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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10000
First Union Corporation
(Exact name of registrant as specified in its charter)
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North Carolina 56-0898180
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
(Address of principal executive offices)
(Zip Code)
(704) 374-6565
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
629,237,671 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of April 27, 1998.
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First Union Corporation (the "Corporation" or "FUNC") may from time to
time make written or oral "forward-looking statements", including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits
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 the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements: the strength of the United States economy in general and the
strength of the local economies in which the Corporation conducts operations;
the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal
Reserve System; inflation, interest rate, market and monetary fluctuations; the
timely development of and acceptance of new products and services of the
Corporation and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to competitors'
products and services; the willingness of users to substitute competitors'
products and services for the Corporation's products and services; the success
of the Corporation in gaining regulatory approval of its products and services,
when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; acquisitions; changes in consumer spending
and saving habits; and the success of the Corporation at managing the risks
involved in the foregoing.
The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation incorporates by reference those factors included
in the Corporation's Current Reports on Form 8-K dated July 21, 1997, August
20, 1997, November 18, 1997, November 28, 1997, and December 2, 1997. The
Corporation does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Corporation.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited consolidated financial statements of the
Corporation within Item 1 include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
fair presentation of such consolidated financial statements for the periods
indicated.
1
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FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Balance Sheets of the Corporation and subsidiaries at
March 31, 1998, March 31, 1997, and December 31, 1997, respectively, set forth
on page T-22 of the Corporation's First Quarter Financial Supplement for the
three months ended March 31, 1998 (the "Financial Supplement"), are
incorporated herein by reference.
The Consolidated Statements of Income of the Corporation and subsidiaries
for the three months ended March 31, 1998 and 1997, set forth on page T-23 of
the Financial Supplement, are incorporated herein by reference.
The Consolidated Statements of Cash Flows of the Corporation and
subsidiaries for the three months ended March 31, 1998 and 1997, set forth on
page T-24 of the Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to the Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures can be found
in Exhibit 13(b) of the Corporation's 1997 Annual Report on Form 10-K in Notes
to Consolidated Financial Statements in Note 11 on page C-23, and is
incorporated herein by reference.
2
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Part II. OTHER INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 2 through 22, P-1 through P-4 and T-1 through T-24
of the Financial Supplement and is incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
Item 4. Submission of Matters to a Vote of Security Holders.
At a Special Meeting of the Stockholders of the Corporation held on
February 27, 1998, the following proposals were approved by the holders of the
Corporation's common stock voting as indicated:
1. Proposal to approve the Agreement and Plan of Mergers, dated as of November
18, 1997, by and between CoreStates Financial Corp ("CFC") and the
Corporation pursuant to which, among other things, (i) CFC will merge with
and into the Corporation, and (ii) each outstanding share of CFC common
stock will be converted into 1.62 shares of the Corporation's common stock,
all as more fully described in the Joint Proxy Statement/ Prospectus,
dated January 9, 1998:
FOR AGAINST ABSTAIN
457,042,091 10,299,597 3,933,778
2. Proposal to approve an amendment to the Corporation's Articles of
Incorporation to increase the number of shares of the Corporation's common
stock that the Corporation is authorized to issue from 750,000,000 to
2,000,000,000:
FOR AGAINST ABSTAIN
446,347,497 19,723,867 5,204,102
At the Annual Meeting of the Stockholders of the Corporation held on April
21, 1998, the following proposals were approved by the holders of the
Corporation's common stock voting as indicated:
1. Proposal to elect the following individuals as directors of the Corporation:
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FOR WITHHELD
<S> <C> <C>
Class III directors:
Edward E. Barr ....... 532,265,084 1,729,859
G. Alex Bernhardt .... 532,046,752 1,948,191
W. Waldo Bradley ..... 532,334,003 1,660,940
Norwood H. Davis, Jr. 532,175,536 1,819,407
John R. Georgius ..... 532,297,276 1,697,667
Frank M. Henry ....... 532,289,360 1,705,583
Lanty L. Smith ....... 532,216,052 1,778,891
Class I director:
Malcolm S. McDonald .. 532,285,299 1,709,644
Class II director:
B.F. Dolan ........... 532,253,198 1,741,745
</TABLE>
2. Proposal to approve the Corporation's 1998 Stock Incentive Plan:
FOR AGAINST ABSTAIN
345,073,801 125,718,654 6,480,673
3. Proposal to approve the Corporation's 1998 Employee Stock Purchase Plan:
FOR AGAINST ABSTAIN
449,089,414 13,638,170 5,088,741
4. Proposal to approve the Corporation's 1999 Employee Stock Plan:
FOR AGAINST ABSTAIN
437,793,468 33,424,941 5,932,699
5. Proposal to ratify the appointment of KPMG Peat Marwick LLP as auditors for
the Corporation:
FOR AGAINST ABSTAIN
529,726,395 1,126,039 3,142,509
3
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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Exhibit No. Description
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(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's First Quarter 1998 Financial Supplement.
(27) (a) The Corporation's Financial Data Schedule.**
(27) (b) The Corporation's Financial Data Schedules.**
</TABLE>
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* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders
of the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
(b) Reports on Form 8-K.
During the quarter ended March 31, 1998, a Current Report on Form 8-K,
dated January 22, 1998, was filed with the Commission by the Corporation.
4
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST UNION CORPORATION
Date: May 14, 1998
By /s/ James H. Hatch
------------------------------------
James H. Hatch
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
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Exhibit No. Description
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(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's First Quarter 1998 Financial Supplement.
(27) (a) The Corporation's Financial Data Schedule.**
(27) (b) The Corporation's Financial Data Schedules.**
</TABLE>
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* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders
of the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
<PAGE>
<TABLE>
<CAPTION>
Exhibit (12)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
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Three
Months
Ended Years Ended December 31,
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Mar. 31,
(In millions) 1998 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 897 2,710 2,499 2,389 2,088 1,795
Fixed charges, excluding capitalized
interest 621 2,068 1,880 1,426 816 608
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Earnings (A) $ 1,518 4,778 4,379 3,815 2,904 2,403
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Interest, excluding interest on deposits $ 587 1,926 1,805 1,349 747 538
Distributions on guaranteed preferred
beneficial interests 16 66 - - - -
One-third of rents 18 76 74 76 69 70
Capitalized interest - - 5 4 1 -
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Fixed charges (B) $ 621 2,068 1,884 1,429 817 608
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Consolidated ratios of earnings to
fixed charges, excluding interest
on deposits (A)/(B) 2.44 X 2.31 2.32 2.67 3.55 3.95
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INCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 897 2,710 2,499 2,389 2,088 1,795
Fixed charges, excluding capitalized
interest 1,443 5,332 5,070 4,502 2,862 2,552
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Earnings (C) $ 2,340 8,042 7,569 6,891 4,950 4,347
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Interest, including interest on deposits $ 1,409 5,190 4,995 4,425 2,793 2,482
Distributions on guaranteed preferred
beneficial interests 16 66 - - - -
One-third of rents 18 76 74 76 69 70
Capitalized interest - - 5 4 1 -
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Fixed charges (D) $ 1,443 5,332 5,074 4,505 2,863 2,552
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Consolidated ratios of earnings to
fixed charges, including interest
on deposits (C)/(D) 1.62 X 1.51 1.49 1.53 1.73 1.70
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</TABLE>
<PAGE>
FIRST QUARTER 1998
FIRST UNION CORPORATION
AND SUBSIDIARIES
Management's Analysis of Operations
Quarterly Financial Supplement
Three Months Ended March 31, 1998
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FIRST UNION CORPORATION AND SUBSIDIARIES
FIRST QUARTER FINANCIAL SUPPLEMENT
THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
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PAGE
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Financial Highlights 1
Management's Analysis of Operations 2
Pro Forma Financial Information P-1
Consolidated Summaries of Income, Per Share and Balance Sheet Data T-1
Business Segments T-2
Internal Capital Growth and Dividend Payout Ratios T-6
Selected Quarterly Data T-6
Securities Available for Sale T-7
Investment Securities T-8
Loans T-9
Allowance for Loan Losses and Nonperforming Assets T-10
Intangible Assets T-11
Foreclosed Properties T-11
Deposits T-12
Time Deposits in Amounts of $100,000 or More T-12
Long-Term Debt T-13
Changes in Stockholders' Equity T-14
Capital Ratios T-15
Off-Balance Sheet Derivative Financial Instruments T-16
Off-Balance Sheet Derivatives - Expected Maturities T-18
Off-Balance Sheet Derivatives Activity T-19
Net Interest Income Summaries T-20
Consolidated Balance Sheets T-22
Consolidated Statements of Income T-23
Consolidated Statements of Cash Flows T-24
</TABLE>
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FINANCIAL HIGHLIGHTS
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Three Months Ended
March 31,
----------------------------------------
(Dollars in millions, except per share data) 1998 1997
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FINANCIAL HIGHLIGHTS
Net income after merger-related and restructuring
charges $ 587 504
After tax merger-related and restructuring charges 19 -
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Net income before merger-related and restructuring
charges $ 606 504
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PER SHARE DATA (a)
Basic earnings
Net income after merger-related and restructuring
charges $ 0.91 0.80
Net income before merger-related and restructuring
charges 0.94 0.80
Diluted earnings
Net income after merger-related and restructuring
charges 0.90 0.79
Net income before merger-related and restructuring
charges 0.93 0.79
Cash dividends 0.37 0.29
Book value 19.16 16.62
Period-end price $ 56.8125 40.50
Average shares (In thousands)
Basic 642,343 627,402
Diluted 651,355 635,852
Actual shares (In thousands) 644,493 625,914
Dividend payout ratios (based on operating earnings) 39.74% 35.43
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PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges
Return on average assets (a) (b) 1.50% 1.40
Return on average stockholders' equity (a) (c) 20.21 19.15
Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 59 57
Net charge-offs to
Average loans, net (a) 0.36 0.63
Average loans, net, excluding Bankcard (a) 0.22 0.25
Nonperforming assets to loans, net and foreclosed properties 0.74 0.80
Net interest margin (a) 3.88% 4.44
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CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION)
Before merger-related and restructuring charges
Net income $ 659 558
Earnings per share - basic $ 1.03 0.89
Return on average tangible assets (a) 1.66% 1.58
Return on average tangible stockholders' equity (a) (c) 28.15 29.09
Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 56 % 54
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PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 32,111 16,839
Investment securities 2,072 2,408
Loans, net of unearned income 98,092 101,747
Earning assets 150,002 131,526
Total assets 171,966 148,442
Noninterest-bearing deposits 22,425 19,978
Interest-bearing deposits 80,901 80,320
Long-term debt 8,252 8,004
Guaranteed preferred beneficial interests 991 990
Stockholders' equity $ 12,349 10,400
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</TABLE>
(a) Quarterly amounts annualized.
(b) Based on net income.
(c) Based on net income and average stockholders' equity excluding average net
unrealized gains or losses on debt and equity securities.
(d) The overhead efficiency ratio is equal to noninterest expense divided by
net operating revenue. Net operating revenue is equal to the sum of
tax-equivalent net interest income and noninterest income, including
investment securities transactions.
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Financial Supplement
contain various forward-looking statements. Please refer to our 1998 First
Quarter Report on Form 10-Q 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 operating earnings in the first quarter of 1998 increased
20 percent to $606 million from $504 million in the first quarter of 1997.
Diluted operating earnings per share were 93 cents in the first quarter of 1998,
up 18 percent from 79 cents per share in the first quarter of 1997. First
quarter 1998 operating earnings represent a return on average common equity of
20.21 percent and a return on average assets of 1.50 percent compared with 19.15
percent and 1.40 percent, respectively, in the year ago period. Operating
earnings represent earnings before merger-related and restructuring charges.
Merger-related and restructuring charges of $19 million after tax were
associated with the January 31, 1998, acquisition of Wheat First Butcher Singer
Inc. After these charges, earnings were $587 million, or 90 cents per diluted
share.
First quarter 1997 results have been restated to reflect the pooling of
interests acquisition of Signet Banking Corporation in November 1997. The
information presented herein has not been restated to reflect the acquisition of
CoreStates Financial Corp on April 28, 1998. In future periods, historical
financial information will be restated to reflect the CoreStates acquisition.
First Union's historical financial statements were not restated for the Wheat
First pooling of interests acquisition, which was deemed to be immaterial.
Growth in first quarter 1998 operating earnings was led by a 39 percent
increase in noninterest income (excluding investment securities
transactions), including a 68 percent increase in Capital Management fee
income and a 59 percent increase in Capital Markets fee income. The
combined Wheat First Union fee income contribution to these segments was
$142 million.
Noninterest expense, excluding merger-related and restructuring charges,
increased 15 percent from the first quarter of 1997, including $115 million of
Wheat First operating expenses. Merger-related and restructuring charges related
to Wheat First Union amounted to $29 million in the first quarter of 1998. On a
core operating basis, expenses were essentially flat with the fourth quarter of
1997.
In addition, credit quality continued to improve, with nonperforming
assets declining to $729 million, or 0.74 percent of net loans and foreclosed
properties, from $819 million, or 0.80 percent, in the first quarter of 1997.
Annualized net charge-offs as a percentage of average net loans improved to 0.36
percent in the first quarter of 1998 compared with 0.63 percent in the first
quarter of 1997.
OUTLOOK
We believe 1998 will be a very active year as we work to turn new markets
and business strategies into strong revenue stories.
As a result of our investments for the future:
2
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(bullet) We continue to see strong growth in fee income from our Capital
Management and Capital Markets business segments, with Wheat First Union
contributing significantly to business opportunities;
(bullet) We are very encouraged by initial results as we introduce our
redesigned retail delivery strategy, which we call the "Future Bank," throughout
the First Union marketplace this year;
(bullet) The pending acquisition of The Money Store Inc., a consumer finance
company, and the April 30, 1998, acquisition of Bowles Hollowell Conner & Co.,
an investment banking firm, will broaden our geographic reach and product
capability; and
(bullet) We completed the systems integration of Signet Banking Corporation
less than four months after we acquired this Virginia-based banking company. We
are working very hard to integrate CoreStates Financial Corp systems, to provide
training and to introduce new products into this franchise, which we acquired
April 28, 1998. Our goal is to refocus our new employees on customer sales and
service, rather than on consolidation issues, as rapidly as possible.
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. In fact, the
percentage of noninterest income to total revenue was 45 percent in the first
quarter of 1998 compared with 36 percent in the first quarter of 1997. 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 contribute a greater
percentage of fee income to our earnings stream and 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 delivery model. The goals are to improve customer service, to increase
sales and to 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 16 million customers in a diverse geographic marketplace and to reduce
the impact of adverse changes in the business cycle.
MERGER AND CONSOLIDATION ACTIVITY
The acquisition of CoreStates, of Philadelphia, Pennsylvania, was
completed on April 28, 1998. We believe this acquisition 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 where the per capita income is 12
percent above the national average.
Approximately 331 million shares of First Union common stock have been
issued in this pooling of interests accounting transaction. At March 31, 1998,
CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $35
billion, stockholders' equity of $3 billion and net income of $203 million for
the quarter ended March 31, 1998.
3
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In 1998, First Union currently estimates after-tax, merger-related and
restructuring expenses of $795 million related the CoreStates 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, in our registration statement on Form S-4 (No.
333-44015), filed with the SEC on January 9, 1998, and in our 1997 Annual Report
on Form 10-K. Additionally, pro forma financial information related to
CoreStates is presented elsewhere in this report.
In addition, in the first quarter of 1998, we announced two purchase
accounting acquisitions: The Money Store, which we expect to complete in the
second or third quarter of 1998, subject to approval by The Money Store's
shareholders and applicable regulators and other conditions of closing, and
Bowles Hollowell Conner & Co. which we completed on April 30, 1998. The Money
Store transaction provides for First Union to pay $34 per share in First Union
common stock for each share of The Money Store's common stock, with a total
indicated purchase price of approximately $2.1 billion. In connection with The
Money Store acquisition, we have repurchased in the open market 34 million of
the outstanding shares of First Union common stock at a cost of $2 billion.
First Union expects to repurchase an additional 3 million shares of
its common stock which will then equal the number of such shares expected to be
issued in the merger, currently estimated to be approximately 37 million shares.
In The Money Store acquisition, we estimate we will take a merger-related and
restructuring expense of approximately $20 million. In connection with the
Bowles Hollowell transaction, we issued approximately 1.2 million shares of
First Union common stock. Bowles Hollowell had assets of $18 million at January
31, 1998.
In addition, the acquisition of Covenant Bancorp, Inc., a bank holding
company 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 1997 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 the Wheat First acquisition. 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 and strategic objectives. Acquisition discussions and in
some cases negotiations may take place from time to time, and future
acquisitions involving cash, debt or equity securities may be expected.
The ACCOUNTING AND REGULATORY MATTERS section provides more information
about legislative, accounting and regulatory matters that have recently been
adopted or proposed.
4
<PAGE>
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 2.
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 isolates the net income
contribution and measures the return on capital for each business segment by
allocating equity, funding credit and expense and corporate expenses to each
segment. We use a risk-based methodology to allocate equity based on the credit,
market and operational risks associated with each business segment. Credit risk
allocations provide sufficient equity to cover 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
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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 secured and unsecured consumer loans, first and
second residential mortgages, installment loans, credit cards, auto loans and
leases, and student loans. The Consumer Bank's traditional deposit and lending
products are fully integrated with nontraditional financial offerings, making
our retail banking branches major distribution points for mutual funds,
insurance and small business loans. This approach is supported by
state-of-the-art technology including centralized customer information centers,
smart cards, electronic and Internet banking capabilities.
The Consumer Bank segment generated $197 million in net income in the
first quarter of 1998 compared with $226 million in the first quarter of 1997.
Primary contributors were credit cards and deposits. The decline reflected lower
securitization gains along with increases in operating expense related to the
increase in mortgage volume, including an acceleration in the amortization of
mortgage servicing rights. Noninterest income was $320 million compared with
$330 million in the first quarter of 1997.
Noninterest expense was $624 million compared with $588 million in the
first quarter of 1997. Expense growth largely reflected training and other costs
related to the implementation of our Future Bank delivery strategy, as well as
expenses related to the increased mortgage volume and accelerated mortgage
servicing rights amortization. Our new Future Bank retail delivery model is
being implemented throughout 1998 in 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
is expected to reduce costs.
Average Consumer Bank loans in the first quarter of 1998 were $49 billion
compared with $54 billion in the first quarter of 1997. While consumer loan
originations were strong, the decrease in the consumer loan portfolio reflects
our strategy to actively manage our balance sheet by selling or securitizing
loans to maximize return on capital. As part of this strategy we securitized or
sold $5 billion of consumer loans in 1997, including adjustable rate mortgages
(ARMs), home equity loans, student loans, indirect auto loans, community
reinvestment loans, credit card receivables and other unsecured consumer credit.
The managed credit card portfolio was $4 billion at March 31, 1998, including $2
billion of securitized credit cards. The credit card 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.
Loan originations in the consumer portfolio were led by mortgage loans,
direct lending through the full-service bank branches, and home equity loans.
First Union's mortgage origination and home equity offices across the nation
also are included in the Consumer
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Bank through our operating subsidiaries: First Union Mortgage Corporation (FUMC)
and First Union Home Equity Bank, N.A. (FUHEB). Our equity lending business,
when combined with that of CoreStates and The Money Store, is expected to be the
second largest in the nation. FUMC was the nation's 12th largest mortgage
servicer, with a mortgage servicing portfolio of $61 billion at March 31, 1998.
In addition, FUHEB is a major participant in both the "A" credit quality market
for our portfolio, as well as in the sub-prime market for securitization or
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 March 31, 1998, this group had $98 billion in
assets under management, which encompassed $53 billion in total trust and
institutional assets, including $15 billion in proprietary mutual funds.
Including the proprietary mutual funds for trust customers, the First
Union-advised mutual funds amounted to $60 billion at March 31, 1998. On a pro
forma basis with CoreStates, we would have had $63 billion in mutual fund assets
under management at March 31, 1998.
The Capital Management Group produced net income of $76 million in the
first quarter of 1998 compared with $44 million in the first quarter of 1997.
Capital Management businesses and products primarily generate fee income. In the
first quarter of 1998, fee income for this segment was $373 million compared
with $222 million in the first quarter of 1997. Growth in fee income was
primarily related to retail brokerage and insurance commissions and mutual
funds, with Wheat First Union contributing $117 million to fee income. Expenses
in the first quarter of 1998 were $346 million compared with $216 million in the
first quarter of 1997.
Retail brokerage and insurance 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 and insurance income included in noninterest
income was $180 million in the first quarter of 1998 compared with $64 million
in the first quarter of 1997.
The CAP Account is an asset management product that enables our 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 2 reflects direct CAP Account fee income
only. CAP Account assets increased to $28 billion at the end of the first
quarter of 1998 compared with $26 billion at year-end 1997. We are seeing an
increase in investment activity through these accounts. The investment
proportion in the CAP Accounts has risen from 33 percent in the first quarter of
1997 to 43 percent in the first quarter of 1998. Trades in CAP Accounts
increased 43 percent compared with the first quarter of 1997.
The Private Client Banking Group 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. In the first
quarter of 1998, the Private Client Banking Group managed $2.1 billion of
average net loans compared with $1.8 billion in the first quarter of 1997, and
$1.8 billion of average deposits compared with $1.6 billion in the first quarter
of 1997. The Private Client Banking Group line in Table 2 reflects only the
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income and expense related to lending and deposit taking activities. Both
capital management and capital market fee income is located within other
business lines.
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
The Commercial Bank provides a comprehensive array of financial solutions
primarily focused on corporate (annual sales of $50 million to $2 billion);
commercial (annual sales of $10 million to $50 million); and small-business
(annual sales up to $10 million) customers. 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.
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 Commercial Bank had net income of $123 million in the first quarter
of 1998 compared with $132 million in the first quarter of 1997. Net interest
income was $352 million compared with $382 million in the first quarter of 1997.
The decline was primarily related to a decrease in outstandings and loan
spreads. Noninterest income increased 8 percent from the first quarter of 1997
to $91 million in the first quarter of 1998, led by Cash Management fee income,
which increased 25 percent from the first quarter of 1997. In addition, service
charge volume has increased as a result of higher sales volume and improved
collection policies and procedures. Expenses in the first quarter of 1998 were
$246 million compared with $248 million in the first quarter of 1997.
Average commercial loans in the first quarter of 1998 declined 7 percent
from the first quarter of 1997, primarily reflecting run-off in all commercial
lending areas due to selective new loan originations and renewals. Average small
business loans increased 25 percent to $1.9 billion in the first quarter of 1998
from $1.5 billion in the first quarter of 1997. Small Business Banking in Table
2 reflects only lending activities, while our Small Business Banking Division
also generates insurance, investment and retirement services, and commercial
deposit services for customers.
When combined with CoreStates, First Union will be the nation's third
largest cash management bank based on revenue. Cash management products
stimulate the gathering of commercial deposit balances. Deposit balances and
their economic profitability are reflected in both the Commercial Bank and the
Capital Markets segments. Cash Management in Table 2 reflects only the direct
service charge income from cash management products.
CAPITAL MARKETS
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
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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.
Within Capital Markets, our primary focus has been to bring a full line
of business products to middle-market customers. We believe this strategy
provides a rewarding platform for long-term growth.
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 financial institution
clients overseas. This unit expanded significantly with the addition of
CoreStates, which has been involved in the international arena for nearly two
centuries.
The Capital Markets Group produced net income of $108 million in the
first quarter of 1998 compared with $70 million in the first quarter of 1997.
Net interest income was $123 million compared with $96 million in the first
quarter of 1997. Noninterest income increased 56 percent to $250 million in the
first quarter of 1998 from $159 million in the first quarter of 1997. The
increase was led by $141 million in fee income from our investment banking
segment, including $25 million from Wheat First Union. Expenses in the first
quarter of 1998 were $203 million compared with $146 million in the first
quarter of 1997.
Average net loans were $17 billion in the first quarter of 1998 compared
with $13 billion in the first quarter of 1997. Loan growth between the two
periods was generated primarily in the commercial real estate, diversified
finance and commercial leasing units.
First Union's Capital Markets Group will continue to expand its
relationship banking efforts, including increased industry segment coverage and
an expanded international presence 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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RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
NET INTEREST INCOME
Tax-equivalent net interest income was $1.37 billion in the first quarter
of 1998 compared with $1.42 billion in the first quarter of 1997. The modest
decline in tax-equivalent net interest income reflects a changing earning asset
mix, primarily related to the divestiture of higher-yielding, unsecured consumer
loans and to the investment of excess capital in lower-yielding securities,
including purchases to leverage the CoreStates acquisition.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In the first quarter of 1998, $13
million in gross interest income would have been recorded if all nonaccrual and
restructured loans had been current in accordance with their original terms and
if they had been outstanding throughout the period (or since origination if held
for part of the period). The amount of interest income related to these assets
and included in income in the first quarter of 1998 was not significant.
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 3.88 percent in the first quarter of 1998 compared with 4.44
percent in the first quarter of 1997, a reduction of 56 basis points.
Significant changes in our asset mix played the greatest role in narrowing the
net interest margin. The restructuring of our unsecured consumer loan portfolio
and the subsequent reinvestment in lower yielding investment securities reduced
the margin in the first quarter of 1998. Additionally, we purchased securities
to rebalance our interest rate sensitivity position in advance of our merger
with CoreStates which added to the decline. The rest of the decline is a result
of substantial increases in the balance of short-term investments and trading
assets, as well as a modest decline in the spread between loan yields and retail
deposit costs. We expect our margin to increase following the consummation of
the CoreStates merger. The average rate earned on earning assets was 7.92
percent in the first quarter of 1998 and 8.25 percent in the first quarter of
1997. The average rate paid on interest-bearing liabilities was 4.57 percent in
the first quarter of 1998 and 4.38 percent in the first quarter of 1997. It
should be noted that the margin is not our primary management focus or goal.
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 investing in high-growth lines of
business 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
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investments were reflected in a 39 percent increase in noninterest income,
excluding investment securities transactions, to $1.1 billion in the first
quarter of 1998 from $813 million in the first quarter of 1997. The combined
Wheat First Union fee income contribution to both segments was $142 million.
Virtually all categories of noninterest income increased in the first
quarter of 1998 from a year earlier. Fee income from Capital Management and
Capital Markets activities made up more than half of noninterest income in the
first quarter of 1998. These two groups are discussed further in the BUSINESS
SEGMENTS section. Sundry income included $55 million of branch sale gains
related to discretionary branch closings. During 1998, we expect to realize
additional branch sale gains associated with the CoreStates acquisition.
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 account assets were $7 billion at March 31, 1998, compared
with $5 billion at December 31, 1997.
NONINTEREST EXPENSE
Noninterest expense was $1.5 billion in the first quarter of 1998
compared with $1.3 billion in the first quarter of 1997. Noninterest expense in
the first quarter of 1998 included $29 million in merger-related and
restructuring charges related to Wheat First Union, as well as $115 million of
Wheat First operating expenses.
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.
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 March 31, 1998, and at December 31, 1997. Costs related to
environmental matters were not material.
We are actively engaged in assessing our own computer systems as well as
those of third-party vendors, counterparties and customers for year 2000
readiness. Our single system platform, as well as the fact that our Emerald
deposit system and essentially all of our Capital Markets systems are already
year 2000 compliant, has minimized the expense related to ensuring that all
computer software and hardware is able to recognize the date change from
December 31, 1999, to January 1, 2000.
We have analyzed our computer hardware platforms and software programs,
and we 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 and overall integrated systems testing. We are
assessing, monitoring and testing the progress of our third-party vendors and
counterparties to determine whether they 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
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possible effects of their inability to become year 2000 compliant. Our formal
risk assessment of customers is incorporated into the underwriting, scheduled
review and credit grading process.
Including closed and pending acquisitions, First Union currently
estimates that aggregate expenses for making its computer systems year 2000
compliant will be between $60 million and $65 million pretax.
BALANCE SHEET REVIEW
SECURITIES AVAILABLE FOR SALE
The available for sale portfolio consists of U.S. Treasury, municipal and
mortgage-backed and asset-backed securities as well as collateralized mortgage
obligations, corporate, foreign and equity securities. Securities available for
sale transactions resulted in gains of $20 million in the first quarter of 1998
and $4 million in the first quarter of 1997.
At March 31, 1998, we had securities available for sale with a market
value of $32 billion compared with $21 billion at year-end 1997. The market
value of securities available for sale was $391 million above amortized cost at
March 31, 1998. 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 the first
quarter of 1998 was 6.68 percent compared with 6.84 percent in the first quarter
of 1997. The average maturity of the portfolio was 5.95 years at March 31, 1998.
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 $2.1 billion at March 31,
1998, and $2.2 billion at December 31, 1997.
The average rate earned on investment securities was 8.74 percent in the
first quarter of 1998 and 8.62 percent in the first quarter of 1997. The average
maturity of the portfolio was 5.31 years at March 31, 1998.
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 generally used to finance fixed assets or acquisitions.
Commercial real estate loans are typically 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
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majority of our commercial loans are for less than $10 million. Consistent with
our longtime standard, we generally look for two repayment sources for
commercial real estate loans: cash flows from the project and other resources of
the borrower.
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 March 31, 1998, was composed of 47 percent in
commercial loans and 53 percent in consumer loans compared with 48 percent and
52 percent, respectively, at December 31, 1997.
Net loans at March 31, 1998, were $98 billion compared with $97 billion
at December 31, 1997. Average net loans were $96 billion in the first quarter of
1998 and $101 billion in the first quarter of 1997. The decrease reflects $7
billion in loans that were securitized, sold or transferred to assets held for
sale as part of our strategy of balance sheet management to maximize its return
on investment. Commercial loan originations in the first quarter of 1998 were
led by Capital Markets and commercial lenders in Georgia and the Carolinas.
Consumer loan originations were strong in mortgages, home equity and direct
lending.
At March 31, 1998, unused loan commitments related to commercial and
consumer loans were $47 billion and $24 billion, respectively. Commercial and
standby letters of credit were $6 billion at March 31, 1998. At March 31, 1998,
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 8.63 percent in the first quarter of
1998 compared with 8.71 percent in the first quarter of 1997. The primary factor
contributing to the decline was the restructuring of our unsecured consumer loan
portfolio. This restructuring, in conjunction with a general downward trend in
Treasury rates over this period, was only partially offset by an increase in the
Fed funds and the prime rates, and growth in high yielding leveraged leases.
The Asset Quality section provides information about geographic exposure
in the loan portfolio.
COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans amounted to 11 percent of the total
portfolio at March 31, 1998, and at December 31, 1997. This portfolio included
commercial real estate mortgage loans of $8 billion at March 31, 1998, compared
with $9 billion at December 31, 1997.
ASSET QUALITY
NONPERFORMING ASSETS
At March 31, 1998, nonperforming assets were $729 million, or 0.74
percent of net loans and foreclosed properties, compared with $723 million, or
0.75 percent, at December 31, 1997.
Loans or properties of less than $5 million each made up 81 percent, or
$594 million, of nonperforming assets at March 31, 1998. Of the rest:
(bullet) Seven loans or properties between $5 million and $10 million each
accounted for $54 million; and
(bullet) Three loans or properties over $10 million each accounted for $81
million.
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Fifty percent of nonperforming assets were collateralized primarily by
real estate at March 31, 1998 and at December 31, 1997.
PAST DUE LOANS
Accruing loans 90 days past due were $229 million at March 31, 1998,
compared with $232 million at December 31, 1997. Of the past dues at March 31,
1998, $23 million were commercial and commercial real estate loans and $206
million were consumer loans. At March 31, 1998, we were closely monitoring
certain loans for which borrowers were experiencing increased levels of
financial stress. None of these loans were included in nonperforming assets or
in accruing loans past due 90 days, and the aggregate amount of these loans was
not significant.
NET CHARGE-OFFS
Net charge-offs amounted to $87 million in the first quarter of 1998 and
$131 million in the fourth quarter of 1997. Annualized net charge-offs were 0.36
percent of average net loans in the first quarter of 1998 compared with 0.53
percent in the fourth quarter of 1997. Excluding net charge-offs related to the
credit card portfolio, net charge-offs were 0.22 percent compared with 0.33
percent in the fourth quarter of 1997. At March 31, 1998, the owned credit card
portfolio represented less than 3 percent of the loan portfolio.
Net charge-offs declined significantly due to the restructuring of the
credit card portfolio, in which certain vintages that experienced higher
charge-off rates have been sold. Our card solicitation marketing efforts are now
focused on customers and prospects within our marketplace and nationally with
whom it is our goal to build long-term, multi-product relationships. We continue
to carefully monitor 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 steps we
believe are appropriate 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 $90 million in the first quarter of 1998
compared with $325 million in the fourth quarter of 1997. The loan loss
provision was increased in the fourth quarter of 1997 to facilitate the
restructuring of the unsecured consumer loan portfolio, which resulted in the
sale of $3 billion of credit card receivables and other unsecured loans.
The allowance for loan losses was $1.2 billion at March 31, 1998, and at
December 31, 1997. 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.
Impaired loans, which are included in nonaccrual loans, amounted to $315
million at March 31, 1998, compared with $301 million at December 31, 1997. 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 March 31, 1998, was $30 million related to $213 million of
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impaired loans. The remaining impaired loans were recorded at or below fair
value. In the first quarter of 1998 the average recorded investment in impaired
loans was $310 million, and $3 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. Our
largest markets are: Atlanta, Georgia; Charlotte, North Carolina; Miami and
Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia,
Pennsylvania; and Washington, D.C. Substantially all of the $11 billion
commercial real estate portfolio at March 31, 1998, was located in our East
Coast banking region.
LIQUIDITY AND FUNDING SOURCES
Liquidity planning and management are necessary to ensure we maintain the
ability to fund operations cost-effectively and to meet current and future
obligations such as loan commitments and deposit outflows. In this process we
focus on both assets and liabilities and on the manner in which they combine to
provide adequate liquidity to meet the corporation's needs.
Funding sources primarily include customer-based core deposits but also
include purchased funds and cash flows from operations. First Union is one of
the nation's largest core deposit-funded banking institutions. Our large
consumer deposit base, which is spread across the economically strong South
Atlantic region and high per-capita income Middle Atlantic region, creates
considerable funding diversity and stability.
Asset liquidity is maintained through maturity management and through our
ability to liquidate assets, primarily securities held for sale. Another
significant source of asset liquidity is the ability to securitize assets such
as credit card receivables and auto, home equity, student and mortgage loans.
Other off-balance sheet sources of liquidity exist as well, including a mortgage
servicing portfolio for which the estimated fair value exceeded book value by
$29 million at March 31, 1998.
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
$98 billion at March 31, 1998, compared with $97 billion at December 31, 1997.
The portion of core deposits in higher-rate, other consumer time deposits
was 31 percent at March 31, 1998, and 30 percent at year-end 1997. 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. They are also less expensive to process.
Average core deposit balances were $96 billion in the first quarter of
1998 and $94 billion in the fourth quarter of 1997. In the first quarter of 1998
and in the fourth quarter of 1997, average noninterest-bearing deposits were 22
percent and 21 percent, respectively, of average core deposits. Average balances
in savings and NOW, other consumer time and noninterest-bearing deposits were
higher when compared with the fourth quarter of 1997, while money market
deposits were lower. Deposits can be affected by branch closings or
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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 March 31, 1998, were $45 billion compared with $34
billion at year-end 1997, largely reflecting funding needs related to the
increased securities available for sale portfolio. Average purchased funds in
the first quarter of 1998 were $42 billion compared with $33 billion in the
fourth quarter of 1997. Purchased funds are acquired primarily through (i) our
large branch network, consisting principally of $100,000 and over certificates
of deposit, public funds and treasury deposits, and (ii) national market
sources, consisting of relatively short-term funding sources such as federal
funds, securities sold under repurchase agreements, eurodollar time deposits,
short-term bank notes and commercial paper, and longer-term funding sources such
as term bank notes, Federal Home Loan Bank borrowings and corporate notes.
CASH FLOWS
Cash flows from operations are a significant source of liquidity. Net
cash provided from operations primarily results from net income adjusted for the
following noncash accounting items: the provisions for loan losses and
foreclosed properties; and depreciation and amortization. This cash was
available in the first quarter of 1998 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 March 31,
1998, and at year-end 1997.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we currently have available for issuance $1.9 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. In April 1998, we issued an
aggregate of $500 million of subordinated debt.
DEBT OBLIGATIONS
We have a $350 million, committed back-up line of credit that expires in
December 1998. This credit facility contains financial covenants that require
First Union to maintain a minimum level of tangible net worth, restrict double
leverage ratios and require capital levels at subsidiary banks to meet
regulatory standards. First Union has not used this line of credit. In 1998,
$1.5 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
At March 31, 1998, $991 million of trust capital securities were
outstanding. 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 $16 million in the first
quarter of 1998 related to the capital securities are included in sundry
expense.
16
<PAGE>
STOCKHOLDERS' EQUITY
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Total stockholders' equity was $12 billion at March 31, 1998, and at
December 31, 1997. Common shares outstanding amounted to 644 million at March
31, 1998, compared with 636 million at December 31, 1997. From January 1, 1998,
through May 12, 1998, we repurchased 34 million shares of our common stock in
the open market in connection with The Money Store acquisition at a cost of $2
billion.
We paid $241 million in dividends to common stockholders in the first
quarter of 1998 compared with $179 million in the first quarter of 1997.
At March 31, 1998, stockholders' equity included a $249 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 $737
million available for dividends at March 31, 1998, without prior regulatory
approval. Our subsidiaries paid $205 million in dividends to the parent company
in the first quarter of 1998.
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
March 31, 1998, the tier 1 and total capital ratios were 8.61 percent and 13.44
percent, respectively, compared with 8.41 percent and 13.40 percent at December
31, 1997.
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
17
<PAGE>
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 March 31, 1998,
was 6.52 percent and at December 31,1997, it was 6.81 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 March 31, 1998, 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.
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.
Our methodology for measuring exposure to interest rate risk for policy
measurement 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. Our methodology measures the impact that 200 basis point rate changes
would have on earnings per share over the subsequent 12 months.
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 as being
18
<PAGE>
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 April 1998 estimate for future short-term interest rates (our "most
likely" scenario) includes a flat federal funds rate of 5.50 percent from April
1998 through March 2000. Our "flat rate" scenario also holds the federal funds
rate at 5.50 percent over this same horizon. Based on the April 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 2.1 percent. Our model indicates that earnings would benefit by 1.4 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
1.5 percent if rates fall gradually by 200 basis points, and would decrease by
1.4 percent if rates gradually rise 200 basis points, compared to our "most
likely" scenario. The difference in the sensitivity measurements between our
flat and best guess methodologies results from using different assumptions
regarding the level or scope of the Treasury yield curve. In 1999, earnings
would increase above those earned in our "most likely" scenario by 4.8 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 4.9 percent. The CoreStates and The
Money Store acquisitions are incorporated into these estimates.
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
19
<PAGE>
extreme interest rate scenarios and time periods. These alternate "what if"
scenarios may include interest rate paths both higher, lower and more volatile
than those used for policy measurement and extend to periods beyond the policy
measurement period.
While our interest rate sensitivity modeling assumes that management
takes no action, we regularly assess the viability of strategies to reduce
unacceptable risks to earnings and implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, management
will continue to formulate strategies to protect earnings from the potential
negative effects of changes in interest rates.
OFF-BALANCE SHEET DERIVATIVES FOR INTEREST RATE RISK MANAGEMENT
As part of our overall interest rate risk management strategy, for many
years we have used off-balance sheet derivatives as a cost- and
capital-efficient way to modify the repricing or maturity characteristics of
on-balance sheet assets and liabilities. Our off-balance sheet derivative
transactions used for interest rate sensitivity management include interest rate
swaps, futures and options with indices that relate to the pricing of specific
financial instruments of the corporation. We believe we have appropriately
controlled the risk so that derivatives used for rate sensitivity management
will not have any significant unintended effect on corporate earnings. As a
matter of policy we do not use highly leveraged derivative instruments for
interest rate risk management. The impact of derivative products on our earnings
and rate sensitivity is fully incorporated in the earnings simulation model in
the same manner as on-balance sheet instruments.
Our overall goal is to manage our rate sensitivity such that earnings are
not adversely affected materially whether rates go up or down. As a result of
interest rate fluctuations, off-balance sheet transactions (and securities) will
from time to time develop unrealized appreciation or depreciation in market
value when compared with their cost. The impact on net interest income
attributable to these off-balance sheet transactions, all of which are linked to
specific financial instruments as part of our overall interest rate risk
management strategy, will generally be offset by net interest income from
on-balance sheet assets and liabilities. The important consideration is not the
shifting of unrealized appreciation or depreciation between and among on- and
off-balance sheet instruments, but the prudent management of interest rate
sensitivity so that corporate earnings are not unduly at risk as interest rates
move up or down.
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $467 million at
March 31, 1998, compared with fair value appreciation of $412 million at
December 31, 1997.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Such gains and losses at March 31, 1998, are not significant.
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
20
<PAGE>
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 March
31, 1998, the total credit risk in excess of thresholds was $313 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 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. The
total value-at-risk amount at March 31, 1998, was $15 million. Value-at-risk
amounts related to interest rate risk and currency risk at March 31, 1998, were
$13 million and $3 million, respectively. Risk management correlation
assumptions resulted in the elimination of $1 million of the value-at-risk
components.
21
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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 changes 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 and in the BUSINESS SEGMENTS table. 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 periods beginning after December 15, 1997,
including interim periods. The CHANGES IN STOCKHOLDERS' EQUITY table provides
information related to this Standard.
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.
22
<PAGE>
Legislation has been enacted providing that deposits and certain claims
for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver.
Various other legislative and accounting proposals concerning the banking
industry are pending in Congress and with the Financial Accounting Standards
Board, respectively. Given the uncertainty of the proposal process, we cannot
assess the impact of any such proposals on our financial condition or results of
operations.
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<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
The following unaudited pro forma combined condensed 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").
March 31, 1998
-----------------------------------------------------------------------------
Pro Forma Pro Forma
(In millions) Corporation CoreStates Adjustments Combined
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 7,077 3,451 - 10,528
Interest-bearing bank balances 217 2,429 - 2,646
Federal funds sold and securities
purchased under resale agreements 10,828 828 - 11,656
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 18,122 6,708 - 24,830
- ----------------------------------------------------------------------------------------------------------------------------------
Trading account assets 6,682 326 - 7,008
Securities available for sale 32,111 2,277 - 34,388
Investment securities 2,072 1,100 - 3,172
Loans, net of unearned income 98,092 35,000 - 133,092
Allowance for loan losses (1,224) (638) - (1,862)
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net 96,868 34,362 - 131,230
- ----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,398 609 - 5,007
Due from customers on acceptances 575 370 - 945
Other intangible assets 2,665 265 - 2,930
Other assets 8,473 2,083 - 10,556
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 171,966 48,100 - 220,066
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 22,425 8,105 - 30,530
Interest-bearing deposits 80,901 26,703 - 107,604
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits 103,326 34,808 - 138,134
Short-term borrowings 40,301 3,223 - 43,524
Bank acceptances outstanding 575 365 - 940
Other liabilities 6,172 1,739 - 7,911
Long-term debt 8,252 3,758 - 12,010
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 158,626 43,893 - 202,519
- ----------------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in junior subordinated deferrable
interest debentures 991 750 - 1,741
- ----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - -
Common stock 2,148 224 871 3,243
Paid-in capital 1,203 1,300 (1,064) 1,439
Retained earnings 8,749 3,063 (978) 10,834
Unrealized gain on debt and equity securities, net 249 41 - 290
Treasury stock - (1,121) 1,121 -
Unallocated shares held by ESOP - (50) 50 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,349 3,457 - 15,806
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 171,966 48,100 - 220,066
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Financial Information.
P-1
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
CORESTATES FINANCIAL CORP
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, Years Ended December 31,
--------------------- ------------------------------------------------------
(In millions, except per share data) 1998 1997 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,602 3,442 14,362 13,758 13,028 10,245 9,507
Interest expense 1,756 1,512 6,452 6,151 5,732 3,739 3,376
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,846 1,930 7,910 7,607 7,296 6,506 6,131
Provision for loan losses 135 205 1,103 678 403 458 559
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,711 1,725 6,807 6,929 6,893 6,048 5,572
Securities available for sale transactions 23 9 52 96 76 24 76
Investment security transactions - - 3 4 6 4 7
Noninterest income 1,354 1,023 4,267 3,435 2,976 2,336 2,332
Merger-related and restructuring charges 29 - 284 421 233 107 -
SAIF special assessment - - - 149 - - -
Noninterest expense 1,852 1,675 7,052 6,360 6,309 5,558 5,430
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,207 1,082 3,793 3,534 3,409 2,747 2,557
Income taxes 417 380 1,084 1,261 1,213 938 818
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 790 702 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 790 702 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 $ 790 702 2,709 2,264 2,170 1,722 1,693
- -----------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings $ 0.82 0.72 2.84 2.33 2.21 1.86 1.85
Diluted earnings $ 0.81 0.72 2.80 2.30 2.17 1.83 1.81
AVERAGE COMMON SHARES (In thousands)
Basic 965,120 969,669 955,241 973,712 979,852 927,941 913,621
Diluted 977,155 981,174 966,792 982,755 1,001,145 946,969 940,167
- -----------------------------------------------------------------------------------------------------------------------------------
CORPORATION HISTORICAL PER COMMON
SHARE DATA
Basic earnings $ 0.91 0.80 3.03 2.61 2.44 2.30 2.15
Diluted earnings $ 0.90 0.79 2.99 2.58 2.38 2.25 2.09
AVERAGE COMMON SHARES (In thousands)
Basic 642,343 627,402 625,649 619,237 619,777 561,442 543,321
Diluted 651,355 635,852 633,772 625,224 637,186 577,709 565,239
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Pro Forma Financial Information.
P-2
<PAGE>
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) The Merger was consummated on April 28, 1998, and it was accounted for on a
pooling of interests accounting basis. 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 202,643,000 shares of
CoreStates common stock which were outstanding at March 31, 1998.
As a result, information was adjusted for the Merger by the (i) addition
of 328,282,000 shares of the Corporation's common stock amounting to $1.1
billion (excluding the shares of the Corporation's common stock issued in
exchange for 1.7 million shares of CoreStates common stock that CoreStates
issued in April 1998 in order to qualify the Merger as a pooling of interests);
(ii) elimination of 202,643,000 shares of outstanding CoreStates common stock
amounting to $224 million; (iii) elimination of the cost of CoreStates treasury
stock of $1.1 billion; (iv) elimination of the cost of unallocated shares held
by the CoreStates ESOP of $50 million; and (v) recordation of the remaining
amount of $1.1 billion as a reduction of paid-in capital at March 31, 1998.
As of March 31, 1998, the Corporation and CoreStates had 48,222,000 and
15,294,000 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 three months ended March 31, 1998, CoreStates had net income
applicable to common stockholders of $203 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. Such
amount has been reclassified to noninterest expense and income taxes 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, and the three months ended March 31, 1998 and 1997.
(4) Except for the three months ended March 31, 1998, 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-3
<PAGE>
- --------------------------------------------------------------------------------
The Corporation issued 1.6 million shares of its common stock to stockholders of
Covenant, substantially all of which were repurchased in 1997 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 has not been combined with the
historical results of the Corporation for periods ended on or prior to December
31, 1997.
(5) The pro forma financial information also does not include financial
information related to the Corporation's (i) pending purchase accounting
acquisition of The Money Store Inc. ("TMSI"), which had assets of $3 billion,
net receivables of $1 billion and stockholders' equity of $698 million, and (ii)
April 30, 1998 purchase accounting acquisition of Bowles, Hollowell Connor &
Co., which had assets of $18 million.
The TMSI transaction requires the Corporation to pay $34 per share in
the Corporation's common stock for each share of TMSI common stock. The total
purchase price is approximately $2 billion. The Corporation expects to
repurchase outstanding shares of common stock equal to the number of such shares
to be issued, currently estimated to be approximately 37 million shares. From
January 1 through May 12, 1998, the Corporation repurchased approximately 34
million shares of its common stock at a cost of $2 billion. None of the
foregoing is included in the pro forma financial information presented herein.
(6) 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.
(7) 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.
(8) 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
expenses 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.
(9) 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 and the three months ended March 31, 1998 by 6
percent and 10 percent, respectively.
P-4
<PAGE>
<TABLE>
<CAPTION>
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------------------
Twelve 1998 1997
Months ----------- ---------------------------------------------------
Ended
Mar. 31, First Fourth Third Second First
(In millions, except per share data) 1998 Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED SUMMARIES OF INCOME
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 11,063 2,755 2,746 2,791 2,771 2,625
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income (a) $ 11,141 2,775 2,767 2,809 2,790 2,643
Interest expense 5,378 1,409 1,330 1,328 1,311 1,221
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 5,763 1,366 1,437 1,481 1,479 1,422
Provision for loan losses 768 90 325 175 178 162
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 4,995 1,276 1,112 1,306 1,301 1,260
Securities available for sale transactions 47 20 12 10 5 4
Investment security transactions 3 - - 2 1 -
Noninterest income 3,678 1,129 905 835 809 813
Merger-related and restructuring charges (b) 298 29 210 - 59 -
Noninterest expense 5,516 1,479 1,450 1,292 1,295 1,283
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 2,909 917 369 861 762 794
Income taxes 852 310 (14) 296 260 272
Tax-equivalent adjustment 78 20 21 18 19 18
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,979 587 362 547 483 504
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic $ 3.14 0.91 0.57 0.88 0.78 0.80
Diluted 3.10 0.90 0.56 0.87 0.77 0.79
Cash dividends $ 1.30 0.37 0.32 0.32 0.29 0.29
Average shares - Basic (In thousands) - 642,343 631,004 622,650 621,541 627,402
Average shares - Diluted (In thousands) - 651,355 639,031 630,552 629,654 635,852
Average stockholders' equity (c)
Quarter-to-date $ - 12,158 11,666 11,060 10,705 10,678
Year-to-date - 12,158 11,030 10,816 10,691 10,678
Common stock price
High 58 1/4 58 1/4 52 7/8 50 11/16 47 7/8 47 3/4
Low 39 1/8 47 1/16 46 15/16 45 7/8 39 1/8 36 5/8
Period-end $ 56 13/16 56 13/16 51 1/4 50 1/16 46 1/4 40 1/2
To earnings ratio (d) 18.33X 18.33 17.14 15.55 15.57 13.78
To book value 297 % 297 271 272 266 244
Book value $ 19.16 19.16 18.91 18.43 17.40 16.62
BALANCE SHEET DATA
Assets 171,966 171,966 157,274 155,175 154,795 148,442
Long-term debt $ 8,252 8,252 8,042 8,169 7,608 8,004
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Tax-equivalent
(b) Merger-related and restructuring charges amounted to $19 million after tax
in the first quarter of 1998, $157 million after tax in the fourth quarter of
1997 and $37 million after tax in the second quarter of 1997.
(c) Quarter-to-date and year-to-date average stockholders' equity excludes
average net unrealized gains or losses on debt and equity securities.
(d) Based on diluted earnings per share.
T-1
<PAGE>
<TABLE>
<CAPTION>
Table 2
BUSINESS SEGMENTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998
-------------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ---------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 21 31 60 571 683
Provision for loan losses 1 2 37 35 75
Noninterest income 75 9 88 148 320
Noninterest expense 93 23 69 439 624
Income tax expense - 5 15 87 107
- ---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 2 10 27 158 197
- ---------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 4.60 % 41.21 42.42 31.32 31.18
Average loans, net $ 1,800 4,107 2,282 40,853 49,042
Average deposits 1,046 - 11 59,775 60,832
Average attributed common
equity $ 157 99 259 2,051 2,566
- ---------------------------------------------------------------------------------------------------------------------------------
Retail
Private Brokerage & Internal
Mutual Client CAP Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 8 1 26 39 14 - 88
Provision for loan losses - - - - - - -
Noninterest income 98 93 2 17 180 (17) 373
Noninterest expense 79 63 16 28 160 346
Income tax expense 9 10 4 10 12 (6) 39
- ---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 18 21 8 18 22 (11) 76
- ---------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 49.97 % 77.41 20.71 63.49 35.04 - 39.38
Average loans, net $ 27 - 2,067 - 744 - 2,838
Average deposits 1,257 - 1,825 10,901 - - 13,983
Average attributed common
equity $ 146 101 142 116 256 - 761
- ---------------------------------------------------------------------------------------------------------------------------------
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 16 12 46 89 189 352
Provision for loan losses 1 - 1 6 - 8
Noninterest income - 65 - - 26 91
Noninterest expense 7 50 20 62 107 246
Income tax expense 3 9 9 6 39 66
- ---------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 5 18 16 15 69 123
- ---------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 18.60 % 88.03 12.88 5.00 65.08 21.34
Average loans, net $ 1,882 - 7,465 17,464 - 26,811
Average deposits - - - - 19,148 19,148
Average attributed common
equity $ 122 81 512 1,205 434 2,354
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-2
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998
-------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 22 11 1 64 25 123
Provision for loan losses - - - 5 - 5
Noninterest income 141 16 22 24 47 250
Noninterest expense 85 31 15 34 38 203
Income tax expense 27 (2) 3 17 12 57
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 51 (2) 5 32 22 108
- -----------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 34.92 % (13.04) 32.37 13.95 83.22 24.17
Average loans, net $ 2,449 966 - 9,965 3,323 16,703
Average deposits 1,409 484 109 3,176 21 5,199
Average attributed common
equity $ 599 102 62 923 110 1,796
- -----------------------------------------------------------------------------------------------------------------------------
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 683 88 352 123 100 1,346
Provision for loan losses 75 - 8 5 2 90
Noninterest income 320 373 91 250 115 1,149
Noninterest expense 624 346 246 203 89 1,508
Income tax expense 107 39 66 57 41 310
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders after
merger-related and
restructuring charges $ 197 76 123 108 83 587
After-tax merger-related and
restructuring charges - - - - 19 19
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders before
merger-related and
restructuring charges $ 197 76 123 108 102 606
- -----------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 31.18 % 39.38 21.34 24.17 8.83 20.21
Average loans, net $ 49,042 2,838 26,811 16,703 632 96,026
Average deposits 60,832 13,983 19,148 5,199 1,725 100,887
Average attributed common
equity $ 2,566 761 2,354 1,796 4,684 12,161
- -----------------------------------------------------------------------------------------------------------------------------
</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.
(Continued)
T-3
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1997
------------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ----------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 12 28 118 592 750
Provision for loan losses 1 2 100 34 137
Noninterest income 81 4 54 191 330
Noninterest expense 70 18 72 428 588
Income tax expense 8 4 - 117 129
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 14 8 - 204 226
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 55.59 % 35.71 (0.18) 38.97 32.99
Average loans, net $ 1,144 3,738 5,247 43,911 54,040
Average deposits 636 1 15 60,375 61,027
Average attributed common
equity $ 103 85 458 2,115 2,761
- ----------------------------------------------------------------------------------------------------------------------------------
Retail
Private Brokerage Internal
Mutual Client CAP & Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 9 1 22 29 3 - 64
Provision for loan losses - - - - - - -
Noninterest income 88 63 1 13 64 (7) 222
Noninterest expense 71 47 14 25 59 - 216
Income tax expense 10 6 4 6 3 (3) 26
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 16 11 5 11 5 (4) 44
- -----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 49.99 % 59.36 22.71 40.92 22.48 - 35.21
Average loans, net $ 14 - 1,774 - 206 - 1,994
Average deposits 1,420 - 1,569 9,896 - - 12,885
Average attributed common
equity $ 135 75 112 108 95 - 525
- -----------------------------------------------------------------------------------------------------------------------------------
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- -----------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 13 9 53 116 191 382
Provision for loan losses - - 3 6 - 9
Noninterest income - 52 - - 32 84
Noninterest expense 6 47 18 69 108 248
Income tax expense 3 5 13 14 42 77
- -----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 4 9 19 27 73 132
- -----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 17.90 % 46.18 13.60 7.93 70.39 20.94
Average loans, net $ 1,510 - 8,430 18,757 - 28,697
Average deposits - - - - 19,091 19,091
Average attributed common
equity $ 99 76 594 1,389 421 2,579
- --------------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
T-4
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1997
-------------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- ----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 17 2 3 61 13 96
Provision for loan losses - - - (2) - (2)
Noninterest income 56 12 17 17 57 159
Noninterest expense 42 13 14 30 47 146
Income tax expense 11 - 2 19 9 41
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 20 1 4 31 14 70
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 26.76 % 6.75 31.74 20.15 48.65 24.73
Average loans, net $ 2,230 393 - 7,712 2,928 13,263
Average deposits 714 75 123 2,624 21 3,557
Average attributed common
equity $ 296 55 44 644 123 1,162
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- ----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 750 64 382 96 112 1,404
Provision for loan losses 137 - 9 (2) 18 162
Noninterest income 330 222 84 159 22 817
Noninterest expense 588 216 248 146 85 1,283
Income tax expense 129 26 77 41 (1) 272
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders after
merger-related and
restructuring charges $ 226 44 132 70 32 504
After-tax merger-related and
restructuring charges - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders before
merger-related and
restructuring charges $ 226 44 132 70 32 504
- ----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 32.99 % 35.21 20.94 24.73 3.55 19.15
Average loans, net $ 54,040 1,994 28,697 13,263 3,018 101,012
Average deposits 61,027 12,885 19,091 3,557 3,869 100,429
Average attributed common
equity $ 2,761 525 2,579 1,162 3,651 10,678
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
(Continued)
T-5
<PAGE>
Table 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997
----------- ---------------------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 13.18 X 12.88 13.54 14.22 13.76
X
Return on assets 1.45 % 0.94 1.43 1.28 1.40
- ---------------------------------------------------------------------------------------------------------------------
Return on stockholders' equity (b) 19.60 % 12.29 19.63 18.09 19.15
X
Earnings retained 59.01 % 43.68 64.97 63.67 64.57
- ---------------------------------------------------------------------------------------------------------------------
Internal capital growth (b) 11.56 % 5.37 12.75 11.52 12.37
- ---------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings 39.74 % 39.26 35.03 33.74 35.43
Net income 40.99 % 56.32 35.03 36.33 35.43
- ---------------------------------------------------------------------------------------------------------------------
</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.
Table 4
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997
----------- -------------------------------------------------
First Fourth Third Second First
(Dollars in millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 1,575 1,274 1,054 1,055 857
Wholesale 2,175 1,393 981 691 780
- ---------------------------------------------------------------------------------------------------------
Total $ 3,750 2,667 2,035 1,746 1,637
- ---------------------------------------------------------------------------------------------------------
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 60,739 60,738 60,825 60,101 59,375
- ---------------------------------------------------------------------------------------------------------
FIRST UNION CORPORATION
OTHER DATA
ATMs 2,693 2,768 2,741 2,727 2,690
Employees 50,899 47,096 47,393 47,943 48,582
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes originations of affiliated banks.
T-6
<PAGE>
Table 5
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998
--------------------------------------------------------------------------------------------
Average
1 Year 1-5 5-10 After 10 Gross Unrealized Amortized Maturity
-----------------
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 170 709 3,408 195 4,482 (100) 19 4,401 8.74
U.S. Government agencies 361 6,475 11,631 4 18,471 (254) 3 18,220 5.76
CMOs 180 4,088 829 - 5,097 (28) 20 5,089 4.81
State, county and municipal 5 2 20 62 89 - - 89 16.45
Other 65 2,256 715 936 3,972 (66) 15 3,921 4.70
- -------------------------------------------------------------------------------------------------------------------------
Total $ 781 13,530 16,603 1,197 32,111 (448) 57 31,720 5.95
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 781 13,530 16,603 459 31,373 (431) 50 30,992
Sundry securities - - - 738 738 (17) 7 728
- -------------------------------------------------------------------------------------------------------------------------
Total $ 781 13,530 16,603 1,197 32,111 (448) 57 31,720
- -------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 777 13,351 16,414 450 30,992
Sundry securities - - - 728 728
- ----------------------------------------------------------------------------------------
Total $ 777 13,351 16,414 1,178 31,720
- ----------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.57 % 6.13 6.10 6.68 6.11
U.S. Government agencies 7.11 7.05 7.04 6.57 7.04
CMOs 7.31 6.96 6.13 - 6.83
State, county and municipal 11.19 7.19 6.02 6.48 6.65
Other 6.10 5.49 5.21 6.18 5.61
Consolidated 6.76 % 6.72 6.72 6.27 6.70
- ----------------------------------------------------------------------------------------
</TABLE>
Included in "U.S. Government agencies" and "Other" at March 31, 1998, are $2.8
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 March 31, 1998, these securities had a weighted average maturity of
4.08 years and a weighted average yield of 5.15 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.65
percent based on a weighted average funding cost differential of (1.50) 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 March 31, 1998. 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
7.25 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 9.5 percent in Connecticut.
There were forward commitments to purchase securities at a cost of $311
million that had a market value of $311 million at March 31, 1998. Gross gains
and losses realized on the sale of debt securities for the three months ended
March 31, 1998 were $27 million and $7 million, respectively. There were no
gains or losses on sundry securities.
T-7
<PAGE>
Table 6
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
March 31, 1998
-------------------------------------------------------------------------------------
Average
1 Year 1-5 5-10 After 10 Gross Unrealized Market Maturity
-----------------
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Government agencies $ - 697 292 - 989 25 (1) 1,013 4.13
CMOs 36 293 - - 329 7 - 336 2.04
State, county and municipal 55 187 169 295 706 109 - 815 8.23
Other - 18 2 28 48 2 - 50 9.09
- --------------------------------------------------------------------------------------------------------------------------
Total $ 91 1,195 463 323 2,072 143 (1) 2,214 5.31
- ---------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 91 1,195 463 323 2,072 143 (1) 2,214
Sundry securities - - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total $ 91 1,195 463 323 2,072 143 (1) 2,214
- --------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 92 1,235 500 387 2,214
Sundry securities - - - - -
- ------------------------------------------------------------------------------------------
Total $ 92 1,235 500 387 2,214
- ------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Government agencies - % 7.41 6.80 - 7.23
CMOs 7.70 7.67 - - 7.67
State, county and municipal 11.17 10.91 11.92 11.90 11.59
Other - 7.68 7.27 9.87 8.94
Consolidated 9.79 % 8.03 8.67 11.73 8.83
- -----------------------------------------------------------------------------------------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at March 31, 1998.
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
7.25 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 9.5 percent in Connecticut.
There were no commitments to purchase or sell investment securities at
March 31, 1998. There were no gains or losses realized on investment securities
for the three months ended March 31, 1998.
T-8
<PAGE>
Table 7
LOANS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
1998 1997
---------- -----------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 27,910 28,111 27,244 27,414 26,683
Real estate - construction and other 2,288 2,386 2,530 2,699 2,837
Real estate - mortgage 8,411 8,576 8,916 9,179 9,460
Lease financing 7,843 8,056 7,871 7,775 6,587
Foreign 1,520 1,431 1,308 1,395 1,091
- --------------------------------------------------------------------------------------------------------------
Total commercial 47,972 48,560 47,869 48,462 46,658
- --------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 26,114 25,382 26,086 26,636 27,356
Installment loans - Bankcard (a) 2,514 2,708 5,137 5,494 5,453
Installment loans - other 20,282 19,297 21,660 21,671 21,309
Vehicle leasing 4,457 4,312 4,005 3,858 3,704
- --------------------------------------------------------------------------------------------------------------
Total retail 53,367 51,699 56,888 57,659 57,822
- --------------------------------------------------------------------------------------------------------------
Total loans 101,339 100,259 104,757 106,121 104,480
Unearned income 3,247 3,386 3,305 3,338 2,733
- --------------------------------------------------------------------------------------------------------------
Loans, net $ 98,092 96,873 101,452 102,783 101,747
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-9
<PAGE>
Table 8
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997
---------- ---------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of quarter $ 1,212 1,496 1,490 1,487 1,502
Provision for loan losses 90 325 175 178 162
Allowance relating to loans acquired, transferred to
accelerated disposition or sold 9 (478) - - (17)
Loan losses, net (87) (131) (169) (175) (160)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, end of quarter $ 1,224 1,212 1,496 1,490 1,487
- --------------------------------------------------------------------------------------------------------------------------------
(as a % of loans, net) 1.25 % 1.25 1.47 1.45 1.46
- --------------------------------------------------------------------------------------------------------------------------------
(as a % of nonaccrual and restructured loans) 195 % 195 235 233 209
- --------------------------------------------------------------------------------------------------------------------------------
(as a % of nonperforming assets) 168 % 168 203 201 182
- --------------------------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 16 45 15 13 10
Real estate - commercial construction and mortgage 4 8 8 6 10
Real estate - residential mortgage 7 10 6 13 7
Installment loans - Bankcard 39 60 113 116 107
Installment loans - other and Vehicle leasing 42 41 56 55 54
- --------------------------------------------------------------------------------------------------------------------------------
Total 108 164 198 203 188
- --------------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 6 16 8 6 12
Real estate - commercial construction and mortgage 2 3 2 4 1
Real estate - residential mortgage - - 1 - -
Installment loans - Bankcard 3 5 9 7 6
Installment loans - other and Vehicle leasing 10 9 9 11 9
- --------------------------------------------------------------------------------------------------------------------------------
Total 21 33 29 28 28
- --------------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 87 131 169 175 160
- --------------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net) (a) 0.36 % 0.53 0.67 0.69 0.63
- --------------------------------------------------------------------------------------------------------------------------------
(as % of average loans, net, excluding Bankcard) (a) 0.22 % 0.33 0.27 0.28 0.25
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 246 236 215 219 231
Commercial real estate loans 80 76 88 101 125
Consumer real estate loans 186 186 188 181 214
Installment loans 114 124 143 136 131
- --------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 626 622 634 637 701
Restructured loans 1 2 1 2 11
Foreclosed properties 102 99 103 102 107
- --------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 729 723 738 741 819
- --------------------------------------------------------------------------------------------------------------------------------
(as % of loans, net and foreclosed properties) 0.74 % 0.75 0.73 0.72 0.80
- --------------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 229 232 306 318 332
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
T-10
<PAGE>
Table 9
INTANGIBLE ASSETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1998 1997
----------- ----------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------
MORTGAGE AND OTHER SERVICING ASSETS $ 436 421 380 367 322
- -----------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 21 24 26 29 32
- -----------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 2,267 2,247 2,278 2,314 2,354
Deposit base premium 393 421 457 488 519
Other 5 6 8 7 9
- -----------------------------------------------------------------------------------------------------------
Total $ 2,665 2,674 2,743 2,809 2,882
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Table 10
FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- --------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Foreclosed properties $ 117 115 119 119 124
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of quarter 16 16 17 17 17
Provision for foreclosed properties - 1 - 1 -
Dispositions, net (1) (1) (1) (1) -
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of quarter 15 16 16 17 17
- -----------------------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 102 99 103 102 107
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-11
<PAGE>
Table 11
DEPOSITS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1998 1997
------------ ----------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 22,425 21,753 20,734 20,962 19,978
Savings and NOW accounts 30,015 30,118 29,274 29,311 29,421
Money market accounts 15,672 15,494 14,848 14,387 14,496
Other consumer time 30,109 29,231 30,575 31,432 32,312
- ----------------------------------------------------------------------------------------------------------
Total core deposits 98,221 96,596 95,431 96,092 96,207
Foreign 1,209 2,483 750 1,708 906
Other time 3,896 3,810 3,222 3,189 3,185
- ----------------------------------------------------------------------------------------------------------
Total deposits $ 103,326 102,889 99,403 100,989 100,298
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Table 12
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
<TABLE>
<CAPTION>
<S> <C> <C>
- -----------------------------------------------------------------------------
March 31, 1998
------------------------
Time Other
(In millions) Certificates Time
- -----------------------------------------------------------------------------
MATURITY OF
3 months or less $ 3,300 -
Over 3 months through 6 months 1,217 -
Over 6 months through 12 months 1,514 -
Over 12 months 2,185 -
- -----------------------------------------------------------------------------
Total $ 8,216 -
- -----------------------------------------------------------------------------
</TABLE>
T-12
<PAGE>
Table 13
LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- --------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES ISSUED BY THE
PARENT COMPANY
7-1/2% debentures $ - - - 16 16
Notes
Floating rate extendible, due June 15, 2005 10 10 10 10 10
6.60%, due June 15, 2000 249 249 249 249 -
Floating rate - 300 300 300 300
6-3/4% - 250 250 250 250
Subordinated notes
7.18%, due April 15, 2011 59 59 59 59 59
8%, due August 15, 2009 149 149 149 149 149
6-3/8%, due January 15, 2009 148 148 148 148 148
6%, due October 30, 2008 198 198 198 198 198
7-1/2%, due July 15, 2006 298 298 298 298 297
7%, due March 15, 2006 199 199 199 198 198
6-7/8%, due September 15, 2005 249 249 249 249 249
7.05%, due August 1, 2005 248 248 248 248 248
6-5/8%, due July 15, 2005 249 249 248 248 248
8.77%, due November 15, 2004 149 149 149 149 149
Floating rate, due July 22, 2003 149 149 149 149 149
7-1/4%, due February 15, 2003 149 149 149 149 149
8%, due November 15, 2002 224 224 224 224 224
8-1/8%, due June 24, 2002 249 249 249 249 249
9.45%, due August 15, 2001 149 149 149 148 148
Fixed rate medium-term, varying rates and terms to June 5, 2001 54 54 54 54 54
9.45%, due June 15, 1999 249 249 249 249 249
Subordinated debentures
6.55%, due October 15, 2035 249 249 249 249 249
7-1/2%, due April 15, 2035 247 246 246 246 246
6.824%/7.574%, due August 1, 2026 298 298 298 298 298
- ------------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,222 4,771 4,770 4,784 4,534
- ------------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4%, due September 1, 2003 119 120 121 122 156
Varying rates and terms to January 26, 2004 161 59 56 52 64
Subordinated notes
Bank, varying rates and terms to December 15, 2036 1,134 975 973 875 1,372
6.80%, due June 15, 2003 149 149 149 149 149
9-5/8%, due August 15, 1999 150 150 150 150 149
9-5/8%, due June 1, 1999 100 100 100 100 100
Floating rate, due April 15, 1998 100 100 100 100 100
Floating rate - - - - 50
Subordinated capital notes
9-5/8%, due June 15, 1999 75 75 75 75 74
9-7/8%, due May 15, 1999 75 75 75 75 75
8-1/2% - 149 149 149 149
10-1/2% collateralized mortgage obligations - - 31 33 35
- ------------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 2,063 1,952 1,979 1,880 2,473
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,935 1,285 1,385 880 930
Mortgage notes and other debt 10 11 12 41 43
Capitalized leases 22 23 23 23 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total other debt 1,967 1,319 1,420 944 997
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,252 8,042 8,169 7,608 8,004
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-13
<PAGE>
Table 14
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Twelve
Months 1998 1997
----------- ---------------------------------------------------
Ended
Mar. 31, First Fourth Third Second First
(In millions) 1998 Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 10,400 12,032 11,710 10,916 10,400 10,932
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 1,979 587 362 547 483 504
Unrealized gain (loss) on debt and
equity securities, net 387 (5) 73 126 193 (140)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,366 582 435 673 676 364
- ----------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock (594) (406) - (83) (105) (836)
Common stock issued for stock options exercised 357 121 80 38 118 103
Common stock issued through dividend
reinvestment plan 24 12 10 - 2 13
Common stock issued through public offerings 358 - - 358 - -
Common stock issued for acquisitions 249 249 - - - 3
Cash dividends paid (811) (241) (203) (192) (175) (179)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 12,349 12,349 12,032 11,710 10,916 10,400
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-14
<PAGE>
Table 15
CAPITAL RATIOS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- --------------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 10,522 10,215 8,986 8,135 7,752
Total capital 16,433 16,279 15,073 13,614 13,027
Adjusted risk-based assets 122,249 121,503 109,851 107,726 106,451
Adjusted leverage ratio assets $ 161,401 149,921 137,516 130,666 126,465
Ratios
Tier 1 capital 8.61 % 8.41 8.18 7.55 7.28
Total capital 13.44 13.40 13.72 12.64 12.24
Leverage 6.52 6.81 6.53 6.23 6.13
STOCKHOLDERS' EQUITY TO ASSETS
Quarter-end 7.18 7.65 7.55 7.05 7.01
Average 7.59 % 7.77 7.38 7.03 7.27
- ----------------------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 7.49 % 6.97 7.13 6.75 6.51
First Union Bank of Delaware 13.75 11.83 13.72 14.16 13.86
First Union Home Equity Bank 11.41 10.95 10.23 9.68 8.27
Total capital
First Union National Bank 10.64 10.20 10.83 10.73 10.11
First Union Bank of Delaware 14.27 13.09 14.97 15.42 15.11
First Union Home Equity Bank 13.61 13.20 12.39 11.94 10.87
Leverage
First Union National Bank 5.90 6.02 5.88 5.48 6.15
First Union Bank of Delaware 6.63 6.24 8.31 11.29 11.43
First Union Home Equity Bank 10.48 % 10.16 9.12 8.44 7.42
- ----------------------------------------------------------------------------------------------------------------------------------
</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 capital ratios presented herein have not been restated to reflect
the Signet pooling of interests acquisition.
T-15
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
----------------------- ----------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -----------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 13,000 6.52% 5.63% 4.15 Converts floating rate loans to fixed
Carrying amount $ 50 rate. Adds to liability sensitivity.
Unrealized gross gain 129 Similar characteristics to a fixed
Unrealized gross loss (5) income security funded with
variable rate liabilities. Includes
$2.9 billion of callable swaps
expected to mature in or before
December 1999 if swap rates are
below 7.04 percent.
-------
Total 174
-------
Forward interest rate swaps 725 6.20 - 2.72 Converts floating rate loans to fixed
Carrying amount - rates in future periods. Effective
Unrealized gross gain 2 December 1998 with put options on
Unrealized gross loss - forward swaps referenced under
"Rate Sensitivity Hedges" linked to
this item.
-------
Total 2
-------
Interest rate floors 500 6.07 5.63 0.87 Paid a premium to convert floating
Carrying amount 2 rate loans to fixed rate when 3
Unrealized gross gain - month LIBOR is below an average
Unrealized gross loss - of 6.07 percent.
-------
Total 2
- --------------------------------------------- -------
Total asset rate
conversions $ 14,225 6.49% 5.63% 3.96 $ 178
- -----------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 6,772 7.01% 5.81% 9.36 Converts $4.0 billion of fixed rate
Carrying amount $ 16 long-term debt to floating rate by
Unrealized gross gain 258 matching the terms of the swap
Unrealized gross loss (6) to the debt issue. Also converts $562
million of fixed rate CDs to variable
rate, $1.2 billion of fixed rate bank
notes to floating rate and $1.0 billion
of fixed rate trust capital securities
to variable rate.
-------
Total 268
-------
Interest rate floors 250 4.43 - 3.20 $250 million floor offsets a
Carrying amount 1 corresponding rate purchased floor
Unrealized gross gain - in long-term debt.
Unrealized gross loss (1)
-------
Total -
- --------------------------------------------- -------
Total liability rate
conversions $ 7,022 6.92% 5.81% 9.14 $ 268
- -----------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-16
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
------------------- ----------------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Put options on forward swaps $ 725 - % 6.20% 0.71 Paid a premium for the right to
Carrying amount $ 3 terminate $725 million of forward
Unrealized gross gain - interest rate swaps based on
Unrealized gross loss - interest rates in effect in December
1998. Reduces liability sensitivity.
----
Total 3
----
Interest rate caps (LIBOR) 148 5.68 7.03 1.73 Paid a premium for the right to lock
Carrying amount 1 in 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps.
Unrealized gross loss (1)
----
Total -
----
Interest rate caps (CMT) 2,200 - 5.70 3.71 Paid a premium for the right to lock
Carrying amount 26 in 1 year Treasury rates for the
Unrealized gross gain - purpose of converting floating rate
Unrealized gross loss (4) liabilities to fixed rate.
----
Total 22
----
Short eurodollar futures 7,534 - 6.20 0.31 Locks in 3 month LIBOR reset rates
Carrying amount - on pay variable rate swaps. $4.8
Unrealized gross gain - billion effective June 1998 and $2.8
Unrealized gross loss (9) billion effective September 1998.
----
Total (9)
----
Long eurodollar futures 2,000 6.62 - 1.09 Converts floating rate LIBOR-based
Carrying amount - loans to fixed rate. Adds to liability
Unrealized gross gain 4 sensitivity. Similar characteristics to
Unrealized gross loss - fixed income security funded with
variable rate liabilities. $500 million
effective December 1998, March
1999, June 1999 and September
1999.
----
Total 4
----
Call Options on eurodollar
futures 512 6.84 - 0.34 Paid a premium for the right to buy
Carrying amount - Eurodollar futures that convert
Unrealized gross gain 1 floating rate LIBOR-based loans to
Unrealized gross loss - fixed rate. Interest rate risk limited
to premium paid. $256 million
effective June 1998 and September
1998.
----
Total 1
- -------------------------------------------- ----
Total rate sensitivity
hedges $ 13,119 6.61 % 6.11% 1.04 $ 21
- -----------------------------------------------------------------------------------------
</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 March 31, 1998. 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.
T-17
<PAGE>
Table 17
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
March 31, 1998 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 1,596 10 8,422 4,197 - 14,225
Weighted average receive rate 5.54% 5.63 6.59 6.65 - 6.49
Estimated fair value $ 10 - 145 23 - 178
- ---------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 865 374 1,045 3,150 1,588 7,022
Weighted average receive rate 5.61% 7.88 7.34 6.81 7.35 6.92
Estimated fair value $ (1) 12 50 126 81 268
- ---------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 9,826 1,050 2,243 - - 13,119
Weighted average receive rate 6.63% 6.61 5.68 - - 6.61
Estimated fair value $ (3) 2 22 - - 21
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. Pay rates are generally based on one
to six month LIBOR and reset at predetermined reset dates. Current pay rates are
not necessarily indicative of future pay rates, and therefore, they have been
excluded from the above table. Weighted average pay rates are indicated in Table
16.
T-18
<PAGE>
<TABLE>
<CAPTION>
Table 18
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- -------------------------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 12,880 7,133 18,308 38,321
Additions 1,600 525 - 2,125
Maturities/Amortizations (255) (636) (5,089) (5,980)
Terminations - - (100) (100)
- ------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 14,225 7,022 13,119 34,366
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-19
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ---------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 1998 FOURTH QUARTER 1997
---------------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 242 3 4.52 % $ 382 5 5.30 %
Federal funds sold and securities
purchased under resale agreements 9,108 119 5.33 7,527 104 5.44
Trading account assets (a) 5,512 83 6.13 6,383 101 6.30
Securities available for sale (a) 28,152 469 6.68 19,192 331 6.90
Investment securities (a)
U.S. Government and other 1,399 27 7.63 1,473 28 7.46
State, county and municipal 711 19 10.90 731 20 10.97
- --------------------------------------------------------------------- ----------------------
Total investment securities 2,110 46 8.74 2,204 48 8.63
- --------------------------------------------------------------------- ----------------------
Loans
Commercial
Commercial, financial and agricultural 27,830 527 7.68 27,094 508 7.44
Real estate - construction and other 2,313 48 8.37 2,486 50 7.95
Real estate - mortgage 8,503 175 8.35 8,726 188 8.55
Lease financing 3,782 105 11.09 3,988 108 10.80
Foreign 1,448 23 6.44 1,299 22 6.62
- --------------------------------------------------------------------- ----------------------
Total commercial 43,876 878 8.10 43,593 876 7.98
- --------------------------------------------------------------------- ----------------------
Retail
Real estate - mortgage 25,686 499 7.77 25,719 507 7.89
Installment loans - Bankcard (c) 2,493 116 18.63 4,982 213 17.17
Installment loans - other and
Vehicle leasing 23,971 562 9.49 24,380 582 9.48
- --------------------------------------------------------------------- ----------------------
Total retail 52,150 1,177 9.08 55,081 1,302 9.43
- --------------------------------------------------------------------- ----------------------
Total loans 96,026 2,055 8.63 98,674 2,178 8.79
- --------------------------------------------------------------------- ----------------------
Total earning assets 141,150 2,775 7.92 134,362 2,767 8.20
------------------- -------------------
Cash and due from banks 6,111 5,978
Other assets 16,709 12,134
- --------------------------------------------------------- ----------
Total assets $ 163,970 $ 152,474
- --------------------------------------------------------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 30,188 225 3.02 28,585 222 3.09
Money market accounts 15,282 123 3.27 16,073 125 3.09
Other consumer time 29,493 386 5.31 29,482 391 5.27
Foreign 1,515 20 5.41 1,002 17 6.48
Other time 3,829 68 7.17 3,995 66 6.47
- --------------------------------------------------------------------- ----------------------
Total interest-bearing deposits 80,307 822 4.15 79,137 821 4.11
Federal funds purchased and securities
sold under repurchase agreements 28,946 360 5.04 22,270 282 5.03
Commercial paper 1,071 14 5.27 864 18 8.17
Other short-term borrowings 6,296 85 5.49 5,094 77 6.03
Long-term debt 8,230 128 6.23 8,173 132 6.49
- --------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 124,850 1,409 4.57 115,538 1,330 4.57
------------------- -------------------
Noninterest-bearing deposits 20,580 20,264
Other liabilities 5,111 3,842
Guaranteed preferred beneficial interests 991 990
Stockholders' equity 12,438 11,840
- --------------------------------------------------------- ----------
Total liabilities and $ 152,474
----------
stockholders' equity $ 163,970
- ---------------------------------------------------------
Interest income and rate earned $ 2,775 7.92 % $ 2,767 8.20 %
Interest expense and equivalent rate paid 1,409 4.04 1,330 3.93
- --------------------------------------------------------------------------------- ----------------------------------
Net interest income and margin $ 1,366 3.88 % $ 1,437 4.27 %
- --------------------------------------------------------------------------------- ----------------------------------
</TABLE>
(a) Yields related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are stated on
a fully tax-equivalent basis. They are reduced by the nondeductible portion of
interest expense, assuming a federal tax rate of 35 percent; and tax rates of
7.25 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 9.5 percent in Connecticut. Lease financing amounts include related
deferred income taxes.
T-20
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1997 SECOND QUARTER 1997 FIRST QUARTER 1997
--------------------------------------------------------------------------------------------------------------------------------
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> <C>
$ 489 6 4.74 % $ 377 5 5.66 % $ 284 3 4.41 %
7,573 104 5.46 7,096 99 5.54 6,110 83 5.59
5,301 88 6.55 4,289 72 6.72 3,557 57 6.49
18,636 328 6.98 19,275 341 7.09 16,525 278 6.84
1,533 28 7.36 1,531 29 7.61 1,646 31 7.47
742 21 10.89 766 21 11.21 787 21 11.03
----------------------- ----------------------- -----------------------
2,275 49 8.51 2,297 50 8.81 2,433 52 8.62
----------------------- ----------------------- -----------------------
26,582 510 7.61 26,661 513 7.72 25,702 485 7.66
2,625 58 8.80 2,795 60 8.65 2,879 61 8.53
9,117 202 8.78 9,289 203 8.77 9,630 200 8.41
4,043 106 10.42 3,919 100 10.19 3,419 83 9.83
1,296 20 6.27 1,290 19 6.14 1,024 16 6.16
----------------------- ----------------------- -----------------------
43,663 896 8.14 43,954 895 8.17 42,654 845 8.03
----------------------- ----------------------- -----------------------
26,373 519 7.80 27,279 534 7.85 28,601 555 7.87
5,321 213 15.87 5,510 202 14.68 5,514 192 14.09
25,096 606 9.59 24,860 592 9.55 24,243 578 9.67
----------------------- ----------------------- -----------------------
56,790 1,338 9.35 57,649 1,328 9.24 58,358 1,325 9.21
----------------------- ----------------------- -----------------------
100,453 2,234 8.82 101,603 2,223 8.78 101,012 2,170 8.71
----------------------- ----------------------- -----------------------
134,727 2,809 8.27 134,937 2,790 8.29 129,921 2,643 8.25
-------------------- --------------------- --------------------
5,740 5,835 5,933
10,895 10,528 10,430
----------- ----------- -----------
$ 151,362 $ 151,300 $ 146,284
----------- ----------- -----------
29,357 219 2.96 29,507 210 2.85 28,840 199 2.80
14,794 119 3.20 14,257 107 3.00 14,696 106 2.93
30,991 409 5.23 31,721 410 5.19 32,920 421 5.18
1,263 17 5.48 3,068 41 5.39 1,821 24 5.27
3,328 54 6.46 3,422 53 6.27 3,684 54 5.94
----------------------- ----------------------- -----------------------
79,733 818 4.07 81,975 821 4.02 81,961 804 3.98
22,011 281 5.06 21,958 275 5.00 18,801 229 4.96
1,089 14 5.36 1,280 18 5.40 905 11 5.05
5,616 85 6.00 4,630 71 6.21 3,296 47 5.73
7,854 130 6.51 7,707 126 6.59 8,032 130 6.54
----------------------- ----------------------- -----------------------
116,303 1,328 4.53 117,550 1,311 4.47 112,995 1,221 4.38
-------------------- --------------------- --------------------
19,197 18,808 18,468
3,696 3,313 3,274
990 990 913
11,176 10,639 10,634
----------- ----------- -----------
$ 151,362 $ 151,300 $ 146,284
----------- ------------ -----------
$ 2,809 8.27 % $ 2,790 8.29 % $ 2,643 8.25 %
1,328 3.91 1,311 3.90 1,221 3.81
----------------------- --------------------- --------------------
$ 1,481 4.36 % $ 1,479 4.39 % $ 1,422 4.44 %
----------------------- --------------------- --------------------
</TABLE>
(b) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(c) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-21
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
------------ --------------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 7,077 6,445 6,661 6,971 6,540
Interest-bearing bank balances 217 710 204 492 353
Federal funds sold and securities
purchased under resale agreements 10,828 7,740 6,898 7,450 5,985
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 18,122 14,895 13,763 14,913 12,878
- ---------------------------------------------------------------------------------------------------------------------------
Trading account assets 6,682 5,457 7,825 5,418 4,194
Securities available for sale 32,111 21,415 18,924 18,817 16,839
Investment securities 2,072 2,175 2,268 2,285 2,408
Loans, net of unearned income 98,092 96,873 101,452 102,783 101,747
Allowance for loan losses (1,224) (1,212) (1,496) (1,490) (1,487)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net 96,868 95,661 99,956 101,293 100,260
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,398 4,233 4,228 4,230 4,310
Due from customers on acceptances 575 854 838 730 635
Other intangible assets 2,665 2,674 2,743 2,809 2,882
Other assets 8,473 9,910 4,630 4,300 4,036
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 171,966 157,274 155,175 154,795 148,442
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 22,425 21,753 20,734 20,962 19,978
Interest-bearing deposits 80,901 81,136 78,669 80,027 80,320
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 103,326 102,889 99,403 100,989 100,298
Short-term borrowings 40,301 27,357 29,545 29,544 24,500
Bank acceptances outstanding 575 855 838 730 635
Other liabilities 6,172 5,108 4,520 4,018 3,615
Long-term debt 8,252 8,042 8,169 7,608 8,004
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 158,626 144,251 142,475 142,889 137,052
- ---------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
deferrable interest debentures 991 991 990 990 990
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2,000,000,000 shares 2,148 2,121 2,118 2,091 2,086
Paid-in capital 1,203 1,384 1,296 1,010 1,000
Retained earnings 8,749 8,273 8,115 7,760 7,452
Accumulated other comprehensive (loss), net 249 254 181 55 (138)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,349 12,032 11,710 10,916 10,400
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 171,966 157,274 155,175 154,795 148,442
- ---------------------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale-amortized cost $ 31,720 21,020 18,639 18,723 17,049
Investment securities-market value 2,214 2,322 2,412 2,417 2,522
Stockholders' equity, net of unrealized
gain (loss) on debt and equity securities $ 12,349 12,032 11,710 10,916 10,400
Shares outstanding (In thousands) 644,493 636,394 635,335 627,398 625,914
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-22
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
---------- ----------------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $ 2,045 2,167 2,226 2,216 2,162
Interest and dividends on securities available for sale 465 329 325 337 276
Interest and dividends on investment securities
Taxable income 27 27 28 29 30
Nontaxable income 14 14 14 14 15
Trading account interest 82 100 88 71 56
Other interest income 122 109 110 104 86
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 2,755 2,746 2,791 2,771 2,625
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 822 821 818 821 804
Interest on short-term borrowings 459 377 380 364 287
Interest on long-term debt 128 132 130 126 130
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,409 1,330 1,328 1,311 1,221
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,346 1,416 1,463 1,460 1,404
Provision for loan losses 90 325 175 178 162
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,256 1,091 1,288 1,282 1,242
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 33 86 24 61 33
Service charges on deposit accounts 214 222 214 208 210
Mortgage banking income 66 74 59 58 56
Capital management income 362 226 223 219 214
Securities available for sale transactions 20 12 10 5 4
Investment security transactions - - 2 1 -
Fees for other banking services 41 27 37 41 46
Equipment lease rental income 46 43 48 46 50
Sundry income 367 227 230 176 204
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,149 917 847 815 817
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 653 597 543 554 527
Other benefits 138 116 118 124 137
- ---------------------------------------------------------------------------------------------------------------------------------
Personnel expense 791 713 661 678 664
Occupancy 101 99 102 100 100
Equipment 150 132 137 126 129
Advertising 30 22 25 29 27
Telecommunications 35 32 30 29 30
Travel 36 35 27 26 22
Postage, printing and supplies 49 45 40 40 45
FDIC assessment 5 6 6 6 5
Professional fees 32 54 29 27 24
External data processing 20 22 25 23 24
Other intangible amortization 66 71 69 68 69
Merger-related and restructuring charges 29 210 - 59 -
Sundry expense 164 219 141 143 144
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,508 1,660 1,292 1,354 1,283
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 897 348 843 743 776
Income taxes (benefits) (a) 310 (14) 296 260 272
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 587 362 547 483 504
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 0.91 0.57 0.88 0.78 0.80
Diluted earnings 0.90 0.56 0.87 0.77 0.79
Cash dividends $ 0.37 0.32 0.32 0.29 0.29
AVERAGE SHARES (In thousands)
Basic 642,343 631,004 622,650 621,541 627,402
Diluted 651,355 639,031 630,552 629,654 635,852
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Certain corporate and interstate banking entities were reorganized, which
resulted in a reduction in the effective federal income tax rate in the fourth
quarter of 1997. This benefit was principally offset by a higher provision for
loan losses related to the restructuring of the unsecured consumer loan
portfolio.
T-23
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 587 504
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 39 7
Provision for loan losses 90 162
Gain on sale of mortgage servicing rights (2) -
Securities available for sale transactions (20) (4)
Investment security transactions - -
Depreciation and amortization 216 192
Trading account assets, net (1,173) 294
Mortgage loans held for resale (912) 140
Gain on sale of premises and equipment (5) -
Gain on sale of assets held for sale (1) (2)
Other assets, net 2,354 96
Other liabilities, net 297 (313)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,470 1,076
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 3,226 3,019
Maturities of securities available for sale 324 463
Purchases of securities available for sale (14,241) (3,732)
Calls and underdeliveries of investment securities - 1
Maturities of investment securities 145 109
Purchases of investment securities (40) (20)
Origination of loans, net (141) 282
Sales of premises and equipment 31 18
Purchases of premises and equipment (241) (178)
Other intangible assets, net (9) (7)
Purchase of bank owned separate account life insurance (31) -
Cash equivalents acquired, net of purchases of banking organizations 80 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (10,897) (45)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net 189 (2,404)
Securities sold under repurchase agreements and other short-term borrowings, net 12,829 (486)
Issuances of guaranteed preferred beneficial interests - 495
Issuances of long-term debt 1,400 -
Payments of long-term debt (1,250) (56)
Sales of common stock 133 116
Purchases of common stock (406) (836)
Cash dividends paid (241) (179)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 12,654 (3,350)
- ------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3,227 (2,319)
Cash and cash equivalents, beginning of year 14,895 15,197
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 18,122 12,878
- ------------------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 1 6
Issuance of common stock for purchase accounting acquisitions 249 4
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale (4) (205)
Other assets (deferred income taxes) $ 1 (65)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-24
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,077
<INT-BEARING-DEPOSITS> 217
<FED-FUNDS-SOLD> 10,828
<TRADING-ASSETS> 6,682
<INVESTMENTS-HELD-FOR-SALE> 32,111
<INVESTMENTS-CARRYING> 2,072
<INVESTMENTS-MARKET> 2,214
<LOANS> 101,339
<ALLOWANCE> (1,224)
<TOTAL-ASSETS> 171,966
<DEPOSITS> 103,326
<SHORT-TERM> 40,301
<LIABILITIES-OTHER> 6,172
<LONG-TERM> 8,252
0
0
<COMMON> 2,148
<OTHER-SE> 10,201
<TOTAL-LIABILITIES-AND-EQUITY> 171,966
<INTEREST-LOAN> 2,045
<INTEREST-INVEST> 506
<INTEREST-OTHER> 122
<INTEREST-TOTAL> 2,755
<INTEREST-DEPOSIT> 822
<INTEREST-EXPENSE> 1,409
<INTEREST-INCOME-NET> 1,346
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 20
<EXPENSE-OTHER> 1,508
<INCOME-PRETAX> 897
<INCOME-PRE-EXTRAORDINARY> 897
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 587
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 3.88
<LOANS-NON> 626
<LOANS-PAST> 229
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,212
<CHARGE-OFFS> 108
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,224
<ALLOWANCE-DOMESTIC> 666
<ALLOWANCE-FOREIGN> 6
<ALLOWANCE-UNALLOCATED> 552
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 6,540 6,971 6,661
<INT-BEARING-DEPOSITS> 353 492 204
<FED-FUNDS-SOLD> 5,985 7,450 6,898
<TRADING-ASSETS> 4,194 5,418 7,825
<INVESTMENTS-HELD-FOR-SALE> 16,839 18,817 18,924
<INVESTMENTS-CARRYING> 2,408 2,285 2,268
<INVESTMENTS-MARKET> 2,522 2,417 2,412
<LOANS> 104,480 106,121 104,757
<ALLOWANCE> (1,487) (1,490) (1,496)
<TOTAL-ASSETS> 148,442 154,795 155,175
<DEPOSITS> 100,298 100,989 99,403
<SHORT-TERM> 24,500 29,544 29,545
<LIABILITIES-OTHER> 3,615 4,018 4,520
<LONG-TERM> 8,004 7,608 8,169
0 0 0
0 0 0
<COMMON> 2,086 2,091 2,118
<OTHER-SE> 8,314 8,825 9,592
<TOTAL-LIABILITIES-AND-EQUITY> 148,442 154,795 155,175
<INTEREST-LOAN> 2,162 4,378 6,604
<INTEREST-INVEST> 321 701 1,068
<INTEREST-OTHER> 86 190 300
<INTEREST-TOTAL> 2,625 5,396 8,187
<INTEREST-DEPOSIT> 804 1,625 2,443
<INTEREST-EXPENSE> 1,221 2,532 3,860
<INTEREST-INCOME-NET> 1,404 2,864 4,327
<LOAN-LOSSES> 162 340 515
<SECURITIES-GAINS> 4 10 22
<EXPENSE-OTHER> 1,283 2,637 3,929
<INCOME-PRETAX> 776 1,519 2,362
<INCOME-PRE-EXTRAORDINARY> 776 1,519 2,362
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 504 987 1,534
<EPS-PRIMARY> 0.80 1.58 2.46
<EPS-DILUTED> 0.79 1.56 2.43
<YIELD-ACTUAL> 4.44 4.42 4.40
<LOANS-NON> 701 637 634
<LOANS-PAST> 332 318 306
<LOANS-TROUBLED> 11 2 1
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 1,502 1,502 1,502
<CHARGE-OFFS> 188 391 589
<RECOVERIES> 28 56 85
<ALLOWANCE-CLOSE> 1,487 1,490 1,496
<ALLOWANCE-DOMESTIC> 1,043 1,027 1,068
<ALLOWANCE-FOREIGN> 5 3 5
<ALLOWANCE-UNALLOCATED> 439 460 423
</TABLE>
