Sensitivity
Our January 1998 estimate for future short-term interest rates (our
"most likely" scenario) includes an average federal funds rate declining
gradually from 5.50 percent in January 1998 to 5.38 percent by December 1998,
then declining to 5.25 percent by December 1999. Our "flat rate" scenario holds
the federal funds rate at 5.50 percent over this same horizon. Based on the
January outlook, if interest rates were to follow our "high rate" scenario
(i.e., a 200 basis point increase in short-term rates from our "flat rate"
scenario), the model indicates that earnings during the policy measurement
period would be negatively affected by 1.0 percent. Our model indicates that
earnings would benefit by 0.8 percent in our "low rate" scenario (i.e., a 200
basis point decline in short-term rates from our "flat rate" scenario). Our
model indicates that a 200 basis point rise in rates from our "most likely"
scenario is less detrimental than the same rise from our "flat rate" scenario.
Over the next year, earnings would increase by 0.4 percent if rates fall
gradually by 200 basis points, and would decrease by 0.8 percent if rates
gradually rise 200 basis points, compared to our "most likely" scenario. In
1999, earnings would fall below those earned in our "most likely" scenario by
0.1 percent if rates were 200 basis points lower than our "most likely"
scenario. If rates were 200 basis points higher than our "most likely" scenario
in 1999, then earnings would be negatively affected by 2.5 percent. The pending
CoreStates acquisition is incorporated in these estimates. Without considering
CoreStates, earnings during the policy measurement period under any of our three
scenarios would not increase by more than 2.4 percent if rates were to fall, and
they would not decrease by more than 2.8 percent if rates were to rise.
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.
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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.
The fair value appreciation of off- balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $412 million at
December 31, 1997, compared with fair value appreciation of $209 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 $13 million
and $7 million, respectively, at December 31, 1997. Net gains of $3 million will
increase net interest income in 1998. Net gains of $3 million will increase net
interest income in subsequent years.
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 December 31, 1997, the total credit risk in excess of
thresholds was $301 million. The fair value of collateral held approximated 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.
Trading Risk Management
Trading activities are undertaken primarily to satisfy the investment
and risk management needs of our customers and secondarily to enhance our
earnings through
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profitable trading for the corporation's own account. We trade a variety of debt
securities and foreign exchange, as well as financial and foreign currency
derivatives, in order to provide customized solutions for the risk management
challenges faced by our customers. We maintain diversified trading positions in
both the fixed income and foreign exchange markets. Risk is controlled through
the imposition of value-at-risk limits and an active, independent monitoring
process.
We use the value-at-risk methodology for measuring the market risk of
the corporation's trading positions. This statistical methodology uses recent
market volatility to estimate the maximum daily trading loss that the
corporation would expect to incur, on average, 97.5 percent of the time. The
model also measures the effect of correlation among the various trading
instruments to determine how much risk is eliminated by "offsetting" positions.
The analysis captures all financial assets and liabilities that are considered
trading positions (including loan trading activities), foreign exchange and
financial and foreign currency derivative instruments. The calculation uses
historical data from either the most recent 180 or 260 business days, depending
on the activity. Value-at-risk amounts related to interest rate risk and
currency risk at December 31, 1997, were $11 million and $2 million,
respectively.
Accounting and
Regulatory Matters
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," does not change
the recognition or measurement associated with pension or postretirement plans.
It standardizes certain disclosures, requires additional information about
changes in the benefit obligations and about change in the fair value of plan
assets to facilitate analysis, and it eliminates certain disclosures that were
not deemed useful. This Standard is effective for financial statements issued
for periods beginning after December 31, 1997.
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 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
assessing performance. Information such as segment earnings, certain revenue and
expense items and certain segment assets are required to be presented, and such
amounts are required to be reconciled to the company's financial statements.
Certain information related to this Standard is included in the Business
Segments section. The corporation will assess the current methodologies and
reporting for compliance with the Standard. This Standard is effective for
financial statements issued for periods beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and the
presentation of comprehensive income, which is defined as the change in equity
transactions with nonowners. It includes 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, including interim periods.
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 was allowed to 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 provided 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 Merger and Consolidation Activity 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.
Earnings and Balance Sheet
Analysis (1996 compared with 1995)
First Union's operating earnings in 1996, before special charges, were
a record $1.9 billion, or basic earnings per common share of $3.04. Diluted
operating earnings per common share were $3.01 in 1996. The special charges were
after-tax merger-related and restructuring charges of $181 million and an
after-tax SAIF special assessment of $87 million. Operating earnings in 1995
were $1.6 billion, or basic earnings per share of $2.56 before restructuring
charges of $73 million after-tax, or 12 cents per share, taken in the fourth
quarter of 1995. Diluted operating earnings per common share were $2.49 in 1995.
After the special charges, net income applicable to common stockholders was $1.6
billion, or basic earnings per share of $2.61, in 1996 compared with $1.5
billion, or $2.44 per share, in 1995. Diluted earnings per common share were
$2.58 in 1996 and $2.38 in 1995.
The restructuring charges were taken in connection with the January 1,
1996, First Fidelity pooling of interests acquisition. The SAIF special
assessment resulted from 1996 legislation to recapitalize the SAIF.
Tax-equivalent net interest income increased 6 percent to $5.6 billion in 1996
from $5.2 billion in 1995. The increase was primarily the result of assets
acquired in purchase accounting acquisitions, an increase in the securities
available for sale portfolio and the repricing of variable rate assets.
Nonperforming loans reduce interest income because the contribution
from these loans is eliminated or sharply reduced. In 1996, $57 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 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 1996 was $13 million.
The net interest margin was 4.25 percent in 1996 compared with 4.51
percent in 1995. The margin decline was primarily related to the securitization
of credit card receivables; the addition of lower spread investment securities
in the early months of 1996; the addition of acquired banks and thrifts with
lower margins; the reduction in the prime rate from 1995; and the purchase of
lower-spread assets related to Capital Markets activities. The average rate
earned on earning assets was 8.06 percent in 1996 and 8.32 percent in 1995. The
average rate paid on interest-bearing liabilities was 4.36 percent in 1996 and
4.42 percent in 1995.
Noninterest income, excluding investment securities transactions,
increased to $2.6 billion in 1996 from $2.1 billion in 1995. Virtually all
categories of noninterest income increased in 1996. Securities available for
sale transactions resulted in gains of $36 million in 1996 and $45 million in
1995. Trading profits were $131 million in 1996 compared with $81 million in
1995. Trading account assets were $4.5 billion at year-end 1996 compared with
$2.4 billion at year-end 1995. The increase was the result of general market
conditions and expanded trading volume.
Noninterest expense increased in 1996 to $5.2 billion from $4.7 billion
in 1995. The
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1996 results include $281 million in pre-tax, merger-related and restructuring
charges and a $135 million pre-tax SAIF special assessment. The 1995 results
include pre-tax restructuring charges of $94 million. In addition to the special
charges, the increase in noninterest expense was primarily related to purchase
accounting acquisitions that resulted in higher personnel costs, an increase in
equipment expense and an increase in external data processing expense.
At December 31, 1996, we had $2.9 billion in other intangible assets
compared with $2.5 billion at December 31, 1995. Costs related to environmental
matters were not material.
Income taxes were $875 million in 1996 compared with $848 million in
1995. The increase resulted primarily from increased income before income taxes.
Average earning assets in 1996 were $131 billion, a 13 percent increase
from $116 billion in 1995.
At December 31, 1996, we had securities available for sale with a
market value of $17 billion compared with $21 billion at year-end 1995. The
market value of securities available for sale was $6 million above amortized
cost at December 31, 1996. The average rate earned on securities available for
sale in 1996 was 6.69 percent compared with 6.53 percent in 1995. The average
maturity of the portfolio was 5.0 years at December 31, 1996.
Our investment securities amounted to $2.5 billion at December 31,
1996, compared with $3.1 billion at year-end 1995. This decline resulted from
scheduled maturities, prepayments and issuer calls. The average rate earned on
investment securities was 8.68 percent in 1996 and 7.59 percent in 1995. The
increase in yield was primarily related to the year-end 1995 transfer of
lower-yielding securities to the available for sale portfolio. The average
maturity of the portfolio was 5.93 years at December 31, 1996.
Net loans at December 31, 1996, were $102 billion compared with $97
billion at year-end 1995. Average net loans in 1996 increased 8 percent to $97
billion from $90 billion in 1995. Demand for credit slowed in 1996, and branch
sales campaigns focused more heavily on investment products rather than on
lending products. Commercial loans increased slightly in 1996, primarily due to
additional lease financings.
The loan portfolio at December 31, 1996, was composed of 44 percent in
commercial loans and 56 percent in consumer loans, which did not represent a
significant change from year-end 1995. At December 31, 1996, unused loan
commitments related to commercial and consumer loans were $52 billion.
Commercial and standby letters of credit were $5 billion. At December 31, 1996,
loan participations sold to other lenders amounted to $1 billion. They were
recorded as a reduction of gross loans.
The average rate earned on loans was 8.58 percent in 1996 and 8.78
percent in 1995. Factors affecting loan rates in 1996 compared with 1995
included a general decrease in market rates used to price loans. For example the
prime rate decreased to an average of 8.27 percent in 1996 from 8.44 percent in
1995. Other factors included the 1995 credit card securitization, as well as a
larger portfolio of fixed and adjustable rate mortgages as a result of bank and
thrift acquisitions. These factors were offset somewhat by the upward repricing
of adjustable rate mortgages and credit card portfolio introductory rates.
Commercial real estate loans amounted to 12 percent of the total
portfolio at December 31, 1996, compared with 13 percent at December 31, 1995.
This portfolio included commercial real estate mortgage loans of $10 billion at
December 31, 1996, and at December 31, 1995.
At December 31, 1996, nonperforming assets were $802 million, or 0.78
percent of net loans and foreclosed properties, compared with $880 million, or
0.91 percent, at December 31, 1995. Fifty-five percent of nonperforming assets
were collateralized primarily by real estate at December 31, 1996, compared with
52 percent at year-end 1995.
Accruing loans 90 days past due were $361 million and $356 million,
respectively, at December 31, 1996 and December 31, 1995. Of these past dues,
$28 million were related to commercial and commercial real estate loans and $333
million were related to retail loans at December 31, 1996, compared with $21
million and $335 million, respectively, at December 31, 1995. Net charge-offs as
a percentage of average net loans were 0.65 percent in 1996 compared with 0.44
percent in 1995. Net charge-offs,excluding credit cards, were 0.35 percent in
1996 compared with 0.25 percent in 1995. The loan loss provision was $449
million in
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1996 compared with $259 million in 1995. The allowance for loan losses was $1.5
billion at December 31, 1996, compared with $1.6 billion at year-end 1995. In
1996 we reallocated the acquired First Fidelity allowance for loan losses based
on First Union's policies and procedures. The ratio of the allowance for loan
losses to nonaccrual and restructured loans was 215 percent at December 31,
1996, and 239 percent at December 31, 1995. The ratio of the allowance to net
loans was 1.47 percent at December 31, 1996, compared with 1.69 percent at
December 31, 1995.
At December 31, 1996, impaired loans, which are included in nonaccrual
loans, amounted to $370 million. Included in the allowance for loan losses was
$36 million related to $237 million of impaired loans. The remaining impaired
loans are recorded at or below fair value. In 1996 the average recorded
investment in impaired loans was $477 million, and $19 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.
Core deposits were $98 billion at December 31, 1996, compared with $94
billion at December 31, 1995. Average core deposit balances were $93 billion in
1996, an increase of $5 billion from 1995 that was primarily related to
acquisitions. In 1996 and 1995, average noninterest-bearing deposits were 20
percent and 19 percent, respectively, of average core deposits. Average balances
in savings and NOW, other consumer time and noninterest-bearing deposits were
higher when compared with 1995, while money market deposits were lower.
Purchased funds at December 31, 1996, were $30 billion, compared with $28
billion at year-end 1995. Average purchased funds in 1996 were $31 billion, an
increase of 41 percent from $22 billion in 1995. The increase was used primarily
to fund loans and to purchase available for sale portfolio securities earlier in
the year.
Long-term debt was 74 percent of total stockholders' equity at December
31, 1996 and December 31, 1995. In 1996 we added $1 billion of subordinated
notes and debentures with rates ranging from 6.824 percent to 7.80 percent and
maturities of 10 years to 30 years. Proceeds from these debt issues were used
for general corporate purposes.
At December 31, 1996, total stockholders' equity was $11 billion,
compared with $10 billion at December 31, 1995, and 641 million common shares
were outstanding compared with 621 million shares at December 31, 1995. In
conjunction with stock-for-stock acquisitions of banks and thrifts in 1996, we
purchased 24 million shares of common stock at a cost of $764 million.
Additionally we purchased 6 million shares of common stock in 1996 at a cost of
$204 million to offset issuances of common stock related to First Union's
employee stock compensation plans, dividend reinvestment plan and the conversion
of shares of the corporation's convertible preferred stock. This compares with
purchases of 40 million shares at a cost of $965 million in 1995.
In 1996 First Union redeemed the outstanding shares of its Series D and
Series F preferred stock at a cost of $109 million. In 1996 First Union also
redeemed its Series B convertible preferred stock, substantially all of which
converted into 6 million shares of common stock. We paid $669 million in
dividends to preferred and common stockholders in 1996. Preferred dividends were
$9 million in 1996 compared with $26 million in 1995. At December 31, 1996,
stockholders' equity was increased by a $2 million unrealized after-tax gain
related to debt and equity securities.
At December 31, 1996, the tier 1 and total capital ratios were 7.33
percent and 12.33 percent, respectively, compared with 6.70 percent and 11.45
percent at December 31, 1995. The leverage ratio at December 31, 1996, was 6.13
percent compared with 5.49 percent at December 31, 1995. These ratios have not
been restated for the Signet acquisition.
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $209 million at
December 31, 1996, compared with fair value appreciation of $437 million at
December 31, 1995.
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Glossary of Terms
Asset Sensitivity
When a company's asset, liability and off-balance sheet financial instrument mix
results in diminished net interest income in a declining interest rate
environment.
Collateralized Mortgage
Obligation (CMO)
A mortgage-backed bond that is divided into separate maturity classes called
tranches. The cash flows for each tranche are paid out in a specific order to
investors based on the prepayment characteristics of the underlying mortgages.
Debit Cards
A method of payment that is tied to a customer's checking account. When used to
make a purchase, the bank-issued debit card (which looks like a credit card)
acts as a "plastic check," and money is deducted directly from the customer's
checking account.
Derivatives
A term used to include a broad base of financial instruments that are, for the
most part, "derived" from underlying securities traded in the cash markets.
Examples include interest rate swaps, index amortizing interest rate swaps,
swaptions, options and futures contracts.
Earnings Per
Common Share - Basic
Net income, adjusted for preferred stock dividends, divided by the average
common shares outstanding.
Earnings Per
Common Share - Diluted
Net income, adjusted for preferred dividends, divided by the sum of average
common shares outstanding and common stock equivalents including restricted
stock awards related to employee stock options and convertible securities.
Futures Contract
An agreement to buy or sell a specific amount of a commodity or financial
instrument at a particular price on a stipulated future date.
Index Amortizing
Interest Rate Swap An interest rate swap in which the final maturity date may
contract, and the "notional amount" may decrease, based on changes in certain
interest rate indices.
Interest Rate Swap
A contractual transaction between two parties in which each agrees to exchange
interest rate payments for a specified period of time. These payments are
calculated on a "notional amount," and no exchange of principal occurs. Such a
transaction is commonly used to manage the asset or liability sensitivity of a
balance sheet by converting fixed rate assets or liabilities to floating rates,
or vice versa.
Internet
A global network of computers providing access to information worldwide.
Liability Sensitivity
When a company's asset, liability and off-balance sheet financial instrument mix
results in diminished net interest income in a rising interest rate environment.
Managed Card Portfolio
Owned and securitized credit card receivables.
Mark-To-Market
A method of accounting for a corporation's assets or liabilities by recording
them at their current market values, rather than at their historical costs.
Mortgage Banking Income
Noninterest income related to mortgage banking activity.
Mortgage Servicing
Portfolio
Mortgage loans owned by investors for which a company manages payment
processing, remittance and escrow accounts.
Net Charge-Offs
The amount of loans written off as uncollectible, net of the recovery of loans
previously written off as uncollectible.
Net Interest Margin
The difference between the tax-equivalent yield on earning assets and the rate
paid on funds to support those assets, divided by average earning assets.
Net Operating Revenue
The sum of tax-equivalent net interest income and noninterest income.
Noninterest Expense
All expenses other than interest.
Noninterest Income
All income other than interest and dividend income.
Nonperforming Assets
Assets on which income is not being accrued for financial reporting purposes;
restructured loans on which interest rates or terms of repayment have been
materially revised; and other real estate that has been acquired through loan
foreclosures, in-substance foreclosures or deeds received in lieu of loan
payments.
Notional Amount
The principal amount of a financial instrument on which a derivative transaction
is based. In an interest rate swap, for example, the "notional amount" is used
to calculate the interest rate cash flows to be exchanged. No exchange of
principal occurs.
Option
A contractual agreement that allows, but does not require, a holder to buy (or
sell) a financial instrument at a predetermined price for a specified time.
Overhead
Efficiency Ratio
Noninterest expense divided by net operating revenue.
Pooling Of
Interests
An accounting method that may restate historical financial information of the
surviving company in a merger as if the two entities were always one, depending
on the material significance of the acquired company to the surviving company.
Purchase Accounting
An accounting method that adds the fair market value of assets and liabilities
of the company acquired to those of the acquiror at the time of acquisition.
Historical financial information of the acquiror is not restated.
Return On Assets (ROA)
Net income as a percentage of average assets.
Return On Common
Equity (ROE)
Net income applicable to common stockholders as a percentage of average common
stockholders' equity, excluding unrealized gains and losses on certain
securities.
Security Gains
Or Losses
A gain or loss resulting from the sale of a security at a price above or below
the security's carrying value.
Smart Cards
A plastic card containing microchips that store data. Although many kinds of
information can be embedded on a smart card (which looks like a credit card),
most issuers are primarily interested in storing cash value.
Stockholders' Equity
A balance sheet amount that represents the total investment in the corporation
by holders of preferred and common stock.
Stored Value Cards
Plastic cards embedded with computer chip technology and used in place of cash
or checks.
Swaptions
Options on interest rate swaps.
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Board of Directors
First Union Corporation Board of Directors
Executive Officers
Edward E. Crutchfield
Chairman and
Chief Executive Officer
Anthony P. Terracciano
Retiring President
John R. Georgius
President
B.J. Walker
Vice Chairman
Robert T. Atwood
Executive Vice President
and Chief Financial Officer
Marion A. Cowell Jr.
Executive Vice President,
Secretary and General
Counsel
First Union Corporation Board of Directors
Edward E. Barr
Chairman,
Sun Chemical Corporation
Fort Lee, New Jersey
G. Alex Bernhardt
Chairman and Chief
Executive Officer,
Bernhardt Furniture Company
Lenoir, North Carolina
W. Waldo Bradley
Chairman,
Bradley Plywood Corporation
Savannah, Georgia
Robert J. Brown
Chairman, President
and Chief Executive Officer,
B&C Associates, Inc.
High Point, North Carolina
Edward E. Crutchfield
Chairman and Chief
Executive Officer,
First Union Corporation
Charlotte, North Carolina
A. Dano Davis
Chairman and Principal
Executive Officer,
Winn-Dixie Stores Inc.
Jacksonville, Florida
R. Stuart Dickson
Chairman of
Executive Committee,
Ruddick Corporation
Charlotte, North Carolina
B.F. Dolan
Investor
Charlotte, North Carolina
Roddey Dowd Sr.
Chairman,
Charlotte Pipe
and Foundry Company
Charlotte, North Carolina
John R. Georgius
President,
First Union Corporation
Charlotte, North Carolina
Arthur M. Goldberg
Executive Vice President
and President of
Gaming Operations,
Hilton Hotels Corporation
Beverly Hills, California
William H. Goodwin Jr.
Chairman,
CCA Industries Inc.
Richmond, Virginia
Howard H. Haworth
President,
The Haworth Group
Charlotte, North Carolina
Frank M. Henry
Chairman,
Frank Martz Coach Company
Wilkes-Barre, Pennsylvania
Leonard G. Herring
Investor
North Wilkesboro, North Carolina
Jack A. Laughery
Chairman,
Laughery Investments
Rocky Mount, North Carolina
Max Lennon
President,
Mars Hill College
Mars Hill, North Carolina
Radford D. Lovett
Chairman,
Commodores Point
Terminal Corporation
Jacksonville, Florida
Mackey J. McDonald
President and Chief
Executive Officer,
VF Corporation
Wyomissing, Pennsylvania
Malcolm S. McDonald
Chairman and Chief
Executive Officer of the Virginia,
Maryland and Washington, D.C.
banking operations of
First Union National Bank
Richmond, Virginia
Joseph Neubauer
Chairman and
Chief Executive Officer,
ARAMARK Corporation
Philadelphia, Pennsylvania
Randolph N. Reynolds
Vice Chairman,
Reynolds Metals Company
Richmond, Virginia
Ruth G. Shaw
Executive Vice President
and Chief Administrative Officer,
Duke Energy Corporation
Charlotte, North Carolina
Charles M. Shelton Sr.
General Partner,
The Shelton Companies
Charlotte, North Carolina
Lanty L. Smith
Chairman,
Precision Fabrics Group, Inc.
Greensboro, North Carolina
Anthony P. Terracciano
Retiring President,
First Union Corporation
Summit, New Jersey
Dewey L. Trogdon
Chairman,
Cone Mills Corporation
Greensboro, North Carolina
John D. Uible
Investor
Jacksonville, Florida
B.J. Walker
Vice Chairman,
First Union Corporation
Jacksonville, Florida
Committees of the Corporate Board of Directors
Executive Committee
B.F. Dolan, Chairman
Edward E. Crutchfield
R. Stuart Dickson
Arthur M. Goldberg
William H. Goodwin Jr.
Leonard G. Herring
Radford D. Lovett
Joseph Neubauer
Lanty L. Smith
Anthony P. Terracciano
B.J. Walker
Audit Committee
G. Alex Bernhardt, Chairman
Howard H. Haworth, Vice
Chairman
Robert J. Brown
Frank M. Henry
Mackey J. McDonald
Randolph N. Reynolds
James H. Hatch (staff)
Peter J. Schild (staff)
Credit/Market Risk
Committee
Lanty L. Smith, Chairman
Ruth G. Shaw, Vice Chairman
A. Dano Davis
Roddey Dowd Sr.
John R. Georgius
Arthur M. Goldberg
Anthony P. Terracciano
Malcolm T. Murray Jr. (staff)
Louis A. Schmitt Jr. (staff)
Financial Services Committee
William H. Goodwin Jr., Chairman
Charles M. Shelton Sr., Vice
Chairman
John R. Georgius
Jack A. Laughery
Max Lennon
Joseph Neubauer
John D. Uible
Anthony P. Terracciano
Robert T. Atwood (staff)
G. Kennedy Thompson (staff)
Human Resources
Committee
R. Stuart Dickson, Chairman
Leonard G. Herring, Vice
Chairman
Edward E. Barr
W. Waldo Bradley
B.F. Dolan
Radford D. Lovett
Dewey L. Trogdon
Don R. Johnson (staff)
Nominating Committee
B.F. Dolan, Chairman
R. Stuart Dickson, Vice Chairman
Edward E. Crutchfield
William H. Goodwin Jr.
Leonard G. Herring
Radford D. Lovett
Anthony P. Terracciano
31
<PAGE>
First Union Across The Nation
Foreign Offices
Nassau Branch
First Union National Bank
Nassau, Bahamas
First Union Bank And Trust (Cayman) Ltd.
Cayman Islands
First Union National Bank
London, England
First Union National Bank
Mumbai, India
(formerly Bombay, India)
First Union HKCB
Asia Ltd.
Hong Kong, Hong Kong
First Union National Bank
Johannesburg, South Africa
First Union National Bank
Jakarta, Indonesia
Headquarters
First Union National Bank
A full-service commercial bank.
One First Union Center
Charlotte, North Carolina 28288
704-374-6161
Regional Headquarters
First Union - Atlantic
A full-service commercial bank.
102 Pennsylvania Avenue
Avondale, Pennsylvania 19311
215-985-6000
First Union - Connecticut
A full-service commercial bank.
300 Main Street
Stamford, Connecticut 06904
203-348-6211
First Union - Florida
A full-service commercial bank.
225 Water Street
Jacksonville, Florida 32202
904-361-2265
First Union - Georgia
A full-service commercial bank.
999 Peachtree Street
Suite 1200
Atlanta, Georgia 30309
404-827-7100
First Union - North Carolina
A full-service commercial bank.
One First Union Center
Charlotte, North Carolina 28288
704-374-6161
First Union - South Carolina
A full-service commercial bank.
Insignia Financial Plaza
One Insignia Place
Greenville, South Carolina 29601
864-255-8000
First Union - Tennessee
A full-service commercial bank.
150 Fourth Avenue North
Nashville, Tennessee 37219
615-251-9200
First Union - Virginia,
Maryland and Washington, D.C.
A full-service commercial bank.
7 North 8th Street
P.O. Box 25970
Richmond, Virginia 23260-5970
804-771-7729
Principal Subsidiaries
First Union Bank
Of Delaware
A full-service commercial bank.
One Rodney Square
Tenth and King Streets
Wilmington, Delaware 19801
302-888-7500
First Union Brokerage
Services Inc.
Securities brokerage firm.
One First Union Center
Charlotte, North Carolina 28288
704-374-6927
First Union Capital
Partners, Inc.
Investment and merchant banking.
One First Union Center
Charlotte, North Carolina 28288
704-374-4615
First Union Commercial Corporation
Provides equipment lease financing.
One First Union Center
Charlotte, North Carolina 28288
704-374-4900
First Union Direct Bank, N.A.
Card products, including credit and
debit cards, remote and electronic
delivery channels.
699 Broad Street
Augusta, Georgia 30903
800-413-7898
First Union Home
Equity Bank, N.A.
Offers home equity loans.
1000 Louis Rose Place
Charlotte, North Carolina 28262
704-593-9300
First Union Mortgage
Corporation
Offers a variety of mortgage
banking and insurance services.
Two First Union Center
Charlotte, North Carolina 28288
704-374-6161
First Union Rail Corporation
Railcar leasing.
6250 River Road
Suite 5000
Rosemont, Illinois 60018
847-318-7575
Wheat First Securities, Inc.
Provides a wide range of investment
banking, brokerage and securities
products and services through its
principal divisions First Union
Capital Markets Group and
Wheat First Union.
First Union Capital
Markets Group
One First Union Center
Charlotte, North Carolina 28288
704-383-8757
Wheat First Union
Riverfront Plaza, West Tower
901 East Byrd Street
Richmond, Virginia 23219
804-649-2311
[MAP OF UNITED STATES APPEARS BELOW DENOTING FIRST UNION LOCATIONS ACROSS THE
NATION]
32
<PAGE>
PRO FORMA FINANCIAL INFORMATION
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
PRO FORMA FINANCIAL INFORMATION
(Unaudited)
- --------------------------------------------------------------------------------
The following unaudited pro forma combined selected statistical data, balance
sheet and condensed statements of income present combined financial information
for First Union Corporation (the "Corporation") and CoreStates Financial Corp
("CoreStates") assuming the Corporation and CoreStates had been combined for
each period presented on a pooling of interests accounting basis (the "Merger").
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA
Securities available for sale $ 23,524 19,199 23,100 12,498 14,402
Investment securities 3,526 4,190 6,200 14,215 15,703
Loans, net of unearned income 131,687 134,647 127,905 107,965 97,375
Earning assets 176,303 173,712 167,036 141,543 132,061
Total assets 205,735 197,341 188,855 159,577 148,759
Noninterest-bearing deposits 31,005 29,713 27,706 24,542 24,976
Interest-bearing deposits 106,072 106,716 106,406 98,097 90,773
Long-term debt 11,746 10,809 9,586 6,405 5,686
Guaranteed preferred beneficial interests 1,741 795 - - -
Common stockholders' equity 15,269 14,628 13,600 11,775 11,137
Total stockholders' equity $ 15,269 14,628 13,783 12,005 11,651
=======================================================================================================
COMBINED AVERAGE BALANCE SHEET DATA
Securities available for sale $ 20,801 21,869 14,905 14,708 8,327
Investment securities 3,607 4,867 12,304 13,915 20,900
Loans, net of unearned income 134,517 129,120 121,245 100,836 92,159
Earning assets 174,502 170,069 156,419 135,328 127,423
Total assets 196,093 189,285 173,981 150,244 143,046
Noninterest-bearing deposits 27,489 24,514 23,240 21,395 20,582
Interest-bearing deposits 105,358 104,925 102,922 90,393 87,715
Long-term debt 10,915 10,386 8,334 6,049 5,492
Guaranteed preferred beneficial interests 1,681 57 - - -
Common stockholders' equity 14,367 13,801 12,978 11,452 10,228
Total stockholders' equity $ 14,367 13,909 13,189 11,954 10,748
=======================================================================================================
COMBINED PERCENTAGE DATA
Allowance for loan losses to
Loans, net 1.40 % 1.64 1.80 2.09 2.32
Nonperforming assets 186 211 201 170 111
Net charge-offs to average loans, net 0.65 0.64 0.45 0.53 0.72
Net charge-offs to average loans, net, excluding
Bankcard 0.31 0.35 0.27 0.46 0.69
Nonperforming assets to loans, net and
foreclosed properties 0.75 % 0.78 0.90 1.23 2.08
=======================================================================================================
See accompanying Notes to Pro Forma Financial Information.
</TABLE>
P-1
<PAGE>
PRO FORMA FINANCIAL INFORMATION
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Pro Forma Pro Forma
(In millions) Corporation CoreStates Adjustments Combined
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,445 3,830 - 10,275
Interest-bearing bank balances 710 3,122 - 3,832
Federal funds sold and securities
purchased under resale agreements 7,740 41 - 7,781
- --------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 14,895 6,993 - 21,888
- --------------------------------------------------------------------------------------------------------
Trading account assets 5,457 496 - 5,953
Securities available for sale 21,415 2,109 - 23,524
Investment securities 2,175 1,351 - 3,526
Loans, net of unearned income 96,873 34,814 - 131,687
Allowance for loan losses (1,212) (634) - (1,846)
- --------------------------------------------------------------------------------------------------------
Loans, net 95,661 34,180 - 129,841
- --------------------------------------------------------------------------------------------------------
Premises and equipment 4,233 630 - 4,863
Due from customers on acceptances 854 642 - 1,496
Other intangible assets 2,674 280 - 2,954
Other assets 9,910 1,780 - 11,690
- --------------------------------------------------------------------------------------------------------
Total assets $ 157,274 48,461 - 205,735
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 21,753 9,252 - 31,005
Interest-bearing deposits 81,136 24,936 - 106,072
- --------------------------------------------------------------------------------------------------------
Total deposits 102,889 34,188 - 137,077
Short-term borrowings 27,357 4,323 - 31,680
Bank acceptances outstanding 855 642 - 1,497
Other liabilities 5,108 1,617 - 6,725
Long-term debt 8,042 3,704 - 11,746
- --------------------------------------------------------------------------------------------------------
Total liabilities 144,251 44,474 - 188,725
- --------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in junior subordinated deferrable
interest debentures 991 750 - 1,741
- --------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - -
Common stock 2,121 224 858 3,203
Paid-in capital 1,384 1,262 (1,065) 1,581
Retained earnings 8,273 3,053 (1,127) 10,199
Unrealized gain on debt and equity securities, net 254 32 - 286
Treasury stock - (1,282) 1,282 -
Unallocated shares held by ESOP - (52) 52 -
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,032 3,237 - 15,269
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 157,274 48,461 - 205,735
========================================================================================================
See accompanying Notes to Pro Forma Financial Information.
</TABLE>
P-2
<PAGE>
PRO FORMA FINANCIAL INFORMATION
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
(In millions, except per share data) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 14,362 13,758 13,028 10,245 9,507
Interest expense 6,452 6,151 5,732 3,739 3,376
- ---------------------------------------------------------------------------------------------------------------
Net interest income 7,910 7,607 7,296 6,506 6,131
Provision for loan losses 1,103 678 403 458 559
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,807 6,929 6,893 6,048 5,572
Securities available for sale transactions 52 96 76 24 76
Investment security transactions 3 4 6 4 7
Noninterest income 4,267 3,435 2,976 2,336 2,332
Merger-related and restructuring charges 284 421 233 107 -
SAIF special assessment - 149 - - -
Noninterest expense 7,052 6,360 6,309 5,558 5,430
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 3,793 3,534 3,409 2,747 2,557
Income taxes 1,084 1,261 1,213 938 818
- ---------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196 1,809 1,739
Dividends on preferred stock - 9 26 46 46
- ---------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders before redemption premium 2,709 2,264 2,170 1,763 1,693
Redemption premium on preferred stock - - - 41 -
- ---------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders after redemption premium $ 2,709 2,264 2,170 1,722 1,693
===============================================================================================================
PER COMMON SHARE DATA
Basic earnings $ 2.84 2.33 2.21 1.86 1.85
Diluted earnings $ 2.80 2.30 2.17 1.83 1.81
AVERAGE COMMON SHARES (In thousands)
Basic 955,241 973,712 979,852 927,941 913,621
Diluted 966,792 982,755 1,001,145 946,969 940,167
===============================================================================================================
CORPORATION HISTORICAL PER COMMON
SHARE DATA
Basic earnings $ 3.03 2.61 2.44 2.30 2.15
Diluted earnings $ 2.99 2.58 2.38 2.25 2.09
AVERAGE COMMON SHARES (In thousands)
Basic 625,649 619,237 619,777 561,442 543,321
Diluted 633,772 625,224 637,186 577,709 565,239
===============================================================================================================
See accompanying Notes to Pro Forma Financial Information.
</TABLE>
P-3
<PAGE>
PRO FORMA FINANCIAL INFORMATION
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
NOTES TO PRO FORMA FINANCIAL INFORMATION
(Unaudited)
- --------------------------------------------------------------------------------
(1) The unaudited pro forma information presented herein is not necessarily
indicative of the results of operations or the combined financial position that
would have resulted had the Merger been consummated at the beginning of the
applicable periods indicated, nor is it necessarily indicative of the results of
operations in future periods or the future financial position of the combined
entities. Pro forma financial information with respect to the Merger assumes the
Merger was consummated as of the beginning of each period presented. Average
common and total stockholders' equity excludes net unrealized gains or losses on
debt and equity securities.
(2) It is assumed that the Merger will be accounted for on a pooling of
interests accounting basis, and accordingly, the related pro forma adjustments
herein reflect, where applicable, an exchange ratio of 1.62 shares of the
Corporation's common stock for each of the 198,216,000 shares of CoreStates
common stock which were outstanding at December 31, 1997. The 1.62 exchange
ratio is subject to possible adjustment under certain circumstances.
As a result, information was adjusted for the Merger by the (i) addition
of 321,110,000 shares of the Corporation's common stock amounting to $1.1
billion (excluding the shares of the Corporation's common stock to be issued in
exchange for an estimated 3.5 million shares of CoreStates common stock that
CoreStates expects to issue in order to qualify the Merger as a pooling of
interests); (ii) elimination of 198,216,000 shares of outstanding CoreStates
common stock amounting to $224 million; (iii) elimination of the cost of
CoreStates treasury stock of $1.3 billion; (iv) reclassification of the cost of
unallocated shares held by the CoreStates ESOP of $52 million; and (v)
recordation of the remaining amount of $1.1 billion as a reduction of paid-in
capital at December 31, 1997.
As of December 31, 1997, the Corporation and CoreStates had 51,580,000
and 16,490,000 shares of common stock reserved for issuance primarily for stock
option plans, respectively, (excluding, as to the Corporation, shares reserved
for issuance in connection with the Merger, or upon exercise of the rights
attached to the Corporation's common stock), which are not included in the
unaudited pro forma financial information presented herein.
For the year ended December 31, 1997, CoreStates had net income
applicable to common stockholders of $813 million.
In 1993, CoreStates changed its method of accounting for postemployment
benefits, and in 1993 CoreStates reported additional expense as a cumulative
effect of a change in accounting principle, net of tax of $16 million in 1993.
Such amount has been reclassified to noninterest expense and income taxes in
1993 in the pro forma financial information presented herein.
(3) On November 28, 1997, the Corporation acquired Signet Banking Corporation
("Signet"), which was accounted for as a pooling of interests. The financial
information presented herein includes Signet as of and for the three years ended
December 31, 1997.
(4) The pro forma financial information presented herein does not include
financial information related to the Corporation's (i) January 15, 1998,
purchase accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which
had assets of $415 million, net loans of $254 million, deposits of $294 million
and stockholders' equity of $31 million at December 31, 1997; and (ii) January
31, 1998, pooling of interests acquisition of Wheat First Butcher Singer, Inc.
("Wheat First"), which had assets of $1.1 billion and stockholders' equity of
$171 million at December 31, 1997.
P-4
<PAGE>
PRO FORMA FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
The Corporation issued 1.6 million shares of its common stock to
stockholders of Covenant, substantially all of which were repurchased in the
open market at a cost of $79 million, and 10.3 million shares of its common
stock to stockholders of Wheat First. Financial information related to Wheat
First is not considered material to the historical results of the Corporation,
and accordingly, such financial information will not be combined with the
historical results of the Corporation.
(5) Earnings per share data has been computed based on the combined historical
net income applicable to common stockholders of the Corporation and CoreStates
using the combined (i) historical weighted average shares outstanding with
respect to basic earnings per share, and (ii) sum of the historical weighted
average shares outstanding and common stock equivalents related to employee
stock options including restricted stock awards with respect to diluted earnings
per share, adjusted to equivalent shares of the Corporation's common stock with
respect to CoreStates, as of the earliest applicable period presented, as
appropriate.
(6) Certain insignificant reclassifications have been included herein to conform
to financial statement presentations. Transactions conducted in the ordinary
course of business between the Corporation and CoreStates are immaterial, and
accordingly, they have not been eliminated.
(7) The unaudited pro forma financial information does not include any material
merger-related expenses or any material expenses related to the Merger. The
Corporation currently estimates after-tax merger-related and restructuring
charges of approximately $795 million related to the Merger, or $0.81 per share
of the Corporation's common stock, expected to be recorded in the second quarter
of 1998. In addition, the Corporation expects to incur an estimated $75 million
in pre-tax merger-related and restructuring charges in the 12-month period
following the Merger.
(8) The Corporation expects to realize significant revenue enhancements and cost
savings from the Merger. The pro forma financial information, which does not
reflect any revenue enhancements, direct costs or potential savings from the
consolidation of operations of the Corporation and CoreStates, is not indicative
of the results of future operations. No assurance can be given with respect to
the ultimate level of such revenue enhancements or cost savings. As indicated by
the foregoing unaudited pro forma financial information and based solely on the
foregoing assumptions, consummation of the Merger would have diluted each of the
Corporation's historical basic and diluted earnings per common share amounts for
the year ended December 31, 1997, by 6 percent.
P-5
<PAGE>
FINANCIAL TABLES
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
(In millions, except per share data) 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARIES OF INCOME
Interest income $ 10,933 10,460 9,553 7,231 6,602 6,609
==============================================================================================================
Interest income (a) $ 11,009 10,552 9,669 7,352 6,736 6,753
Interest expense 5,190 4,995 4,424 2,793 2,482 2,942
- --------------------------------------------------------------------------------------------------------------
Net interest income (a) 5,819 5,557 5,245 4,559 4,254 3,811
Provision for loan losses 840 449 259 179 370 643
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses (a) 4,979 5,108 4,986 4,380 3,884 3,168
Securities available for sale transactions 31 36 45 6 33 39
Investment security transactions 3 4 6 4 7 (3)
Noninterest income 3,362 2,596 2,125 1,566 1,542 1,360
Merger-related and restructuring charges (b) 269 281 94 - - -
SAIF special assessment (c) - 135 - - - -
Noninterest expense 5,320 4,737 4,563 3,747 3,536 3,443
- --------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 2,786 2,591 2,505 2,209 1,930 1,121
Income taxes 814 875 848 712 579 278
Tax-equivalent adjustment 76 92 116 121 134 144
- --------------------------------------------------------------------------------------------------------------
Net income 1,896 1,624 1,541 1,376 1,217 699
Dividends on preferred stock - 9 26 46 46 53
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders before redemption premium 1,896 1,615 1,515 1,330 1,171 646
Redemption premium on preferred stock - - - 41 - -
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders after redemption premium $ 1,896 1,615 1,515 1,289 1,171 646
==============================================================================================================
PER COMMON SHARE DATA
Basic earnings $ 3.03 2.61 2.44 2.30 2.15 1.27
Diluted earnings 2.99 2.58 2.38 2.25 2.09 1.22
Cash dividends $ 1.22 1.10 0.98 0.86 0.75 0.64
Average common shares (In thousands)
Basic 625,649 619,237 619,777 561,442 543,321 508,730
Diluted 633,772 625,224 637,186 577,709 565,239 536,603
Average common stockholders' equity (d) $ 11,030 9,937 9,266 7,870 6,782 5,724
Common stock price
High 52 7/8 28 1/2 29 3/8 23 3/4 25 3/4 22 3/8
Low 36 5/8 25 3/4 20 5/8 19 5/8 18 7/8 14 3/4
Period-end $ 51 1/4 37 27 3/4 20 5/8 20 5/8 21 3/4
To earnings 17.14 X 14.34 11.66 9.17 9.87 17.83
To book value 271 % 217 177 146 154 186
Book value $ 18.91 17.06 15.66 14.10 13.36 11.68
BALANCE SHEET DATA
Assets 157,274 151,847 142,858 113,529 104,550 95,308
Long-term debt $ 8,042 8,060 7,374 4,242 3,675 3,733
==============================================================================================================
</TABLE>
(a) Tax-equivalent.
(b) Merger-related and restructuring charges amounted to $194 million after tax
in 1997, $181 million after tax in 1996 and $73 million after tax in 1995.
(c) The SAIF special assessment amounted to $87 million after tax in 1996.
(d) Average common stockholders' equity excludes average net unrealized gains or
losses on debt and equity securities.
T-1
<PAGE>
FINANCIAL TABLES
Table 2
NONINTEREST INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Trading account profits $ 204 131 81 52 60 40
Service charges on deposit accounts 854 734 684 580 573 525
Mortgage banking income 247 194 180 88 151 165
Capital management income 882 607 461 330 306 264
Securities available for sale transactions 31 36 45 6 33 39
Investment security transactions 3 4 6 4 7 (3)
Fees for other banking services 151 172 172 131 100 80
Equipment lease rental income 187 112 32 22 20 15
Sundry income 837 646 515 363 332 271
- ------------------------------------------------------------------------------------------------
Total noninterest income $3,396 2,636 2,176 1,576 1,582 1,396
================================================================================================
</TABLE>
Table 3
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Salaries $2,221 1,994 1,811 1,436 1,321 1,219
Other benefits 495 457 396 337 303 255
- -----------------------------------------------------------------------------------------------
Personnel expense 2,716 2,451 2,207 1,773 1,624 1,474
Occupancy 401 389 394 353 342 346
Equipment 524 448 352 270 234 208
Advertising 103 61 90 65 44 38
Telecommunications 121 113 101 76 71 70
Travel 110 99 84 61 50 40
Postage, printing and supplies 170 178 161 123 124 104
FDIC assessment 23 41 129 184 182 164
Professional fees 134 102 196 169 95 98
External data processing 94 146 101 72 90 79
Other intangible amortization 277 250 235 163 131 106
Merger-related and restructuring charges 269 281 94 - - -
SAIF special assessment - 135 - - - -
Sundry expense 647 459 513 438 549 716
- -----------------------------------------------------------------------------------------------
Total noninterest expense $5,589 5,153 4,657 3,747 3,536 3,443
===============================================================================================
Overhead efficiency ratio (a) 61 % 63 63 61 61 66
Overhead efficiency ratio, adjusted (b) 57 % 58 61 61 61 66
===============================================================================================
</TABLE>
(a) 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.
(b) These ratios are the result of reducing noninterest expense by the 1997,
1996 and 1995 merger-related and restructuring charges and the 1996 SAIF special
assessment. Additionally, net operating revenue and noninterest expense are
reduced by trust capital securities expense included in sundry expense.
T-2
<PAGE>
FINANCIAL TABLES
Table 4
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSUMER BANK
Income statement data
Net interest income $ 58 124 476 2,425 3,083
Provision for loan losses 3 9 363 147 522
Noninterest income 302 44 245 647 1,238
Noninterest expense 302 77 290 1,783 2,452
Income tax expense 20 30 25 418 493
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 35 52 43 724 854
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 30.28% 57.87 10.15 33.74 30.78
Average loans, net $ 1,182 3,928 4,731 42,669 52,510
Average deposits 826 - - 59,597 60,423
Average attributed common
equity $ 114 91 424 2,145 2,774
==================================================================================================================================
Retail Internal
Evergreen Private CAP Brokerage Mgt.
(In millions) Trust Funds Client Account Services Elimination Total
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 33 2 98 116 14 - 263
Provision for loan losses - - 3 - - - 3
Noninterest income 369 252 7 55 268 (31) 920
Noninterest expense 303 167 58 105 254 - 887
Income tax expense 36 32 16 24 10 (11) 107
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 63 55 28 42 18 (20) 186
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 44.25 % 82.56 17.68 44.82 17.83 - 33.25
Average loans, net $ 17 - 1,880 - 252 - 2,149
Average deposits 1,381 - 1,577 10,300 - - 13,258
Average attributed common
equity $ 142 67 155 93 101 - 558
==================================================================================================================================
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- ----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 57 36 209 449 754 1,505
Provision for loan losses 3 - 11 46 - 60
Noninterest income - 236 - - 102 338
Noninterest expense 27 196 75 280 435 1,013
Income tax expense 10 28 48 42 154 282
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 17 48 75 81 267 488
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 16.95 % 61.64 13.27 6.30 63.67 19.87
Average loans, net $ 1,620 - 8,145 18,184 - 27,949
Average deposits - - - - 18,608 18,608
Average attributed common
equity $ 101 78 565 1,296 419 2,459
==================================================================================================================================
</TABLE>
(Continued)
T-3
<PAGE>
FINANCIAL TABLES
Table 4
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 79 21 9 230 96 435
Provision for loan losses 1 (1) - 1 - 1
Noninterest income 226 178 94 93 202 793
Noninterest expense 214 92 60 124 189 679
Income tax expense 33 39 16 72 40 200
- --------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 57 69 27 126 69 348
- --------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 16.13 % 45.19 50.44 18.39 46.33 24.99
Average loans, net $ 2,326 646 - 8,546 3,369 14,887
Average deposits 818 212 111 2,658 21 3,820
Average attributed common
equity $ 353 152 54 684 149 1,392
==================================================================================================
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- --------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 3,083 263 1,505 435 457 5,743
Provision for loan losses 522 3 60 1 254 840
Noninterest income 1,238 920 338 793 107 3,396
Noninterest expense 2,452 887 1,013 679 558 5,589
Income tax expense 493 107 282 200 (268) 814
- --------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders after
merger-related and
restructuring charges $ 854 186 488 348 20 1,896
After-tax merger-related and
restructuring charges - - - - 194 194
- --------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders before
merger-related and
restructuring charges $ 854 186 488 348 214 2,090
- --------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 30.78 % 33.25 19.87 24.99 5.52 18.90
Average loans, net $52,510 2,149 27,949 14,887 2,934 100,429
Average deposits 60,423 13,258 18,608 3,820 3,771 99,880
Average attributed common
equity $ 2,774 558 2,459 1,392 3,875 11,058
==================================================================================================
</TABLE>
(a) Average attributed common equity excludes merger-related and restructuring
charges and average net unrealized gains or losses on debt and equity
securities. See the "Business Segments" discussion in Management's Analysis of
Operations for further information about the methodology and assumptions used
herein.
T-4
<PAGE>
FINANCIAL TABLES
Table 5
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 13.58 X 14.53 13.73 12.86 13.64 14.43
X
Return on assets 1.26 % 1.12 1.19 1.29 1.22 0.77
- -------------------------------------------------------------------------------------------------------------------
Return on total stockholders' equity (b) 17.19 % 16.17 16.26 16.44 16.66 11.13
X
Earnings retained 60.47 % 58.80 62.65 63.57 67.14 54.88
- -------------------------------------------------------------------------------------------------------------------
Internal capital growth (b) 10.39 % 9.51 10.19 10.45 11.18 6.11
===================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 35.86 % 35.06 34.60 34.16 30.25 40.61
Preferred and common shares 35.86 35.36 35.67 36.43 32.86 45.12
Net income
Common shares 39.53 40.88 36.26 34.16 30.25 40.61
Preferred and common shares 39.53 % 41.20 37.35 36.43 32.86 45.12
===================================================================================================================
SELECTED RATIOS ON
Operating earnings
Return on assets 1.39 % 1.30 1.25 1.29 1.22 0.77
Return on common
stockholders' equity (b) (c) 18.90 18.50 17.13 16.38 17.26 11.28
Net income
Return on common
stockholders' equity (b) (c) 17.19 % 16.25 16.35 16.38 17.26 11.28
===================================================================================================================
</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.
T-5
<PAGE>
FINANCIAL TABLES
Table 6
SELECTED QUARTERLY DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ------------------------------------
(In millions, except per
share data) Fourth Third Second First Fourth Third Second First
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 2,746 2,791 2,771 2,625 2,648 2,634 2,637 2,541
Interest expense 1,330 1,328 1,311 1,221 1,276 1,251 1,256 1,212
- ---------------------------------------------------------------------------------------------------------------
Net interest income 1,416 1,463 1,460 1,404 1,372 1,383 1,381 1,329
Provision for loan losses 325 175 178 162 150 124 94 81
- ---------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,091 1,288 1,282 1,242 1,222 1,259 1,287 1,248
Securities available for sale
transactions 12 10 5 4 16 2 3 15
Investment security
transactions - 2 1 - 1 - 2 1
Noninterest income 905 835 809 813 757 667 605 567
Merger-related and
restructuring charges (a) 210 - 59 - - - - 281
SAIF special assessment (b) - - - - - 135 - -
Noninterest expense 1,450 1,292 1,295 1,283 1,238 1,199 1,173 1,127
- ---------------------------------------------------------------------------------------------------------------
Income before income
taxes (benefits) 348 843 743 776 758 594 724 423
Income taxes (benefits) (14) 296 260 272 264 208 254 149
- ---------------------------------------------------------------------------------------------------------------
Net income 362 547 483 504 494 386 470 274
Dividends on preferred stock - - - - 1 1 3 4
- ---------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 362 547 483 504 493 385 467 270
===============================================================================================================
PER COMMON
SHARE DATA
Basic earnings $ 0.57 0.88 0.78 0.80 0.80 0.63 0.75 0.43
Diluted earnings 0.56 0.87 0.77 0.79 0.79 0.62 0.74 0.43
Cash dividends 0.32 0.32 0.29 0.29 0.29 0.29 0.26 0.26
Common stock price
High 52 7/8 50 11/16 47 7/8 47 3/4 38 1/2 33 7/8 32 1/4 31 3/8
Low 46 15/16 45 7/8 39 1/8 36 5/8 33 1/2 30 1/2 28 3/4 25 3/4
Period-end $51 1/4 50 1/16 46 1/4 40 1/2 37 33 3/8 30 3/8 30 1/8
===============================================================================================================
SELECTED RATIOS (c)
After merger-related and
restructuring charges and
SAIF special assessment
Return on assets (d) 0.94 % 1.43 1.28 1.40 1.33 1.06 1.28 0.78
Return on common
stockholders' equity (e) 12.29 19.63 18.09 19.15 19.23 15.70 18.73 11.14
Stockholders' equity to assets 7.77 % 7.38 7.03 7.27 6.93 6.71 6.81 7.10
===============================================================================================================
SELECTED RATIOS (c)
Before merger-related and
restructuring charges and
SAIF special assessment
Return on assets (d) 1.35 % 1.43 1.38 1.40 1.33 1.30 1.28 1.29
Return on common
stockholders' equity (e) 17.53 % 19.56 19.47 19.15 18.61 18.73 18.26 18.38
===============================================================================================================
</TABLE>
(a) Merger-related restructuring charges amounted to $194 million after tax in
1997 and $181 million after tax in 1996.
(b) The SAIF special assessment amounted to $87 million after tax in 1996.
(c) Based on average balances.
(d) Based on net income.
(e) Based on net income applicable to common stockholders, excluding average net
unrealized gains or losses on debt and equity securities.
T-6
<PAGE>
FINANCIAL TABLES
Table 7
SELECTED SIX-YEAR DATA (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (b) $ 4,240 5,065 3,630 3,570 6,277 4,549
Wholesale 3,845 399 428 933 2,431 2,642
- ---------------------------------------------------------------------------------------------------------------------
Total $ 8,085 5,464 4,058 4,503 8,708 7,191
=====================================================================================================================
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 60,738 58,098 55,745 32,677 32,786 22,528
=====================================================================================================================
FIRST UNION CORPORATION
OTHER DATA
ATMs 2,768 2,677 2,376 1,242 1,189 847
Employees 47,096 48,679 49,021 31,858 32,861 23,459
Common stockholders 120,437 103,538 89,257 54,236 58,670 37,955
=====================================================================================================================
</TABLE>
(a) 1992-1994 are not restated for pooling of interests acquisitions.
(b) Includes originations of affiliated banks.
T-7
<PAGE>
FINANCIAL TABLES
Table 8
SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 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>
MARKET VALUE
U.S. Treasury $ 175 785 1,420 178 2,558 (116) - 2,442 7.89
U.S. Government agencies 1 5,542 7,702 4 13,249 (232) 3 13,020 5.49
CMOs 317 1,794 142 - 2,253 (25) 7 2,235 3.65
State, county and municipal 6 3 20 63 92 - - 92 16.31
Other 83 2,147 176 857 3,263 (42) 10 3,231 5.35
- ---------------------------------------------------------------------------------------------------------
Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020 5.61
==================================================================================================================
MARKET VALUE
Debt securities $ 582 10,205 9,460 394 20,641 (404) 19 20,256
Sundry securities - 66 - 708 774 (11) 1 764
- ------------------------------------------------------------------------------------------------------
Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020
======================================================================================================
AMORTIZED COST
Debt securities $ 569 10,077 9,224 386 20,256
Sundry securities - 66 - 698 764
------------------------------------------------------------------------
Total $ 569 10,143 9,224 1,084 21,020
========================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.95 % 6.23 7.01 7.07 6.69
U.S. Government agencies 4.70 7.15 7.05 6.56 7.09
CMOs 7.52 6.62 5.66 - 6.68
State, county and municipal 11.42 8.79 6.52 6.47 6.86
Other 7.13 5.66 7.19 6.56 6.02
Consolidated 7.01 % 6.67 7.03 6.63 6.84
========================================================================
December 31, 1996
------------------------------------------------------------------------------------
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>
MARKET VALUE
U.S. Treasury $ 183 1,868 50 2 2,103 (9) 14 2,108 2.23
U.S. Government agencies 9 2,490 8,969 26 11,494 (43) 60 11,511 5.82
CMOs 32 928 - - 960 (5) 5 960 3.56
State, county and municipal 13 7 13 26 59 (1) - 58 10.48
Other 97 1,050 89 953 2,189 (42) 15 2,162 4.31
- ----------------------------------------------------------------------------------------------------------
Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799 5.10
=================================================================================================================
MARKET VALUE
Debt securities $ 334 6,326 9,121 187 15,968 (84) 94 15,978
Sundry securities - 17 - 820 837 (16) - 821
- ------------------------------------------------------------------------------------------------------
Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799
======================================================================================================
AMORTIZED COST
Debt securities $ 333 6,298 9,149 198 15,978
Sundry securities - 16 - 805 821
- --------------------------------------------------------------------------
Total $ 333 6,314 9,149 1,003 16,799
==========================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.79 % 5.93 7.26 7.93 6.04
U.S. Government agencies 6.07 6.86 6.98 8.04 6.95
CMOs 7.86 7.34 - - 7.35
State, county and municipal 10.12 12.01 8.41 7.30 8.68
Other 7.76 6.14 8.08 5.64 6.08
Consolidated 7.28 % 6.54 6.99 5.76 6.75
==========================================================================
</TABLE>
T-8
<PAGE>
FINANCIAL TABLES
- --------------------------------------------------------------------------------
Included in "U.S. Government agencies" and "Other" at December 31, 1997,
are $2.7 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 December 31, 1997, these securities had a weighted average maturity of
3.75 years and a weighted average yield of 5.31 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.57
percent based on a weighted average funding cost differential of (1.26) 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 December 31, 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 forward commitments to purchase securities at a cost of $6.4
billion that had a market value of $6.4 billion at December 31, 1997. Gross
gains and losses realized on the sale of debt securities in 1997 were $51
million and $43 million, respectively, and gross gains on sundry securities $23
million. Gross gains and losses realized on the sale of debt securities in 1996
were $159 million and $125 million, respectively, and gross gains on sundry
securities $2 million.
T-9
<PAGE>
FINANCIAL TABLES
Table 9
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 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>
CARRYING VALUE
U.S. Government agencies $ - 703 313 - 1,016 25 (1) 1,040 4.33
CMOs 30 337 - - 367 9 - 376 2.92
State, county and municipal 63 172 187 302 724 112 - 836 8.31
Other 2 12 34 20 68 2 - 70 5.98
- ---------------------------------------------------------------------------------------------------------
Total $ 95 1,224 534 322 2,175 148 (1) 2,322 5.46
=========================================================================================================
CARRYING VALUE
Debt securities $ 95 1,224 534 303 2,156 148 (1) 2,303
Sundry securities - - - 19 19 - - 19
- ----------------------------------------------------------------------------------------------
Total $ 95 1,224 534 322 2,175 148 (1) 2,322
==============================================================================================
MARKET VALUE
Debt securities $ 96 1,262 576 369 2,303
Sundry securities - - - 19 19
- ----------------------------------------------------------------------
Total $ 96 1,262 576 388 2,322
======================================================================
WEIGHTED AVERAGE
YIELD
U.S. Government agencies - % 7.71 6.98 - 7.48
CMOs 7.61 7.66 - - 7.66
State, county and municipal 10.68 10.81 11.65 11.69 11.38
Other 7.83 8.15 9.66 5.03 7.99
Consolidated 9.66 % 8.13 8.78 11.28 8.83
======================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------
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 $ - 776 318 - 1,094 22 (3) 1,113 4.68
CMOs 67 414 - - 481 8 - 489 2.72
State, county and municipal 61 219 145 380 805 105 (1) 909 8.73
Other 1 11 9 100 121 4 - 125 15.84
- -------------------------------------------------------------------------------------------------------
Total $ 129 1,420 472 480 2,501 139 (4) 2,636 5.93
=================================================================================================================
CARRYING VALUE
Debt securities $ 129 1,420 472 426 2,447 139 (4) 2,582
Sundry securities - - - 54 54 - - 54
- ---------------------------------------------------------------------------------------------------
Total $ 129 1,420 472 480 2,501 139 (4) 2,636
===================================================================================================
MARKET VALUE
Debt securities $ 130 1,456 494 502 2,582
Sundry securities - - - 54 54
- ------------------------------------------------------------------------
Total $ 130 1,456 494 556 2,636
========================================================================
WEIGHTED AVERAGE
YIELD
U.S. Government agencies - % 7.95 7.18 - 7.72
CMOs 7.47 7.67 - - 7.64
State, county and municipal 10.29 10.74 11.11 11.68 11.22
Other 7.59 7.72 7.81 7.43 7.49
Consolidated 8.80 % 8.29 8.40 10.80 8.82
========================================================================
</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 December 31, 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 December
31, 1997. Gross gains realized on calls of sundry securities in 1997 were $3
million. In 1996, gross gains and losses realized on repurchase agreement
underdeliveries and calls of investment securities were $5 million and $1
million, respectively.
T-10
<PAGE>
FINANCIAL TABLES
Table 10
LOANS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 28,111 25,997 26,812 22,053 19,691 16,751
Real estate - construction and other 2,386 2,919 2,742 2,052 2,138 2,489
Real estate - mortgage 8,576 9,758 10,359 9,473 9,282 8,699
Lease financing 8,056 5,951 4,116 1,921 1,287 1,442
Foreign 1,431 1,087 653 527 417 392
- ---------------------------------------------------------------------------------------------------------------------------
Total commercial 48,560 45,712 44,682 36,026 32,815 29,773
- ---------------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 25,382 29,108 27,493 21,062 18,206 14,323
Installment loans - Bankcard (a) 2,708 5,620 3,830 4,345 2,155 -
Installment loans - other 19,297 20,827 19,759 15,492 14,497 15,965
Vehicle leasing 4,312 3,480 2,664 1,889 1,161 855
- ---------------------------------------------------------------------------------------------------------------------------
Total retail 51,699 59,035 53,746 42,788 36,019 31,143
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 100,259 104,747 98,428 78,814 68,834 60,916
- ---------------------------------------------------------------------------------------------------------------------------
UNEARNED INCOME
Loans 627 521 477 420 335 384
Lease financing 2,759 1,910 1,221 563 236 231
- ---------------------------------------------------------------------------------------------------------------------------
Total unearned income 3,386 2,431 1,698 983 571 615
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net $ 96,873 102,316 96,730 77,831 68,263 60,301
===========================================================================================================================
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts. Data is not available prior to 1993.
Table 11
CERTAIN COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------
Real
Commercial, Estate-
Financial Construction Real
and and Estate-
(In millions) Agricultural Other Mortgage Foreign Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED RATE
1 year or less $ 1,352 33 603 197 2,185
1-5 years 2,300 99 1,813 - 4,212
After 5 years 1,354 107 1,130 - 2,591
- ----------------------------------------------------------------------------------------
Total 5,006 239 3,546 197 8,988
- ----------------------------------------------------------------------------------------
ADJUSTABLE RATE
1 year or less 9,422 688 780 1,120 12,010
1-5 years 11,091 1,178 2,625 112 15,006
After 5 years 2,592 281 1,625 2 4,500
- ----------------------------------------------------------------------------------------
Total 23,105 2,147 5,030 1,234 31,516
- ----------------------------------------------------------------------------------------
Total $ 28,111 2,386 8,576 1,431 40,504
=======================================================================================
</TABLE>
T-11
<PAGE>
FINANCIAL TABLES
Table 12
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year $ 1,502 1,638 1,578 1,622 1,551 1,461
Provision for loan losses 840 449 259 179 370 643
Allowance relating to loans acquired, transferred
to accelerated disposition or sold (495) 50 193 59 191 51
Loan losses, net (635) (635) (392) (282) (490) (604)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,212 1,502 1,638 1,578 1,622 1,551
========================================================================================================================
as % of loans, net 1.25 % 1.47 1.69 2.03 2.38 2.57
========================================================================================================================
as % of nonaccrual and restructured loans 195 % 215 239 248 151 105
========================================================================================================================
as % of nonperforming assets 168 % 187 186 178 115 76
========================================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 83 148 114 151 232 277
Real estate - construction and other 31 65 23 16 76 108
Real estate - mortgage 37 28 71 80 134 109
Installment loans - Bankcard (a) 396 315 195 73 64 -
Installment loans - Bankcard special adjustment (b) - 34 - - - -
Installment loans - other and Vehicle leasing 206 204 123 95 107 208
- ------------------------------------------------------------------------------------------------------------------------
Total 753 794 526 415 613 702
- ------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 42 77 67 68 47 41
Real estate - construction and other 10 16 8 3 9 2
Real estate - mortgage 1 1 12 16 19 6
Installment loans - Bankcard (a) 27 33 17 12 10 -
Installment loans - other and Vehicle leasing 38 32 30 34 38 49
- ------------------------------------------------------------------------------------------------------------------------
Total 118 159 134 133 123 98
- ------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 635 635 392 282 490 604
========================================================================================================================
as % of average loans, net 0.63 % 0.65 0.44 0.40 0.78 1.03
========================================================================================================================
as % of average loans, net,
excluding Bankcard (a) 0.28 % 0.35 0.25 0.32 0.72 -
========================================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 236 227 340 280 423 642
Commercial real estate loans 76 135 - - - -
Consumer real estate loans 186 199 - - - -
Installment loans 124 123 82 - - -
Real estate loans - - 260 337 610 735
- ------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 622 684 682 617 1,033 1,377
Restructured loans 2 14 4 19 40 105
Foreclosed properties 99 104 194 251 338 565
- ------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 723 802 880 887 1,411 2,047
========================================================================================================================
as % of loans, net and foreclosed properties 0.75 % 0.78 0.91 1.14 2.06 3.36
========================================================================================================================
Accruing loans past due 90 days $ 232 361 356 272 213 240
========================================================================================================================
</TABLE>
(a) Data is not available prior to 1993.
(b) Installment loans - Bankcard special adjustment includes a 1996 one-time
charge-off related to an anticipated regulatory change that would reduce the
period delinquent loans could be held before charge-off.
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 in Management's Analysis of Operations do
not (i) represent or result from trends or uncertainties that management expects
will materially affect 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-12
<PAGE>
FINANCIAL TABLES
Table 13
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ---------------- ----------------- ----------------- ---------------
Loans Loans Loans Loans Loans
% to % to % to % to % to
Total Total Total Total Total
(In millions) Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt. Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 245 28 % $ 267 25 % $ 431 27 % $ 504 28 % $ 413 28 %
Real estate -
Construction and
other 25 2 61 3 70 3 93 3 171 3
Mortgage 96 34 217 37 325 38 292 39 370 40
Installment loans -
Bankcard 158 3 354 5 246 4 188 5 101 3
Other and Vehicle
leasing 141 24 229 23 271 23 194 22 220 23
Lease financing 8 8 33 6 17 4 7 2 7 2
Foreign 5 1 4 1 35 1 24 1 8 1
Unallocated 534 - 337 - 243 - 276 - 332 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,212 100 % $ 1,502 100 $ $ 1,638 100 % $ 1,578 100 % $ 1,622 100 %
====================================================================================================================================
</TABLE>
(a) The allocation of the allowance for loan losses to the respective
classifications is not necessarily indicative of future losses or future
allocations. First Fidelity allocated all allowance amounts to specific loan
classifications in 1993 through 1995, and as a result, conforming
reclassifications of allocated amounts to the unallocated portion of the
allowance occurred in 1996. See the "Loans" and the "Provision and Allowance for
Loan Losses" discussions in Management's Analysis of Operations and the
"Allowance for Loan Losses" discussion in Note 1 of Notes to Consolidated
Financial Statements.
Table 14
INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
(In millions) 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE AND OTHER SERVICING ASSETS $ 421 282 208 134 91 187
========================================================================================================================
CREDIT CARD PREMIUM $ 24 35 44 58 76 71
========================================================================================================================
OTHER INTANGIBLE ASSETS
Goodwill $ 2,247 2,406 1,937 1,382 1,038 840
Deposit base premium 421 488 547 535 367 285
Other 6 11 13 20 27 35
- ------------------------------------------------------------------------------------------------------------------------
Total $ 2,674 2,905 2,497 1,937 1,432 1,160
========================================================================================================================
</TABLE>
T-13
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL TABLES
Table 15
FORECLOSED PROPERTIES
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------
(In millions) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreclosed properties $ 115 121 219 293
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning
of year 17 25 42 63
Provision for foreclosed properties 2 (1) (3) 14
Transfer from allowance for segregated assets - 1 - 2
Dispositions, net (3) (8) (14) (37)
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of year 16 17 25 42
- --------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 99 104 194 251
================================================================================================================================
<CAPTION>
FORECLOSED PROPERTIES
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------
(In millions) 1993 1992
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreclosed properties 401 674
- ---------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning
of year 109 38
Provision for foreclosed properties 46 132
Transfer from allowance for segregated assets 5 -
Dispositions, net (97) (61)
- ---------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of year 63 109
- ---------------------------------------------------------------------------------------------------------
Foreclosed properties, net 338 565
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Table 16
DEPOSITS
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------
(In millions) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
<S> <C> <C> <C> <C>
Noninterest-bearing $ 21,753 20,383 18,769 15,917
Savings and NOW accounts 30,118 28,869 26,795 23,263
Money market accounts 15,494 14,899 14,452 14,376
Other consumer time 29,231 33,541 33,795 27,403
- -----------------------------------------------------------------------------------------------------------------------------------
Total core deposits 96,596 97,692 93,811 80,959
Foreign 2,483 1,897 3,577 4,803
Other time 3,810 3,113 2,760 2,103
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 102,889 102,702 100,148 87,865
===================================================================================================================================
<CAPTION>
DEPOSITS
- ---------------------------------------------------------------------------
Years Ended December 31,
---------------------
(In millions) 1993 1992
- ---------------------------------------------------------------------------
CORE DEPOSITS
<S> <C> <C>
Noninterest-bearing 16,208 14,583
Savings and NOW accounts 21,661 17,653
Money market accounts 15,025 13,836
Other consumer time 25,534 27,212
- ---------------------------------------------------------------------------
Total core deposits 78,428 73,284
Foreign 1,457 513
Other time 2,000 2,359
- ---------------------------------------------------------------------------
Total deposits 81,885 76,156
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Table 17
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ---------------------------------------------------------------------------------------------------------------
December 31, 1997
-------------------------
Time Other
(In millions) Certificates Time
- ---------------------------------------------------------------------------------------------------------------
MATURITY OF
<S> <C>
3 months or less $ 3,029 -
Over 3 months through 6 months 1,552 -
Over 6 months through 12 months 1,126 -
Over 12 months 2,029 -
- -----------------------------------------------------------------------------------------------------------------
Total $ 7,736 -
================================================================================================================
</TABLE>
T-14
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 18
CAPITAL RATIOS
- --------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
<S> <C> <C> <C>
Tier 1 capital $ 10,215 7,633 6,551
Total capital 16,279 12,842 11,198
Adjusted risk-based assets 121,503 104,126 97,830
Adjusted leverage ratio assets $ 149,921 124,419 119,421
Ratios
Tier 1 capital 8.41% 7.33 6.70
Total capital 13.40 12.33 11.45
Leverage 6.81 6.13 5.49
Stockholders' equity to assets
Year-end 7.65 7.14 6.86
Average 7.37% 6.82 7.23
==============================================================================================================
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank (North Carolina) 6.97% 6.43 6.46
First Union National Bank (New Jersey) 10.70 8.98 9.16
First Union Bank of Delaware 11.83 13.61 25.45
First Union Home Equity Bank 10.95 8.40 7.50
Total capital
First Union National Bank (North Carolina) 10.20 10.20 10.15
First Union National Bank (New Jersey) 13.99 12.22 10.95
First Union Bank of Delaware 13.09 14.87 26.74
First Union Home Equity Bank 13.20 10.77 10.09
Leverage
First Union National Bank (North Carolina) 6.02 5.95 5.72
First Union National Bank (New Jersey) 7.06 7.06 7.43
First Union Bank of Delaware 6.24 10.60 17.20
First Union Home Equity Bank 10.16% 7.84 6.48
==============================================================================================================
<CAPTION>
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
(In millions) 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capita
<S> <C> <C> <C> <C>
Tier 1 capital 4,467 4,343 3,189
Total capital 7,451 6,961 4,948
Adjusted risk-based assets 57,594 47,529 34,574
Adjusted leverage ratio assets 73,011 70,786 48,672
Ratios
Tier 1 capital 7.76 9.14 9.22
Total capital 12.94 14.64 14.31
Leverage 6.12 6.13 6.55
Stockholders' equity to assets
Year-end 6.98 7.36 6.99
Average 7.52 7.11 6.89
=============================================================================================================
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank (North Carolina) 7.32 8.24 7.22
First Union National Bank (New Jersey) - - -
First Union Bank of Delaware - - -
First Union Home Equity Bank 7.60 - -
Total capital
First Union National Bank (North Carolina) 10.69 11.35 10.60
First Union National Bank (New Jersey) - - -
First Union Bank of Delaware - - -
First Union Home Equity Bank 12.10 - -
Leverage
First Union National Bank (North Carolina) 6.10 5.52 5.46
First Union National Bank (New Jersey) - - -
First Union Bank of Delaware - - -
First Union Home Equity Bank 7.22 - -
=============================================================================================================
</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. The 1992-1996 capital ratios presented herein have not been restated to
reflect the Signet pooling of interests acquisition.
(b) By the end of 1997, all First Union bank affiliates were merged into
First Union National Bank (North Carolina), except those included herein.
Accordingly, historical information related to such affiliates is not presented,
and historical ratios for First Union National Bank (North Carolina) are not
restated. On February 26, 1998, First Union National Bank (New Jersey) and First
Union National Bank (North Carolina) were combined. The combined banks will
operate as First Union National Bank.
T-15
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------------------ ----------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value
- -----------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
<S> <C> <C> <C> <C>
Interest rate swaps $ 11,655 6.46 % 5.87 % 3.59
Carrying amount $ 4
Unrealized gross gain 121
Unrealized gross loss (7)
----------
Total 118
----------
Forward interest rate swaps 725 6.20 - 2.97
Carrying amount -
Unrealized gross gain 1
Unrealized gross loss -
----------
Total 1
----------
Interest rate floors 500 6.07 5.84 1.19
Carrying amount 3
Unrealized gross gain -
Unrealized gross loss (1)
----------
Total 2
- ---------------------------------------------- ----------
Total asset rate
conversions $ 12,880 6.43 % 5.86 % 3.46 $ 121
==================================================================================================================
<CAPTION>
Comments
----------------------------------------
<S> <C>
Interest rate swaps Converts floating rate loans to fixed
rate. Adds to liability sensitivity.
Similar characteristics to a fixed
income security funded with variable
rate liabilities. Includes $1.4 billion
of callable swaps expected to mature in
December 1999 if swap rates are below
6.99 percent.
Forward interest swaps Converts floating rate loans to fixed
rates in future periods. Effective
December 1998 with put options on
forward swaps referenced under
"Rate Sensitivity Hedges" linked to
this item.
Interest rate floors Paid a premium to convert floating
rate loans to fixed rate when 3
month LIBOR is below an average
of 6.07 percent.
</TABLE>
<TABLE>
<CAPTION>
LIABILITY RATE
CONVERSIONS
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 6,883 7.05 % 5.93 % 9.37
Carrying amount $ 12
Unrealized gross gain 258
Unrealized gross loss (7)
Total 263
----------
Interest rate floors 250 4.43 - 3.45
Carrying amount 1
Unrealized gross gain -
Unrealized gross loss (1)
----------
Total -
- ---------------------------------------------- ----------
Total liability rate
conversions $ 7,133 6.96 % 5.93 % 9.17 $ 263
=================================================================================================================
<CAPTION>
<S> <C>
Interest rate swaps Converts $4.6 billion of fixed rate
long-term debt to floating rate by
matching the terms of the swap to the
debt issue. Also converts $648 million
of fixed rate CDs to variable rate,
$650 million of fixed rate bank notes
to floating rate and $1 billion of
fixed rate trust capital securities to
variable rate.
Interest rate floors $250 million floor offsets a
corresponding rate purchased floor
in long-term debt.
</TABLE>
(Continued)
T-16
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------------------ ----------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value
- ------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
<S> <C> <C> <C> <C>
Put options on forward swaps $ 725 - % 6.20 % 0.95
Carrying amount $ 5
Unrealized gross gain -
Unrealized gross loss -
----------
Total 5
----------
Interest rate caps (LIBOR) 158 5.88 7.03 1.86
Carrying amount 1
Unrealized gross gain -
Unrealized gross loss (1)
----------
Total -
----------
Interest rate caps (CMT) 2,200 - 5.70 3.96
Carrying amount 26
Unrealized gross gain -
Unrealized gross loss -
----------
Total 26
----------
Short eurodollar futures 12,301 - 6.13 0.42
Carrying amount -
Unrealized gross gain -
Unrealized gross loss (10)
----------
Total (10)
----------
Short Deutschemark futures 56 - 3.94 0.21
Carrying amount -
Unrealized gross gain -
Unrealized gross loss -
----------
Total -
----------
Long eurodollar futures 2,000 6.62 - 1.33
Carrying amount -
Unrealized gross gain 3
Unrealized gross loss -
----------
Total 3
----------
Call Options on eurodollar
futures 768 6.79 - 0.46
Carrying amount -
Unrealized gross gain 2
Unrealized gross loss -
----------
Total 2
----------
CMT Floor 100 6.42 5.84 3.34
Carrying amount 1
Unrealized gross gain 1
Unrealized gross loss -
----------
Total 2
- ------------------------------------------------ ----------
Total rate sensitivity
hedges $ 18,308 6.61 % 6.07 % 1.00 $ 28
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Comments
---------------------------------------
<S> <C>
Put options on forward swaps Paid a premium for the right to
terminate $725 million of forward
interest rate swaps based on
interest rates in effect in December
1998. Reduces liability sensitivity.
Interest rate caps (LIBOR) Paid a premium for the right to lock
in 3 month LIBOR reset rates on
pay variable rate swaps.
Interest rate caps (CMT) Paid a premium for the right to lock
in 1 year Treasury rates for the
purpose of converting floating rate
liabilities to fixed rate.
Short eurodollar futures Locks in 3 month LIBOR reset rates
on pay variable rate swaps. $4.8
billion effective March 1998 and
June 1998 and $2.8 billion effective
September 1998.
Short Deutschemark futures Locks in 3 month Deutschemark
funding levels in March 1998 for a
portion of the German bonds in the
foreign bond portfolio.
Long eurodollars futures Converts floating rate LIBOR-based
loans to fixed rate. Adds to liability
sensitivity. Similar characteristics to
fixed income security funded with
variable rate liabilities. $500 million
effective December 1998, March
1999, June 1999 and September
1999.
Call Options on eurodollars
futures Paid a premium for the right to buy
Eurodollar futures that convert
floating rate LIBOR-based loans to
fixed rate. Interest rate risk limited
to premium paid. $256 million
effective March 1998, June 1998
and September 1998.
CMT Floors First Union Mortgage Corporation
paid a premium for a CMT floor in
order to offset the decline in value
of mortgage servicing in a falling
rate environment.
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. (b) Estimated maturity approximates
average life except for eurodollar futures, average life 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 reset at predetermined reset dates over the life of the contract. Rates
shown are the pay rates in effect as of December 31, 1997. Weighted average
receive rates are fixed rates set at the time the contract was transacted.
Carrying amount includes accrued interest receivable/payable and unamortized
premiums paid/received.
(Continued)
T-17
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ----------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------------------ --------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value
- ------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
<S> <C> <C> <C> <C>
Interest rate swaps $ 20,330 6.24 % 5.52 % 1.89
Carrying amount $ 3
Unrealized gross gain 129
Unrealized gross loss (23)
----------
Total 109
----------
Interest rate floors 550 5.98 5.50 1.96
Carrying amount 5
Unrealized gross gain -
Unrealized gross loss -
----------
Total 5
----------
Forward bullet interest
rate swaps 57 7.83 - 1.21
Carrying amount -
Unrealized gross gain 1
Unrealized gross loss -
----------
Total 1
- ---------------------------------------------- ----------
Total asset rate
conversions $ 20,937 6.24 % 5.50 % 1.89 $ 115
====================================================================================================================
<CAPTION>
Comments
---------------------------------------
<S> <C>
Interest rate swaps Converts floating rate loans to fixed
rate. Adds to liability sensitivity.
Similar characteristics to a fixed
income security funded with variable
rate liabilities. Includes $4.8 billion
of indexed amortizing swaps, with $1.3
billion maturing within 1 year and $3.5
billion within 4 years.
Interest rate floors Paid a premium to convert floating
rate loans to fixed rate when 3
month LIBOR is below 6.00
percent (approximately).
Forward bullet interest
rate swaps Converts floating rate loans to fixed
rates in future periods. Effective
March 1997.
<CAPTION>
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 7,811 6.81 % 5.68 % 5.57
Carrying amount $ 21
Unrealized gross gain 122
Unrealized gross loss (53)
----------
Total 90
----------
Other financial instruments 250 4.42 - 4.45
Carrying amount 2
Unrealized gross gain -
Unrealized gross loss (2)
----------
Total -
- ---------------------------------------------- ----------
Total liability rate
conversions $ 8,061 6.74 % 5.50 % 5.54 $ 90
=================================================================================================================
ASSET HEDGES
Forward sale of Treasury notes $ 662 - % 5.74 % 0.03
Carrying amount $ -
Unrealized gross gain 5
Unrealized gross loss -
----------
Total 5
- ---------------------------------------------- ----------
Total asset hedges $ 662 - % 5.74 % 0.03 $ 5
=================================================================================================================
<CAPTION>
<S> <C>
Interest rate swaps Converts $4.2 billion of fixed rate
long-term debt to floating rate by
matching the terms of the swap to the
debt issue. Rate sensitivity remains
unchanged due to the direct linkage of
the swap to the debt issue. Also
converts $2.6 billion of fixed rate CDs
to variable rate and $1.1 billion of
fixed rate bank notes to floating rate.
Other financial instruments $150 million floor offsets a
corresponding rate floor in long-
term debt.
Forward sale of treasury notes Sold U.S. Treasury notes forward to
hedge the market value of similar
U.S. Treasury notes in the available
for sale portfolio.
</TABLE>
(Continued)
T-18
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------------------ --------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value
- -----------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
<S> <C> <C> <C> <C> <C> <C>
Put options on eurodollar
futures $ 12,678 - % 6.37% 0.31
Carrying amount $ 6
Unrealized gross gain -
Unrealized gross loss (5)
----------
Total 1
----------
Interest rate caps 168 5.54 7.03 2.70
Carrying amount 1
Unrealized gross gain -
Unrealized gross loss -
----------
Total 1
----------
Short futures 15,062 - 5.84 0.22
Carrying amount -
Unrealized gross gain -
Unrealized gross loss (11)
----------
Total (11)
----------
CMT floor 100 6.42 6.37 4.34
Carrying amount 1
Unrealized gross gain 1
Unrealized gross loss -
----------
Total 2
----------
Long eurodollar futures 14,550 6.29 - 1.28
Carrying amount -
Unrealized gross gain 8
Unrealized gross loss (2)
----------
Total 6
- ---------------------------------------------- ----------
Total rate sensitivity
hedges $ 42,558 6.28 % 6.09 % 0.63 $ (1)
=======================================================================================================================
<CAPTION>
Comments
----------------------------------------
<S> <C>
Put options on eurodollar
futures Paid a premium for the right to lock in
the 3 month LIBOR reset rates on pay
variable rate swaps. $7.6 billion
effective March 1997; $5.1 billion
effective June 1997.
Interest rate caps Paid a premium for the right to lock
in 3 month LIBOR reset rates on
pay variable rate swaps.
Short futures Locks in 3 month LIBOR reset rates
on pay variable rate swaps. $15.0
billion effective March 1997;
$89 million effective June 1997.
CMT floor First Union Mortgage Corporation
paid a premium for a CMT floor in
order to offset the decline in value of
mortgage servicing in a falling rate
environment.
Long eurodollar futures Converts floating rate LIBOR-based
loans to fixed rate. Adds to liability
sensitivity. Similar characteristics to
fixed income security funded with
variable rate liabilities. $4.6 billion
effective September 1997; $2.0 billion
effective December 1997, March 1998,
June 1998 and September 1998; $500
million effective December 1998, March
1999, June 1999 and September 1999.
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. (b) Estimated maturity approximates
duration except for forward bullets, average duration of 1.0 years; and 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 December 31, 1996. 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-19
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 20
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- -------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
<S> <C> <C> <C> <C> <C>
Notional amount $ 1,072 601 8,429 2,778 -- 12,880
Weighted average receive rate 5.44% 5.96 6.59 6.41 -- 6.43
Estimated fair value $ (6) 1 116 10 -- 121
- -------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 953 338 954 3,300 1,588 7,133
Weighted average receive rate 6.01% 7.83 7.41 6.82 7.35 6.96
Estimated fair value $ 1 10 45 123 84 263
- -------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 13,680 1,560 3,068 -- -- 18,308
Weighted average receive rate 6.66% 6.60 6.26 -- -- 6.61
Estimated fair value $ (7) 3 32 -- -- 28
==========================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 11,083 1,532 8,322 -- -- 20,937
Weighted average receive rate 6.12% 5.28 6.57 -- -- 6.24
Estimated fair value $ 34 (21) 102 -- -- 115
--------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 1,370 1,414 767 3,950 560 8,061
Weighted average receive rate 6.59% 5.98 7.44 6.93 6.74 6.74
Estimated fair value $ 11 5 30 58 (14) 90
--------------------------------------------------------------------------------------------------------------------
ASSET HEDGES
Notional amount $ 662 -- -- -- -- 662
Weighted average receive rate -% -- -- -- -- --
Estimated fair value $ 5 -- -- -- -- 5
--------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 34,300 6,555 1,703 -- -- 42,558
Weighted average receive rate 5.90% 6.58 6.55 -- -- 6.28
Estimated fair value $ (10) 6 3 -- -- (1)
=========================================================================================================================
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. Pay rates are generally based on one
to six month LIBOR and reset at predetermined reset dates. Current pay rates are
not necessarily indicative of future pay rates, and therefore, they have been
excluded from the above table. Weighted average pay rates are indicated in Table
19.
T-20
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 21
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, 1995 $ 18,543 7,432 1,016 29,674 56,665
Additions 7,740 2,583 662 80,229 91,214
Maturities/Amortizations (5,241) (1,954) (697) (41,023) (48,915)
Terminations (105) - (319) (26,322) (26,746)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 20,937 8,061 662 42,558 72,218
Additions 3,694 1,628 - 41,480 46,802
Maturities/Amortizations (11,251) (1,725) (662) (51,744) (65,382)
Terminations (500) (831) - (13,986) (15,317)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 12,880 7,133 - 18,308 38,321
===================================================================================================================================
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-21
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
Table 22
INTEREST DIFFERENTIAL
- --------------------------------------------------------------------------------------------------------
1997 Compared to 1996
----------------------------------------------
Interest
Income/ Variance
Expense Attributable to (b)
--------------------------------
(In millions) Variance Rate Volume
- --------------------------------------------------------------------------------------------------------
EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing bank balances $ 12 (1) 13
Federal funds sold and securities
purchased under resale agreements 31 14 17
Trading account assets (a) 6 (7) 13
Securities available for sale (a) (18) 47 (65)
Investment securities (a)
U.S. Government and other (16) (1) (15)
State, county and municipal (21) 1 (22)
- --------------------------------------------------------------------------------------------------------
Total investment securities (37) - (37)
- --------------------------------------------------------------------------------------------------------
Loans (a) 463 181 282
- --------------------------------------------------------------------------------------------------------
Total earning assets $ 457 234 223
========================================================================================================
INTEREST-BEARING LIABILITIES
Deposits 74 72 2
Short-term borrowings 96 44 52
Long-term debt 25 19 6
- --------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 195 135 60
========================================================================================================
Net interest income $ 262 99 163
- --------------------------------------------------------------------------------------------------------
<CAPTION>
1996 Compared to 1995
--------------------------------------
Interest
Income/ Variance
Expense Attributable to (b)
------------------------
(In millions) Variance Rate Volume
- ----------------------------------------------------------------------------------------------
EARNING ASSETS
<S> <C> <C> <C>
Interest-bearing bank balances (21) - (21)
Federal funds sold and securities
purchased under resale agreements 189 (26) 215
Trading account assets (a) 185 11 174
Securities available for sale (a) 451 26 425
Investment securities (a)
U.S. Government and other (300) 29 (329)
State, county and municipal (59) (2) (57)
- ----------------------------------------------------------------------------------------------
Total investment securities (359) 27 (386)
- ----------------------------------------------------------------------------------------------
Loans (a) 438 (187) 625
- ----------------------------------------------------------------------------------------------
Total earning assets 883 (149) 1,032
==============================================================================================
INTEREST-BEARING LIABILITIES
Deposits 115 (6) 121
Short-term borrowings 370 (151) 521
Long-term debt 86 (30) 116
- ----------------------------------------------------------------------------------------------
Total interest-bearing liabilities 571 (187) 758
==============================================================================================
Net interest income 312 38 274
=============================================================================================
</TABLE>
(a) Income 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 state tax rates
of 7.5 percent in 1997, and 7.75 percent in 1996 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 1997, and 10.75 percent
in 1996 in Connecticut.
(b) Changes attributable to rate/volume are allocated to both rate and volume on
an equal basis.
T-22
<PAGE>
FINANCIAL TABLES
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1997 YEAR ENDED 1996
---------------------------------------------- ----------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing bank balances $ 384 19 5.05% $ 135 7 5.64%
Federal funds sold and securities
purchased under resale agreements 7,082 390 5.50 6,772 359 5.30
Trading account assets (a) (d) 4,892 318 6.49 4,699 312 6.64
Securities available for sale (a) (d) 18,415 1,278 6.94 19,360 1,296 6.69
Investment securities (a) (d)
U.S. Government and other 1,545 116 7.46 1,754 132 7.51
State, county and municipal 756 83 11.00 960 104 10.81
- ------------------------------------------------------------------------ ------------------------
Total investment securities 2,301 199 8.63 2,714 236 8.68
- ------------------------------------------------------------------------- ------------------------
Loans (a) (b) (d)
Commercial
Commercial, financial and agricultural 26,514 2,016 7.61 25,347 1,971 7.78
Real estate - construction and other 2,695 229 8.49 2,973 255 8.58
Real estate - mortgage 9,188 793 8.63 9,929 843 8.49
Lease financing 3,844 397 10.31 2,742 242 8.83
Foreign 1,228 77 6.31 757 47 6.24
- ------------------------------------------------------------------------ -----------------------
Total commercial 43,469 3,512 8.08 41,748 3,358 8.04
- ------------------------------------------------------------------------- ------------------------
Retail
Real estate - mortgage 26,984 2,115 7.84 27,652 2,143 7.75
Installment loans - Bankcard (c) 5,330 820 15.38 4,922 665 13.51
Installment loans - other and
Vehicle leasing 24,646 2,358 9.57 22,859 2,176 9.52
- ------------------------------------------------------------------------ ------------------------
Total retail 56,960 5,293 9.29 55,433 4,984 8.99
- ------------------------------------------------------------------------- ------------------------
Total loans 100,429 8,805 8.77 97,181 8,342 8.58
- ------------------------------------------------------------------------- ------------------------
Total earning assets 133,503 11,009 8.25 130,861 10,552 8.06
========================= ================
Cash and due from banks 5,871 5,775
Other assets 11,001 8,855
- ------------------------------------------------------------
Total assets $ 150,375 $ 145,491
============================================================= ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 29,072 850 2.92 27,359 732 2.68
Money market accounts 14,958 457 3.06 14,593 422 2.89
Other consumer time 31,269 1,631 5.22 33,159 1,732 5.22
Foreign 1,785 99 5.53 2,273 119 5.25
Other time 3,607 227 6.28 3,252 185 5.69
- ------------------------------------------------------------------------- ------------------------
Total interest-bearing deposits 80,691 3,264 4.04 80,636 3,190 3.96
Federal funds purchased and securities
sold under repurchase agreements 21,272 1,067 5.01 21,194 1,051 4.96
Commercial paper 1,034 61 5.90 903 46 5.08
Other short-term borrowings 4,666 280 6.01 3,853 215 5.58
Long-term debt 7,942 518 6.52 7,860 493 6.28
- ------------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities 115,605 5,190 4.49 114,446 4,995 4.36
====================== ===============
Noninterest-bearing deposits 19,189 18,273
Other liabilities 3,534 2,710
Guaranteed preferred beneficial interests 971 47
Stockholders' equity 11,076 10,015
- ------------------------------------------------------------- -----------
Total liabilities and
stockholders' equity $ 150,375 $ 145,491
============================================================= ===========
Interest income and rate earned $ 11,009 8.25% $ 10,552 8.06%
Interest expense and equivalent rate paid 5,190 3.89 4,995 3.81
- ---------------------------------------------------------------------------------------- ---------------------
Net interest income and margin $ 5,819 4.36% $ 5,557 4.25%
======================================================================================== ====================
</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 state tax rates
of 7.5 percent in 1997, 7.75 percent in 1995 and 1996, 7.8275 percent in 1994,
and 7.905 percent in 1993 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 1995 through 1997, and 10.25 percent in 1993 and 1994 in
Washington, D.C.; 4.87 percent in 1996 and 1997 in Delaware; 6.5 percent in 1996
and 1997 in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in
Connecticut. Lease financing amounts include related deferred income taxes.
T-23
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL TABLES
-------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1995 YEAR ENDED 1994 YEAR ENDED 1993
------------------------------------------ ----------------------------------------------- ----------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid Balances Expense Paid
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 510 28 5.49% $ 1,273 65 5.11% $ 2,008 88 4.36%
2,909 170 5.83 1,391 57 4.09 1,045 33 3.15
2,014 127 6.33 1,154 68 5.87 1,075 48 4.43
12,939 845 6.53 13,542 750 5.54 8,327 418 5.02
6,353 432 6.81 5,912 355 6.01 11,147 701 6.29
1,488 163 10.94 1,806 202 11.21 1,720 198 11.51
----------------------- ------------------------ -----------------------
7,841 595 7.59 7,718 557 7.23 12,867 899 6.99
----------------------- ------------------------ -----------------------
24,675 1,960 7.94 19,797 1,549 7.82 17,631 1,364 7.73
2,491 234 9.39 1,980 154 7.77 2,543 152 5.98
10,279 917 8.92 9,441 766 8.12 8,475 661 7.80
2,076 176 8.48 861 77 8.90 793 77 9.69
619 44 7.04 548 30 5.40 385 18 4.85
----------------------- ------------------------ -----------------------
40,140 3,331 8.30 32,627 2,576 7.89 29,827 2,272 7.62
----------------------- ------------------------ -----------------------
23,696 1,811 7.64 19,172 1,407 7.34 14,864 1,168 7.86
4,960 701 14.12 2,949 416 14.09 2,129 325 15.24
21,182 2,061 9.73 15,978 1,456 9.12 16,176 1,485 9.18
----------------------- ------------------------ -----------------------
49,838 4,573 9.17 38,099 3,279 8.61 33,169 2,978 8.98
----------------------- ------------------------ -----------------------
89,978 7,904 8.78 70,726 5,855 8.28 62,996 5,250 8.33
----------------------- ------------------------ -----------------------
116,191 9,669 8.32 95,804 7,352 7.67 88,318 6,736 7.63
======================== ========================= ======================
5,527 4,862 5,093
7,558 5,747 6,199
----------- ----------- -----------
$ 129,276 $ 106,413 $ 99,610
=========== =========== ===========
25,364 663 2.62 21,786 464 2.13 18,858 408 2.16
14,631 435 2.98 14,620 352 2.41 14,264 328 2.30
31,634 1,620 5.12 25,216 1,042 4.13 26,444 1,091 4.13
3,195 184 5.77 1,969 91 4.61 798 28 3.48
2,768 173 6.24 1,963 97 4.95 2,078 89 4.30
----------------------- ------------------------ -----------------------
77,592 3,075 3.96 65,554 2,046 3.12 62,442 1,944 3.11
12,396 706 5.69 8,869 382 4.31 8,207 295 3.59
1,053 60 5.71 849 35 4.15 484 13 2.64
2,878 176 6.11 1,463 79 5.36 810 32 3.93
6,072 407 6.71 4,009 251 6.26 3,598 198 5.51
----------------------- ------------------------ -----------------------
99,991 4,424 4.42 80,744 2,793 3.46 75,541 2,482 3.29
========================= ========================= ======================
17,050 15,206 14,388
2,821 2,190 2,379
- - -
9,414 8,273 7,302
----------- ----------- -----------
$ 129,276 $ 106,413 $ 99,610
============= ============ ===========
$ 9,669 8.32% $ 7,352 7.67% $ 6,736 7.63%
4,424 3.81 2,793 2.92 2,482 2.81
---------------------- ---------------------- -------------------
$ 5,245 4.51% $ 4,559 4.75% $ 4,254 4.82%
======================== ========================== ======================
</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 for all
years. (d) Tax-equivalent adjustments included in trading account assets,
securities available for sale, investment securities, commercial, financial and
agricultural loans, and lease financing are (in millions) $3, $11, $28, $29 and
$5, respectively, in 1997; and $10, $14, $36, $29 and $3, respectively, in 1996.
T-24
<PAGE>
STATEMENT OF FINANCIAL RESPONSIBILITY
FIRST UNION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
- --------------------------------------------------------------------------------
Management of First Union Corporation and its subsidiaries (the "Corporation")
is committed to the highest standards of quality customer service and the
enhancement of stockholder value. Management expects the Corporation's employees
to respect its customers and to assign the highest priority to customer needs.
The accompanying consolidated financial statements were prepared in
conformity with generally accepted accounting principles and include, as
necessary, best estimates and judgments by management. Other financial
information contained in this annual report is presented on a basis consistent
with the consolidated financial statements unless otherwise indicated.
To ensure the integrity, objectivity and fairness of the information in
these consolidated financial statements, management of the Corporation has
established and maintains internal control supplemented by a program of internal
audits. The internal control is designed to provide reasonable assurance that
assets are safeguarded and transactions are executed, recorded and reported in
accordance with management's intentions and authorizations and to comply with
applicable laws and regulations. To enhance the reliability of internal control,
management recruits and trains highly qualified personnel, and maintains sound
risk management practices.
The consolidated financial statements have been audited by KPMG Peat
Marwick LLP, independent auditors, in accordance with generally accepted
auditing standards. KPMG Peat Marwick LLP reviews the results of its audit with
both management and the Audit Committee of the Board of Directors of the
Corporation. The Audit Committee, composed entirely of outside directors, meets
periodically with management, internal auditors and KPMG Peat Marwick LLP to
determine that each is fulfilling its responsibilities and to support actions to
identify, measure and control risks and augment internal controls.
Edward E. Crutchfield
Chairman and
Chief Executive Officer
Robert T. Atwood
Executive Vice President and
Chief Financial Officer
January 21, 1998
C-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
FIRST UNION CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
First Union Corporation
We have audited the consolidated balance sheets of First Union Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Union
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
January 21, 1998
C-2
<PAGE>
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------
December 31,
------------------------
(In millions, except per share data) 1997 1996
- ----------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 6,445 7,076
Interest-bearing bank balances 710 319
Federal funds sold and securities purchased under resale agreements 7,740 7,802
- --------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 14,895 15,197
- --------------------------------------------------------------------------------------------------------
Trading account assets 5,457 4,480
Securities available for sale (amortized cost $21,020 in 1997; $16,799 in 1996) 21,415 16,805
Investment securities (market value $2,322 in 1997; $2,636 in 1996) 2,175 2,501
Loans, net of unearned income ($3,386 in 1997; $2,431 in 1996) 96,873 102,316
Allowance for loan losses (1,212) (1,502)
- --------------------------------------------------------------------------------------------------------
Loans, net 95,661 100,814
- --------------------------------------------------------------------------------------------------------
Premises and equipment 4,233 4,257
Due from customers on acceptances 854 764
Other intangible assets 2,674 2,905
Other assets 9,910 4,124
- --------------------------------------------------------------------------------------------------------
Total assets $ 157,274 151,847
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 21,753 20,383
Interest-bearing deposits 81,136 82,319
- --------------------------------------------------------------------------------------------------------
Total deposits 102,889 102,702
Short-term borrowings 27,357 24,987
Bank acceptances outstanding 855 765
Other liabilities 5,108 3,906
Long-term debt 8,042 8,060
- --------------------------------------------------------------------------------------------------------
Total liabilities 144,251 140,420
- --------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in Corporation's junior subordinated
deferrable interest debentures 991 495
- --------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, $3.33-1/3 par value; authorized 750,000,000 shares, outstanding
636,393,722 shares in 1997; 640,781,862 shares in 1996 2,121 2,136
Paid-in capital 1,384 1,668
Retained earnings 8,273 7,126
Unrealized gain on debt and equity securities, net 254 2
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,032 10,932
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 157,274 151,847
========================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
C-3
<PAGE>
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
(In millions, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 8,771 8,310 7,866
Interest and dividends on securities available for sale 1,267 1,282 833
Interest and dividends on investment securities
Taxable income 114 130 416
Nontaxable income 57 70 118
Trading account interest 315 302 122
Other interest income 409 366 198
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 10,933 10,460 9,553
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,264 3,190 3,075
Interest on short-term borrowings 1,408 1,312 942
Interest on long-term debt 518 493 407
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,190 4,995 4,424
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 5,743 5,465 5,129
Provision for loan losses 840 449 259
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,903 5,016 4,870
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 204 131 81
Service charges on deposit accounts 854 734 684
Mortgage banking income 247 194 180
Capital management income 882 607 461
Securities available for sale transactions 31 36 45
Investment security transactions 3 4 6
Fees for other banking services 151 172 172
Equipment lease rental income 187 112 32
Sundry income 837 646 515
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,396 2,636 2,176
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,221 1,994 1,811
Other benefits 495 457 396
- -------------------------------------------------------------------------------------------------------------------------------
Personnel expense 2,716 2,451 2,207
Occupancy 401 389 394
Equipment 524 448 352
Advertising 103 61 90
Telecommunications 121 113 101
Travel 110 99 84
Postage, printing and supplies 170 178 161
FDIC assessment 23 41 129
Professional fees 134 102 196
External data processing 94 146 101
Other intangible amortization 277 250 235
Merger-related and restructuring charges 269 281 94
SAIF special assessment - 135 -
Sundry expense 647 459 513
- -------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,589 5,153 4,657
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,710 2,499 2,389
Income taxes 814 875 848
- -------------------------------------------------------------------------------------------------------------------------------
Net income 1,896 1,624 1,541
Dividends on preferred stock - 9 26
- -------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,896 1,615 1,515
===============================================================================================================================
PER COMMON SHARE DATA
Basic earnings $ 3.03 2.61 2.44
Diluted earnings 2.99 2.58 2.38
Cash dividends $ 1.22 1.10 0.98
AVERAGE COMMON SHARES (In thousands)
Basic 625,649 619,237 619,777
Diluted 633,772 625,224 637,186
===============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
C-4
<PAGE>
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
(Shares in thousands, Preferred Stock Common Stock Paid-in Retained Debt and
---------------------------------------------- Equity
dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
as originally reported 5,213 $ 230 285,361 $ 951 2,361 5,022 (290) 8,274
Common stock issued in
1997 two-for-one stock split - - 285,361 951 (951) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994,
as restated 5,213 230 570,722 1,902 1,410 5,022 (290) 8,274
Stockholders' equity of
pooled bank not restated
prior to 1995 - - 64,501 215 277 641 (22) 1,111
Net income - - - - - 1,541 - 1,541
Purchase of common stock
primarily for acquisitions - - (51,154) (171) (1,037) - - (1,208)
Common stock issued for
stock options exercised - - 13,791 46 215 (51) - 210
Common stock issued
through dividend
reinvestment plan - - 2,368 7 44 1 - 52
Common stock issued for
purchase accounting
acquisitions - - 25,090 84 527 - - 611
Converted preferred stock (1,574) (40) 3,316 12 53 (25) - -
Pre-merger transactions of
pooled bank (251) (7) (7,812) (26) (161) (383) - (577)
Cash dividends paid by
First Union Corporation
8.90% per Series 1990
preferred share - - - - - (7) - (7)
$0.98 per common share - - - - - (336) - (336)
Acquired banks
Preferred shares - - - - - (19) - (19)
Common shares - - - - - (213) - (213)
Unrealized gain on debt and
equity securities - - - - - - 468 468
====================================================================================================================================
Balance, December 31, 1995 3,388 183 620,822 2,069 1,328 6,171 156 9,907
Net income - - - - - 1,624 - 1,624
Redemption of preferred
stock (433) (109) - - - - - (109)
Purchase of common stock
primarily for purchase
accounting acquisitions - - (30,568) (100) (868) - - (968)
Common stock issued for
stock options exercised - - 10,930 36 217 - - 253
Common stock issued
through dividend
reinvestment plan - - 1,380 5 35 - - 40
Common stock issued for
purchase accounting
acquisitions - - 31,994 106 902 - - 1,008
Converted preferred stock (2,955) (74) 6,224 20 54 - - -
Cash dividends paid by
First Union Corporation
Preferred shares - - - - - (9) - (9)
$1.10 per common share - - - - - (611) - (611)
Acquired bank
Common shares - - - - - (49) - (49)
Unrealized loss on debt and
equity securities - - - - - - (154) (154)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - - 640,782 2,136 1,668 7,126 2 10,932
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-5
<PAGE>
AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
Debt and
(Shares in thousands, Preferred Stock Common Stock Paid-in Retained Equity
------------------- ---------------------
dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - - 640,782 2,136 1,668 7,126 2 10,932
Net income - - - - - 1,896 - 1,896
Purchase of common stock - - (23,973) (80) (944) - - (1,024)
Common stock issued for
stock options exercised - - 11,344 38 301 - - 339
Common stock issued
through dividend
reinvestment plan - - 624 2 23 - - 25
Common stock issued
through public offerings - - 7,500 25 333 - - 358
Common stock issued for
purchase accounting
acquisitions - - 117 - 3 - - 3
Cash dividends paid by
First Union Corporation
$1.22 per common share - - - - - (711) - (711)
Acquired bank
Common shares - - - - - (38) - (38)
Unrealized gain on debt and
equity securities - - - - - - 252 252
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - $ - 636,394 $ 2,121 1,384 8,273 254 12,032
==================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
C-6
<PAGE>
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,896 1,624 1,541
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 40 37 (34)
Provision for loan losses 840 449 259
Provision for foreclosed properties 2 (1) (3)
Gain on sale of mortgage servicing rights (1) (49) (1)
Securities available for sale transactions (31) (36) (45)
Investment security transactions (3) (4) (5)
Depreciation and amortization 795 668 582
Deferred income taxes 545 540 396
Trading account assets, net (977) (2,092) (677)
Mortgage loans held for resale (568) (102) (386)
(Gain) loss on sales of premises and equipment 5 (3) 11
Gain on sale of segregated assets (7) (12) (18)
Other assets, net (797) 1,021 186
Other liabilities, net 657 (254) 102
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,396 1,786 1,908
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 9,121 19,953 8,943
Maturities of securities available for sale 1,471 3,307 2,294
Purchases of securities available for sale (14,806) (18,059) (10,089)
Calls and underdeliveries of investment securities 4 10 33
Maturities of investment securities 505 803 2,640
Purchases of investment securities (190) (172) (3,668)
Origination of loans, net 1,688 (1,816) (6,697)
Sales of premises and equipment 160 60 47
Purchases of premises and equipment (558) (1,047) (667)
Other intangible assets, net (44) (18) (72)
Purchase of bank-owned separate account life insurance (2,011) - -
Cash equivalents acquired, net of purchases of banking organizations 6 (484) 2,527
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (4,654) 2,537 (4,709)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net 160 (2,593) (3,230)
Securities sold under repurchase agreements and other short-term borrowings, net 2,370 2,423 6,983
Issuance of guaranteed preferred beneficial interests 495 495 -
Issuances of long-term debt 1,148 1,817 3,346
Increase in long-term debt due to a spin-off of an acquired company - - 1,388
Payments of long-term debt (1,166) (1,421) (777)
Sales of common stock 722 293 262
Purchases of preferred stock - - (7)
Redemption of preferred stock - (109) -
Purchases of common stock (1,024) (968) (1,208)
Cash dividends paid (749) (669) (575)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,956 (732) 6,182
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (302) 3,591 3,381
Cash and cash equivalents, beginning of year 15,197 11,606 8,225
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 14,895 15,197 11,606
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 5,960 5,040 4,338
Income taxes 308 242 471
NONCASH ITEMS
Increase in securities available for sale - 289 6,983
Decrease in investment securities - - (6,304)
Increase in other assets - - 15
Increase in assets available for sale and a decrease in loans 3,200 - -
Increase in foreclosed properties and a decrease in loans 8 39 67
Conversion of preferred stock to common stock - 74 40
Issuance of common stock for purchase accounting acquisitions 3 1,008 611
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale 389 (262) 664
Other assets (deferred income taxes) $ 137 (108) 196
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
C-7
<PAGE>
AUDITED FINANCIAL STATEMENTS
FIRST UNION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
First Union Corporation (the "Parent Company") is a bank holding company
whose principal wholly owned subsidiaries are national banking associations
using the name First Union National Bank; First Union Capital Markets Corp., an
investment banking firm; First Union Mortgage Corporation, a mortgage banking
firm; First Union Brokerage Services, Inc., a securities brokerage firm; and
certain business trusts as more fully described in Note 11.
The accounting and reporting policies of First Union Corporation and
subsidiaries (the "Corporation") are in accordance with generally accepted
accounting principles and conform to general practices within the banking,
investment banking and mortgage banking industries. The consolidated financial
statements include accounts of the Parent Company and all its subsidiaries. In
consolidation, all significant intercompany accounts and transactions are
eliminated.
The Corporation is a diversified financial services company with principal
operations in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and
Washington, D.C. Its foreign banking operations are immaterial.
Management of the Corporation has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks,
interest-bearing bank balances and federal funds sold and securities purchased
under resale agreements. Generally, both cash and cash equivalents are
considered to have maturities of three months or less, and accordingly, the
carrying amount of such instruments is deemed to be a reasonable estimate of
fair value.
SECURITIES
The classification of securities is determined at the date of commitment
or purchase. Gains or losses on the sale of securities are recognized on a
specific identification, trade date basis.
Trading account assets, primarily debt securities, and trading
derivatives, which include interest rate futures, options, caps, floors and
forward contracts, are recorded at market value. Included in noninterest income
are realized and unrealized gains and losses resulting from such market value
adjustments and from recording the results of sales of trading account
securities.
Securities available for sale, primarily debt securities, are recorded at
market value with a corresponding adjustment net of tax recorded as a component
of stockholders' equity. Securities available for sale are used as a part of the
Corporation's interest rate risk management strategy and may be sold in response
to changes in interest rates, changes in prepayment risk and other factors.
Investment securities, primarily debt securities, are stated at cost, net
of the amortization of premium and the accretion of discount. The Corporation
intends and has the ability to hold such securities until maturity.
The market value of securities, including securities sold not owned, is
generally based on quoted market prices or dealer quotes. If a quoted market
price is not available, market value is estimated using quoted market prices for
similar securities.
INTEREST RATE SWAPS, FLOORS AND CAPS
The Corporation uses interest rate swaps, floors and caps for interest
rate risk management, in connection with providing risk management services to
customers and for trading for its own account.
Interest rate swaps, floors and caps used to achieve interest rate risk
management objectives are designated as hedges of specific assets and
liabilities. The net interest payable or receivable on swaps, floors and caps is
accrued and recognized as an adjustment to interest income or interest expense
of the related asset or liability. Premiums paid for purchased floors and caps
are amortized over the term of the floors and caps as a yield adjustment of the
related asset or liability. Floors and caps are written only to adjust the
amount or term of purchased floors and caps to more effectively reduce interest
rate risk, and a net written position is not created. Premiums received on
floors and caps offset the premium paid on the floors and caps they adjust. On
the early termination of swaps, floors and caps, the net proceeds received or
paid, including premiums, are deferred and included in other assets or
liabilities, and they are amortized over the shorter of the remaining contract
life or the maturity of the related asset or liability.
C-8
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On disposition or settlement of the asset or liability being hedged, deferral
accounting is discontinued and any deferred amount is recognized in earnings.
Additionally, the fair value of the swap, floor and cap agreements, and changes
in fair value as a result of changes in market interest rates, are not
recognized in the consolidated financial statements. These hedges are designed
to be effective hedges of the hedged items, and if determined to be ineffective,
they are recorded at market value. The rate indices specified in the floors and
caps have been, and they are expected to be, highly correlated with the interest
rates of the hedged items.
Interest rate swaps, floors and caps entered into for trading purposes and
sold to customers are recorded at market value with both realized and unrealized
gains and losses recognized as trading profits. The fair value of these
financial instruments represents the estimated amount the Corporation would
receive or pay to terminate the contracts or agreements, and it is determined
using a valuation model that considers current market yields, quoted prices and
other relevant variables.
INTEREST RATE FUTURES, FORWARD AND OPTION CONTRACTS
The Corporation uses interest rate futures, forward and option contracts
for interest rate risk management and in connection with hedging interest rate
products sold to customers.
Interest rate futures and option contracts are used to hedge interest rate
risk arising from specific financial instruments. Gains and losses on interest
rate futures are (i) deferred and included in the carrying value of the related
assets or liabilities, and (ii) amortized over the estimated lives of those
assets and liabilities as a yield adjustment. Premiums paid for option contracts
are included in other assets, and they are amortized over the option term as a
yield adjustment of the related asset or liability. On the early termination of
futures contracts, the deferred amounts are amortized over the remaining
maturity of the related asset or liability. On disposition or settlement of the
asset or liability being hedged, deferral accounting is discontinued and any
deferred amount is recognized in earnings. Additionally, interest rate futures
and forwards that are designed 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 recorded at market value.
Interest rate futures, forward and option contracts used to hedge risk
management products sold to customers are recorded at market value, and both the
realized and unrealized gains and losses are recognized as trading profits. The
market value of these financial instruments is based on dealer or exchange
quotes.
LOANS
Commercial, financial and agricultural loans include industrial revenue
bonds, highly leveraged transaction loans and certain other loans that are made
primarily on the strength of the borrower's general credit standing and ability
to generate repayment cash flows from income sources even though such bonds and
loans may be secured by real estate or other assets. Commercial real estate
construction and mortgage loans represent interim and permanent financing of
commercial properties that are secured by real estate. Retail real estate
mortgage loans represent 1-4 family first mortgage loans. Bankcard installment
loans include credit card, instant cash reserve, signature and First Choice
unsecured revolving lines of credit. Retail installment loans represent all
other consumer loans, including home equity and second mortgage loans.
Mortgage notes held for sale are valued at the lower of cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis. Gains or
losses resulting from sales of mortgage loans are recognized when the proceeds
are received from investors.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment, and collateral liquidation is a
secondary source of repayment. The Corporation determines the need for
collateral on a case-by-case or product-by-product basis. Factors considered
include the current and prospective creditworthiness of the customer, terms of
the instrument and economic conditions.
Unearned income is generally accreted to interest income using the
constant yield method. Interest income is recorded on an accrual basis.
A loan is considered to be impaired when based on current information, it
is probable the Corporation will not receive all amounts due in accordance with
the contractual terms of a loan agreement. Discounted cash flows using stated
loan rates or the estimated collateral fair value are used in determining the
value of impaired loans.
C-9
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
When the ultimate collectibility of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent any interest has been foregone, and
then they are recorded as recoveries of any amounts previously charged off. When
this doubt does not exist, cash receipts are applied under the contractual terms
of the loan agreement.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after January 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of December
31, 1997 and 1996, there were no accruing impaired loans.
The accrual of interest is generally discontinued on all loans, except
consumer loans, that become 90 days past due as to principal or interest unless
collection of both principal and interest is assured by way of
collateralization, guarantees or other security. Generally, loans past due 180
days or more are placed on nonaccrual status regardless of security. Consumer
loans and bankcard products that become approximately 120 days and 180 days past
due, respectively, are generally charged to the allowance for loan losses. When
borrowers demonstrate over an extended period the ability to repay a loan in
accordance with the contractual terms of a loan the Corporation has classified
as nonaccrual, such loan is returned to accrual status.
Fair values are estimated for loans with similar financial
characteristics. These loans are segregated by type of loan, considering credit
risk and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair values of performing loans for all portfolios are calculated by
discounting estimated cash flows through expected maturity dates. These cash
flows are discounted using estimated market yields that reflect the credit and
interest rate risks inherent in each category of loans. Such market yields also
reflect a component for the estimated cost of servicing the portfolio. A
prepayment assumption is used as an estimate of the number of loans that will be
repaid prior to their scheduled maturity.
For performing residential mortgage loans, fair values are estimated using
a discounted cash flow analysis utilizing yields of comparable mortgage-backed
securities. The loan portfolio is segmented into homogeneous pools based on loan
types, coupon rates, maturities, prepayment characteristics and credit risk.
These pools are compared with similar mortgage-backed securities to arrive at an
appropriate discount rate; whole loan liquidity and risk characteristics are
considered within the comparison.
The fair value of nonperforming loans is calculated by estimating the
timing and amount of cash flows. These cash flows are discounted using estimated
market yields commensurate with the risk associated with such cash flows.
Estimates of cash flows are made using knowledge of the borrower and available
market data.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. Generally, for fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of commitments and letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount considered adequate to provide
for potential losses in the portfolio. Management's evaluation of the adequacy
of the allowance is based on a review of individual loans, recent loss
experience, current economic conditions, the risk characteristics of the various
classifications of loans, the fair value of underlying collateral and other
factors.
Management believes the allowances for losses on loans and real estate
owned are adequate. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may be
necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's bank subsidiaries'
allowances for losses on loans and real estate owned. Such agencies may require
such subsidiaries to recognize changes to the allowances based on their
judgments about information available to them at the time of their examination.
C-10
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on a straight-line
basis for financial purposes and on straight-line and accelerated bases for tax
purposes, using estimated lives generally as follows: buildings, 10 to 50 years;
furniture and equipment, 3 to 10 years; and leasehold improvements and
capitalized leases, over the lives of the respective leases.
INTANGIBLE ASSETS
Generally, goodwill is amortized on a straight-line basis over periods
ranging from 15 to 25 years. The Corporation's unamortized goodwill is
periodically reviewed to ensure that there are no conditions which exist
indicating that the recorded amount of goodwill is not recoverable from future
undiscounted cash flows. The review process includes an evaluation of the
earnings history of each subsidiary, its contribution to the Corporation,
capital levels and other factors. If events or changes in circumstances indicate
further evaluation is warranted, the undiscounted net cash flows of the
operations to which goodwill relates are estimated. If the estimated
undiscounted net cash flows are less than the carrying amount of goodwill, a
loss is recognized to reduce goodwill's carrying value to fair value, and when
appropriate, the amortization period is also reduced. Unamortized goodwill
associated with disposed assets is charged to current earnings. Credit card
premiums are amortized principally over the estimated period of benefit not to
exceed 10 years using the sum-of-the-years' digits method. Deposit base premiums
are amortized principally over a 10-year period using accelerated methods.
Annually, the fair value of the unamortized balance of such premiums is
estimated on a discounted cash flow basis, and if such value is less than such
balance, the difference is charged to noninterest expense.
FORECLOSED PROPERTIES
Foreclosed properties are included in other assets, and they represent
other real estate that has been acquired through loan or in-substance
foreclosures or deeds received in lieu of loan payments. Generally, such
properties are appraised annually, and they are recorded at the lower of cost or
fair value less estimated selling costs. When appropriate, adjustments to cost
are charged or credited to the allowance for foreclosed properties.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation records the securitization or transfer of assets as sales
when the assets securitized or transferred have been isolated from the
Corporation and the transferee obtains the unconditional right to pledge or
exchange the assets, or the transferee is a qualifying special purpose entity.
Transfers not meeting these criteria are generally treated as secured
borrowings. Gains or losses on the securitization or transfer of assets
determined to be sales are based on the fair value of the assets obtained and
liabilities assumed less the carrying value of the assets sold. Any servicing
assets or other interests retained remain on the balance sheet at their
allocated carrying value based on relative fair value. Servicing assets
purchased are initially recorded at fair value. Gains or losses resulting from
the securitization or transfer of assets are recorded in noninterest income.
Retained residual interests subject to prepayment risk are recorded as trading
account assets or as securities available for sale. Servicing assets and
liabilities are included in other assets and other liabilities, and they are
amortized to noninterest income in proportion to net servicing income.
Servicing assets are evaluated for impairment based on the fair value of
those assets. Fair values are estimated based on market prices for similar
servicing assets and on the discounted estimated future net cash flows based on
market consensus loan prepayment estimates, historical prepayment rates,
interest rates, and other economic factors. For purposes of impairment
evaluation, the servicing assets are stratified based on predominant risk
characteristics of the underlying loans, including loan type (conventional or
government), amortization type (fixed or adjustable), note rate, and in certain
instances, period of origination. To the extent the carrying value of the
servicing asset exceeds fair value by individual stratum, a valuation allowance
is established. Servicing assets amounted to $421 million and $282 million at
December 31, 1997 and 1996, respectively.
PENSION AND SAVINGS PLANS
Substantially all employees with one year of service are eligible for
participation in a non-contributory, defined benefit pension plan and a matching
savings plan. Pension cost is determined annually by an actuarial valuation,
which includes service costs for the current year and amortization of amounts
related to prior years. The Corporation's funding policy is to contribute to the
pension plan the amount required to fund the benefits expected to be earned for
the current year and to amortize amounts related to prior years using the
projected unit credit valuation method. The difference between the pension cost
included in current income and the funded amount is included in other assets or
other liabilities, as appropriate. Actuarial assumptions are evaluated annually.
C-11
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The matching savings plan permits eligible employees to make basic
contributions to the plan of up to six percent of base compensation and
supplemental contributions of up to nine percent of base compensation. Annually,
on approval of the Board of Directors, employee basic contributions may be
matched up to six percent of the employee's base compensation.
INCOME TAXES
The operating results of the Parent Company and its eligible subsidiaries
are included in a consolidated federal income tax return. Each subsidiary pays
its allocation of federal income taxes to the Parent Company or receives payment
from the Parent Company to the extent tax benefits are realized. Where state
income tax laws do not permit consolidated income tax returns, applicable state
income tax returns are filed.
INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
such net income by the sum of such weighted average number of shares and the
potentially dilutive shares, including restricted stock awards, that could occur
through the issuance of common stock options or convertible securities.
- --------------------------------------------------------------------------------
NOTE 2: ACQUISITIONS
On November 28, 1997, the Corporation acquired Signet Banking Corporation
("Signet"), a bank holding company based in Virginia. The merger was accounted
for as a pooling of interests, and accordingly, all historical financial
information for the Corporation has been restated to include Signet historical
information for all periods presented herein. At September 30, 1997, Signet had
assets of $11 billion, net loans of $7 billion, deposits of $8 billion and net
income applicable to common stockholders of $73 million.
As a result of the merger, each of the 61 million net outstanding shares
of Signet common stock was converted into 1.10 shares of the Corporation's
common stock and common stock equivalents, except that cash was paid for
fractional share interests.
Additionally, merger-related and restructuring charges associated with the
Signet merger of $269 million ($194 million after tax) are included as a
component of noninterest expense in 1997. The remaining unpaid balance of the
initial accrual of $269 million is $169 million at December 31, 1997. The
remaining restructuring charges will be paid primarily in 1998, and they include
$17 million of noncash charges.
At December 31, 1997, the Corporation had two pending acquisitions, both
of which were consummated in January 1998. The first relates to the purchase
accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which at December
31, 1997, had assets of $415 million, for 1.6 million shares of the
Corporation's common stock, substantially all of which were repurchased in the
open market at a cost of $79 million. The second relates to the pooling of
interests accounting acquisition of Wheat First Butcher Singer, Inc. ("Wheat
First"), which at December 31, 1997 had assets of $1 billion and stockholders'
equity of $171 million for 10.3 million shares of the Corporation's common
stock. Financial information related to Wheat First is not considered material
to the historical results of the Corporation, and accordingly, the Corporation's
financial statements will not be restated.
The Corporation entered into an Agreement and Plan of Mergers on November
18, 1997, providing for the pooling of interests acquisition of CoreStates
Financial Corp ("CoreStates"), a multi-bank holding company based in
Pennsylvania, and for the exchange of 1.62 shares of the Corporation's common
stock for each share of CoreStates common stock, subject to increase under
certain circumstances. The Corporation expects to take an after-tax,
merger-related and restructuring charge of $795 million in 1998. Additionally,
the Corporation expects to consummate the merger in the first half of 1998,
subject to regulatory approvals and other conditions of closing. At December 31,
1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits
of $34 billion, stockholders' equity of $3 billion and net income applicable to
common stockholders of $813 million. Certain pro forma financial information
related to the Corporation and CoreStates and which does not include information
related to Covenant or Wheat First follows.
C-12
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In millions, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Interest income $ 14,362 13,758 13,028
Interest expense 6,452 6,151 5,732
Provision for loan losses 1,103 678 403
Noninterest income 4,322 3,535 3,058
Noninterest expense 7,336 6,930 6,542
Income taxes 1,084 1,261 1,213
- -----------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196
Dividends on preferred stock - 9 26
- -----------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,170
=====================================================================================================
Basic earning per share $ 2.84 2.33 2.21
Diluted earning per share $ 2.80 2.30 2.17
=====================================================================================================
Assets $ 205,735 197,341 188,855
Loans, net of unearned income 131,687 134,647 127,905
Deposits 137,077 136,429 134,112
Stockholders' equity $ 15,269 14,628 13,783
=====================================================================================================
</TABLE>
On January 1, 1996, the Corporation acquired First Fidelity Bancorporation
("First Fidelity"), a multi-bank holding company based in New Jersey. The merger
was accounted for as a pooling of interests, and accordingly, all historical
financial information for the Corporation has been restated to include First
Fidelity historical information for all periods presented herein. At December
31, 1995, First Fidelity had assets of $35 billion, net loans of $25 billion,
deposits of $28 billion and net income applicable to common stockholders of $398
million.
As a result of the merger, each of the 79 million net outstanding shares
of First Fidelity common stock was converted into 1.35 shares of the
Corporation's common stock and common stock equivalents, except that cash was
paid for fractional share interests. In addition, the 3 million net outstanding
shares of First Fidelity Series B Convertible Preferred Stock were converted
into a like number of shares of the Corporation's Series B Convertible Class A
Preferred Stock (the "Series B Stock") having substantially identical terms as
the First Fidelity Series B, the 350,000 outstanding shares of First Fidelity
Series D Adjustable Rate Cumulative Preferred Stock were converted into a like
number of shares of the Corporation's Series D Adjustable Rate Cumulative Class
A Preferred Stock (the "Series D Stock") having substantially identical terms as
the First Fidelity Series D, and the 3 million net outstanding First Fidelity
Depository Receipts (each representing a 1/40th interest in a share of First
Fidelity Series F 10.64% Preferred Stock (74,130 net outstanding shares) were
converted into a like number of the Corporation's Depository Receipts (each
representing a 1/40th interest in the Corporation's Series F 10.64% Class A
Preferred Stock (the "Series F Stock") having substantially identical terms as
the First Fidelity Series F. See Note 12 for information related to the
redemption of the Series B Stock, the Series D Stock and the Series F Stock.
Additionally, merger-related and restructuring charges associated with the
First Fidelity merger of $281 million ($181 million after tax) and $94 million
($73 million after tax) are included as a component of noninterest expense in
1996 and 1995, respectively. The remaining unpaid balance of the initial accrual
of $375 million was $29 million at December 31, 1996 , and it was paid in 1997.
In 1996, various banking subsidiaries of the Parent Company also acquired
twelve financial institutions and certain other assets which in the aggregate
amounted to the addition of $7.8 billion in assets, $4.8 billion in net loans
and $5.1 billion in deposits. The purchase method of accounting, which requires
(i) no restatement of the Corporation's historical financial statements, and
(ii) the inclusion of the acquired company's financial information on a fair
value basis only from the date of consummation, was used in these transactions.
With respect to these transactions, the Parent Company issued 32 million shares
of its common stock in exchange for the common stock of certain of the acquired
financial institutions, and it paid cash for the other financial institutions
and assets, which in the aggregate amounted to $1.1 billion. These transactions
resulted in an increase to stockholders' equity of $1.0 billion, and the
increase was reduced by the Parent Company's purchase in the open market of 24
million shares of its common stock for $764 million in 1996. These transactions
also resulted in an increase in goodwill of $595 million, which will be
amortized on a straight-line basis over 25 years, and in deposit base premium of
$70 million, which will be amortized on an accelerated basis over 10 years.
C-13
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3: SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------------------
1 Year 1-5 5-10 After 10 Gross Unrealized Amortized
--------------------
(In millions) or Less Years Years Years Total Gains Losses Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 175 785 1,420 178 2,558 (116) - 2,442
U.S. Government agencies 1 5,542 7,702 4 13,249 (232) 3 13,020
Collateralized mortgage obligations 317 1,794 142 - 2,253 (25) 7 2,235
State, county and municipal 6 3 20 63 92 - - 92
Other 83 2,147 176 857 3,263 (42) 10 3,231
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020
==================================================================================================================================
MARKET VALUE
Debt securities $ 582 10,205 9,460 394 20,641 (404) 19 20,256
Sundry securities - 66 - 708 774 (11) 1 764
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020
==================================================================================================================================
AMORTIZED COST
Debt securities $ 569 10,077 9,224 386 20,256
Sundry securities - 66 - 698 764
- ------------------------------------------------------------------------------------------------
Total $ 569 10,143 9,224 1,084 21,020
================================================================================================
December 31, 1996
-------------------------------------------------------------------------------------------
1 Year 1-5 5-10 After 10 Gross Unrealized Amortized
-------------------
(In millions) or Less Years Years Years Total Gains Losses Cost
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 183 1,868 50 2 2,103 (9) 14 2,108
U.S. Government agencies 9 2,490 8,969 26 11,494 (43) 60 11,511
Collateralized mortgage obligations 32 928 - - 960 (5) 5 960
State, county and municipal 13 7 13 26 59 (1) - 58
Other 97 1,050 89 953 2,189 (42) 15 2,162
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799
==================================================================================================================================
MARKET VALUE
Debt securities $ 334 6,326 9,121 187 15,968 (84) 94 15,978
Sundry securities - 17 - 820 837 (16) - 821
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799
==================================================================================================================================
AMORTIZED COST
Debt securities $ 333 6,298 9,149 198 15,978
Sundry securities - 16 - 805 821
- -------------------------------------------------------------------------------------------------
Total $ 333 6,314 9,149 1,003 16,799
=================================================================================================
</TABLE>
C-14
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Securities available for sale with an aggregate amortized cost of $4.9
billion at December 31, 1997, are pledged to secure U.S. Government and other
public deposits and for other purposes as required by various statutes or
agreements.
Included in "U.S. Government agencies" and "Other" at December 31, 1997,
are $2.7 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 December 31, 1997, these securities had a weighted average maturity of
3.75 years and a weighted average yield of 5.31 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.57
percent based on a weighted average funding cost differential of (1.26) percent.
Expected maturities differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Generally, the aging of mortgage-backed securities included in U.S.
Government agencies and collateralized mortgage obligations is based on their
weighted average maturities at December 31, 1997 and 1996.
At December 31, 1997 and 1996, collateralized mortgage obligations had a
weighted average yield based on amortized cost of 6.68 percent and 7.35 percent,
respectively.
At December 31, 1997 and 1996, there were forward commitments to purchase
securities at a cost of $6.4 billion and $127 million, respectively, that at
December 31, 1997 and 1996, had a market value of $6.4 billion and $127 million,
respectively.
Gross gains and losses realized on the sale of debt securities in 1997
were $51 million and $43 million, respectively, and on sundry securities such
gains were $23 million.
Gross gains and losses realized on the sale of debt securities in 1996
were $159 million and $125 million, respectively, and on sundry securities such
gains were $2 million.
Gross gains and losses realized on the sale of debt securities in 1995
were $72 million and $44 million, respectively, and on sundry securities such
gains were $17 million.
At December 31, 1997, stockholders' equity includes an after-tax amount of
$254 million, which is based on net unrealized appreciation in the securities
available for sale portfolio of $395 million.
At December 31, 1996, stockholders' equity includes an after-tax amount of
$2 million, which is based on net unrealized appreciation in the securities
available for sale portfolio of $6 million.
C-15
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4: INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------------------------------
1 Year 1-5 5-10 After 10 Gross Unrealized Market
---------------------
(In millions) or Less Years Years Years Total Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Government agencies $ - 703 313 - 1,016 25 (1) 1,040
Collateralized mortgage obligations 30 337 - - 367 9 - 376
State, county and municipal 63 172 187 302 724 112 - 836
Other 2 12 34 20 68 2 - 70
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 95 1,224 534 322 2,175 148 (1) 2,322
==================================================================================================================================
CARRYING VALUE
Debt securities $ 95 1,224 534 303 2,156 148 (1) 2,303
Sundry securities - - - 19 19 - - 19
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 95 1,224 534 322 2,175 148 (1) 2,322
==================================================================================================================================
MARKET VALUE
Debt securities $ 96 1,262 576 369 2,303
Sundry securities - - - 19 19
- --------------------------------------------------------------------------------------------------
Total $ 96 1,262 576 388 2,322
==================================================================================================
December 31, 1996
----------------------------------------------------------------------------------------
1 Year 1-5 5-10 After 10 Gross Unrealized Market
------------------
(In millions) or Less Years Years Years Total Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Government agencies $ - 776 318 - 1,094 22 (3) 1,113
Collateralized mortgage obligations 67 414 - - 481 8 - 489
State, county and municipal 61 219 145 380 805 105 (1) 909
Other 1 11 9 100 121 4 - 125
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 129 1,420 472 480 2,501 139 (4) 2,636
===================================================================================================================================
CARRYING VALUE
Debt securities $ 129 1,420 472 426 2,447 139 (4) 2,582
Sundry securities - - - 54 54 - - 54
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 129 1,420 472 480 2,501 139 (4) 2,636
===================================================================================================================================
MARKET VALUE
Debt securities $ 130 1,456 494 502 2,582
Sundry securities - - - 54 54
- --------------------------------------------------------------------------------------------------
Total $ 130 1,456 494 556 2,636
==================================================================================================
</TABLE>
C-16
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investment securities with an aggregate carrying value of $1.6 billion at
December 31, 1997, are pledged to secure U.S. Government and other public
deposits and for other purposes as required by various statutes or agreements.
Expected maturities differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Generally, the aging of mortgage-backed securities included in U.S.
Government agencies and collateralized mortgage obligations is based on their
weighted average maturities at December 31, 1997 and 1996.
At December 31, 1997 and 1996, collateralized mortgage obligations had a
weighted average yield of 7.66 percent and 7.64 percent, respectively.
There were no commitments to purchase or sell investment securities at
December 31, 1997 and 1996.
Gross gains realized on calls of sundry securities in 1997 were $3
million.
Gross gains and losses realized on repurchase agreement underdeliveries
and calls of investment securities in 1996 were $5 million and $1 million,
respectively.
Gross gains and losses realized on repurchase agreement underdeliveries
and calls of investment securities in 1995 were $6 million and $1 million,
respectively.
C-17
<PAGE>
- --------------------------------------------------------------------------------
NOTE 5: LOANS
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------
(In millions) 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 28,111 25,997
Real estate - construction and other 2,386 2,919
Real estate - mortgage 8,576 9,758
Lease financing 8,056 5,951
Foreign 1,431 1,087
- -------------------------------------------------------------------------------------------------------
Total commercial 48,560 45,712
- -------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 25,382 29,108
Installment loans - Bankcard 2,708 5,620
Installment loans - other 19,297 20,827
Vehicle leasing 4,312 3,480
- -------------------------------------------------------------------------------------------------------
Total retail 51,699 59,035
- -------------------------------------------------------------------------------------------------------
Total loans $ 100,259 104,747
=======================================================================================================
</TABLE>
Directors and executive officers of the Parent Company and their related
interests were indebted to the Corporation in the aggregate amounts of $2.4
billion and $1.3 billion at December 31, 1997 and 1996, respectively. From
January 1, 1997, through December 31, 1997, directors and executive officers of
the Parent Company and their related interests borrowed $1.5 billion and repaid
$376 million. In the opinion of management, these loans do not involve more than
the normal risk of collectibility, nor do they present other unfavorable
features.
At December 31, 1997 and 1996, nonaccrual and restructured loans amounted
to $624 million and $698 million, respectively. Interest related to nonaccrual
and restructured loans for the years ended December 31, 1997, 1996 and 1995,
amounted to $51 million, $57 million and $73 million, respectively. Interest
collected on such loans and included in the results of operations for each of
the years in the three-year period then ended amounted to $21 million, $13
million and $18 million, respectively.
Included in other assets at December 31, 1997, are $3.2 billion of credit
card receivables and other unsecured installment loans with a carrying value of
$2.8 billion that are being held for accelerated disposition.
At December 31, 1997 and 1996, impaired loans, which are included in
nonaccrual loans, amounted to $301 million and $370 million, respectively.
Included in the allowance for loan losses is $43 million related to $253 million
of impaired loans at December 31, 1997, and $36 million related to $237 million
of impaired loans at December 31, 1996. The rest of the impaired loans are
recorded at or below fair value. For the years ended December 31, 1997 and 1996,
the average recorded investment in impaired loans was $306 million and $477
million, respectively; and $22 million and $19 million, respectively, of
interest income was recognized on loans while they were impaired. All this
income was recognized on loans using a cash-basis method of accounting.
C-18
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6: ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 1,502 1,638 1,578
Provision for loan losses 840 449 259
Allowance of loans acquired, transferred to
accelerated disposition or sold (495) 50 193
- ------------------------------------------------------------------------------------------------------------
1,847 2,137 2,030
- ------------------------------------------------------------------------------------------------------------
Loan losses 753 794 526
Loan recoveries 118 159 134
- ------------------------------------------------------------------------------------------------------------
Loan losses, net 635 635 392
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,212 1,502 1,638
============================================================================================================
- --------------------------------------------------------------------------------
NOTE 7: PREMISES AND EQUIPMENT
Years Ended December 31,
---------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
Land $ 495 499 487
Buildings 2,269 2,154 1,947
Equipment 3,702 3,508 2,014
Capitalized leases 40 41 40
- -------------------------------------------------------------------------------------------------------------
6,506 6,202 4,488
Accumulated depreciation and amortization (2,273) (1,945) (1,743)
- -------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 4,233 4,257 2,745
============================================================================================================
Net premises and equipment pledged as security for mortgage notes $ 26 62 63
============================================================================================================
Depreciation and amortization $ 444 360 294
============================================================================================================
- --------------------------------------------------------------------------------
NOTE 8: FORECLOSED PROPERTIES
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
Foreclosed properties $ 115 121 219
- ------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of year 17 25 42
Provision for foreclosed properties 2 (1) (3)
Transfer from allowance for segregated assets - 1 -
Dispositions, net (3) (8) (14)
- ------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of year 16 17 25
- ------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 99 104 194
============================================================================================================
</TABLE>
C-19
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9: SHORT-TERM BORROWINGS
Short-term borrowings of the Corporation at December 31, 1997, 1996 and 1995,
which includes securities sold under repurchase agreements and accrued interest
thereon, and the related maximum amount outstanding at the end of any month
during such periods are presented below.
<TABLE>
<CAPTION>
Years Ended December 31, Maximum Outstanding
------------------------------------- ----------------------------------
(In millions) 1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under repurchase agreements $ 19,772 17,882 12,142 20,457 21,422 12,513
Federal funds purchased 1,996 2,679 4,165 2,626 3,951 4,671
Fixed and variable rate bank notes 268 843 2,586 1,076 2,462 2,586
Interest-bearing demand deposits issued to
the U. S. Treasury 323 391 365 398 605 764
Commercial paper 871 1,021 1,162 1,541 1,122 1,382
Other 4,127 2,171 984 4,575 3,573 3,188
- -------------------------------------------------------------------------------------------
Total $ 27,357 24,987 21,404
=================================================================================================================================
</TABLE>
At December 31, 1997, 1996 and 1995, the combined weighted average
interest rates related to federal funds purchased and securities sold under
repurchase agreements were 6.14 percent, 6.06 percent and 5.46 percent,
respectively. Maturities related to such instruments in each of the years in the
three-year period then ended were not greater than 350 days.
At December 31, 1997, 1996 and 1995, the weighted average interest rates
for fixed and variable rate bank notes were 5.71 percent, 5.53 percent and 5.70
percent, respectively. Weighted average maturities related to such notes in each
of the years in the three-year period then ended were 153 days, 109 days and 90
days, respectively.
At December 31, 1997, 1996 and 1995, the weighted average interest rates
for commercial paper were 5.59 percent, 5.49 percent and 5.49 percent,
respectively. Weighted average maturities related to such commercial paper in
each of the years in the three-year period then ended were 4 days, 21 days and
21 days, respectively.
Included in "Other" are Federal Home Loan Bank borrowings and securities
sold short of $286 million and $3.5 billion, respectively, at December 31, 1997;
$211 million and $1.9 billion, respectively, at December 31, 1996; and $230
million and $439 million, respectively, at December 31, 1995.
Substantially all short-term borrowings are due within 90 days, and
accordingly, the carrying amount of such borrowings is deemed to be a reasonable
estimate of fair value.
C-20
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10: LONG-TERM DEBT
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY
7-1/2% debentures $ - - 16 16
Notes
Floating rate extendible, due June 15, 2005 (a) 10 10 10 10
6.60%, due June 15, 2000 (par value $250) (b) 249 252 - -
Floating rate, due February 24, 1998 (par value $300) (b) 300 300 300 300
6-3/4%, due January 15, 1998 (par value $250) (b) 250 250 250 251
Subordinated notes
7.18%, due April 15, 2011 (par value $60) 59 65 59 60
8%, due August 15, 2009 (par value $150) 149 162 149 155
6-3/8%, due January 15, 2009 (par value $150) (b) 148 148 148 138
6%, due October 30, 2008 (par value $200) (b) 198 192 197 178
7-1/2%, due July 15, 2006 (par value $300) (b) 298 321 297 306
7%, due March 15, 2006 (par value $200) (b) 199 207 198 198
6-7/8%, due September 15, 2005 (par value $250) (b) 249 257 249 246
7.05%, due August 1, 2005 (par value $250) (b) 248 259 248 249
6-5/8%, due July 15, 2005 (par value $250) (b) 249 253 248 240
8.77%, due November 15, 2004 (par value $150) 149 171 149 157
Floating rate, due July 22, 2003 (par value $150) (b) 149 150 149 149
7-1/4%, due February 15, 2003 (par value $150) (b) 149 156 149 152
8%, due November 15, 2002 (par value $225) (b) 224 237 224 236
8-1/8%, due June 24, 2002 (par value $250) (b) 249 267 249 264
9.45%, due August 15, 2001 (par value $150) (b) 149 165 148 164
Fixed rate medium-term, varying rates and terms to June 5, 2001 (c) 54 58 54 62
9.45%, due June 15, 1999 (par value $250) (b) 249 262 249 266
Subordinated debentures
6.55%, due October 15, 2035 (par value $250) 249 256 249 243
7-1/2%, due April 15, 2035 (par value $250) 246 279 246 261
6.824%/7.574%, due August 1, 2026 (par value $300) 298 317 298 304
- ----------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,771 4,994 4,533 4,605
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-21
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4% senior, due September 1, 2003 (par value $145) 120 140 158 159
Varying rates and terms to November 1, 2002 59 61 65 69
Subordinated notes
Bank, varying rates and terms to December 15, 2036 975 986 1,397 1,409
6.80%, due June 15, 2003 (par value $150) (b) 149 153 149 154
9-5/8%, due August 15, 1999 (par value $150) (b) 150 156 149 161
9-5/8%, due June 1, 1999 (par value $100) (b) (d) 100 105 100 107
Floating rate, due April 15, 1998 (c) (d) 100 100 100 100
Floating rate - - 50 50
Floating rate - - 25 25
Subordinated capital notes
9-5/8%, due June 15, 1999 (par value $75) (b) (d) 75 79 74 80
9-7/8%, due May 15, 1999 (par value $75) (b) (d) 75 79 75 82
8-1/2%, due April 1, 1998 (par value $150) (b) 149 150 149 153
10-1/2% collateralized mortgage obligations - - 37 41
- ----------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 1,952 2,009 2,528 2,590
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,285 1,285 930 930
Mortgage notes and other debt of subsidiaries, varying rates and terms 11 11 44 45
Capitalized leases, rates generally ranging from 7-1/2% to 15.20% 23 23 25 25
- ----------------------------------------------------------------------------------------------------------------------------------
Total other debt 1,319 1,319 999 1,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 8,042 8,322 8,060 8,195
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Redeemable in whole or in part at the option of the Parent Company.
(b) Not redeemable prior to maturity.
(c) Redeemable at the option of the Parent Company.
(d) Assumed by the Parent Company.
The fair value of long-term debt is estimated based on the quoted market prices
for the same or similar issues or on the current rates offered to the
Corporation for debt of the same remaining maturities.
The interest rate on the floating rate extendible notes is 6.0875 percent
to March 16, 1998.
The interest rate on the floating rate notes due February 24, 1998, is
5.1875 percent.
The 7.18 percent subordinated notes are redeemable in whole and not in
part at the option of the Parent Company on April 15, 2000 and on each October
15 and April 15 thereafter.
The 8 percent subordinated notes due August 15, 2009, are redeemable in
whole and not in part at the option of the Parent Company on August 15, 2004.
The 8.77 percent subordinated notes are redeemable in whole or in part at
the option of the Parent Company on November 15, 1999.
The interest rate on the floating rate subordinated notes is 5.93359
percent to January 22, 1998.
Fixed rate medium-term senior and subordinated notes can be issued
periodically. Interest rates, maturities, redemption and other terms are
determined at the date of issuance. At December 31, 1997, the Parent Company had
issued medium-term subordinated notes with fixed rates of interest ranging from
9.49 percent to 9.93 percent.
Holders of the 6.55 percent subordinated debentures and the 7-1/2 percent
subordinated debentures may elect to redeem a part or all of such debentures on
October 15, 2005, and April 15, 2005, respectively. Otherwise such debentures
are not redeemable prior to maturity.
Holders of the 6.824 percent/7.754 percent subordinated debentures may
elect to redeem a part or all of such debentures on August 1, 2006, or August 1,
2016. Otherwise such debentures are not redeemable prior to maturity.
C-22
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The 9-3/4 percent senior notes were issued by an acquired subsidiary prior
to the acquisition, and in accordance with a covenant defeasance related
thereto, the subsidiary has announced that it will redeem all such notes on
September 2, 1998, the earliest date the notes can be redeemed, at a redemption
price equal to 103.375 percent of the principal amount then outstanding plus any
accrued and unpaid interest to such date. The subsidiary has deposited with the
trustee sufficient cash and securities to effect the redemption of the notes on
such date.
At December 31, 1997, bank notes of $175 million had floating rates of
interest ranging from 5.69 percent to 6.14 percent, and $800 million of the
notes had fixed rates of interest ranging from 6.18 percent to 7.80 percent.
The interest rate on the floating rate subordinated notes is 5.875 percent
to April 15, 1998. In February 1998, $2.4 billion of senior or
subordinated debt securities or equity securities
remained available for issuance under a shelf registration statement filed with
the Securities and Exchange Commission.
The weighted average rate paid for long-term debt in 1997, 1996 and 1995
was 6.52 percent, 6.28 percent and 6.71 percent, respectively. Interest rate
swap agreements entered into at the time of issuance of certain long-term debt
reduced related interest expense.
Long-term debt maturing in each of the five years subsequent to December
31, 1997, is as follows (in millions): 1998, $2,072; 1999, $859; 2000, $381;
2001, $196; and 2002, $516.
- --------------------------------------------------------------------------------
NOTE 11: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
First Union Institutional Capital I, a statutory business trust (the
"Trust") created by the Parent Company had outstanding at December 31, 1997 and
1996, $495 million (par value $500 million) of 8.04% Capital Securities which
will mature on December 1, 2026 (the "Capital Securities"). The principal assets
of the Trust are $515 million of the Parent Company's 8.04% Junior Subordinated
Deferrable Interest Debentures, which will mature on December 1, 2026 (the
"Subordinated Debentures"). Additionally, the Trust has issued $15 million of
common securities (the "Common Securities") to the Parent Company. The estimated
fair value of each of the Capital Securities and the related Subordinated
Debentures at December 31, 1997 and 1996, was $536 million and $500 million,
respectively.
The Capital Securities, the Subordinated Debentures and the Common
Securities are redeemable in whole or in part on or after December 1, 2006, or
at any time in whole but not in part from the date of issuance on the occurrence
of certain events.
On January 6, 1997, and January 16, 1997, First Union Institutional
Capital II and First Union Capital I, respectively, both statutory business
trusts (the "Trusts") created by the Parent Company, issued $250 million of
7.85% Capital Securities and $250 million of 7.935% Capital Securities, Series
A, respectively, (together the "Securities") which will mature on January 1,
2027, and January 15, 2027, respectively. The principal combined assets of the
Trusts are $515 million of the Parent Company's subordinated debentures with
like maturities and like interest rates to the Securities. Additionally, the
Trusts have issued $15 million in the aggregate of common securities to the
Parent Company. The 7.85% Capital Securities and the 7.935% Capital Securities,
Series A, both had $248 million outstanding at December 31, 1997 and estimated
fair values of $263 million and $265 million, respectively. The related
subordinated debentures had a combined estimated fair value of $528 million.
The Securities, the assets of the Trusts and the common securities issued
by the Trusts are redeemable in whole or in part on or after January 1, 2007,
and January 15, 2007, respectively, or at any time in whole but not in part from
the date of issuance on the occurrence of certain events.
The Capital Securities and the Securities may be included in tier 1
capital for regulatory capital adequacy determination purposes. Distributions to
the holders of the Capital Securities and the Securities are included in sundry
expense.
The obligations of the Parent Company with respect to the issuance of the
Capital Securities and the Securities constitute a full and unconditional
guarantee by the Parent Company of the Trusts' obligations with respect to the
Capital Securities or Securities.
Subject to certain exceptions and limitations, the Parent Company may
elect from time to time to defer subordinated debenture interest payments, which
would result in a deferral of distribution payments on the related Capital
Securities or Securities.
C-23
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12: PREFERRED STOCK
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- -------------------- --------------------
(Shares in thousands, dollars in millions) Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series B Stock
Balance, beginning of year - $ - 2,964 74 4,788 120
Purchases of preferred stock - - - - (250) (6)
Conversions of preferred stock into common stock - - (2,955) (74) (1,574) (40)
Redemption of preferred stock - - (9) - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 2,964 74
- -------------------------------------------------------------------------------------------------------------------------------
Series D Stock - -
Balance, beginning of year - - 350 35 350 35
Redemption of preferred stock - - (350) (35) - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 350 35
- -------------------------------------------------------------------------------------------------------------------------------
Series F Stock - -
Balance, beginning of year - - 74 74 75 75
Purchases of preferred stock - - - - (1) (1)
Redemption of preferred stock - - (74) (74) - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 74 74
- -------------------------------------------------------------------------------------------------------------------------------
Total - $ - - - 3,388 183
===============================================================================================================================
</TABLE>
The Corporation is authorized to issue up to 40 million shares of class A
preferred stock, no-par value, and 10 million shares of preferred stock, no-par
value, each in one or more series. In connection with the First Fidelity merger,
the Corporation issued three new series of preferred stock, which are described
in Note 2 and all of which were redeemed or converted into the Corporation's
common stock as more fully described herein.
On November 15, 1996, the Corporation redeemed all of the outstanding
shares of the Series B Stock at a redemption price of $25.00 per share (plus
accrued and unpaid dividends), substantially all of which were converted into 3
million shares of common stock.
On July 1, 1996, the Corporation redeemed all of the outstanding shares of
the Series D Stock and the Series F Stock at an aggregate redemption price of
$109 million (plus accrued and unpaid dividends).
C-24
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13: COMMON STOCK, CAPITAL RATIOS AND EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Option Weighted
Prices or Average
Grant Exercise
Date Balance, Grants Exercises Forfeitures Balance, Prices,
(Options and shares Market Beginning or New or and Other End of End of
in thousands) Values of 1997 Shares Purchases Reductions 1997 1997 Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 Master Stock Plan
Options granted - 134 - (127) (7) - $ - -
Available 1,034 - - 7 1,041 - -
1988 Master Stock Plan
Options granted $7.38-$17.94 1,542 - (477) (2) 1,063 $ 14.39 1,063
Available 2,228 - - 2 2,230 - -
1992 Master Stock Plan
Options granted $22.38-$29.25 4,288 - (705) (10) 3,573 $ 23.52 3,573
Restricted stock granted $22.38-$29.25 1,892 - (582) (54) 1,256 - -
Available 1,798 - - 10 1,808 - -
1996 Master Stock Plan
Options granted $29.25-$40.13 2,724 4,397 (423) (104) 6,594 $ 36.41 2,253
Restricted stock granted $29.25-$43.16 1,808 2,229 (490) (120) 3,427 - -
Available 23,434 (6,626) - 104 16,912 - -
1996 Employee Plan $27.26 6,922 - (4,210) (175) 2,537 $ 27.26 2,537
Dividend Reinvestment Plan - 7,014 - (1,207) - 5,807 - -
Option plans of acquired
companies
Options granted $6.17-$26.00 3,870 - (1,277) (114) 2,479 $ 16.24 2,437
Options granted $1.73-$52.07 2,547 931 (1,203) (79) 2,196 $ 21.34 2,196
Options granted $3.41-$31.57 1,852 - (1,291) (35) 526 $ 15.53 526
Options granted $2.99-$4.20 18 - (2) (6) 10 $ 3.90 10
Options granted $51.76-$295.13 136 - - (15) 121 $ 126.67 121
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK SPLIT
All common stock and per share data has been restated to reflect a two-for
one stock split that was paid on July 31, 1997.
OPTION AND OTHER PLANS
Under the terms of the 1984, 1988, 1992 and 1996 Master Stock Plans (the
"Plans"), stock options may be periodically granted to key personnel at a price
not less than the fair market value of the shares at the date of grant. The
exercise periods for options granted under the Plans are (i) determined at the
date of grant, (ii) not exercisable for one year following the date of grant,
and (iii) for periods no longer than ten years.
Restricted stock may also be granted under the Plans. The stock is subject
to certain restrictions over a specified period (generally, five years), during
which time the holder is entitled to full voting rights and dividend privileges.
Compensation cost recognized for restricted stock during 1997 and 1996 was $43
million and $23 million, respectively.
Employees, based on their eligibility and compensation, were granted
options to purchase shares of common stock under the 1996 Employee Stock
Purchase Plan (the "Plan") at a price equal to 85 percent of the fair market
value of the shares as of the Plan date. From the Plan date, and generally for
approximately a two-year period thereafter, employees have the option to
purchase all or a portion of the optioned shares. The Plan provides that at the
end of such two-year period (the "Final Purchase Date"), the option price will
be the lesser of 85 percent of the fair market value as of the Plan date or 85
percent of the fair market value as of the Final Purchase Date.
Under the terms of the Dividend Reinvestment Plan, a participating
stockholder's cash dividends and optional cash payments are used to purchase
Parent Company common stock.
Under the terms of the Parent Company's merger agreements with certain
acquired companies, all options with respect to their common stock were
converted into options to purchase Parent Company common stock.
In accordance with a Shareholder Protection Rights Agreement dated
December 18, 1990, as amended, the Parent Company issued a dividend of one right
for each share of Parent Company common stock outstanding as of such date. These
continue to attach to all common stock issued after December 18, 1990. The
rights will become exercisable if any person or group commences a tender or
exchange offer that would result in (i) their becoming the beneficial owner of
15 percent or more of the Parent Company's common stock, or (ii) any person
being determined by the Federal Reserve Board to control the Corporation within
the meaning of the Bank Holding Company Act of 1956, as amended.
C-25
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The rights will also become exercisable if a person or group acquires
beneficial ownership of 15 percent or more of the Parent Company's common stock.
Each right (other than rights owned by such person or group) will entitle its
holder to purchase, for an exercise price of $105.00, a number of shares of the
Parent Company's common stock (or at the option of the Board of Directors,
shares of junior participating class A preferred stock) having a market value of
twice the exercise price. If any person or group acquires beneficial ownership
of between 15 percent and 50 percent of the Parent Company's common stock, the
Board of Directors may, at its option, exchange for each outstanding right
(other than rights owned by such person or group) either two shares of common
stock or two one-hundredths of a share of junior participating class A preferred
stock having economic and voting terms similar to two shares of common stock.
The rights are subject to adjustment if certain events occur, and they will
expire on December 28, 2000, if not redeemed or terminated sooner.
On January, 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as
amended ("FAS 123"), which requires either the (i) fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income as of the date of grant of awards related to
such plans, or (ii) impact of such fair value on net income and earnings per
share be disclosed on a pro forma basis in a footnote to financial statements
for awards granted after December 15, 1994, if the accounting for such awards
continues to be in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"). The Corporation has
elected to continue such accounting under the provisions of APB 25. As
determined in accordance with FAS 123, certain pro forma information which is
based on the estimated fair value of the Corporation's outstanding stock options
for each of the three years ended December 31, 1997, 1996 and 1995, is as
follows: pro forma net income, $1.865 billion, $1.552 billion and $1.508
billion, respectively; pro forma basic earnings per common share, $2.98, $2.51
and $2.43, respectively; and pro forma diluted earnings per common share, $2.94,
$2.48 and $2.37, respectively. The Black-Scholes option pricing model
methodology was used in preparing such pro forma information. Option pricing
models require the use of highly subjective assumptions, including expected
stock price volatility, which when changed can materially affect fair value
estimates. Accordingly, the model does not necessarily provide a reliable single
measure of the fair value of the Corporation's stock options.
CAPITAL RATIOS
Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4 percent and a minimum ratio of total
capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier
1 capital to adjusted average quarterly assets is from 3 percent to 5 percent.
At December 31, 1997, the Corporation's tier 1 capital ratio, total
capital ratio and leverage ratio were 8.41 percent, 13.40 percent and 6.81
percent, respectively. At December 31, 1996, such ratios were 7.33 percent,
12.33 percent and 6.13 percent, respectively. The Corporation does not
anticipate or foresee any conditions that would reduce such ratios to levels at
or below minimum or that would cause its deposit-taking banking affiliates to be
less than well capitalized.
Additional information related to the consolidated capital ratios of the
Corporation for each of the years in the two-year period ended December 31,
1997, can be found in "Management's Analysis of Operations" - "Stockholders'
Equity; Regulatory Capital" on page 22 and in Table 18 on page T-15, which are
incorporated herein by reference.
EARNINGS PER COMMON SHARE
The reconciliation between basic and diluted earings per common share is
below.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(Dollars in millions, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic
Net income $ 1,896 1,624 1,541
Preferred stock dividends - (9) (26)
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,896 1,615 1,515
===========================================================================================================================
Basic earnings per common share $ 3.03 2.61 2.44
===========================================================================================================================
Average common shares (In thousands) 625,649 619,237 619,777
===========================================================================================================================
Diluted
Net income applicable to common stockholders $ 1,896 1,615 1,515
Dividends on convertible preferred stock - - 9
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,896 1,615 1,524
===========================================================================================================================
Diluted earnings per common share $ 2.99 2.58 2.38
===========================================================================================================================
Average common shares (In thousands) 625,649 619,237 619,777
Options 8,123 5,987 8,577
Convertible preferred stock - - 8,832
- ---------------------------------------------------------------------------------------------------------------------------
Average common shares - diluted (In thousands) 633,772 625,224 637,186
===========================================================================================================================
</TABLE>
C-26
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14: PERSONNEL EXPENSE
Personnel expense for each of the years in the three-year period ended December
31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries $ 2,221 1,994 1,811
Pension cost 51 59 29
Savings plan 66 61 60
Other benefits 378 337 307
- ------------------------------------------------------------------------------------------------------------------
Total $ 2,716 2,451 2,207
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Pension expense for nonqualified plans was $19 million, $13 million and
$12 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The accumulated benefit obligation for nonqualified plans was $121
million, $101 million and $62 million for the years ended December 31, 1997,
1996 and 1995, respectively, including vested benefits of $120 million, $100
million and $61 million, respectively. Such plans have no assets. The assumed
rates used in actuarial computations were the same as those used in the
qualified pension plan computations.
The Corporation has tax-qualified defined benefit pension plans (together,
the "Plan") covering substantially all of its employees with one year of
service. The benefits are based on years of service and the employee's highest
five-year average compensation. Contributions are made each year to a trust in
an amount that is determined by an actuary to meet the minimum requirements of
ERISA and to fall at or below the maximum amount that can be deducted on the
Corporation's tax return.
At December 31, 1997, Plan assets include U.S. Government and Government
agency securities, equity securities and other investments. Also included are
two million shares of the Parent Company's common stock. All Plan assets are
held by First Union National Bank (North Carolina) (the "Bank") in a
Bank-administered trust fund.
The Plan's funded status for each of the years in the three-year period
ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Accumulated benefit obligation including vested benefits of $844, 1997; $746, 1996;
and $679, 1995 $ 909 807 739
- -----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date (1,139) (1,006) (934)
Plan assets at fair value 1,400 1,214 1,069
- -----------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 261 208 135
Prior service cost 33 38 42
Unrecognized net loss from past experience different from that assumed and effects
of changes in assumptions 85 109 154
Unrecognized net transition asset (17) (21) (25)
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost included in other assets $ 362 334 306
- -----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS
Discount rate at beginning of year 7.50-7.75% 7.00-7.50 8.25-8.75
Discount rate at end of year 7.25 7.50-7.75 7.00-7.50
Weighted average rate of increase in future compensation levels 4.25 4.50-5.00 4.50-5.00
Long-term average rate of return 8.50-9.00% 8.50 8.50-9.75
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-27
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Certain components of net pension cost for each of the years in the three-year
period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PENSION COST
Service cost-benefits earned during the period $ 63 64 43
Interest cost on projected benefit obligation 75 67 60
Actual (return) on Plan assets (215) (110) (154)
Net amortization and deferral 109 26 68
- --------------------------------------------------------------------------------------------------------
Net pension cost $ 32 47 17
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees. Substantially all the Corporation's
employees may become eligible for these benefits if they reach retirement age
while working for the Corporation. Life insurance benefits are provided through
an insurance company. Medical and other benefits are provided through a
tax-exempt trust formed by the Corporation. The Corporation recognizes the cost
of providing these benefits by expensing annual insurance premiums, trust
funding allocations and administrative expenses.
The amount expensed for group insurance for active employees in 1997, 1996
and 1995 was $118 million, $117 million and $106 million, respectively.
The status of postretirement benefits other than pensions and certain
amounts recognized in the Corporation's consolidated financial statements for
each of the years in the three-year period ended December 31, 1997, are
presented below.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF POSTRETIREMENT BENEFITS OBLIGATION
Retirees $ 179 187 226
Fully eligible active employees 6 5 5
Other active participants 64 51 47
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $ 249 243 278
- -----------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value 4 6 6
Projected benefit obligation in excess of plan assets $ 245 237 272
Unrecognized prior service cost (11) - 10
Unrecognized net gain (loss) from past experience different from that assumed and
effects of changes in assumptions 58 41 (18)
Unrecognized net transition obligation (60) (66) (84)
- -----------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 232 212 180
- -----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS
Weighted average discount rate 7.25 % 7.50-7.75 7.00-7.50
Rate of increase in future compensation levels, depending on age 4.25 4.50 4.00-9.00
Health care cost trend rate
Prior to age 65 6.00 11.67 5.00-
grading 12.25
to 5.50
After age 65 5.00 10.67 5.00-
grading
% to 5.50 11.25
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF ONE PERCENT INCREASE IN HEALTH CARE COST TREND RATE
Service costs $ - - -
Interest costs 1 1 1
Accumulated postretirement benefit obligation $ 11 13 19
- -----------------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT COSTS
Service cost-benefits earned during the period $ 5 5 4
Interest cost on projected benefit obligation 19 20 19
Actual (return) on Plan assets - (1) (1)
Amortization of transition obligation 4 6 4
- -----------------------------------------------------------------------------------------------------------------------------------
Net cost $ 28 30 26
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-28
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15: INCOME TAXES
The Corporation accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The provision for income taxes for each of the years in the three-year
period ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT INCOME TAX EXPENSE
Federal $ 244 283 416
State 25 52 36
- ----------------------------------------------------------------------------------------------------------------------
Total 269 335 452
- ----------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX EXPENSE
Federal 520 535 345
State 25 5 51
- ----------------------------------------------------------------------------------------------------------------------
Total 545 540 396
- ----------------------------------------------------------------------------------------------------------------------
Total $ 814 875 848
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of federal income tax rates and amounts to the
effective income tax rates and amounts for each of the years in the three-year
period ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Pre-tax Pre-tax Pre-tax
(In millions) Amount Income Amount Income Amount Income
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 2,710 $ 2,499 $ 2,389
=========== ============ ==========
Tax at federal income tax rate $ 948 35.0 % $ 875 35.0 % $ 836 35.0%
Reasons for difference in federal income
tax rate and effective tax rate
Tax-exempt interest, net of cost to carry (37) (1.4) (45) (1.8) (60) (2.5)
Non-taxable distributions from
corporate reorganizations (155) (5.7) - - - -
State income taxes, net of federal tax
benefit 32 1.2 37 1.5 57 2.4
Goodwill amortization 45 1.6 37 1.5 33 1.4
Change in the beginning-of-the-year
deferred tax assets valuation allowance (11) (0.4) (12) (0.5) 3 0.1
Other items, net (8) (0.3) (17) (0.7) (21) (0.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 814 30.0 % $ 875 35.0 % $ 848 35.5%
==================================================================================================================================
</TABLE>
C-29
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax liabilities (assets) for each of the
years in the three-year period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
(In millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES
<S> <C> <C> <C>
Depreciation $ 263 96 73
Unrealized gain on debt and equity securities 137 1 84
Intangible assets 114 97 77
Leasing activities 1,922 1,367 857
Loan products 45 24 7
Prepaid pension assets 130 109 90
Loan loss reserve recapture 30 49 72
Other 46 67 66
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 2,687 1,810 1,326
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX ASSETS
Provision for loan losses, net (587) (542) (582)
Accrued expenses, deductible when paid (416) (291) (286)
Foreclosed properties (7) (9) (16)
Sale and leaseback transactions (15) (10) (17)
Deferred income (8) (15) (16)
Purchase accounting adjustments (primarily loans and securities) (79) (144) (63)
Net operating loss carryforwards (71) (55) (38)
First American segregated assets - (4) (20)
Other (115) (87) (57)
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets (1,298) (1,157) (1,095)
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance 24 35 43
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 1,413 688 274
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes to the deferred tax assets valuation allowance for each of the years in
the three-year period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets valuation allowance, beginning of year $ 35 43 37
Current year deferred provision, change in deferred tax assets valuation allowance (11) (12) 3
Purchase acquisitions - 4 3
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance, end of year $ 24 35 43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A portion of the current year change in the net deferred tax liability
(asset) relates to unrealized gains and losses on debt and equity securities
available for sale. The related 1997, 1996 and 1995 deferred tax expense
(benefit) of $136 million, $(83) million and $252 million, respectively, have
been recorded directly to stockholders' equity. Purchase acquisitions also
increased (decreased) the net deferred tax liability by $44 million, $(43)
million and $1 million in 1997, 1996 and 1995, respectively.
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
in certain periods and the utilization of tax planning strategies. Management
has determined that it is more likely than not that the deferred tax assets can
be supported by carrybacks to federal taxable income in excess of $1.2 billion
in the two-year federal carryback period and by expected future taxable income
that will far exceed amounts necessary to fully realize remaining deferred tax
assets resulting from net operating loss carryforwards and from the scheduling
of temporary differences. The valuation allowance primarily relates to certain
state temporary differences and to federal and state net operating loss
carryforwards. To the extent that the valuation allowance attributable to
purchase acquisitions of $22 million is subsequently recognized, such income tax
benefit will reduce goodwill.
C-30
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1997, the Corporation has net operating loss carryforwards
of $35 million which are available to offset future federal taxable income
through 2007, subject to annual limitations. The Corporation also has net
operating loss carryforwards of $1.7 billion, which are available to offset
future state taxable income through 2012.
Income tax expense related to securities available for sale transactions
was $11 million, $14 million, and $14 million in 1997, 1996 and 1995,
respectively. Income tax expense related to investment security transactions was
$1 million, $1 million, and $2 million in 1997, 1996 and 1995, respectively.
The Internal Revenue Service (the "IRS") is examining the Corporation's
federal income tax returns for the years 1991 through 1996, and the IRS is
examining federal income tax returns for certain acquired subsidiaries for
periods prior to acquisition. In 1995, the IRS examination of the Corporation's
federal income tax returns for the years through 1990 was settled with no
material impact to the Corporation's financial position or results of
operations. In 1996 and 1995, tax liabilities for certain acquired subsidiaries
for periods prior to their acquisition by the Corporation were settled with the
IRS with no significant impact on the Corporation's financial position or
results of operations.
- --------------------------------------------------------------------------------
NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers, to reduce its own exposure to fluctuations in interest rates and to
conduct lending activities. These financial instruments include commitments to
extend credit; standby and commercial letters of credit; forward and futures
contracts; interest rate swaps; options, interest rate caps, floors, collars and
swaptions; foreign currency and exchange rate swap commitments; commodity swaps;
and commitments to purchase and sell securities. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of amounts
recognized in the consolidated financial statements.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby and commercial letters of credit is represented by the contract
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. For forward and futures contracts, interest rate swaps, options,
interest rate caps, floors, collars and swaptions, the contract or notional
amounts do not represent the exposure to credit loss. The Corporation controls
the credit risk of its forward and futures contracts, interest rate swap
agreements, foreign currency and exchange rate swaps, and securities
transactions through collateral arrangements, credit approvals, limits and
monitoring procedures.
Our policy requires all swaps and options to be governed by an
International Swaps and Derivatives Association Master Agreement. Bilateral
collateral agreements are in place for substantially all dealer counterparties.
Collateral for dealer transactions is delivered by either party when the credit
risk associated with a particular transaction, or group of transactions to the
extent netting exists, exceeds defined thresholds of credit risk. Thresholds are
determined based on the strength of the individual counterparty, and they are
bilateral. As of December 31, 1997, the total credit risk in excess of
thresholds was $301 million. The fair value of collateral held approximated the
total credit risk in excess of the thresholds.
For non-dealer transactions, the need for collateral is evaluated on an
individual transaction basis, and it is primarily dependent on the financial
strength of the counterparty.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses. The amount of
deferred gains and losses was $13 million and $7 million, respectively, at
December 31, 1997. Net gains of $3 million will increase net interest income in
1998. Net gains of $3 million in the aggregate will increase net interest income
in subsequent years.
Additional information related to derivative financial instruments and
financial instruments held or issued for the purposes of trading activity or
other than for trading can be found below and in Tables 19 through Table 21 on
pages T-16 through T-21, which are incorporated herein by reference.
Off-balance sheet derivative and other financial instruments and their
related fair values as of December 31, 1997 and 1996, are presented below.
C-31
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------- -------------------------------
Contract Contract
Estimated or Estimated or
Carrying Fair Notional Carrying Fair Notional
(In millions) Amount Value Amount Amount Value Amount
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS WHOSE
CONTRACT AMOUNTS REPRESENT
CREDIT RISK
Commitments to extend credit $ - 208 63,832 - 151 52,243
Standby and commercial letters of credit - 59 5,983 - 49 5,176
FINANCIAL INSTRUMENTS WHOSE
CONTRACT OR NOTIONAL
AMOUNTS EXCEED THE AMOUNT
OF CREDIT RISK
Forward and futures contracts
Trading and dealer activities 81 81 27,690 62 62 20,740
Interest rate risk management
Asset rate conversions - 1 725 - 1 57
Asset hedges - - - - 5 662
Rate sensitivity hedges - (7) 14,301 - (5) 29,612
Interest rate swap agreements
Trading and dealer activities (204) (204) 42,424 (45) (45) 24,110
Interest rate risk management
Asset rate conversions 4 118 11,655 3 109 20,330
Liability rate conversions 12 263 6,883 21 90 7,811
Purchased options, interest rate
caps, floors, collars and swaptions
Trading and dealer activities 250 250 10,615 68 68 9,781
Interest rate risk management
Asset rate conversions 3 2 500 5 5 550
Liability rate conversions 1 - 250 2 - 250
Rate sensitivity hedges 33 35 3,951 8 4 12,946
Written options, interest rate caps,
floors, collars and swaptions
Trading and dealer activities (136) (136) 12,692 (56) (56) 9,668
Foreign currency and exchange
rate swap commitments
Trading and dealer activities 44 44 5,221 2 2 4,149
Foreign currency risk management - - 56 - - -
Commodity swaps
Trading and dealer activities - - 24 3 3 67
Commitments to purchase
trading securities (1) (1) 375 (2) (2) 597
Commitments to sell
trading securities $ (1) (1) 1,103 1 1 522
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
C-32
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and they may require payment of a fee. Since many of the commitments are
expected to expire without being drawn on, the total commitment amounts do not
necessarily represent future cash requirements.
Standby and commercial letters of credit are conditional commitments
issued by the Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. Except for short-term guarantees of $2.9 billion, guarantees
extend for more than one year, and they expire in varying amounts primarily
through 2019. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds various assets as collateral supporting those commitments
for which collateral is deemed necessary.
Forward and futures contracts are contracts for delayed deliveries of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities values and
interest rates.
The Corporation enters into a variety of interest rate contracts,
including options, interest rate caps, floors, collars and swaptions written,
and interest rate swap agreements, in its trading activities and in managing its
interest rate exposure. Interest rate caps, floors, collars and swaptions
written by the Corporation enable customers to transfer, modify or reduce their
interest rate risk. Interest rate options are contracts that allow the holder of
the option to purchase or sell a financial instrument at a specified price and
within a specified period of time from the seller or writer of the option. As a
writer of options, the Corporation receives a premium at the outset and bears
the risk of an unfavorable change in the price of the financial instrument
underlying the option.
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions. Notional principal amounts often are used to express the
volume of these transactions, but the amounts potentially subject to credit risk
are much smaller. The Corporation also acts as an intermediary in arranging
interest rate swap transactions for customers.
Generally, futures contracts are exchange traded, and all other
off-balance sheet instruments are transacted in the over-the-counter markets.
In the normal course of business, the Corporation has entered into certain
transactions that have recourse options. These recourse options, if acted on,
would not have a material impact on the Corporation's financial position.
Substantially all time drafts accepted by December 31, 1997, met the
requirements for discount with Federal Reserve Banks. Average daily Federal
Reserve Bank balance requirements for the year ended December 31, 1997, amounted
to $261 million. Minimum operating lease payments due in each of the five years
subsequent to December 31, 1997, are as follows (in millions): 1998, $153; 1999,
$136; 2000, $122; 2001, $108; 2002, $101; and subsequent years, $661. Rental
expense for all operating leases for the three years ended December 31, 1997,
was $227 million, 1997; $223 million, 1996; and $202 million, 1995.
The Parent Company and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which damages in various amounts are claimed. Although the amount
of any ultimate liability with respect to such matters cannot be determined, in
the opinion of management, based on the opinions of counsel, any such liability
will not have a material impact on the Corporation's consolidated financial
position.
C-33
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17: CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments at
December 31, 1997 and 1996, which should be read in conjunction with Note 16 and
certain other notes to the consolidated financial statements presented elsewhere
herein, is set forth below.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 14,895 14,895 15,197 15,197
Trading account assets 5,457 5,457 4,480 4,480
Securities available for sale 21,415 21,415 16,805 16,805
Investment securities 2,175 2,322 2,501 2,636
Loans
Commercial, financial and agricultural 28,046 28,119 25,928 26,239
Real estate - construction and other 2,381 2,407 2,915 2,972
Real estate - commercial mortgage 8,559 8,697 9,745 9,950
Lease financing 5,304 5,304 4,041 4,042
Foreign 1,421 1,420 1,079 1,076
Real estate - mortgage 25,364 25,773 29,098 29,461
Installment loans - Bankcard 2,708 2,751 5,620 5,669
Installment loans - other and Vehicle leasing 23,090 23,111 23,890 23,879
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 96,873 97,582 102,316 103,288
Allowance for loan losses (1,212) - (1,502) -
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net 95,661 97,582 100,814 103,288
- --------------------------------------------------------------------------------------------------------------------------------
Other assets $ 8,472 8,472 3,132 3,140
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 21,753 21,753 20,383 20,383
Interest-bearing deposits
Savings and NOW accounts 30,118 30,118 28,869 28,869
Money market accounts 15,494 15,494 14,899 14,899
Other consumer time 29,231 29,648 33,541 33,983
Foreign 2,483 2,483 1,897 1,897
Other time 3,810 3,835 3,113 3,129
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 102,889 103,331 102,702 103,160
Short-term borrowings 27,357 27,357 24,987 24,987
Other liabilities 3,690 3,690 2,779 2,779
Long-term debt 8,042 8,322 8,060 8,195
Guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures $ 991 1,064 495 500
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-34
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Estimated fair values for the commercial loan portfolio were based on
weighted average discount rates ranging from 6.62 percent to 7.58 percent and
7.34 percent to 7.68 percent at December 31, 1997 and 1996, respectively, and
for the retail portfolio from 8.05 percent to 14.71 percent and 8.35 percent to
14.14 percent, respectively.
The fair value of noninterest-bearing deposits, savings and NOW accounts,
and money market accounts is the amount payable on demand at December 31, 1997
and 1996. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. For
example, the Corporation has a substantial trust department, which includes
mutual fund activities, that contributes net fee income annually. The trust
department is not considered a financial instrument, and its value has not been
incorporated into fair value estimates. Other significant assets and liabilities
that are not considered financial assets or liabilities include the mortgage
banking operation, brokerage network, deferred tax assets, premises and
equipment, and goodwill. In addition, tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates, and they have not been considered in any of the estimates. The
fair value of off-balance sheet derivative financial instruments has not been
considered in determining on-balance sheet fair value estimates.
C-35
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18: FIRST UNION CORPORATION (PARENT COMPANY)
The Parent Company's principal assets are its investments in its
subsidiaries, interest-bearing balances with bank subsidiaries, securities
purchased under resale agreements, securities available for sale and loans to
subsidiaries. The significant sources of income of the Parent Company are
dividends from its subsidiary bank holding companies, interest and fees charged
on loans made to its subsidiaries, interest on eurodollars purchased from bank
subsidiaries, interest on securities available for sale and fees charged to its
subsidiaries for providing various services.
In addition, the Parent Company serves as the primary source of funding
for the mortgage banking and other activities of its nonbank subsidiaries,
including First Union Capital Markets Corp. Lines of credit in the aggregate
amount of $350 million are available to the Parent Company at an annual facility
fee of 8.00 basis points to 18.75 basis points and a utilization fee of 6.25
basis points. The facility fee is based on the daily average commitment amount,
and the utilization fee is based on the daily average principal amount
outstanding. Generally, interest rates will be determined when credit line usage
occurs, and they will vary based on the type of loan extended to the Parent
Company. The lines of credit expire in December 1998.
Certain regulatory and other requirements restrict the (i) lending of
funds by the bank subsidiaries to the Parent Company and to the Parent Company's
nonbank subsidiaries, and (ii) amount of dividends that can be paid to the
Parent Company by the bank subsidiaries and certain of the Parent Company's
other subsidiaries. On December 31, 1997, the Parent Company was indebted to
subsidiary banks in the amount of $375 million that, under the terms of
revolving credit agreements, was collateralized by certain interest-bearing
balances, securities available for sale, loans, premises and equipment and was
payable on demand. On such date, a subsidiary bank had loans outstanding to
Parent Company nonbank subsidiaries in the amount of $139 million that, under
the terms of a revolving credit agreement, were collateralized by securities
available for sale and certain loans and were payable on demand.
Industry regulators limit dividends that can be paid by the Corporation's
subsidiaries. National banks are limited in their ability to pay dividends in
two principal ways. First, dividends cannot exceed the bank's undivided profits,
less statutory bad debt in excess of the 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. The Parent Company's subsidiaries, including its bank
subsidiaries, had available retained earnings of $426 million at December 31,
1997, for the payment of dividends to the Parent Company without such regulatory
or other restrictions.
Subsidiary net assets of $10.7 billion were restricted from being
transferred to the Parent Company at December 31, 1997, under such regulatory or
other restrictions. Dividends from subsidiaries includes $835 million in equity
transfers to the Parent Company related to internal bank consolidations in 1997.
At both December 31, 1997 and 1996, the estimated fair value of the Parent
Company's loans was $2.7 billion.
See Note 11 for information related to the Parent Company's junior
subordinated deferrable interest debentures.
The Parent Company's condensed balance sheets as of December 31, 1997 and
1996, and the related condensed statements of income and cash flows for the
three-year period ended December 31, 1997, are presented below. The condensed
financial statements of the Parent Company as of December 31, 1996, and for the
two-year period then ended reflect the November 28, 1997, merger of Signet's
parent company into the Parent Company on a net basis within the investment in
wholly owned subsidiaries and equity in undistributed net income of subsidiaries
line classifications, as appropriate.
C-36
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
(In millions) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-bearing balances with bank subsidiary $ 4,215 2,160
Securities purchased under resale agreements 381 306
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 4,596 2,466
- ----------------------------------------------------------------------------------------------------------------
Securities available for sale (amortized cost $436 in 1997; $256 in 1996) 437 265
Investment securities 28 -
Loans, net of unearned income ($1 in 1997 and $1 in 1996) 154 108
Allowance for loan losses - (1)
- ----------------------------------------------------------------------------------------------------------------
Loans, net 154 107
- ----------------------------------------------------------------------------------------------------------------
Loans due from subsidiaries
Banks 1,835 1,785
Bank holding companies 174 311
Other subsidiaries 494 512
Investments in wholly owned subsidiaries
Arising from investments in equity in undistributed net income of subsidiaries
Banks 9,125 6,168
Bank holding companies 2,357 5,288
Other subsidiaries 619 513
- ----------------------------------------------------------------------------------------------------------------
12,101 11,969
Arising from purchase acquisitions 101 93
- ----------------------------------------------------------------------------------------------------------------
Total investments in wholly owned subsidiaries 12,202 12,062
- ----------------------------------------------------------------------------------------------------------------
Other assets 585 416
- ----------------------------------------------------------------------------------------------------------------
Total $ 20,505 17,924
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 1 -
Commercial paper 871 1,021
Other short-term borrowings with affiliates 755 651
Other liabilities 704 203
Long-term debt 5,121 4,607
Junior subordinated deferrable interest debentures 1,021 510
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 8,473 6,992
Stockholders' equity 12,032 10,932
- ----------------------------------------------------------------------------------------------------------------
Total $ 20,505 17,924
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
C-37
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 177 158 134
Interest and dividends on securities available for sale 26 8 4
Interest and dividends on investment securities 3 - -
Other interest income from subsidiaries 172 73 84
- ----------------------------------------------------------------------------------------------------------------
Total interest income 378 239 222
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on short-term borrowings 82 68 71
Interest on long-term debt 416 278 234
- ----------------------------------------------------------------------------------------------------------------
Total interest expense 498 346 305
- ----------------------------------------------------------------------------------------------------------------
Net interest income (120) (107) (83)
Provision for loan losses (1) - -
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (119) (107) (83)
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Dividends from subsidiaries
Banks 1,601 610 508
Bank holding companies 452 1,693 275
Other subsidiaries 25 15 10
Securities available for sale transactions 6 - 10
Investment security transactions 3 - -
Sundry income 537 362 320
- ----------------------------------------------------------------------------------------------------------------
Total noninterest income 2,624 2,680 1,123
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE 468 316 279
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) and equity in undistributed
net income of subsidiaries 2,037 2,257 761
Income taxes (benefits) 20 (18) (14)
- ----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 2,017 2,275 775
Equity in undistributed net income of subsidiaries (121) (651) 766
- ----------------------------------------------------------------------------------------------------------------
Net income 1,896 1,624 1,541
Dividends on preferred stock - 9 26
- ----------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 1,896 1,615 1,515
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
C-38
<PAGE>
AUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,896 1,499 1,430
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Equity in undistributed net income of subsidiaries 121 776 (655)
Accretion and revaluation losses on securities available for sale 2 1 (4)
Provision for loan losses (1) - -
Securities available for sale transactions (6) - (10)
Investment security transactions (3) - -
Depreciation and amortization 13 10 6
Deferred income taxes (benefits) (48) 5 1
Other assets, net (114) 130 (294)
Other liabilities, net 497 (82) 1
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,357 2,339 475
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 161 104 99
Purchases of securities available for sale (335) (171) (125)
Sales of investment securities 18 - -
Purchases of investment securities (43) - -
Advances to subsidiaries, net 105 (328) (595)
Investments in subsidiaries 6 (851) 363
Longer-term loans originated or acquired (382) (244) (101)
Principal repaid on longer-term loans 336 212 97
Purchases of premises and equipment, net (18) (26) (7)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (152) (1,304) (269)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits 1 - -
Commercial paper (150) 79 546
Other short-term borrowings, net 104 190 161
Issuance of junior subordinated deferrable interest debentures 511 510 -
Issuances of long-term debt 525 852 1,292
Payments of long-term debt (15) (287) (272)
Sales of common stock 722 279 249
Purchases of preferred stock - - (7)
Redemption of preferred stock - (109) -
Purchases of common stock (1,024) (968) (1,199)
Cash dividends paid (749) (620) (529)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (75) (74) 241
- ----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,130 961 447
Cash and cash equivalents, beginning of year 2,466 1,505 1,058
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,596 2,466 1,505
- ----------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 436 321 288
Income taxes 200 225 338
NONCASH ITEMS
Increase in investments in subsidiaries as a result of acquisitions of institutions
for common stock 3 1,008 611
Assumption of long-term debt of liquidated affiliate - - 74
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity
securities included in
Parent Company
Securities available for sale (8) (60) 27
Other liabilities 4 3 24
Parent Company subsidiaries
Securities available for sale 397 (153) 458
Other assets $ 133 (92) 136
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
C-39
<PAGE>
[THREE POST CARDS WITH THE FOLLOWING INFORMATION APPEARS HERE]
[FRONT OF CARDS:]
DUPLICATE MAILINGS
Reduce your mail.
First Union seeks to eliminate mailing duplicate annual reports to its
registered shareholders when possible. However, the annual report is an
important document of disclosure that we are required to provide. We may
eliminate the mailing of an annual report as outlined at right and with the
signature of each registered shareholder named on the account. First Union is
unable to change the mailing status of any account held through a bank,
brokerage firm or other nominee.
Name(s)________________________________
Address________________________________
City/State/ZIP_________________________
Please print all information legibly and exactly as it appears on the
stockholder account.
[ ] The above is a new address. Please change your records.
[ ] I (we) have two stockholder accounts whose registration is identical.
Please keep these accounts separate, but eliminate the mailing of an annual
report to one of these identically registered accounts.
[ ] I (we) have two stockholder accounts whose registration is identical.
Please consolidate these accounts so that I (we) will receive only one set
of stockholder materials in the future.
[ ] There are two or more differently registered accounts receiving First Union
stockholder information at the above address. Please eliminate the mailing
of an annual report to the stockholder account specified above.
[ ] I (we) wish to begin receiving future annual reports via the First Union
Web site. I understand that I may incur certain costs for Internet access
or on-line time charged by my Internet access provider.
Signature(s)
______________________________
______________________________
Signatures are required for all of these requests. Each stockholder listed on
the stockholder account must sign.
Should you require other maintenance on your stockholder account, please contact
Shareholder Services at 800-347-1246 for assistance.
If you hold First Union Corporation through a bank, broker or other nominee, you
will be unable to use this card to eliminate duplicate mailings. Please contact
your bank or brokerage firm.
- --------------------------------------------------------------------------------
ANNUAL REPORT IMPACT SURVEY
Rate this report.
To help us improve our ability to communicate effectively about your company's
performance, progress and strategic plans, we would appreciate your completing
and returning this survey about the 1997 Annual Report. Just fill it out and
drop it in the mail. No postage is required.
Thank you for your investment in First Union.
On a scale of 1 to 5 (one being the lowest and five being the highest), please
rate the following:
How clearly did the 1997 Annual Report tell you what you wanted to know about
First Union?
- --------------------------------------------------------------------------------
1 2 3 4 5
- --------------------------------------------------------------------------------
How well did the Annual Report meet your needs as an investor?
Some things to consider in answering this question: Do I understand clearly
where First Union is heading? Did the Annual Report provide information that
was of use to me in making my investment decision? Was it the "right" amount of
detail?
- --------------------------------------------------------------------------------
1 2 3 4 5
- --------------------------------------------------------------------------------
How well did this Annual Report help me understand First Union's corporate
strategy?
- --------------------------------------------------------------------------------
1 2 3 4 5
- --------------------------------------------------------------------------------
General Comments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Thank you for your help and time. Please complete the following:
[ ] I am an individual investor. [ ] I am an institutional investor.
[ ] I am a stock analyst.
- --------------------------------------------------------------------------------
CAP ACCOUNT
You've put your
stock in First Union.
Now put it in
the CAP Account.
The CAP Account gives you access to dozens of brokerage* and banking services in
one place -- with the advice you need to make the most of your money.
To open a CAP, CAP1 or CAP for Business Account, call 1-888-213-1352, visit a
First Union Financial Center or visit CAP online at www.firstunion.com/CAP.
You can open a CAP Account with $15,000 or more in any combination of cash,
stocks, bonds, mutual funds or certain other investments. Even your First Union
self-directed IRA balance can be used to meet the CAP Account minimum balance
requirement.
The CAP1 Account offers many of the same features as CAP, but with a lower
annual fee and only $5,000 to open.
The CAP for Business Account has special benefits designed to meet the needs of
our business clients.
*Brokerage services are offered through First Union Brokerage Services, Inc., a
registered broker-dealer, member NASD, and separate non-bank affiliate of First
Union Corporation.
Please rush me more information on:
[ ] The CAP Account
[ ] The CAP1 Account
[ ] The CAP for Business Account
Name________________________________________
Address_____________________________________
_____________________________________
City/State/ZIP______________________________
Phone_______________________________________
Are you currently a First Union customer? [ ] Yes [ ] No
Investments in stocks, bonds and mutual funds.
- ---------------------------------------------------
ARE NOT FDIC ARE NOT BANK MAY LOSE
INSURED GUARANTEED VALUE
- ---------------------------------------------------
<PAGE>
[BACK OF CARDS:]
[BAR CODE -------------
APPEARS NO POSTAGE
HERE] NECESSARY
IF MAILED
IN THE
UNITED STATES
-------------
- -------------------------------------------------- [BAR CODE
BUSINESS REPLY MAIL APPEARS HERE]
FIRST-CLASS MAIL PERMIT NO. 1273 CHARLOTTE, NC
- --------------------------------------------------
POSTAGE WILL BE PAID BY THE ADDRESSEE
FIRST UNION CORPORATION
INVESTOR RELATIONS NC0206
301 S. COLLEGE STREET
CHARLOTTE, NC 28254-0040
[POSTAGE ROUTING CODE APPEARS HERE]
[APPEARING ON RIGHT SIDE OF CARD ROTATED 90 DEGREES]
Please detach along perforated line.
- --------------------------------------------------------------------------------
[BAR CODE -------------
APPEARS NO POSTAGE
HERE] NECESSARY
IF MAILED
IN THE
UNITED STATES
-------------
- -------------------------------------------------- [BAR CODE
BUSINESS REPLY MAIL APPEARS HERE]
FIRST-CLASS MAIL PERMIT NO. 1273 CHARLOTTE, NC
- --------------------------------------------------
POSTAGE WILL BE PAID BY THE ADDRESSEE
FIRST UNION CORPORATION
CORPORATE RELATIONS NC0570
301 S. COLLEGE STREET
CHARLOTTE, NC 28254-0040
[POSTAGE ROUTING CODE APPEARS HERE]
[APPEARING ON RIGHT SIDE OF CARD ROTATED 90 DEGREES]
Please detach along perforated line.
- --------------------------------------------------------------------------------
[BAR CODE -------------
APPEARS NO POSTAGE
HERE] NECESSARY
IF MAILED
IN THE
UNITED STATES
-------------
- -------------------------------------------------- [BAR CODE
BUSINESS REPLY MAIL APPEARS HERE]
FIRST-CLASS MAIL PERMIT NO. 1273 CHARLOTTE, NC
- --------------------------------------------------
POSTAGE WILL BE PAID BY THE ADDRESSEE
FIRST UNION CORPORATION
CAP ACCOUNT ADMINISTRATION NC1164
301 S. COLLEGE STREET
CHARLOTTE, NC 28254-0040
[POSTAGE ROUTING CODE APPEARS HERE]
[APPEARING ON RIGHT SIDE OF CARD ROTATED 90 DEGREES]
Please detach along perforated line.
<PAGE>
Stockholder Information
[APPEARING ON RIGHT SIDE OF PAGE ROTATED 90 DEGREES:]
Customers for Life
How To Reach Us
Financial Information
Analysts, stockholders and other investors seeking financial information about
First Union should contact Alice Lehman, managing director of Corporate
Relations and Investor Relations at 704-374-4139. News media and others seeking
general information should contact R. Jeep Bryant, senior vice president for
Corporate Communications, at 704-374-2957.
Print. Printed financial materials including our 1997 Annual Report on Form 10-K
may be obtained from Investor Relations by calling 704-383-5401.
Internet. First Union's annual report and quarterly financial releases, as well
as other company news releases, can be accessed through our website on the
Internet at www.firstunion.com.
Fax-On-Demand. Call 1-800-283-6214 for the latest news announcements through
FAX-On-Demand.
Stockholder Assistance
General information, including information about our dividend reinvestment
program and direct deposit of dividends, may be obtained by calling Investor
Relations at 704-374-6782.
If you have questions concerning your stockholder
account, please call our transfer agent, First Union National Bank, at
1-800-347-1246. This is the place to call if you require a change of address,
records or information about lost certificates, dividend checks or dividend
reinvestment.
Customer Inquiries
Mail. If you need to contact our Corporate Headquarters, write First Union
Corporation, One First Union Center, 301 South College Street, Suite 4000,
28288, or call 704-374-4880.
Internet. Our Internet address is: http://www.firstunion.com or via electronic
mail: [email protected].
Phone. Customers nationwide who wish to open a checking or savings account;
transfer funds; apply for a mortgage, home equity or auto loan or lease; request
credit cards; pay bills; and conduct other banking transactions may call
toll-free at 1-800-413-7898.
Duplicate Copies Our goal is to reduce the expense associated with mailing
financial reports to stockholders by receiving your authorization to mail only
one per address. This authorization is strictly voluntary.
Annual Meeting
The annual meeting of stockholders will be at 9:30 a.m. on Tuesday, April 21,
1998, in the 12th floor auditorium of Two First Union Center, Charlotte, North
Carolina.
Equal Opportunity Employer
First Union Corporation is an equal opportunity employer. All matters regarding
recruiting, hiring, training, compensation, benefits, promotions, transfers and
all other personnel policies will continue to be free from discriminatory
practices.
Securities Markets
First Union Corporation common stock is traded on the New York Stock Exchange
under the symbol FTU. First Union's debt ratings are:
First Union Corporation
- --------------------------------------------------------------------------------
Senior Debt Subordinated Debt Commercial Paper
- --------------------------------------------------------------------------------
Standard & Poor's A A- A-1
Moody's A1 A2 P-1
Thomson BankWatch A+ A TBW-1
First Union National Bank
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Long-Term Letters Long-Term Certificates Short-Term Letters Short-Term Certificates
of Credit of Deposit of Credit of Deposit
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Standard & Poor's A+ A+ A-1 A-1
Moody's Aa3 Aa3 P-1 P-1
Thomson BankWatch - - TBW-1 TBW-1
</TABLE>
<PAGE>
First Union Corporation
One First Union Center
Charlotte, NC 28288-0570
505097
<PAGE>
Exhibit (21)
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1)
ABCA, Inc. (3) (Jacksonville, FL)
-- 1005 Corp. (Charlotte, NC)
-- Citrus County Land Corp. (3) (Jacksonville, FL)
-- Citrus County Service Corp. (3) (Jacksonville, FL)
-- Melbourne Atlantic Venture Partners (20% -- NV) (Jacksonville, FL)
-- Naples Financial Services, Inc. (Jacksonville, FL)
Ameribanc Development Corporation (Roanoke, VA)
Austin Ventures IV-A, L. P. (6.42% -- NV) (Austin, TX)
Butcher & Singer Financial Services Agency of Ohio, Inc. (Youngstown, OH)
Boca Raton First National Bank (Boca Raton, FL)
Capitol Finance Group, Inc. (Charlotte, NC)
Education Financing Services, LLC (19.318%) (Winston-Salem, NC)
First American Service Corporation (Roanoke, VA)
-- Long, Travers & FASC (40% -- NV) (Springfield, VA)
-- New Rivers Towers Limited Partnership (NV) (INACTIVE) (Annandale, VA)
-- Woodlawn Joint Venture (INACTIVE) (40% -- NV) (Woodbridge, VA)
First Card Corporation (Charlotte, NC)
First Union Bank of Delaware (Wilmington, DL)
-- Delaware Financial Services Corporation (Wilmington, DL)
-- First Fidelity Insurance Services of Delaware, Inc. (Wilmington, DL)
-- Taylor & Clark Insurance Services, Incorporated (Fairfax, VA)
First Union Capital I (Wilmington, DL)
First Union Capital II (Wilmington, DL)
First Union Capital III (Wilmington, DL)
First Union Community Development Corporation (Charlotte, NC)
-- 349-59 Lenox LLC (99.99% -- NV) (Mount Vernon, NY)
-- Anacuitas Manor, Ltd. (99% -- NV) (Austin, TX)
-- Cherokee Hills Associates LLC (99% -- NV) (Nashville, TN)
-- Harlingen Community Development Corporation 1, LP (99% -- NV)
(Altamonte Springs, FL)
-- Headhouse Retail Associates, L.P. (99.99% -- NV) (Philadelphia, PA)
-- Housing Equity Fund of Virginia I, L.P. (6.945% -- NV) (Roanoke, VA)
-- Montgomery Homes L. P. IX (99% -- NV) (Kensington, MD)
-- Parkchester Limited Partnership (99% -- NV) (Roanoke, VA)
-- Pendleton Pines Associates, LLC (99% -- NV) (Nashville, TN)
-- Richmond Green Limited Partnership (99.99% -- NV) (Nashville, TN)
-- Roanoke Community Development Corporation (27.778%)(7) (INACTIVE)
(Roanoke, VA)
-- Sable Point Apartments Limited Partnership (99% -- NV) (Altamonte
Springs, FL)
-- San Benito Housing, Ltd. (99% -- NV) (Altamonte Springs, FL)
-- Stoneybrooke Heights Associates LLC (99.99% -- NV) (Nashville, TN)
-- Sycamore Row, LLC (99% -- NV) (Bronx, NY)
First Union Corporation of New Jersey (Newark, NJ)
-- First Fidelity Incorporated (Newark, NJ)
-- Brynwood Partners I, L. P. (7.14% -- NV) (Greenwich, CT)
-- FCC-PR, Inc. (3) (Philadelphia, PA)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- Fairfield Properties, Inc. (Stamford, CT)
-- Fidelcor Business Credit Corporation (New York, NY)
-- Comwest Capital Corporation (3) (Los Angeles, CA)
-- First Union National Bank (Avondale, PA)
-- 2-4 Potter Place Urban Renewal, L.P. (99% -- NV) (Weehawken, NJ)
-- AIRPORT ROAD/FIDOREO, INC. (3) (Newark, NJ)
-- Andalusia Senior Housing, L. P. (99% -- NV) (Levittown, PA)
-- Beaumont Avenue Apartments, L. P. (99% -- NV) (New York, NY)
-- BEST PARKING/FIDOREO, INC. (3) (Newark, NJ)
-- BGMCO PA, Inc. (3) (Philadelphia, PA)
-- BRICK INDUSTRIAL/FIDOREO, INC. (3) (Newark, NJ)
-- Bucks/DHS Real Estate, Inc. (3) (Allentown, PA)
-- Chambers Bridge Urban Renewal Housing, L. P. (99% -- NV)
(Yardville, NJ)
-- CHI ES Holding, Inc. (3) (Philadelphia, PA)
-- City Affordable Housing LLC (99.99% -- NV) (Charlotte, NC)
-- COMMERCE/FIDOREO LS, INC. (3) (INACTIVE) (Newark, NJ)
-- Cranford Avenue Apartments, L.P. (99% -- NV) (New York, NY)
-- CRAWFORDS CORNER/FIDOREO, INC. (3) (Newark, NJ)
-- CRL Real Estate, Inc. (3) (Philadelphia, PA)
-- Develcor NJ, Inc. (3) (INACTIVE) (Philadelphia, PA)
-- Equitable Realty Associates, L. P. (99% -- NV) (Yonkers, NY)
-- FFBIC New York, Inc. (Spring Valley, NY)
-- FFBIC New York II, Inc. (Spring Valley, NY)
-- FFL Services Corporation (Newark, NJ)
-- Fidelity Overseas Investment, Inc. (INACTIVE) (Wilmington, DL)
-- First Fidelity Building Corporation (Philadelphia, PA)
-- First Fidelity Insurance Services, Inc. (Newark, NJ)
-- First Fidelity International Bank (Charlotte, NC)
-- First Union I, Inc. (St. Thomas, US Virgin Islands)
-- Matthew International Sales, Inc. (St. Thomas, US Virgin
Islands)
-- First Fidelity Private Capital, Inc. (Philadelphia, PA)
-- Actuator and Valve Services, Inc. (100% -- NV; Convertible
into 35% Voting) (Woodstock, GA)
-- Case Holdings, Inc. (30% -- NV; Convertible into 35% Voting)
(Manalapan, NJ)
-- Communications Systems Technologies, Inc. (12.5% -- NV;
Convertible into 4% Voting)
(Columbia, MD)
-- Fresh Creek Technologies, Inc. (100% -- NV; Convertible into
22% Voting) (Fairfield, NJ)
-- Integra Services Technologies, Inc. (100% -- NV; Convertible
into 25% Voting) (Pasadena, TX)
-- Larex, Inc. (12% -- NV; Convertible into 3.3% Voting) (6)
(St. Paul, MN)
-- Lion Laboratories, Inc. (100% -- NV; Convertible into 45%
Voting) (6) (Old Saybrooke, CT)
-- MaxFlight Technologies, Inc. (100% -- NV; Convertible into
17% Voting) (6) (Bayville, NJ)
-- National Resource Directories, Inc. (100% -- NV; Convertible
into 40% Voting) (6) (Eatontown, NJ)
-- Polycel Acquisition, Inc. (25%) (Somerville, NJ)
-- First Fidelity Urban Investment Corporation (Newark, NJ)
-- Allentown Development Company, Inc. (24%) (Trenton, NJ)
-- First Union Auto Finance, Inc. (Charlotte, NC)
-- First Union NOVA Holdings of NJ, Inc. (Newark, NJ)
-- NOVA Corporation (8.93%) (4) (Atlanta, GA)
-- First Union Real Estate Asset Company of New Jersey (Avondale,
PA)
-- First Union Real Estate Investment Company of New Jersey
(INACTIVE) (Avondale, PA)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- First Union Trust Company, National Association (Wilmington, DE)
-- FFBIC, Inc. (Newark, DE)
-- FOIL, Inc. (3) (Philadephia, PA)
-- FREEHOLD/FIDOREO, INC. (3) (INACTIVE) (Newark, NJ)
-- GJA R/E Corp. (3) (New York, NY)
-- Hamilton Manor Limited Partnership (99% -- NV) (Stroudsburg, PA)
-- HOHOKUS/FIDOREO LS, INC. (3) (Newark, NJ)
-- HOVBILT VILLAS/FIDOREO, INC. (3) (Newark, NJ)
-- Industrial Valley Real Estate Co. (Philadelphia, PA)
-- JERSEY CENTER/FIDOREO, INC. (3) (Newark, NJ)
-- KOGEL ISLAND/FIDOREO, INC. (3) (New York, NY)
-- LIVINGSTON AVENUE/FIDOREO, INC. (3) (Newark, NJ)
-- Maryland Housing Equity Fund III Limited Partnership (7.7647% --
NV) (Columbia, MD)
-- MIDDLE ISLAND/FIDOREO, INC. (3) (INACTIVE) (New York, NY)
-- MT. EPHRAM/FIDOREO LS, INC. (3) (INACTIVE) (Newark, NJ)
-- Multi I/FNY, Inc. (3) (Port Chester, NY)
-- Old York Road Real Estate, Inc. (3) (Philadelphia, PA)
-- Old York Agency, Inc. (Avondale, PA)
-- Orianna Street Limited Partnership (99% -- NV) (Philadelphia,
PA)
-- PARK AVENUE/FIDOREO, INC. (3) (INACTIVE) (Newark, NJ)
-- PAROG, Inc. (3) (Philadelphia, PA)
-- PERRY STREET/FIDOREO, INC. (NEVER ACTIVE) (Newark, NJ)
-- Sellit, Inc. (3) (INACTIVE) (Philadelphia, PA)
-- Senior Cottages of Shippensburg, Ltd. (99% -- NV) (St. Louis
Park, MN)
-- S.H.E. Urban Renewal Associates, L. P. (99% -- NV) (Newark, NJ)
-- Skyhawk Agency, Inc. (Hawthorne, NY)
-- St. Joseph's Affordable Housing Limited Partnership (74.25% --
NV) (Wayne, PA)
-- SURREY DOWNS/FIDOREO, INC. (3) (Newark, NJ)
-- TAYLORR LAKES/FIDOREO, INC. (3) (Newark, NJ)
-- The Howard Mortgage Group, Inc. (Newark, NJ)
-- VERO/FIDOREO LS, INC. (3) (Plantation, FL)
-- Washington Apartments Associates, Limited Partnership (99% --
NV) (Emmaus, PA)
-- WATERVIEW/FIDOREO, INC. (3) (Newark, NJ)
-- Radnor Venture Partners, L. P. (7.39% -- NV) (Wayne, PA)
-- TDH II Limited (5.72% -- NV) (Rosemont, PA)
-- Waller House Corporation (Philadelphia, PA)
-- National Temple Limited Partnership-II (98.99% -- NV)
(Philadelphia, PA)
-- HONOR Technologies, Inc. (2.1270%) (5) (Maitland, FL)
First Union Development Corporation (Charlotte, NC)
-- 425 South Tryon Street, LLC (50%) (Charlotte, NC)
-- The First Service Corporation of South Carolina (Greenville, SC)
-- Arrowwood Associates (50%) (Columbia, SC)
First Union Export Trading Company (INACTIVE) (Charlotte, NC)
First Union FPS, Inc. (Charlotte, NC)
First Union Futures Corporation (Charlotte, NC)
First Union Home Equity Bank, N. A. (Charlotte, NC)
First Union Institutional Capital I (Wilmington, DL)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
First Union Institutional Capital II (Wilmington, DL)
First Union Investors, Inc. (Charlotte, NC)
-- Atlantic Venture Partners II, L.P. (5.44% -- NV) (Roanoke, VA)
-- Canaan Ventures II L. P. (19.60% -- NV) (Rowayton, CT)
-- Carousel Capital Partners, L. P. (13.62% -- NV) (Charlotte, NC)
-- Center Street Capital Partners, L. P. (5.40% -- NV) (Little Rock, AR)
-- Chartwell Capital Investors, L. P. (16.03% -- NV) (Jacksonville, FL)
-- Chisholm Partners III, L. P. (14.60% -- NV) (Providence, RI)
-- Commonwealth Investors II, L. P. (9.09% -- NV) (Richmond, VA)
-- DeMuth, Folger & Wetherill II, L. P. (7.5% -- NV) (Teaneck, NJ)
-- General Finance Service Corporation (Richmond, VA)
-- Global Private Equity III L.P. (5.18% -- NV) (Boston, MA)
-- High Ridge Capital, LLC (24.99% -- NV) (Stamford, CT)
-- HRC General Partners Limited Partnership (15% -- NV) (Stamford, CT)
-- Kinder Morgan Energy Partners, L.P. (7.4% -- NV) (Houston, TX)
-- Knightsbridge Capital Fund I, L. P. (10.76% -- NV) (New York, NY)
-- McCown De Leeuw & Co. IV, L.P. (7.1182% -- NV) (Menlo Park, CA)
-- Pacific Venture Group, L. P. (5.24% -- NV) (Irvine, CA)
-- Virginia Baseball Club, L.P. (9.25% -- NV) (Alexandria, VA)
First Union Life Insurance Company (Charlotte, NC)
First Union Mortgage Corporation (Charlotte, NC)
-- Argo Partnership, L. P. (8% -- NV) (New York, NY)
-- Farmington, Incorporated (Charlotte, NC)
-- Ghent-Farmington Associates (50%) (Norfolk, VA)
-- First Union Title Corporation (Atlanta, GA)
-- R.B.C. Corporation (Charlotte, NC)
-- Slate Stone Hills, Incorporated (Charlotte, NC)
-- The Fairfax Corporation (Charlotte, NC)
-- Interchange Partners (50% -- NV) (Charlotte, NC)
-- Real Estate Consultants of the South, Inc. (Charlotte, NC)
-- Water Street Insurance Agency, Inc. (Jacksonville, FL)
First Union National Bank (94%) (2) (Charlotte, NC)
-- 100 Block Associates Limited Partnership (93.75% -- NV) (Charlotte, NC)
-- Concessions, Inc. (100% -- NV) (Raleigh, NC)
-- Raleigh Club, Inc. (100% -- NV) (Raleigh, NC)
-- 1560 Wilson Boulevard Limited Partnership (28% -- NV) (Washington, DC)
-- ACB Services, Inc. (INACTIVE) (Nashville, TN)
-- Alden Pond, Inc. (3) (Jacksonville, FL)
-- Arbor Glenn L.P. (99% -- NV) (Roanoke, VA)
-- Arbor Village, L.P. (99% -- NV) (Winter Park, FL)
-- Ashton of Richmond Hill, L. P. (99% -- NV) (Gainesville, FL)
-- Athens Rental Housing, L.P. (99% -- NV) (Cordele, GA)
-- Bacon Housing, L.P. (99% -- NV) (Richmond, VA)
-- Barrett Place Limited Partnership (99% -- NV) (Wake Forest, NC)
-- Barrett Place II Limited Partnership (99.99% -- NV) (Raleigh, NC)
-- Bart, Inc. (Jacksonville, FL)
-- Beechridge Limited Partnership (99% -- NV) (Raleigh, NC)
-- BOB Title Holdings, Inc. (3) (Baltimore, MD)
-- BOB Title XXX, Inc. (3) (Baltimore, MD)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- Annapolis Overlook Utility, Inc. (3) (Rockville, MD)
-- Bowler Housing L.P. (99% -- NV) (Richmond, VA)
-- BR Limited Partnership (99% -- NV) (Washington, DC)
-- Builders Acceptance Corporation (Raleigh, NC)
-- Business Development Corporation of South Carolina (8.7%) (Columbia,
SC)
-- Camellia Court Apartments Limited Partnership (99.99% -- NV) (Beaufort,
NC)
-- Cannon/Hearthwood Limited Partnership (99% -- NV) (Culpeper, VA)
-- Cantebury of Hilliard, Ltd. (99% -- NV) (Gainesville, FL)
-- Cedar Forest Limited Partnership (95% -- NV) (Boston, MA)
-- Center Credit Corporation (Waterbury, CT)
-- Center Funding Company (Waterbury, CT)
-- CFF Financial Corporation (Roanoke, VA)
-- CIMC, Inc. (3) (Jacksonville, FL)
-- Creative Choice Homes IX, Ltd. (99% -- NV) (Palm Beach Gardens, FL)
-- CT I Limited Partnership (99% -- NV) (Raleigh, NC)
-- CTB Realty Ventures XIV, Inc. (3) (New Haven, CT)
-- CTB Realty Ventures XXI, Inc. (3) (New Haven, CT)
-- Danville Community Development Corporation (13% -- NV) ((Danville, VA)
-- DF Southeastern Mortgage, Inc. (Atlanta, GA)
-- Ellenton Housing Associates, Ltd. (99% -- NV) (Coral Gables, FL)
-- Elm Lake Apartments, Ltd. (99% -- NV) (Bradenton, FL)
-- Evergreen Apartments, L.P. (99.99% -- NV) (Cordele, GA)
-- Evergreen Asset Management Corp. (Charlotte, NC)
-- Fairbrooke Apartments Limited Partnership (99% -- NV) (Baltimore, MD)
-- Fairfax County Redevelopment and Housing Authority/HCDC One L.P. (99%
-- NV) (Fairfax, VA)
-- Fairfax County Redevelopment and Housing Authority/HCDC Two L.P. (99%
-- NV) (Fairfax, VA)
-- FH Crossings, Ltd. (3) (Richmond, VA)
-- FIFTEEN/UNIONOREO, INC. (3) (Newark, NJ)
-- FIFTY-EIGHT/UNIONOREO, INC. (3) (INACTIVE) (Stamford, CT)
-- FIFTY-SEVEN/UNIONOREO, INC. (3) (Stamford, CT)
-- FIFTY-SIX/UNIONOREO, INC. (3) (INACTIVE) (Shelton, CT)
-- First Union Auto Loan Securitization, Inc. (Charlotte, NC)
-- First Union Bank and Trust Company (Cayman) Ltd. (Grand Cayman, British
West Indes)
-- First Union Brokerage Services, Inc. (Charlotte, NC)
-- First Union Capital Partners, Inc. (Charlotte, NC)
-- American Information Co., Inc. (33%) (San Francisco, CA)
-- Arcon HealthCare, Inc. (6.60%) (Nashville, TN)
-- Atlantic Spinners, Inc. (12.5%) (Bessemer City, NC)
-- Chattem, Inc. (6.3%) (Chattanooga, TN)
-- Cybergenics Holding, Inc. (30.9%) (New York, NY)
-- Electronic Manufacturing Systems, Inc. (10.6%) (Longmont, CO)
-- Envoy Corporation (6.2%) (Nashville, TN)
-- FrontierVision Partners, L. P. (15.05% -- NV) (Denver, CO)
-- FVP GP, L.P. (5.01% -- NV) (Denver, CO)
-- Genesis Direct, Inc. (5%) (Seaucus, NJ)
-- Grapevine Broadcasting of Anchorage, LLC (23%) (Anchorage, AK)
-- Grapevine Broadcasting of Austin, LLC (23%) (Austin, MN)
-- Grapevine Broadcasting of Joplin, LLC (23%) (Joplin, MO)
-- Grapevine Broadcasting of Wyoming, LLC (23%) (Casper, WO)
-- Heartland Pork Enterprises, Inc. (20.93%) (Alden, IO)
-- HTI Communications, Inc. (25%) (Austin, TX)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- Meigher Communications, L. P. (13.2% -- NV) (New York, NY)
-- Renal Disease Management by Physicians, Inc. (17.11%) (Old Lyme, CT)
-- Right Source, Inc. (36.19%) (Greenville, SC)
-- US Salt Holdings, Inc. (49.3%) (Jacksonville, FL)
-- First Union Commercial Corporation (Charlotte, NC)
-- First Union Commercial Leasing Group, L.L.C. (1%) (Charlotte, NC)
-- First Union Institutional Mortgage Services, LLC (Charlotte, NC)
-- First Union/Maher Partners (50%) (Wayne, PA)
-- First Union Overseas Investment Corporation (Charlotte, NC)
-- Union Hamilton Assurance, Ltd. (Hamilton, Bermuda)
-- First Union Rail Corporation (Charlotte, NC)
-- Ironbrand Capital LLC (1%) (Charlotte, NC)
-- National Auto Finance Company, L.P. (10% -- NV) (Boca Raton,
FL)
-- RAILEASE, Inc. (Bellevue, WA)
-- Transportation Equipment Advisors, Inc. (Arlington Heights, IL)
-- First Wells Fargo Leasing Partnership (90% -- NV) (Charlotte, NC)
-- Ironbrand Capital LLC (99%) (Charlotte, NC)
-- National Auto Finance Company, L.P. (10% -- NV) (Boca Raton, FL)
-- Multiplex Leasing Partners (90% -- NV) (Charlotte, NC)
-- First Union Commercial Leasing Group, L.L.C. (99%) (Charlotte, NC)
-- First Union Commercial Mortgage Securities, Inc. (Charlotte, NC)
-- First Union Direct Bank, N. A. (Augusta, GA)
-- First Union Real Estate Asset Company of Connecticut (Stamford, CT)
-- First Union Real Estate Investment Company of Connecticut
(Stamford, CT)
-- First Union Holdings, Inc. (Nashville, TN)
-- First Union Financial Investments, Inc. (Nashville, TN)
-- First Union Insurance Agency of FL, Inc. (Redington, FL)
-- First Union Insurance Agency of NC, Inc. (Charlotte, NC)
-- First Union International Banking Corporation (Charlotte, NC)
-- Besso Holdings Limited (6.55%) (London, England)
-- First Union HKCB Asia, Ltd. (50%) (Hong Kong)
-- Keystone Management , S. A. (Luxembourg)
-- Wheat International, Ltd. (Bermuda) (49.67%) (INACTIVE) (Hamilton,
Bermuda)
-- First Union Investment Corporation (3) (Charlotte, NC)
-- 100 Block Associates Limited Partnership (6.25% -- NV) (Charlotte,
NC)
-- Concessions, Inc. (100% -- NV) (Raleigh, NC)
-- Raleigh Club, Inc. (100% -- NV) (Raleigh, NC)
-- ERB, Inc. (Raleigh, NC)
-- Concessions, Inc. (Raleigh, NC)
-- Raleigh Club, Inc. (Raleigh, NC)
-- Southwind Parking Corp. (Raleigh, NC)
-- First Union Keystone, Inc. (Charlotte, NC)
-- Keystone Investment Management Company (Boston, MA)
-- Chronicle Securities Investment Trust Company Ltd.
(13.5%)(Taipei, Taiwan)
-- Evergreen Investment Services, Inc. (Charlotte, NC)
-- Evergreen Service Company (Boston, MA)
-- Keystone Financial Consulting GmbH (Frankfurt, Germany)
(INACTIVE)
-- Keystone Trust Company (Portsmouth, NH)
-- First Union NOVA Holdings of Connecticut, Inc. (Stamford, CT)
-- NOVA Corporation (1.10%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of DC, Inc. (Washington, DC)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- NOVA Corporation (0.24%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of FL, Inc. (Jacksonville, FL)
-- NOVA Corporation (11.84%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of GA, Inc. (Atlanta, GA)
-- NOVA Corporation (1.91%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of MD, Inc. (Rockville, MD)
-- NOVA Corporation (0.18%) (4) ((Atlanta, GA)
-- First Union NOVA Holdings of NC, Inc. (Charlotte, NC)
-- NOVA Corporation (3.57%) (Atlanta, GA)
-- First Union NOVA Holdings of SC, Inc. (Greenville, SC)
-- NOVA Corporation (1.12%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of TN, Inc. (Nashville, TN)
-- NOVA Corporation (0.89%) (4) (Atlanta, GA)
-- First Union NOVA Holdings of VA, Inc. (Roanoke, VA)
-- NOVA Corporation (2.13%) (4) (Atlanta, GA)
-- First Union Real Estate Asset Company of Georgia (Atlanta, GA)
-- First Union Real Estate Investment Company of Georgia (INACTIVE)
(Atlanta, GA)
-- First Union Real Estate Asset Company of North Carolina (Charlotte, NC)
-- First Union Real Estate Investment Company of North Carolina )
(INACTIVE) (Charlotte, NC)
-- First Union Residential Securitization Transactions, Inc. (Charlotte,
NC)
-- Flagship Partners, L. P. (99% -- NV) (Knoxville, TN)
-- Floral Oaks Apartments, Ltd. ( 99% -- NV)(Gainesville, FL)
-- FNB Properties, Inc. (3) (Jacksonville, FL)
-- Fountain Place Associates Limited Partnership (99% -- NV) (Annapolis,
MD)
-- Fox Haven Limited Partnership (99% -- NV) (Raleigh, NC)
-- Ft. Lauderdale Hotel Holding Company (Miami, FL)
-- GABK Holdings, Inc. (3) (Charlotte, NC)
-- Gainsborough Corporation (3) (Charlotte, NC)
-- General Homes Corp. (9.205%) (3) (Houston, TX)
-- GF Mortgage Corporation (Atlanta, GA)
-- GGL, Inc. (3) (INACTIVE)(Charlotte, NC)
-- C4 Media Cable South, Limited Partnership (3) (INACTIVE) (99% -- NV)
(Charlotte, NC)
-- Novaten Communications, Inc. (3) (INACTIVE) (Charlotte, NC)
-- C4 Media Cable South, Limited Partnership (3) (INACTIVE) (1% --
NV) (Charlotte, NC)
-- Glen Royall Mill Limited Partnership (99% -- NV) (Wake Forest, NC)
-- Gold Rush I Apartments Limited Partnership (99% -- NV) (Phoenix, AZ)
-- Gold Rush II Apartments Limited Partnership (99% -- NV) (Phoenix, AZ)
-- Golfview Associates Limited Partnership (99% -- NV) (Fayetteville, NC)
-- Green Gables Apartments, Ltd. (99% -- NV) (Gainesville, FL)
-- Green Ridge Associates, LLC (99% -- NV) (Nashville, TN)
-- Greenleaf Village of Groveland, Ltd. (89% -- NV) (Gainesville, FL)
-- HHS Property Corporation (3) (Atlanta, GA)
-- Homes for Fredericksburg Limited Partnership (99% -- NV) (Sterling, VA)
-- Horizon Appraisal Services, Inc. (Jacksonville, FL)
-- Housing Equity Fund of Virginia II, L.P. (38.5% -- NV) (Roanoke, VA)
-- Indian Run Limited Partnership (86% -- NV) (Boston, MA)
-- International Progress, Inc. (50%) (Winchester, VA)
-- Mountain Falls Park, Inc. (Winchester, VA)
-- Jacksonville Affordable Housing, Ltd. (98% -- NV) (Panama City, FL)
-- Kaufman, Alsberg & Co. (INACTIVE) (Jacksonville, FL)
-- Lafayette Family L.P. (99% -- NV) (Roanoke, VA)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- Landexco, Inc. (Baltimore, MD)
-- Lantana Associates, Ltd. (99% -- NV) (Coral Gables, FL)
-- Laurel Pointe of Salisbury Limited Partnership (99% -- NV) (Panama
City, FL)
-- L'Hermitage Developers, Inc. (3) (Waterbury, CT)
-- Lieber I Corp. (Charlotte, NC)
-- Lieber & Company (99% -- NV) (Purchase, NY)
-- Lieber II Corp. (Charlotte, NC)
-- Lieber & Company (1% -- NV) (Purchase, NY)
-- Manor Ridge Limited Partnership (99.99% -- NV) (Raleigh, NC)
-- Martin's Landing Limited Partnership (99% -- NV) (Winter Park, FL)
-- Martin's Landing II Limited Partnership (99% -- NV) (Winter Park, FL)
-- Mentor Trust Company (Pennsylvania) (Philadelphia, PA)
-- Mentor Trust Company (Virginia) (Richmond, VA)
-- Montgomery Homes Limited Partnership (99% -- NV) (Kensington, MD)
-- MHD, Inc. (3) (Charlotte, NC)
-- MWG VII, Inc. (3) (Richmond, VA)
-- NNI Bell Street Limited Partnership (99% -- NV) ((Stamford, CT)
-- NP Corporation (3) (Baltimore, MD)
-- EEI Holdings Corporation, Inc. (3) (Richmond, VA)
-- Oak Crest Apartments of Kannapolis, Ltd. (99% -- NV) (Panama City, FL)
-- Oldbridge Urban Renewal, L.P. (99% -- NV) (Cherry Hill, NJ)
-- One South Place, L.P. (99% -- NV) (Knoxville, TN)
-- O.R.E.O., Inc. (3) (Jacksonville, FL)
-- Peppermill Partners, L. P. (99% -- NV) (Atlanta, GA)
-- Pioneer Development Corporation (Richmond, VA)
-- Pioneer Properties I, Inc. (3) (Richmond, VA)
-- Ravenwood of Kissimmee, Ltd. (99% -- NV) (Gainesville, FL)
-- Reservoir Hill Limited Partnership IX (99% -- NV) (Baltimore, MD)
-- Richmond Community Development Corporation (19% -- NV) (Richmond, VA)
-- River Reach of Orange County, Ltd. (99% -- NV) (Panama City, FL)
-- Roanoke Community Development Corporation (11.11% -- NV)(7)
(INACTIVE)(Roanoke, VA)
-- Rome Rental Housing, L. P. (99% -- NV) (Cordele, GA)
-- Rosemont Manor Ltd. (99% -- NV) (Gainesville, FL)
-- Sable Point II Apartments Limited Partnership (99% -- NV) (Martinsburg,
WV)
-- Salem Run Associates, L. P. (99% -- NV) (Midlothian, VA)
-- Salem Run II Associates, L. P. (99% -- NV) (Fredericksburg, VA)
-- Sandlewood Terrace of Ludowici L.P. (99% -- NV) (Gainesville, FL)
-- Savings Associations Financial Enterprises, Inc. (48.15%) (Washington,
DC)
-- Shenandoah Valley Properties L.P. (99% -- NV) (Roanoke, VA)
-- Craigmont II, L.P. (99% -- NV) (Roanoke, VA)
-- Elkmont Partners, L.P. (99% -- NV) (Roanoke, VA)
-- Grottoes Partners L.P. (99% -- NV) (Roanoke, VA)
-- Willow Lake Partners, L.P. (99% -- NV) (Roanoke, VA)
-- Signet Bank (Bahamas) Limited (Nassau, Bahamas)
-- Second Eleutheran Investment Company, Ltd. (INACTIVE) (Nassau,
Bahamas)
-- Signet Business Leasing Corporation (Richmond, VA)
-- Signet Equipment Company (Baltimore, MD)
-- Signet Loan Company/Pennsylvania (INACTIVE) (Baltimore, MD)
-- Signet Mortgage Corporation (Richmond, VA)
-- Signet Municipal LeaseCorp, Inc. (Richmond, VA)
-- Signet Residential Finance Corporation (Richmond, VA)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
-- Southwoods Limited Partnership (99% -- NV) (Greensboro, NC)
-- Spinnaker Reach Apartments of Duval, Ltd. (99% -- NV) (Panama City, FL)
-- Spring Gate Manor Limited (99% -- NV) (Gainesville, FL)
-- St. Paul Realty, Inc. (INACTIVE) (Baltimore, MD)
-- Statesboro Rental Housing, L. P. (99% -- NV) (Cordele, GA)
-- Steeplechase Apartments, Ltd. (99% -- NV) (Gainesville, FL)
-- Stonecreek Apartments of Mooresville, Ltd. (99% -- NV) (Panama City,
FL)
-- Sugar Mill Apartments, L. P. (99% -- NV) (Cordele, GA)
-- Taroc, Inc. (Jacksonville, FL)
-- The Atlanta Business Community Development Corporation (21.7%)
(Atlanta, GA)
-- The Exchange Building Limited Partnership (99% -- NV) (Portland, ME)
-- The Mortgage Corner, Inc. (Waterbury, CT)
-- Timberleaf Estates Limited Partnership (99% -- NV) (Martinsburg, WV)
-- Tobacco Row Phase II Associates, L.P. (99% -- NV) (Richmond, VA)
-- Towsen Service Corporation (3) (Towsen, MD)
-- Ashland Joint Venture (50% -- NV) (Baltimore, MD)
-- Silver Spring Station Joint Venture (50% -- NV) (Baltimore, MD)
-- TWC Eighty-Eight, Ltd. (99% -- NV) (Tampa, FL)
-- TWC Ninety-Eight, Ltd. (99% -- NV) (Tampa, FL)
-- TWC Ninety-Five, Ltd. (99% -- NV) (Tampa, FL)
-- TWC Ninety-Four, Ltd. (98% -- NV) (Tampa, FL)
-- TWC Ninety-One, Ltd. (99% -- NV) (Tampa, FL)
-- TWC Ninety-Six, Ltd. (99% -- NV) (Tampa, FL)
-- Union Trust Brokerage Services, Inc. (INACTIVE) (Stamford, CT)
-- UTC Properties No. 4, Inc. (3) (INACTIVE) (Baltimore, MD)
-- VCP-Alderman Park Partners, Ltd. (99% -- NV) (Jacksonville, FL)
-- Venice Service Corp. (3) (Jacksonville, FL)
-- Port Charlotte Service Corp. (3) (Jacksonville, FL)
-- Vestcor-WR Associates, Ltd. (99% -- NV) (Jacksonville, FL)
-- Villa Biscayne of South Dade, Ltd. (99% -- NV) (Panama City, FL)
-- Waterford Manor, L. P. (99% -- NV) (Winter Park, FL)
-- West Brickell Apartments, Ltd. (99% -- NV) (Miami, FL)
-- Westville, Ltd. (99% -- NV) (Gainesville, FL)
-- Wheat Benefit Services, LLC (61.446%) (Richmond, VA)
-- William Byrd Hotel Associates, L. P. (99% -- NV) (Richmond, VA)
-- WNB Corporation (Roanoke, VA)
-- Lone Stone, L. C. (43.946% -- NV) (3) (Albany, NY)
-- Woodlawn Joint Venture (30% -- NV) (INACTIVE) (Woodbridge, VA)
-- WSI, Inc. (3) (Jacksonville, FL)
-- Yorktown Arms Development Limited Partnership (99% -- NV)
(Philadelphia, PA)
First Union Services, Inc. (Charlotte, NC)
Franklin Ventures III, L. P. (6.60% -- NV) (Franklin, TN)
GF Title Corporation (Atlanta, GA)
HONOR Technologies, Inc. (11.7871%) (5) (Maitland, FL)
Kinder Morgan, Inc. (24.9% -- NV; includes 2% voting) (Houston,TX)
Media/Communications Partners (5.71% -- NV) (Boston, MA)
Morgan Stanley Bridge Fund, LLC (24.99% -- NV) (New York, NY)
<PAGE>
FIRST UNION CORPORATION
LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued
Phillips-Smith Specialty Retail Group III, L. P. (7.14% -- NV) (Dallas, TX)
Signet Financial Services, Inc. (Richmond, VA)
Signet Insurance Services, Inc. (Richmond, VA)
Signet Nequity Corporation (Richmond, VA)
Signet Realty, Inc. (Baltimore, MD)
Signet Strategic Capital Corporation (Richmond, VA)
Signet Student Loan Corporation (Richmond, VA)
Signet Trust Company (Richmond, VA)
TRSTE, Inc. (Charlotte, NC)
TRSTE II, Inc. (Nashville, TN)
Tryon Management, Inc. (Charlotte, NC)
Virtus Capital Management, Inc. (Richmond, VA)
Walden Golf Club, Inc. (3) (Roanoke, VA)
-- Walden Golf Club ManagementCompany (3) (Roanoke, VA)
WFS Real Estate Investment Corporation (Richmond, VA)
-- Huguenot Professional Center Associates, LP (25% -- V; 5.826% -- NV)
(Richmond, VA)
Wheat First Butcher Singer, Inc. (Richmond, VA)
-- Jackson Asset Management Corporation (15%) (Atlanta, GA)
-- Jackson Securities Incorporated (15%) (Atlanta, GA)
-- Mentor Investment Advisors, LLC (Richmond, VA) (1%)
-- Mentor Investment Group, LLC (Richmond, VA)
-- Mentor Perpetual Advisors, LLC (Richmond, VA)
-- Mentor Investment Advisors, LLC (Richmond, VA) (99%)
-- Mentor Services Company, Inc. (Richmond, VA)
-- Wheat First Securities, Inc. (Richmond, VA)
Wheat Insurance Services, Inc. (Richmond, VA)
-- Wheat Insurance Services of Alabama, Inc. (Richmond, VA)
Wheat Service & Equipment Corporation (Richmond, VA)
-- Energy Search LP (INACTIVE) (7.7% -- NV)
-- WBP Associates (INACTIVE) (33% -- NV)
Women's Growth Capital Fund I, L.L.L.P. (10% -- NV) (Washington,DC)
- ---------
(1) 100% of voting securities owned unless otherwise indicated. NV indicates
non-voting equity. Does not include companies in which the ownership
interest is 5% or less of voting equity nor companies where the sole
ownership is through non-voting equity (except for banks and bank holding
companies). All partnership interests in excess of 5% are shown.
(2) 352,317 shares (6%) of First Union National Bank, Charlotte, NC, (FUNB-NC)
were issued to First Fidelity Incorporated, the parent of First Union Bank
of Connecticut (FUB-CT) on 7/31/97 as consideration for the merger of
FUB-CT into FUNB-NC.
(3) Interest acquired or subsidiary formed in connection with debts previously
contracted (DPC).
(4) Combined ownership percentage by all First Union entities is 31.90%.
(5) Combined ownership percentage by all First Union entities is 19.1357%.
(6) Votes as on a converted basis.
(7) Combined ownership percentage by all First Union entities is 38.888%.
<PAGE>
EXHIBIT (23)(a)
CONSENT OF KPMG PEAT MARWICK LLP
- --------------------------------------------------------------------------------
Board of Directors
First Union Corporation
We consent to the incorporation by reference in the Registration Statements of
(i) First Union Corporation on:
REGISTRATION REGISTRATION
STATEMENT STATEMENT
FORM NUMBER FORM NUMBER
----------- ------------------ ----------- ------------------
S-3 33-50103 S-8 333-2561
S-8 33-51964 S-8 333-10179
S-8 33-54148 S-8 333-10211
S-8 33-54274 S-8 333-11613
S-8 33-54739 S-8 333-14469
S-3 33-56927 S-3 333-15743
S-8 33-60835 S-3 333-17599
S-8 33-60913 S-4 333-19039-01
S-8 33-62307 S-4 333-20611
S-8 33-62399 S-3 333-34151
S-8 33-63387 S-3 333-35363
S-8 33-65501 S-8 333-36839
S-8 333-2551 S-8 333-37709
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02);(iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of First Union Corporation of our report dated January 21, 1998,
relating to the consolidated balance sheets of First Union Corporation and
subsidiaries as of December 31,1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997, which report appears
in the 1997 Annual Report to Stockholders which is incorporated by reference in
First Union Corporation's 1997 Form 10-K.
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
March 18, 1998
<PAGE>
EXHIBIT (23)(b)
CONSENT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
We consent to the inclusion in the 1997 Form 10-K of First Union Corporation and
to the incorporation by the reference in the Registration Statements of (i)
First Union Corporation on:
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION
STATEMENT STATEMENT
FORM NUMBER FORM NUMBER
----------- ----------------- ----------- -----------------
<S> <C> <C> <C>
S-3 33-50103 S-8 333-2561
S-8 33-51964 S-8 333-10179
S-8 33-54148 S-8 333-10211
S-8 33-54274 S-8 333-11613
S-8 33-54739 S-8 333-14469
S-3 33-56927 S-3 333-15743
S-8 33-60835 S-3 333-17599
S-8 33-60913 S-4 333-19039-01
S-8 33-62307 S-4 333-20611
S-8 33-62399 S-3 333-34151
S-8 33-63387 S-3 333-35363
S-8 33-65501 S-8 333-36839
S-8 333-2551 S-8 333-37709
</TABLE>
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 20, 1998, with respect to the
consolidated balance sheets of CoreStates Financial Corp as of December 31,1997
and 1996, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997, which are included in the 1997 Form 10-K of First
Union Corporation.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 17, 1998
<PAGE>
EXHIBIT (23)(c)
CONSENT OF KPMG PEAT MARWICK LLP
- --------------------------------------------------------------------------------
Board of Directors
CoreStates Financial Corp
We consent to the incorporation by reference in the Registration Statements of
(i) First Union Corporation on:
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION
STATEMENT STATEMENT
FORM NUMBER FORM NUMBER
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
S-3 33-50103 S-8 333-2561
S-8 33-51964 S-8 333-10179
S-8 33-54148 S-8 333-10211
S-8 33-54274 S-8 333-11613
S-8 33-54739 S-8 333-14469
S-3 33-56927 S-3 333-15743
S-8 33-60835 S-3 333-17599
S-8 33-60913 S-4 333-19039-01
S-8 33-62307 S-4 333-20611
S-8 33-62399 S-3 333-34151
S-8 33-63387 S-3 333-35363
S-8 33-65501 S-8 333-36839
S-8 333-2551 S-8 333-37709
</TABLE>
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 17, 1996, except as to Note 2, which
is as of February 23, 1996, with respect to the consolidated balance sheet of
Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year ended December 31, 1995, which report appears as an exhibit
to CoreStates Financial Corp's Form 8-K dated March 23, 1998 and in First Union
Corporation's 1997 Form 10-K.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 17, 1998
<PAGE>
EXHIBIT (23)(d)
CONSENT OF KPMG PEAT MARWICK LLP
- --------------------------------------------------------------------------------
Board of Directors
CoreStates Financial Corp
We consent to the incorporation by reference in the Registration Statements of
(i) First Union Corporation on:
<TABLE>
<CAPTION>
REGISTRATION REGISTRATION
STATEMENT STATEMENT
FORM NUMBER FORM NUMBER
----------- ----------------- ----------- -----------------
<S> <C> <C> <C>
S-3 33-50103 S-8 333-2561
S-8 33-51964 S-8 333-10179
S-8 33-54148 S-8 333-10211
S-8 33-54274 S-8 333-11613
S-8 33-54739 S-8 333-14469
S-3 33-56927 S-3 333-15743
S-8 33-60835 S-3 333-17599
S-8 33-60913 S-4 333-19039-01
S-8 33-62307 S-4 333-20611
S-8 33-62399 S-3 333-34151
S-8 33-63387 S-3 333-35363
S-8 33-65501 S-8 333-36839
S-8 333-2551 S-8 333-37709
</TABLE>
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of our report dated January 16, 1996, except as to Note 20, which
is as of February 23, 1996, with respect to the consolidated balance sheet of
United Counties Bancorporation and subsidiaries as of December 31, 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year ended December 31, 1995, which report appears as an
exhibit to CoreStates Financial Corp's Form 8-K dated March 23, 1998 and in
First Union Corporation's 1997 Form 10-K.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 17, 1998
<PAGE>
Exhibit (24)
FIRST UNION CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers
of FIRST UNION CORPORATION (the "Corporation") hereby constitute and appoint
Marion A. Cowell, Jr. and Kent S. Hathaway, and each of them severally, the
true and lawful agents and attorneys-in-fact of the undersigned with full power
and authority in said agents and the attorneys-in-fact, and in any one of them,
to sign for the undersigned and in their respective names as directors and
officers of the Corporation, the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1997, to be filed with the Securities and Exchange
Commission, and to sign any and all amendments to such Annual Report.
<TABLE>
<CAPTION>
Signature Capacity
- ----------------------------------- -----------------------------------------------------
<S> <C>
/s/ EDWARD E. CRUTCHFIELD Chairman and Chief Executive Officer and Director
- ----------------------------------
Edward E. Crutchfield
/s/ ROBERT T. ATWOOD Executive Vice President and Chief Financial Officer
- ----------------------------------
Robert T. Atwood
/s/ JAMES H. HATCH Senior Vice President and Controller
- ----------------------------------
James H. Hatch (Principal Accounting Officer)
Director
- ----------------------------------
Edward E. Barr
/s/ G. ALEX BERNHARDT Director
- ----------------------------------
G. Alex Bernhardt
/s/ W. WALDO BRADLEY Director
- ----------------------------------
W. Waldo Bradley
/s/ ROBERT J. BROWN Director
- ----------------------------------
Robert J. Brown
/s/ A. DANO DAVIS Director
- ----------------------------------
A. Dano Davis
/s/ R. STUART DICKSON Director
- ----------------------------------
R. Stuart Dickson
/s/ B. F. DOLAN Director
- ----------------------------------
B. F. Dolan
/s/ RODDEY DOWD, SR. Director
- ----------------------------------
Roddey Dowd, Sr.
/s/ JOHN R. GEORGIUS Director
- ----------------------------------
John R. Georgius
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- ------------------------------------ ---------
<S> <C>
Director
- ----------------------------------
Arthur M. Goldberg
/s/ WILLIAM H. GOODWIN, JR. Director
- ----------------------------------
William H. Goodwin, Jr.
/s/ HOWARD H. HAWORTH Director
- ----------------------------------
Howard H. Haworth
/s/ FRANK M. HENRY Director
- ----------------------------------
Frank M. Henry
/s/ LEONARD G. HERRING Director
- ----------------------------------
Leonard G. Herring
/s/ JACK A. LAUGHERY Director
- ----------------------------------
Jack A. Laughery
/s/ MAX LENNON Director
- ----------------------------------
Max Lennon
/s/ RADFORD D. LOVETT Director
- ----------------------------------
Radford D. Lovett
/s/ MACKEY J. MCDONALD Director
- ----------------------------------
Mackey J. McDonald
/s/ MALCOLM S. MCDONALD Director
- ----------------------------------
Malcolm S. McDonald
/s/ JOSEPH NEUBAUER Director
- ----------------------------------
Joseph Neubauer
/s/ RANDOLPH N. REYNOLDS Director
- ----------------------------------
Randolph N. Reynolds
/s/ RUTH G. SHAW Director
- ----------------------------------
Ruth G. Shaw
/s/ CHARLES M. SHELTON, SR. Director
- ----------------------------------
Charles M. Shelton, Sr.
/s/ LANTY L. SMITH Director
- ----------------------------------
Lanty L. Smith
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity
- ----------------------------------- ---------
<S> <C>
/s/ ANTHONY P. TERRACCIANO Director
- ----------------------------------
Anthony P. Terracciano
Director
- ----------------------------------
Dewey L. Trogdon
/s/ JOHN D. UIBLE Director
- ----------------------------------
John D. Uible
/s/ B. J. WALKER Director
- ----------------------------------
B. J. Walker
</TABLE>
Dated: February 17, 1998
Charlotte, North Carolina
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,445
<INT-BEARING-DEPOSITS> 710
<FED-FUNDS-SOLD> 7,740
<TRADING-ASSETS> 5,457
<INVESTMENTS-HELD-FOR-SALE> 21,415
<INVESTMENTS-CARRYING> 2,175
<INVESTMENTS-MARKET> 2,322
<LOANS> 100,259
<ALLOWANCE> (1,212)
<TOTAL-ASSETS> 157,274
<DEPOSITS> 102,889
<SHORT-TERM> 27,357
<LIABILITIES-OTHER> 5,108
<LONG-TERM> 8,042
0
0
<COMMON> 2,121
<OTHER-SE> 9,911
<TOTAL-LIABILITIES-AND-EQUITY> 157,274
<INTEREST-LOAN> 8,771
<INTEREST-INVEST> 1,438
<INTEREST-OTHER> 409
<INTEREST-TOTAL> 10,933
<INTEREST-DEPOSIT> 3,264
<INTEREST-EXPENSE> 5,190
<INTEREST-INCOME-NET> 5,743
<LOAN-LOSSES> 840
<SECURITIES-GAINS> 34
<EXPENSE-OTHER> 5,589
<INCOME-PRETAX> 2,710
<INCOME-PRE-EXTRAORDINARY> 2,710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,896
<EPS-PRIMARY> 3.03
<EPS-DILUTED> 2.99
<YIELD-ACTUAL> 4.36
<LOANS-NON> 622
<LOANS-PAST> 232
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,502
<CHARGE-OFFS> 753
<RECOVERIES> 118
<ALLOWANCE-CLOSE> 1,212
<ALLOWANCE-DOMESTIC> 673
<ALLOWANCE-FOREIGN> 5
<ALLOWANCE-UNALLOCATED> 534
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,076
<INT-BEARING-DEPOSITS> 319
<FED-FUNDS-SOLD> 7,802
<TRADING-ASSETS> 4,480
<INVESTMENTS-HELD-FOR-SALE> 16,805
<INVESTMENTS-CARRYING> 2,501
<INVESTMENTS-MARKET> 2,636
<LOANS> 104,747
<ALLOWANCE> (1,502)
<TOTAL-ASSETS> 151,847
<DEPOSITS> 102,702
<SHORT-TERM> 24,987
<LIABILITIES-OTHER> 3,906
<LONG-TERM> 8,060
0
0
<COMMON> 2,136
<OTHER-SE> 8,796
<TOTAL-LIABILITIES-AND-EQUITY> 151,847
<INTEREST-LOAN> 8,310
<INTEREST-INVEST> 1,482
<INTEREST-OTHER> 366
<INTEREST-TOTAL> 10,460
<INTEREST-DEPOSIT> 3,190
<INTEREST-EXPENSE> 4,995
<INTEREST-INCOME-NET> 5,465
<LOAN-LOSSES> 449
<SECURITIES-GAINS> 40
<EXPENSE-OTHER> 5,153
<INCOME-PRETAX> 2,499
<INCOME-PRE-EXTRAORDINARY> 2,499
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,624
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.58
<YIELD-ACTUAL> 4.25
<LOANS-NON> 684
<LOANS-PAST> 361
<LOANS-TROUBLED> 14
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,638
<CHARGE-OFFS> 794
<RECOVERIES> 159
<ALLOWANCE-CLOSE> 1,502
<ALLOWANCE-DOMESTIC> 1,161
<ALLOWANCE-FOREIGN> 4
<ALLOWANCE-UNALLOCATED> 337
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,911
<INT-BEARING-DEPOSITS> 82
<FED-FUNDS-SOLD> 4,613
<TRADING-ASSETS> 2,360
<INVESTMENTS-HELD-FOR-SALE> 20,528
<INVESTMENTS-CARRYING> 3,140
<INVESTMENTS-MARKET> 3,320
<LOANS> 98,428
<ALLOWANCE> 1,638
<TOTAL-ASSETS> 142,858
<DEPOSITS> 100,148
<SHORT-TERM> 21,404
<LIABILITIES-OTHER> 3,407
<LONG-TERM> 7,374
0
183
<COMMON> 2,069
<OTHER-SE> 7,655
<TOTAL-LIABILITIES-AND-EQUITY> 142,858
<INTEREST-LOAN> 7,866
<INTEREST-INVEST> 1,367
<INTEREST-OTHER> 198
<INTEREST-TOTAL> 9,553
<INTEREST-DEPOSIT> 3,075
<INTEREST-EXPENSE> 4,424
<INTEREST-INCOME-NET> 5,129
<LOAN-LOSSES> 259
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 4,657
<INCOME-PRETAX> 2,389
<INCOME-PRE-EXTRAORDINARY> 2,389
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,541
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.38
<YIELD-ACTUAL> 4.51
<LOANS-NON> 682
<LOANS-PAST> 356
<LOANS-TROUBLED> 4
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,578
<CHARGE-OFFS> 526
<RECOVERIES> 134
<ALLOWANCE-CLOSE> 1,638
<ALLOWANCE-DOMESTIC> 1,360
<ALLOWANCE-FOREIGN> 35
<ALLOWANCE-UNALLOCATED> 243
</TABLE>
<PAGE>
CoreStates Financial Corp and Subsidiaries
<TABLE>
<CAPTION>
CONTENTS OF FINANCIAL SECTION PAGE
-----
<S> <C>
FINANCIAL STATEMENTS
Management's Report Regarding the Effectiveness of Internal Control Over Financial Reporting........ 43
Report of Independent Auditors....................................................................... 44
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............... 45
Consolidated Balance Sheets as of December 31, 1997 and 1996......................................... 46
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................................................ 47-48
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........... 49-50
Notes to the Consolidated Financial Statements....................................................... 51-84
Note: The page numbers set forth herein conform with those presented in
information provided by CoreStates Financial Corp.
</TABLE>
<PAGE>
CORESTATES FINANCIAL CORP AND SUBSIDIARIES
Management's Report on Internal Controls Over Financial Reporting
Financial Statements
CoreStates Financial Corp is responsible for the preparation, integrity,
and fair presentation of its published financial statements as of December 31,
1997, and the year then ended. The consolidated financial statements of
CoreStates Financial Corp have been prepared in accordance with generally
accepted accounting principles and, as such, include some amounts that are based
on judgments and estimates of management.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective
internal control over financial reporting. The system contains monitoring
mechanisms and actions are taken to correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal
control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed CoreStates Financial Corp's internal control over
financial reporting as of December 31, 1997. This assessment was based on
criteria for effective internal control over financial reporting described in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that CoreStates Financial Corp maintained effective internal control
over financial reporting as of December 31, 1997.
Chief Financial Officer
/s/ Albert W. Mandia
Chairman and Chief Executive Officer
/s/ Terrence A. Larsen
43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CoreStates Financial Corp
We have audited the accompanying consolidated balance sheets of CoreStates
Financial Corp as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 financial statements of Meridian Bancorp,
Inc. and United Counties Bancorporation, which statements reflect combined net
interest income constituting 31.3% of the related consolidated total for the
year ended December 31, 1995. Those statements were audited by other auditors
whose reports thereon have been furnished to us, and our opinion, insofar as it
relates to data included for Meridian Bancorp, Inc. and United Counties
Bancorporation, is based solely on the reports of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of CoreStates Financial Corp at December 31,
1997 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 20, 1998
44
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable income..................................................... $2,995,604 $2,845,898 $2,902,265
Tax exempt income.................................................. 20,310 25,335 30,390
Interest on investment securities:
Taxable income..................................................... 202,425 254,576 349,138
Tax exempt income.................................................. 18,455 23,190 31,018
Interest on time deposits in banks.................................... 163,454 122,752 121,993
Interest on Federal funds sold, securities purchased
under agreements to resell and other............................... 29,067 26,453 40,276
---------- --------- ----------
Total interest income.............................................. 3,429,315 3,298,204 3,475,080
---------- --------- ----------
INTEREST EXPENSE
Interest on deposits:
Domestic savings................................................... 383,333 295,650 396,176
Domestic time...................................................... 436,135 497,956 492,610
Overseas branches and subsidiaries................................. 64,896 48,174 52,261
---------- --------- ----------
Total interest on deposits...................................... 884,364 841,780 941,047
Interest on short-term funds borrowed................................. 189,835 153,129 214,119
Interest on long-term debt............................................ 239,248 161,811 152,989
---------- --------- ----------
Total interest expense.......................................... 1,313,447 1,156,720 1,308,155
---------- --------- ----------
Net interest income................................................ 2,115,868 2,141,484 2,166,925
Provision for losses on loans......................................... 263,000 228,767 144,002
---------- --------- ----------
Net interest income after provision for losses on loans............ 1,852,868 1,912,717 2,022,923
---------- --------- ----------
NON-INTEREST INCOME
Service charges on deposit accounts................................... 242,285 229,592 233,592
Trust income.......................................................... 186,031 167,138 162,776
Fees for international services....................................... 113,767 101,761 94,396
Debit and credit card fees............................................ 96,983 88,811 94,659
Income from investment in EPS, Inc.................................... 29,486 29,902 30,114
Income from trading activities........................................ 34,445 25,216 35,403
Securities gains...................................................... 21,111 59,512 31,475
Other gains........................................................... - 8,200 26,400
Other operating income................................................ 201,662 188,943 173,407
----------- --------- ----------
Total non-interest income.......................................... 925,770 899,075 882,222
----------- --------- ----------
NON-FINANCIAL EXPENSES
Salaries, wages and benefits.......................................... 834,184 826,442 904,377
Net occupancy......................................................... 143,112 157,358 159,530
Equipment expenses.................................................... 125,070 120,602 118,532
Restructuring and merger-related charges.............................. 15,000 139,702 138,600
Other operating expenses.............................................. 578,411 532,724 564,489
----------- --------- ----------
Total non-financial expenses....................................... 1,695,777 1,776,828 1,885,528
----------- --------- ----------
INCOME BEFORE INCOME TAXES............................................ 1,082,861 1,034,964 1,019,617
Provision for income taxes............................................ 269,582 385,820 364,441
----------- --------- ----------
NET INCOME............................................................ $ 813,279 $ 649,144 $ 655,176
=========== ========= ==========
PER COMMON SHARE DATA
Net income:
Basic.............................................................. $4.00 $2.97 $2.95
===== ===== =====
Diluted............................................................ $3.96 $2.94 $2.92
===== ===== =====
Cash dividends declared............................................... $1.91 $1.73 $1.44
===== ===== =====
</TABLE>
See accompanying notes to the financial statements.
45
<PAGE>
CoreStates Financial Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks................................... $ 3,829,893 $ 3,462,287
Time deposits, principally Eurodollars.................... 3,122,444 2,443,154
Federal funds sold and securities purchased under
agreements to resell.................................. 41,207 509,694
Trading account assets.................................... 495,472 122,317
Investment securities available-for-sale.................. 2,109,254 2,394,166
Investment securities held-to-maturity (market value:
1997-$1,347,819; 1996-$1,692,243)..................... 1,351,137 1,689,058
Total loans, net of unearned discounts of
$249,702 in 1997 and $234,607 in 1996................. 34,813,886 32,331,297
Less: Allowance for loan losses....................... (634,432) (710,327)
------------ ------------
Net loans......................................... 34,179,454 31,620,970
------------ ------------
Due from customers on acceptances......................... 641,859 738,077
Premises and equipment.................................... 629,965 625,876
Other assets.............................................. 2,060,280 1,888,595
------------ ------------
Total assets...................................... $ 48,460,965 $ 45,494,194
============ ============
LIABILITIES
Deposits:
Domestic:
Non-interest bearing.............................. $ 9,252,376 $ 9,330,445
Interest bearing.................................. 23,490,992 22,986,955
Overseas branches and subsidiaries.................... 1,444,522 1,409,756
------------ ------------
Total deposits.................................... 34,187,890 33,727,156
------------ ------------
Short-term funds borrowed................................. 4,323,319 2,633,157
Bank acceptances outstanding.............................. 641,464 727,728
Other liabilities......................................... 1,616,624 1,661,162
Long-term debt............................................ 4,454,236 3,049,297
------------ ------------
Total liabilities................................. 45,223,533 41,798,500
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Preferred stock: authorized 10.0 million
shares; no shares issued.............................. - -
Common stock: $1 par value; authorized 350.0 million
shares; issued 223.599 million shares in 1997 and 1996
(including treasury shares of 23.235 million in 1997
and 8.900 million in 1996, and unallocated shares held
by Employee Stock Ownership Plan ("ESOP") of 2.148
million in 1997 and 2.267 million in 1996)............ 223,599 223,599
Other common shareholders' equity, net.................... 3,013,833 3,472,095
------------ ------------
Total shareholders' equity........................ 3,237,432 3,695,694
------------ ------------
Total liabilities and shareholders' equity........ $ 48,460,965 $ 45,494,194
============ ============
</TABLE>
See accompanying notes to the financial statements.
46
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 of 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
-------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994.......................... $229,827 $1,200,658 $2,360,312 $ (24,297) $ (35,568) $3,730,932
Net income............................................. 655,176 655,176
Net change in unrealized gain on investments
available-for-sale, net of tax..................... 41,187 41,187
Treasury shares acquired (10,307 shares)............... (335,528) (335,528)
Repurchase and retirement of common stock
(595 shares)....................................... (595) (4,093) (12,446) (17,134)
Common stock issued under employee benefit plans
(1,002 new shares; 3,089 treasury shares).......... 999 26,825 (25,483) 96,670 99,011
Common stock issued under dividend reinvestment plan
(417 treasury shares).............................. (9) (2) 12,690 12,679
Purchase of shares for Employee Stock Ownership Plan
(876 shares) ...................................... (20,922) (20,922)
Employee Stock Ownership Plan shares committed for
release (123 shares)............................... 1,786 2,824 4,610
Cash paid for fractional shares........................ (24) (24)
Foreign currency translation adjustments............... (29) (29)
Common dividends declared.............................. (294,393) (294,393)
-------- ---------- ---------- --------- --------- ----------
Balances at December 31, 1995.......................... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565
Net income............................................. 649,144 649,144
Net change in unrealized gain on investments
available-for-sale, net of tax..................... (25,070) (25,070)
Treasury shares acquired (11,055 shares)............... (533,932) (533,932)
Treasury shares issued in merger (7,300 shares)........ (7,300) (33,288) (192,042) 232,630 -
Repurchase and retirement of common stock
(1,340 shares)..................................... (1,340) (43,559) (12,804) (57,703)
Common stock issued under employee benefit plans
(1,824 new shares; 2,330 treasury shares).......... 1,824 75,618 (48,119) 100,826 130,149
Common stock issued under dividend reinvestment plan
(184 new shares; 353 treasury shares)............. 184 8,225 (68) 13,361 21,702
Purchase of shares for Employee Stock Ownership
Plan (65 shares).................................. (38) (3,509) (3,547)
Employee stock ownership plan shares
committed for release (126 shares)................. 2,397 3,018 5,415
Cash paid for fractional shares........................ (342) (342)
Foreign currency translation adjustments............... 5,448 5,448
Common dividends declared.............................. (371,135) (371,135)
-------- ---------- ---------- --------- -------- ----------
Balances at December 31, 1996.......................... 223,599 1,234,522 2,729,310 (437,580) (54,157) 3,695,694
</TABLE>
(continued)
47
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY: continued
(in thousands)
<TABLE>
<CAPTION>
Common Capital Retained Treasury Unallocated
stock surplus earnings stock ESOP shares Total
-------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income............................................ 813,279 813,279
Net change in unrealized gain on investments
available-for-sale, net of tax.................... 5,149 5,149
Treasury shares acquired (17,100 shares).............. (1,007,832) (1,007,832)
Common stock issued under employee benefit plans
(2,209 treasury shares)........................... 22,665 (70,325) 133,198 85,538
Common stock issued under dividend reinvestment plan
(556 treasury shares)............................. 676 (1,058) 30,383 30,001
Employee stock ownership plan shares
committed for release (119 shares)................ 4,423 2,846 7,269
Foreign currency translation adjustments.............. (748) (748)
Common dividends declared............................. (390,918) (390,918)
-------- ---------- ---------- ---------- ----------- ----------
Balances at December 31, 1997......................... $223,599 $1,262,286 $3,084,689 $(1,281,831) $(51,311) $3,237,432
======== ========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to the financial statements.
48
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 1 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
OPERATING ACTIVITIES 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income........................................................... $ 813,279 $ 649,144 $ 655,176
Adjustments to reconcile net income to net
cash provided by operating activities:
Restructuring and merger-related charges.......................... 15,000 139,702 138,600
Provision for losses on loans..................................... 263,000 228,767 144,002
Provision for losses and writedowns
on other real estate owned...................................... 5,500 3,387 15,971
Depreciation and amortization..................................... 126,749 110,512 122,996
Deferred income tax expense....................................... 100,751 9,156 28,420
Securities gains.................................................. (21,111) (59,512) (31,475)
Gains on sale of mortgage servicing............................... - - (2,387)
Other gains....................................................... - (8,200) (26,400)
(Increase) decrease in loans held-for-sale........................ (395,583) 93,039 82,226
(Increase) decrease in trading account assets.................... (373,155) 24,901 200,833
Increase (decrease) in due to factored clients.................... 143,486 1,805 (86,921)
(Increase) decrease in interest receivable........................ (34,460) 45,046 2,009
Increase in interest payable...................................... 23,014 10,163 45,044
Decrease in merger-related accrual ............................... (59,451) (100,258) (33,270)
Other, net........................................................ (101,623) 216,135 ( 84,141)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 505,396 1,363,787 1,170,683
------------ ------------ ------------
INVESTING ACTIVITIES
Net increase in loans................................................ (3,592,259) (2,989,441) (1,914,405)
Proceeds from sales of loans......................................... 898,828 1,577,270 1,087,732
Loans originated or acquired--non-bank subsidiaries.................. (37,198,437) (39,054,032) (35,767,440)
Principal collected on loans--non-bank subsidiaries.................. 37,056,155 39,039,627 35,407,667
Net increase in time deposits, principally Eurodollars............... (679,290) (533,894) (33,172)
Purchases of investments held-to-maturity............................ (650,362) (490,995) (686,652)
Purchases of investments available-for-sale.......................... (568,161) (2,062,012) (589,327)
Proceeds from maturities of investments held-to-maturity............. 995,449 1,524,670 2,175,780
Proceeds from maturities of investments available-for-sale........... 807,037 854,898 161,477
Proceeds from sales of investments available-for-sale................ 122,037 1,500,504 546,728
Net decrease in Federal funds sold and
securities purchased under agreements to resell................... 468,487 210,243 203,693
Purchases of premises and equipment.................................. (90,085) (101,469) (125,216)
Proceeds from sales and paydowns on other
real estate owned................................................. 12,896 31,465 66,834
Other, net........................................................... 33,493 141,063 11,303
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................................... (2,384,212) (352,103) 545,002
------------ ------------ ------------
</TABLE>
(continued)
49
<PAGE>
CoreStates Financial Corp and Subsidiaries Page 2 of 2
CONSOLIDATED STATEMENT OF CASH FLOWS: continued
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in deposits........................... 460,734 172,155 (660,745)
Payment for sales of deposits................................. - (368,110) (154,360)
Proceeds from issuance of long-term debt...................... 2,033,056 1,340,099 582,251
Retirement of long-term debt.................................. (630,547) (501,165) (533,480)
Net increase (decrease) in short-term funds borrowed.......... 1,690,162 (1,043,856) 215,764
Cash dividends paid........................................... (391,781) (328,114) (286,565)
Purchases of treasury stock................................... (1,007,832) (533,932) (335,528)
Repurchase and retirement of common stock..................... - (57,703) (17,134)
Common stock issued under employee benefit plans.............. 62,873 87,726 99,011
Other, net.................................................... 29,757 21,360 12,655
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES...................................... 2,246,422 (1,211,540) (1,078,131)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS................................................ 367,606 (199,856) 637,554
Cash and due from banks at January 1,......................... 3,462,287 3,662,143 3,024,589
------------ ------------ ------------
CASH AND DUE FROM BANKS AT DECEMBER 31,....................... $ 3,829,893 $ 3,462,287 $ 3,662,143
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 1,290,433 $ 1,146,557 $ 1,263,681
============ ============ ============
Income taxes.............................................. $ 193,532 $ 331,940 $ 284,987
============ ============ ============
Net cash received on interest rate swaps...................... $ 54,230 $ 68,103 $ 7,493
============ ============ ============
</TABLE>
See accompanying notes to the financial statements.
50
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of CoreStates
Financial Corp ("the Corporation") and all of its subsidiaries, including:
CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD");
Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All
material intercompany transactions have been eliminated. Certain amounts in
prior years have been reclassified for comparative purposes.
The Corporation is a bank holding company incorporated under the laws of the
Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania,
northern Delaware and the central and southern New Jersey markets. Through its
subsidiaries, the Corporation is engaged in the business of providing global and
specialized banking (including international banking services), regional
banking, retail credit services, trust and asset management and third party
processing services to a diversified customer base.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Changes in accounting principles
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS
125"), was issued in June 1996. FAS 125 requires an entity to recognize the
financial and servicing assets it controls and the liabilities it has incurred
and to derecognize financial assets when control has been surrendered in
accordance with the criteria provided in the Statement. FAS 125 is applicable to
transactions occurring after December 31, 1996, except for provisions dealing
with securities lending, repurchase and dollar repurchase agreements, which are
deferred by FAS 127 and became effective January 1, 1998. The adoption of
FAS 125 did not, and the adoption of FAS 127 is not expected to, have a
material impact on the Corporation's results of operations or financial
condition.
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS
128") was issued in February 1997. FAS 128, which was adopted on December 31,
1997, required entities to change the method used to compute earnings per share.
Under FAS 128, basic earnings per share excludes the dilutive effect of stock
options and diluted earnings per share includes the dilutive effect of stock
options even if the dilutive effect is immaterial. All periods presented have
been restated to comply with FAS 128.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") was adopted by the Corporation in 1996 and establishes
accounting and reporting standards for stock-based employee compensation plans
such as stock option and restricted stock plans ("stock-based plans"). FAS 123
defines a fair value method of accounting for measuring compensation expense for
stock-based plans and encourages all entities to adopt that method of
accounting. However, FAS 123 also permits entities to continue to measure
compensation expense for stock-based plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the fair value method, compensation expense would be measured as the value
of an award under a stock-based plan on the date the award is granted, and would
be recognized over the vesting period of the award. Under the intrinsic value
method, compensation expense is measured as the excess, if any, of the market
price of the stock underlying the award on the date the award is granted, over
the exercise price. Under the Corporation's stock-based long-term incentive
plan, awards have no intrinsic value on the date of grant as the exercise price
equals the market price on that date. The Corporation did not adopt the fair
value method of accounting for stock-based plans, and will continue to use the
intrinsic value method to measure compensation expense.
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses
accounting for impairment of certain loans and requires that impaired loans
within the scope of FAS 114 be measured based on the present value of expected
cash flows discounted at the loan's effective interest rate, or be measured at
the loan's observable market price or the fair value of its collateral. FAS 118
amended the income recognition policies and clarified disclosure requirements of
FAS 114. The adoption of these standards did not have an impact on CoreStates'
provision for loan losses or allowance for loan losses, nor change CoreStates'
methodology for recognizing income on impaired loans.
51
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Income taxes
Deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
The Corporation and its subsidiaries file a consolidated Federal income tax
return.
Investments
Held-to-maturity securities, consisting primarily of debt securities, are
carried at cost adjusted for amortization of premiums and accretion of
discounts, both computed on the interest method. The Corporation has both the
ability and positive intent to hold these securities until maturity. Trading
account assets are carried at market value. Gains on trading account assets
include both realized and unrealized gains and losses on the portfolio. All
other securities are classified as available-for-sale and are carried at fair
value, with unrealized gains and losses, net of tax, reported as a component of
shareholders' equity. The net unrealized gain on available-for-sale securities
included in retained earnings was $31,704 at December 31, 1997 and $26,555 at
December 31, 1996. Realized securities gains and losses are determined using the
adjusted cost of a specific security sold.
Interest and dividends on investment securities are recognized as income when
earned.
Loans
Interest on commercial loans is recognized on the daily principal amounts
outstanding. Loan fees are generally considered adjustments of interest rate
yields and are amortized into interest income on loans over the terms of the
related loans. Interest on installment loans is principally recognized on the
interest method.
Commercial loans are placed on a non-accrual status, generally recognizing
interest as income when received, when, in the opinion of management, the
collectability of principal or interest payments becomes doubtful or when such
payments are 90 days or more past due, unless the loan is well secured and in
the process of collection. The deferral or non-recognition of interest does not
constitute forgiveness of the borrower's obligation.
Consumer loans, excluding residential mortgage loans and credit card loans, are
charged off after reaching 120 days past due. Residential mortgage loans are
placed on non-accrual status after reaching 120 days past due and are written
down to the fair value of underlying collateral at that time. Credit card loans
are charged off after reaching 150 days past due. Prior to the second quarter of
1996, credit card loans were charged off after reaching 180 days past due.
Loans classified as held for sale are included in other assets and are carried
at their net realizable value.
Other real estate owned
When a property is acquired through foreclosure of a loan secured by real
estate, that property is recorded at the lower of the cost basis in the loan or
the estimated fair value of the property less estimated disposal costs.
Writedowns at the time of foreclosure are charged against the allowance for loan
losses. Subsequent writedowns for changes in the fair value of the property are
charged to other non-financial expense.
Allowance for loan losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Factors included in
management's determination of an adequate level of allowance for loan losses are
a statistical analysis of historical loss levels throughout an economic cycle
and one year of projected charge-offs, establishing a minimum level below which
the allowance for loan losses is considered inadequate and a maximum level above
which is considered inappropriate. A quarterly evaluation of loss potential on
specific credits, products, industries, portfolios and markets, as well as
indicators for loan growth, the economic environment and concentrations assist
in validating the position of the allowance for loan losses within those
boundaries. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
52
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the
allowance for loan losses related to "impaired loans" is based on discounted
cash flows using the impaired loan's initial effective interest rate as the
discount rate, or the fair value of the collateral for collateral dependent
loans. A loan is impaired when it meets the criteria to be placed on non-accrual
status or is a renegotiated loan. Loans which are evaluated for impairment
pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only
commercial non-accrual and renegotiated loans. Large groups of smaller balance
homogeneous loans, such as commercial loans less than $250 and credit cards,
lease financing receivables, loans secured by first and second liens on
residential properties, and other consumer loans are evaluated collectively for
impairment.
Additions to the allowance arise from the provision for loan losses charged to
operations or from the recovery of amounts previously charged off. Loan
charge-offs reduce the allowance. Loans are charged off when there has been
permanent impairment of the related carrying values.
Premises and equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. The provision for depreciation and amortization is computed,
generally, on the straight-line method at rates based on the following range of
lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold
improvements - 3 to 15 years.
Intangible assets (included in other assets)
Goodwill and other acquired intangibles, such as core deposits, are amortized
over the estimated periods to be benefited generally ranging from 5 to 25 years.
An impairment review is performed periodically on these assets.
Retirement plans
The Corporation maintains non-contributory defined benefit pension plans for
substantially all employees. Benefits are primarily based on the employee's
years of credited service, average annual salary and primary social security
benefit, as defined in the plans. It is the Corporation's policy to fund the
plans on a current basis to the extent deductible under existing tax
regulations.
The Corporation provides postretirement health care and life insurance benefits
for substantially all retired employees. In order to participate in the health
care plan, an employee must retire with at least 10 years of service. The
postretirement health care plan is contributory, with retiree contributions
based on years of service. It is the Corporation's policy to fund these plans on
a current basis to the extent deductible under existing tax regulations.
Employee Stock Ownership Plan ("ESOP")
Compensation expense in 1996 and 1995 was recognized based on the average fair
value of shares committed to be released to employees. Effective January 1,
1997, the ESOP was combined with the Corporation's 401(k) Savings Plan. The
remaining shares in the ESOP will be released to substantially all employees of
the Corporation and compensation expense will be recorded as a portion of the
Corporation's match of employee contributions to the 401(k) Savings Plan. Shares
are released based on the fair value of the shares at the date the compensation
expense is recorded.
Foreign exchange/currency
Forward exchange contracts are valued at current rates of exchange. Gains or
losses on forward exchange contracts intended to hedge an identifiable foreign
currency commitment, if any, are deferred and included in the measurement of the
related foreign currency transaction. All other gains or losses on forward
exchange contracts are included in fees for international services.
Currency gains and losses in connection with non-dollar denominated loans and
deposits, which are included in interest income and expenses, are recognized pro
rata over the contract terms. Foreign currency translation adjustments are
recorded directly to retained earnings. The cumulative foreign currency
translation gain (loss) was $3,100, $3,848 and $(1,600) at December 31, 1997,
1996 and 1995, respectively.
53
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Derivative interest rate contracts
The Corporation uses various interest rate contracts such as, interest rate
swaps, futures, forward rate agreements, caps and floors, tender option bonds,
Treasury float agreements, and forward commitments to purchase and sell loans
and securities, primarily to manage the interest rate risk of specific assets,
liabilities or anticipated transactions, to manage interest rate risk in
securities trading positions and to provide for the needs of its customers. For
contracts held for purposes other than trading, gains or losses are deferred and
recognized as adjustments to interest income or expense of the underlying assets
or liabilities and the interest differentials are recognized as adjustments of
the related interest income or expense. Gains or losses resulting from early
terminations of these contracts are deferred and amortized over the remaining
term of the underlying assets or liabilities. Any fees received or disbursed
which represent adjustments to the yield on interest rate contracts are
capitalized and amortized over the term of the interest rate contracts. If the
underlying assets or liabilities related to a derivative matures, is sold,
extinguished, or terminates, the amount of the previously unrecognized gain or
loss is recognized at that time in the consolidated income statement.
The Corporation's trading and customer-related derivative positions mostly
include tender option bonds, Treasury float agreements, and forward commitments
to purchase and sell loans and securities, and interest rate caps, floors, and
swaps. Gains and losses and net interest spread earned on these products are
generally included in non-interest income. Treasury float agreements represent
purchased option contracts. Forward commitments to purchase and sell loans and
securities consist primarily of forward commitments to sell mortgage-backed
securities, which are used to hedge mortgage loans held in the trading account.
These commitments are marked to fair value with unrealized gains and losses
recorded in income from trading activities. Contracts held or issued for
customers are valued at market with gains or losses included in income from
trading activities.
Earnings per common share
Basic earnings per common share for all periods presented are calculated by
dividing net income by weighted average common shares outstanding. Diluted
earnings per share for all periods presented are calculated by dividing net
income by the sum of weighted average common shares outstanding and potentially
dilutive shares (primarily stock options). For purposes of computing earnings
per share, only shares committed to be released and shares allocated in the ESOP
are considered outstanding. Unless otherwise noted, all "per share" amounts are
on a diluted basis.
Treasury stock
The purchase of the Corporation's common stock is recorded at cost. At the date
of subsequent reissuance, the treasury stock account is reduced by the cost of
shares reissued on a last-in-first-out basis.
Cash dividends declared per share
Cash dividends declared per share for the periods prior to the acquisition of
Meridian Bancorp, Inc. ("Meridian") on April 9, 1996, assume that the
Corporation would have declared cash dividends equal to the cash dividends per
share actually declared by the Corporation.
2. MERGERS AND ACQUISITIONS
Pending merger
On November 18, 1997, the Corporation entered into an Agreement and Plan of
Mergers (the "Merger Agreement"), which provides, among other things, for the
merger (the "Merger") of the Corporation into First Union Corporation ("First
Union"). Pursuant to the Merger Agreement, each outstanding share of the
Corporation's common stock would be converted into 1.62 shares of First Union's
common stock (the "Exchange Ratio"), subject to possible adjustment under
certain circumstances.
The Merger is intended to be accounted for as a pooling of interests.
Consummation of the Merger is subject to various conditions, including: (i)
receipt of the approval of the Merger Agreement by the Corporation's and First
Union's stockholders, and approval by First Union's stockholders of an amendment
to First Union's Articles of Incorporation to increase the number of authorized
shares of First Union's common stock from 750,000,000 to 2,000,000,000, which
such approvals were obtained on February 27, 1998; (ii) receipt of requisite
regulatory approvals from the Board of Governors of the Federal Reserve System
and other federal and state regulatory authorities; (iii) receipt of opinions as
to the tax and accounting treatment of certain aspects of the Merger; (iv)
listing, subject to notice of issuance, of First Union's common stock to be
issued in the Merger; and (v) satisfaction of certain other conditions.
54
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
2. MERGERS AND ACQUISITIONS - continued
The Merger Agreement may be terminated under certain circumstances, including by
the Corporation's Board of Directors by giving notice to First Union if either
(x) both (i) the average closing price of First Union's common stock for the ten
full trading days ending on the date the Federal Reserve Board approves the
Merger (the "Average Closing Price") is less than the product of the closing
price of First Union's common stock (the "Starting Price") on the first full
trading day after public announcement of execution of the Merger Agreement (the
"Starting Date") and 0.85, and (ii) the number obtained by dividing the Average
Closing Price by the Starting Price is less than the number obtained by (a)
dividing the weighted average of the closing prices of a specified group index
of bank stocks during the above-mentioned ten-day period by the weighted average
closing prices of such bank stocks on the Starting Date and (b) subtracting
0.15, or (y) the Average Closing Price is less than the product of the Starting
Price and 0.75. In the event CoreStates gives notice of its intent to terminate
the Merger Agreement pursuant to the conditions set forth in the preceding
sentence, First Union may determine, in its sole discretion, to increase the
Exchange Ratio to eliminate the Corporation's right to terminate the Merger
Agreement.
A summary of selected unaudited historical financial information for First Union
for the three years ended December 31, 1997 follows (in millions, except per
share):
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net interest income.............................. $5,743 $ 5,465 $ 5,128
Provision for losses on loans.................... 840 449 258
Non-interest income.............................. 3,396 2,636 2,176
Non-financial expenses........................... 5,589 5,153 4,657
Provision for income taxes....................... 814 875 848
Net income....................................... 1,896 1,624 1,541
Per common share:
Net income - basic............................ $3.03 $2.61 $2.44
Net income - diluted.......................... 2.99 2.58 2.38
Cash dividends declared....................... 1.22 1.10 0.98
</TABLE>
Meridian acquisition
On April 9, 1996, the Corporation acquired Meridian Bancorp, Inc. ("Meridian"),
a Pennsylvania bank holding company with $15.2 billion in assets and $12.1
billion in deposits. The Corporation issued approximately 81.1 million shares of
common stock to shareholders of Meridian based on an exchange ratio of 1.225
shares of the Corporation's common stock for each share of Meridian common
stock. On February 23, 1996, Meridian acquired United Counties Bancorporation
("United Counties"), a New Jersey bank holding company with $1.6 billion in
assets in a transaction accounted for as a pooling of interests. Accordingly,
the consolidated accounts of Meridian include United Counties for all periods
presented.
55
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share amounts)
2. MERGERS AND ACQUISITIONS - continued
The Meridian acquisition was accounted for under the pooling of interests method
of accounting; accordingly, the consolidated financial statements include the
consolidated accounts of Meridian for all periods presented. Financial
information on a separate company basis for the year ended December 31, 1995 for
the Corporation and Meridian (including United Counties) was as
follows (in millions, except per share):
<TABLE>
<CAPTION>
1995
---------------------------
The (Unaudited)
Corporation Meridian
------------ ----------
<S> <C> <C>
Net interest income............................... $ 1,488,534 $ 678,391
Provision for losses on loans..................... 105,000 38,877
Non-interest income............................... 605,666 276,556
Non-financial expenses............................ 1,274,398 612,695
Provision for income taxes........................ 262,565 101,372
Net income........................................ 452,237 202,003
Per common share:
Net income - basic............................. 3.22 3.03
Net income - diluted........................... 3.19 2.98
Cash dividends declared........................ 1.44 1.45
</TABLE>
The restated consolidated statement of income for 1995 reflects a conforming
accounting adjustment for Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS
106"). The Corporation elected to recognize immediately the January 1, 1992
transitional liability of $128,706 pre-tax, $84,946 after-tax, as the cumulative
effect of a change in accounting principle in the first quarter of 1992.
Meridian adopted FAS 106 on January 1, 1993, the date required under that
statement. As permitted by FAS 106, Meridian elected to amortize its liability
over 20 years. As permitted under pooling of interests accounting, the restated
financial information is prepared as if Meridian adopted FAS 106 effective
January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax,
transitional liability. Restated salaries, wages and benefits have been adjusted
accordingly.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value
information about financial instruments, whether or not required to be
recognized in the balance sheet, for which it is practicable to estimate that
value. FAS 107 defines a financial instrument as cash, evidence of ownership
interest in an entity, or a contractual obligation or right that will be settled
with another financial instrument.
In cases where quoted market prices are not available, fair values are based on
estimates using discounted cash flow or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Fair value estimates derived
through those techniques cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. FAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the
Corporation.
56
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
The following table summarizes the carrying amount and fair value estimates of
financial instruments at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Carrying
or Notional Fair or Notional Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term assets.................................... $ 6,993,544 $ 6,993,544 $ 6,415,135 $ 6,415,135
Investment securities......................................... 3,460,391 3,457,073 4,083,224 4,086,409
Trading account assets........................................ 495,472 495,472 122,317 122,317
Net loans, excluding leases................................... 32,822,537 33,136,437 30,388,757 30,391,968
Loans held for sale........................................... 841,318 841,318 445,735 445,735
Liabilities:
Demand and savings deposits................................... 22,160,650 22,160,650 22,629,513 22,629,513
Time deposits, including overseas branches and subsidiaries... 12,027,240 12,226,204 11,097,643 11,321,471
Short-term borrowings......................................... 4,323,319 4,323,319 2,633,157 2,633,157
Long-term debt................................................ 4,454,236 4,480,927 3,049,297 3,059,173
Off-balance sheet asset (liability):
Letters of credit............................................. 3,291,983 (32,920) 2,893,214 (28,931)
Commitments to extend credit.................................. 23,875,236 (28,581) 19,569,566 (21,204)
Mortgage loans sold and loan servicing
acquired with recourse.................................... 299,322 (8,559) 361,410 (9,637)
Derivative financial instruments.............................. 22,896,165 147,582 20,173,225 96,629
</TABLE>
Fair value estimates, methods, and assumptions for the Corporation's financial
instruments are set forth below:
Cash and due from banks and short-term instruments The carrying amounts reported
in the balance sheet for cash and due from banks and short-term instruments
approximate their fair values. Short-term instruments include: time deposits;
Federal funds sold; and securities purchased under agreements to resell, all of
which generally have original maturities of less than 90 days.
Investment securities Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Trading account assets Fair values for the Corporation's trading account assets,
which also are the amounts recognized in the balance sheet, are based on quoted
market prices where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments or are
derived from pricing models or formulas using discounted cash flows.
Loans Fair values are estimated for loans in groups with similar financial and
risk characteristics. Loans are segregated by type including: commercial and
industrial; commercial real estate; residential real estate; credit card and
other consumer; financial institutions; factoring receivables; and foreign. Each
loan type is further segmented into fixed and variable rate interest terms and
by performing and non-performing categories in order to estimate fair values.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate risk
inherent in the loan type at December 31, 1997 and 1996. The estimate of
maturity is based on the Corporation's historical experience with repayments for
each loan type, modified by an estimate of the effect of current economic and
lending conditions. For performing residential mortgage loans, fair value is
estimated by referring to secondary market source pricing.
57
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience and are discounted using
secondary market rates adjusted for differences in servicing and credit costs.
This estimate does not include the benefit that relates to cash flows which
could generate from new loans to existing cardholders over the remaining life of
the portfolio.
For variable rate loans that reprice frequently and which have experienced no
significant change in credit risk, fair values are based on carrying amounts.
Fair value for non-performing loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding cash flows and discount rates are determined using
available market information and specific borrower information.
Deposit liabilities The fair values disclosed for demand deposits (non-interest
bearing checking accounts, NOW accounts, savings accounts, and money market
accounts) are, by FAS 107 definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates offered on
certificates at December 31, 1997 and 1996, respectively, to an estimate of
aggregate expected maturities for those certificates of deposit.
The estimated fair values do not include the benefit that results from funding
provided by core deposit liabilities as compared to the cost of borrowing funds
in the financial markets.
Short-term funds borrowed The carrying amounts of Federal funds purchased,
securities sold under agreements to repurchase, commercial paper and other
short-term borrowings approximate their fair values.
Long-term debt The fair values for long-term debt are based on quoted market
prices where available. If quoted market prices are not available, fair values
are estimated using discounted cash flow analyses based on the Corporation's
borrowing rates at December 31, 1997 and 1996 for comparable types of borrowing
arrangements.
Off-balance sheet derivative financial instruments and commitments Fair values
for the Corporation's futures, forwards, interest rate swaps, options, interest
rate caps and floors, foreign exchange contracts, tender option bonds and
Treasury float contracts are based on quoted market prices (futures); current
settlement values (forwards); quoted market prices of comparable instruments
(foreign currency exchange contracts); or, if there are no directly comparable
instruments, on pricing models or formulas using current assumptions (interest
rate swaps, interest rate caps and floors, tender option bonds, Treasury float
contracts and options). The fair value of commitments to extend credit, other
than credit card lines, is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The value of
commitments to extend credit under credit card lines is embodied in the benefit
that relates to estimated cash flows from new loans expected to be generated
from existing cardholders over the remaining life of the portfolio.
The fair value of standby and commercial letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
the agreements or otherwise settle the obligations with the counterparties.
4. LOAN PORTFOLIO
The following are summaries of certain loan categories, net of unearned
discounts, for the two years ended December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Domestic loans:
Commercial, industrial and other......... $15,949,264 $ 13,906,646
Real estate loans:
Construction and development........... 651,064 554,924
Residential............................ 3,915,702 4,073,272
Other, primarily commercial mortgages
and commercial loans secured by
owner-occupied real estate........... 4,284,281 4,541,697
------------- ------------
Total real estate loans............ 8,851,047 9,169,893
------------- ------------
Consumer loans:
Installment............................ 2,973,719 3,027,943
Credit card............................ 1,205,932 1,674,921
------------- ------------
Total consumer loans............... 4,179,651 4,702,864
------------- ------------
Financial institutions................... 1,568,015 1,153,715
Factoring receivables.................... 454,850 411,280
Lease financing.......................... 1,356,917 1,232,213
------------- ------------
Total domestic loans.............. 32,359,744 30,576,611
------------- ------------
Foreign loans:
Loans to or guaranteed by foreign
banks.................................. 1,864,883 1,369,015
Commercial and industrial................ 587,071 385,426
Loans to other financial institutions.... 2,188 245
------------- ------------
Total foreign loans................ 2,454,142 1,754,686
------------- ------------
Total loans.................. $34,813,886 $ 32,331,297
=========== ============
</TABLE>
The following represents the Corporation's non-accrual loans, renegotiated loans
and other real estate owned for the two years ended December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Non-accrual loans
Domestic........................................ $253,909 $220,770
Foreign......................................... - -
---------- ---------
Total non-accrual loans.................... 253,909 220,770
---------- ---------
Renegotiated loans (a).......................... 10 18
---------- ---------
Total non-performing loans................. 253,919 220,788
---------- ---------
Other real estate owned (OREO).................. 14,342 24,175
---------- ---------
Total non-performing assets..................... $268,261 $244,963
========== =========
Non-performing assets as a
percentage of loans plus OREO................. 0.77% 0.76%
==== ====
Non-performing assets as a
percentage of total assets.................... 0.55% 0.54%
==== ====
</TABLE>
- -------------------
(a) There were no foreign renegotiated loans in any periods presented.
The Corporation has traditionally maintained limits on industry, country and
borrower concentrations as a way to diversify and manage credit risk. The
Corporation manages industry concentrations by applying limits to a family of
industries that have common risk characteristics.
58
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
4. LOAN PORTFOLIO - continued
At December 31, 1997 and 1996, the Corporation had loans totaling $125,224 and
$110,948, respectively, to its officers, directors and companies in which the
directors had a 10% or more voting interest. These loans were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than normal risk of collectability. The 1997 additions and
reductions were $373,282 and $359,006, respectively.
Included in other assets at December 31, 1997 and 1996 were $841,000 and
$446,000, respectively, of loans held for sale and carried at lower of cost or
market.
The book value of real estate loans transferred to other real estate owned
during 1997, 1996 and 1995 was $8,563, $19,536, and $29,337, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with loans:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
At December 31,
Notional value......................... $6,283,000 $ 9,118,000
Unrealized gains....................... 71,000 64,000
Unrealized losses...................... 6,000 19,000
Effect on loan yield for the
years ended December 31,
From................................... 8.78% 8.92%
To..................................... 8.89 9.03
</TABLE>
59
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES
The carrying and fair values of investment securities at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies........................ $ 379,968 $ 3,076 $ 793 $ 382,251
State and municipal............................ 292,119 8,247 194 300,172
Mortgage-backed................................ 156,047 175 499 155,723
Other:
Domestic................................... 473,738 146 13,476 460,408
Foreign.................................... 49,265 - - 49,265
----------- ------- -------- -----------
Total held-to-maturity.................. $ 1,351,137 $11,644 $ 14,962 $ 1,347,819
=========== ======= ======== ===========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies........................ $ 1,149,771 $ 5,286 $ 751 $ 1,154,306
State and municipal............................ 43,279 493 90 43,682
Mortgage-backed................................ 439,653 4,098 2,072 441,679
Other:
Domestic................................... 347,556 10,024 394 357,186
Foreign.................................... 80,197 32,886 682 112,401
----------- ------- -------- -----------
Total available-for-sale................ $ 2,060,456 $52,787 $ 3,989 $ 2,109,254
=========== ======= ======== ===========
1996
- ----
Held-to-Maturity
- ----------------
U.S. Treasury and
Government agencies........................ $ 362,736 $ 3,501 $ 815 $ 365,422
State and municipal............................ 366,012 8,548 95 374,465
Mortgage-backed................................ 463,796 52 1,023 462,825
Other:
Domestic................................... 442,082 340 7,529 434,893
Foreign................................... 54,432 224 18 54,638
----------- ------- -------- -----------
Total held-to-maturity.................. $ 1,689,058 $12,665 $ 9,480 $ 1,692,243
=========== ======= ======== ===========
Available-for-Sale
- ------------------
U.S. Treasury and
Government agencies........................ $ 1,512,966 $ 9,207 $ 1,061 $ 1,521,112
State and municipal............................ 59,864 468 335 59,997
Mortgage-backed................................ 505,527 4,494 4,854 505,167
Other:
Domestic................................... 186,029 14,096 939 199,186
Foreign.................................... 87,741 20,974 11 108,704
----------- ------- -------- -----------
Total available-for-sale................ $ 2,352,127 $49,239 $ 7,200 $ 2,394,166
=========== ======= ======== ===========
</TABLE>
On November 15, 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities", which permitted an enterprise to reassess the
appropriateness of the classification of all investment securities held between
November 15, 1995 and December 31, 1995. Based on its reassessment, the
Corporation reclassified $1,726,739 in investment securities previously
classified as held-to-maturity to the available-for-sale category. Unrealized
gains on transferred investments were $12,160, unrealized losses were $8,340,
and the fair value was $1,730,559.
Marketable equity securities are carried in the available-for-sale portfolio and
have been written up by $42,052 at December 31, 1997 and $34,808 at December 31,
1996, the aggregate of their excess fair values over cost, through after-tax
credits to retained earnings. The Corporation recorded pre-tax gains of $23,668
in 1997, $13,210 in 1996, and $ 7,654 in 1995 on sales of certain domestic
equity securities. During 1997 and 1996, the Corporation recorded pre-tax gains
of $4,939 and $28,656, on the exchange of certain domestic equity securities.
During 1997, 1996 and 1995, the Corporation recorded pre-tax gains of $559,
$18,924, and $939 on sales of foreign equity securities.
60
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
5. INVESTMENT SECURITIES - continued
At December 31, 1997 and 1996, there were no investments in securities of any
single, non-Federal issuer in excess of 10% of shareholders' equity.
Securities with a carrying value of $1,998,066 were pledged at December 31, 1997
to secure public deposits, trust deposits, and for certain other purposes as
required by law.
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to prepay
obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Held-to-Maturity
- ----------------
Due in one year or less........................ $ 245,009 $ 245,032
Due after one year through five years.......... 315,218 318,726
Due after five years through ten years......... 170,726 174,986
Due after ten years............................ 167,196 169,758
Mortgage-backed securities..................... 156,047 155,723
----------- -----------
$ 1,054,196 $ 1,064,225
=========== ===========
Available-for-Sale
- ------------------
Due in one year or less........................ $ 736,623 $ 737,858
Due after one year through five years.......... 565,386 569,185
Due after five years through ten years......... 63,362 63,653
Due after ten years............................ 97,075 97,321
Mortgage-backed securities..................... 439,653 441,679
----------- -----------
$ 1,902,099 $ 1,909,696
=========== ===========
</TABLE>
Proceeds from sales of investments in debt securities during 1997, 1996, and
1995 were $63,587, $1,411,398, and $560,022, respectively. Gross gains of $2,710
in 1997, $4,100 in 1996, and $11,180 in 1995, and gross losses of $422 in 1997,
$5,378 in 1996, and $1,894 in 1995, were realized on those sales.
61
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
6. REGULATORY AND CAPITAL MATTERS
The Corporation and its subsidiaries are subject to the regulations of certain
Federal and state agencies including minimum risk-based and leverage capital
guidelines issued by the Federal Reserve Board and Comptroller of the Currency.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
At December 31, 1997, management believes that the Corporation and its principal
bank subsidiary, CBNA, meet all capital adequacy requirements to which they are
subject. The following table illustrates the Corporation's and CBNA's risk-based
and leverage capital ratios at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Per Regulatory Guidelines
-----------------------------------------------------
Actual Minimum "Well-Capitalized"
--------------------- --------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Tier 1 capital (a):
Consolidated.......................... $3,756,680 8.48% $1,771,948 4% $2,657,922 6%
CBNA.................................. 2,901,577 6.82 1,700,741 4 2,551,111 6
Total capital (b):
Consolidated.......................... 5,306,410 11.98 3,543,897 8 4,429,871 10
CBNA.................................. 4,617,721 10.86 3,401,481 8 4,251,852 10
Tier 1 leverage ratio:
Consolidated.......................... 3,756,680 7.97 1,414,618 3 2,357,697 5
CBNA.................................. 2,901,577 6.50 1,340,100 3 2,233,499 5
December 31, 1996
Tier 1 capital (a):
Consolidated.......................... $3,725,318 9.45% $1,576,914 4% $2,365,372 6%
CBNA.................................. 3,270,045 8.90 1,471,992 4 2,207,987 6
Total capital (b):
Consolidated.......................... 5,215,789 13.23 3,153,829 8 3,942,286 10
CBNA.................................. 4,206,434 11.43 2,943,983 8 3,679,979 10
Tier 1 leverage ratio:
Consolidated.......................... 3,725,318 8.46 1,321,090 3 2,201,817 5
CBNA.................................. 3,270,045 7.80 1,257,745 3 2,096,241 5
</TABLE>
- --------------------
(a) Consists primarily of common shareholders' equity and Trust Capital
Securities, less goodwill and certain intangible assets.
(b) Consists of Tier 1 capital plus qualifying subordinated debt and the
allowance for loan losses, within permitted limits.
The primary source of funds for cash dividend payments by the Corporation to its
shareholders is dividends received from its banking subsidiaries. The approval
of the Comptroller of the Currency is required for a nationally chartered bank
to pay dividends if the total of all dividends declared in any calendar year
exceeds the bank's net profits (as defined by national banking regulations) for
that year combined with its retained net profits for the preceding two calendar
years. Under this formula, CBNA can declare dividends without approval of the
Comptroller of the Currency of approximately $32,000 plus an additional amount
equal to CBNA's retained net profits for 1998 up to the date of any such
dividend declaration. Due to the special provision for losses on credit card
outstandings recorded in the fourth quarter of 1997, CBD is unable to pay
dividends without prior approval of the Comptroller of the Currency.
The Federal Reserve Act requires that extensions of credit by CBNA to certain
affiliates, including the Corporation, be secured by specified amounts and types
of collateral, that extensions of credit to any such affiliate generally be
limited to 10% of capital and surplus (as defined in that Act) and that
extensions of credit to all such affiliates be limited to 20% of capital and
surplus.
The Corporation's banking subsidiaries are required to maintain reserve balances
with the Federal Reserve Bank. The average amount of those reserve balances for
the years ended December 31, 1997 and 1996 were approximately $211,000 and
$257,000, respectively.
62
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
7. ALLOWANCE FOR LOAN LOSSES
The following represents an analysis of changes in the allowance for loan losses
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Balance at beginning of period..................... $ 710,327 $ 670,265 $ 681,124
Provision charged to operating expense............. 263,000 228,767 144,002
Recoveries of loans previously charged off......... 84,301 92,985 85,226
Loan charge-offs................................... (321,196) (281,690) (240,087)
Allowance for loans designated as held for sale.... (102,000) - -
---------- --------- ----------
Balance at end of period........................... $ 634,432 $ 710,327 $ 670,265
========== ========= ==========
</TABLE>
The following presents information on loans that are considered impaired under
FAS 114:
<TABLE>
<CAPTION>
At December 31, 1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Recorded investment in impaired loans.............. $183,978 $183,330
Impaired loans against which a portion
of the allowance for loan losses is
specifically allocated......................... 130,614 74,609
Amount of allowance for loan losses
specifically allocated to impaired loans....... 46,436 15,105
For the years ended December 31,
Average recorded investment in impaired
loans.......................................... 173,375 197,854 $257,746
Interest income recognized on impaired
loans.......................................... 15,075 8,977 14,354
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment on the consolidated balance sheet is presented net of
accumulated depreciation and amortization of $536,137 and $667,412 at December
31, 1997 and 1996, respectively. Depreciation and amortization of premises and
equipment for the years ended December 31, 1997, 1996, and 1995, was $87,606,
$95,897, and $98,033, respectively.
9. OPERATING LEASES
Rental expense, reduced by sublease rental income, charged to operations was
$89,300, $90,982 and $85,419 for 1997, 1996 and 1995, respectively.
63
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
10. DEPOSITS
The following presents a breakdown of deposits at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Domestic:
Non-interest bearing checking.............. $ 9,252,376 $ 9,330,445
Savings, NOW and money
market accounts......................... 12,908,274 13,299,068
Time deposits.............................. 10,582,718 9,687,887
------------ ------------
Total domestic deposits................. 32,743,368 32,317,400
Overseas branches and subsidiaries............. 1,444,522 1,409,756
------------ ------------
Total deposits.......................... $34,187,890 $ 33,727,156
=========== ============
</TABLE>
Domestic time deposits in denominations of $100 or more at December 31, 1997,
1996, and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Commercial certificates of deposit............. $2,489,415 $ 754,437 $ 695,970
Other domestic time deposits,
principally savings certificates........... 608,968 613,126 501,058
----------- ----------- -----------
Total........................... $3,098,383 $ 1,367,563 $ 1,197,028
========== =========== ===========
</TABLE>
Interest expense on domestic time deposits in denominations of $100 or more for
the years ended December 31, 1997, 1996, and 1995 was:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- --------
<S> <C> <C> <C>
Interest expense:
Commercial certificates of deposit......... $ 98,669 $30,857 $ 36,520
Other domestic time deposits, principally
savings certificates................ 31,294 25,451 30,057
--------- ------- --------
Total........................... $129,963 $56,308 $ 66,577
======== ======= ========
</TABLE>
Substantially all of the deposits of overseas branches and subsidiaries were
time deposits in denominations of $100 or more for each of the three years
presented.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with deposits:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
At December 31,
Notional value............................. $3,789,000 $ 5,314,000
Unrealized gains........................... 30,000 50,000
Unrealized losses.......................... 6,000 16,000
Effect on deposit interest expense for the
year ended December 31,
From....................................... 3.68% 3.62%
To......................................... 3.60 3.49
</TABLE>
64
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
11. SHORT-TERM FUNDS BORROWED
Short-term funds borrowed at December 31, 1997, 1996 and 1995 include the
following:
<TABLE>
<CAPTION>
Weighted
Maximum Average Average
Balance outstanding outstanding interest
at end of during during rate during
year year(e) year year(f)
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1997
- ----
Federal funds purchased (a).......................... $ 1,422,208 $1,550,412 $ 860,000 5.84%
Securities sold under agreements to repurchase (b)... 571,804 767,480 627,000 4.86
Commercial paper (c)................................. 865,835 1,147,909 914,000 5.61
Other short-term funds borrowed (d).................. 1,463,472 1,507,363 1,013,000 5.71
----------- -----------
Total short-term funds borrowed ................ $ 4,323,319 $ 3,414,000 5.56
=========== ===========
1996
- ----
Federal funds purchased (a).......................... $ 532,334 $1,977,950 $ 873,000 5.54%
Securities sold under agreements to repurchase (b)... 656,397 836,722 749,000 4.52
Commercial paper (c)................................. 675,181 1,106,078 962,000 5.44
Other short-term funds borrowed (d).................. 769,245 842,410 374,000 4.96
----------- -----------
Total short-term funds borrowed ................ $ 2,633,157 $ 2,958,000 5.18
=========== ===========
1995
- ----
Federal funds purchased (a).......................... $ 1,129,432 $2,060,375 $ 1,432,000 6.02%
Securities sold under agreements to repurchase (b)... 812,281 863,937 771,000 5.03
Commercial paper (c)................................. 1,255,656 1,388,927 1,051,000 5.94
Other short-term funds borrowed (d).................. 479,644 1,005,699 498,000 5.33
----------- -----------
Total short-term funds borrowed ................ $ 3,677,013 $ 3,752,000 5.71
=========== ===========
</TABLE>
(a) Federal funds purchased generally represent the overnight Federal funds
transactions of banking subsidiaries with correspondent banks.
(b) Securities sold under agreements to repurchase usually mature within one to
thirty days or are due on demand.
(c) Commercial paper issued by CSCC is used to finance the short-term
borrowing requirements of certain banking-related activities. Commercial
paper is issued with maturities of not more than nine months and there are
no provisions for extension, renewal or automatic rollover.
At December 31, 1997, the Corporation had a $700,000 revolving credit
facility from unaffiliated banks. The facility was established in support
of commercial paper borrowings, Medium Term Note (see Note 12) issuance
and general corporate purposes. Unless extended by the Corporation in
accordance with the terms of the facility agreement, the facility expires
February 2000. There were no borrowings under this facility at December
31, 1997. The interest rate charged for usage of these lines varies with
money market conditions.
(d) Other short-term funds borrowed include term Federal funds purchased,
short-term Bank Notes and demand notes payable to the U.S. Treasury.
(e) Represents the maximum amount outstanding at any month end during the year.
(f) The weighted average interest rate is calculated primarily on a daily
average of short-term funds borrowed.
65
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 includes the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CoreStates Financial Corp:
6 5/8% Notes due 2000 (a).............................. $ 150,000 $ 150,000
7 7/8% Subordinated Notes due 2002 (b)................. 100,000 100,000
8 5/8% Mortgages due 2001.............................. 5,963 6,603
Unamortized Discounts.................................. (221) (271)
----------- -----------
255,742 256,332
----------- -----------
CSCC:
6 3/4% Guaranteed Subordinated
Notes due 2006 (c)................................... 200,000 200,000
5 7/8% Guaranteed Subordinated
Notes due 2003 (c)................................... 200,000 200,000
6 5/8% Guaranteed Subordinated
Notes due 2005 (c)................................... 175,000 175,000
9 5/8% Guaranteed Subordinated
Notes due 2001 (c)................................... 150,000 150,000
9 3/8% Guaranteed Subordinated
Notes due 2003 (c)................................... 100,000 100,000
Medium Term Notes (d).................................. 1,641,000 1,509,000
Unamortized Discounts.................................. (4,003) (4,990)
----------- -----------
2,461,997 2,329,010
----------- -----------
Trust Capital Securities:
8% Trust Capital Securities due 2026 (e)............... 300,000 300,000
Libor + .57% Trust Capital Securities due 2027 (f)..... 300,000 -
Libor + .65% Trust Capital Securities due 2027 (f)..... 150,000 -
Unamortized Discounts.................................. (5,872) (6,491)
----------- -----------
744,128 293,509
----------- -----------
Other subsidiaries:`
Libor + .05% Eurodollar Notes due 2002 (g)............. 500,000 -
Bank Note Program (h).................................. 232,130 -
6 5/8% Subordinated Notes due 2003 (i)................. 150,000 150,000
Federal Home Loan Bank Borrowings (j).................. 100,000 2,888
Various other.......................................... 12,488 18,175
Unamortized Discounts.................................. (2,249) (617)
----------- -----------
992,369 170,446
----------- -----------
Total long-term debt (k)............................... $4,454,236 $3,049,297
=========== ===========
</TABLE>
(a) The Notes are unsecured and senior in right of payment to all subordinated
indebtedness of the Corporation. The Notes are not redeemable by the
Corporation or the holders prior to the maturity date and are not entitled
to the benefit of any sinking fund.
(b) The Notes are unsecured and subordinate in right of payment to all present
and future senior indebtedness of the Corporation. The Notes are not
redeemable by the Corporation or the holders prior to the maturity date
and are not entitled to the benefit of any sinking fund.
(c) The Notes are not subject to redemption prior to maturity and are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Notes are subordinated to
all existing and future senior CSCC indebtedness and the guarantee is
subordinated to all outstanding senior Corporation indebtedness.
66
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. LONG-TERM DEBT - continued
(d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities
of nine months or greater from date of issue. The interest rate or
interest rate formula on each Note is established by CSCC at the time of
issuance. The Senior Notes are unconditionally guaranteed as to payment of
principal and interest by the Corporation. The Subordinated Notes are
unconditionally guaranteed, on a subordinated basis, as to payment of
principal and interest by the Corporation. The Subordinated Notes are
subordinated to all existing and future senior CSCC indebtedness and the
guarantee is subordinated to all existing and future senior Corporation
indebtedness. At December 31, 1997, $1,641,000 of debt is outstanding with
maturities up to five years. Interest rates are predominately variable.
Under an existing shelf registration statement filed with the Securities
and Exchange Commission, the Corporation had debt and capital securities
that were registered but unissued of approximately $579,000 at December
31, 1997.
(e) The Trust Capital Securities evidence a preferred ownership interest in a
trust, of which 100% of the common equity is owned by CBNA. The Trust
Capital Securities are unconditionally guaranteed by CBNA. The proceeds
from issuance of the Trust Capital Securities are invested in 8% Junior
Subordinated Deferrable Interest Debentures of CBNA due 2026. These
Subordinated Debt Securities have provisions enabling certain actions such
as redemption or the deferment of the semiannual payments of interest,
which will impact the Trust Capital Securities. CBNA may redeem the
Subordinated Debt Securities in whole or in part, on or after December 15,
2006. In addition, Subordinated Debt Securities may be redeemed by CBNA at
any time upon the occurrence of certain events. In the event of such a
redemption of the Subordinated Debt Securities, the proceeds of such
payment or repayment shall concurrently be applied to redeem the Trust
Capital Securities.
(f) The Trust Capital Securities evidence a preferred ownership interest in a
trust, of which 100% of the common equity is owned by CBNA. The Trust
Capital Securities are unconditionally guaranteed by CBNA. The proceeds
from issuance of the Trust Capital Securities are invested in Floating
Rate Junior Subordinated Deferrable Interest Debentures of CBNA due 2027.
These Subordinated Debt Securities have provisions enabling certain
actions such as redemption or the deferment of the semiannual payments of
interest, which will impact the Trust Capital Securities. CBNA may redeem
the Subordinated Debt Securities in whole or in part, on or after February
15, 2007 and January 15, 2007 for the $300,000 and $150,000 Trust Capital
Securities, respectively. In addition, Subordinated Debt Securities may be
redeemed by CBNA at any time upon the occurrence of certain events. In the
event of such a redemption of the Subordinated Debt Securities, the
proceeds of such payment or repayment shall concurrently be applied to
redeem the Trust Capital Securities.
(g) On October 3, 1997, CSCC and CBNA applied to list up to $4.0 billion of
debt securities ("the Programme") on the Luxembourg Stock Exchange. Under
this Programme, CSCC and CBNA may each issue up to $2.0 billion of debt
securities ("the Notes") with maturities from 30 days to 30 years. The
Notes are direct, unconditional and unsecured general obligations of the
relevant issuer. On October 29, 1997, CBNA issued $500 million 5 year
floating rate notes under the Programme.
(h) On November 7, 1997, CBNA and CBD established a $3.0 billion Senior and
Subordinated Bank Note program ("the Bank Note Program") which
accommodates subordinated debt issuance with maturities up to 30 years. In
the fourth quarter of 1997, CBNA issued $232 million in senior notes with
maturities ranging from one to two years.
67
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
12. LONG-TERM DEBT - continued
(i) The Notes were issued by CBNA and are unsecured and subordinate to the
claims of depositors and other creditors. The Notes are not redeemable by
CBNA or the holders prior to the maturity date and are not entitled to the
benefit of any sinking fund.
(j) The borrowing matured in January 1998 and carries a fixed interest rate of
5.63%. These borrowings require membership in the Federal Home Loan Bank
of Pittsburgh and the maintenance of available collateral with a fair
value which approximates the total amount of the outstanding debt.
(k) The consolidated aggregate maturities for long-term debt for the years
ending December 31, 1998 through 2002 are: $758,417; $831,982; $390,590;
$298,477, and $599,782, respectively.
The following presents information on derivative financial instruments used to
manage interest rate risk associated with long-term debt:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
At December 31,
Notional value............................. $1,531,000 $ 1,019,000
Unrealized gains........................... 34,000 16,000
Unrealized losses.......................... 7,000 13,000
Effect on long-term debt cost for
the years ended December 31,
From....................................... 6.64% 6.53%
To......................................... 6.50 6.38
</TABLE>
68
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
13. RETIREMENT AND BENEFIT PLANS
The fair value of the assets in the Corporation's defined benefit pension plans
exceeded the projected benefit obligation by $126,512 at December 31, 1997,
based on current and estimated future salary levels. The excess of the fair
value of plan assets is reconciled to the accrued pension cost included in other
liabilities as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
---------- ---------
<S> <C> <C>
Plan assets at fair value(a)................................. $1,046,610 $ 902,947
---------- ---------
Present value of benefit obligation:
Accumulated benefits based on salaries to date, including
vested benefits of $753,667 in 1997 and $667,536
in 1996................................................. 776,522 688,102
Additional benefits based on estimated future salary levels 143,576 157,687
----------- ---------
Projected benefit obligation................................. 920,098 845,789
----------- ---------
Amount the fair value of plan assets exceeds
the projected benefit obligation at December 31,.......... 126,512 57,158
Reconciliation:
Unrecognized prior service cost........................... 15,278 30,770
Unrecognized net asset from date of initial application... (13,685) (20,016)
Net deferred actuarial gain............................... (156,939) (91,835)
---------- --------
Accrued pension expense included in other liabilities $ (28,834) $(23,923)
========== ========
</TABLE>
- ---------------
(a) Primarily U.S. Government securities, U.S. agency securities, fixed income
securities, common stock, and commingled funds managed by subsidiary banks.
Net pension cost for the years ended December 31, 1997, 1996 and 1995 included
the following expense (income) components:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Service cost benefits earned during the period.............. $ 20,963 $ 29,020 $ 24,492
Interest cost on projected benefit obligation............... 63,290 60,793 54,497
Actual return on plan assets................................ (183,388) (121,868) (162,143)
Net amortization and deferral............................... 105,847 53,887 96,484
---------- ---------- ---------
Net pension cost....................................... $ 6,712 $ 21,832 $ 13,330
========== ========== =========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for the Corporation was 7.25% and
7.5%, respectively, at December 31, 1997 and 1996. The rate of increase on
future compensation levels was 5.0% in both 1997 and 1996. The expected
long-term rate of return on plan assets was 9.0% in 1997, 8.5% in 1996, and 7.5%
- - 9.5% in 1995.
The Corporation sponsors a 401(k) savings plan for substantially all its
employees whereby the Corporation may make matching contributions equal to a
percentage of the contribution made by participants. Contribution expense
related to the savings plan for the employer's match was $20,964 in 1997,
$18,955 in 1996, and $18,192 in 1995.
The ESOP is a leveraged plan funded through a direct loan from the Corporation.
The ESOP has acquired a total of 2,515,000 shares of common stock for
distribution to eligible employees ratably over a 20 year period. Compensation
cost has been recognized based on the fair market value of the shares committed
to be released to employees. Total compensation cost recognized was $5,378 in
1996 and $3,600 in 1995. Dividends on allocated shares are paid to participants
and are charged to retained earnings. Dividends on unallocated shares are used
by the ESOP to reduce its loan. Effective January 1, 1997 the ESOP was combined
with the Corporation's 401(k) savings plan and expense related to the ESOP of
$7,269 for 1997 was included in the 401(k) savings plan employer's match.
69
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
13. RETIREMENT AND BENEFIT PLANS - continued
The Corporation and its subsidiaries provide postretirement health care and life
insurance benefits for substantially all retired employees. Postretirement
benefits are provided through an insurance company whose premiums are based on
the benefits paid during the year. The postretirement health care plan is
contributory, with retiree contributions based on years of service.
The liability for postretirement benefits included in other liabilities at
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................. $ (56,396) $ (68,702)
Fully eligible active plan participants.............................. (2,597) (1,827)
Other active plan participants....................................... (42,211) (29,748)
--------- ---------
Accumulated postretirement benefit obligation........................... (101,204) (100,277)
Plan assets at fair value (a)........................................... 62,553 52,591
--------- ---------
Unfunded obligation at December 31,..................................... (38,651) (47,686)
Unrecognized prior service cost......................................... (43,433) (45,239)
Unrecognized net gain................................................... (45,984) (51,157)
--------- ---------
Accrued postretirement benefit obligation included in other liabilities $(128,068) $(144,082)
========= =========
</TABLE>
- ------------------
(a) Primarily municipal bonds and short-term investments.
Net periodic postretirement benefit cost for the years ended December 31, 1997,
1996 and 1995 included the following expense (income) components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost benefits earned during the period............ $ 2,482 $ 2,769 $ 3,044
Interest cost on accumulated postretirement
benefit obligation.................................... 7,103 7,947 11,932
Actual return on plan assets.............................. (1,770) (1,527) (1,107)
Net amortization and deferral............................. (7,223) (6,069) (1,436)
------- ------- -------
Net periodic postretirement benefit cost.................. $ 592 $ 3,120 $12,433
======= ======= =======
</TABLE>
For measurement purposes, the rate of increase in the per capita cost of covered
health care benefits was assumed to be 5.5% per year and remains at that level
until a predetermined benefit cap is reached. This fixed dollar cap was
established as the per capita projected cost level in 1997 associated with the
Corporation's indemnity medical plan. The health care cost trend rate assumption
has an effect on the amounts reported. To illustrate, increasing the assumed
health care cost trend rates by 1 percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 31, 1997 by
$4,355 and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $386.
The expected long-term rate of return on plan assets was 6.0%. The
weighted-average discount rate used in determining the Corporation's accumulated
postretirement benefit obligation was 7.25% and 7.5%, respectively, at December
31, 1997 and 1996.
70
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
14. LONG-TERM INCENTIVE PLAN
The Corporation has outstanding options granted under the Corporation's
long-term incentive plan (the "Plan"). As provided in the Plan, a variety of
incentives can be issued to eligible participants including restricted stock
awards, incentive stock options, non-qualified stock options, or stock
appreciation rights. Meridian and United Counties had maintained similar plans.
Options granted under those plans were assumed by the Corporation upon
consummation of their respective acquisitions. The Plan provides for a maximum
number of options available to be granted each year equal to 1.5% of outstanding
common shares as of January 1 of that year. Options under the Plan are granted
to purchase the Corporation's common shares at market value on the date of grant
and are exercisable one year from the date of grant for a period not exceeding
ten years from the date of grant. Stock appreciation rights may be granted in
conjunction with the granting of an option.
Information on option activity for 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------------
Shares under Weighted-Average Shares Under Weighted-Average
Option Exercise Price Option Exercise Price
------------ ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Balance at beginning of year............. 5,789,064 $29.98 8,581,554 $23.86
Options granted.......................... 1,634,052(a) 51.50 1,968,001 (a) 41.49
Options exercised........................ (2,201,107) 28.32 (4,519,411) 23.27
Options canceled......................... (155,110) 50.04 (241,080) 31.84
------------ --------------
Balance at end of year................... 5,066,899 37.00 5,789,064 29.98
========= =========
Shares exercisable....................... 3,585,769 31.00 4,405,540 25.37
========= =========
</TABLE>
(a) The fair value of options granted during 1997 and 1996 was $14.5 million and
$12.6 million, respectively.
The following table summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ ----------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Price Exercise Exercisable Exercise Price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 8.20 to $19.50 195,977 2.8 years $15.30 195,977 $15.30
$20.53 to $29.95 2,306,766 6.2 27.10 2,306,766 27.10
$37.96 to $51.50 2,564,156 8.7 47.55 1,083,026 42.16
---------- ----------
$ 8.20 to $51.50 5,066,899 7.3 37.00 3,585,769 31.00
========== ==========
</TABLE>
The Corporation uses the intrinsic value method of accounting to measure
compensation expense. If the fair value method had been used to measure
compensation expense, net income would have been reduced by $9.8 million, or
$0.05 per share, $7.4 million, or $0.03 per share, and $7.2 million, or $0.03
per share, to $803.4 million, or $3.91 per share, $641.8 million, or $2.91 per
share, and $647.9 million, or $2.88 per share, for the years ended December 31,
1997, 1996 and 1995, respectively.
The fair value of options granted in 1997, 1996 and 1995 was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions, respectively: risk-free interest rates of 5.49% to
7.80%, dividend yield of 4.0%, volatility factors of the expected market price
of the Corporation's common stock of .148 to .223, and a weighted-average
expected life of the options of 6 years.
71
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
14. LONG-TERM INCENTIVE PLAN - continued
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments and
contingent liabilities which are not reflected in the financial statements.
These include various financial instruments with off-balance sheet risk used in
connection with the Corporation's asset and liability management, the management
of interest rate risk in securities trading positions and to provide for the
needs of customers. These involve varying degrees of credit, interest rate and
liquidity risk, but do not represent unusual risks for the Corporation and
management does not anticipate any significant losses as a result of these
transactions.
Derivative Financial Instruments Held or Issued for Purposes Other Than Trading
The Corporation uses off-balance sheet derivative financial instruments, such as
interest rate swaps, futures and caps, to manage interest rate risk. The
Corporation's exposure to interest rate risk stems from the mismatch between the
sensitivity to movements in interest rates of the Corporation's assets and
liabilities and from the spread risk between the rates on those assets and
liabilities and financial market rates. The use of derivatives to manage
interest rate risk falls into three categories: interest sensitivity
adjustments, interest rate spread protection and hedging anticipated asset
sales.
Interest rate swaps and futures are generally used to lengthen the interest rate
sensitivity of short-term assets and to shorten the repricing characteristics of
longer term liabilities. Interest rate caps are used to manage spread risk.
Interest rate caps are also used to offset the risk of upward interest rate
movement on adjustable rate mortgages and other products with imbedded caps as
well as to reduce the risk that interest rate spreads narrow on prime based
products. Gains or losses are used to adjust the basis of the related asset or
liability and interest differentials are adjustments of the related interest
income or expense.
In connection with anticipated sales of longer term assets acquired through
merger or generated in the loan origination process, the Corporation uses
interest rate swaps, rate locks and option agreements to reduce interest rate
sensitivity as the assets are readied for sale. Hedge gains or losses are used
to adjust the basis of the assets held for sale.
Derivative financial instruments used in the management of interest rate risk at
December 31, 1997 are summarized below (in millions):
<TABLE>
<CAPTION>
Interest Interest Interest
rate rate rate caps Other
swaps futures and floors derivatives Total
------- ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest Sensitivity Adjustment:
Assets (primarily loans):
Notional amount............... $ 4,668 $1,089 $ 7 $ 5,764
Unrealized gains.............. 80 - - 80
Unrealized losses............. (6) - - (6)
Deposits and other borrowings:
Notional amount............... 2,829 824 $ 50 3,703
Unrealized gains.............. 24 6 - 30
Unrealized losses............. (6) - - (6)
Long-term debt:
Notional amount............... 1,381 150 1,531
Unrealized gains.............. 33 1 34
Unrealized losses............. (7) - (7)
Spread Protection:
Assets (primarily loans):
Notional amount............... 76 492 568
Unrealized gains.............. 1 2 3
Unrealized losses............. - - -
Deposits and other borrowings:
Notional amount............... 86 86
Unrealized gains.............. - -
Unrealized losses............. - -
Anticipated Asset Sales:
Notional amount............... 51 51
Unrealized gains.............. - -
Unrealized losses............. - -
Total:
Notional amount............ $ 8,954 $ 1,089 $ 1,409 $ 251 $ 11,703
======= ======= ====== ====== ========
Unrealized gains........... $ 138 $ - $ 8 $ 1 $ 147
======= ======= ======= ====== ========
Unrealized losses.......... $ (19) $ - $ - $ - $ (19)
======= ======= ======= ====== ========
Net unrealized gains....... $ 119 $ - $ 8 $ 1 $ $128
======= ======= ======= ====== ========
A summary of interest rate swap contracts categorized by whether the Corporation
receives or pays fixed rates and stratified by repricing or maturity date is
below (in millions):
Years
--------------------------------------------------------------------
0-1 1-2 2-3 3-4 4-5 over 5 Total
---------- ---------- --------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Receive Fixed/Pay Floating:
Receive Notional................ $1,288 $1,527 $1,385 $1,630 $ 768 $ 894 $7,492
Rate.................... 6.34% 6.74% 6.42% 6.56% 6.38% 6.76% 6.54%
Pay Notional................ $7,492 $7,492
Rate.................... 6.03% 6.03%
Pay Fixed/Receive Floating:
Pay Notional................ $ 14 $ 25 $ 39
Rate.................... 8.27% 9.26% 8.91%
Receive Notional................ $ 39 $ 39
Rate.................... 6.00% 6.00%
Receive Floating/Pay Floating:
(Basis Swaps)
Notional................ $ 963 $ 963
Receive Rate.................... 5.91% 5.91%
Pay Rate.................... 6.04% 6.04%
Receive Fixed/Pay Floating(a):
(Forward Start)
Receive Notional................ $ 150 $ 189 $ 75 $ 46 $ 460
Rate.................... 7.14% 6.52% 6.86% 7.00% 6.82%
Start Date Notional................ $ 150 $ 310 $ 460
</TABLE>
- ----------------------------------------
(a) Pay rate will be determined on forward start date.
Foreign currency derivatives used for hedging activities have not had a
material impact on income or liquidity of the Corporation for any of the years
presented.
72
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
Derivative Financial Instruments Held or Issued for Trading Purposes
In its business of providing risk management services for its customers, the
Corporation purchases and sells certain derivatives including interest rate
swaps, caps and floors. In addition, as part of its international business, the
Corporation enters into foreign exchange contracts on behalf of customers. These
contracts are matched against forward sale or purchase contracts. Customer
related derivative financial instrument transactions are generally marked to
market and any gains or losses are recorded in the income statement. The
Corporation also holds derivatives in connection with its securities trading
activities and, at times, as a position taken in the expectation of profiting
from favorable movements in interest rates. These products include tender option
bonds and Treasury float contracts. Included in the income statement are trading
revenues from derivatives of $33,901 of which $25,531 represents net foreign
exchange gains included in fees for international services.
Outstanding notional amounts and related fair values of trading and customer
related derivative financial instruments at December 31, 1997 and 1996 are
summarized by type of instrument below (in millions):
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
Positive Negative
Notional Net assets Market Market
Interest Rate Swaps: amount (liability)(a) Value Value
----------- -------------- --------- ---------
<S> <C> <C> <C> <C>
CoreStates receives fixed........ $ 1,521 $ 17.7 $21.6 $ (3.9)
CoreStates pays fixed............ 2,005 (39.1) 4.1 (43.2)
Futures................................... 777 (1.9) 0.1 (2.0)
Rate Locks:
CoreStates receives fixed........ 130 (0.7) - (0.7)
CoreStates pays fixed............ 130 0.8 0.8 -
Interest Rate Caps/Floors:
Sold............................. 1,491 (3.1) - (3.1)
Purchased........................ 1,562 3.0 3.0 -
Commitments to purchase/sell whole
mortgage loans and securities (including
when-issued securities):
Sold............................. 145 (1.7) - (1.7)
Purchased........................ 64 - - -
Other Options:
Sold............................. 881 39.8 39.8 -
Purchased........................ 247 0.7 0.7 -
Foreign exchange contracts (b)............ 2,241 4.0 35.2 (31.2)
------- ------- ------- -------
Total Trading and Customer Related
Derivatives...................... $11,194 $ 19.5 $ 105.3 $ (85.8)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
Positive Negative
Notional Net assets Market Market
Interest Rate Swaps: amount (liability)(a) Value Value
----------- -------------- --------- ---------
<S> <C> <C> <C> <C>
CoreStates receives fixed........ $ 355 $ 1.5 $ 2.7 $ (1.2)
CoreStates pays fixed............ 353 (1.0) 1.3 (2.3)
Futures................................... 39 0.4 0.4 -
Rate Locks:
CoreStates receives fixed........ 30 (0.1) - (0.1)
CoreStates pays fixed............ 30 0.1 0.1 -
Interest Rate Caps/Floors:
Sold............................. 705 (2.7) - (2.7)
Purchased........................ 704 2.7 2.7 -
Commitments to purchase/sell whole
mortgage loans and securities (including
when-issued securities):
Sold............................. 83 (0.2) 0.1 (0.3)
Purchased........................ 19 - - -
Other Options:
Sold............................. 206 6.5 7.1 (0.6)
Purchased........................ 334 0.8 0.8 -
Foreign exchange contracts (b)............ 1,766 (0.5) 28.0 (28.5)
------- ------- ------- -------
Total Trading and Customer Related
Derivatives...................... $ 4,624 $ 7.5 $ 43.2 $ (35.7)
======= ======= ======= =======
</TABLE>
- ------------
(a) Average net assets (liabilities) during 1997 and 1996 were substantially the
same as the net assets (liabilities) at December 31, 1997 and 1996,
respectively.
(b) Foreign exchange contracts purchased and sold at December 31, 1997 were $987
million and $1,254 million, respectively, and at December 31, 1996 were $836
million and $930 million, respectively.
The following is a summary of off-balance sheet commitments and derivative
financial instruments as of December 31, 1997 and 1996, including fair values.
See Note 3 for a discussion of fair value.
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
Notional Fair Notional Fair
or Value or Value
Contractual of Asset Contractual of Asset
Amount (Liability) Amount (Liability)
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Standby letters of credit, net of participations (a) $ 1,817,591 $ (18,176) $ 1,630,621 $ (16,306)
Commercial letters of credit....................... 1,474,392 (14,744) 1,262,593 (12,625)
Commitments to extend credit (b)................... 19,332,394 (28,581) 15,396,553 (21,204)
Unused commitments under credit card lines......... 4,542,842 - 4,173,013 -
When-issued securities (c):
Commitments to purchase...................... 47,838 (5) 1,770 -
Commitments to sell.......................... 106,310 (455) 75,120 (140)
Commitments to purchase/sell whole mortgage loans
and securities (c):
Commitments to purchase..................... 15,782 30 17,280 30
Commitments to sell......................... 39,120 (1,254) 7,965 (70)
Mortgage loans sold and loan servicing acquired
with recourse (d).............................. 299,322 (8,559) 361,410 (9,637)
Interest rate futures contracts (e):
Commitments to purchase........................ 1,866,100 (1,764) 4,489,800 2,781
Commitments to purchase foreign and
U.S. currencies (f)............................ 2,240,895 4,025 1,766,122 (488)
Interest rate swaps, notional principal
amounts (g).................................... 12,479,564 97,670 9,850,708 67,673
Interest rate caps and floors (h):
Written........................................ 1,693,886 (3,091) 908,799 (2,842)
Purchased...................................... 2,768,289 11,003 2,039,331 17,383
Tender option bonds (i)............................ 849,854 37,876 148,711 5,976
Treasury float contracts (j)....................... 246,781 646 270,358 682
Other derivatives.................................. 541,746 2,901 597,261 5,644
</TABLE>
73
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
(a) Standby letters of credit ("SBLC") are used in various transactions to
enhance the credit standing of the Corporation's customers and are
subjected to the same risk, credit review and approval process as loans.
SBLC's are irrevocable assurances that the Corporation will make payment in
the event that a customer cannot perform its contractual obligations to
third parties.
(b) Commitments to extend credit represent the Corporation's obligation to fund
various types of loans, including home equity lines, lines of credit,
revolving lines of credit and other types of commitments.
(c) The Corporation has commitments to purchase/sell mortgage-backed securities
or loans with delivery at a future date but typically within 120 days. The
fair value of these instruments is affected by interest rates. In a
declining interest rate environment, commitments to sell mortgage-backed
securities or loans will decline in value. In a rising interest rate
environment, commitments to buy mortgage-backed securities or loans will
decrease in value.
Forward agreements to sell securities are used in transactions with
municipalities that generally have a debt payment due in the future. Under
these agreements, the Corporation agrees to deliver primarily United States
Treasury securities that will mature on or before the required payment
date. The type and associated interest rate of these securities is
established when the agreement is entered. The primary risk associated with
forward agreements is interest rate risk to the extent the required
securities have not been purchased. If interest rates fall, securities
yielding the higher agreed upon fixed rate will be more expensive for the
Corporation to purchase.
When-issued securities and commitments to purchase/sell whole mortgage
loans and securities are entirely customer and trading-related products.
(d) The Corporation originates and sells residential mortgage loans as part of
various mortgage-backed security programs sponsored by the United States
government agencies or government-sponsored agencies, such as the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association. Certain sales
and other servicing acquired are subject to recourse provisions in the
event of default by the borrower. The Corporation provides for potential
losses under these recourse provisions by establishing reserves at the time
of sale and evaluates the adequacy of these reserves on an ongoing basis.
(e) Exchange traded futures contracts represent agreements to exchange dollar
amounts at a specified future date for interest rate differentials between
an agreed interest rate and a reference rate, computed on a notional
amount. Credit and market risk exist with respect to these instruments.
Exchange traded futures contracts entail daily cash settlement; therefore,
the credit risk amount represents a one-day receivable.
(f) Commitments to purchase foreign and U.S. currencies are primarily executed
for the needs of customers. These foreign exchange contracts are structured
similar to interest rate futures and forward contracts. The risk associated
with a foreign exchange contract arises from the counterparty's ability to
make payment at settlement and that the value of a foreign currency might
change in relation to the U.S. dollar. The Corporation's exposure, if any,
to counterparty failure equals the current market value of the contract,
which at December 31, 1997 and 1996 was $35,257 and $27,962, respectively.
Included in fees for international services are net foreign exchange gains
of $25,531, $22,557, and $22,943 for the years ended December 31, 1997,
1996 and 1995, respectively.
(g) Interest rate swaps generally represent the contractual exchange of fixed
and variable rate interest payments based on a notional principal amount
and an interest reference rate. Credit risk exists with respect to these
instruments arising from the possible failure of the counterparty to make
required payments on those contracts which are favorable to the
Corporation. The Corporation's exposure to counterparty failure equals the
current replacement cost of the contract. At December 31, 1997 and 1996,
the replacement cost of the Corporation's interest rate swap contracts was
$163,903 and $118,929, respectively. The risk of counterparty failure is
controlled by limiting transactions to an approved list of counterparties
and requiring collateral in certain instances. Net cash received on
interest rate swaps during 1997 and 1996 totaled $54,230 and $68,103,
respectively.
74
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND
CONTINGENT LIABILITIES - continued
(h) Interest rate caps and floors are written by the Corporation to enable
customers to transfer, modify or reduce their interest rate risk. Interest
rate caps and floors are similar to interest rate swaps except that
payments are made only if current interest rates move above or below a
predetermined rate. The risk associated with interest rate caps and floors
is an unfavorable change in interest rates. As a writer of interest rate
caps and floors, the Corporation receives a premium in exchange for bearing
the risk of an unfavorable change in interest rates. The Corporation
generally reduces risk by entering into offsetting cap and floor positions
that essentially counterbalance each other. The Corporation also enters
interest rate caps to offset the risk of upward interest rate movement on
assets with embedded caps as well as to limit spread risk. As a purchaser
of interest rate caps, the Corporation pays a premium in exchange for the
right to receive payments if interest rates rise above predetermined
levels. The Corporation has also purchased interest rate floors in which
the Corporation has paid a fee for the right to receive payments if rates
fall below a predetermined level. Similar to interest rate swaps, credit
risk exists with respect to the possible failure of the counterparty to
make required payments on those contracts which are favorable to the
Corporation. Exposure to counterparty failure equals the current
replacement cost of the contract which totaled $11,003 and $17,383,
respectively, at December 31, 1997 and 1996.
(i) Tender option bonds are instruments associated with tax-free municipal
bonds. The Corporation will transfer a tax-free, fixed rate, long-term
security into a trust. The trust, in turn, issues short-term securities to
third parties. The trust satisfies the short-term interest payments using
the interest proceeds from the municipal bond. The Corporation receives
the spread between the long-term fixed interest payment and the short-
term security.
(j) A Treasury float contract is created because a municipality, which has
defeased a bond issue with government securities, has a mismatch in the
timing of the maturity of the securities and the date the funds are needed
to pay the debt service. The Corporation will pay an up-front fee for the
right to sell government securities to the municipality, generally at par.
The Corporation retains any profit between the sales price and the price at
which the Corporation acquired the securities.
Contingent Liabilities
In the normal course of business, the Corporation and its subsidiaries are
subject to numerous pending and threatened legal actions and proceedings, some
for which the relief or damages sought are substantial. Management does not
believe the outcome of these actions and proceedings will have a materially
adverse effect on the consolidated financial position of the Corporation.
75
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $142,688 $344,142 $303,647
State......................................... 14,368 20,401 24,134
-------- -------- --------
Total domestic........................... 157,056 364,543 327,781
Foreign....................................... 11,775 12,121 8,240
-------- -------- --------
Total current............................ 168,831 376,664 336,021
Deferred Federal and state expense............... 100,751 9,156 28,420
-------- -------- --------
Total provision for income taxes......... $269,582 $385,820 $364,441
======== ======== ========
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.................... $270,169 $ 261,180
Postretirement and postemployment benefits... 48,550 57,191
Reserves..................................... 50,186 56,489
Other 80,135 77,181
-------- ---------
Total deferred tax assets............... 449,040 452,041
-------- ---------
Deferred tax liabilities:
Auto leasing portfolio....................... 136,253 142,196
FAS 115 fair value accounting................ 17,094 14,298
Partnership investments...................... 4,558 3,781
Tax over book depreciation................... 43,711 38,446
Affiliate income............................. 38,862 32,873
Other 70,584 71,802
-------- ---------
Total deferred tax liabilities.......... 311,062 303,396
-------- ---------
Net deferred tax assets.......................... $137,978 $ 148,645
======== =========
</TABLE>
At December 31, 1997, cumulative deductible temporary differences related to the
deferred tax asset are approximately $1,283,000. Cumulative taxable temporary
differences related to deferred tax liabilities at December 31, 1997 are
estimated at $889,000.
At December 31, 1997, the Corporation has determined that it is not required to
establish a valuation allowance for the deferred tax asset since it is more
likely than not that the deferred tax asset of $449,040 will be realized
principally through carryback to taxable income in prior years, future reversals
of existing taxable temporary differences, future taxable income and to a lesser
extent, tax planning strategies. The Corporation's conclusion that it is "more
likely than not" that the deferred tax asset will be realized is based on a
history of growth in earnings and the prospects for continued growth, including
an analysis of potential uncertainties that may affect future operating results.
The Corporation will continue to review the tax criteria of "more likely than
not" for the recognition of deferred tax assets on a quarterly basis.
76
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
16. PROVISION FOR INCOME TAXES - continued
The consolidated effective tax rates are reconciled to the statutory rate as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory rate..................................... 35.0% 35.0% 35.0%
Difference resulting from:
Tax-exempt income.............................. (1.4) (1.6) (2.0)
State, local and foreign income tax............ 1.0 1.6 1.5
Liquidation of affiliate....................... (10.1) - -
Other, net..................................... 0.4 2.3 1.2
----- ----- -----
Effective tax rate................................. 24.9% 37.3% 35.7%
===== ===== =====
</TABLE>
Foreign earnings of certain subsidiaries would be taxed only upon their transfer
to the United States. No transfers or dividends are contemplated at this time.
Taxes payable upon remittance of such accumulated earnings of $21,323 at
December 31, 1997 would approximate $7,065.
Taxes, other than income taxes, included in other operating expenses for the
years ended December 31, 1997, 1996 and 1995 are $107,553, $101,109 and
$105,913, respectively.
77
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following represents summarized quarterly financial data of the
Corporation, which, in the opinion of management, reflects all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
Interest income............................... $888,593 $873,034 $850,359 $817,329
======== ======== ======== ========
Interest expense.............................. $363,676 $342,540 $316,006 $291,225
======== ======== ======== ========
Net interest income........................... $524,917 $530,494 $534,353 $526,104
======== ======== ======== ========
Provision for losses on loans................. $120,000(a) $ 50,000 $ 50,000 $ 43,000
======== ======== ======== ========
Securities gains.............................. $ 6,254 $ 5,023 $ 5,015 $ 4,819
======== ======== ======== ========
Net income ................................... $216,626(b)(c) $198,814 $199,726 $198,113
======== ======== ======== ========
Net income per common share:
Basic...................................... $1.09 $1.00 $0.97 $0.94
======== ======== ======== ========
Diluted.................................... 1.08 0.98 0.97 0.93
======== ======== ======== ========
Average common shares outstanding:
Basic...................................... 197,920 199,817 204,982 211,276
======== ======== ======== ========
Diluted.................................... 200,416 202,704 206,712 213,162
======== ======== ======== ========
Common stock price information:
High....................................... $81 3/8 $68 13/16 $57 7/8 $55
Low........................................ 65 11/16 53 1/4 46 1/2 47 1/2
Quarter-end................................ 80 1/2 66 3/16 53 3/4 47 1/2
1996
Interest income............................... $835,649 $823,082 $815,755 $823,718
======== ======== ======== ========
Interest expense.............................. $298,561 $282,735 $282,360 $293,064
======== ======== ======== ========
Net interest income........................... $537,088 $540,347 $533,395 $530,654
======== ======== ======== ========
Provision for losses on loans................. $ 40,000 $ 40,000 $110,000(d) $ 38,767
======== ======== ======== ========
Securities gains.............................. $ 4,036 $ 31,135 $17,393 $ 6,948
======== ======== ======== ========
Net income ................................... $195,546 $196,857 $79,597(d)(e) $177,144
======== ======== ======== ========
Net income per common share:
Basic...................................... $0.91 $0.89 $0.36(d)(e) $0.81
======== ======== ======== ========
Diluted.................................... 0.90 0.88 0.36 0.80
======== ======== ======== ========
Average common shares outstanding:
Basic...................................... 215,866 220,409 219,478 219,512
======== ======= ======== =======
Diluted.................................... 218,020 222,270 220,621 221,253
======== ======= ======= =======
Common stock price information:
High....................................... $55 3/8 $44 $43 1/8 $44
Low........................................ 42 3/4 35 1/2 35 3/4 36 1/8
Quarter-end................................ 51 7/8 43 1/4 38 1/2 42 3/8
</TABLE>
(a) Includes a $70.0 million, $44.9 million after-tax or $0.22 per share,
special provision for loan losses primarily related to management's
decision to sell approximately $450 million of credit card outstandings.
(b) Includes a tax benefit of $109.0 million, or $0.54 per share, related to
the liquidation of an affiliate.
(c) Includes restructuring and merger-related charges of $15.0 million, $9.6
million after-tax or $0.05 per share, and other significant one-time
charges of $57.0 million, $36.5 million after-tax or $0.18 per share.
(d) Includes a provision for loan losses of $70.0 million, $45.5 million
after-tax or $0.20 per share, related to the Meridian acquisition.
(e) Includes net restructuring and merger-related charges of $139.7 million,
$105.3 million after-tax or $0.47 per share, primarily recorded in the
second quarter and related to costs associated with the Meridian
acquisition.
78
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
18. JOINT VENTURE
In December 1992, the Corporation entered into a joint venture with three other
banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint
venture combines the partners' separate consumer electronic transaction
processing businesses and provides automated teller machine ("ATM") and
electronic point-of-sale ("POS") processing services. The Corporation
contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc.
("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party
processor of electronic POS transactions.
At the formation of EPS, the Corporation had equal ownership with two partners
in the joint venture, each with 31%. The fourth partner owned 7%. As part of the
1992 transaction, the Corporation received a cash payment of $79,350 and
$245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets
involved in the transaction resulted in a 1992 pre-tax gain to the Corporation
of $41,072, $25,670 after-tax. The exchange also generated a deferred gain of
approximately $138,000.
In December 1993, the Corporation and EPS mutually agreed to enter into a
recapitalization of EPS involving the EPS preferred stock held by the
Corporation. In exchange for substantially all of the preferred stock, the
Corporation received from EPS a ten-year 6.45% note providing for equal
principal payments over the life of the note. The recapitalization did not
affect the amount of deferred gain, but changed the timing of deferred gain
income recognition from a five-year period beginning in 1996 to a ten-year
period which began in 1994.
On March 27, 1995, EPS added a new partner and increased the ownership interests
of an existing partner to that of a full partner, resulting in a decrease in the
Corporation's share of ownership from 31% to 20%. As a direct result of this
change in ownership interests, the Corporation recognized a pre-tax gain of
$19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax
gain amount was $4,000 related to the acceleration of deferred gain recognition.
The Corporation's investment in EPS at December 31, 1997, net of $87,000
deferred gain, is $59,156 and is included in other assets. "Income from
investment in EPS, Inc.", which is included in non-interest income, reflects the
Corporation's share in EPS net income, interest income on the 6.45% note and
amortization of the deferred gain.
79
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
19. RESTRUCTURING AND MERGER-RELATED CHARGES
A summary of restructuring and merger-related charges for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Merger-related restructuring charges............. $ 6,200 $ 161,598 $ 10,000
Strategic technology alliance charges............ 8,800 - -
Meridian merger-related implementation costs..... - 29,019 -
Process redesign restructuring charges........... - - 142,000
Gains on sales of branches....................... - (43,064) (3,988)
Pension curtailment gains........................ - (7,851) (9,412)
--------- --------- ----------
Total........................................ $15,000 $ 139,702 $ 138,600
========= ========= ==========
</TABLE>
In 1997, CoreStates recorded pre-tax restructuring and merger-related charges of
$15,000, $9,612 after-tax or $0.05 per share, primarily related to costs
incurred in the pending First Union merger and costs incurred in the creation of
a strategic technology alliance with Andersen Consulting. Cash outflow related
to these costs in 1997 was $11,700.
In 1996, the Corporation recorded merger-related restructuring charges of
$161,598, $120,150 after-tax or $0.54 per share, in connection
with the acquisitions of Meridian and United Counties. The charges included
direct and incremental costs associated with these acquisitions. The components
of the merger-related restructuring charges were as follows:
<TABLE>
<CAPTION>
Requiring Cash
Cash Outflow
Provision Outflow to Date
--------- --------- --------
<S> <C> <C> <C>
Severance costs......................... $ 70,469 $ 70,469 $ 65,941
Branch closing costs.................... 33,469 15,102 6,585
Office reconfiguration costs............ 19,059 2,792 (5,764)
Merger transaction costs................ 14,624 14,624 13,461
System consolidation writedowns......... 6,391 - -
Miscellaneous........................... 17,586 17,593 12,316
-------- -------- --------
Total............................. $161,598 $120,580 $ 92,539
======== ======== ========
</TABLE>
The severance costs relate to severance packages, which were or are expected to
be paid to approximately 1,350 employees who have been displaced as a result of
the Meridian consolidation.
Restructuring and merger-related charges in 1996 also included $29,019, $18,263
after-tax or $0.07 per share, of implementation costs that were incurred in the
process of consolidating Meridian and United Counties businesses and operations.
The Corporation recorded restructuring credits of $50,915, $33,096 after-tax or
$0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in 1996 and
1995, respectively, related to gains on the curtailment of pension benefits
associated with employees displaced during 1996 and 1995 and gains on the sale
of branches which were sold as a result of consolidating the Meridian and United
Counties branches and the process redesigns.
Upon consummation of the Meridian merger, the Corporation recorded a $70 million
provision for loan losses in connection with a change in strategic direction
related to Meridian's problem assets and to conform its consumer lending
charge-off policies to those of the Corporation.
80
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
19. RESTRUCTURING AND MERGER-RELATED CHARGES - continued
In 1995, the Corporation recorded restructuring charges of $142,000, $90,800
after-tax or $0.40 per share, in connection with process redesigns commenced
during that year. The objectives of the process redesigns were: (i) to enhance
customer focus; (ii) to accelerate "cultural changes" which were already in
progress; and (iii) to improve productivity. The charges included direct and
incremental costs associated with the process redesigns. The components of the
process redesign restructuring charges were as follows:
<TABLE>
<CAPTION>
Requiring Cash
Cash Outflow
Provision Outflow to Date
---------- ---------- ----------
<S> <C> <C> <C>
Severance costs........................ $ 87,900 $ 87,900 $ 87,328
Office reconfiguration and branch
closing costs...................... 44,300 16,600 6,901
Outplacement costs..................... 2,500 2,500 2,358
Miscellaneous.......................... 7,300 5,300 4,653
---------- ---------- ----------
Total............................. $ 142,000 $ 112,300 $ 101,240
========== ========== ==========
</TABLE>
The following table summarizes the activity in the restructuring and
merger-related accrual for the year ended December 31, 1997:
1997
--------
Balance at beginning of year................ $108,205
Provision charged against income............ 15,000
Cash outflow................................ (59,451)
Writedowns of assets........................ (30,269)
--------
Balance at December 31,..................... $ 33,485
=========
81
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
20. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Earnings
- --------
(a) Net income.............................. $813,279 $649,144 $655,176
======== ======== ========
Average Common Shares
- ---------------------
(b) Average common shares outstanding....... 203,452 218,812 222,268
Average potentially dilutive shares..... 2,116 1,886 2,398
-------- ------- -------
(c) Average common and potentially
dilutive shares....................... 205,568 220,698 224,666
======= ======= =======
Net Income Per Common Share
- ---------------------------
Basic (a / b)............................... $4.00 $2.97 $2.95
===== ===== =====
Diluted (a / c)............................. $3.96 $2.94 $2.92
===== ===== =====
</TABLE>
21. FINANCIAL STATEMENTS OF THE PARENT COMPANY
<TABLE>
<CAPTION>
STATEMENT OF INCOME Year ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
- --------
Dividends from subsidiaries:
Banks.................................................... $ 625,000 $ 657,744 $ 373,023
Other subsidiaries....................................... 90,940 27,217 91,917
--------- -------- ---------
Total dividends from subsidiaries..................... 715,940 684,961 464,940
Management fees and other income from subsidiaries.......... 189,000 178,179 190,027
Securities gains (losses)................................... - (22) 16,343
Other income................................................ 444 3,054 3,241
--------- -------- ---------
Total revenues........................................ 905,384 866,172 674,551
--------- -------- ---------
EXPENSES
- --------
Interest on:
Funds borrowed........................................... 13,361 5,606 19,685
Long-term debt........................................... 18,436 22,843 21,578
--------- -------- ---------
Total interest expense................................ 31,797 28,449 41,263
Other operating expenses.................................... 181,663 245,836 219,463
--------- -------- ---------
Total expenses........................................ 213,460 274,285 260,726
--------- -------- ---------
Income before income tax benefit and equity in
undistributed income of subsidiaries................... 691,924 591,887 413,825
Income tax benefit.......................................... (6,953) (14,911) (11,977)
--------- -------- ---------
Income before equity in undistributed income of subsidiaries 698,877 606,798 425,802
--------- -------- ---------
Equity in undistributed income (excess dividends) of subsidiaries:
Banks.................................................. 62,503 (52,497) 203,909
Other subsidiaries..................................... 51,899 94,843 25,465
--------- -------- ---------
114,402 42,346 229,374
Total equity in undistributed income of subsidiaries.. --------- -------- ---------
NET INCOME.................................................. $ 813,279 $649,144 $ 655,176
- ---------- ========= ======== =========
</TABLE>
82
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
<TABLE>
<CAPTION>
BALANCE SHEET December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
- ------
Cash ...................................................... $ 1,508 $ 1,374
Time deposits............................................... - 887
Investment-securities available-for-sale.................... 15,512 97,786
Investments and receivables - subsidiaries:
Investments in subsidiaries at equity in underlying net assets:
Banks.................................................... 3,220,941 3,389,148
Other subsidiaries....................................... 655,274 558,062
---------- ----------
Total investments in subsidiaries..................... 3,876,215 3,947,210
Receivables - subsidiaries................................ 113,715 40,814
---------- ----------
Total investments and receivables-subsidiaries........ 3,989,930 3,988,024
Other assets................................................ 42,258 80,039
---------- ----------
Total assets.......................................... $4,049,208 $4,168,110
========== ==========
LIABILITIES
- -----------
Funds borrowed - subsidiaries............................... $ 359,123 $ -
Dividends payable and other liabilities..................... 196,911 214,925
Long-term debt.............................................. 255,742 257,491
---------- ----------
Total liabilities..................................... 811,776 472,416
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Total shareholders' equity............................ 3,237,432 3,695,694
---------- ----------
Total liabilities and shareholders' equity............ $4,049,208 $4,168,110
========== ==========
</TABLE>
The Corporation has guaranteed certain borrowings of its subsidiaries at
December 31, 1997 in the amount of $3,331,835 which includes $865,835 for
commercial paper.
The maturities for parent company long-term debt for the years ending
December 31, 1998 through 2002 are: $1,607; $1,751; $151,855; $696 and $99,833,
respectively.
83
<PAGE>
CoreStates Financial Corp and Subsidiaries
NOTES TO THE FINANCIAL STATEMENTS
(dollar amounts in thousands)
21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
<TABLE>
<CAPTION>
Statement of Cash Flows
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 813,279 $ 649,144 $ 655,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries............................... (114,402) (42,346) (229,374)
Securities losses (gains).......................................... - 22 (16,343)
Deferred income tax expense (benefit).............................. 2,644 180 (785)
Net decrease (increase) in other assets............................ 29,749 (6,969) 24,265
Net increase (decrease) in other liabilities....................... 2,577 8,454 (22,761)
Other, net......................................................... 6,073 7,288 7,840
---------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 739,920 615,773 418,018
---------- ----------- ----------
INVESTING ACTIVITIES
Net capital returned from subsidiaries................................. 190,000 270,226 190,900
(Increase) decrease in receivables from subsidiaries................... (72,901) 107,069 (3,593)
Purchases of investment securities..................................... (53,493) (707,008) (170,988)
Proceeds from maturities and sales of investment securities............ 135,767 717,536 118,483
Other, net............................................................. - - (1,380)
---------- ----------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES.......................... 199,373 387,823 133,422
---------- ----------- ----------
FINANCING ACTIVITIES
Repayment of funds borrowed............................................ - - (75,000)
Retirement of long-term debt........................................... (1,749) (77,401) (1,471)
Proceeds from issuance of long-term debt............................... - - 149,877
Net increase (decrease) in financing from and due to subsidiaries...... 369,329 (115,498) (94,054)
Cash dividends paid.................................................... (391,781) (328,114) (286,565)
Purchases of treasury stock............................................ (1,007,832) (533,932) (335,528)
Repurchase and retirement of common stock.............................. - (57,703) (17,134)
Common stock issued under employee benefit plans....................... 62,873 87,726 99,011
Other, net............................................................. 30,001 21,360 6,777
---------- ----------- ----------
NET CASH USED IN FINANCING ACTIVITIES.................................. (939,159) (1,003,562) (554,087)
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS....................... 134 34 (2,647)
Cash and due from banks at January 1,................................ 1,374 1,340 3,987
---------- ----------- ----------
CASH AND DUE FROM BANKS AT DECEMBER 31,.............................. $ 1,508 $ 1,374 $ 1,340
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest............................................................. $ 28,187 $ 25,267 $ 40,745
========== =========== ==========
Income taxes......................................................... $ - $ - $ 43
========== =========== ==========
</TABLE>
84
<PAGE>
EXHIBIT (99)(b)
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors
Merdian Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Meridian Bancorp,
Inc. and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meridian Bancorp,
Inc. and subsidiaries as of December 31, 1995 and the results of their
operations and their cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Philadelphia, PA
January 17, 1996,
Except as to note 2, which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
<PAGE>
EXHIBIT (99)(c)
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
United Counties Bancorporation:
We have audited the accompanying consolidated balance sheet of United Counties
Bancorporation and subsidiaries as of December 31, 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year ended December 31, 1995. These consolidated financial
statements are the responsibility of the Bancorporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Counties
Bancorporation and subsidiaries at December 31, 1995 and the results of their
operations and their cash flows for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
Short Hills, New Jersey
January 16, 1996, except for note 20,
which is as of February 23, 1996
/s/ KPMG Peat Marwick LLP
