<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) April 28, 1998
--------------------------------
FIRST UNION CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 1-10000 56-0898180
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
One First Union Center
Charlotte, North Carolina 28288-0013
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (704)374-6565
----------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. OTHER EVENTS.
As previously reported by First Union Corporation (the
"Corporation") in its Current Report on Form 8-K dated May 7, 1998, the
Corporation completed its pooling of interests acquisition of CoreStates
Financial Corp ("CoreStates") on April 28, 1998. As a result of such
acquisition, the Corporation's historical financial statements have been
restated.
Attached hereto as exhibits and incorporated herein by reference are
(i) the Corporation's 1997 Supplemental Annual Report (the "Supplemental Annual
Report"), which sets forth on a restated basis to reflect the CoreStates
acquisition, among other things, the audited supplemental consolidated balance
sheets of the Corporation as of December 31, 1997 and 1996, and the related
supplemental consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997, and the related notes thereto; (ii) the Corporation's Supplemental
Quarterly Financial Report for the Three Months Ended March 31, 1998 (the
"Supplemental Quarterly Report"), which sets forth on a restated basis to
reflect the oreStates acquisition, among other things, the unaudited
supplemental consolidated balance sheet of the Corporation as of March 31, 1998
and 1997, and the related supplemental consolidated statements of income,
changes in stockholders' equity and cash flows for the three months ended March
31, 1998 and March 31, 1997; (iii) computations, on a restated basis to reflect
the CoreStates acquisition, of the Corporation's (a) consolidated ratios of
earnings to fixed charges, and (b) consolidated ratios of earnings to fixed
charges and preferred stock dividends; (iv) the consent of KPMG Peat Marwick
LLP.; and (v) the Corporation's financial data schedules restated to reflect the
CoreStates acquisition.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
(2) The Agreement and Plan of Mergers, dated as
of November 18, 1997, between CoreStates and
the Corporation (without exhibits).
(Incorporated by reference to Exhibit (2) to
the Corporation's Current Report on Form 8-K
dated November 28, 1997.)
(12)(a) Computations of Consolidated Ratios of
Earnings to Fixed Charges.
(12)(b) Computations of Consolidated Ratios of
Earnings to Fixed Charges and Preferred
Stock Dividends.
(23)(a) Consent of KPMG Peat Marwick LLP
(27)(a) The Corporation's Financial Data
Schedules.
(27)(b) The Corporation's Financial Data
Schedule.
(27)(c) The Corporation's Financial Data
Schedules.
(99)(a) Supplemental Annual Report.
(99)(b) Supplemental Quarterly Report.
<PAGE>
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 26, 1998 By: /s/ James H. Hatch
-------------------
Name: James H. Hatch
Title: Senior Vice President and Corporate
Controller
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(2) The Agreement and Plan of Mergers, dated as
of November 18, 1997, between CoreStates and
the Corporation (without exhibits).
(Incorporated by reference to Exhibit (2) to
the Corporation's Current Report on Form 8-K
dated November 28, 1997.)
(12)(a) Computations of Consolidated Ratios of
Earnings to Fixed Charges.
(12)(b) Computations of Consolidated Ratios of
Earnings to Fixed Charges and Preferred
Stock Dividends.
(23)(a) Consent of KPMG Peat Marwick LLP.
(27)(a) The Corporation's Financial Data
Schedules.
(27)(b) The Corporation's Financial Data
Schedule.
(27)(c) The Corporation's Financial Data
Schedules.
(99)(a) Supplemental Annual Report.
(99)(b) Supplemental Quarterly Report.
<PAGE>
<TABLE>
<CAPTION>
Exhibit (12)(a)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------
Three
Months
Ended Years Ended December 31,
---------------------------------------------------------
Mar. 31,
(In millions) 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $1,207 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding capitalized
interest 740 2,526 2,224 1,821 1,110 835
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (A) $1,947 6,319 5,758 5,230 3,857 3,400
- ----------------------------------------------------------------------------------------------------------------------------
Interest, excluding interest on deposits $ 685 2,304 2,120 1,716 1,013 737
Distributions on guaranteed preferred
beneficial interests 29 116 -- -- -- --
One-third of rents 26 106 104 105 97 98
Capitalized interest -- -- 5 4 1 --
- ---------------------------------------------------------------------------------------------------------------------------
Fixed charges (B) $ 740 2,526 2,229 1,825 1,111 835
- ---------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, excluding interest
on deposits (A)/(B) 2.63 X 2.50 2.58 2.87 3.47 4.07
- ---------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $1,207 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding capitalized
interest 1,797 6,674 6,255 5,837 3,836 3,474
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (C) $3,004 10,467 9,789 9,246 6,583 6,039
- ---------------------------------------------------------------------------------------------------------------------------
Interest, including interest on deposits $1,742 6,452 6,151 5,732 3,739 3,376
Distributions on guaranteed preferred
beneficial interests 29 116 -- -- -- --
One-third of rents 26 106 104 105 97 98
Capitalized interest -- -- 5 4 1 --
- ---------------------------------------------------------------------------------------------------------------------------
Fixed charges (D) $1,797 6,674 6,260 5,841 3,837 3,474
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, including interest
on deposits (C)/(D) 1.67 X 1.57 1.56 1.58 1.72 1.74
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit (12)(b)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
- --------------------------------------------------------------------------------
Three
Months Years Ended December 31,
Ended ------------------------------------------------------------
Mar. 31,
(In millions) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 1,207 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding preferred
stock dividends and capitalized interest 740 2,526 2,224 1,821 1,110 835
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (A) $ 1,947 6,319 5,758 5,230 3,857 3,400
- -------------------------------------------------------------------------------------------------------------------------------
Interest, excluding interest on deposits $ 685 2,304 2,120 1,716 1,013 737
Distributions on guaranteed preferred
beneficial interests 29 116 -- -- -- --
One-third of rents 26 106 104 105 97 98
Preferred stock dividends (a) 14 41 133 67
Capitalized interest -- -- 5 4 1 --
- -------------------------------------------------------------------------------------------------------------------------------
Fixed charges (B) $ 740 2,526 2,243 1,866 1,244 902
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, excluding interest
on deposits (A)/(B) 2.63 X 2.50 2.57 2.80 3.10 3.77
- -------------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 1,207 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding preferred
stock dividends and capitalized
interest 1,797 6,674 6,255 5,837 3,836 3,474
- -------------------------------------------------------------------------------------------------------------------------------
Earnings (C) $ 3,004 10,467 9,789 9,246 6,583 6,039
- -------------------------------------------------------------------------------------------------------------------------------
Interest, including interest on deposits $ 1,742 6,452 6,151 5,732 3,739 3,376
Distributions on guaranteed preferred
beneficial interests 29 116 -- -- -- --
One-third of rents 26 106 104 105 97 98
Preferred stock dividends (a) 14 41 133 67
Capitalized interest -- -- 5 4 1 --
- -------------------------------------------------------------------------------------------------------------------------------
Fixed charges (D) $ 1,797 6,674 6,274 5,882 3,971 3,541
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, including interest
on deposits (C)/(D) 1.67 X 1.57 1.56 1.57 1.66 1.71
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Preferred stock dividends include a redemption premium of $41 million in
1994.
<PAGE>
Exhibit (23)(a)
CONSENT OF KPMG PEAT MARWICK LLP
- -------------------------------------------------------------------------------
Board of Directors
First Union Corporation
We consent to the incorporation by reference in the Registration
Statements of (i) First Union Corporation on:
<TABLE>
<CAPTION>
Registration Registration
Statement Statement
Form Number Form Number
---------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
S-3 33-50103 S-8 333-10211
S-8 33-51964 S-8 333-11613
S-8 33-54148 S-8 333-14469
S-8 33-54274 S-3 333-15743
S-8 33-54739 S-3 333-17599
S-3 33-56927 S-4 333-19039-01
S-8 33-60835 S-4 333-20611
S-8 33-60913 S-3 333-34151
S-8 33-62307 S-3 333-35363
S-8 33-62399 S-8 333-36839
S-8 33-63387 S-8 333-37709
S-8 33-65501 S-8 333-44015
S-8 333-2551 S-8 333-50589
S-8 333-2561 S-3 333-50999
S-8 333-10179
</TABLE>
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union
Capital II on Form S-3 (No. 333-15743-02);(iv) First Union Capital III on Form
S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No.
333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No.
333-20611-01) of First Union Corporation of our reports dated January 21, 1998,
relating to the consolidated balance sheets of First Union Corporation and
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997, which report appears
in the 1997 Annual Report to Stockholders which is incorporated by reference in
First Union Corporation's 1997 Form 10-K, and dated May 15, 1998, relating to
the supplemental consolidated balance sheets of First Union Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related supplemental
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the 1997 Supplemental Annual Report to Stockholders
which is included in First Union Corporation's Form 8-K dated May 26, 1998.
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
May 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 10,275 10,538 10,573
<INT-BEARING-DEPOSITS> 3,832 2,762 1,991
<FED-FUNDS-SOLD> 7,781 8,312 5,333
<TRADING-ASSETS> 5,952 4,602 2,507
<INVESTMENTS-HELD-FOR-SALE> 23,524 19,199 23,100
<INVESTMENTS-CARRYING> 3,526 4,190 6,200
<INVESTMENTS-MARKET> 3,670 4,328 6,396
<LOANS> 135,323 137,313 129,859
<ALLOWANCE> 1,847 2,212 2,308
<TOTAL-ASSETS> 205,735 197,341 188,855
<DEPOSITS> 137,077 136,429 134,112
<SHORT-TERM> 31,681 27,620 25,081
<LIABILITIES-OTHER> 6,725 5,567 5,127
<LONG-TERM> 11,752 10,815 9,586
0 0 0
0 0 183
<COMMON> 3,203 3,295 3,270
<OTHER-SE> 12,066 11,333 10,329
<TOTAL-LIABILITIES-AND-EQUITY> 205,735 197,341 188,855
<INTEREST-LOAN> 11,787 11,181 10,799
<INTEREST-INVEST> 1,658 1,760 1,747
<INTEREST-OTHER> 581 507 329
<INTEREST-TOTAL> 14,362 13,758 13,028
<INTEREST-DEPOSIT> 4,148 4,031 4,016
<INTEREST-EXPENSE> 6,452 6,151 5,732
<INTEREST-INCOME-NET> 7,910 7,607 7,296
<LOAN-LOSSES> 1,103 678 403
<SECURITIES-GAINS> 55 100 82
<EXPENSE-OTHER> 7,336 6,930 6,542
<INCOME-PRETAX> 3,793 3,534 3,409
<INCOME-PRE-EXTRAORDINARY> 3,793 3,534 3,409
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,709 2,273 2,196
<EPS-PRIMARY> 2.84 2.33 2.21
<EPS-DILUTED> 2.80 2.30 2.17
<YIELD-ACTUAL> 4.59 4.55 4.76
<LOANS-NON> 876 905 905
<LOANS-PAST> 326 474 445
<LOANS-TROUBLED> 2 14 11
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 2,212 2,308 2,259
<CHARGE-OFFS> 1,074 1,076 766
<RECOVERIES> 202 252 219
<ALLOWANCE-CLOSE> 1,847 2,212 2,308
<ALLOWANCE-DOMESTIC> 1,171 1,741 1,845
<ALLOWANCE-FOREIGN> 49 39 60
<ALLOWANCE-UNALLOCATED> 627 432 403
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,528
<INT-BEARING-DEPOSITS> 2,646
<FED-FUNDS-SOLD> 11,656
<TRADING-ASSETS> 7,008
<INVESTMENTS-HELD-FOR-SALE> 34,388
<INVESTMENTS-CARRYING> 3,172
<INVESTMENTS-MARKET> 3,315
<LOANS> 136,594
<ALLOWANCE> (1,862)
<TOTAL-ASSETS> 220,066
<DEPOSITS> 138,134
<SHORT-TERM> 43,524
<LIABILITIES-OTHER> 7,911
<LONG-TERM> 12,010
0
0
<COMMON> 3,243
<OTHER-SE> 12,563
<TOTAL-LIABILITIES-AND-EQUITY> 220,066
<INTEREST-LOAN> 2,787
<INTEREST-INVEST> 555
<INTEREST-OTHER> 169
<INTEREST-TOTAL> 3,602
<INTEREST-DEPOSIT> 1,057
<INTEREST-EXPENSE> 1,742
<INTEREST-INCOME-NET> 1,860
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 1,895
<INCOME-PRETAX> 1,207
<INCOME-PRE-EXTRAORDINARY> 1,207
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 790
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
<YIELD-ACTUAL> 4.18
<LOANS-NON> 888
<LOANS-PAST> 328
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,847
<CHARGE-OFFS> 180
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 1,862
<ALLOWANCE-DOMESTIC> 1,167
<ALLOWANCE-FOREIGN> 50
<ALLOWANCE-UNALLOCATED> 645
</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> 9,205 10,092 9,827
<INT-BEARING-DEPOSITS> 2,590 3,259 3,248
<FED-FUNDS-SOLD> 6,535 7,784 7,037
<TRADING-ASSETS> 4,395 5,720 8,152
<INVESTMENTS-HELD-FOR-SALE> 19,059 20,931 21,135
<INVESTMENTS-CARRYING> 4,024 3,891 3,681
<INVESTMENTS-MARKET> 4,138 4,026 3,829
<LOANS> 137,775 140,234 139,491
<ALLOWANCE> (2,191) (2,181) (2,175)
<TOTAL-ASSETS> 193,507 201,642 202,766
<DEPOSITS> 133,369 135,202 133,144
<SHORT-TERM> 27,349 32,892 33,784
<LIABILITIES-OTHER> 5,092 5,645 6,445
<LONG-TERM> 10,767 10,559 11,209
0 0 0
0 0 0
<COMMON> 3,214 3,183 3,197
<OTHER-SE> 10,629 10,911 11,626
<TOTAL-LIABILITIES-AND-EQUITY> 193,507 201,642 202,766
<INTEREST-LOAN> 2,883 5,849 8,841
<INTEREST-INVEST> 378 815 1,237
<INTEREST-OTHER> 123 265 420
<INTEREST-TOTAL> 3,443 7,064 10,727
<INTEREST-DEPOSIT> 1,008 2,042 3,089
<INTEREST-EXPENSE> 1,501 3,114 4,771
<INTEREST-INCOME-NET> 1,942 3,950 5,956
<LOAN-LOSSES> 205 433 658
<SECURITIES-GAINS> 9 20 37
<EXPENSE-OTHER> 1,688 3,459 5,170
<INCOME-PRETAX> 1,083 2,133 3,285
<INCOME-PRE-EXTRAORDINARY> 1,083 2,133 3,285
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 703 1,385 2,133
<EPS-PRIMARY> 0.72 1.44 2.23
<EPS-DILUTED> 0.72 1.42 2.20
<YIELD-ACTUAL> 4.70 4.68 4.65
<LOANS-NON> 935 901 880
<LOANS-PAST> 431 428 416
<LOANS-TROUBLED> 11 2 1
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 2,212 2,212 2,212
<CHARGE-OFFS> 259 548 825
<RECOVERIES> 50 101 147
<ALLOWANCE-CLOSE> 2,191 2,181 2,175
<ALLOWANCE-DOMESTIC> 1,610 1,581 1,610
<ALLOWANCE-FOREIGN> 49 47 49
<ALLOWANCE-UNALLOCATED> 532 553 516
</TABLE>
<PAGE>
Exhibit (99)(a)
FIRST UNION CORPORATION
AND SUBSIDIARIES
1997 SUPPLEMENTAL ANNUAL REPORT
Restated to reflect the pooling of interests accounting
acquisition of CoreStates Financial Corp on April 28,
1998
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
1997 SUPPLEMENTAL ANNUAL REPORT
DECEMBER 31, 1997
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
- ----------------------------------------------------------------------------------------------
<S> <C>
Financial Highlights 1
Management's Analysis of Operations 2
Consolidated Summaries of Income, Per Common Share and Balance Sheet Data T-1
Noninterest Income T-2
Noninterest Expense T-2
Business Segments T-3
Internal Capital Growth and Dividend Payout Ratios T-5
Selected Quarterly Data T-6
Selected Five-Year Data T-7
Securities Available for Sale T-8
Investment Securities T-10
Loans T-11
Certain Commercial Loan Maturities and Sensitivity to Changes in Interest Rates T-12
Allowance for Loan Losses and Nonperforming Assets T-13
Allocation of the Allowance for Loan Losses T-14
Intangible Assets T-14
Foreclosed Properties T-15
Deposits T-16
Time Deposits in Amounts of $100,000 or More T-17
Capital Ratios T-18
Off-Balance Sheet Derivative Financial Instruments T-19
Off-Balance Sheet Derivatives - Expected Maturities T-27
Off-Balance Sheet Derivatives Activity T-28
Interest Differential T-28
Net Interest Income Summaries T-29
Management's Statement of Responsibility C-1
Independent Auditors' Opinion C-2
Supplemental Consolidated Balance Sheets C-3
Supplemental Consolidated Statements of Income C-4
Supplemental Consolidated Statements of Changes in Stockholders' Equity C-5
Supplemental Consolidated Statements of Cash Flows C-7
Notes to Supplemental Consolidated Financial Statements C-8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------
Years Ended
December 31,
------------------------- Percent
Increase
(Dollars in millions, except per share data) 1997 1996 (Decrease)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS
Net income $ 2,709 2,273 19 %
Dividends on preferred stock - 9 -
- --------------------------------------------------------------------------------
Net income applicable to common stockholders after
merger-related and restructuring charges and SAIF
special assessment 2,709 2,264 20
After-tax merger-related and restructuring charges and
SAIF special assessment 204 368 (45)
- --------------------------------------------------------------------------------
Net income applicable to common stockholders before
merger-related and restructuring charges and SAIF
special assessment $ 2,913 2,632 11 %
- -------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings per share
Net income after merger-related and restructuring
charges and SAIF special assessment $ 2.84 2.33 22 %
Net income before merger-related and restructuring
charges and SAIF special assessment 3.05 2.70 13
Diluted earnings per share
Net income after merger-related and restructuring
charges and SAIF special assessment 2.80 2.30 22
Net income before merger-related and restructuring
charges and SAIF special assessment 3.01 2.68 12
Cash dividends 1.22 1.10 11
Book value 15.95 14.85 7
Period-end price $ 51.25 37.00 39
Average common shares (In thousands)
Basic 955,241 973,712 (2)
Diluted 966,792 982,755 (2)
Actual common shares (In thousands) 960,984 988,594 (3)
Dividend payout ratios (based on operating earnings) 39.18 % 39.18 %
- -------------------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges and
SAIF special assessment
Return on average assets 1.49% 1.39 -
Return on average common equity 20.24 18.76 -
Overhead efficiency ratio 57 56 -
Net charge-offs as a percentage of -
Average loans, net 0.65 0.64 -
Average loans, net, excluding Bankcard 0.31 0.35 -
Nonperforming assets to loans, net and -
foreclosed properties 0.75 0.78 -
Net interest margin 4.59 % 4.55 -
- -------------------------------------------------------------------------------------------
CASH EARNINGS (EXCLUDING OTHER
INTANGIBLE AMORTIZATION)
Before merger-related and restructuring charges and
SAIF special assessment
Net income applicable to common stockholders $ 3,156 2,847 11 %
Net income per common share - basic $ 3.30 2.92 13
Return on average tangible assets 1.64 % 1.53 -
Return on average tangible common equity 27.97 25.44 -
Overhead efficiency ratio 54 % 54 %
- -------------------------------------------------------------------------------------------
YEAR-END BALANCE SHEET ITEMS
Securities available for sale $ 23,524 19,199 23
Investment securities 3,526 4,190 (16)
Loans, net of unearned income 131,687 134,647 (2)
Earning assets 176,302 173,712 1
Total assets 205,735 197,341 4
Noninterest-bearing deposits 31,005 29,713 4
Interest-bearing deposits 106,072 106,716 (1)
Long-term debt 11,752 10,815 9
Guaranteed preferred beneficial interests 1,735 789 120
Stockholders' equity $ 15,269 14,628 4
- -------------------------------------------------------------------------------------------
</TABLE>
1
<PAGE>
The following discussion and other portions of this Supplemental Annual
Report contain various forward-looking statements. Please refer to our 1997
Annual Report on Form 10-K for a discussion of various factors that could cause
our actual results to differ materially from those expressed in such
forward-looking statements.
The following review is a discussion of the performance and financial
condition of First Union Corporation and CoreStates Financial Corp on a combined
basis. All First Union historical financial data have been restated for the
pooling of interests acquisition of CoreStates, which was consummated on April
28, 1998, except as otherwise noted.
EARNINGS HIGHLIGHTS
First Union's basic operating earnings in 1997 (which represents earnings
before special charges) were $2.9 billion, or $3.05 per common share compared
with $2.6 billion or $2.70 per share in 1996. Diluted operating earnings per
common share were $3.01 in 1997 and $2.68 in 1996. Basic earnings per common
share are calculated by dividing net income applicable to common stockholders by
average common shares outstanding. Diluted earnings per common share are
calculated by dividing net income applicable to common stockholders by the sum
of average common shares outstanding and common stock equivalents related to
employee stock options including restricted stock awards.
All per common share data have been restated for all periods to reflect a
two-for-one stock split, which was paid on July 31, 1997.
Special charges excluded from operating earnings are after-tax
merger-related and restructuring charges of $204 million, or 21 cents per share,
in 1997 primarily related to the November 28, 1997, pooling of interests
acquisition of Richmond, Virginia - based Signet Banking Corporation, and $272
million, or 28 cents per share, in 1996 primarily related to 1996 acquisitions.
Operating earnings in 1996 also exclude a special charge related to an after-tax
Savings Association Insurance Fund (SAIF) special assessment of $96 million, or
10 cents per common share. After the special charges, basic earnings in 1997
were $2.7 billion or $2.84 per common share compared with $2.3 billion or $2.33
per common share in 1996. Diluted earnings per common share were $2.80 in 1997
and $2.30 in 1996.
In the fourth quarter of 1997, First Union's net income applicable to
common stockholders before restructuring charges was $743 million, or 78 cents
on a basic per common share basis, and after restructuring charges, $576
million, or 61 cents per common share. Related diluted per common share amounts
were 77 cents and 60 cents, respectively. This compares with earnings of $687
million, or 71 cents on a basic per common share basis and 70 cents on a diluted
basis in the fourth quarter of 1996.
Growth in 1997 operating earnings was led by a 24 percent increase in
noninterest income (excluding securities transactions), including, on an
unrestated basis, a 58 percent increase in Capital Markets fee income and a 45
percent increase in Capital Management fee income.
Our operating overhead efficiency ratio (excluding special charges and
capital securities expense) was 57 percent in 1997 and 56 percent in 1996.
In addition, nonperforming assets declined to $991 million, or 0.75
percent of net loans and foreclosed properties, from $1.05 billion, or 0.78
percent, in 1996. Net charge-offs as a percentage of average net loans were 0.65
percent in 1997 compared with 0.64 percent in 1996.
Outlook
In 1997, First Union also took several actions to better position itself
for 1998.
o In the fourth quarter of 1997, the unsecured consumer portfolio was
significantly restructured to help position the company for higher credit
quality in 1998. This restructuring resulted in the sale of $3 billion of
credit card receivables and other unsecured loans. The
2
<PAGE>
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.
o The investment portfolio was repositioned in the fall of 1997 to maximize
income in the face of declining interest rates and a flattening yield curve.
o In addition, we increased the annual dividend 11 percent to $1.22 per common
share, representing the 20th consecutive year of dividend increases. In
December 1997, we again announced a dividend increase of 16 percent to 37
cents on a quarterly basis, or $1.48 on an annualized basis.
o Also in 1997, we announced the pending acquisition of CoreStates Financial
Corp as well as the acquisitions of Signet, Wheat First and Covenant, all of
which are discussed below.
First Union continues to diversify its business mix in order to meet
client demands and to decrease the corporation's reliance on interest income,
which can be affected by volatility in economic conditions and movements in
interest rates. First Union's goal is to increase noninterest income in
proportion to total revenue to 40 to 45 percent by the year 2000. We have made
significant progress toward that goal with noninterest income to total revenue
of 35 percent in 1997 compared with 31 percent in 1996. To help us meet this
goal, we continue to invest in high-growth business lines such as the investment
banking, brokerage services and asset management businesses in our Capital
Markets and Capital Management Groups. These nontraditional businesses
complement our loan and deposit activities. We also are applying nontraditional
approaches to our more mature lines of business, primarily by streamlining
processes, by adding electronic and remote banking alternatives and by
implementing our Future Bank retail branch model. The goals are to improve
customer service, increase sales and generate efficiencies. We expect strong
sales momentum in light of demographic trends, a robust economy and our market
expansion.
Our primary management attention is focused on leveraging our existing
business base as we invest in new technology and fee income-generating lines of
business. The significant investments we have made in acquisitions, in
technology and in expanded products and services have positioned us to better
serve our 16 million customers in a diverse geographic marketplace and to reduce
the impact of adverse changes in the business cycle.
In 1997 First Union leveraged these internal investments through three
significant mergers that will greatly enhance our key businesses and expand our
share of markets that can benefit from our product mix.
Merger and Consolidation Activity
The acquisition of CoreStates, of Philadelphia, Pennsylvania, will create
new opportunities to leverage our growing Capital Management and Capital Markets
businesses in states that generate 36 percent of the nation's gross state
product and in attractive consumer markets in which per capita income is 12
percent above the national average.
Approximately 331 million shares of First Union's common stock were
issued in this pooling of interests accounting transaction. The merger agreement
provided for the issuance of 1.62 shares of First Union common stock for each
share of CoreStates common stock. Using First Union's closing price of $52.4375
on November 17, 1997, the last business day before public announcement of the
merger, the transaction was valued at approximately $17 billion. At December 31,
1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits
of $34 billion, stockholders' equity of $3 billion and net income of $813
million.
First Union currently estimates after-tax, merger-related and
restructuring expenses of $795 million in 1998 in connection with the CoreStates
merger. In addition, six directors of CoreStates are expected to be nominated
for election or appointed to the First Union board of directors. More
information related to CoreStates is available in our Current Reports on Form
8-K, which we filed with the Securities and Exchange Commission (SEC) dated
November 18,
3
<PAGE>
1997, November 28, 1997, and December 2, 1997, and in our registration statement
on Form S-4, filed with the SEC on January 9, 1998.
The Signet acquisition was consummated on November 28, 1997. Signet, with
assets of $11 billion, net loans of $7 billion, deposits of $8 billion,
stockholders' equity of $990 million and net income of $73 million for the nine
months ended September 30, 1997, moved First Union into the leading deposit
share position in Virginia. First Union issued 1.10 shares of its common stock
for each share of Signet common stock, or 67 million shares, to consummate the
merger. The Signet acquisition was accounted for as a pooling of interests.
First Union's historical financial statements for periods beginning on and after
January 1, 1995, and ended prior to November 28, 1997, were restated to reflect
the Signet acquisition.
In addition, the acquisition of Covenant Bancorp, Inc., based in
Haddonfield, New Jersey, was consummated on January 15, 1998. Covenant had
assets of $415 million, net loans of $254 million, deposits of $294 million and
stockholders' equity of $31 million at December 31, 1997. First Union issued 1.6
million shares in this purchase accounting transaction, substantially all of
which we repurchased in 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
therefore, such historical results will not be restated as a result of the
acquisition. First Union issued 10.3 million shares of its common stock in
exchange for Wheat First shares. Wheat First had assets of $1 billion and
stockholders' equity of $171 million at December 31, 1997.
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 that First Union 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 37 million of
the outstanding shares of First Union common stock at a cost of $2 billion,
which equals the number of such shares currently expected to be issued in
the merger. 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.
We continue to evaluate acquisition opportunities that will provide
access to customers and markets that we believe complement our long-term goals.
Acquisition opportunities are evaluated as a part of our ongoing capital
allocation decision-making process. Decisions to pursue acquisitions will be
measured in conjunction with financial performance guidelines adopted in 1997
and other financial objectives. Acquisition discussions and in some cases
negotiations may take place from time to time, and future acquisitions involving
cash, debt or equity securities may be expected.
In addition, First Union is taking advantage of the opportunity afforded
by the Riegle-Neal Interstate Banking and Branching Efficiency Act to operate
national banks across state lines by consolidating our banks. In 1997 all banks
in the southern region of First Union and in Connecticut were consolidated into
First Union National Bank, based in Charlotte, North Carolina. With the
exception of our Delaware bank, the final consolidation in the rest of the
northern region occurred in February 1998.
4
<PAGE>
The Accounting and Regulatory Matters section provides more information
about Riegle-Neal and provides information about legislative, accounting and
regulatory matters that have recently been adopted or proposed.
BUSINESS SEGMENTS
Business Focus
First Union's operations are divided into four primary business segments
encompassing more than 40 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank and Capital
Markets. Additional information can be found in Table 4. Information related to
CoreStates is separately discussed below and in Table 4.
We have developed an internal performance reporting model to measure the
results of these four business segments and the Treasury/Nonbank segment.
Because of the complexity of the corporation and the interrelationships of these
business segments, we have used various estimates and allocation methodologies
in the preparation of the Business Segments financial information. Restatements
of various periods may occasionally occur because these estimates and
methodologies could be refined over time.
Our management structure combines this internal performance reporting
with a matrix management approach, which integrates product management with our
various distribution channels. Additionally First Union's management structure
and internal reporting methodologies will produce business segment results that
are not necessarily comparable to presentations by other bank holding companies
or stand-alone entities in similar industry segments.
Our internal performance reporting model was implemented in 1997. Prior
periods have not been restated because of practical limitations. The model
isolates the net income contribution and measures the return on capital for each
business segment by allocating equity, funding credit and 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
5
<PAGE>
exposure to interest rate risk. Because most market risk is held in the
Treasury/Nonbank segment, the profitability of this segment is expected to be
more volatile than for the other business segments.
General corporate expenses, with the exception of goodwill amortization,
are allocated to each segment in a pro rata manner based on the direct and
attributable indirect expenses for each segment. Residual corporate expense
remaining in the Treasury/ Nonbank segment reflects the costs of portfolio
management activities, goodwill amortization and merger-related restructuring
charges. In general this approach should not result in significant volatility to
business segment returns.
Consumer Bank
The Consumer Bank, our primary deposit-taking entity, provides an
attractive source of funding for our secured and unsecured consumer loans, first
and second residential mortgages, installment loans, credit cards, auto loans
and leases, and student loans.
The Consumer Bank combines traditional deposit and lending products with
innovative financial solutions all supported by state-of-the-art technology --
including smart cards, electronic banking and Internet access -- to provide
quality customer service.
Our new Future Bank retail branch model, rolled out initially in Atlanta,
Georgia, will be implemented in 1998 throughout our full-service branch network
in 12 states and Washington, D.C. The Future Bank model increases service
options and access for our customers, improves sales capacity for employees and
ultimately reduces costs. Through our First Union Direct Bank, N.A., centralized
customer information centers manage the majority of the servicing and
administrative tasks for the branches, freeing the Future Bank financial
consultants to focus on building relationships and tailoring financial solutions
to meet customer needs. First Union Direct also provides direct telephone sales
and servicing for all our consumer lending products.
First Union's mortgage origination and home equity offices across the
nation also are included in the Consumer Bank through our operating subsidiaries
First Union Mortgage Corporation (FUMC) and First Union Home Equity Bank, N.A.
(FUHEB). Our equity lending business, including FUHEB and branch-based lending,
is the second largest in the nation, while FUMC was the nation's 12th largest
mortgage servicer, with a mortgage servicing portfolio of $61 billion at
December 31, 1997. In addition, FUHEB is a major participant in both the "A"
credit quality market as well as in the sub-prime market. FUHEB securitized and
sold $914 million in sub-prime originations through our Capital Markets Group in
1997.
Consumer loans in 1997 exclude $5 billion in securitized adjustable rate
mortgages (ARMs), home equity loans, student loans, indirect auto loans and
community reinvestment loans, as well as $3 billion in credit card receivables
and Signet's loan-by-check portfolio, which were transferred to assets held for
sale. Loan originations in the consumer portfolio were led by mortgage and home
equity loans.
The managed credit card portfolio was $7 billion at December 31, 1997.
This amount includes $2 billion of securitized credit cards and $2 billion in
credit card receivables that were transferred to assets held for sale.
Capital Management
The Capital Management Group unites our banking and investment offerings
for retail and institutional customers, providing products and services that
primarily produce fee income. At December 31, 1997, this group had $80 billion
in assets under management, which encompassed $50 billion in total trust and
institutional assets, including $12 billion in mutual funds held in trust.
Including the mutual funds held in trust, the First Union-advised mutual funds
amounted to $42 billion at December 31, 1997. An additional $10 billion in
mutual fund assets were added in 1998 with Wheat First, which expanded our
marketing power with a
6
<PAGE>
combined sales force of more than 4,300 registered representatives in 20 states
and more than 2,000 brokerage locations.
The trust unit anticipates continued growth with the addition of new
products and services. On the personal trust side, a Family Trust program was
introduced in September 1997 to assist trust and investment management customers
in providing elder care. Corporate Trust has added structured finance trust
services and an investment holding company subsidiary, Delaware Financial
Services Corporation.
Capital Management results in 1997 reflect the December 1996 purchase
accounting acquisition of Keystone Investments, Inc., the Boston, Mass.-based
investment adviser to the Keystone family of mutual funds, now combined with the
Evergreen Funds. Evergreen manages $42 billion in assets for more than 1 million
shareholders, and offers over 70 mutual funds. Thirty-five Evergreen portfolios
were rated "four" or "five" stars by the Morningstar ratings service at December
31, 1997. We are also introducing a new family of First Union-advised mutual
funds designed for the institutional and corporate marketplace.
Our CAP Accounts are an asset management product that enables customers
to manage their securities trading and banking activities in a single,
consolidated account. Income related to the CAP Account is therefore reflected
in several of our lines of business, including mutual funds and retail brokerage
services. The CAP Account item in Table 4 reflects direct CAP Account fee income
only. At year-end 1997, CAP Account assets were $26 billion and there were
290,000 accounts. CAP customers generally hold balances split evenly between
deposits and securities. Trading activity by customers through their CAP
Accounts also increased in 1997. We also have introduced variations of the CAP
Account designed to appeal to a broader mass of investors and to attract
first-time investors, including the CAP1 Account with a lower minimum balance
and a CAP for Business Account targeted primarily toward small businesses,
professional associations and nonprofit groups.
The Private Client Group (formerly Private Banking) provides high net
worth clients with a single point of access to First Union's investments,
mortgages, personal loans, trusts, financial planning, brokerage services and
other services. At December 31, 1997, the Private Client Group managed $2
billion of average net loans and $2 billion of average deposits, in addition to
a variety of fee-generating capital markets and investment products.
Retail brokerage services are the primary distribution center for
investment and insurance products. This segment does not reflect sales of
credit, life or other insurance products sold in other areas of the corporation.
Retail brokerage revenues were $282 million. Mutual fund sales through the
brokerage unit reached $3 billion and annuity sales exceeded $1 billion.
Brokerage expenses in 1997 largely reflected significant investment in
reengineering our processes to implement a new operating system designed to
support future growth and to provide enhanced customer service features,
including cost basis investment reporting and dividend reinvestment. New
brokerage products introduced in 1997 include a fee-based account that offers
access to Schwab OneSource mutual funds. The expanded operating system positions
retail brokerage to pursue an expanded Internet sales distribution channel in
1998.
We anticipate increased growth in all of the Capital Management business
lines as we introduce new products and services throughout our multistate
network and with the addition of new customers from our acquisitions.
Commercial Bank
Our Commercial Bank's products and services go beyond traditional
commercial banking to areas such as asset-based financing, risk management
products, property and casualty insurance, leasing, treasury services,
international services, pension plans and 401(k)s.
As a result, the Commercial Bank is increasing its proportion of fee
income along with the rest of the corporation as customers demand more
innovative products and transaction efficiency. The Commercial Bank provides a
comprehensive array of financial products to
7
<PAGE>
corporate, middle-market, commercial and small- business customers. Specialized
relationship teams throughout our region focus on sales and service. In
addition, we have an integrated approach that leverages the capabilities of
First Union's Capital Markets Group for the more complex financing solutions.
The increase in Commercial Bank fee income was led by its Cash Management unit.
Service charge volume has increased as a result of higher sales volume and
improved collection policies and procedures.
In addition, we have streamlined the processes in the Commercial Bank,
which has increased efficiency. Revenue per relationship manager increased in
1997 to $1 million.
Cash Management offers corporate customers a comprehensive selection of
treasury management services, including a full range of electronic commerce,
collection, disbursement and information reporting services. These products are
designed and priced based on the diverse needs of companies of various sizes and
industries.
Combined with CoreStates, First Union is the nation's third largest cash
management bank based on revenue, ranking in the Top 10 for all core cash
management products, and leading the nation in corporate check clearing. The
combination adds significantly to First Union's commercial cash management
offerings, including Internet-based electronic commerce services, a nationwide
lockbox network and expanded international cash management capabilities.
Cash management products stimulate the gathering of commercial deposit
balances. Deposit balances and their economic profitability are reflected in
both the Commercial Bank and Capital Markets segments. Cash Management in Table
4 reflects only the direct service charge income from cash management products.
Small Business Banking provides a comprehensive selection of proprietary
and joint venture financial products including insurance, investment services
and retirement planning services as well as loans and commercial deposit
services to entrepreneurs, professionals and companies with annual sales ranging
up to $10 million. Small Business Banking loan volume in 1997 was $1 billion and
average net loans were $2 billion in 1997. Small Business Banking reflects only
lending activities.
Capital Markets
In 1997 our Capital Markets Group produced strong momentum with record
transaction volume and earnings, capped by the announcement of our merger with
Wheat First. With this transaction, we are able to provide a crucial product to
First Union's Capital Markets clients. We also have enhanced the competitive
products and service offerings available to Wheat First's more than 950,000
brokerage customers.
Our institutional business has a sales force of more than 100 traders
covering 1,000 institutional clients, and we are a market maker in more than 300
NASDAQ stocks. We have 30 equity research analysts covering more than 300
companies with a focus on key specialized industries: communications and
technology; financial services; consumer; furnishings, textiles and building;
health care; and industrial.
The announcement of the merger with Wheat First followed the May 1997
Federal Reserve Board approval of public equity underwriting through First
Union's Section 20 subsidiary, First Union Capital Markets Corp. (FUCMC),
renamed Wheat First Securities, Inc. Wheat First moved First Union far ahead in
its business plan to make this service available to customers.
With the addition of equity underwriting, sales and trading capabilities,
our Capital Markets Group provides corporate and institutional clients one-stop
shopping for a full range of investment banking products and services. These
products and services are fully integrated with our wholesale delivery strategy,
and they are a natural extension of our Commercial Bank. We have the capability
to help a company grow from its first checking account to its initial public
offering. In the Capital Markets Group, the Commercial Bank and the bank and
8
<PAGE>
nonbank brokerage units, the strategy is the same: the focus is on providing
customized solutions that are in our clients' best interests.
Our primary focus has been to bring a full line of business products to
middle-market customers who have been underserved by other capital markets
providers. We believe this strategy, coupled with new powers, provides a
rewarding platform for long-term growth.
We have relationships with 42 percent of the middle-market and corporate
businesses in our regional marketplace. Our relationship coverage begins in our
East Coast banking markets and extends nation-wide through industry-specific
specialization in such areas as health care; financial institutions; real
estate; media and communications; utilities; energy; forest products; and
specialty finance. In addition our International unit continues to develop
strong correspondent banking relationships overseas. The primary focus of the
International unit is to meet the trade finance and foreign exchange needs of
our corporate customers and to provide commercial banking and capital markets
products to the United States subsidiaries of foreign corporations. This unit is
expected to expand significantly as a result of consummation of the merger with
CoreStates, which has been involved in the international arena for a century.
Capital Markets has five primary units: Investment Banking; Real Estate
Finance; Risk Management; Commercial Leasing and Rail; and Traditional Banking.
The Investment Banking unit provides loan syndications, high-yield debt
and equity underwriting, private finance, merger and acquisition advisory
services, merchant banking and asset securitizations.
Loan syndications are significant contributors to earnings in the
Investment Banking unit. The Loan Syndications unit, which spreads the risk of
large credit facilities among several lenders, served as agent on 63 leveraged
transactions amounting to $12 billion in 1997.
The High-Yield unit, which underwrites below-investment grade debt and
preferred stock securities, completed its first sole-managed high yield
transaction in 1997 -- a $100 million offering for a communications company.
This unit completed 18 high-yield bond offerings amounting to $3 billion in
1997.
The Private Finance unit structures and places senior and subordinated
debt, preferred and common stock, and other hybrid securities with institutional
investors. This unit closed 17 transactions in 1997 with transaction volume of
$309 million.
The Mergers and Acquisition Advisory unit offers full advisory services
to companies engaged in corporate sales and divestitures, acquisitions, fairness
opinions and takeover defenses. In 1997 the M&A unit was involved in 21 closed
or announced transactions with an aggregate value of nearly $3 billion.
The Merchant Banking unit, or Capital Partners, was established in 1987
to make equity and subordinated debt investments in growing companies. This unit
currently has committed and funded investments amounting to $625 million in 65
companies.
The Asset Securitization unit undertakes the pooling and underwriting of
corporate receivables and other financial assets, which are then sold in the
form of securities to investors. In 1997 this unit securitized and sold to
investors $6 billion of assets and securities.
The Real Estate Finance unit expanded into a variety of commercial real
estate finance activities in 1997. In addition to its commercial conduit
operations, the Real Estate Finance unit offers credit tenant lease financings,
real estate investment trust (REIT) lending, affordable housing debt and equity
financings and off-balance sheet lending products for corporate real estate
clients. In 1997 the Commercial Real Estate Finance unit expanded to the West,
Midwest and Southwest by opening offices in Irvine, California, Chicago and
Houston. The unit, which provides loan origination capabilities for mortgage
loans secured by multi-family and commercial properties, originated $2 billion
in loans in 1997. In November 1997 FUCMC and Lehman Bros. completed a $2 billion
offering of securities backed by commercial mortgage loans, representing the
industry's largest commercial mortgage loan securitization. In December 1997 the
Mortgage Finance unit priced a $407 million offering of
9
<PAGE>
securities backed by sub-prime home equity loans -- representing First Union's
largest lead-managed home equity securitization. This transaction, coupled with
two other securitizations earlier in the year, underscores the synergies within
FUHEB in leveraging our capabilities in the home equity securities market. The
Mortgage Finance unit issued new securities amounting to $1 billion in 1997.
Our Risk Management unit creates customized solutions to risk management
needs that allow customers to manage a wide variety of market risks, including
interest rate risk, foreign exchange risk and commodity risk. The derivatives
desk makes markets and trades in a large variety of derivative products and spot
and forward exchange markets. The interest rate derivatives group completed more
than 2,100 transactions with a notional principal value of $58 billion in 1997.
The unit contributed $103 million in gross revenues in 1997. The unit expects to
introduce equity derivatives for customers in the first quarter of 1998.
Our Commercial Leasing and Rail unit includes First Union Rail which,
with three major acquisitions in 1996, became the second largest general railcar
leasing company in the United States with a fleet of more than 60,000 rail cars.
First Union Rail also has developed innovative fleet management and logistics
services, using the latest computer technologies to manage programs for
customers and to provide insurance coverage and car accounting systems.
The Traditional Banking unit includes Specialized Industries, Diversified
Finance and International Finance. Specialized Industries delivers
custom-tailored corporate finance advice to customers in six industry segments.
Relationship managers from Diversified Finance, which includes leveraged finance
and asset-based lending, also call on middle-market customers nationally. The
relationship banking areas are the primary source for many of our Investment
Banking products. The unit had $9 billion in average net loans in 1997.
First Union will continue to expand its relationship banking efforts,
including increased industry segment coverage and an expanded international
presence as a result of the combination 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.
CoreStates
Discreet CoreStates segment data which would conform to First Union's
segment reporting methodologies and assumptions are not available, and
accordingly, the amounts related to CoreStates in the Business Segments table
represent the consolidated historical results of CoreStates. Additionally, the
information presented above does not include CoreStates financial data.
CoreStates was composed of five primary businesses: Global and
Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset
Management; and Third Party Processing. Each segment was comprised of
well-defined business lines with market or
10
<PAGE>
product specific missions. These segments may or may not conform to those
defined by First Union.
Global and Specialized Banking includes specialized banking, secured
lending, real estate, large corporate banking, Congress Financial Corporation,
international banking, investment banking and cash management. Regional Banking
consists of retail banking and delivery, small business lending, commercial
business lending and middle market lending. Retail Credit Services include
credit card, dealer services, educational lending, mortgage services, merchant
credit card processing and consumer and commercial card processing. Trust and
Asset Management consists of personal trust (including private banking),
institutional trust, retirement plan services and investment management. Third
Party Processing includes QuestPoint specialty transaction processing, earnings
from CoreStates investment in Electronic Payment Services, Inc., and earnings
from CoreStates Bank's Financial Institutions Division.
Results of Operations
INCOME STATEMENT REVIEW
Net Interest Income
Tax-equivalent net interest income increased 4 percent to $8.0 billion in
1997 from $7.7 billion in 1996. The increase in tax-equivalent net interest
income was primarily the result of increased earning assets.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In 1997, $72 million in gross
interest income would have been recorded if all nonaccrual and restructured
loans had been current in accordance with their original terms and if they had
been outstanding throughout the period (or since origination if held for part of
the period). The amount of interest income related to these assets and included
in income in 1997 was $36 million.
Net Interest Margin
The net interest margin, which is the difference between the
tax-equivalent yield on earning assets and the rate paid on funds to support
those assets, was 4.59 percent in 1997 compared with 4.55 percent in 1996. The
margin increase in 1997 was partially a result of upward repricing of credit
card loans and an increase in lease financings. The average rate earned on
earning assets was 8.29 percent in 1997 and 8.16 percent in 1996. The average
rate paid on interest-bearing liabilities was 4.40 percent in 1997 and 4.26
percent in 1996. It should be noted that the margin is not our primary
management focus or goal. Our focus is on increasing revenues.
We use securities and off-balance sheet transactions to manage interest
rate sensitivity. More information on these transactions is included in the
Market Risk Management section.
Noninterest Income
We are meeting the challenges of increasing competition, changing
customer demands and demographic shifts by making discretionary investments to
enhance revenue growth. We have significantly broadened our product lines,
particularly in the Capital Markets and Capital Management Groups, to provide
additional sources of fee income that complement our long-standing banking
products and services. These investments were reflected in a 24 percent increase
in noninterest income, excluding investment securities transactions, to $4.3
billion in 1997 from $3.4 billion in 1996.
Almost all categories of noninterest income increased in 1997 from a year
earlier. On an unrestated basis, fee income from Capital Management and Capital
Markets activities made
11
<PAGE>
up one-half of noninterest income in 1997. These two groups are discussed
further in the Business Segments section. Service charges on deposit accounts
increased 14 percent from 1996 and mortgage banking income increased 25 percent,
reflecting primarily purchase accounting acquisitions completed in 1996.
Equipment leasing rental income increased 67 percent primarily reflecting the
full year of railcar leasing activity.
Trading Activities
Our Capital Markets Group also makes a key contribution to noninterest
income through trading profits. Trading activities are undertaken primarily to
satisfy the investment and risk management needs of our customers and
secondarily to enhance our earnings through profitable trading for the
corporation's own account. Market making and position taking activities across a
wide array of financial instruments add to our ability to optimally serve our
customers. Trading profits increased 56 percent to $252 million in 1997 compared
with $162 million in 1996. The increase was largely related to asset
securitization activity and to increased customer transactions. Trading account
assets were $6 billion at December 31, 1997, compared with $5 billion at
year-end 1996.
Noninterest Expense
Noninterest expense was $7.3 billion in 1997 compared with $6.9 billion
in 1996. Noninterest expense in 1997 included $284 million in pre-tax,
merger-related and restructuring charges. Noninterest expense in 1996 included
pre-tax, merger-related and restructuring charges of $421 million and the SAIF
special assessment of $149 million pre-tax. The increase from 1996 also included
the incremental impact of the fourth quarter 1996 purchase accounting
acquisitions and expenses associated with our capital securities issues. More
information on these capital securities is in the Guaranteed Preferred
Beneficial Interests section.
The increases in various categories of noninterest expense reflect our
continued investments in fee-income generating businesses such as those managed
by the Capital Management and the Capital Markets Groups, in which expenses move
more in tandem with revenues, and in technology and retail branch
transformation. Our overhead efficiency ratio continued to improve even while we
increased our discretionary investments. This ratio was 57 percent in 1997,
compared with 56 percent in 1996. These ratios exclude amounts related to the
capital securities issues, merger-related and restructuring charges, and SAIF.
Amortization of other intangible assets predominantly represents the
amortization of goodwill and deposit base premium related to purchase accounting
acquisitions. These intangibles are amortized over periods ranging from six to
25 years. Amortization is a noncash charge to income; therefore, liquidity and
funds management activities are not affected. We had $2.9 billion in other
intangible assets at December 31, 1997, compared with $3.2 billion at December
31, 1996. Costs related to environmental matters were not material.
We are well aware of the ramifications of the change from December 31,
1999, to January 1, 2000. In February 1996 we assembled a corporate project team
and engaged a leading technology firm to begin an initial assessment of the
scope of the project. We determined early on that our single system platform
would help minimize expenses related to the year 2000 project. Also minimizing
the impact is the fact that our Emerald deposit system and essentially all of
our Capital Markets systems are already year 2000 compliant. We have analyzed
our computer hardware platforms and software programs and expect to have
virtually all of the systems and application modifications in place and tested
by the end of 1998, allowing time in 1999 for any system refinements that may be
needed. Our relationship with third- party vendors, counterparties and customers
also present year 2000 challenges, and we are assessing and monitoring their
progress. Our process regarding vendors and counterparties includes direct
access with the entity, surveys and testing procedures to assess whether such
parties will be able to successfully interact with First Union in the year 2000.
In addition we are assessing the needs of our customers and the possible effects
of their inability
12
<PAGE>
to become year 2000 compliant. Excluding any such expenses related to future
acquisitions, First Union currently estimates total cumulative expenses for
making its computer systems year 2000 compliant will be between $60 million and
$65 million pretax.
Income Taxes
Income taxes were $1.1 billion in 1997 compared with $1.3 billion in
1996. The decrease resulted primarily from an after-tax benefit of $264 million
realized in 1997 from the reorganization of certain corporate and interstate
banking entities. The tax benefit had the result of reducing the corporation's
effective tax rate to 29 percent from 36 percent. This benefit was principally
offset by a higher provision for loan losses related to the restructuring of the
unsecured consumer loan portfolio.
Balance Sheet Review
Earning Assets
Earnings from our primary earning assets, securities and loans, are
subject to two principal kinds of risks: interest rate risk and credit risk.
Interest rate risk could result if rate indices related to sources and uses of
funds were mismatched. Our Funds Management Committee manages interest rate
risk, as well as credit risks associated with securities, under specific policy
standards, which are discussed in more detail in the Market Risk Management
section. In addition to certain securities, off-balance sheet transactions such
as interest rate swaps have been used to maintain interest rate risk at
acceptable levels in accordance with our policy standards. The loan portfolio
carries the potential credit risk of past due, nonperforming or, ultimately,
charged-off loans. We manage this risk primarily through credit approval
standards, which are discussed in the Loans section. Average earning assets in
1997 were $175 billion, a 3 percent increase from $170 billion in 1996.
Securities Available For Sale
The available for sale portfolio consists of U.S. Treasury, municipal and
mortgage-backed and asset-backed securities as well as collateralized mortgage
obligations, corporate, foreign and equity securities. Securities available for
sale transactions resulted in gains of $52 million in 1997 and $96 million in
1996.
At December 31, 1997, we had securities available for sale with a market
value of $24 billion compared with $19 billion at year-end 1996. The market
value of securities available for sale was $444 million above amortized cost at
December 31, 1997. Activity in this portfolio is undertaken primarily to manage
liquidity and interest rate risk and to take advantage of market conditions that
create more economically attractive returns on these investments.
The average rate earned on securities available for sale in 1997 was 6.83
percent compared with 6.62 percent in 1996. The average maturity of the
portfolio was 5.72 years at December 31, 1997.
Investment Securities
The investment securities portfolio consists of U.S. Government agency,
corporate, municipal and mortgage-backed securities, and collateralized mortgage
obligations. Our investment securities amounted to $3.5 billion at December 31,
1997, and $4.2 billion at December 31, 1996.
The average rate earned on investment securities was 7.97 percent in 1997
and 7.66 percent in 1996. The average maturity of the portfolio was 6.94 years
at December 31, 1997.
Loans
The loan portfolio, which represents our largest asset class, is a
significant source of interest and fee income. Elements of the loan portfolio
are subject to differing levels of credit
13
<PAGE>
and interest rate risk. Our lending strategy stresses quality growth and
portfolio diversification by product, geography and industry. A common credit
underwriting structure is in place throughout the corporation.
The commercial loan portfolio includes general commercial loans, both
secured and unsecured, and commercial real estate loans. Commercial loans are
typically either working capital loans, which are used to finance the inventory,
receivables and other working capital needs of commercial borrowers, or term
loans, which are typically used to finance fixed assets or acquisitions.
Commercial real estate loans typically are used to finance the construction or
purchase of commercial real estate.
Our commercial lenders focus principally on middle-market companies,
which we believe reduces the risk of credit loss from any single borrower or
group of borrowers. A majority of our commercial loans are for less than $10
million. 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 December 31, 1997, was composed of 55 percent in
commercial loans and 45 percent in consumer loans compared with 50 percent and
50 percent, respectively, in 1996.
Net loans at December 31, 1997, were $132 billion compared with $135
billion at December 31, 1996. Average net loans were $135 billion in 1997 and
$129 billion in 1996. First Union transferred to assets held for sale $3 billion
in loans in 1997 as part of its strategy of balance sheet management to maximize
its return on investment. The increase in average loans was primarily
attributable to the fourth quarter 1996 purchase accounting acquisitions and
growth in both our consumer and Capital Markets portfolios.
At December 31, 1997, unused loan commitments related to commercial and
consumer loans were $58 billion and $30 billion, respectively. Commercial and
standby letters of credit were $9 billion at December 31, 1997. At December 31,
1997, loan participations sold to other lenders amounted to $4 billion. They
were recorded as a reduction of gross loans.
The average rate earned on loans was 8.80 percent in 1997 compared with
8.70 percent in 1996. Factors contributing to the increase in the rate on loans
included a reduction in lower-yielding mortgage loans, the upward repricing of
credit card loans and growth in high-yielding leveraged leases. The 1997
reduction in mortgage loans resulted from the sale of $1 billion of ARMs and
from the natural runoff of our mortgage portfolio. The improvement in the yield
on credit cards reflected the repricing of loans originated with lower
introductory rates and the targeted repricing of certain accounts to improve
overall profitability. The reduction in installment loans-other was primarily
attributable to the securitization of student loans, indirect auto loans and
community reinvestment loans.
The Asset Quality section provides information about geographic exposure
in the loan portfolio.
Commercial Real Estate Loans
Commercial real estate loans amounted to 12 percent of the total
portfolio at December 31, 1997, and 13 percent at December 31, 1996. This
portfolio included commercial real estate mortgage loans of $13 billion at
December 31, 1997, compared with $14 billion at December 31, 1996.
14
<PAGE>
ASSET QUALITY
Nonperforming Assets
At December 31, 1997, nonperforming assets were $991 million, or 0.75
percent of net loans and foreclosed properties, compared with $1.05 billion, or
0.78 percent, at December 31, 1996.
Loans or properties of less than $5 million each made up 75 percent, or
$740 million, of nonperforming assets at December 31, 1997. Of the rest:
o Eleven loans or properties between $5 million and $10 million each accounted
for $80 million; and
o Seven loans or properties over $10 million each accounted for $171 million.
Forty-nine percent of nonperforming assets were collateralized primarily
by real estate at December 31, 1997, and 56 percent at year-end 1996.
Past Due Loans
Accruing loans 90 days past due were $326 million at December 31, 1997,
compared with $474 million at December 31, 1996. Of the past dues, $44 million
were commercial and commercial real estate loans and $282 million were consumer
loans. At December 31, 1997, we were closely monitoring certain loans for which
borrowers were experiencing increased levels of financial stress. None of these
loans were included in nonperforming assets or in accruing loans past due 90
days, and the aggregate amount of these loans was not significant.
Net Charge-Offs
Net charge-offs amounted to $872 million in 1997 compared with $824
million in 1996. Net charge-offs were 0.65 percent of average net loans in 1997
compared with 0.64 percent in 1996. Excluding net charge-offs related to the
credit card portfolio, net charge-offs were 0.31 percent compared with 0.35
percent in 1996. At December 31, 1997, the owned credit card portfolio
represented 3 percent of the loan portfolio.
We do not believe that the higher levels of net charge-offs in the credit
card portfolio are indicative of any significant deterioration in the credit
quality of the total loan portfolio. The higher credit card-related net
charge-offs were concentrated in certain vintages that were transferred to
assets held for sale. We are carefully monitoring trends in both the commercial
and consumer loan portfolios for signs of credit weakness. Additionally we have
evaluated our credit policies in light of changing economic trends, and we have
taken appropriate steps where necessary. All of these steps have been taken with
the goals of minimizing future credit losses and deterioration and of allowing
for maximum profitability.
Provision and Allowance for Loan Losses
The loan loss provision was $1.1 billion in 1997 compared with $678
million in 1996. We increased the loan loss provision 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 $1.8 billion at December 31, 1997, and
$2.2 billion at December 31, 1996. The decrease was commensurate with the
reduction in the credit card portfolio. We establish reserves based on various
factors, including results of quantitative analyses of the quality of commercial
loans and commercial real estate loans. Reserves for commercial and commercial
real estate loans are based principally on loan grades, historical loss rates,
borrowers' creditworthiness, underlying cash flows from the project and from the
borrowers, and analysis of other less quantifiable factors that might influence
the portfolio. We analyze all loans in excess of $1 million that are being
monitored as potential credit problems to determine whether supplemental,
specific reserves are necessary. Reserves for consumer loans are based
principally on delinquencies and historical and projected loss rates.
15
<PAGE>
At December 31, 1997, impaired loans, which are included in nonaccrual
loans, amounted to $485 million compared with $553 million at December 31, 1996.
A loan is considered to be impaired when, based on current information, it is
probable that we will not receive all amounts due in accordance with the
contractual terms of a loan agreement. Included in the allowance for loan losses
at December 31, 1997, was $89 million related to $384 million of impaired loans.
The remaining impaired loans were recorded at or below fair value. In 1997 the
average recorded investment in impaired loans was $479 million, and $37 million
of interest income was recognized on loans while they were impaired. This income
was recognized using a cash-basis method of accounting.
Geographic Exposure
The loan portfolio in the East Coast region of the United States is
spread primarily across 106 metropolitan areas with diverse economies. Atlanta,
Georgia; Charlotte, North Carolina; Miami and Jacksonville, Florida; Newark, New
Jersey; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C.,
are our largest markets. Substantially all of the $16 billion commercial real
estate portfolio at December 31, 1997, was located in our East Coast banking
region.
Liquidity and Funding Sources
Liquidity planning and management are necessary to ensure we maintain the
ability to fund operations cost-effectively and to meet current and future
obligations such as loan commitments and deposit outflows. In this process we
focus on both assets and liabilities and on the manner in which they combine to
provide adequate liquidity to meet the corporation's needs.
Funding sources primarily include customer-based core deposits but also
include purchased funds and cash flows from operations. First Union is one of
the nation's largest core deposit-funded banking institutions. Our large
consumer deposit base, which is spread across the economically strong South
Atlantic region and high per-capita income Middle Atlantic region, creates
considerable funding diversity and stability.
Asset liquidity is maintained through maturity management and through our
ability to liquidate assets, primarily securities held for sale. Another
significant source of asset liquidity is the ability to securitize assets such
as credit card receivables and auto, home equity, student and mortgage loans.
Other off-balance sheet sources of liquidity exist as well, including a mortgage
servicing portfolio for which the estimated fair value exceeded book value by
$44 million at December 31, 1997.
Core Deposits
Core deposits are a fundamental and cost-effective source of funding.
Core deposits include savings, negotiable order of withdrawal (NOW), money
market, noninterest-bearing and other consumer time deposits. Core deposits were
$127 billion at December 31, 1997, compared with $129 billion at December 31,
1996. The decline largely reflected runoff that is typical following
acquisitions, in addition to customers' movement into investment products.
The portion of core deposits in higher-rate, other consumer time deposits
was 29 percent at December 31, 1997, and 33 percent at year-end 1996. Other
consumer time and other noncore deposits usually pay higher rates than savings
and transaction accounts, but they generally are not available for immediate
withdrawal, and they are less expensive to process.
Average core deposit balances were $124 billion in 1997 and in 1996. In
1997 and 1996, average noninterest- bearing deposits were 22 percent and 21
percent, respectively, of average core deposits. Average balances in money
market and noninterest-bearing deposits were higher when compared with 1996,
while savings and now and other consumer time deposits were lower. Deposits can
be affected by branch closings or consolidations, seasonal factors and the rates
being offered compared to other investment
16
<PAGE>
opportunities. The Net Interest Income Summaries provide additional information
about average core deposits.
Purchased Funds
Purchased funds at December 31, 1997, were $42 billion compared with $35
billion at year-end 1996, largely reflecting funding needs related to the
increased securities available for sale portfolio and the decrease in core
deposits. Average purchased funds in 1997 were $39 billion compared with $36
billion in 1996. Purchased funds are acquired primarily through (i) our large
branch network, consisting principally of $100,000 and over certificates of
deposit, public funds and treasury deposits, and (ii) national market sources,
consisting of relatively short-term funding sources such as federal funds,
securities sold under repurchase agreements, eurodollar time deposits,
short-term bank notes and commercial paper, and longer-term funding sources such
as term bank notes, Federal Home Loan Bank borrowings and corporate notes.
Cash Flows
Cash flows from operations are a significant source of liquidity. Net
cash provided from operations primarily results from net income adjusted for the
following noncash accounting items: the provisions for loan losses and
foreclosed properties; depreciation and amortization; and deferred income taxes
or benefits. This cash was available in 1997 to increase earning assets, to make
discretionary investments and to reduce borrowings.
Long-Term Debt
Long-term debt was 77 percent of total stockholders' equity at December
31, 1997, compared with 74 percent at year-end 1996.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we have available for issuance $1.9 billion of senior or
subordinated debt securities, common stock or preferred stock at April 30, 1998.
The sale of any additional debt or equity securities will depend on future
market conditions, funding needs and other factors.
Debt Obligations
We have a $350 million, committed back-up line of credit that expires in
December 1998. This credit facility contains financial covenants that require
First Union to maintain a minimum level of tangible net worth, restrict double
leverage ratios and require capital levels at subsidiary banks to meet
regulatory standards. First Union has not used this line of credit. In 1998, $3
billion of long-term debt will mature. Funds for the payment of long-term debt
will come from operations or, if necessary, additional borrowings.
Guaranteed Preferred Beneficial Interests
In 1997 we issued $945 million of trust capital securities. As a result,
$1.7 billion of capital securities were outstanding as of December 31, 1997.
Subsidiary trusts issued these capital securities, and proceeds were received by
issuing junior subordinated debentures to the trusts. These capital securities
are considered tier 1 capital for regulatory purposes. Expenses of $116 million
in 1997 related to capital securities are included in sundry expense.
Stockholders' Equity
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
17
<PAGE>
Total stockholders' equity was $15 billion at December 31, 1997, and
December 31, 1996. Common shares outstanding amounted to 961 million at December
31, 1997, compared with 989 million at December 31, 1996. In 1997 we repurchased
52 million shares of our common stock at a cost of $2.4 billion compared with 51
million shares at a cost of $1.6 billion in 1996. In addition in 1997 we issued
7.5 million shares and received $358 million in proceeds, which were used for
general corporate purposes.
We paid $1.1 billion in dividends to common stockholders in 1997 compared
with $1 billion in 1996.
At December 31, 1997, stockholders' equity included a $286 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 $458
million available for dividends at December 31, 1997, without prior regulatory
approval. Our subsidiaries paid $2 billion in dividends to the parent company in
1997. In addition the consolidation of our banks in our southern region and
Connecticut into First Union National Bank, based in Charlotte, North Carolina,
resulted in a reduction of capital of $835 million, which was paid to the parent
company.
Regulatory Capital
Federal banking regulations require that bank holding companies and their
subsidiary banks maintain minimum levels of capital. These banking regulations
measure capital using three formulas including tier 1 capital, total capital and
leverage capital. The minimum level for the ratio of total capital to
risk-weighted assets (including certain off-balance sheet financial instruments,
such as standby letters of credit and interest rate swaps) is currently 8
percent. At least half of total capital is to be composed of common equity,
retained earnings and a limited amount of qualifying preferred stock, less
certain intangible assets (tier 1 capital). The rest may consist of a limited
amount of subordinated debt, nonqualifying preferred stock and a limited amount
of the loan loss allowance (together with tier 1 capital, total capital). At
December 31, 1997, the tier 1 and total capital ratios were 8.43 percent and
13.02 percent, respectively, compared with 7.91 percent and 12.58 percent at
December 31, 1996. Amounts prior to 1997 are not restated for the Signet
acquisition.
In addition the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet specified criteria,
including having the highest regulatory rating. All other bank holding companies
are generally required to maintain a leverage ratio of at least 4 to 5 percent.
The leverage ratio at December 31, 1997, was 7.09 percent and at December 31,
1996, it was 6.74 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
18
<PAGE>
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised us of any specific minimum
leverage ratio applicable to us.
Each subsidiary bank is subject to similar capital requirements. None of
our subsidiary banks has been advised of any specific minimum capital ratios
applicable to it.
The regulatory agencies also have adopted regulations establishing
capital tiers for banks. Banks in the highest capital tier, or well capitalized,
must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and
a total capital ratio of 10 percent. At December 31, 1997, our deposit-taking
subsidiary banks met the capital and leverage ratio requirements for well
capitalized banks. We expect to maintain these ratios at the required levels by
the retention of earnings and, if necessary, the issuance of additional capital.
Failure to meet certain capital ratio or leverage ratio requirements could
subject a bank to a variety of enforcement remedies, including termination of
deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union
Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking
banks.
The Accounting and Regulatory Matters section provides more information
about proposed changes in risk-based capital standards. The Merger and
Consolidation Activity and the Accounting and Regulatory Matters sections
provide additional information about the consolidation of our regional banks.
MARKET RISK MANAGEMENT
Interest Rate Risk Methodology
Managing interest rate risk is fundamental to banking. The inherent
maturity and repricing characteristics of our day-to-day lending and deposit
activities create a naturally asset-sensitive structure. By using a combination
of on- and off-balance sheet financial instruments, we manage the sensitivity of
earnings to changes in interest rates within our established policy guidelines.
The Credit/Market Risk Committee of the corporation's board of directors
reviews overall interest rate risk management activity. The Funds Management
Committee of the corporation oversees the interest rate risk management process
and approves policy guidelines. Balance sheet management and finance personnel
monitor the day-to-day exposure to changes in interest rates in response to loan
and deposit flows. They make adjustments within established policy guidelines.
In 1997 we modified our methodology for measuring exposure to interest
rate risk for policy measurement. This change in methodology is intended to
ensure we include a sufficiently broad range of rate scenarios and pattern of
rate movements that we believe to be reasonably possible. The fundamental
difference between our previous and our new methodologies is in the absolute
amount of change in interest rates we incorporate in our alternative scenarios
and the rapidity with which these rate changes occur. Previously we measured the
impact that 100 basis point rate changes over a three-month period had on
earnings per share over the subsequent 12 months. Our new methodology uses 200
basis point changes over a 12-month period. We retained our 5 percent policy
limit described below because our change in methodology was intended to focus on
the pattern of rate change rather than on the average amount of change in rates
between the two methodologies.
We believe our earnings simulation model is a more relevant depiction of
interest rate risk than traditional gap tables because it captures multiple
effects excluded in less sophisticated presentations, and it includes
significant variables that we identify as being affected by interest rates. For
example our model captures rate of change differentials, such as federal funds
rates versus savings account rates; maturity effects, such as calls on
securities; and rate barrier effects, such as caps and floors on loans. It also
captures changing balance sheet levels, such as commercial and consumer loans
(both floating and fixed rate); noninterest-bearing deposits and investment
securities. In addition our model considers leads and lags
19
<PAGE>
that occur in long-term rates as short-term rates move away from current levels;
the elasticity in the repricing characteristics of savings and money market
deposits; and the effects of prepayment volatility on various fixed-rate assets
such as residential mortgages, mortgage-backed securities and consumer loans.
These and certain other effects are evaluated in developing the scenarios from
which sensitivity of earnings to changes in interest rates is determined.
We use two separate measures that each include three standard scenarios
in analyzing interest rate sensitivity for policy measurement. Each of these
measures compares our forecasted earnings per share in both a "high rate" and
"low rate" scenario to a base-line scenario. The base-line scenario is our
estimated most likely path for future short-term interest rates over the next 24
months. The second base-line scenario holds short-term rates flat at their
current level over our forecast horizon. The "high rate" and "low rate"
scenarios assume gradual 200 basis point increases or decreases in the federal
funds rate from the beginning point of each base-line scenario over the most
current 12-month period. Our policy limit for the maximum negative impact on
earnings per share resulting from "high rate" or "low rate" scenarios is 5
percent. The policy limit applies to both the "most likely rate" scenario and
the "flat rate" scenario. The policy measurement period is 12 months in length,
beginning with the first month of the forecast.
Earnings Sensitivity
Our January 1998 estimate for future short-term interest rates (our "most
likely" scenario) includes an average federal funds rate declining gradually
from 5.50 percent in January 1998 to 5.38 percent by December 1998, then
declining to 5.25 percent by December 1999. Our "flat rate" scenario holds the
federal funds rate at 5.50 percent over this same horizon. Based on the January
outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200
basis point increase in short- term rates from our "flat rate" scenario), the
model indicates that earnings during the policy measurement period would be
negatively affected by 1.0 percent. Our model indicates that earnings would
benefit by 0.8 percent in our "low rate" scenario (i.e., a 200 basis point
decline in short-term rates from our "flat rate" scenario). Our model indicates
that a 200 basis point rise in rates from our "most likely" scenario is less
detrimental than the same rise from our "flat rate" scenario. Over the next
year, earnings would increase by 0.4 percent if rates fall gradually by 200
basis points, and would decrease by 0.8 percent if rates gradually rise 200
basis points, compared to our "most likely" scenario. In 1999, earnings would
fall below those earned in our "most likely" scenario by 0.1 percent if rates
were 200 basis points lower than our "most likely" scenario. If rates were 200
basis points higher than our "most likely" scenario in 1999, then earnings would
be negatively affected by 2.5 percent.
In addition to the three standard scenarios used to analyze rate
sensitivity over the policy measurement period, we regularly analyze the
potential impact of other remote, more extreme interest rate scenarios and time
periods. These alternate "what if" scenarios may include interest rate paths
both higher, lower and more volatile than those used for policy measurement and
extend to periods beyond the policy measurement period.
While our interest rate sensitivity modeling assumes that management
takes no action, we regularly assess the viability of strategies to reduce
unacceptable risks to earnings and implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, management
will continue to formulate strategies to protect earnings from the potential
negative effects of changes in interest rates.
Off-Balance Sheet Derivatives For Interest Rate Risk Management
As part of our overall interest rate risk management strategy, for many
years we have used off-balance sheet derivatives as a cost- and
capital-efficient way to modify the repricing or maturity characteristics of
on-balance sheet assets and liabilities. Our off-balance sheet
20
<PAGE>
derivative transactions used for interest rate sensitivity management include
interest rate swaps, futures and options with indices that relate to the pricing
of specific financial instruments of the corporation. We believe we have
appropriately controlled the risk so that derivatives used for rate sensitivity
management will not have any significant unintended effect on corporate
earnings. As a matter of policy we do not use highly leveraged derivative
instruments for interest rate risk management. The impact of derivative products
on our earnings and rate sensitivity is fully incorporated in the earnings
simulation model in the same manner as on-balance sheet instruments.
Our overall goal is to manage our rate sensitivity such that earnings are
not adversely affected materially whether rates go up or down. As a result of
interest rate fluctuations, off-balance sheet transactions (and securities) will
from time to time develop unrealized appreciation or depreciation in market
value when compared with their cost. The impact on net interest income
attributable to these off-balance sheet transactions, all of which are linked to
specific financial instruments as part of our overall interest rate risk
management strategy, will generally be offset by net interest income from
on-balance sheet assets and liabilities. The important consideration is not the
shifting of unrealized appreciation or depreciation between and among on- and
off-balance sheet instruments, but the prudent management of interest rate
sensitivity so that corporate earnings are not unduly at risk as interest rates
move up or down.
Despite significant year-to-year fluctuations in the market value of both
on- and off-balance sheet positions and related fluctuations in net interest
income contribution from these positions, tax-equivalent net interest income
continued to increase. This is the outcome we strive to achieve in using
portfolio securities and off-balance sheet products to balance the income
effects of core loans and deposits from changing interest rate environments.
The fair value appreciation of off- balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $566 million at
December 31, 1997, compared with fair value appreciation of $325 million at
December 31, 1996.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Deferred gains and losses were each $14 million at December 31, 1997.
Net gains of $3 million will increase net interest income in 1998. Net losses of
$3 million in the aggregate will reduce net interest income in subsequent years.
Although off-balance sheet derivative financial instruments do not expose
the corporation to credit risk equal to the notional amount, we are exposed to
credit risk equal to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize the credit risk in these instruments by dealing only with high-quality
counterparties. Each transaction is specifically approved for applicable credit
exposure.
In addition our policy is to require that all swaps and options be
governed by an International Swaps and Derivatives Association Master Agreement.
Bilateral collateral arrangements are in place for substantially all dealer
counterparties used in our Asset/Liability Management activities. Derivative
collateral arrangements for dealer transactions and trading activities are based
on established thresholds of acceptable credit risk by counterparty. Thresholds
are determined based on the strength of the individual counterparty, and they
are bilateral. As of December 31, 1997, the total credit risk in excess of
thresholds was $301 million. This amount does not include credit risk related
to CoreStates dealer transactions and trading activities.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
21
<PAGE>
well as financial and foreign currency derivatives, in order to provide
customized solutions for the risk management challenges faced by our customers.
We maintain diversified trading positions in both the fixed income and foreign
exchange markets. Risk is controlled through the imposition of value-at-risk
limits and an active, independent monitoring process.
We use the value-at-risk methodology for measuring the market risk of the
corporation's trading positions. This statistical methodology uses recent market
volatility to estimate the maximum daily trading loss that the corporation would
expect to incur, on average, 97.5 percent of the time. The model also measures
the effect of correlation among the various trading instruments to determine how
much risk is eliminated by "offsetting" positions. The analysis captures all
financial assets and liabilities that are considered trading positions
(including loan trading activities), foreign exchange and financial and foreign
currency derivative instruments. The calculation uses historical data from
either the most recent 180 or 260 business days, depending on the activity.
Value-at-risk amounts related to interest rate risk and currency risk at
December 31, 1997, were $11 million and $2 million, respectively.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," does not change
the recognition or measurement associated with pension or postretirement plans.
It standardizes certain disclosures, requires additional information about
changes in the benefit obligations and about change in the fair value of plan
assets to facilitate analysis, and it eliminates certain disclosures that were
not deemed useful. This Standard is effective for financial statements issued
for periods beginning after December 31, 1997.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards and
disclosure requirements for the way companies report information about operating
segments both in annual and interim reports issued to stockholders. Operating
segments are components of a company about which separate financial information
is available and which are used in determining resource allocations and
assessing performance. Information such as segment earnings, certain revenue and
expense items and certain segment assets are required to be presented, and such
amounts are required to be reconciled to the company's financial statements.
Certain information related to this Standard is included in the Business
Segments section. The corporation will assess the current methodologies and
reporting for compliance with the Standard. This Standard is effective for
financial statements issued for periods beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and the
presentation of comprehensive income, which is defined as the change in equity
transactions with nonowners. It includes net income and other comprehensive
income. Other comprehensive income items are to be classified by their nature
and by their related accumulated balances in the appropriate financial
statements of a company. Generally, other comprehensive income includes
transactions not typically recorded as a component of net income such as foreign
currency items, minimum pension liability adjustments, and unrealized gains and
losses on certain debt and equity securities. This Standard requires that such
items be presented with equal prominence on a comparative basis in the
appropriate financial statements for fiscal years beginning after December 15,
1997, including interim periods.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA), among other provisions, imposes liability on a bank insured by the
FDIC for certain obligations to the FDIC incurred in connection with other
insured banks under common control with such bank.
The Federal Deposit Insurance Corporation Improvement Act, among other
things, requires a revision of risk-based capital standards. The new standards
are required to
22
<PAGE>
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.
Legislation has been enacted providing that deposits and certain claims
for administrative expenses and employee compensation against an insured
depository institution would be afforded a priority over other general unsecured
claims against such an institution, including federal funds and letters of
credit, in the liquidation or other resolution of such an institution by any
receiver.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(IBBEA) authorized interstate acquisitions of banks and bank holding companies
without geographic limitation beginning September 27, 1995. Beginning June 1,
1997, a bank was allowed to merge with a bank in another state as long as
neither of the states opt out of interstate branching between the date of
enactment of IBBEA and May 31, 1997. IBBEA further provided that a state may
enact laws permitting interstate merger transactions before June 1, 1997.
Certain states in which First Union conducts banking operations have enacted
such legislation. Information about First Union's consolidation under this
legislation is in the Merger and Consolidation Activity section.
Various other legislative and accounting proposals concerning the banking
industry are pending in Congress and with the Financial Accounting Standards
Board, respectively. Given the uncertainty of the proposal process, we cannot
assess the impact of any such proposals on our financial condition or results of
operations.
EARNINGS AND BALANCE SHEET ANALYSIS (1996 compared with 1995)
First Union's operating earnings in 1996, before special charges, were
$2.6 billion, or basic earnings per common share of $2.70. Diluted operating
earnings per common share were $2.68 in 1996. The special charges were after-tax
merger-related and restructuring charges of $272 million and an after-tax SAIF
special assessment of $96 million. Operating earnings in 1995 were $2.3 billion,
or basic earnings per share of $2.38 before restructuring charges of $163
million after-tax, or 17 cents per share, taken in the fourth quarter of 1995.
Diluted operating earnings per common share were $2.33 in 1995. After the
special charges, net income applicable to common stockholders was $2.3 billion,
or basic earnings per share of $2.33, in 1996 compared with $2.2 billion, or
$2.21 per share, in 1995. Diluted earnings per common share were $2.30 in 1996
and $2.17 in 1995.
The restructuring charges were related in part to the January 1, 1996,
First Fidelity pooling of interests acquisition. The SAIF special assessment
resulted from 1996 legislation to recapitalize the SAIF.
Tax-equivalent net interest income increased 4 percent to $7.7 billion in
1996 from $7.4 billion in 1995. The increase was primarily the result of assets
acquired in purchase accounting acquisitions, an increase in the securities
available for sale portfolio and the repricing of variable rate assets.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In 1996, $77 million in gross
interest income would have been recorded if all nonaccrual and restructured
loans had been current in accordance with their original terms and had been
outstanding throughout the period, or since origination if held for part of the
period. The amount of interest income related to these assets and included in
income in 1996 was $22 million.
The net interest margin was 4.55 percent in 1996 compared with 4.76
percent in 1995. The margin decline was primarily related to the securitization
of credit card receivables; the addition of lower spread investment securities
in the early months of 1996; the addition of acquired banks and thrifts with
lower margins; the reduction in the prime rate from 1995; and the purchase of
lower-spread assets related to Capital Markets activities. The average rate
23
<PAGE>
earned on earning assets was 8.16 percent in 1996 and 8.42 percent in 1995. The
average rate paid on interest-bearing liabilities was 4.26 percent in 1996 and
4.36 percent in 1995.
Noninterest income, excluding investment securities transactions,
increased to $3.4 billion in 1996 from $3.0 billion in 1995. Virtually all
categories of noninterest income increased in 1996. Securities available for
sale transactions resulted in gains of $96 million in 1996 and $76 million in
1995. Trading profits were $162 million in 1996 compared with $122 million in
1995. Trading account assets were $4.6 billion at year-end 1996 compared with
$2.5 billion at year-end 1995. The increase was the result of general market
conditions and expanded trading volume.
Noninterest expense increased in 1996 to $6.9 billion from $6.5 billion
in 1995. The 1996 results include $421 million in pre-tax, merger-related and
restructuring charges and a $149 million pre-tax SAIF special assessment. The
1995 results include pre-tax restructuring charges of $233 million. In addition
to the special charges, the increase in noninterest expense was primarily
related to purchase accounting acquisitions that resulted in higher personnel
costs, an increase in equipment expense and an increase in external data
processing expense.
At December 31, 1996, we had $3.2 billion in other intangible assets
compared with $2.8 billion at December 31, 1995. Costs related to environmental
matters were not material.
Income taxes were $1.3 billion in 1996 compared with $1.2 billion in
1995. The increase resulted primarily from increased income before income taxes.
Average earning assets in 1996 were $170 billion, a 9 percent increase
from $156 billion in 1995.
At December 31, 1996, we had securities available for sale with a market
value of $19 billion compared with $23 billion at year-end 1995. The market
value of securities available for sale was $48 million above amortized cost at
December 31, 1996. The average rate earned on securities available for sale in
1996 was 6.62 percent compared with 6.45 percent in 1995. The average maturity
of the portfolio was 4.84 years at December 31, 1996.
Our investment securities amounted to $4.2 billion at December 31, 1996,
compared with $6.2 billion at year-end 1995. This decline resulted from
scheduled maturities, prepayments and issuer calls. The average rate earned on
investment securities was 7.66 percent in 1996 and 7.11 percent in 1995. The
increase in yield was primarily related to the year-end 1995 transfer of
lower-yielding securities to the available for sale portfolio. The average
maturity of the portfolio was 5.14 years at December 31, 1996.
Net loans at December 31, 1996, were $135 billion compared with $128
billion at year-end 1995. Average net loans in 1996 increased 6 percent to $129
billion from $121 billion in 1995. Demand for credit slowed in 1996, and branch
sales campaigns focused more heavily on investment products rather than on
lending products. Commercial loans increased slightly in 1996, primarily due to
additional lease financings.
The loan portfolio at December 31, 1996, was composed of 50 percent in
commercial loans and 50 percent in consumer loans, which did not represent a
significant change from year-end 1995. At December 31, 1996, unused loan
commitments related to commercial and consumer loans were $72 billion.
Commercial and standby letters of credit were $8 billion. At December 31, 1996,
loan participations sold to other lenders amounted to $3 billion. They were
recorded as a reduction of gross loans.
The average rate earned on loans was 8.70 percent in 1996 and 8.95
percent in 1995. Factors affecting loan rates in 1996 compared with 1995
included a general decrease in market rates used to price loans. For example the
prime rate decreased to an average of 8.27 percent in 1996 from 8.44 percent in
1995. Other factors included the 1995 credit card securitization, as well as a
larger portfolio of fixed and adjustable rate mortgages as a result of bank and
thrift acquisitions. These factors were offset somewhat by the upward repricing
of adjustable rate mortgages and credit card portfolio introductory rates.
24
<PAGE>
Commercial real estate loans amounted to 13 percent of the total
portfolio at December 31, 1996, compared with 14 percent at December 31, 1995.
This portfolio included commercial real estate mortgage loans of $14 billion at
December 31, 1996, and $15 million at December 31, 1995.
At December 31, 1996, nonperforming assets were $1 billion, or 0.78
percent of net loans and foreclosed properties, compared with $1.1 billion, or
0.90 percent, at December 31, 1995. Fifty-six percent of nonperforming assets
were collateralized primarily by real estate at December 31, 1996, compared with
43 percent at year-end 1995.
Accruing loans 90 days past due were $474 million and $445 million,
respectively, at December 31, 1996 and December 31, 1995. Net charge-offs as a
percentage of average net loans were 0.64 percent in 1996 compared with 0.45
percent in 1995. Net charge-offs, excluding credit cards, were 0.35 percent in
1996 compared with 0.27 percent in 1995. The loan loss provision was $678
million in 1996 compared with $403 million in 1995. The allowance for loan
losses was $2.2 billion at December 31, 1996, compared with $2.3 billion at
year-end 1995. In 1996 we reallocated the acquired First Fidelity allowance for
loan losses based on First Union's policies and procedures. The ratio of the
allowance for loan losses to nonaccrual and restructured loans was 241 percent
at December 31, 1996, and 252 percent at December 31, 1995. The ratio of the
allowance to net loans was 1.64 percent at December 31, 1996, compared with 1.80
percent at December 31, 1995.
At December 31, 1996, impaired loans, which are included in nonaccrual
loans, amounted to $553 million. Included in the allowance for loan losses was
$51 million related to $312 million of impaired loans. The remaining impaired
loans are recorded at or below fair value. In 1996 the average recorded
investment in impaired loans was $675 million, and $28 million of interest
income was recognized on loans while they were impaired. All of this income was
recognized using a cash-basis method of accounting.
Core deposits were $129 billion at December 31, 1996, compared with $126
billion at December 31, 1995. Average core deposit balances were $124 billion in
1996, an increase of $4 billion from 1995 that was primarily related to
acquisitions. In 1996 and 1995, average noninterest-bearing deposits were 21
percent of average core deposits. Average balances in money market, other
consumer time and noninterest-bearing deposits were higher when compared with
1995, while savings and NOW deposits were lower. Purchased funds at December 31,
1996, were $35 billion, compared with $33 billion at year-end 1995. Average
purchased funds in 1996 were $36 billion, an increase of 30 percent from $28
billion in 1995. The increase was used primarily to fund loans and to purchase
available for sale portfolio securities earlier in the year.
Long-term debt was 74 percent of total stockholders' equity at December
31, 1996 and 70 percent at December 31, 1995. In 1996 we added $1 billion of
subordinated notes and debentures with rates ranging from 6.824 percent to 7.80
percent and maturities of 10 years to 30 years. Proceeds from these debt issues
were used for general corporate purposes.
At December 31, 1996, total stockholders' equity was $15 billion,
compared with $14 billion at December 31, 1995, and 989 million common shares
were outstanding compared with 981 million shares at December 31, 1995. We
repurchased 51 million shares of common stock at a cost of $1.6 billion. This
compares with repurchases of 69 million shares at a cost of $1.6 billion in
1995.
In 1996 First Union redeemed the outstanding shares of its Series D and
Series F preferred stock at a cost of $109 million. In 1996 First Union also
redeemed its Series B convertible preferred stock, substantially all of which
converted into 6 million shares of common stock. We paid $1 billion in dividends
to preferred and common stockholders in 1996. Preferred dividends were $9
million in 1996 compared with $26 million in 1995. At December 31, 1996,
stockholders' equity was increased by a $29 million unrealized after-tax gain
related to debt and equity securities.
25
<PAGE>
At December 31, 1996, the tier 1 and total capital ratios were 7.91
percent and 12.58 percent, respectively, compared with 7.40 percent and 11.81
percent at December 31, 1995. The leverage ratio at December 31, 1996, was 6.74
percent compared with 6.16 percent at December 31, 1995. These ratios have not
been restated for the Signet acquisition.
26
<PAGE>
<TABLE>
<CAPTION>
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In millions, except per share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 14,362 13,758 13,028 10,245 9,507
- -------------------------------------------------------------------------------------------------------------
Interest income (a) $ 14,461 13,876 13,177 10,405 9,691
Interest expense 6,452 6,151 5,732 3,739 3,376
- -------------------------------------------------------------------------------------------------------------
Net interest income (a) 8,009 7,725 7,445 6,666 6,315
Provision for loan losses 1,103 678 403 458 559
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses (a) 6,906 7,047 7,042 6,208 5,756
Securities available for sale transactions 52 96 76 24 76
Investment security transactions 3 4 6 4 7
Noninterest income 4,267 3,435 2,976 2,336 2,332
Merger-related and restructuring charges (b) 284 421 233 107 17
SAIF special assessment (c) - 149 - - -
Noninterest expense 7,052 6,360 6,309 5,558 5,405
- -------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 3,892 3,652 3,558 2,907 2,749
Income taxes 1,084 1,261 1,213 938 826
Tax-equivalent adjustment 99 118 149 160 184
- -------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196 1,809 1,739
Dividends on preferred stock - 9 26 46 46
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders before redemption premium 2,709 2,264 2,170 1,763 1,693
Redemption premium on preferred stock - - - 41 -
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders after redemption premium $ 2,709 2,264 2,170 1,722 1,693
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings $ 2.84 2.33 2.21 1.86 1.85
Diluted earnings 2.80 2.30 2.17 1.83 1.81
Cash dividends $ 1.22 1.10 0.98 0.86 0.75
Average common shares (In thousands)
Basic 955,241 973,712 979,852 927,941 913,621
Diluted 966,792 982,755 1,001,145 946,969 940,167
Average common stockholders' equity (d) $ 14,365 13,788 12,977 11,453 10,190
Common stock price
High 52 7/8 38 1/2 29 3/8 23 3/4 25 3/4
Low 36 5/8 25 3/4 20 5/8 19 5/8 18 7/8
Period-end $ 51 1/4 37 27 3/4 20 5/8 20 5/8
To earnings 18.30 X 16.09 12.79 11.27 11.40
To book value 321 % 249 199 164 172
Book value $ 15.95 14.85 13.91 12.58 11.99
BALANCE SHEET DATA
Assets 205,735 197,341 188,855 159,577 148,759
Long-term debt $ 11,752 10,815 9,586 6,405 5,685
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Tax-equivalent.
(b) After tax merger-related and restructuring charges amounted to $204 million
in 1997, $272 million in 1996, $163 in 1995, $70 million in 1994 and $11 million
in 1993.
(c) The SAIF special assessment amounted to $96 million after tax in 1996.
(d) Average common stockholders' equity excludes average net unrealized gains or
losses on debt and equity securities.
T-1
<PAGE>
<TABLE>
<CAPTION>
Table 2
NONINTEREST INCOME
- ---------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
Trading account profits $ 252 162 122 75 104
Service charges on deposit accounts 1,119 979 921 820 809
Mortgage banking income 256 205 196 100 181
Capital management income 1,078 782 631 483 451
Securities available for sale transactions 52 96 76 24 76
Investment security transactions 3 4 6 4 7
Fees for other banking services 263 280 226 157 125
Equipment lease rental income 187 112 32 22 20
Sundry income 1,112 915 848 679 642
- ---------------------------------------------------------------------------------------------------------
Total noninterest income $ 4,322 3,535 3,058 2,364 2,415
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 3
NONINTEREST EXPENSE
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Salaries $ 2,909 2,649 2,514 2,173 2,057
Other benefits 641 628 597 548 506
- ------------------------------------------------------------------------------------------------------------------
Personnel expense 3,550 3,277 3,111 2,721 2,563
Occupancy 544 546 553 515 501
Equipment 649 569 471 388 349
Advertising 141 100 127 107 86
Telecommunications 168 158 142 115 109
Travel 125 114 96 76 67
Postage, printing and supplies 225 236 220 180 182
FDIC assessment 29 45 169 254 261
Professional fees 292 257 342 290 216
External data processing 94 146 101 72 90
Other intangible amortization 315 290 280 192 158
Merger-related and restructuring charges 284 421 233 107 17
SAIF special assessment - 149 - - -
Sundry expense 920 622 697 648 823
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 7,336 6,930 6,542 5,665 5,422
- ------------------------------------------------------------------------------------------------------------------
Overhead efficiency ratio (a) 59 % 62 62 63 62
Overhead efficiency ratio, adjusted (b) 57 % 56 60 62 62
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The overhead efficiency ratio is equal to noninterest expense divided by net
operating revenue. Net operating revenue is equal to the sum of tax-equivalent
net interest income and noninterest income.
(b) These ratios are the result of reducing noninterest expense by
merger-related and restructuring charges and the 1996 SAIF special assessment.
Additionally, net operating revenue and noninterest expense are reduced by trust
capital securities expense included in sundry expense.
T-2
<PAGE>
<TABLE>
<CAPTION>
Table 4
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
-----------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER BANK
Income statement data
Net interest income $ 58 124 476 2,425 3,083
Provision for loan losses 3 9 363 147 522
Noninterest income 302 44 245 647 1,238
Noninterest expense 302 77 290 1,783 2,452
Income tax expense 20 30 25 418 493
- --------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 35 52 43 724 854
- --------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 30.28 % 57.87 10.15 33.74 30.78
Average loans, net $ 1,182 3,928 4,731 42,669 52,510
Average deposits 826 - - 59,597 60,423
Average attributed common
equity $ 114 91 424 2,145 2,774
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Retail Internal
Evergreen Private CAP Brokerage Mgt.
(In millions) Trust Funds Client Account Services Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 33 2 98 116 14 - 263
Provision for loan losses - - 3 - - - 3
Noninterest income 369 252 7 55 268 (31) 920
Noninterest expense 303 167 58 105 254 - 887
Income tax expense 36 32 16 24 10 (11) 107
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 63 55 28 42 18 (20) 186
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 44.25 % 82.56 17.68 44.82 17.83 - 33.25
Average loans, net $ 17 - 1,880 - 252 - 2,149
Average deposits 1,381 - 1,577 10,300 - - 13,258
Average attributed common
equity $ 142 67 155 93 101 - 558
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL BANK
Income statement data
Net interest income $ 57 36 209 449 754 1,505
Provision for loan losses 3 - 11 46 - 60
Noninterest income - 236 - - 102 338
Noninterest expense 27 196 75 280 435 1,013
Income tax expense 10 28 48 42 154 282
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 17 48 75 81 267 488
- ---------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 16.95 % 61.64 13.27 6.30 63.67 19.87
Average loans, net $ 1,620 - 8,145 18,184 - 27,949
Average deposits - - - - 18,608 18,608
Average attributed common
equity $ 101 78 565 1,296 419 2,459
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-3
<PAGE>
<TABLE>
<CAPTION>
Table 4
BUSINESS SEGMENTS
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
-------------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 79 21 9 230 96 435
Provision for loan losses 1 (1) - 1 - 1
Noninterest income 226 178 94 93 202 793
Noninterest expense 214 92 60 124 189 679
Income tax expense 33 39 16 72 40 200
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 57 69 27 126 69 348
- -----------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 16.13 % 45.19 50.44 18.39 46.33 24.99
Average loans, net $ 2,326 646 - 8,546 3,369 14,887
Average deposits 818 212 111 2,658 21 3,820
Average attributed common
equity $ 353 152 54 684 149 1,392
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank CoreStates Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED (b)
Income statement data
Net interest income $ 3,083 263 1,505 435 457 2,167 7,910
Provision for loan losses 522 3 60 1 254 263 1,103
Noninterest income 1,238 920 338 793 107 926 4,322
Noninterest expense 2,452 887 1,013 679 558 1,747 7,336
Income tax expense 493 107 282 200 (268) 270 1,084
- ----------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders after
merger-related and
restructuring charges $ 854 186 488 348 20 813 2,709
After-tax merger-related and
restructuring charges - - - - 194 10 204
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders before
merger-related and
restructuring charges $ 854 186 488 348 214 823 2,913
- ----------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
common equity (a) 30.78 % 33.25 19.87 24.99 5.52 24.68 20.24
Average loans, net $ 52,510 2,149 27,949 14,887 2,934 34,088 134,517
Average deposits 60,423 13,258 18,608 3,820 3,771 32,967 132,847
Average attributed common
equity $ 2,774 558 2,459 1,392 3,875 3,335 14,393
- ----------------------------------------------------------------------------------------------------------------------------
</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.
(b) Discreet CoreStates segment data which would conform to the Corporation's
segment reporting methodologies and assumptions are not available, and
accordingly, the amounts related to CoreStates represent the consolidated
historical results of CoreStates.
T-4
<PAGE>
<TABLE>
<CAPTION>
Table 5
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 13.58 X 13.61 13.22 12.63 13.31
X
Return on assets 1.38 % 1.20 1.26 1.20 1.22
- ----------------------------------------------------------------------------------------------------
Return on total stockholders' equity (b) 18.86 % 16.36 16.65 15.14 16.23
X
Earnings retained 57.88 % 54.24 60.43 58.59 64.45
- ----------------------------------------------------------------------------------------------------
Internal capital growth (b) 10.91 % 8.87 10.06 8.87 10.46
- ----------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 39.18 % 39.18 36.13 38.30 33.59
Preferred and common shares 39.18 39.38 36.84 39.84 35.32
Net income
Common shares 42.12 45.55 38.84 39.85 33.81
Preferred and common shares 42.12 % 45.76 39.57 41.41 35.55
- ----------------------------------------------------------------------------------------------------
SELECTED RATIOS ON
Operating earnings
Return on assets 1.49 % 1.39 1.36 1.25 1.22
Return on common
stockholders' equity (b) (c) 20.24 18.76 17.98 15.65 16.73
Net income
Return on common
stockholders' equity (b) (c) 18.86 % 16.42 16.72 15.04 16.62
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on average balances and net income.
(b) The determination of these ratios exclude average net unrealized gains or
losses on debt and equity securities.
(c) Based on average balances and net income applicable to common stockholders.
T-5
<PAGE>
<TABLE>
<CAPTION>
Table 6
SELECTED QUARTERLY DATA
- --------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------------
(In millions, except per
share data) Fourth Third Second First Fourth Third Second First
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,635 3,663 3,621 3,443 3,484 3,457 3,452 3,365
Interest expense 1,681 1,657 1,613 1,501 1,574 1,534 1,538 1,505
- --------------------------------------------------------------------------------------------------------------------
Net interest income 1,954 2,006 2,008 1,942 1,910 1,923 1,914 1,860
Provision for loan losses 445 225 228 205 190 164 204 120
- --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,509 1,781 1,780 1,737 1,720 1,759 1,710 1,740
Securities available for sale
transactions 18 15 10 9 20 33 21 22
Investment security
transactions - 2 1 - 1 - 2 1
Noninterest income 1,147 1,065 1,030 1,025 976 873 817 769
Merger-related and
restructuring charges (a) 225 - 59 - 10 12 104 295
SAIF special assessment (b) - - - - - 149 - -
Noninterest expense 1,941 1,711 1,712 1,688 1,646 1,605 1,580 1,529
- --------------------------------------------------------------------------------------------------------------------
Income before income
taxes (benefits) 508 1,152 1,050 1,083 1,061 899 866 708
Income taxes (benefits) (68) 404 368 380 373 316 315 257
- --------------------------------------------------------------------------------------------------------------------
Net income 576 748 682 703 688 583 551 451
Dividends on preferred stock - - - - 1 1 3 4
- --------------------------------------------------------------------------------------------------------------------
Net income applicable to
common stockholders $ 576 748 682 703 687 582 548 447
- --------------------------------------------------------------------------------------------------------------------
PER COMMON
SHARE DATA
Basic earnings $ 0.61 0.79 0.72 0.72 0.71 0.60 0.56 0.46
Diluted earnings 0.60 0.78 0.70 0.72 0.70 0.60 0.55 0.45
Cash dividends 0.32 0.32 0.29 0.29 0.29 0.29 0.26 0.26
Common stock price
High 52 7/8 50 11/16 47 7/8 47 3/4 38 1/2 33 7/8 32 1/4 31 3/8
Low 46 15/16 45 7/8 39 1/8 36 5/8 33 1/2 30 1/2 28 3/4 25 3/4
Period-end $ 51 1/4 50 1/16 46 1/4 40 1/2 37 33 3/8 30 3/8 30 1/8
- --------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS (c)
Return on assets (d) 1.14 % 1.50 1.39 1.50 1.51 1.23 1.16 0.98
Return on common
stockholders' equity (e) 15.44 20.36 19.37 19.91 20.70 16.87 15.85 13.14
Stockholders' equity to assets 7.51 % 7.29 7.15 7.51 7.31 7.27 7.27 7.54
- --------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS (f)
Return on assets (d) 1.47 % 1.50 1.47 1.50 1.52 1.45 1.30 1.39
Return on common
stockholders' equity (e) 19.82 % 20.31 20.42 19.91 20.39 19.50 17.49 18.57
- --------------------------------------------------------------------------------------------------------------------
CORPORATION AS
REPORTED
Net interest income $ 1,416 1,463 1,460 1,404 1,372 1,383 1,381 1,329
Net income 362 547 483 504 494 386 470 274
Net income applicable to
common stockholders 362 547 483 504 493 385 467 270
Basic earnings per share 0.57 0.88 0.78 0.80 0.80 0.63 0.75 0.43
Diluted earnings per share $ 0.56 0.87 0.77 0.79 0.79 0.62 0.74 0.43
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Merger-related restructuring charges amounted to $204 million after tax in
1997 and $272 million after tax in 1996.
(b) The SAIF special assessment amounted to $96 million after tax in 1996.
(c) Based on average balances and after merger-related and restructuring charges
and SAIF special assessment.
(d) Based on net income.
(e) Based on net income applicable to common stockholders, excluding average net
unrealized gains or losses on debt and equity securities.
(f) Based on average balances and before merger-related and restructuring
charges and SAIF special assessment.
T-6
<PAGE>
<TABLE>
<CAPTION>
Table 7
SELECTED FIVE-YEAR DATA
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
(Dollars in millions) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 4,827 5,707 3,836 3,842 6,277
Wholesale 3,845 399 428 933 2,431
- ----------------------------------------------------------------------------------------------------------------
Total $ 8,672 6,106 4,264 4,775 8,708
- ----------------------------------------------------------------------------------------------------------------
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 64,363 61,909 57,504 33,881 32,786
- ----------------------------------------------------------------------------------------------------------------
FIRST UNION CORPORATION
OTHER DATA
ATMs 3,701 3,458 3,165 2,039 1,986
Employees 65,943 67,793 68,978 54,479 56,430
Common stockholders 120,437 103,538 89,257 54,236 58,670
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes originations of affiliated banks.
T-7
<PAGE>
<TABLE>
<CAPTION>
Table 8
SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 718 1,106 1,420 178 3,422 (120) - 3,302 6.05
U.S. Government agencies 170 5,749 7,722 46 13,687 (234) 4 13,457 5.41
CMOs 333 1,806 176 224 2,539 (25) 7 2,521 4.68
State, county and municipal 13 30 22 71 136 (1) - 135 12.75
Other 114 2,250 237 1,139 3,740 (87) 12 3,665 6.83
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080 5.72
- -------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 1,348 10,875 9,577 751 22,551 (414) 21 22,158
Sundry securities - 66 - 907 973 (53) 2 922
- -------------------------------------------------------------------------------------------------------------------
Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 1,334 10,743 9,341 740 22,158
Sundry securities - 66 - 856 922
- -----------------------------------------------------------------------------------
Total $ 1,334 10,809 9,341 1,596 23,080
- -----------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.06 % 6.30 7.01 7.07 6.57
U.S. Government agencies 5.96 7.11 7.05 7.57 7.07
CMOs 7.49 6.62 5.68 5.77 6.59
State, county and municipal 8.09 6.93 6.64 6.90 6.98
Other 6.90 5.69 6.91 6.44 6.03
Consolidated 6.48 % 6.66 7.02 6.47 6.78
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 595 2,677 53 22 3,347 (16) 15 3,346 2.25
U.S. Government agencies 100 2,669 8,970 31 11,770 (45) 60 11,785 5.74
CMOs 199 1,256 1 8 1,464 (9) 9 1,464 3.12
State, county and municipal 29 35 25 31 120 (1) - 119 7.10
Other 122 1,128 115 1,133 2,498 (77) 16 2,437 4.68
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151 4.84
- -------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 1,045 7,748 9,164 225 18,182 (97) 100 18,185
Sundry securities - 17 - 1,000 1,017 (51) - 966
- -------------------------------------------------------------------------- ----------------------------------------
Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151
- -------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 1,042 7,716 9,192 235 18,185
Sundry securities - 16 - 950 966
- -----------------------------------------------------------------------------------
Total $ 1,042 7,732 9,192 1,185 19,151
- -----------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.10 % 6.05 7.24 6.46 6.08
U.S. Government agencies 5.83 6.82 6.98 7.77 6.93
CMOs 6.32 6.99 6.03 6.03 6.90
State, county and municipal 7.68 7.41 7.72 7.14 7.47
Other 7.36 6.15 7.83 5.76 6.11
Consolidated 6.31 % 6.49 6.99 5.86 6.68
- -----------------------------------------------------------------------------------
</TABLE>
T-8
<PAGE>
Included in "U.S. Government agencies" and "Other" at December 31, 1997, are
$2.7 billion of securities that are denominated in currencies other than the
U.S. dollar. The currency exchange rates were hedged utilizing both on-and
off-balance sheet instruments to minimize the exposure to currency revaluation
risks. At December 31, 1997, these securities had a weighted average maturity of
3.75 years and a weighted average yield of 5.31 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.57
percent based on a weighted average funding cost differential of (1.26) percent.
The amounts included in this paragraph are not restated for the CoreStates
acquisition.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at December 31, 1997. Average maturity in years
excludes preferred and common stocks and money market funds.
Yields related to securities exempt from both federal and state income taxes,
federal income taxes only or state income taxes only are stated on a fully
tax-equivalent basis. They are reduced by the nondeductible portion of interest
expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent
in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6
percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in
Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5
percent in Connecticut.
There were forward commitments to purchase securities at a cost of $6.4 billion
that had a market value of $6.4 billion at December 31, 1997. Gross gains and
losses realized on the sale of debt securities in 1997 were $54 million and $43
million, respectively, and gross gains and losses on sundry securities were $52
million and $11 million, respectively. Gross gains and losses realized on the
sale of debt securities in 1996 were $163 million and $130 million,
respectively, and gross gains on sundry securities $63 million.
T-9
<PAGE>
<TABLE>
<CAPTION>
Table 9
INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
-------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Treasury $ 14 3 1 - 18 - - 18 0.86
U.S. Government agencies 171 861 323 24 1,379 28 (2) 1,405 3.89
CMOs 31 380 42 67 520 9 - 529 4.77
State, county and municipal 105 282 302 327 1,016 120 - 1,136 8.60
Other 16 56 79 442 593 2 (13) 582 20.70
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 337 1,582 747 860 3,526 159 (15) 3,670 6.94
- -------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 337 1,582 747 544 3,210 159 (2) 3,367
Sundry securities - - - 316 316 - (13) 303
- -------------------------------------------------------------------------------------------------------------------
Total $ 337 1,582 747 860 3,526 159 (15) 3,670
- -------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 338 1,623 791 615 3,367
Sundry securities - - - 303 303
- ---------------------------------------------------------------------------------
Total $ 338 1,623 791 918 3,670
- ---------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.96 % 5.62 6.10 - 5.91
U.S. Government agencies 6.03 7.29 6.92 5.35 7.02
CMOs 7.82 7.88 6.34 2.66 7.08
State, county and municipal 9.77 10.90 13.14 12.20 11.87
Other 3.75 4.74 7.18 9.72 8.74
Consolidated 7.25 % 7.98 9.43 9.99 8.71
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Treasury $ 12 23 - 1 36 1 - 37 2.36
U.S. Government agencies 108 988 319 5 1,420 25 (4) 1,441 4.13
CMOs 221 715 1 8 945 8 (1) 952 2.51
State, county and municipal 160 388 215 408 1,171 113 (1) 1,283 7.16
Other 41 159 50 368 618 5 (8) 615 8.68
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 542 2,273 585 790 4,190 152 (14) 4,328 5.14
- -------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 542 2,273 585 468 3,868 152 (2) 4,018
Sundry securities - - - 322 322 - (12) 310
- -------------------------------------------------------------------------------------------------------------------
Total $ 542 2,273 585 790 4,190 152 (14) 4,328
- -------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 547 2,318 608 545 4,018
Sundry securities - - - 310 310
- ---------------------------------------------------------------------------------
Total $ 547 2,318 608 855 4,328
- ---------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.80 % 6.31 - 6.34 6.14
U.S. Government agencies 5.81 7.60 7.18 6.34 7.36
CMOs 6.47 6.98 6.03 6.03 6.85
State, county and municipal 7.50 8.81 9.76 11.31 9.68
Other 5.83 6.41 7.12 6.64 6.56
Consolidated 6.58 % 7.51 8.12 9.05 7.77
- ----------------------------------------------------------------------------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. The aging of mortgage-backed securities is based on their
weighted average maturities at December 31, 1997.
Yields related to securities exempt from both federal and state income taxes,
federal income taxes only or state income taxes only are stated on a fully
tax-equivalent basis. They are reduced by the nondeductible portion of interest
expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent
in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6
percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in
Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5
percent in Connecticut.
There were no commitments to purchase or sell investment securities at
December 31, 1997. Gross gains realized on calls of sundry securities in 1997
were $3 million. In 1996, gross gains and losses realized on repurchase
agreement underdeliveries and calls of investment securities were $5 million and
$1 million, respectively.
T-10
<PAGE>
<TABLE>
<CAPTION>
Table 10
LOANS
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 46,117 41,489 40,959 35,220 31,871
Real estate - construction and other 3,037 3,474 3,350 2,651 2,791
Real estate - mortgage 13,160 14,300 15,071 14,533 14,448
Lease financing 8,610 6,348 4,556 2,278 1,769
Foreign 3,885 2,842 1,675 1,121 968
- ----------------------------------------------------------------------------------------------------
Total commercial 74,809 68,453 65,611 55,803 51,847
- ----------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 28,998 33,181 32,782 26,615 23,862
Installment loans - Bankcard (a) 3,914 7,295 5,358 5,837 3,425
Installment loans - other 22,271 23,855 22,493 18,153 17,171
Vehicle leasing 5,331 4,529 3,615 2,799 1,905
- ----------------------------------------------------------------------------------------------------
Total retail 60,514 68,860 64,248 53,404 46,363
- ----------------------------------------------------------------------------------------------------
Total loans 135,323 137,313 129,859 109,207 98,210
- ----------------------------------------------------------------------------------------------------
UNEARNED INCOME
Loans 661 542 513 456 372
Lease financing 2,975 2,124 1,441 786 463
- ----------------------------------------------------------------------------------------------------
Total unearned income 3,636 2,666 1,954 1,242 835
- ----------------------------------------------------------------------------------------------------
Loans, net $ 131,687 134,647 127,905 107,965 97,375
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
<PAGE>
T-11
<TABLE>
<CAPTION>
Table 11
CERTAIN COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
- ----------------------------------------------------------------------------------------------------------------
December 31, 1997
----------------------------------------------------------
Real
Commercial, Estate-
Financial Construction Real
and and Estate-
(In millions) Agricultural Other Mortgage Foreign Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED RATE
1 year or less $ 11,285 37 1,405 2,417 15,144
1-5 years 4,447 252 3,473 199 8,371
After 5 years 1,642 199 1,788 - 3,629
- ----------------------------------------------------------------------------------------------------------------
Total 17,374 488 6,666 2,616 27,144
- ----------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE
1 year or less 14,045 905 1,350 1,148 17,448
1-5 years 11,934 1,339 3,196 119 16,588
After 5 years 2,764 305 1,948 2 5,019
- ----------------------------------------------------------------------------------------------------------------
Total 28,743 2,549 6,494 1,269 39,055
- ----------------------------------------------------------------------------------------------------------------
Total $ 46,117 3,037 13,160 3,885 66,199
================================================================================================================
</TABLE>
T-12
<PAGE>
<TABLE>
<CAPTION>
Table 12
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year $ 2,212 2,308 2,259 2,259 2,171
Provision for loan losses 1,103 678 403 458 559
Allowance relating to loans acquired, transferred
to accelerated disposition or sold (596) 50 193 82 197
Loan losses, net (872) (824) (547) (540) (668)
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,847 2,212 2,308 2,259 2,259
- ------------------------------------------------------------------------------------------------------------
as % of loans, net 1.40 % 1.64 1.80 2.09 2.32
- ------------------------------------------------------------------------------------------------------------
as % of nonaccrual and restructured loans 211 % 241 252 228 142
- ------------------------------------------------------------------------------------------------------------
as % of nonperforming assets 186 % 211 201 170 111
- ------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 172 221 187 276 357
Real estate - construction and other 49 98 64 123 127
Real estate - mortgage 54 60 97 123 174
Installment loans - Bankcard 511 405 255 110 95
Installment loans - Bankcard special adjustment (a) - 34 - - -
Installment loans - other and Vehicle leasing 288 258 163 125 137
- ------------------------------------------------------------------------------------------------------------
Total 1,074 1,076 766 757 890
- ------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 74 120 103 101 111
Real estate - construction and other 23 33 24 20 17
Real estate - mortgage 9 12 22 23 24
Installment loans - Bankcard 35 40 23 18 16
Installment loans - other and Vehicle leasing 61 47 47 55 54
- ------------------------------------------------------------------------------------------------------------
Total 202 252 219 217 222
- ------------------------------------------------------------------------------------------------------------
Loan losses, net $ 872 824 547 540 668
- ------------------------------------------------------------------------------------------------------------
as % of average loans, net 0.65 % 0.64 0.45 0.53 0.72
- ------------------------------------------------------------------------------------------------------------
as % of average loans, net,
excluding Bankcard 0.31 % 0.35 0.27 0.46 0.66
- ------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 384 324 514 569 797
Commercial real estate loans 135 218 - - -
Consumer real estate loans 233 240 - - -
Installment loans 124 123 131 - -
Real estate loans - - 260 397 686
- ------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 876 905 905 966 1,483
Restructured loans 2 14 11 27 106
Foreclosed properties 113 128 232 335 448
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 991 1,047 1,148 1,328 2,037
- ------------------------------------------------------------------------------------------------------------
as % of loans,
net and foreclosed properties 0.75 % 0.78 0.90 1.23 2.08
- ------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 326 474 445 350 294
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard special adjustment includes a 1996 one-time
charge-off related to an anticipated regulatory change that would reduce the
period delinquent loans could be held before charge-off.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed herein or under the "Loans" or
"Asset Quality" narrative discussions in Management's Analysis of Operations
do not (i) represent or result from trends or uncertainties that management
expects will materially affect future operating results, liquidity or capital
resources, or (ii) represent material credits about which management is aware
of any information that causes management to have serious doubts as to the
ability of such borrowers to comply with the loan repayment terms.
T-13
<PAGE>
<TABLE>
<CAPTION>
Table 13
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (a)
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- -------------- --------------- --------------
Loans Loans Loans Loans Loans
% to % to % to % to % to
Total Total Total Total Total
(In millions) Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt. Loans
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 480 35 % $ 543 30 % $ 645 32 % $ 689 32 % $ 657 32 %
Real estate -
Construction and
other 44 2 90 3 102 3 106 2 243 3
Mortgage 149 31 284 34 405 36 403 39 466 40
Installment loans -
Bankcard 225 3 442 5 322 4 238 5 142 3
Other and Vehicle
leasing 227 20 309 21 334 20 251 19 275 19
Lease financing 46 6 73 5 37 4 39 2 26 2
Foreign 49 3 39 2 60 1 44 1 18 1
Unallocated 627 - 432 - 403 - 489 - 432 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,847 100 % $ 2,212 100 % $ 2,308 100 % $ 2,259 100 % $ 2,259 100 %
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The allocation of the allowance for loan losses to the respective
classifications is not necessarily indicative of future losses or future
allocations. See the "Loans" and the "Provision and Allowance for Loan Losses"
discussions in Management's Analysis of Operations and the "Allowance for Loan
Losses" discussion in Note 1 of Notes to Supplemental Consolidated Financial
Statements.
<PAGE>
<TABLE>
<CAPTION>
Table 14
INTANGIBLE ASSETS
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In millions) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
MORTGAGE AND OTHER SERVICING ASSETS $ 427 284 209 135 95
- --------------------------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 24 35 46 62 82
- --------------------------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 2,465 2,650 2,202 1,665 1,110
Deposit base premium 473 551 622 627 404
Other 10 15 19 29 40
- --------------------------------------------------------------------------------------------------------------------------
Total $ 2,948 3,216 2,843 2,321 1,554
==========================================================================================================================
</TABLE>
T-14
<PAGE>
<TABLE>
<CAPTION>
Table 15
FORECLOSED PROPERTIES
- -------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreclosed properties $ 129 145 257 377 511
- -------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning
of year 17 25 42 63 109
Provision for foreclosed properties 2 (1) (3) 14 46
Transfer from allowance for segregated assets - 1 - 2 5
Dispositions, net (3) (8) (14) (37) (97)
- -------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of year 16 17 25 42 63
- -------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 113 128 232 335 448
- -------------------------------------------------------------------------------------------------------------
</TABLE>
T-15
<PAGE>
<TABLE>
<CAPTION>
Table 16
DEPOSITS
- ---------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORE DEPOSITS
Noninterest-bearing $ 31,005 29,713 27,706 24,542 24,976
Savings and NOW accounts 37,281 35,892 36,654 33,634 31,903
Money market accounts 21,240 21,193 18,719 19,284 20,455
Other consumer time 37,324 42,457 42,857 36,671 33,545
- ---------------------------------------------------------------------------------------------
Total core deposits 126,850 129,255 125,936 114,131 110,879
Foreign 3,928 3,307 4,720 5,916 2,254
Other time 6,299 3,867 3,456 2,592 2,616
- ---------------------------------------------------------------------------------------------
Total deposits $ 137,077 136,429 134,112 122,639 115,749
- ---------------------------------------------------------------------------------------------
</TABLE>
T-16
<PAGE>
Table 17
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ------------------------------------------------------------------------
December 31, 1997
--------------------
Time Other
(In millions) Certificates Time
- ------------------------------------------------------------------------
MATURITY OF
3 months or less $ 3,783 -
Over 3 months through 6 months 2,307 -
Over 6 months through 12 months 2,016 -
Over 12 months 2,728 -
- ------------------------------------------------------------------------
Total $ 10,834 -
- ------------------------------------------------------------------------
T-17
<PAGE>
<TABLE>
<CAPTION>
Table 18
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------
(In millions) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 13,972 11,358 10,085 7,854 6,216
Total capital 21,585 18,058 16,089 12,190 9,722
Adjusted risk-based assets 165,802 143,549 136,261 94,410 67,702
Adjusted leverage ratio assets $ 197,075 168,455 163,668 116,642 93,654
Ratios
Tier 1 capital 8.43 % 7.91 7.40 8.32 9.18
Total capital 13.02 12.58 11.81 12.91 14.36
Leverage 7.09 6.74 6.16 6.73 6.64
STOCKHOLDERS' EQUITY TO ASSETS (a)
Year-end 7.42 7.41 7.30 7.52 7.83
Average 7.36 % 7.35 7.56 7.92 7.51
- ----------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank (North Carolina) 6.97 % 6.43 6.46 7.32 8.24
First Union National Bank (New Jersey) 10.70 8.98 9.16 - -
First Union Bank of Delaware 11.83 13.61 25.45 - -
First Union Home Equity Bank 10.95 8.40 7.50 7.60 -
Total capital
First Union National Bank (North Carolina) 10.20 10.20 10.15 10.69 11.35
First Union National Bank (New Jersey) 13.99 12.22 10.95 - -
First Union Bank of Delaware 13.09 14.87 26.74 - -
First Union Home Equity Bank 13.20 10.77 10.09 12.10 -
Leverage
First Union National Bank (North Carolina) 6.02 5.95 5.72 6.10 5.52
First Union National Bank (New Jersey) 7.06 7.06 7.43 - -
First Union Bank of Delaware 6.24 10.60 17.20 - -
First Union Home Equity Bank 10.16 % 7.84 6.48 7.22 -
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and a minimum ratio of total
capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of
tier 1 capital to adjusted average quarterly assets is from 3.00 to 5.00
percent. The 1992-1996 capital ratios presented herein have not been restated to
reflect the Signet pooling of interests acquisition. The amounts presented
herein have been restated for all periods presented to reflect the CoreStates
acquisition.
(b) By the end of 1997, all First Union bank affiliates were merged into
First Union National Bank (North Carolina), except those included herein.
Accordingly, historical information related to such affiliates is not presented,
and historical ratios for First Union National Bank (North Carolina) are not
restated. On February 26, 1998, First Union National Bank (New Jersey) and First
Union National Bank (North Carolina) were combined. The combined banks will
operate as First Union National Bank. The amounts presented herein do not
include those of acquired banks.
T-18
<PAGE>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted
Average Rate Estimated
------------------------------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- ---------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 16,287 6.50 % 5.94 % 3.59 Converts floating rate loans to fixed
Carrying amount $ 13 rate. Adds to liability sensitivity.
Unrealized gross gain 190 Similar characteristics to a fixed
Unrealized gross loss (14) income security funded with variable
rate liabilities. Includes $1.4 billion
of callable swaps expected to mature
in December 1999 if swap rates are
below 6.99 percent.
-------
Total 189
-------
Forward interest rate swaps 725 6.20 - 2.97 - Converts floating rate loans to fixed
Carrying amount rates in future periods. Effective
Unrealized gross gain 1 December 1998 with put options on
Unrealized gross loss - forward swaps referenced under
"Rate Sensitivity Hedges" linked to
this item.
--------
Total 1
--------
Interest rate floors 579 6.06 5.90 1.60 Paid a premium to convert floating
Carrying amount 3 rate loans to fixed rate when 3
Unrealized gross gain 2 month LIBOR is below an average
Unrealized gross loss (1) of 6.06 percent.
--------
Total 4
--------
Portfolio swaps 100 8.19 6.08 6.30 - Converts 3 month floating rate
Carrying amount treasury bill-based portfolio assets
Unrealized gross gain 11 to 1 month floating rate LIBOR
Unrealized gross loss - assets.
--------
Total 11
--------
Mortgage swap 9 6.05 8.09 4.30 - Offsets interest rate risk in a portion
Carrying amount of the fixed rate long-term mortgage
Unrealized gross gain - portfolio.
Unrealized gross loss -
--------
Total -
--------
Interest rate caps 14 8.50 7.65 0.90 - Offsets corresponding rate caps in
Carrying amount commercial loans.
Unrealized gross gain -
Unrealized gross loss -
--------
Total -
- ---------------------------------------- --------
Total asset rate
conversions $ 17,714 6.48 % 5.94 % 3.52 $ 205
- -----------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-19
<PAGE>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted
Average Rate Estimated
--------------------------------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 10,627 6.77 % 6.24 % 7.09 Converts $6.0 billion of fixed rate
Carrying amount $ 19 long-term debt to floating rate by
Unrealized gross gain 309 matching the terms of the swap to
Unrealized gross loss (19) the debt issue. Also converts $1.1
billion of fixed rate CDs to variable
rate, $950 million of fixed rate bank
notes to floating rate, $1 billion of
capital trust securities to variable
rate, and $1.5 billion of deposits
to variable rate.
-----
Total 309
-----
Forward interest rate swaps 459 6.83 - 3.30 - Converts fixed rate deposit liabilities
Carrying amount to floating rate in future periods.
Unrealized gross gain 6
Unrealized gross loss -
-----
Total 6
-----
Interest rate floors 336 4.65 - 2.67 $250 million and $86 million offset
Carrying amount 1 corresponding rate purchased floors
Unrealized gross gain - in long-term debt and 2 year floating
Unrealized gross loss (1) rate retail deposits, respectively.
-----
Total -
- ------------------------------------------ -----
Total liability rate
conversions $ 11,422 6.71 % 6.24 % 6.81 $ 315
- ----------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-20
<PAGE>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------------------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Put options on forward swaps $ 725 - % 6.20 % 0.95 Paid a premium for the right to
Carrying amount $ 5 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 5
------
Call options on forward swaps 200 - - 6.70 Paid a premium for the right to
Carrying amount 3 extend interest rate swaps hedging
Unrealized gross gain 1 $50 million of deposits and other
Unrealized gross loss - borrowings if LIBOR rates rise
above a certain level, and to execute
interest rate swaps to convert $150
million of long-term fixed rate debt
into floating rate.
------
Total 4
------
Interest rate caps (LIBOR) 158 5.88 7.03 1.86 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 -
------
Periodic caps 408 - 7.84 8.37 Paid a premium for the right to lock
Carrying amount 5 in 1 year LIBOR reset rates for the
Unrealized gross gain - purpose of converting floating rate
Unrealized gross loss - liabilities to fixed rate.
======
Total 5
------
Interest rate caps (CMT) 2,200 - 5.70 3.96 Paid a premium for the right to lock
Carrying amount 27 in 1 year Treasury rates for the
Unrealized gross gain - purpose of converting floating rate
Unrealized gross loss (1) liabilities to fixed rate.
------
Total 26
------
Interest rate floors 625 7.13 - 1.40 Paid a premium for the right to
Carrying amount 2 receive a fixed rate if LIBOR is
Unrealized gross gain 6 below 7.13 percent. Adds to
Unrealized gross loss - liability sensitivity when rates are
below 7.13 percent.
======
Total 8
------
Interest rate caps 200 - 6.13 0.70 Received a premium for the
Carrying amount - obligation to pay a fixed rate when
Unrealized gross gain - rates are above 6.13 percent. Adds
Unrealized gross loss - to liability sensitivity when rates
are above 6.13 percent.
------
Total -
------
Forward rate locks 50 5.69 - 0.50 Offsets interest rate risk and
Carrying amount - corresponding price risk associated
Unrealized gross gain - with the anticipated sale of 10- and
Unrealized gross loss - 15-year fixed rate home equity
loans.
------
Total -
------
</TABLE>
(Continued)
T-21
<PAGE>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------------------------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES (continued)
Short eurodollar futures 12,922 - 6.11 0.40 Locks in 3 month LIBOR reset rates
Carrying amount - on pay variable rate swaps. $4.8
Unrealized gross gain - billion effective March and June
Unrealized gross loss (10) 1998 and $2.8 billion effective
September 1998. $621 million
converts 1 month floating rate loans
to 1 month fixed rate loans.
--------
Total (10)
--------
Long eurodollar futures 2,468 6.47 - 1.13 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,
June and September 1999. $468
million converts 1 month floating
rate loans to 3 month fixed rate
loans.
--------
Total 4
--------
Call Options on eurodollar
futures 768 6.79 - 0.46 Paid a premium for the right to buy
Carrying amount - Eurodollar futures that convert
Unrealized gross gain 2 floating rate LIBOR-based loans to
Unrealized gross loss - fixed rate. Interest rate risk limited
to premium paid. $256 million
effective March 1998, June 1998
and September 1998.
--------
Total 2
--------
Short Deutschemark futures 56 - 3.94 0.21 Locks in 3 month Deutschemark
Carrying amount - funding levels in March 1998 for a
Unrealized gross gain - portion of the German bonds in the
Unrealized gross loss - foreign bond portfolio.
--------
Total -
--------
CMT Floor 100 6.42 5.84 3.34 First Union Mortgage Corporation
Carrying amount 1 paid a premium for a CMT floor in
Unrealized gross gain 1 order to offset the decline in value
Unrealized gross loss - of mortgage servicing in a falling
rate environment.
--------
Total 2
- ------------------------------------------- --------
Total rate sensitivity
hedges $ 20,880 6.66 % 6.10 % 1.14 $ 46
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Estimated maturity approximates average life except for eurodollar futures,
average life of .25 years. London Interbank Offered Rates (LIBOR) - The average
of interbank offered rates on dollar deposits in the London market, based on
quotations at five major banks. Weighted average pay rates are generally based
on one to six month LIBOR. Pay rates reset at predetermined reset dates over the
life of the contract. Rates shown are the pay rates in effect as of December
31, 1997. Weighted average receive rates are fixed rates set at the time the
contract was transacted. Carrying amount includes accrued interest
receivable/payable and unamortized premiums paid/received.
T-22
<PAGE>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------------------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 24,088 6.27 % 5.56 % 2.18 Converts floating rate loans to fixed
Carrying amount $ 11 rate. Adds to liability sensitivity.
Unrealized gross gain 183 Similar characteristics to a fixed
Unrealized gross loss (41) income security funded with
variable rate liabilities. Includes
$4.8 billion of indexed amortizing
swaps, with $1.3 billion maturing
within 1 year and $3.5 billion within
4 years.
--------
Total 153
--------
Forward interest rate swaps 57 7.83 - 1.21 Converts floating rate loans to fixed
Carrying amount - rates in future periods. Effective
Unrealized gross gain 1 March 1997 with put options on
Unrealized gross loss - forward swaps referenced under
"Rate Sensitivity Hedges" linked to
this item.
--------
Total 1
--------
Interest rate floors 558 5.98 5.51 1.98 Paid a premium to convert floating
Carrying amount 4 rate loans to fixed rate when 3
Unrealized gross gain - month LIBOR is below 5.98
Unrealized gross loss - percent (approximately).
--------
Total 4
--------
Mortgage swap 139 6.24 8.09 5.10 Offsets interest rate risk in a portion
Carrying amount - of the fixed rate long-term mortgage
Unrealized gross gain 1 portfolio.
Unrealized gross loss -
--------
Total 1
--------
Interest rate caps 20 8.25 7.33 1.90 Offsets corresponding rate caps in
Carrying amount - commercial loans.
Unrealized gross gain -
Unrealized gross loss -
--------
Total -
- ------------------------------------------ --------
Total asset rate
conversions $ 24,862 6.27 % 5.57 % 2.18 $ 159
- -------------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-23
<PAGE>
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
----------------------------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 12,322 6.58 % 5.73 % 4.67 Converts $4.8 billion of fixed rate
Carrying amount $ 31 long-term debt to floating rate by
Unrealized gross gain 178 matching the terms of the swap
Unrealized gross loss (81) to the debt issue. Rate sensitivity
remains unchanged due to the direct
linkage of the swap to the debt issue.
Also converts $3.4 billion of fixed
rate CDs to variable rate, $1.2
billion of fixed rate bank notes to
floating rate and $2.9 billion of
deposits to variable rate.
--------
Total 128
--------
Forward interest rate swaps 482 6.73 - 4.10 Converts fixed rate deposit liabilities
Carrying amount - to floating rate in future periods.
Unrealized gross gain 2
Unrealized gross loss (1)
--------
Total 1
--------
Interest rate floors 357 4.69 - 3.33 $250 million and $107 million offset
Carrying amount 2 corresponding rate purchased floors
Unrealized gross gain - in long-term debt and 2 year floating
Unrealized gross loss (1) rate retail deposits, respectively.
--------
Total 1
- ------------------------------------------ --------
Total liability rate
conversions $ 13,161 6.53 % 5.73 % 4.61 $ 130
- -------------------------------------------------------------------------------------------
ASSET HEDGES
Forward sale of Treasury notes$ 662 - % 5.74 % 0.03 Sold U.S. Treasury notes forward to
Carrying amount $ - hedge the market value of similar
Unrealized gross gain 5 U.S. Treasury notes in the available
Unrealized gross loss - for sale portfolio.
--------
Total 5
- ------------------------------------------ --------
Total asset hedges $ 662 - % 5.74 % 0.03 $ 5
- -------------------------------------------------------------------------------------------
</TABLE>
(Continued)
T-24
<PAGE>
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
----------------------------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVITY
HEDGES
Put options on eurodollar
futures $ 12,678 - % 6.37 % 0.31 Paid a premium for the right to lock
Carrying amount $ 6 in the 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps. $7.6 billion
Unrealized gross loss (5) effective March 1997; $5.1 billion
effective June 1997.
--------
Total 1
--------
Call options on forward swaps 250 - - 7.70 Paid a premium for the right to
Carrying amount 3 extend interest rate swaps hedging
Unrealized gross gain 3 $100 million of deposits and other
Unrealized gross loss - borrowings if LIBOR rates rise
above a certain level, and to execute
interest rate swaps to convert $150
million of long-term fixed rate debt
into floating rate.
--------
Total 6
--------
Interest rate caps (LIBOR) 168 5.54 7.03 2.70 Paid a premium for the right to lock
Carrying amount 1 in 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps.
Unrealized gross loss -
--------
Total 1
--------
Periodic caps 483 - 7.77 9.39 Paid a premium for the right to lock
Carrying amount 6 in 1 year LIBOR reset rates for the
Unrealized gross gain 2 purpose of converting floating rate
Unrealized gross loss - liabilities to fixed rate.
--------
Total 8
--------
Interest rate floors 725 7.04 - 2.20 Paid a premium for the right to
Carrying amount 2 receive a fixed rate if LIBOR is
Unrealized gross gain 12 below 7.04 percent. Adds to
Unrealized gross loss - liability sensitivity when rates are
below 7.04 percent.
--------
Total 14
--------
Interest rate caps 200 - 6.18 1.70 Received a premium for the
Carrying amount - obligation to pay a fixed rate when
Unrealized gross gain - rates are above 6.18 percent. Adds
Unrealized gross loss - to liability sensitivity when rates
are above 6.18 percent.
--------
Total -
--------
Forward rate locks 165 5.52 - 0.10 Offsets interest rate risk and
Carrying amount - corresponding price risk associated
Unrealized gross gain 2 with the anticipated sale of 10- and
Unrealized gross loss - 15-year fixed rate home equity
loans.
--------
Total 2
--------
</TABLE>
(continued)
T-25
<PAGE>
<TABLE>
<CAPTION>
Table 19
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------------------------------------
Maturity
December 31, 1996 Notional In Fair
(In millions) Amount Receive Pay Years(b) Value Comments
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVITY
HEDGES (continued)
Short eurodollar futures 16,955 - 5.82 0.21 Locks in 3 month LIBOR reset rates
Carrying amount - on pay variable rate swaps. $15.0
Unrealized gross gain - billion effective March 1997; $89
Unrealized gross loss (11) million effective June 1997. $1.9
billion converts 1 month floating rate
loans to 1 month fixed rate loans.
--------
Total (11)
--------
Long eurodollar futures 17,108 6.19 - 1.13 Converts floating rate LIBOR-based
Carrying amount - loans to fixed rate. Adds to liability
Unrealized gross gain 10 sensitivity. Similar characteristics to
Unrealized gross loss (2) fixed income security funded with
variable rate liabilities. $4.6
billion effective September 1997; $2.0
billion effective December 1997,
March, June and September 1998; $500
million effective December 1998,
March, June and September 1999. $2.5
billion converts 1 month floating rate
loans to 3 month fixed rate loans.
--------
Total 8
--------
CMT floor 100 6.42 6.37 4.34 First Union Mortgage Corporation
Carrying amount 1 paid a premium for a CMT floor in
Unrealized gross gain 1 order to offset the decline in value of
Unrealized gross loss - mortgage servicing in a falling rate
environment.
--------
Total 2
- ------------------------------------------ --------
Total rate sensitivity
hedges $ 48,832 6.24 % 5.95 % 0.74 $ 31
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Estimated maturity approximates duration except for forward bullets, average
duration of 1.0 years; and long eurodollar futures, average duration of .25
years. London Interbank Offered Rates (LIBOR) - The average of interbank offered
rates on dollar deposits in the London market, based on quotations at five major
banks. Weighted average pay rates are generally based on one to six month LIBOR.
Pay rates related to forward interest rate swaps are set on the future effective
date. Pay rates reset at predetermined reset dates over the life of the
contract. Rates shown are the rates in effect as of December 31, 1996. Weighted
average receive rates were set at the time the contract was transacted. Carrying
amount includes accrued interest receivable/payable, unamortized premiums
paid/received and any related margin accounts.
T-26
<PAGE>
<TABLE>
<CAPTION>
Table 20
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1997 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Notional amount $ 1,747 1,561 11,167 3,237 2 17,714
Weighted average receive rate 5.90 % 6.49 6.58 6.53 6.80 6.48
Estimated fair value $ (8) 14 170 29 - 205
- ----------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 2,643 927 2,462 3,502 1,888 11,422
Weighted average receive rate 5.98 % 7.06 6.87 6.79 7.29 6.71
Estimated fair value $ (9) 18 77 125 104 315
- ----------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 15,022 2,185 3,137 436 100 20,880
Weighted average receive rate 6.59 % 6.65 6.30 7.94 7.72 6.66
Estimated fair value $ (7) 9 32 12 - 46
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1996 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ----------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 11,509 2,064 10,874 415 - 24,862
Weighted average receive rate 6.15 % 5.64 6.54 5.88 - 6.27
Estimated fair value $ 39 (9) 145 (16) - 159
- ----------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 2,984 2,175 2,984 4,158 860 13,161
Weighted average receive rate 6.27 % 5.99 6.58 6.88 6.48 6.53
Estimated fair value $ 16 8 54 56 (4) 130
- ----------------------------------------------------------------------------------------------------------------------
ASSET HEDGES
Notional amount $ 662 - - - - 662
Weighted average receive rate - % - - - - -
Estimated fair value $ 5 - - - - 5
- ----------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 39,118 6,805 2,303 506 100 48,832
Weighted average receive rate 5.87 % 6.55 6.51 8.03 7.70 6.24
Estimated fair value $ (5) 7 13 15 1 31
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. Pay rates are generally based on one
to six month LIBOR and reset at predetermined reset dates. Current pay rates are
not necessarily indicative of future pay rates, and therefore, they have been
excluded from the above table. Weighted average pay rates are indicated in Table
19.
T-27
<PAGE>
<TABLE>
<CAPTION>
Table 21
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- -------------------------------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Asset Sensitivity
(In millions) Conversions Conversions Hedges Hedges Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 21,644 11,368 1,016 34,564 68,592
Additions 11,555 8,305 662 89,766 110,288
Maturities/Amortizations (5,786) (4,678) (697) (48,647) (59,808)
Terminations (2,551) (1,834) (319) (26,851) (31,555)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 24,862 13,161 662 48,832 87,517
Additions 4,905 2,435 - 41,765 49,105
Maturities/Amortizations (11,553) (3,147) (662) (55,730) (71,092)
Terminations (500) (1,027) - (13,987) (15,514)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 17,714 11,422 - 20,880 50,016
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
<PAGE>
<TABLE>
<CAPTION>
Table 22
INTEREST DIFFERENTIAL
- --------------------------------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
---------------------------------------------------------------
Interest Variance Interest Variance
Income/ Attributable to (b) Income/ Attributable to (b)
Expense -------------------- Expense --------------------
(In millions) Variance Rate Volume Variance Rate Volume
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Interest-bearing bank balances $ 52 1 51 (20) (11) (9)
Federal funds sold and securities
purchased under resale agreements 22 15 7 198 (12) 210
Trading account assets (a) 21 (3) 24 162 (9) 171
Securities available for sale (a) (26) 44 (70) 501 32 469
Investment securities (a)
U.S. Government and other (62) 10 (72) (447) 22 (469)
State, county and municipal (27) - (27) (70) (3) (67)
- --------------------------------------------------------------------------------------------------------------
Total investment securities (89) 10 (99) (517) 19 (536)
- --------------------------------------------------------------------------------------------------------------
Loans (a) 605 134 471 375 (320) 695
- --------------------------------------------------------------------------------------------------------------
Total earning assets $ 585 201 384 699 (301) 1,000
- --------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits 117 100 17 15 (63) 78
Short-term borrowings 132 56 76 309 (169) 478
Long-term debt 52 18 34 95 (39) 134
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 301 174 127 419 (271) 690
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 284 27 257 280 (30) 310
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Income related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are stated on
a fully tax-equivalent basis. They are reduced by the nondeductible portion of
interest expense assuming a federal tax rate of 35 percent; and state tax rates
of 7.5 percent in 1997, and 7.75 percent in 1996 in North Carolina; 5.5 percent
in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7
percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in
Delaware; 6.5 percent in New Jersey; and 10.5 percent in 1997, and 10.75 percent
in 1996 in Connecticut.
(b) Changes attributable to rate/volume are allocated to both rate and volume on
an equal basis.
T-28
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1997 YEAR ENDED 1996
----------------------------------------------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing bank balances $ 3,184 182 5.68 % $ 2,298 130 5.67 %
Federal funds sold and securities
purchased under resale agreements 7,219 399 5.51 7,104 377 5.32
Trading account assets (a) (d) 5,174 341 6.59 4,811 320 6.64
Securities available for sale (a) (d) 20,844 1,423 6.83 21,869 1,449 6.62
Investment securities (a) (d)
U.S. Government and other 2,478 179 7.22 3,497 241 6.89
State, county and municipal 1,085 105 9.67 1,370 132 9.64
- ---------------------------------------------------------------- --------------------
Total investment securities 3,563 284 7.97 4,867 373 7.66
- ---------------------------------------------------------------- --------------------
Loans (a) (b) (d)
Commercial
Commercial, financial and agricultural 43,118 3,464 8.03 40,089 3,285 8.20
Real estate - construction and other 3,295 293 8.89 3,562 302 8.48
Real estate - mortgage 13,619 1,180 8.67 14,230 1,283 9.02
Lease financing 4,199 423 10.09 3,124 264 8.44
Foreign 3,349 215 6.43 2,144 136 6.33
- ---------------------------------------------------------------- --------------------
Total commercial 67,580 5,575 8.25 63,149 5,270 8.35
- ---------------------------------------------------------------- --------------------
Retail
Real estate - mortgage 31,241 2,426 7.77 32,856 2,514 7.65
Installment loans - Bankcard (c) 7,005 1,058 15.11 6,478 922 14.24
Installment loans - other and
Vehicle leasing 28,691 2,773 9.66 26,637 2,521 9.47
- ---------------------------------------------------------------- --------------------
Total retail 66,937 6,257 9.35 65,971 5,957 9.03
- ---------------------------------------------------------------- --------------------
Total loans 134,517 11,832 8.80 129,120 11,227 8.70
- ---------------------------------------------------------------- --------------------
Total earning assets 174,501 14,461 8.29 170,069 13,876 8.16
-------------------- -------------------
Cash and due from banks 8,695 8,620
Other assets 12,897 10,596
---------- ---------
- --------------------------------------------
Total assets $ 196,093 $ 189,285
- ------------------------------------------------------ ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 33,104 898 2.71 33,360 828 2.48
Money market accounts 24,033 694 2.89 22,179 622 2.80
Other consumer time 39,752 2,067 5.20 42,226 2,198 5.21
Foreign 3,092 164 5.29 3,307 167 5.07
Other time 5,377 325 6.05 3,853 216 5.60
- ---------------------------------------------------------------- --------------------
Total interest-bearing deposits 105,358 4,148 3.94 104,925 4,031 3.84
Federal funds purchased and securities
sold under repurchase agreements 22,759 1,147 5.04 22,815 1,133 4.97
Commercial paper 1,948 112 5.76 1,865 98 5.27
Other short-term borrowings 5,680 338 5.96 4,228 234 5.53
Long-term debt 10,916 707 6.47 10,386 655 6.30
- ---------------------------------------------------------------- --------------------
Total interest-bearing liabilities 146,661 6,452 4.40 144,219 6,151 4.26
-------------------- -------------------
Noninterest-bearing deposits 27,489 26,351
Other liabilities 5,823 4,753
Guaranteed preferred beneficial interests 1,680 57
Stockholders' equity 14,440 13,905
- ------------------------------------------------------ ---------
Total liabilities and
stockholders' equity $ 196,093 $ 189,285
- ------------------------------------------------------ ---------
Interest income and rate earned $ 14,461 8.29 % $ 13,876 8.16 %
Interest expense and equivalent rate paid 6,452 3.70 6,151 3.61
- ------------------------------------------------------------------------------ --------------------
Net interest income and margin $ 8,009 4.59 % $ 7,725 4.55 %
- ------------------------------------------------------------------------------ -------------------
</TABLE>
(a) Yields related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are stated on
a fully tax-equivalent basis. They are reduced by the nondeductible portion of
interest expense, assuming a federal tax rate of 35 percent; and state tax rates
of 7.5 percent in 1997, 7.75 percent in 1995 and 1996, 7.8275 percent in 1994,
and 7.905 percent in 1993 in North Carolina; 5.5 percent in Florida; 4.5 percent
in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland;
9.975 percent in 1995 through 1997, and 10.25 percent in 1993 and 1994 in
Washington, D.C.; 4.87 percent in 1996 and 1997 in Delaware; 6.5 percent in 1996
and 1997 in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in
Connecticut. Lease financing amounts include related deferred income taxes.
T-29
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
YEAR ENDED 1995 YEAR ENDED 1994 YEAR ENDED 1993
------------------------------------ ------------------------------------------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid Balances Expense Paid
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 2,439 150 6.15 % $ 2,896 136 4.70 % $ 3,431 135 3.96 %
3,231 179 5.55 1,680 69 4.14 1,381 44 3.18
2,294 158 6.90 1,294 77 5.97 1,225 59 4.79
14,690 948 6.45 14,708 816 5.55 9,296 547 5.88
10,470 688 6.58 11,451 670 5.85 17,430 1,020 5.85
2,050 202 9.83 2,464 245 9.97 2,502 251 10.03
-------------------- -------------------- --------------------
12,520 890 7.11 13,915 915 6.58 19,932 1,271 6.38
-------------------- -------------------- --------------------
38,493 3,265 8.48 32,173 2,585 8.03 29,036 2,252 7.75
3,077 315 10.24 2,606 225 8.64 3,286 225 6.83
15,246 1,483 9.73 14,554 1,252 8.60 13,587 1,156 8.51
2,453 209 8.52 1,326 120 9.06 1,171 127 10.85
1,453 102 7.05 1,145 62 5.39 936 46 4.94
-------------------- -------------------- --------------------
60,722 5,374 8.85 51,804 4,244 8.19 48,016 3,806 7.93
-------------------- -------------------- --------------------
29,426 2,190 7.44 25,411 1,802 7.09 21,112 1,570 7.44
6,366 902 14.17 4,321 562 13.00 3,292 433 13.14
24,731 2,386 9.65 19,299 1,784 9.25 19,739 1,826 9.25
-------------------- -------------------- --------------------
60,523 5,478 9.05 49,031 4,148 8.46 44,143 3,829 8.67
-------------------- -------------------- --------------------
121,245 10,852 8.95 100,835 8,392 8.32 92,159 7,635 8.28
-------------------- -------------------- --------------------
156,419 13,177 8.42 135,328 10,405 7.69 127,424 9,691 7.60
------------------ ------------------ -------------------
8,306 7,844 8,049
9,257 7,072 7,574
--------- --------- ---------
$ 173,982 $ 150,244 $ 143,047
--------- --------- ---------
33,781 824 2.44 30,835 604 1.96 27,470 553 2.01
20,654 633 3.06 21,006 496 2.36 20,936 462 2.21
40,766 2,112 5.18 33,209 1,384 4.17 34,963 1,459 4.17
4,284 237 5.53 2,800 121 4.30 1,516 46 3.05
3,437 210 6.11 2,543 121 4.77 2,830 119 4.21
-------------------- -------------------- --------------------
102,922 4,016 3.90 90,393 2,726 3.02 87,715 2,639 3.01
14,599 831 5.69 10,960 470 4.28 10,158 354 3.48
2,104 123 5.83 1,607 67 4.19 1,090 32 2.92
3,376 202 6.00 2,050 109 5.30 1,290 53 4.12
8,334 560 6.72 6,049 367 6.07 5,492 298 5.43
-------------------- -------------------- --------------------
131,335 5,732 4.36 111,059 3,739 3.37 105,745 3,376 3.19
------------------ ------------------ -------------------
24,822 23,322 22,403
4,669 3,964 4,151
- - -
13,156 11,899 10,748
--------- --------- ---------
$ 173,982 $ 150,244 $ 143,047
--------- --------- ---------
$ 13,177 8.42 % $ 10,405 7.69 % $ 9,691 7.60 %
5,732 3.66 3,739 2.76 3,376 2.65
------------------ ------------------ -------------------
$ 7,445 4.76 % $ 6,666 4.93 % $ 6,315 4.95 %
------------------ ------------------ -------------------
</TABLE>
b) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(c) Installment loans -Bankcard include credit card, ICR, signature and First
Choice amounts for all years.
(d) Tax-equivalent adjustments included in trading account assets, securities
available for sale, investment securities, commercial, financial and
agricultural loans, commercial real estate--mortgage loans, and lease financing
are (in millions) $5, $11, $38, $32, $8 and $5, respectively, in 1997; and $10,
$14, $48, $35, $8 and $3, respectively, in 1996.
T-30
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
- --------------------------------------------------------------------------------
Management of First Union Corporation and its subsidiaries (the
"Corporation") is committed to the highest standards of quality customer service
and the enhancement of stockholder value. Management expects the Corporation's
employees to respect its customers and to assign the highest priority to
customer needs.
The accompanying supplemental consolidated financial statements were
prepared in conformity with generally accepted accounting principles and
include, as necessary, best estimates and judgments by management. Other
financial information contained in this supplemental annual report is presented
on a basis consistent with the supplemental consolidated financial statements
unless otherwise indicated.
To ensure the integrity, objectivity and fairness of the information in
these supplemental consolidated financial statements, management of the
Corporation has established and maintains internal control supplemented by a
program of internal audits. The internal control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed,
recorded and reported in accordance with management's intentions and
authorizations and to comply with applicable laws and regulations. To enhance
the reliability of internal control, management recruits and trains highly
qualified personnel, and maintains sound risk management practices.
The supplemental consolidated financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors, in accordance with generally
accepted auditing standards. KPMG Peat Marwick LLP reviews the results of its
audit with both management and the Audit Committee of the Board of Directors of
the Corporation. The Audit Committee, composed entirely of outside directors,
meets periodically with management, internal auditors and KPMG Peat Marwick LLP
to determine that each is fulfilling its responsibilities and to support actions
to identify, measure and control risks and augment internal controls.
Edward E. Crutchfield
Chairman and
Chief Executive Officer
Robert T. Atwood
Executive Vice President and
Chief Financial Officer
May 15, 1998
C-1
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
First Union Corporation
We have audited the supplemental consolidated balance sheets of First
Union Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related supplemental consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These supplemental consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these supplemental consolidated financial statements based on our
audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of First Union Corporation and CoreStates Financial Corp on April
28, 1998, which has been accounted for as a pooling of interests as described in
Note 2 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the consummation date. These financial statements
do not extend through the date of consummation. However, they will become the
historical consolidated statements of First Union Corporation and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of First Union Corporation and subsidiaries at December 31, 1997 and
1996, and the results of their operations and cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.
KPMG Peat Marwick LLP
Charlotte, North Carolina
May 15, 1998
C-2
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------
December 31,
--------------------
(In millions, except per share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,275 10,538
Interest-bearing bank balances 3,832 2,762
Federal funds sold and securities purchased under resale agreements 7,781 8,312
- ------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 21,888 21,612
- ------------------------------------------------------------------------------------------------------------------
Trading account assets 5,952 4,602
Securities available for sale (amortized cost $23,080 in 1997; $19,151 in 1996) 23,524 19,199
Investment securities (market value $3,670 in 1997; $4,328 in 1996) 3,526 4,190
Loans, net of unearned income ($3,636 in 1997; $2,666 in 1996) 131,687 134,647
Allowance for loan losses (1,847) (2,212)
- ------------------------------------------------------------------------------------------------------------------
Loans, net 129,840 132,435
- ------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,863 4,883
Due from customers on acceptances 1,496 1,502
Other intangible assets 2,948 3,216
Other assets 11,698 5,702
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 205,735 197,341
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 31,005 29,713
Interest-bearing deposits 106,072 106,716
- ------------------------------------------------------------------------------------------------------------------
Total deposits 137,077 136,429
Short-term borrowings 31,681 27,620
Bank acceptances outstanding 1,496 1,493
Other liabilities 6,725 5,567
Long-term debt 11,752 10,815
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 188,731 181,924
- ------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in junior subordinated
deferrable interest debentures 1,735 789
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock, $3.33-1/3 par value; authorized 2 billion shares, outstanding
961 million shares in 1997; 989 million shares in 1996 3,203 3,295
Paid-in capital 1,582 1,855
Retained earnings 10,198 9,449
Unrealized gain on debt and equity securities, net 286 29
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,269 14,628
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 205,735 197,341
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
C-3
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------
(In millions, except per share data) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,787 11,181 10,799
Interest and dividends on securities available for sale 1,412 1,435 935
Interest and dividends on investment securities
Taxable income 176 238 670
Nontaxable income 70 87 142
Trading account interest 336 310 153
Other interest income 581 507 329
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 14,362 13,758 13,028
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,148 4,031 4,016
Interest on short-term borrowings 1,597 1,465 1,156
Interest on long-term debt 707 655 560
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,452 6,151 5,732
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 7,910 7,607 7,296
Provision for loan losses 1,103 678 403
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,807 6,929 6,893
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 252 162 122
Service charges on deposit accounts 1,119 979 921
Mortgage banking income 256 205 196
Capital management income 1,078 782 631
Securities available for sale transactions 52 96 76
Investment security transactions 3 4 6
Fees for other banking services 263 280 226
Equipment lease rental income 187 112 32
Sundry income 1,112 915 848
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 4,322 3,535 3,058
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,909 2,649 2,514
Other benefits 641 628 597
- -------------------------------------------------------------------------------------------------------------------------
Personnel expense 3,550 3,277 3,111
Occupancy 544 546 553
Equipment 649 569 471
Advertising 141 100 127
Telecommunications 168 158 142
Travel 125 114 96
Postage, printing and supplies 225 236 220
FDIC assessment 29 45 169
Professional fees 292 257 342
External data processing 94 146 101
Other intangible amortization 315 290 280
Merger-related and restructuring charges 284 421 233
SAIF special assessment - 149 -
Sundry expense 920 622 697
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 7,336 6,930 6,542
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,793 3,534 3,409
Income taxes 1,084 1,261 1,213
- -------------------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196
Dividends on preferred stock - 9 26
- -------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,170
- -------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings $ 2.84 2.33 2.21
Diluted earnings 2.80 2.30 2.17
Cash dividends $ 1.22 1.10 0.98
AVERAGE COMMON SHARES (In thousands)
Basic 955,241 973,712 979,852
Diluted 966,792 982,755 1,001,145
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
C-4
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
(Shares in thousands, Preferred Stock Common Stock Debt and
------------------ ---------------- Paid-in Retained Equity
dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
as originally reported 5,213 $ 230 285,361 $ 951 2,361 5,022 (290) 8,274
Common stock issued in
1997 two-for-one stock split - - 285,361 951 (951) - - -
Common stock issued for
pooled bank acquired
April 28, 1998 - - 370,656 1,236 153 2,331 11 3,731
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994,
as restated 5,213 230 941,378 3,138 1,563 7,353 (279) 12,005
Stockholders' equity of
pooled bank not restated
prior to 1995 - - 64,501 215 277 641 (22) 1,111
Net income - - - - - 2,196 - 2,196
Purchase of common stock
primarily for purchase
accounting acquisitions - - (68,816) (230) (1,157) (167) - (1,554)
Common stock issued for
stock options exercised - - 20,414 68 332 (51) - 349
Common stock issued
through dividend
reinvestment plan - - 3,044 9 55 1 - 65
Common stock issued for
purchase accounting
acquisitions - - 25,090 84 527 - - 611
Converted preferred stock (1,574) (40) 3,316 12 53 (25) - -
Pre-merger transactions of
pooled bank (251) (7) (7,812) (26) (171) (436) - (640)
Cash dividends paid by
First Union Corporation
8.90% per Series 1990
preferred share - - - - - (7) - (7)
$0.98 per common share - - - - - (336) - (336)
Acquired companies
Preferred shares - - - - - (19) - (19)
Common shares - - - - - (507) - (507)
Unrealized gain on debt and
equity securities - - - - - - 508 508
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,388 183 981,115 3,270 1,479 8,643 207 13,782
Net income - - - - - 2,273 - 2,273
Redemption of preferred
stock (433) (109) - - - - - (109)
Purchase of common stock
primarily for purchase
accounting acquisitions - - (50,648) (167) (1,184) (233) - (1,584)
Common stock issued for
stock options exercised - - 17,659 58 356 - - 414
Common stock issued
through dividend
reinvestment plan - - 2,250 8 54 - - 62
Common stock issued for
purchase accounting
acquisitions - - 31,994 106 1,096 (194) - 1,008
Converted preferred stock (2,955) (74) 6,224 20 54 - - -
Cash dividends paid by
First Union Corporation
Preferred shares - - - - - (9) - (9)
$1.10 per common share - - - - - (611) - (611)
Acquired companies
Common shares - - - - - (420) - (420)
Unrealized loss on debt and
equity securities - - - - - - (178) (178)
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - - 988,594 3,295 1,855 9,449 29 14,628
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
C-5
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
(Loss) on
(Shares in thousands, Preferred Stock Common Stock Debt and
------------------ ---------------- Paid-in Retained Equity
dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - - 988,594 3,295 1,855 9,449 29 14,628
Net income - - - - - 2,709 - 2,709
Purchase of common stock - - (51,675) (172) (1,369) (819) - (2,360)
Common stock issued for
stock options exercised - - 14,923 50 709 - - 759
Common stock issued
through dividend
reinvestment plan - - 1,525 5 51 - - 56
Common stock issued
through public offering - - 7,500 25 333 - - 358
Common stock issued for
purchase accounting
acquisitions - - 117 - 3 - - 3
Cash dividends paid by
First Union Corporation
$1.22 per common share - - - - - (711) - (711)
Acquired companies
Common shares - - - - - (430) - (430)
Unrealized gain on debt and
equity securities - - - - - - 257 257
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - $ - 960,984 $ 3,203 1,582 10,198 286 15,269
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
C-6
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,709 2,273 2,196
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 40 37 (34)
Provision for loan losses 1,103 678 403
Provision for foreclosed properties 2 (1) (3)
Gain on sale of mortgage servicing rights (1) (49) (3)
Securities available for sale transactions (52) (96) (76)
Investment security transactions (3) (4) (5)
Depreciation and amortization 922 779 705
Deferred income taxes 553 554 425
Trading account assets, net (1,350) (2,067) (476)
Mortgage loans held for resale (964) (9) (304)
(Gain) loss on sales of premises and equipment 5 (3) 11
Gain on sale of segregated assets (7) (12) (18)
Other assets, net (648) 1,215 (343)
Other liabilities, net 933 (47) 668
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,242 3,248 3,146
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 9,243 21,453 9,490
Maturities of securities available for sale 2,278 4,162 2,455
Purchases of securities available for sale (15,374) (20,121) (10,678)
Calls and underdeliveries of investment securities 4 10 33
Maturities of investment securities 1,500 2,328 4,816
Purchases of investment securities (840) (663) (4,355)
Origination of loans, net (1,114) (3,102) (7,872)
Sales of premises and equipment 160 60 47
Purchases of premises and equipment (648) (1,148) (792)
Other intangible assets, net (44) (18) (72)
Purchase of bank-owned separate account life insurance (2,011) - -
Cash equivalents acquired, net of purchases of banking organizations 6 (484) 2,527
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (6,840) 2,477 (4,401)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net 620 (2,789) (4,045)
Securities sold under repurchase agreements and other short-term borrowings, net 4,061 1,380 7,199
Issuance of guaranteed preferred beneficial interests 945 789 -
Issuances of long-term debt 2,731 2,863 3,928
Increase in long-term debt due to a spin-off of an acquired company - - 1,388
Payments of long-term debt (1,797) (1,922) (1,310)
Sales of common stock 815 402 374
Purchases of preferred stock - - (7)
Redemption of preferred stock - (109) -
Purchases of common stock (2,360) (1,584) (1,554)
Cash dividends paid (1,141) (1,040) (869)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,874 (2,010) 5,104
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 276 3,715 3,849
Cash and cash equivalents, beginning of year 21,612 17,897 14,048
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 21,888 21,612 17,897
- -----------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 7,250 6,187 5,602
Income taxes 502 574 756
NONCASH ITEMS
Increase in securities available for sale - 592 7,602
Increase (decrease) in investment securities - 303 (6,923)
Increase in other assets - - 15
Increase in assets available for sale and a decrease in loans 3,200 - -
Increase in foreclosed properties and a decrease in loans 17 59 72
Conversion of preferred stock to common stock - 74 40
Issuance of common stock for purchase accounting acquisitions 3 1,008 611
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale 397 (295) 701
Other assets (deferred income taxes) $ 140 (117) 193
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Supplemental Consolidated Financial Statements.
C-7
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
First Union Corporation (the "Parent Company") is a bank holding company
whose principal wholly owned subsidiaries are national banking associations
using the name First Union National Bank; Wheat First Securities, Inc., an
investment banking firm; First Union Mortgage Corporation, a mortgage banking
firm; First Union Brokerage Services, Inc., a securities brokerage firm; and
certain business trusts as more fully described in Note 11.
The accounting and reporting policies of First Union Corporation and
subsidiaries (the "Corporation") are in accordance with generally accepted
accounting principles and conform to general practices within the banking,
investment banking and mortgage banking industries. The consolidated financial
statements include accounts of the Parent Company and all its subsidiaries. In
consolidation, all significant intercompany accounts and transactions are
eliminated.
The Corporation is a diversified financial services company with principal
operations in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and
Washington, D.C. Its foreign banking operations are immaterial.
Management of the Corporation has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks,
interest-bearing bank balances and federal funds sold and securities purchased
under resale agreements. Generally, both cash and cash equivalents are
considered to have maturities of three months or less, and accordingly, the
carrying amount of such instruments is deemed to be a reasonable estimate of
fair value.
SECURITIES
The classification of securities is determined at the date of commitment
or purchase. Gains or losses on the sale of securities are recognized on a
specific identification, trade date basis.
Trading account assets, primarily debt securities, and trading
derivatives, which include interest rate futures, options, caps, floors and
forward contracts, are recorded at market value. Included in noninterest income
are realized and unrealized gains and losses resulting from such market value
adjustments and from recording the results of sales of trading account
securities.
Securities available for sale, primarily debt securities, are recorded at
market value with a corresponding adjustment net of tax recorded as a component
of stockholders' equity. Securities available for sale are used as a part of the
Corporation's interest rate risk management strategy and may be sold in response
to changes in interest rates, changes in prepayment risk and other factors.
Investment securities, primarily debt securities, are stated at cost, net
of the amortization of premium and the accretion of discount. The Corporation
intends and has the ability to hold such securities until maturity.
The market value of securities, including securities sold not owned, is
generally based on quoted market prices or dealer quotes. If a quoted market
price is not available, market value is estimated using quoted market prices for
similar securities.
INTEREST RATE SWAPS, FLOORS AND CAPS
The Corporation uses interest rate swaps, floors and caps for interest
rate risk management, in connection with providing risk management services to
customers and for trading for its own account.
Interest rate swaps, floors and caps used to achieve interest rate risk
management objectives are designated as hedges of specific assets and
liabilities. The net interest payable or receivable on swaps, floors and caps is
accrued and recognized as an adjustment to interest income or interest expense
of the related asset or liability. Premiums paid for purchased floors and caps
are amortized over the term of the floors and caps as a yield adjustment of the
related asset or liability. Floors and caps are written only to adjust the
amount or term of purchased floors and caps to more effectively reduce interest
rate risk, and a net written position is not created. Premiums received on
floors and caps offset the premium paid on the floors and caps they adjust. On
the early termination of swaps, floors and caps, the net proceeds received or
paid, including premiums, are deferred and included in other assets or
liabilities, and they are amortized over the shorter of the remaining contract
life or the maturity of the related asset or liability.
C-8
<PAGE>
- --------------------------------------------------------------------------------
On disposition or settlement of the asset or liability being hedged, deferral
accounting is discontinued and any deferred amount is recognized in earnings.
Additionally, the fair value of the swap, floor and cap agreements, and changes
in fair value as a result of changes in market interest rates, are not
recognized in the consolidated financial statements. These hedges are designed
to be effective hedges of the hedged items, and if determined to be ineffective,
they are recorded at market value. The rate indices specified in the floors and
caps have been, and they are expected to be, highly correlated with the interest
rates of the hedged items.
Interest rate swaps, floors and caps entered into for trading purposes and
sold to customers are recorded at market value with both realized and unrealized
gains and losses recognized as trading profits. The fair value of these
financial instruments represents the estimated amount the Corporation would
receive or pay to terminate the contracts or agreements, and it is determined
using a valuation model that considers current market yields, quoted prices and
other relevant variables.
INTEREST RATE FUTURES, FORWARD AND OPTION CONTRACTS
The Corporation uses interest rate futures, forward and option contracts
for interest rate risk management and in connection with hedging interest rate
products sold to customers.
Interest rate futures and option contracts are used to hedge interest rate
risk arising from specific financial instruments. Gains and losses on interest
rate futures are (i) deferred and included in the carrying value of the related
assets or liabilities, and (ii) amortized over the estimated lives of those
assets and liabilities as a yield adjustment. Premiums paid for option contracts
are included in other assets, and they are amortized over the option term as a
yield adjustment of the related asset or liability. On the early termination of
futures contracts, the deferred amounts are amortized over the remaining
maturity of the related asset or liability. On disposition or settlement of the
asset or liability being hedged, deferral accounting is discontinued and any
deferred amount is recognized in earnings. Additionally, interest rate futures
and forwards that are designed as hedges are expected to reduce overall interest
rate risk, and they have been, and they are expected to be, highly correlated
with the interest rate risk of the hedged items. Interest rate futures and
forwards that do not reduce overall interest rate risk or that are not highly
correlated are recorded at market value.
Interest rate futures, forward and option contracts used to hedge risk
management products sold to customers are recorded at market value, and both the
realized and unrealized gains and losses are recognized as trading profits. The
market value of these financial instruments is based on dealer or exchange
quotes.
LOANS
Commercial, financial and agricultural loans include industrial revenue
bonds, highly leveraged transaction loans and certain other loans that are made
primarily on the strength of the borrower's general credit standing and ability
to generate repayment cash flows from income sources even though such bonds and
loans may be secured by real estate or other assets. Commercial real estate
construction and mortgage loans represent interim and permanent financing of
commercial properties that are secured by real estate. Retail real estate
mortgage loans represent 1-4 family first mortgage loans. Bankcard installment
loans include credit card, instant cash reserve, signature and First Choice
unsecured revolving lines of credit. Retail installment loans represent all
other consumer loans, including home equity and second mortgage loans.
Mortgage notes held for sale are valued at the lower of cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis. Gains or
losses resulting from sales of mortgage loans are recognized when the proceeds
are received from investors.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment, and collateral liquidation is a
secondary source of repayment. The Corporation determines the need for
collateral on a case-by-case or product-by-product basis. Factors considered
include the current and prospective creditworthiness of the customer, terms of
the instrument and economic conditions.
Unearned income is generally accreted to interest income using the
constant yield method. Interest income is recorded on an accrual basis.
A loan is considered to be impaired when based on current information, it
is probable the Corporation will not receive all amounts due in accordance with
the contractual terms of a loan agreement. Discounted cash flows using stated
loan rates or the estimated collateral fair value are used in determining the
value of impaired loans.
C-9
<PAGE>
- --------------------------------------------------------------------------------
When the ultimate collectibility of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent any interest has been foregone, and
then they are recorded as recoveries of any amounts previously charged off. When
this doubt does not exist, cash receipts are applied under the contractual terms
of the loan agreement.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after January 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of December
31, 1997 and 1996, there were no accruing impaired loans.
The accrual of interest is generally discontinued on all loans, except
consumer loans, that become 90 days past due as to principal or interest unless
collection of both principal and interest is assured by way of
collateralization, guarantees or other security. Generally, loans past due 180
days or more are placed on nonaccrual status regardless of security. Consumer
loans and bankcard products that become approximately 120 days and 180 days past
due, respectively, are generally charged to the allowance for loan losses. When
borrowers demonstrate over an extended period the ability to repay a loan in
accordance with the contractual terms of a loan the Corporation has classified
as nonaccrual, such loan is returned to accrual status.
Fair values are estimated for loans with similar financial
characteristics. These loans are segregated by type of loan, considering credit
risk and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair values of performing loans for all portfolios are calculated by
discounting estimated cash flows through expected maturity dates. These cash
flows are discounted using estimated market yields that reflect the credit and
interest rate risks inherent in each category of loans. Such market yields also
reflect a component for the estimated cost of servicing the portfolio. A
prepayment assumption is used as an estimate of the number of loans that will be
repaid prior to their scheduled maturity.
For performing residential mortgage loans, fair values are estimated using
a discounted cash flow analysis utilizing yields of comparable mortgage-backed
securities. The loan portfolio is segmented into homogeneous pools based on loan
types, coupon rates, maturities, prepayment characteristics and credit risk.
These pools are compared with similar mortgage-backed securities to arrive at an
appropriate discount rate; whole loan liquidity and risk characteristics are
considered within the comparison.
The fair value of nonperforming loans is calculated by estimating the
timing and amount of cash flows. These cash flows are discounted using estimated
market yields commensurate with the risk associated with such cash flows.
Estimates of cash flows are made using knowledge of the borrower and available
market data.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. Generally, for fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates. The fair value of commitments and letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount considered adequate to provide
for potential losses in the portfolio. Management's evaluation of the adequacy
of the allowance is based on a review of individual loans, recent loss
experience, current economic conditions, the risk characteristics of the various
classifications of loans, the fair value of underlying collateral and other
factors.
Management believes the allowances for losses on loans and real estate
owned are adequate. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowances may be
necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's bank subsidiaries'
allowances for losses on loans and real estate owned. Such agencies may require
such subsidiaries to recognize changes to the allowances based on their
judgments about information available to them at the time of their examination.
C-10
<PAGE>
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on a straight-line
basis for financial purposes and on straight-line and accelerated bases for tax
purposes, using estimated lives generally as follows: buildings, 10 to 50 years;
furniture and equipment, 3 to 10 years; and leasehold improvements and
capitalized leases, over the lives of the respective leases.
INTANGIBLE ASSETS
Generally, goodwill is amortized on a straight-line basis over periods
ranging from 15 to 25 years. The Corporation's unamortized goodwill is
periodically reviewed to ensure that there are no conditions which exist
indicating that the recorded amount of goodwill is not recoverable from future
undiscounted cash flows. The review process includes an evaluation of the
earnings history of each subsidiary, its contribution to the Corporation,
capital levels and other factors. If events or changes in circumstances indicate
further evaluation is warranted, the undiscounted net cash flows of the
operations to which goodwill relates are estimated. If the estimated
undiscounted net cash flows are less than the carrying amount of goodwill, a
loss is recognized to reduce goodwill's carrying value to fair value, and when
appropriate, the amortization period is also reduced. Unamortized goodwill
associated with disposed assets is charged to current earnings. Credit card
premiums are amortized principally over the estimated period of benefit not to
exceed 10 years using the sum-of-the-years' digits method. Deposit base premiums
are amortized principally over a 10-year period using accelerated methods.
Annually, the fair value of the unamortized balance of such premiums is
estimated on a discounted cash flow basis, and if such value is less than such
balance, the difference is charged to noninterest expense.
FORECLOSED PROPERTIES
Foreclosed properties are included in other assets, and they represent
other real estate that has been acquired through loan or in-substance
foreclosures or deeds received in lieu of loan payments. Generally, such
properties are appraised annually, and they are recorded at the lower of cost or
fair value less estimated selling costs. When appropriate, adjustments to cost
are charged or credited to the allowance for foreclosed properties.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation records the securitization or transfer of assets as sales
when the assets securitized or transferred have been isolated from the
Corporation and the transferee obtains the unconditional right to pledge or
exchange the assets, or the transferee is a qualifying special purpose entity.
Transfers not meeting these criteria are generally treated as secured
borrowings. Gains or losses on the securitization or transfer of assets
determined to be sales are based on the fair value of the assets obtained and
liabilities assumed less the carrying value of the assets sold. Any servicing
assets or other interests retained remain on the balance sheet at their
allocated carrying value based on relative fair value. Servicing assets
purchased are initially recorded at fair value. Gains or losses resulting from
the securitization or transfer of assets are recorded in noninterest income.
Retained residual interests subject to prepayment risk are recorded as trading
account assets or as securities available for sale. Servicing assets and
liabilities are included in other assets and other liabilities, and they are
amortized to noninterest income in proportion to net servicing income.
Servicing assets are evaluated for impairment based on the fair value of
those assets. Fair values are estimated based on market prices for similar
servicing assets and on the discounted estimated future net cash flows based on
market consensus loan prepayment estimates, historical prepayment rates,
interest rates, and other economic factors. For purposes of impairment
evaluation, the servicing assets are stratified based on predominant risk
characteristics of the underlying loans, including loan type (conventional or
government), amortization type (fixed or adjustable), note rate, and in certain
instances, period of origination. To the extent the carrying value of the
servicing asset exceeds fair value by individual stratum, a valuation allowance
is established. Servicing assets amounted to $427 million and $284 million at
December 31, 1997 and 1996, respectively.
PENSION AND SAVINGS PLANS
Substantially all employees with one year of service are eligible for
participation in a non-contributory, defined benefit pension plan and a matching
savings plan. Pension cost is determined annually by an actuarial valuation,
which includes service costs for the current year and amortization of amounts
related to prior years. The Corporation's funding policy is to contribute to the
pension plan the amount required to fund the benefits expected to be earned for
the current year and to amortize amounts related to prior years using the
projected unit credit valuation method. The difference between the pension cost
included in current income and the funded amount is included in other assets or
other liabilities, as appropriate. Actuarial assumptions are evaluated annually.
C-11
<PAGE>
- --------------------------------------------------------------------------------
The matching savings plan permits eligible employees to make basic
contributions to the plan of up to six percent of base compensation and
supplemental contributions of up to nine percent of base compensation. Annually,
on approval of the Board of Directors, employee basic contributions may be
matched up to six percent of the employee's base compensation.
INCOME TAXES
The operating results of the Parent Company and its eligible subsidiaries
are included in a consolidated federal income tax return. Each subsidiary pays
its allocation of federal income taxes to the Parent Company or receives payment
from the Parent Company to the extent tax benefits are realized. Where state
income tax laws do not permit consolidated income tax returns, applicable state
income tax returns are filed.
INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
such net income by the sum of such weighted average number of shares and the
potentially dilutive shares, including restricted stock awards, that could occur
through the issuance of common stock options or convertible securities.
C-12
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2: ACQUISITIONS
The supplemental consolidated financial statements give retroactive effect to
the pooling of interests acquisition of CoreStates Financial Corp ("CoreStates")
as more fully described below. As a result, the supplemental consolidated
balance sheets as of December 31, 1997 and 1996, and the related supplemental
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
are presented as if the combining companies had been consolidated for all
periods presented. As required by generally accepted accounting principles, the
supplemental consolidated financial statements will become the historical
consolidated financial statements upon issuance of the consolidated financial
statements for the period that includes the date of acquisition. The
supplemental consolidated statements of changes in stockholders' equity reflect
the accounts of the Corporation as if the additional common stock had been
issued for all periods presented. The supplemental consolidated financial
statements, including the notes thereto, should be read in conjunction with
the historical consolidated financial statements of the Corporation included
in the Corporation's 1997 annual report on Form 10-K.
On November 28, 1997, the Corporation acquired Signet Banking Corporation
("Signet"), a bank holding company based in Virginia. The merger was accounted
for as a pooling of interests, and accordingly, all historical financial
information for the Corporation has been restated to include Signet historical
information for all periods presented herein. At September 30, 1997, Signet had
assets of $11 billion, net loans of $7 billion, deposits of $8 billion and net
income applicable to common stockholders of $73 million.
As a result of the merger, each of the 61 million net outstanding shares
of Signet common stock was converted into 1.10 shares of the Corporation's
common stock and common stock equivalents, except that cash was paid for
fractional share interests.
Additionally, merger-related and restructuring charges associated with the
Signet merger of $269 million ($194 million after tax) are included as a
component of noninterest expense in 1997. The remaining unpaid balance of the
initial accrual of $269 million is $169 million at December 31, 1997. The
remaining restructuring charges will be paid primarily in 1998, and they include
$17 million of noncash charges.
At December 31, 1997, the Corporation had two pending acquisitions, both
of which were consummated in January 1998. The first relates to the purchase
accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which at December
31, 1997, had assets of $415 million, for 1.6 million shares of the
Corporation's common stock, substantially all of which were repurchased in the
open market at a cost of $79 million. The second relates to the pooling of
interests accounting acquisition of Wheat First Butcher Singer, Inc. ("Wheat
First"), which at December 31, 1997 had assets of $1 billion and stockholders'
equity of $171 million for 10.3 million shares of the Corporation's common
stock. Financial information related to Wheat First is not considered material
to the historical results of the Corporation, and accordingly, the Corporation's
financial statements will not be restated.
On April 28, 1998, the Corporation acquired CoreStates, a multi-bank
holding company based in Pennsylvania. The merger was accounted for as a pooling
of interests. On such date, each of the 204 million shares of CoreStates' common
stock was exchanged for 1.62 shares of the Corporation's common stock. In 1998,
the Corporation currently estimates after-tax, merger-related and restructuring
expenses of $795 million related to the CoreStates acquisition. At December 31,
1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits
of $34 billion, stockholders' equity of $3 billion and net income applicable to
common stockholders of $813 million. Certain pro forma financial information
related to the Corporation and CoreStates and which does not include information
related to Covenant or Wheat First follows.
C-13
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------
(In millions, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Interest income $ 14,362 13,758 13,028
Interest expense 6,452 6,151 5,732
Provision for loan losses 1,103 678 403
Noninterest income 4,322 3,535 3,058
Noninterest expense 7,336 6,930 6,542
Income taxes 1,084 1,261 1,213
- -----------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196
Dividends on preferred stock - 9 26
- -----------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,170
- -----------------------------------------------------------------------------------------------------------------
Basic earning per share $ 2.84 2.33 2.21
Diluted earning per share $ 2.80 2.30 2.17
- -----------------------------------------------------------------------------------------------------------------
CORPORATION AS REPORTED
Net interest income $ 5,743 5,465 5,129
Net income 1,896 1,624 1,541
Net income applicable to common stockholders 1,896 1,615 1,515
Basic earning per share 3.03 2.61 2.44
Diluted earning per share $ 2.99 2.58 2.38
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
On January 1, 1996, the Corporation acquired First Fidelity Bancorporation
("First Fidelity"), a multi-bank holding company based in New Jersey. The merger
was accounted for as a pooling of interests, and accordingly, all historical
financial information for the Corporation has been restated to include First
Fidelity historical information for all periods presented herein. At December
31, 1995, First Fidelity had assets of $35 billion, net loans of $25 billion,
deposits of $28 billion and net income applicable to common stockholders of $398
million.
As a result of the merger, each of the 79 million net outstanding shares
of First Fidelity common stock was converted into 1.35 shares of the
Corporation's common stock and common stock equivalents, except that cash was
paid for fractional share interests. In addition, the 3 million net outstanding
shares of First Fidelity Series B Convertible Preferred Stock were converted
into a like number of shares of the Corporation's Series B Convertible Class A
Preferred Stock (the "Series B Stock") having substantially identical terms as
the First Fidelity Series B, the 350,000 outstanding shares of First Fidelity
Series D Adjustable Rate Cumulative Preferred Stock were converted into a like
number of shares of the Corporation's Series D Adjustable Rate Cumulative Class
A Preferred Stock (the "Series D Stock") having substantially identical terms as
the First Fidelity Series D, and the 3 million net outstanding First Fidelity
Depository Receipts (each representing a 1/40th interest in a share of First
Fidelity Series F 10.64% Preferred Stock (74,130 net outstanding shares) were
converted into a like number of the Corporation's Depository Receipts (each
representing a 1/40th interest in the Corporation's Series F 10.64% Class A
Preferred Stock (the "Series F Stock") having substantially identical terms as
the First Fidelity Series F. See Note 12 for information related to the
redemption of the Series B Stock, the Series D Stock and the Series F Stock.
Additionally, merger-related and restructuring expenses associated with
the First Fidelity merger of $281 million ($181 million after tax) and $94
million ($73 million after tax) are included as a component of noninterest
expense in 1996 and 1995, respectively. The remaining unpaid balance of the
initial accrual of $375 million was $29 million at December 31, 1996, and it was
paid in 1997.
In 1996, various banking subsidiaries of the Parent Company also acquired
twelve financial institutions and certain other assets which in the aggregate
amounted to the addition of $7.8 billion in assets, $4.8 billion in net loans
and $5.1 billion in deposits. The purchase method of accounting, which requires
(i) no restatement of the Corporation's historical financial statements, and
(ii) the inclusion of the acquired company's financial information on a fair
value basis only from the date of consummation, was used in these transactions.
With respect to these transactions, the Parent Company issued 32 million shares
of its common stock in exchange for the common stock of certain of the acquired
financial institutions, and it paid cash for the other financial institutions
and assets, which in the aggregate amounted to $1.1 billion. These transactions
resulted in an increase to stockholders' equity of $1.0 billion, and the
increase was reduced by the Parent Company's purchase in the open market of 24
million shares of its common stock for $764 million in 1996. These transactions
also resulted in an increase in goodwill of $595 million, which will be
amortized on a straight-line basis over 25 years, and in deposit base premium of
$70 million, which will be amortized on an accelerated basis over 10 years.
C-14
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 3: SECURITIES AVAILABLE FOR SALE
December 31, 1997
-----------------------------------------------------------------------------------------
Gross Unrealized
1 Year 1-5 5-10 After 10 ------------------ Amortized
(In millions) or Less Years Years Years Total Gains Losses Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 718 1,106 1,420 178 3,422 (120) - 3,302
U.S. Government agencies 170 5,749 7,722 46 13,687 (234) 4 13,457
Collateralized mortgage obligations 333 1,806 176 224 2,539 (25) 7 2,521
State, county and municipal 13 30 22 71 136 (1) - 135
Other 114 2,250 237 1,139 3,740 (87) 12 3,665
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 1,348 10,875 9,577 751 22,551 (414) 21 22,158
Sundry securities - 66 - 907 973 (53) 2 922
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080
- -----------------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 1,334 10,743 9,341 740 22,158
Sundry securities - 66 - 856 922
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,334 10,809 9,341 1,596 23,080
- ---------------------------------------------------------------------------------------------------
December 31, 1996
-----------------------------------------------------------------------------------------
Gross Unrealized
1 Year 1-5 5-10 After 10 ------------------- Amortized
(In millions) or Less Years Years Years Total Gains Losses Cost
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 595 2,677 53 22 3,347 (16) 15 3,346
U.S. Government agencies 100 2,669 8,970 31 11,770 (45) 60 11,785
Collateralized mortgage obligations 199 1,256 1 8 1,464 (9) 9 1,464
State, county and municipal 29 35 25 31 120 (1) - 119
Other 122 1,128 115 1,133 2,498 (77) 16 2,437
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 1,045 7,748 9,164 225 18,182 (97) 100 18,185
Sundry securities - 17 - 1,000 1,017 (51) - 966
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151
- ------------------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 1,042 7,716 9,192 235 18,185
Sundry securities - 16 - 950 966
- ---------------------------------------------------------------------------------------------------
Total $ 1,042 7,732 9,192 1,185 19,151
- ---------------------------------------------------------------------------------------------------
</TABLE>
C-15
<PAGE>
- --------------------------------------------------------------------------------
Securities available for sale with an aggregate amortized cost of $6.9 billion
at December 31, 1997, are pledged to secure U.S. Government and other public
deposits and for other purposes as required by various statutes or agreements.
Included in "U.S. Government agencies" and "Other" at December 31, 1997,
are $2.7 billion of securities that are denominated in currencies other than the
U.S. dollar. The currency exchange rates were hedged utilizing both on- and
off-balance sheet instruments to minimize the exposure to currency revaluation
risks. At December 31, 1997, these securities had a weighted average maturity of
3.75 years and a weighted average yield of 5.31 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.57
percent based on a weighted average funding cost differential of (1.26) percent.
The amounts included in this paragraph are not restated for the CoreStates
acquisition.
Expected maturities differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Generally, the aging of mortgage-backed securities included in U.S.
Government agencies and collateralized mortgage obligations is based on their
weighted average maturities at December 31, 1997 and 1996.
At December 31, 1997 and 1996, collateralized mortgage obligations had a
weighted average yield based on amortized cost of 6.59 percent and 6.90 percent,
respectively.
At December 31, 1997 and 1996, there were forward commitments to purchase
securities at a cost of $6.4 billion and $127 million, respectively, that at
December 31, 1997 and 1996, had a market value of $6.4 billion and $127 million,
respectively.
Gross gains and losses realized on the sale of debt securities in 1997
were $54 million and $43 million, respectively, and on sundry securities such
gains and losses were $52 million and $11 million, respectively.
Gross gains and losses realized on the sale of debt securities in 1996
were $163 million and $130 million, respectively, and on sundry securities such
gains were $63 million.
Gross gains and losses realized on the sale of debt securities in 1995
were $83 million and $46 million, respectively, and on sundry securities such
gains were $39 million.
At December 31, 1997, stockholders' equity includes an after-tax amount of
$286 million, which is based on net unrealized appreciation in the securities
available for sale portfolio of $444 million.
At December 31, 1996, stockholders' equity includes an after-tax amount of
$29 million, which is based on net unrealized appreciation in the securities
available for sale portfolio of $48 million.
C-16
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 4: INVESTMENT SECURITIES
December 31, 1997
-----------------------------------------------------------------------------------
Gross Unrealized
1 Year 1-5 5-10 After 10 ----------------- Market
(In millions) or Less Years Years Years Total Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Treasury $ 14 3 1 - 18 - - 18
U.S. Government agencies 171 861 323 24 1,379 28 (2) 1,405
Collateralized mortgage obligations 31 380 42 67 520 9 - 529
State, county and municipal 105 282 302 327 1,016 120 - 1,136
Other 16 56 79 442 593 2 (13) 582
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 337 1,582 747 860 3,526 159 (15) 3,670
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 337 1,582 747 544 3,210 159 (2) 3,367
Sundry securities - - - 316 316 - (13) 303
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 337 1,582 747 860 3,526 159 (15) 3,670
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 338 1,623 791 615 3,367
Sundry securities - - - 303 303
- ---------------------------------------------------------------------------------------------------
Total $ 338 1,623 791 918 3,670
- ---------------------------------------------------------------------------------------------------
December 31, 1996
-----------------------------------------------------------------------------------------
Gross Unrealized
1 Year 1-5 5-10 After 10 ----------------- Market
(In millions) or Less Years Years Years Total Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 12 23 - 1 36 1 - 37
U.S. Government agencies 108 988 319 5 1,420 25 (4) 1,441
Collateralized mortgage obligations 221 715 1 8 945 8 (1) 952
State, county and municipal 160 388 215 408 1,171 113 (1) 1,283
Other 41 159 50 368 618 5 (8) 615
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 542 2,273 585 790 4,190 152 (14) 4,328
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 542 2,273 585 468 3,868 152 (2) 4,018
Sundry securities - - - 322 322 - (12) 310
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 542 2,273 585 790 4,190 152 (14) 4,328
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 547 2,318 608 545 4,018
Sundry securities - - - 310 310
- ---------------------------------------------------------------------------------------------------
Total $ 547 2,318 608 855 4,328
- ---------------------------------------------------------------------------------------------------
</TABLE>
C-17
<PAGE>
- --------------------------------------------------------------------------------
Investment securities with an aggregate carrying value of $1.6 billion at
December 31, 1997, are pledged to secure U.S. Government and other public
deposits and for other purposes as required by various statutes or agreements.
Expected maturities differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Generally, the aging of mortgage-backed securities included in U.S.
Government agencies and collateralized mortgage obligations is based on their
weighted average maturities at December 31, 1997 and 1996.
At December 31, 1997 and 1996, collateralized mortgage obligations had a
weighted average yield of 7.08 percent and 6.85 percent, respectively.
There were no commitments to purchase or sell investment securities at
December 31, 1997 and 1996.
Gross gains realized on calls of sundry securities in 1997 were $3
million.
Gross gains and losses realized on repurchase agreement underdeliveries
and calls of investment securities in 1996 were $5 million and $1 million,
respectively.
Gross gains and losses realized on repurchase agreement underdeliveries
and calls of investment securities in 1995 were $6 million and $1 million,
respectively.
C-18
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NOTE 5: LOANS
Years Ended
December 31,
------------------------
(In millions) 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 46,117 41,489
Real estate - construction and other 3,037 3,474
Real estate - mortgage 13,160 14,300
Lease financing 8,610 6,348
Foreign 3,885 2,842
- -------------------------------------------------------------------------------------------------------------------------
Total commercial 74,809 68,453
- -------------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 28,998 33,181
Installment loans - Bankcard 3,914 7,295
Installment loans - other 22,271 23,855
Vehicle leasing 5,331 4,529
- -------------------------------------------------------------------------------------------------------------------------
Total retail 60,514 68,860
- -------------------------------------------------------------------------------------------------------------------------
Total loans $ 135,323 137,313
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Directors and executive officers of the Parent Company and their related
interests were indebted to the Corporation in the aggregate amounts of $2.4
billion and $1.3 billion at December 31, 1997 and 1996, respectively. From
January 1, 1997, through December 31, 1997, directors and executive officers of
the Parent Company and their related interests borrowed $1.5 billion and repaid
$376 million. In the opinion of management, these loans do not involve more than
the normal risk of collectibility, nor do they present other unfavorable
features.
At December 31, 1997 and 1996, nonaccrual and restructured loans amounted
to $878 million and $919 million, respectively. Interest related to nonaccrual
and restructured loans for the years ended December 31, 1997, 1996 and 1995,
amounted to $72 million, $77 million and $100 million, respectively. Interest
collected on such loans and included in the results of operations for each of
the years in the three-year period then ended amounted to $36 million, $22
million and $32 million, respectively.
Included in other assets at December 31, 1997, are $4.0 billion of credit
card receivables and other unsecured installment loans with a carrying value of
$3.6 billion that are being held for accelerated disposition.
At December 31, 1997 and 1996, impaired loans, which are included in
nonaccrual loans, amounted to $485 million and $553 million, respectively.
Included in the allowance for loan losses is $89 million related to $384 million
of impaired loans at December 31, 1997, and $51 million related to $312 million
of impaired loans at December 31, 1996. The rest of the impaired loans are
recorded at or below fair value. For the years ended December 31, 1997 and 1996,
the average recorded investment in impaired loans was $479 million and $675
million, respectively; and $37 million and $28 million, respectively, of
interest income was recognized on loans while they were impaired. All this
income was recognized on loans using a cash-basis method of accounting.
Loan fair values are disclosed in Note 17.
C-19
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
NOTE 6: ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,212 2,308 2,259
Provision for loan losses 1,103 678 403
Allowance of loans acquired, transferred to
accelerated disposition or sold (596) 50 193
- ------------------------------------------------------------------------------------------------------------
2,719 3,036 2,855
- ------------------------------------------------------------------------------------------------------------
Loan losses 1,074 1,076 766
Loan recoveries 202 252 219
- ------------------------------------------------------------------------------------------------------------
Loan losses, net 872 824 547
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,847 2,212 2,308
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NOTE 7: PREMISES AND EQUIPMENT
Years Ended December 31,
--------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 548 555 561
Buildings 2,827 2,731 2,591
Equipment 4,241 4,147 2,671
Capitalized leases 56 62 41
- -------------------------------------------------------------------------------------------------------------------------
7,672 7,495 5,864
Accumulated depreciation and amortization (2,809) (2,612) (2,455)
- -------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 4,863 4,883 3,409
- -------------------------------------------------------------------------------------------------------------------------
Net premises and equipment pledged as security for mortgage notes $ 26 62 63
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization $ 532 456 392
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
NOTE 8: FORECLOSED PROPERTIES
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreclosed properties $ 129 145 257
- ------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of year 17 25 42
Provision for foreclosed properties 2 (1) (3)
Transfer from allowance for segregated assets - 1 -
Dispositions, net (3) (8) (14)
- ------------------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of year 16 17 25
- ------------------------------------------------------------------------------------------------------------------
Foreclosed properties, net $ 113 128 232
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
C-21
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9: SHORT-TERM BORROWINGS
Short-term borrowings of the Corporation at December 31, 1997, 1996 and 1995,
which includes securities sold under repurchase agreements and accrued interest
thereon, and the related maximum amount outstanding at the end of any month
during such periods are presented below.
<TABLE>
<CAPTION>
Years Ended December 31, Maximum Outstanding
------------------------------------------------------------------------------
(In millions) 1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under repurchase agreements $ 20,344 18,539 12,954 21,070 22,258 13,325
Federal funds purchased 3,418 3,211 5,294 3,865 5,625 5,801
Fixed and variable rate bank notes 1,114 1,155 2,631 2,076 2,485 2,632
Interest-bearing demand deposits issued to
the U. S. Treasury 649 805 623 793 1,183 1,408
Commercial paper 1,737 1,696 2,418 2,467 2,123 2,584
Other 4,419 2,214 1,161 4,765 3,319 3,315
- ------------------------------------------------------------------------------------------
Total $ 31,681 27,620 25,081
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, 1996 and 1995, the combined weighted average
interest rates related to federal funds purchased and securities sold under
repurchase agreements were 6.14 percent, 6.06 percent and 5.46 percent,
respectively. Maturities related to such instruments in each of the years in the
three-year period then ended were not greater than 350 days.
At December 31, 1997, 1996 and 1995, the weighted average interest rates
for fixed and variable rate bank notes were 5.71 percent, 5.53 percent and 5.70
percent, respectively. Weighted average maturities related to such notes in each
of the years in the three-year period then ended were 153 days, 109 days and 90
days, respectively.
At December 31, 1997, 1996 and 1995, the weighted average interest rates
for commercial paper were 5.59 percent, 5.49 percent and 5.49 percent,
respectively. Weighted average maturities related to such commercial paper in
each of the years in the three-year period then ended were 4 days, 21 days and
21 days, respectively.
Included in "Other" are Federal Home Loan Bank borrowings and securities
sold short of $286 million and $3.5 billion, respectively, at December 31, 1997;
$211 million and $1.9 billion, respectively, at December 31, 1996; and $380
million and $444 million, respectively, at December 31, 1995.
Substantially all short-term borrowings are due within 90 days, and
accordingly, the carrying amount of such borrowings is deemed to be a reasonable
estimate of fair value.
C-22
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NOTE 10: LONG-TERM DEBT
1997 1996
------------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY
7-1/2% debentures $ - - 16 16
Notes
Floating rate extendible, due June 15, 2005 (a) 10 10 10 10
6.60%, due June 15, 2000 (par value $250) (b) 249 252 - -
Floating rate, due February 24, 1998 (par value $300) (b) 300 300 300 300
6-3/4%, due January 15, 1998 (par value $250) (b) 250 250 250 251
Subordinated notes
7.18%, due April 15, 2011 (par value $60) 59 65 59 60
8%, due August 15, 2009 (par value $150) 149 162 149 155
6-3/8%, due January 15, 2009 (par value $150) (b) 148 148 148 138
6%, due October 30, 2008 (par value $200) (b) 198 192 197 178
7-1/2%, due July 15, 2006 (par value $300) (b) 298 321 297 306
7%, due March 15, 2006 (par value $200) (b) 199 207 198 198
6-7/8%, due September 15, 2005 (par value $250) (b) 249 257 249 246
7.05%, due August 1, 2005 (par value $250) (b) 248 259 248 249
6-5/8%, due July 15, 2005 (par value $250) (b) 249 253 248 240
8.77%, due November 15, 2004 (par value $150) 149 171 149 157
Floating rate, due July 22, 2003 (par value $150) (b) 149 150 149 149
7-1/4%, due February 15, 2003 (par value $150) (b) 149 156 149 152
8%, due November 15, 2002 (par value $225) (b) 224 237 224 236
8-1/8%, due June 24, 2002 (par value $250) (b) 249 267 249 264
9.45%, due August 15, 2001 (par value $150) (b) 149 165 148 164
Fixed rate medium-term, varying rates and terms to June 5, 2001 (c) 54 58 54 62
9.45%, due June 15, 1999 (par value $250) (b) 249 262 249 266
Subordinated debentures
6.55%, due October 15, 2035 (par value $250) 249 256 249 243
7-1/2%, due April 15, 2035 (par value $250) 246 279 246 261
6.824%/7.574%, due August 1, 2026 (par value $300) 298 317 298 304
- -------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,771 4,994 4,533 4,605
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-23
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
------------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4% senior, due September 1, 2003 (par value $145) 120 140 158 159
Variable rate medium-term, varying rates
and terms to November 5, 2001 1,640 1,638 1,507 1,505
Varying rates and terms to November 1, 2002 62 63 71 71
Floating rate, due October 29, 2002 (par value $500) 500 497 - -
6-5/8%, due June 15, 2000 (par value $150) (b) (d) 150 152 150 150
Subordinated notes
Bank, varying rates and terms to December 15, 2036 1,205 1,219 1,397 1,409
6-3/4%, due November 15, 2006 (par value $200) (b) 199 202 198 193
6-5/8%, due March 15, 2005 (par value $175) (b) 174 177 174 170
5-7/8%, due October 15, 2003 (par value $200) (b) 200 195 200 189
6.80%, due June 15, 2003 (par value $150) (b) 149 153 149 154
9-3/8%, due April 15, 2003 (par value $100) (b) 100 113 100 113
6-5/8%, due March 15, 2003 (par value $150) (b) 149 149 149 149
7-7/8%, due July 15, 2002 (par value $100) (b) (d) 100 106 100 105
9-5/8%, due February 15, 2001 (par value $150) (b) 150 164 150 166
9-5/8%, due August 15, 1999 (par value $150) (b) 150 156 149 161
9-5/8%, due June 1, 1999 (par value $100) (b) (d) 100 105 100 107
Floating rate, due April 15, 1998 (c) (d) 100 100 100 100
Floating rate - - 50 50
Floating rate - - 25 25
Subordinated capital notes
9-5/8%, due June 15, 1999 (par value $75) (b) (d) 75 79 74 80
9-7/8%, due May 15, 1999 (par value $75) (b) (d) 75 79 75 82
8-1/2%, due April 1, 1998 (par value $150) (b) 149 150 149 153
10-1/2% collateralized mortgage obligations - - 37 41
- -----------------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 5,547 5,637 5,262 5,332
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,385 1,385 933 933
Mortgage notes and other debt of subsidiaries, varying rates and terms 16 16 51 52
Capitalized leases, rates generally ranging from 7-1/2% to 15.20% 33 33 36 36
- -----------------------------------------------------------------------------------------------------------------------------------
Total other debt 1,434 1,434 1,020 1,021
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 11,752 12,065 10,815 10,958
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Redeemable in whole or in part at the option of the Parent Company.
(b) Not redeemable prior to maturity.
(c) Redeemable at the option of the Parent Company.
(d) Assumed by the Parent Company.
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Corporation for debt of the same remaining maturities.
The interest rate on the floating rate extendible notes is 6.0875 percent
to March 16, 1998.
The interest rate on the floating rate notes due February 24, 1998, is
5.1875 percent.
The 7.18 percent subordinated notes are redeemable in whole and not in
part at the option of the Parent Company on April 15, 2000 and on each October
15 and April 15 thereafter.
The 8 percent subordinated notes due August 15, 2009, are redeemable in
whole and not in part at the option of the Parent Company on August 15, 2004.
The 8.77 percent subordinated notes are redeemable in whole or in part at
the option of the Parent Company on November 15, 1999.
The interest rate on the floating rate subordinated notes is 5.93359
percent to January 22, 1998.
Fixed rate medium-term senior and subordinated notes can be issued
periodically. Interest rates, maturities, redemption and other terms are
determined at the date of issuance. At December 31, 1997, the Parent Company had
issued medium-term subordinated notes with fixed rates of interest ranging from
9.49 percent to 9.93 percent.
C-24
<PAGE>
- --------------------------------------------------------------------------------
Holders of the 6.55 percent subordinated debentures and the 7-1/2 percent
subordinated debentures may elect to redeem a part or all of such debentures on
October 15, 2005, and April 15, 2005, respectively. Otherwise such debentures
are not redeemable prior to maturity.
Holders of the 6.824 percent/7.754 percent subordinated debentures may
elect to redeem a part or all of such debentures on August 1, 2006, or August 1,
2016. Otherwise such debentures are not redeemable prior to maturity.
The 9-3/4 percent senior notes were issued by an acquired subsidiary prior
to the acquisition, and in accordance with a covenant defeasance related
thereto, the subsidiary has announced that it will redeem all such notes on
September 2, 1998, the earliest date the notes can be redeemed, at a redemption
price equal to 103.375 percent of the principal amount then outstanding plus any
accrued and unpaid interest to such date. The subsidiary has deposited with the
trustee sufficient cash and securities to effect the redemption of the notes on
such date.
The interest rate on the floating rate notes due October 29, 2009, is
5.731 percent to January 29, 1998.
At December 31, 1997, bank notes of $200 million had floating rates of
interest ranging from 5.69 percent to 6.14 percent, and $1.0 billion of the
notes had fixed rates of interest ranging from 5.65 percent to 7.80 percent.
The interest rate on the floating rate subordinated notes is 5.875 percent
to April 15, 1998.
In April 1998, $1.9 billion of senior or subordinated debt securities
or equity securities remained available for issuance under a shelf registration
statement filed with the Securities and Exchange Commission.
The weighted average rate paid for long-term debt in 1997, 1996 and 1995
was 6.47 percent, 6.30 percent and 6.72 percent, respectively. Interest rate
swap agreements entered into at the time of issuance of certain long-term debt
reduced related interest expense.
Long-term debt maturing in each of the five years subsequent to December
31, 1997, is as follows (in millions): 1998, $2,830; 1999, $1,691; 2000, $772;
2001, $494; and 2002, $1,116.
C-25
<PAGE>
- --------------------------------------------------------------------------------
NOTE 11: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
First Union Institutional Capital I, a statutory business trust (the "Trust")
created by the Parent Company had outstanding at December 31, 1997 and 1996,
$495 million (par value $500 million) of 8.04% Capital Securities which will
mature on December 1, 2026 (the "Capital Securities"). The principal assets of
the Trust are $515 million of the Parent Company's 8.04% Junior Subordinated
Deferrable Interest Debentures, which will mature on December 1, 2026 (the
"Subordinated Debentures"). Additionally, the Trust has issued $15 million of
common securities (the "Common Securities") to the Parent Company. The estimated
fair value of each of the Capital Securities and the related Subordinated
Debentures at December 31, 1997 and 1996, was $536 million and $500 million,
respectively.
The Capital Securities, the Subordinated Debentures and the Common
Securities are redeemable in whole or in part on or after December 1, 2006, or
at any time in whole but not in part from the date of issuance on the occurrence
of certain events.
On January 6, 1997, and January 16, 1997, First Union Institutional
Capital II and First Union Capital I, respectively, both statutory business
trusts (the "Trusts") created by the Parent Company, issued $250 million of
7.85% Capital Securities and $250 million of 7.935% Capital Securities, Series
A, respectively, (together the "Securities") which will mature on January 1,
2027, and January 15, 2027, respectively. The principal combined assets of the
Trusts are $515 million of the Parent Company's subordinated debentures with
like maturities and like interest rates to the Securities. Additionally, the
Trusts have issued $15 million in the aggregate of common securities to the
Parent Company. The 7.85% Capital Securities and the 7.935% Capital Securities,
Series A, both had $248 million outstanding at December 31, 1997 and estimated
fair values of $263 million and $265 million, respectively. The related
subordinated debentures had a combined estimated fair value of $528 million.
The Securities, the assets of the Trusts and the common securities issued
by the Trusts are redeemable in whole or in part on or after January 1, 2007,
and January 15, 2007, respectively, or at any time in whole but not in part from
the date of issuance on the occurrence of certain events.
The Capital Securities and the Securities may be included in tier 1
capital for regulatory capital adequacy determination purposes. Distributions to
the holders of the Capital Securities and the Securities are included in sundry
expense.
The obligations of the Parent Company with respect to the issuance of the
Capital Securities and the Securities constitute a full and unconditional
guarantee by the Parent Company of the Trusts' obligations with respect to the
Capital Securities or Securities.
Subject to certain exceptions and limitations, the Parent Company may
elect from time to time to defer subordinated debenture interest payments, which
would result in a deferral of distribution payments on the related Capital
Securities or Securities.
<PAGE>
- --------------------------------------------------------------------------------
Additionally, an acquired bank subsidiary (the "Acquired Bank") issued through
a statutory business trust, trust capital securities (the "Acquired Bank Capital
Securities") and the Acquired Bank issued related junior subordinated deferrable
interest rate debentures, all with terms substantially the same as the Capital
Securities and Subordinated Debentures issued by the Parent Company. At December
31, 1997 and 1996, the Acquired Bank had outstanding $299 million and $294
million, respectively, of 8% Acquired Bank Capital Securities (par value $300
million), which will mature on December 15, 2026. At December 31, 1997, the
Acquired Bank had outstanding $147 million (par value $150 million) and $298
million (par value $300 million) of Libor-indexed floating rate Acquired Bank
Capital Securities, which will mature on January 15, 2027, and February 15,
2027, respectively. The aggregate estimated fair value of the Acquired Bank
Capital Securities at December 31, 1997 and 1996, was $737 million and $296
million, respectively.
C-26
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NOTE 12: PREFERRED STOCK
1997 1996 1995
---------------------- ------------------------ ------------------------
(Shares in thousands, dollars in millions) Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Series B Stock
Balance, beginning of year - $ - 2,964 $ 74 4,788 $ 120
Purchases of preferred stock - - - - (250) (6)
Conversions of preferred stock into common stock - - (2,955) (74) (1,574) (40)
Redemption of preferred stock - - (9) - - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 2,964 74
- -------------------------------------------------------------------------------------------------------------------------------
Series D Stock - -
Balance, beginning of year - - 350 35 350 35
Redemption of preferred stock - - (350) (35) - -
- -------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 350 35
- -------------------------------------------------------------------------------------------------------------------------------
Series F Stock - -
Balance, beginning of year - - 74 74 75 75
Purchases of preferred stock - - - - (1) (1)
Redemption of preferred stock - - (74) (74) -
- --------------------------------------------------------------------------------------------------------------------------------
Balance, end of year - - - - 74 74
- -------------------------------------------------------------------------------------------------------------------------------
Total - $ - - $ - 3,388 $ 183
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation is authorized to issue up to 40 million shares of class A
preferred stock, no-par value, and 10 million shares of preferred stock, no-par
value, each in one or more series. In connection with the First Fidelity merger,
the Corporation issued three new series of preferred stock, which are described
in Note 2 and all of which were redeemed or converted into the Corporation's
common stock as more fully described herein.
On November 15, 1996, the Corporation redeemed all of the outstanding
shares of the Series B Stock at a redemption price of $25.00 per share (plus
accrued and unpaid dividends), substantially all of which were converted into 3
million shares of common stock.
On July 1, 1996, the Corporation redeemed all of the outstanding shares of
the Series D Stock and the Series F Stock at an aggregate redemption price of
$109 million (plus accrued and unpaid dividends).
C-27
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NOTE 13: COMMON STOCK, CAPITAL RATIOS AND EARNINGS PER COMMON SHARE
Option Weighted
Prices or Average
Grant Exercise
Date Balance, Grants Exercises Forfeitures Balance, Prices,
(Options and shares Market Beginning or New or and Other End of End of
in thousands) Values of 1997 Shares Purchases Reductions 1997 1997 Exercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1984 Master Stock Plan
Options granted - 134 - (127) (7) - - -
Available 1,034 - - 7 1,041 - -
1988 Master Stock Plan
Options granted $7.38-$17.94 1,542 - (477) (2) 1,063 14.39 1,063
Available 2,228 - - 2 2,230 - -
1992 Master Stock Plan
Options granted $22.38-$29.25 4,288 - (705) (10) 3,573 23.52 3,573
Restricted stock granted $22.38-$29.25 1,892 - (582) (54) 1,256 - -
Available 1,798 - - 10 1,808 - -
1996 Master Stock Plan
Options granted $29.25-$40.13 2,724 4,397 (423) (104) 6,594 36.41 2,253
Restricted stock granted $29.25-$43.16 1,808 2,229 (490) (120) 3,427 - -
Available 23,434 (6,626) - 104 16,912 - -
1996 Employee Plan $27.26 6,922 - (4,210) (175) 2,537 27.26 2,537
Dividend Reinvestment Plan - 7,014 - (1,207) - 5,807 - -
Option plans of acquired
companies
Options granted $6.17-$26.00 3,870 - (1,277) (114) 2,479 16.24 2,437
Options granted $1.73-$52.07 2,547 931 (1,203) (79) 2,196 21.34 2,196
Options granted $3.41-$31.57 1,852 - (1,291) (35) 526 15.53 526
Options granted $2.99-$4.20 18 - (2) (6) 10 3.90 10
Options granted $51.76-$295.13 136 - - (15) 121 126.67 121
Options granted $5.06-$31.79 9,378 2,647 (3,566) (251) 8,208 22.84 5,809
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMMON STOCK SPLIT
All common stock and per share data has been restated to reflect a two-for
one stock split that was paid on July 31, 1997.
OPTION AND OTHER PLANS
Under the terms of the 1984, 1988, 1992 and 1996 Master Stock Plans (the
"Plans"), stock options may be periodically granted to key personnel at a price
not less than the fair market value of the shares at the date of grant. The
exercise periods for options granted under the Plans are (i) determined at the
date of grant, (ii) not exercisable for one year following the date of grant,
and (iii) for periods no longer than ten years.
Restricted stock may also be granted under the Plans. The stock is subject
to certain restrictions over a specified period (generally, five years), during
which time the holder is entitled to full voting rights and dividend privileges.
Compensation cost recognized for restricted stock during 1997 and 1996 was $43
million and $23 million, respectively.
Employees, based on their eligibility and compensation, were granted
options to purchase shares of common stock under the 1996 Employee Stock
Purchase Plan (the "Plan") at a price equal to 85 percent of the fair market
value of the shares as of the Plan date. From the Plan date, and generally for
approximately a two-year period thereafter, employees have the option to
purchase all or a portion of the optioned shares. The Plan provides that at the
end of such two-year period (the "Final Purchase Date"), the option price will
be the lesser of 85 percent of the fair market value as of the Plan date or 85
percent of the fair market value as of the Final Purchase Date.
Under the terms of the Dividend Reinvestment Plan, a participating
stockholder's cash dividends and optional cash payments are used to purchase
Parent Company common stock.
Under the terms of the Parent Company's merger agreements with certain
acquired companies, all options with respect to their common stock were
converted into options to purchase Parent Company common stock.
In accordance with a Shareholder Protection Rights Agreement dated
December 18, 1990, as amended, the Parent Company issued a dividend of one right
for each share of Parent Company common stock outstanding as of such date. These
continue to attach to all common stock issued after December 18, 1990. The
rights will become exercisable if any person or group commences a tender or
exchange offer that would result in (i) their becoming the beneficial owner of
15 percent or more of the Parent Company's common stock, or (ii) any person
being determined by the Federal Reserve Board to control the Corporation within
the meaning of the Bank Holding Company Act of 1956, as amended.
C-28
<PAGE>
- --------------------------------------------------------------------------------
The rights will also become exercisable if a person or group acquires
beneficial ownership of 15 percent or more of the Parent Company's common stock.
Each right (other than rights owned by such person or group) will entitle its
holder to purchase, for an exercise price of $105.00, a number of shares of the
Parent Company's common stock (or at the option of the Board of Directors,
shares of junior participating class A preferred stock) having a market value of
twice the exercise price. If any person or group acquires beneficial ownership
of between 15 percent and 50 percent of the Parent Company's common stock, the
Board of Directors may, at its option, exchange for each outstanding right
(other than rights owned by such person or group) either two shares of common
stock or two one-hundredths of a share of junior participating class A preferred
stock having economic and voting terms similar to two shares of common stock.
The rights are subject to adjustment if certain events occur, and they will
expire on December 28, 2000, if not redeemed or terminated sooner.
On January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as
amended ("FAS 123"), which requires either the (i) fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income as of the date of grant of awards related to
such plans, or (ii) impact of such fair value on net income and earnings per
share be disclosed on a pro forma basis in a footnote to financial statements
for awards granted after December 15, 1994, if the accounting for such awards
continues to be in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"). The Corporation has
elected to continue such accounting under the provisions of APB 25. As
determined in accordance with FAS 123, certain pro forma information which is
based on the estimated fair value of the Corporation's outstanding stock options
for each of the three years ended December 31, 1997, 1996 and 1995, is as
follows: pro forma net income, $2.669 billion, $2.194 billion and $2.156
billion, respectively; pro forma basic earnings per common share, $2.79, $2.25
and $2.20, respectively; and pro forma diluted earnings per common share, $2.76,
$2.23 and $2.15, respectively. The Black-Scholes option pricing model
methodology was used in preparing such pro forma information. Option pricing
models require the use of highly subjective assumptions, including expected
stock price volatility, which when changed can materially affect fair value
estimates. Accordingly, the model does not necessarily provide a reliable single
measure of the fair value of the Corporation's stock options.
CAPITAL RATIOS
Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4 percent and a minimum ratio of total
capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier
1 capital to adjusted average quarterly assets is from 3 percent to 5 percent.
At December 31, 1997, the Corporation's tier 1 capital ratio, total
capital ratio and leverage ratio were 8.43 percent, 13.02 percent and 7.09
percent, respectively. At December 31, 1996, such ratios were 7.91 percent,
12.58 percent and 6.74 percent, respectively. The Corporation does not
anticipate or foresee any conditions that would reduce such ratios to levels at
or below minimum or that would cause its deposit-taking banking affiliates to be
less than well capitalized.
Additional information related to the consolidated capital ratios of the
Corporation for each of the years in the two-year period ended December 31,
1997, can be found in "Management's Analysis of Operations" - "Stockholders'
Equity; Regulatory Capital" on page 18 and in Table 18 on page T-18, which are
incorporated herein by reference.
EARNINGS PER COMMON SHARE
The reconciliation between basic and diluted earings per common share is
below.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
(Dollars in millions, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic
Net income $ 2,709 2,273 2,196
Preferred stock dividends - (9) (26)
- ------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,170
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 2.84 2.33 2.21
- ------------------------------------------------------------------------------------------------------------------------
Average common shares (In thousands) 955,241 973,712 979,852
- ------------------------------------------------------------------------------------------------------------------------
Diluted
Net income applicable to common stockholders $ 2,709 2,264 1,270
Dividends on convertible preferred stock - - 9
- ------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,179
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 2.80 2.30 2.17
- ------------------------------------------------------------------------------------------------------------------------
Average common shares (In thousands) 955,241 973,712 979,852
Options 11,551 9,043 12,461
Convertible preferred stock - - 8,832
- ------------------------------------------------------------------------------------------------------------------------
Average common shares - diluted (In thousands) 966,792 982,755 1,001,145
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-29
<PAGE>
- --------------------------------------------------------------------------------
NOTE 14: PERSONNEL EXPENSE
Personnel expense for each of the years in the three-year period ended
December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries $ 2,909 2,649 2,514
Pension cost 58 81 42
Savings plan 87 80 78
Other benefits 496 467 477
- -----------------------------------------------------------------------------------------------------------
Total $ 3,550 3,277 3,111
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Pension expense for nonqualified plans was $19 million, $13 million and
$12 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The accumulated benefit obligation for nonqualified plans was $121
million, $101 million and $62 million for the years ended December 31, 1997,
1996 and 1995, respectively, including vested benefits of $120 million, $100
million and $61 million, respectively. Such plans have no assets. The assumed
rates used in actuarial computations were the same as those used in the
qualified pension plan computations.
The Corporation has tax-qualified defined benefit pension plans (together,
the "Plan") covering substantially all of its employees with one year of
service. The benefits are based on years of service and the employee's highest
five-year average compensation. Contributions are made each year to a trust in
an amount that is determined by an actuary to meet the minimum requirements of
ERISA and to fall at or below the maximum amount that can be deducted on the
Corporation's tax return.
At December 31, 1997, Plan assets include U.S. Government and Government
agency securities, equity securities and other investments. Also included are
two million shares of the Parent Company's common stock. All Plan assets are
held by First Union National Bank (the "Bank") in a Bank-administered trust
fund.
The Plan's funded status for each of the years in the three-year period
ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Accumulated benefit obligation including vested benefits of $1,598, 1997; $1,414, 1996;
and $1,290, 1995 $ 1,686 1,495 1,387
- ----------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date (2,059) (1,852) (1,757)
Plan assets at fair value 2,447 2,117 1,884
- ----------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 388 265 127
Prior service cost 48 69 54
Unrecognized net loss from past experience different from that assumed and effects
of changes in assumptions 71 89 129
Unrecognized net transition asset (174) (113) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost, net $ 333 310 307
- ----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS
Discount rate at beginning of year 7.50-7.75 % 7.00-7.50 8.00-8.75
Discount rate at end of year 7.25 7.50-7.75 7.00-7.50
Weighted average rate of increase in future compensation levels 4.25-5.00 4.50-5.00 4.50-6.00
Long-term average rate of return 8.50-9.00 % 8.50 7.50-9.75
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-30
<PAGE>
Certain components of net pension cost for each of the years in the three-year
period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
NET PENSION COST
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 84 93 67
Interest cost on projected benefit obligation 138 128 115
Actual (return) on Plan assets (398) (232) (316)
Net amortization and deferral 215 80 164
- -------------------------------------------------------------------------------------------------------------------------
Net pension cost $ 39 69 30
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees. Substantially all the Corporation's
employees may become eligible for these benefits if they reach retirement age
while working for the Corporation. Life insurance benefits are provided through
an insurance company. Medical and other benefits are provided through a
tax-exempt trust formed by the Corporation. The Corporation recognizes the cost
of providing these benefits by expensing annual insurance premiums, trust
funding allocations and administrative expenses.
The amount expensed for group insurance for active employees in 1997, 1996
and 1995 was $157 million, $157 million and $152 million, respectively.
The status of postretirement benefits other than pensions and certain
amounts recognized in the Corporation's consolidated financial statements for
each of the years in the three-year period ended December 31, 1997, are
presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF POSTRETIREMENT BENEFITS OBLIGATION
Retirees $ 235 256 351
Fully eligible active employees 9 6 9
Other active participants 106 81 87
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation $ 350 343 447
- ----------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value 66 58 53
Projected benefit obligation in excess of plan assets $ 284 285 394
Unrecognized prior service cost 32 45 10
Unrecognized net gain (loss) from past experience different from that assumed and
effects of changes in assumptions 104 92 5
Unrecognized net transition obligation (60) (66) (84)
- ----------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ 360 356 325
- ----------------------------------------------------------------------------------------------------------------------------------
ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS
Weighted average discount rate 7.25 % 7.50-7.75 7.00-7.50
Rate of increase in future compensation levels, depending on age 4.25-5.00 4.50-5.00 4.00-9.00
Health care cost trend rate
Prior to age 65 5.50-6.00 5.50-11.67 5.00-
grading 12.25
to 5.50
After age 65 5.00-8.75 10.67-11.50 5.00-
grading grading
to 5.50 % to 5.50 11.25
- ----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF ONE PERCENT INCREASE IN HEALTH CARE COST TREND RATE
Service costs $ - - -
Interest costs 1 2 2
Accumulated postretirement benefit obligation $ 15 17 29
- ----------------------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT COSTS
Service cost-benefits earned during the period $ 8 8 7
Interest cost on projected benefit obligation 26 28 31
Actual (return) on Plan assets (2) (3) (2)
Amortization of transition obligation (3) 0 2
- ----------------------------------------------------------------------------------------------------------------------------------
Net cost $ 29 33 38
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-31
<PAGE>
- --------------------------------------------------------------------------------
NOTE 15: INCOME TAXES
The Corporation accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The provision for income taxes for each of the years in the three-year
period ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
(In millions) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT INCOME TAX EXPENSE
Federal $ 480 622 720
State 39 73 60
- -------------------------------------------------------------------------------------------------------------------------
Total 519 695 780
Foreign 12 12 8
- -------------------------------------------------------------------------------------------------------------------------
Total 531 707 788
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX EXPENSE
Federal 526 544 373
State 27 10 52
- -------------------------------------------------------------------------------------------------------------------------
Total 553 554 425
- -------------------------------------------------------------------------------------------------------------------------
Total $ 1,084 1,261 1,213
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of federal income tax rates and amounts to the
effective income tax rates and amounts for each of the years in the three-year
period ended December 31, 1997, is presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------------
Percent of Percent of Percent of
Pre-tax Pre-tax Pre-tax
(In millions) Amount Income Amount Income Amount Income
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 3,793 $ 3,534 $ 3,409
-------- -------- -----------
Tax at federal income tax rate $ 1,327 35.0 % $ 1,237 35.0 % $ 1,193 35.0 %
Reasons for difference in federal income
tax rate and effective tax rate
Tax-exempt interest, net of cost to carry (53) (1.4) (62) (1.7) (80) (2.3)
Non-taxable distributions from
corporate reorganizations (264) (7.0) - - - -
State income taxes, net of federal tax
benefit 43 1.1 54 1.5 73 2.1
Goodwill amortization 50 1.3 40 1.1 37 1.1
Change in the beginning-of-the-year
deferred tax assets valuation allowance (11) (0.3) (12) (0.3) 3 0.1
Other items, net (8) (0.2) 4 0.1 (13) (0.4)
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 1,084 28.5 % $ 1,261 35.7 % $ 1,213 35.6 %
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-32
<PAGE>
- --------------------------------------------------------------------------------
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax liabilities (assets) for each of the
years in the three-year period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
(In millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES
<S> <C> <C> <C>
Depreciation $ 303 131 100
Unrealized gain on debt and equity securities 154 15 100
Intangible assets 115 99 84
Leasing activities 2,082 1,527 994
Loan products 46 25 8
Prepaid pension assets 128 105 91
Loan loss reserve recapture 30 49 72
Other 126 148 128
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 2,984 2,099 1,577
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX ASSETS
Provision for loan losses, net (857) (803) (823)
Accrued expenses, deductible when paid (524) (413) (406)
Foreclosed properties (7) (9) (16)
Sale and leaseback transactions (15) (10) (17)
Deferred income (18) (25) (22)
Purchase accounting adjustments (primarily loans and securities) (79) (144) (63)
Net operating loss carryforwards (71) (55) (38)
First American segregated assets - (4) (20)
Other (162) (132) (102)
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets (1,733) (1,595) (1,507)
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance 24 35 43
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 1,275 539 113
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Changes to the deferred tax assets valuation allowance for each of the
years in the three-year period ended December 31, 1997, are presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
(In millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets valuation allowance, beginning of year $ 35 43 37
Current year deferred provision, change in deferred tax assets valuation allowance (11) (12) 3
Purchase acquisitions - 4 3
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance, end of year $ 24 35 43
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A portion of the current year change in the net deferred tax liability
(asset) relates to unrealized gains and losses on debt and equity securities
available for sale. The related 1997, 1996 and 1995 deferred tax expense
(benefit) of $139 million, $(85) million and $258 million, respectively, have
been recorded directly to stockholders' equity. Purchase acquisitions also
increased (decreased) the net deferred tax liability by $44 million, $(43)
million and $1 million in 1997, 1996 and 1995, respectively.
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
in certain periods and the utilization of tax planning strategies. Management
has determined that it is more likely than not that the deferred tax assets can
be supported by carrybacks to federal taxable income in excess of $2.4 billion
in the two-year federal carryback period and by expected future taxable income
that will far exceed amounts necessary to fully realize remaining deferred tax
assets resulting from net operating loss carryforwards and from the scheduling
of temporary differences. The valuation allowance primarily relates to certain
state temporary differences and to federal and state net operating loss
carryforwards. To the extent that the valuation allowance attributable to
purchase acquisitions in the amount of $22 million is subsequently recognized,
such income tax benefit will reduce goodwill.
C-33
<PAGE>
- --------------------------------------------------------------------------------
At December 31, 1997, the Corporation has net operating loss carryforwards
of $40 million which are available to offset future federal taxable income
through 2007, subject to annual limitations. The Corporation also has net
operating loss carryforwards of approximately $1.7 billion, which are available
to offset future state taxable income through 2012.
Income tax expense related to securities available for sale transactions
was $11 million, $14 million, and $14 million in 1997, 1996 and 1995,
respectively. Income tax expense related to investment security transactions was
$1 million, $1 million, and $2 million in 1997, 1996 and 1995, respectively.
The Internal Revenue Service (the "IRS") is examining the Corporation's
federal income tax returns for the years 1991 through 1996, and the IRS is
examining federal income tax returns for certain acquired subsidiaries for
periods prior to acquisition. In 1995, the IRS examination of the Corporation's
federal income tax returns for the years through 1990 was settled with no
material impact to the Corporation's financial position or results of
operations. In 1996 and 1995, tax liabilities for certain acquired subsidiaries
for periods prior to their acquisition by the Corporation were settled with the
IRS with no significant impact on the Corporation's financial position or
results of operations.
C-34
<PAGE>
- --------------------------------------------------------------------------------
NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers, to reduce its own exposure to fluctuations in interest rates and to
conduct lending activities. These financial instruments include commitments to
extend credit; standby and commercial letters of credit; forward and futures
contracts; interest rate swaps; options, interest rate caps, floors, collars and
swaptions; foreign currency and exchange rate swap commitments; commodity swaps;
and commitments to purchase and sell securities. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of amounts
recognized in the consolidated financial statements.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby and commercial letters of credit is represented by the contract
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments. For forward and futures contracts, interest rate swaps, options,
interest rate caps, floors, collars and swaptions, the contract or notional
amounts do not represent the exposure to credit loss. The Corporation controls
the credit risk of its forward and futures contracts, interest rate swap
agreements, foreign currency and exchange rate swaps, and securities
transactions through collateral arrangements, credit approvals, limits and
monitoring procedures.
Our policy requires all swaps and options to be governed by an
International Swaps and Derivatives Association Master Agreement. Bilateral
collateral agreements are in place for substantially all dealer counterparties.
Collateral for dealer transactions is delivered by either party when the credit
risk associated with a particular transaction, or group of transactions to the
extent netting exists, exceeds defined thresholds of credit risk. Thresholds are
determined based on the strength of the individual counterparty, and they are
bilateral. As of December 31, 1997, the total credit risk in excess of
thresholds was $301 million. This amount does not include credit risk related to
CoreStates dealer transactions and trading activities. The fair value of
collateral held approximated the total credit risk in excess of the thresholds.
For non-dealer transactions, the need for collateral is evaluated on an
individual transaction basis, and it is primarily dependent on the financial
strength of the counterparty.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses. Deferred gains and
losses were each $14 million at December 31, 1997. Net gains of $3 million will
increase net interest income in 1998. Net losses of $3 million in the aggregate
will reduce net interest income in subsequent years.
Additional information related to derivative financial instruments and
financial instruments held or issued for the purposes of trading activity or
other than for trading can be found below and in Tables 19 through Table 21 on
pages T-19 through T-28, which are incorporated herein by reference.
Off-balance sheet derivative and other financial instruments and their
related fair values as of December 31, 1997 and 1996, are presented below.
C-35
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
--------------------------------------- -----------------------------------
Contract Contract
Estimated or Estimated or
Carrying Fair Notional Carrying Fair Notional
(In millions) Amount Value Amount Amount Value Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL INSTRUMENTS WHOSE
CONTRACT AMOUNTS REPRESENT
CREDIT RISK
Commitments to extend credit $ - 180 87,707 - 130 71,813
Standby and commercial letters of credit - 26 9,275 - 20 8,069
FINANCIAL INSTRUMENTS WHOSE
CONTRACT OR NOTIONAL
AMOUNTS EXCEED THE AMOUNT
OF CREDIT RISK
Forward and futures contracts
Trading and dealer activities 81 79 28,727 62 62 20,839
Interest rate risk management
Asset rate conversions - 1 725 - 1 57
Liability rate conversions - 6 459 - 482 -
Asset hedges - - - - 5 662
Rate sensitivity hedges - (6) 15,440 - (1) 34,228
Interest rate swap agreements
Trading and dealer activities (204) (225) 45,950 (45) (44) 24,818
Interest rate risk management
Asset rate conversions 13 189 16,287 11 153 24,088
Liability rate conversions 19 309 10,627 32 129 12,322
Purchased options, interest rate
caps, floors, collars and swaptions
Trading and dealer activities 250 254 12,424 68 72 10,819
Interest rate risk management
Asset rate conversions 3 15 702 4 5 717
Liability rate conversions 1 - 336 2 1 357
Rate sensitivity hedges 44 52 5,384 19 32 14,604
Written options, interest rate caps,
floors, collars and swaptions
Trading and dealer activities (136) (99) 15,064 (56) (52) 10,579
Foreign currency and exchange
rate swap commitments
Trading and dealer activities 44 48 7,462 2 1 5,915
Foreign currency risk management - - 56 - - -
Commodity swaps
Trading and dealer activities - - 24 3 3 67
Commitments to purchase
trading securities (1) (1) 439 (2) (2) 616
Commitments to sell
trading securities $ (1) (3) 1,248 1 1 605
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-36
<PAGE>
- --------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and they may require payment of a fee. Since many of the commitments are
expected to expire without being drawn on, the total commitment amounts do not
necessarily represent future cash requirements.
Standby and commercial letters of credit are conditional commitments
issued by the Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. Except for short-term guarantees of $6.2 billion, guarantees
extend for more than one year, and they expire in varying amounts primarily
through 2019. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation holds various assets as collateral supporting those commitments
for which collateral is deemed necessary.
Forward and futures contracts are contracts for delayed deliveries of
securities or money market instruments in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities values and
interest rates.
The Corporation enters into a variety of interest rate contracts,
including options, interest rate caps, floors, collars and swaptions written,
and interest rate swap agreements, in its trading activities and in managing its
interest rate exposure. Interest rate caps, floors, collars and swaptions
written by the Corporation enable customers to transfer, modify or reduce their
interest rate risk. Interest rate options are contracts that allow the holder of
the option to purchase or sell a financial instrument at a specified price and
within a specified period of time from the seller or writer of the option. As a
writer of options, the Corporation receives a premium at the outset and bears
the risk of an unfavorable change in the price of the financial instrument
underlying the option.
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions. Notional principal amounts often are used to express the
volume of these transactions, but the amounts potentially subject to credit risk
are much smaller. The Corporation also acts as an intermediary in arranging
interest rate swap transactions for customers.
Generally, futures contracts are exchange traded, and all other
off-balance sheet instruments are transacted in the over-the-counter markets.
In the normal course of business, the Corporation has entered into certain
transactions that have recourse options. These recourse options, if acted on,
would not have a material impact on the Corporation's financial position.
Substantially all time drafts accepted by December 31, 1997, met the
requirements for discount with Federal Reserve Banks. Average daily Federal
Reserve Bank balance requirements for the year ended December 31, 1997, amounted
to $472 million. Minimum operating lease payments due in each of the five years
subsequent to December 31, 1997, are as follows (in millions): 1998, $153; 1999,
$136; 2000, $122; 2001, $108; 2002, $101; and subsequent years, $661. Rental
expense for all operating leases for the three years ended December 31, 1997,
was $316 million, 1997; $314 million, 1996; and $287 million, 1995.
The Parent Company and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which damages in various amounts are claimed. Although the amount
of any ultimate liability with respect to such matters cannot be determined, in
the opinion of management, based on the opinions of counsel, any such liability
will not have a material impact on the Corporation's consolidated financial
position.
C-37
<PAGE>
- --------------------------------------------------------------------------------
NOTE 17: CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments at
December 31, 1997 and 1996, which should be read in conjunction with Note 16 and
certain other notes to the consolidated financial statements presented elsewhere
herein, is set forth below.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 21,888 21,888 21,612 21,612
Trading account assets 5,952 5,952 4,602 4,602
Securities available for sale 23,524 23,524 19,199 19,199
Investment securities 3,526 3,670 4,190 4,328
Loans
Commercial, financial and agricultural 45,563 45,825 40,988 41,112
Real estate - construction and other 3,032 3,081 3,470 3,543
Real estate - commercial mortgage 13,143 13,361 14,287 14,567
Lease financing 5,786 5,786 4,398 4,399
Foreign 3,875 3,874 2,834 2,831
Real estate - mortgage 28,980 29,420 33,171 33,555
Installment loans - Bankcard 3,914 3,981 7,295 7,397
Installment loans - other and Vehicle leasing 27,394 27,477 28,204 28,219
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 131,687 132,805 134,647 135,623
Allowance for loan losses (1,847) - (2,212) -
- ----------------------------------------------------------------------------------------------------------------------------
Loans, net 129,840 132,805 132,435 135,623
- ----------------------------------------------------------------------------------------------------------------------------
Other assets $ 9,313 9,313 3,578 3,586
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 31,005 31,005 29,713 29,713
Interest-bearing deposits
Savings and NOW accounts 37,281 37,281 35,892 35,892
Money market accounts 21,240 21,240 21,193 21,193
Other consumer time 37,324 37,867 42,457 43,123
Foreign 3,928 3,928 3,307 3,307
Other time 6,299 6,398 3,867 3,883
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 137,077 137,719 136,429 137,111
Short-term borrowings 31,681 31,681 27,620 27,620
Other liabilities 3,690 3,690 2,779 2,779
Long-term debt 11,752 12,065 10,815 10,958
Guaranteed preferred beneficial interests in Corporation's junior
subordinated deferrable interest debentures $ 1,735 1,801 789 796
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-38
<PAGE>
- --------------------------------------------------------------------------------
Estimated fair values for the commercial loan portfolio were based on
weighted average discount rates ranging from 6.57 percent to 8.68 percent and
6.18 percent to 8.95 percent at December 31, 1997 and 1996, respectively, and
for the retail portfolio from 7.24 percent to 14.71 percent and 8.33 percent to
14.14 percent, respectively.
The fair value of noninterest-bearing deposits, savings and NOW accounts,
and money market accounts is the amount payable on demand at December 31, 1997
and 1996. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates above do not include the benefit that results from the low-cost
funding provided by deposit liabilities compared to the cost of borrowing funds
in the market.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. For
example, the Corporation has a substantial trust department, which includes
mutual fund activities, that contributes net fee income annually. The trust
department is not considered a financial instrument, and its value has not been
incorporated into fair value estimates. Other significant assets and liabilities
that are not considered financial assets or liabilities include the mortgage
banking operation, brokerage network, deferred tax assets, premises and
equipment, and goodwill. In addition, tax ramifications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates, and they have not been considered in any of the estimates. The
fair value of off-balance sheet derivative financial instruments has not been
considered in determining on-balance sheet fair value estimates.
C-39
<PAGE>
- --------------------------------------------------------------------------------
NOTE 18: FIRST UNION CORPORATION (PARENT COMPANY)
The Parent Company's principal assets are its investments in its
subsidiaries, interest-bearing balances with bank subsidiaries, securities
purchased under resale agreements, securities available for sale and loans to
subsidiaries. The significant sources of income of the Parent Company are
dividends from its subsidiaries, interest and fees charged on loans made to its
subsidiaries, interest on eurodollars purchased from bank subsidiaries and
interest on securities available for sale. Additionally, a significant amount of
sundry income includes fees the Parent Company charges to its subsidiaries for
providing various services.
In addition, the Parent Company serves as the primary source of funding
for the mortgage banking and other activities of its nonbank subsidiaries,
including Wheat First Securities, Inc. Lines of credit in the aggregate amount
of $350 million are available to the Parent Company at an annual facility fee of
8.00 basis points to 18.75 basis points and a utilization fee of 6.25 basis
points. The facility fee is based on the daily average commitment amount, and
the utilization fee is based on the daily average principal amount outstanding.
Generally, interest rates will be determined when credit line usage occurs, and
they will vary based on the type of loan extended to the Parent Company. The
lines of credit expire in December 1998.
Certain regulatory and other requirements restrict the (i) lending of
funds by the bank subsidiaries to the Parent Company and to the Parent Company's
nonbank subsidiaries, and (ii) amount of dividends that can be paid to the
Parent Company by the bank subsidiaries and certain of the Parent Company's
other subsidiaries. On December 31, 1997, the Parent Company was indebted to
subsidiary banks in the amount of $375 million that, under the terms of
revolving credit agreements, was collateralized by certain interest-bearing
balances, securities available for sale, loans, premises and equipment and was
payable on demand. On such date, a subsidiary bank had loans outstanding to
Parent Company nonbank subsidiaries in the amount of $139 million that, under
the terms of a revolving credit agreement, were collateralized by securities
available for sale and certain loans and were payable on demand. The Parent
Company has guaranteed certain borrowings of its subsidiaries that at December
31, 1997, amounted to $3.3 billion.
Industry regulators limit dividends that can be paid by the Corporation's
subsidiaries. National banks are limited in their ability to pay dividends in
two principal ways. First, dividends cannot exceed the bank's undivided profits,
less statutory bad debt in excess of the bank's allowance for loan losses; and
second, in any year, dividends may not exceed a bank's net profits for that
year, plus its retained earnings from the preceding two years, less any required
transfers to surplus. The Parent Company's subsidiaries, including its bank
subsidiaries, had available retained earnings of $458 million at December 31,
1997, for the payment of dividends to the Parent Company without such regulatory
or other restrictions.
Subsidiary net assets of $10.7 billion were restricted from being
transferred to the Parent Company at December 31, 1997, under such regulatory or
other restrictions. Dividends from subsidiaries includes $835 million in equity
transfers to the Parent Company related to internal bank consolidations in 1997.
At both December 31, 1997 and 1996, the estimated fair value of the Parent
Company's loans was $2.8 billion.
See Note 11 for information related to the Parent Company's junior
subordinated deferrable interest debentures.
The Parent Company's condensed balance sheets as of December 31, 1997 and
1996, and the related condensed statements of income and cash flows for the
three-year period ended December 31, 1997, are presented below. The condensed
financial statements of the Parent Company as of December 31, 1996, and for the
two-year period then ended reflect the November 28, 1997, merger of Signet's
parent company into the Parent Company on a net basis within the investment in
wholly owned subsidiaries and equity in undistributed net income of subsidiaries
line classifications, as appropriate. Information with respect to CoreStates has
been appropriately classified within the condensed financial statements of the
Parent Company on a gross basis.
C-40
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31,
------------------------
(In millions) 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Interest-bearing balances with bank subsidiary $ 4,215 2,161
Securities purchased under resale agreements 381 306
- --------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 4,596 2,467
- --------------------------------------------------------------------------------------------------------------------------
Securities available for sale (amortized cost $452 in 1997; $354 in 1996) 453 363
Investment securities 28 -
Loans, net of unearned income ($1 in 1997 and $1 in 1996) 154 108
Allowance for loan losses - (1)
- --------------------------------------------------------------------------------------------------------------------------
Loans, net 154 107
- --------------------------------------------------------------------------------------------------------------------------
Loans due from subsidiaries
Banks 1,912 1,786
Bank holding companies 174 311
Other subsidiaries 531 552
Investments in wholly owned subsidiaries
Arising from investments in equity in undistributed net income of subsidiaries
Banks 12,346 9,557
Bank holding companies 2,357 5,288
Other subsidiaries 1,274 1,071
- --------------------------------------------------------------------------------------------------------------------------
15,977 15,916
Arising from purchase acquisitions 101 93
- --------------------------------------------------------------------------------------------------------------------------
Total investments in wholly owned subsidiaries 16,078 16,009
- --------------------------------------------------------------------------------------------------------------------------
Other assets 628 497
- --------------------------------------------------------------------------------------------------------------------------
Total $ 24,554 22,092
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 1 -
Commercial paper 871 1,021
Other short-term borrowings with affiliates 1,114 651
Other liabilities 901 418
Long-term debt 5,377 4,864
Junior subordinated deferrable interest debentures 1,021 510
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,285 7,464
Stockholders' equity 15,269 14,628
- --------------------------------------------------------------------------------------------------------------------------
Total $ 24,554 22,092
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 177 158 134
Interest and dividends on securities available for sale 29 22 15
Interest and dividends on investment securities 3 - -
Other interest income from subsidiaries 172 73 84
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 381 253 233
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on short-term borrowings 95 74 91
Interest on long-term debt 434 301 256
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 529 375 347
- -----------------------------------------------------------------------------------------------------------------------
Net interest income (148) (122) (114)
Provision for loan losses (1) - -
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (147) (122) (114)
- -----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Dividends from subsidiaries
Banks 2,226 1,268 881
Bank holding companies 452 1,693 275
Other subsidiaries 116 42 102
Securities available for sale transactions 6 - 26
Investment security transactions 3 - -
Sundry income 723 529 503
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,526 3,532 1,787
- -----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE 650 561 498
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) and equity in undistributed
net income of subsidiaries 2,729 2,849 1,175
Income taxes (benefits) 13 (33) (26)
- -----------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 2,716 2,882 1,201
Equity in undistributed net income of subsidiaries (7) (609) 995
- -----------------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273 2,196
Dividends on preferred stock - 9 26
- -----------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264 2,170
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
C-42
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,709 2,148 2,085
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Equity in undistributed net income of subsidiaries 7 734 (884)
Accretion and revaluation losses on securities available for sale 2 1 (4)
Provision for loan losses (1) - -
Securities available for sale transactions (6) - (26)
Investment security transactions (3) - -
Depreciation and amortization 13 10 6
Deferred income taxes (benefits) (46) 5 -
Other assets, net (79) 131 (262)
Other liabilities, net 828 42 33
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,424 3,071 948
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 161 104 99
Purchases of securities available for sale (335) (171) (125)
Sales of investment securities 153 718 118
Purchases of investment securities (96) (707) (258)
Advances to subsidiaries, net 402 (316) (599)
Investments in subsidiaries 196 (581) 553
Longer-term loans originated or acquired (382) (244) (101)
Principal repaid on longer-term loans 336 212 97
Purchases of premises and equipment, net (18) (26) (7)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities 417 (1,011) (223)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits 1 - -
Commercial paper (150) 79 546
Other short-term borrowings, net 104 190 86
Issuance of junior subordinated deferrable interest debentures 511 510 -
Issuances of long-term debt 525 852 1,442
Payments of long-term debt (17) (364) (273)
Sales of common stock 815 367 348
Purchases of preferred stock - - (7)
Redemption of preferred stock - (109) -
Purchases of common stock (2,360) (1,584) (1,554)
Cash dividends paid (1,141) (1,040) (869)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,712) (1,099) (281)
- ------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 2,129 961 444
Cash and cash equivalents, beginning of year 2,467 1,506 1,062
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 4,596 2,467 1,506
- ------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 464 346 329
Income taxes 200 225 381
NONCASH ITEMS
Increase in investments in subsidiaries as a result of acquisitions of institutions
for common stock 3 1,008 611
Assumption of long-term debt of liquidated affiliate - - 74
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity
securities included in
Parent Company
Securities available for sale (8) (60) 27
Other liabilities 4 3 24
Parent Company subsidiaries
Securities available for sale 429 (126) 501
Other assets $ 133 (92) 136
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
C-43
FIRST UNION CORPORATION
AND SUBSIDIARIES
Management's Analysis of Operations
Supplemental Quarterly Financial Report
Three Months Ended March 31, 1998
Restated to reflect the pooling of interests accounting
acquisition of CoreStates Financial Corp on April 28, 1998
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL QUARTERLY FINANCIAL REPORT
THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
PAGE
- --------------------------------------------------------------------------------------------
<S> <C>
Financial Highlights 1
Management's Analysis of Operations 2
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-7
Securities Available for Sale T-8
Investment Securities T-9
Loans T-10
Allowance for Loan Losses and Nonperforming Assets T-11
Intangible Assets T-12
Foreclosed Properties T-13
Deposits T-14
Time Deposits in Amounts of $100,000 or More T-15
Long-Term Debt T-16
Changes in Stockholders' Equity T-17
Capital Ratios T-18
Off-Balance Sheet Derivative Financial Instruments T-19
Off-Balance Sheet Derivatives - Expected Maturities T-23
Off-Balance Sheet Derivatives Activity T-23
Net Interest Income Summaries T-24
Consolidated Balance Sheets T-26
Consolidated Statements of Income T-27
Consolidated Statements of Cash Flows T-28
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------
(Dollars in millions, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL HIGHLIGHTS
Net income after merger-related and restructuring
charges $ 790 703
After tax merger-related and restructuring charges 19 --
- ------------------------------------------------------------------------------------------------------------------
Net income before merger-related and restructuring
charges $ 809 703
==================================================================================================================
PER SHARE DATA (a)
Basic earnings
Net income after merger-related and restructuring
charges $ 0.82 0.72
Net income before merger-related and restructuring
charges 0.84 0.72
Diluted earnings
Net income after merger-related and restructuring
charges 0.81 0.72
Net income before merger-related and restructuring
charges 0.83 0.72
Cash dividends 0.37 0.29
Book value 16.31 14.41
Period-end price $56.8125 40.50
Average shares (In thousands)
Basic 965,120 969,669
Diluted 977,155 981,174
Actual shares (In thousands) 972,775 964,186
Dividend payout ratios (based on operating earnings) 42.26% 39.62
==================================================================================================================
PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges
Return on average assets (a) (b) 1.56% 1.50
Return on average stockholders' equity (a) (c) 21.22 19.91
Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 57 56
Net charge-offs to
Average loans, net (a) 0.39 0.62
Average loans, net, excluding Bankcard (a) 0.24 0.27
Nonperforming assets to loans, net and foreclosed properties 0.75 0.79
Net interest margin (a) 4.18% 4.71
==================================================================================================================
CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION)
Before merger-related and restructuring charges
Net income $ 865 760
Earnings per share - basic $ 0.90 0.78
Return on average tangible assets (a) 1.69% 1.65
Return on average tangible stockholders' equity (a) (c) 28.03 27.74
Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 54% 53
==================================================================================================================
PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 34,388 19,059
Investment securities 3,172 4,024
Loans, net of unearned income 133,092 134,839
Earning assets 191,962 171,442
Total assets 220,066 193,507
Noninterest-bearing deposits 30,530 28,935
Interest-bearing deposits 107,604 104,434
Long-term debt 12,010 10,767
Guaranteed preferred beneficial interests 1,741 1,734
Stockholders' equity $ 15,806 13,843
==================================================================================================================
</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.
MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Supplemental Quarterly
Financial Report 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.
The following review is a discussion of the performance and financial
condition of First Union Corporation and CoreStates Financial Corp on a combined
basis. All CoreStates historical financial data have been restated for the
pooling of interests acquisition of CoreStates, which was consummated on April
28, 1998.
EARNINGS HIGHLIGHTS
First Union's operating earnings in the first quarter of 1998 increased 15
percent to $809 million from $703 million in the first quarter of 1997. Diluted
operating earnings per share were 83 cents in the first quarter of 1998, up 15
percent from 72 cents per share in the first quarter of 1997. First quarter 1998
operating earnings represent a return on average common equity of 21.22 percent
and a return on average assets of 1.56 percent compared with 19.88 percent and
1.50 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 $790 million, or 81 cents per diluted share.
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 32 percent
increase in noninterest income (excluding investment securities transactions)
compared to the first quarter of 1997, including, on an unrestated basis, 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 11 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 nonperforming assets declined to $1.0 billion, or 0.75 percent
of net loans and foreclosed properties, from $1.1 billion, or 0.79 percent, in
the first quarter of 1997. Annualized net charge-offs as a percentage of average
net loans improved to 0.39 percent in the first quarter of 1998 compared with
0.62 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
<PAGE>
o 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;
o 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;
o 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
o 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' 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. The percentage of
noninterest income to total revenue was 42 percent in the first quarter of 1998
compared with 34 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
<PAGE>
In 1998, First Union currently estimates after-tax, merger-related and
restructuring expenses of $795 million related to the CoreStates merger. More
information is available in our Current Reports on Form 8-K, 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 Securities and Exchange Commission on
January 9, 1998, and in our 1997 Supplemental Annual Report on Form 8-K.
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 that First Union 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 37 million of
the outstanding shares of First Union common stock at a cost of $2 billion,
which equals the number of such shares currently expected to be issued in the
merger. 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 historical results will not be restated as a result of this acquisition.
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. Information related to
CoreStates is separately discussed below and 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
5
<PAGE>
enhance corporate earnings and to manage exposure to interest rate risk. Because
most market risk is held in the Treasury/Nonbank segment, the profitability of
this segment is expected to be more volatile than for the other business
segments.
General corporate expenses, with the exception of goodwill amortization,
are allocated to each segment in a pro rata manner based on the direct and
attributable indirect expenses for each segment. Residual corporate expense
remaining in the Treasury/Nonbank segment reflects the costs of portfolio
management activities, goodwill amortization and merger-related restructuring
charges. In general this approach should not result in significant volatility to
business segment returns.
Consumer Bank
The Consumer Bank, our primary deposit-taking entity, provides an
attractive source of funding for 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
6
<PAGE>
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 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. Including
CoreStates, we 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
7
<PAGE>
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.
First Union is 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 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.
8
<PAGE>
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.
CoreStates
Discreet CoreStates segment data which would conform to First Union's
segment reporting methodologies and assumptions are not available, and
accordingly, the amounts related to CoreStates in the Business Segments table
represent the consolidated historical results of CoreStates. Additionally, the
information presented above does not include CoreStates financial data.
CoreStates was composed of five primary businesses: Global and Specialized
Banking; Regional Banking; Retail Credit Services; Trust and Asset Management;
and Third
9
<PAGE>
Party Processing. Each segment was comprised of well-defined business lines with
market or product specific missions. These segments may or may not conform to
those defined by First Union.
Global and Specialized Banking includes specialized banking, secured
lending, real estate, large corporate banking, Congress Financial Corporation,
international banking, investment banking and cash management. Regional Banking
consists of retail banking and delivery, small business lending, commercial
business lending and middle market lending. Retail Credit Services include
credit card, dealer services, educational lending, mortgage services, merchant
credit card processing and consumer and commercial card processing. Trust and
Asset Management consists of personal trust (including private banking),
institutional trust, retirement plan services and investment management. Third
Party Processing includes QuestPoint specialty transaction processing, earnings
from CoreStates investment in Electronic Payment Services, Inc., and earnings
from CoreStates Bank's Financial Institutions Division.
RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
Net Interest Income
Tax-equivalent net interest income was $1.89 billion in the first quarter
of 1998 compared with $1.97 billion in the first quarter of 1997. The 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, $15
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 $3 million.
Net Interest Margin
The net interest margin, which is the difference between the tax-equivalent
yield on earning assets and the rate paid on funds to support those assets, was
4.18 percent in the first quarter of 1998 compared with 4.70 percent in the
first quarter of 1997, a reduction of 52 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
10
<PAGE>
8.04 percent in the first quarter of 1998 and 8.30 percent in the first quarter
of 1997. The average rate paid on interest-bearing liabilities was 4.48 percent
in the first quarter of 1998 and 4.27 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 investments were reflected in a 31 percent increase
in noninterest income, excluding investment securities transactions, to $1.3
billion in the first quarter of 1998 from $1.0 billion 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. On an unrestated basis, 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 $6 billion at December 31, 1997.
Noninterest Expense
Noninterest expense was $1.9 billion in the first quarter of 1998 compared
with $1.7 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
11
<PAGE>
affected. We had $2.9 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 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 $23 million in the first quarter of 1998
and $9 million in the first quarter of 1997.
At March 31, 1998, we had securities available for sale with a market value
of $34 billion compared with $24 billion at year-end 1997. The market value of
securities available for sale was $454 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 6.70 percent compared with 6.75 percent in the first quarter
of 1997. The average maturity of the portfolio was 5.93 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 $3.2 billion at March 31,
1998, and $3.5 billion at December 31, 1997.
The average rate earned on investment securities was 8.13 percent in the
first quarter of 1998 and 7.83 percent in the first quarter of 1997. The average
maturity of the portfolio was 7.75 years at March 31, 1998.
12
<PAGE>
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 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 55 percent in
commercial loans and 45 percent in consumer loans, which did not represent a
significant change from December 31, 1997.
Net loans at March 31, 1998, were $133 billion compared with $132 billion
at December 31, 1997. Average net loans were $131 billion in the first quarter
of 1998 and $134 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 $65 billion and $29 billion, respectively. Commercial and
standby letters of credit were $10 billion at March 31, 1998. At March 31, 1998,
loan participations sold to other lenders amounted to $4 billion. They were
recorded as a reduction of gross loans.
The average rate earned on loans was 8.66 percent in the first quarter of
1998 compared with 8.77 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.
13
<PAGE>
Commercial Real Estate Loans
Commercial real estate loans amounted to 12 percent of the total portfolio
at March 31, 1998, and at December 31, 1997. This portfolio included commercial
real estate mortgage loans of $13 billion at March 31, 1998 and December 31,
1997.
ASSET QUALITY
Nonperforming Assets
At March 31, 1998, nonperforming assets were $1.0 billion, or 0.75 percent
of net loans and foreclosed properties, compared with $991 million, or 0.75
percent, at December 31, 1997.
Loans or properties of less than $5 million each made up 74 percent, or
$746 million, of nonperforming assets at March 31, 1998. Of the rest:
o Twelve loans or properties between $5 million and $10 million each
accounted for $81 million; and
o Eight loans or properties over $10 million each accounted for $175
million.
Forty-eight percent of nonperforming assets were collateralized primarily
by real estate at March 31, 1998 compared with 49 percent at December 31, 1997.
Past Due Loans
Accruing loans 90 days past due were $328 million at March 31, 1998,
compared with $326 million at December 31, 1997. Of the past dues at March 31,
1998, $63 million were commercial and commercial real estate loans and $265
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 $129 million in the first quarter of 1998 and
$194 million in the fourth quarter of 1997. Annualized net charge-offs were 0.39
percent of average net loans in the first quarter of 1998 compared with 0.58
percent in the fourth quarter of 1997. Excluding net charge-offs related to the
credit card portfolio, net charge-offs were 0.24 percent compared with 0.35
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 $135 million in the first quarter of 1998
compared with $445 million in the fourth quarter of 1997. The loan loss
provision was increased in the
14
<PAGE>
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 $1.9 billion at March 31, 1998, compared
with 1.8 billion 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 $509
million at March 31, 1998, compared with $485 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 $82 million related to $363 million of 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 $499
million, and $6 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 $16 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.
15
<PAGE>
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 $129
billion at March 31, 1998, compared with $127 billion at December 31, 1997.
The portion of core deposits in higher-rate, other consumer time deposits
was 30 percent at March 31, 1998 and December 31, 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 $125 billion in the first quarter of
1998 and $124 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 and 23 percent, respectively, of average core deposits. Average balances
in savings and NOW and money market deposits were higher when compared with the
fourth quarter of 1997, while other consumer time and noninterest-bearing
deposits were lower. Deposits can be affected by branch closings or
consolidations, seasonal factors and the rates being offered compared to other
investment opportunities. The Net Interest Income Summaries provide additional
information about average core deposits.
Purchased Funds
Purchased funds at March 31, 1998, were $53 billion compared with $42
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 $49 billion compared with $41 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 76 percent of total stockholders' equity at March 31,
1998, and 77 percent 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.
16
<PAGE>
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, $2
billion of long-term debt will mature. Funds for the payment of long-term debt
will come from operations or, if necessary, additional borrowings.
Guaranteed Preferred Beneficial Interests
At March 31, 1998, $1.7 billion of trust capital securities were
outstanding. Subsidiary trusts issued these capital securities, and received the
proceeds by issuing junior subordinated debentures to the trusts. These capital
securities are considered tier 1 capital for regulatory purposes. Expenses of
$29 million in the first quarter of 1998 related to the capital securities are
included in sundry expense.
Stockholders' Equity
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Total stockholders' equity was $16 billion at March 31, 1998, and $15
billion at December 31, 1997. Common shares outstanding amounted to 973 million
at March 31, 1998, compared with 961 million at December 31, 1997. From January
1, 1998, through May 21, 1998, we repurchased 37 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 $341 million in dividends to common stockholders in the first
quarter of 1998 compared with $279 million in the first quarter of 1997.
At March 31, 1998, stockholders' equity included a $290 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 $809
million available for dividends at March 31, 1998, without prior regulatory
approval. Our subsidiaries paid $368 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
17
<PAGE>
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 8.66 percent and 13.09 percent, respectively, compared
with 8.43 percent and 13.02 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 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 6.97 percent and at December 31,1997,
it was 7.09 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.
18
<PAGE>
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 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"
19
<PAGE>
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 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.
20
<PAGE>
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $622 million at
March 31, 1998, compared with fair value appreciation of $566 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 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. This amount does not include credit risk related to
CoreStates dealer transactions and trading activities. 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 of
components.
21
<PAGE>
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.
23
<PAGE>
<TABLE>
<CAPTION>
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA
- --------------------------------------------------------------------------------------------------------------------------
Twelve
Months 1998 1997
Ended ----------------------------------------------------
Mar. 31, First Fourth Third Second First
(In millions, except per share data) 1998 Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARIES OF INCOME
Interest income $ 14,521 3,602 3,635 3,663 3,621 3,443
==========================================================================================================================
Interest income (a) $ 14,625 3,630 3,664 3,683 3,648 3,466
Interest expense 6,693 1,742 1,681 1,657 1,613 1,501
- --------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,932 1,888 1,983 2,026 2,035 1,965
Provision for loan losses 1,033 135 445 225 228 205
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 6,899 1,753 1,538 1,801 1,807 1,760
Securities available for sale transactions 66 23 18 15 10 9
Investment security transactions 3 -- -- 2 1 --
Noninterest income 4,596 1,354 1,147 1,065 1,030 1,025
Merger-related and restructuring charges (b) 313 29 225 -- 59 --
Noninterest expense 7,230 1,866 1,941 1,711 1,712 1,688
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 4,021 1,235 537 1,172 1,077 1,106
Income taxes 1,121 417 (68) 404 368 380
Tax-equivalent adjustment 104 28 29 20 27 23
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 2,796 790 576 748 682 703
==========================================================================================================================
PER SHARE DATA
Basic $ 2.94 0.82 0.61 0.79 0.72 0.72
Diluted 2.89 0.81 0.60 0.78 0.70 0.72
Cash dividends $ 1.30 0.37 0.32 0.32 0.29 0.29
Average shares - Basic (In thousands) -- 965,120 960,596 946,354 953,612 969,669
Average shares - Diluted (In thousands) -- 977,155 972,051 959,013 964,518 981,174
Average stockholders' equity (c)
Quarter-to-date $ -- 15,456 14,806 14,575 14,111 14,326
Year-to-date -- 15,456 14,365 14,010 14,077 14,326
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) 19.66X 19.66 18.30 17.26 17.00 15.76
To book value 348% 348 321 325 312 281
Book value $ 16.31 16.31 15.95 15.40 14.82 14.41
BALANCE SHEET DATA
Assets 220,066 220,066 205,735 202,766 201,642 193,507
Long-term debt $ 12,010 12,010 11,752 11,209 10,559 10,767
==========================================================================================================================
</TABLE>
(a) Tax-equivalent.
(b) Merger-related and restructuring charges amounted to $19 million after tax
in the first quarter of 1998, $167 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 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998
---------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ 2 10 27 158 197
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 157 99 259 2,051 2,566
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Retail
Private Brokerage & Internal
Mutual Client CAP Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $ 18 21 8 18 22 (11) 76
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 146 101 142 116 256 -- 761
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $ 5 18 16 15 69 123
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 122 81 512 1,205 434 2,354
====================================================================================================================================
(continued)
</TABLE>
T-2
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
====================================================================================================================================
Three Months Ended March 31, 1998
---------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 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 $ 51 (2) 5 32 22 108
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 599 102 62 923 110 1,796
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank CoreStates Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED (b)
Income statement data
Net interest income $ 683 88 352 123 100 514 1,860
Provision for loan losses 75 -- 8 5 2 45 135
Noninterest income 320 373 91 250 115 228 1,377
Noninterest expense 624 346 246 203 89 387 1,895
Income tax expense 107 39 66 57 41 107 417
Net income after
merger-related and
restructuring charges $ 197 76 123 108 83 203 790
After-tax merger-related and
restructuring charges -- -- -- -- 19 -- 19
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before
merger-related and
restructuring charges $ 197 76 123 108 102 203 809
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 31.18% 39.38 21.34 24.17 8.83 24.95 21.22
Average loans, net $49,042 2,838 26,811 16,703 632 35,008 131,034
Average deposits 60,832 13,983 19,148 5,199 1,725 33,629 134,516
Average attributed stockholders'
equity $ 2,566 761 2,354 1,796 4,684 3,298 15,459
====================================================================================================================================
(continued)
</TABLE>
(a) Average attributed stockholders' 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.
(b) Discreet CoreStates segment data which would conform to the
Corporation's segment reporting methodologies and assumptions are not available,
and accordingly, the amounts related to CoreStates represent the consolidated
historical results of CoreStates.
T-3
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
====================================================================================================================================
Three Months Ended March 31, 1997
---------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ 14 8 -- 204 226
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 103 85 458 2,115 2,761
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Retail
Private Brokerage & Internal
Mutual Client CAP Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $ 16 11 5 11 5 (4) 44
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 135 75 112 108 95 -- 525
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 $ 4 9 19 27 73 132
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 99 76 594 1,389 421 2,579
====================================================================================================================================
(continued)
</TABLE>
T-4
<PAGE>
Table 2
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1997
---------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL MARKETS
Income statement data
Net interest income $ 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 $ 20 1 4 31 14 70
- -----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' 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 stockholders'
equity $ 296 55 44 644 123 1,162
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank CoreStates Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED (b)
Income statement data
Net interest income $ 750 64 382 96 112 538 1,942
Provision for loan losses 137 -- 9 (2) 18 43 205
Noninterest income 330 222 84 159 22 217 1,034
Noninterest expense 588 216 248 146 85 405 1,688
Income tax expense 129 26 77 41 (1) 108 380
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 226 44 132 70 32 199 703
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 32.99% 35.21 20.94 24.73 3.55 22.02 19.88
Average loans, net $54,040 1,994 28,697 13,263 3,018 32,803 133,815
Average deposits 61,027 12,885 19,091 3,557 3,869 32,356 132,785
Average attributed stockholders'
equity $ 2,761 525 2,579 1,162 3,651 3,648 14,326
====================================================================================================================================
</TABLE>
(a) Average attributed stockholders' 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.
(b) Discreet CoreStates segment data which would conform to the Corporation's
segment reporting methodologies and assumptions are not available, and
accordingly, the amounts related to CoreStates represent the consolidated
historical results of CoreStates.
T-5
<PAGE>
TABLE 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- --------------------------------------------------------------------------------
1998 1997
--------- ----------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 13.35X 13.32 13.72 13.99 13.31
X
Return on assets 1.52% 1.14 1.50 1.39 1.50
- --------------------------------------------------------------------------------
Return on stockholders' equity (b) 20.74% 15.44 20.36 19.37 19.91
X
Earnings retained 56.75% 47.43 61.71 59.91 60.38
- --------------------------------------------------------------------------------
Internal capital growth (b) 11.77% 7.32 12.56 11.61 12.02
================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings 42.26% 40.77 38.29 38.02 39.62
Net income 43.25% 52.57 38.29 40.09 39.62
================================================================================
SELECTED RATIOS ON
Operating earnings
Return on assets 1.56% 1.47 1.50 1.47 1.50
Return on stockholders' equity (b) 21.22 19.82 20.31 20.42 19.91
Net income
Return on stockholders' equity (b) 20.74% 15.44 20.36 19.37 19.91
(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.
T-6
<PAGE>
Table 4
SELECTED QUARTERLY DATA
- -------------------------------------------------------------------------------
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) $ 1,812 1,448 1,218 1,194 967
Wholesale 2,175 1,393 981 691 780
===============================================================================
Total $ 3,987 2,841 2,199 1,885 1,747
===============================================================================
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 64,344 64,363 64,471 63,772 63,133
===============================================================================
FIRST UNION CORPORATION
OTHER DATA
ATMs 3,631 3,701 3,645 3,565 3,471
Employees 69,416 65,943 66,355 67,076 67,883
===============================================================================
(a) Includes originations of affiliated banks.
T-7
<PAGE>
Table 5
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
March 31, 1998
-------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARKET VALUE
U.S. Treasury $ 610 1,033 3,409 195 5,247 (104) 19 5,162 $ 7.56
U.S. Government agencies 719 6,678 11,649 50 19,096 (256) 4 18,844 5.66
CMOs 180 4,098 880 173 5,331 (29) 21 5,323 5.25
State, county and
municipal 11 26 23 69 129 -- -- 129 12.57
Other 79 2,365 876 1,265 4,585 (125) 16 4,476 5.56
- -------------------------------------------------------------------------------------------------------
Total $ 1,599 14,200 16,837 1,752 34,388 (514) 60 33,934 $ 5.93
=======================================================================================================
MARKET VALUE
Debt securities $ 1,598 14,200 16,837 779 33,414 (438) 52 33,028
Sundry securities 1 -- -- 973 974 (76) 8 906
- -----------------------------------------------------------------------------------------
Total $ 1,599 14,200 16,837 1,752 34,388 (514) 60 33,934
=========================================================================================
AMORTIZED COST
Debt securities $ 1,592 14,017 16,648 771 33,028
Sundry securities 1 -- -- 905 906
- -----------------------------------------------------------------
Total $ 1,593 14,017 16,648 1,676 33,934
=================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.69% 6.21 6.10 6.68 6.13
U.S. Government
agencies 6.44 7.02 7.04 7.30 7.01
CMOs 7.31 6.96 6.11 5.81 6.79
State, county and
municipal 8.24 6.35 6.62 6.89 6.85
Other 6.30 5.53 5.36 6.30 5.72
Consolidated 6.36% 6.69 6.71 6.35 6.67
=================================================================
</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-8
<PAGE>
Table 6
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
March 31, 1998
-------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CARRYING VALUE
U.S. Treasury $ 42 3 1 -- 46 -- -- 46 0.37
U.S. Government
agencies 66 830 300 23 1,219 28 (1) 1,246 3.99
CMOs 36 327 33 41 437 7 -- 444 3.72
State, county and
municipal 91 292 272 316 971 117 -- 1,088 7.42
Other 20 48 25 406 499 2 (10) 491 21.80
- ----------------------------------------------------------------------------------------------------
Total $ 255 1,500 631 786 3,172 154 (11) 3,315 7.75
====================================================================================================
CARRYING VALUE
Debt securities $ 250 1,500 631 499 2,880 154 (2) 3,032
Sundry securities 5 -- -- 287 292 -- (9) 283
- ---------------------------------------------------------------------------------------
Total $ 255 1,500 631 786 3,172 154 (11) 3,315
=======================================================================================
MARKET VALUE
Debt securities $ 251 1,546 670 565 3,032
Sundry securities 5 -- -- 278 283
- -----------------------------------------------------------------
Total $ 256 1,546 670 843 3,315
=================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 4.08% 6.42 6.00 -- 4.29
U.S. Government
agencies 6.00 7.31 6.83 8.25 7.14
CMOs 7.70 7.47 5.70 6.35 7.25
State, county and
municipal 9.61 9.63 10.35 11.82 10.54
Other 7.05 6.89 6.25 6.38 6.45
Consolidated 7.29% 7.78 8.27 8.62 8.05
=================================================================
</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-9
<PAGE>
Table 7
LOANS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997
-------- -----------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 46,266 46,117 45,007 44,440 43,013
Real estate - construction and other 2,957 3,037 3,156 3,284 3,421
Real estate - mortgage 12,994 13,160 13,228 13,604 13,882
Lease financing 8,407 8,610 8,307 8,182 6,976
Foreign 4,050 3,885 3,278 3,441 2,999
- --------------------------------------------------------------------------------------
Total commercial 74,674 74,809 72,976 72,951 70,291
- --------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 29,612 28,998 30,131 30,721 31,507
Installment loans - Bankcard (a) 3,639 3,914 6,824 7,164 7,129
Installment loans - other 23,179 22,271 24,589 24,564 24,157
Vehicle leasing 5,490 5,331 4,971 4,834 4,691
- --------------------------------------------------------------------------------------
Total retail 61,920 60,514 66,515 67,283 67,484
- --------------------------------------------------------------------------------------
Total loans 136,594 135,323 139,491 140,234 137,775
Unearned income 3,502 3,636 3,525 3,558 2,936
- --------------------------------------------------------------------------------------
Loans, net $ 133,092 131,687 135,966 136,676 134,839
======================================================================================
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-10
<PAGE>
Table 8
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
-------- ----------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of quarter $1,847 2,175 2,181 2,191 2,212
Provision for loan losses 135 445 225 228 205
Allowance relating to loans acquired,
transferred to accelerated
disposition or sold 9 (579) -- -- (17)
Loan losses, net (129) (194) (231) (238) (209)
- -------------------------------------------------------------------------------------------
Balance, end of quarter $1,862 1,847 2,175 2,181 2,191
===========================================================================================
(as a % of loans, net) 1.40% 1.40 1.60 1.60 1.60
===========================================================================================
(as a % of nonaccrual and restructured loans) 210% 211 247 242 232
===========================================================================================
(as a % of nonperforming assets) 186% 186 218 213 203
===========================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 37 70 37 39 26
Real estate - commercial construction
and mortgage 9 11 12 12 15
Real estate - residential mortgage 11 15 9 18 11
Installment loans - Bankcard 56 90 144 145 132
Installment loans - other and Vehicle leasing 67 64 75 75 75
- -------------------------------------------------------------------------------------------
Total 180 250 277 289 259
- -------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 24 26 13 15 20
Real estate - commercial construction and mortgage 5 7 5 7 4
Real estate - residential mortgage 1 2 3 3 2
Installment loans - Bankcard 4 7 11 9 8
Installment loans - other and Vehicle leasing 17 14 14 17 16
- -------------------------------------------------------------------------------------------
Total 51 56 46 51 50
- -------------------------------------------------------------------------------------------
Loan losses, net $ 129 194 231 238 209
===========================================================================================
(as % of average loans, net) (a) 0.39% 0.58 0.68 0.71 0.62
===========================================================================================
(as % of average loans, net,
excluding Bankcard) (a) 0.24% 0.35 0.30 0.32 0.27
===========================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 410 384 346 366 341
Commercial real estate loans 130 135 158 175 204
Consumer real estate loans 234 233 233 224 259
Installment loans 114 124 143 136 131
- -------------------------------------------------------------------------------------------
Total nonaccrual loans 888 876 880 901 935
Restructured loans 1 2 1 2 11
Foreclosed properties 114 113 119 120 132
- -------------------------------------------------------------------------------------------
Total nonperforming assets $1,003 991 1,000 1,023 1,078
===========================================================================================
(as % of loans, net and foreclosed properties) 0.75% 0.75 0.73 0.75 0.79
===========================================================================================
Accruing loans past due 90 days $ 328 326 416 428 431
===========================================================================================
</TABLE>
(a) Annualized.
T-11
<PAGE>
Table 9
INTANGIBLE ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997
-------- -----------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE AND OTHER SERVICING ASSETS $ 443 427 384 370 325
=============================================================================================
CREDIT CARD PREMIUM $ 21 24 26 29 32
=============================================================================================
OTHER INTANGIBLE ASSETS
Goodwill $ 2,479 2,465 2,502 2,545 2,591
Deposit base premium 443 473 512 546 579
Other 8 10 12 11 13
- ---------------------------------------------------------------------------------------------
Total $ 2,930 2,948 3,026 3,102 3,183
=============================================================================================
</TABLE>
T-12
<PAGE>
Table 10
FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1998 1997
-------- ----------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreclosed properties $ 129 129 135 137 149
- ---------------------------------------------------------------------------------------------
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 $ 114 113 119 120 132
=============================================================================================
</TABLE>
T-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Table 11
DEPOSITS
- --------------------------------------------------------------------------------------------------------------------
1998 1997
------------- ---------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 30,530 31,005 29,676 30,374 28,935
Savings and NOW accounts 37,256 37,281 36,432 36,603 36,594
Money market accounts 22,864 21,240 20,383 20,227 20,489
Other consumer time 38,023 37,324 38,806 40,017 41,006
- --------------------------------------------------------------------------------------------------------------------
Total core deposits 128,673 126,850 125,297 127,221 127,024
Foreign 2,723 3,928 2,147 3,295 2,174
Other time 6,738 6,299 5,700 4,686 4,171
- --------------------------------------------------------------------------------------------------------------------
Total deposits $ 138,134 137,077 133,144 135,202 133,369
=====================================================================================================================
</TABLE>
T-14
<PAGE>
Table 12
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ---------------------------------------------------------------------------
March 31, 1998
------------------------
Time Other
(In millions) Certificates Time
- ---------------------------------------------------------------------------
MATURITY OF
3 months or less $ 4,180 --
Over 3 months through 6 months 2,018 --
Over 6 months through 12 months 2,540 --
Over 12 months 2,935 --
- ---------------------------------------------------------------------------
Total $11,673 --
===========================================================================
T-15
<PAGE>
Table 13
LONG-TERM DEBT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
----------- -------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEBENTURES AND NOTES ISSUED BY THE
PARENT COMPANY
7-1/2% debentures $ -- -- -- 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
Variable rate medium-term, varying rates and terms
to November 5, 2001 1,550 1,640 1,615 1,542 1,517
Varying rates and terms to January 26, 2004 161 62 59 57 69
Floating rate, due October 29, 2002 500 500 -- -- --
6-5/8%, due June 15, 2000 150 150 150 150 150
Subordinated notes
Bank, varying rates and terms to December 15, 2036 1,611 1,205 973 875 1,372
6-3/4%, due November 15, 2006 198 199 199 199 199
6-5/8%, due March 15, 2005 174 174 174 174 174
5-7/8%, due October 15, 2003 200 200 200 200 200
6.80%, due June 15, 2003 149 149 149 149 149
9-3/8%, due April 15, 2003 100 100 100 100 100
6-5/8%, due March 15, 2003 149 149 149 149 149
7-7/8%, due July 15, 2002 100 100 100 100 100
9-5/8%, due February 15, 2001 150 150 150 150 150
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 5,811 5,547 4,819 4,649 5,217
- ---------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,935 1,385 1,570 880 933
Mortgage notes and other debt 10 16 17 213 49
Capitalized leases 32 33 33 33 34
- ---------------------------------------------------------------------------------------------------------------------------
Total other debt 1,977 1,434 1,620 1,126 1,016
- ---------------------------------------------------------------------------------------------------------------------------
Total $12,010 11,752 11,209 10,559 10,767
===========================================================================================================================
</TABLE>
T-16
<PAGE>
Table 14
CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twelve
Months 1998 1997
Ended ------- -------------------------------------------
Mar. 31, First Fourth Third Second First
(In millions) 1998 Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 13,843 15,269 14,823 14,094 13,843 14,628
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 2,796 790 576 748 682 703
Unrealized gain (loss) on debt and
equity securities, net 410 4 70 134 202 (149)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 3,206 794 646 882 884 554
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of common stock (1,695) (531) (326) (312) (526) (1,196)
Common stock issued for stock options exercised 986 339 413 79 155 112
Common stock issued through dividend
reinvestment plan 62 27 16 8 11 21
Common stock issued through public offering 358 -- -- 358 -- --
Common stock issued for acquisitions 249 249 -- -- -- 3
Cash dividends paid (1,203) (341) (303) (286) (273) (279)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 15,806 15,806 15,269 14,823 14,094 13,843
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-17
<PAGE>
Table 15
CAPITAL RATIOS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 $ 14,500 13,972 12,604 11,814 11,694
Total capital 21,911 21,585 20,231 18,839 18,523
Adjusted risk-based assets 167,348 165,802 153,278 150,004 147,012
Adjusted leverage ratio assets $ 207,973 197,075 183,359 175,480 170,259
Ratios
Tier 1 capital 8.66% 8.43 8.22 7.88 7.95
Total capital 13.09 13.02 13.20 12.56 12.60
Leverage 6.97 7.09 6.87 6.73 6.87
STOCKHOLDERS' EQUITY TO ASSETS (a)
Quarter-end 7.18 7.42 7.31 6.99 7.15
Average 7.49% 7.51 7.29 7.15 7.51
- -----------------------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
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. The amounts presented herein have
been restated for all periods presented to reflect the Signet pooling of
interests acquisition. The amounts presented herein have been restated for all
periods presented to reflect the CoreStates acquisition.
(b) The amounts presented herein do not include those of acquired banks.
T-18
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Rate Estimated
------------------------- ------------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years(b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET RATE
CONVERSIONS
Interest rate swaps $ 17,705 6.54% 5.70% 3.98 Converts floating rate loans to fixed
Carrying amount $ 60 rate. Adds to liability sensitivity.
Unrealized gross gain 198 Similar characteristics to a fixed
Unrealized gross loss (10) income security funded with variable
rate liabilities. Includes $3.0 billion
of callable swaps expected to mature in
or before December 1999 if swap rates
are below 7.04 percent.
-------
Total 248
-------
Forward interest rate swaps 725 6.20 -- 2.73 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 578 6.06 5.72 1.29 Paid a premium to convert floating rate
Carrying amount 2 loans to fixed rate when 3 month LIBOR
Unrealized gross gain 1 is below an average of 6.06 percent.
Unrealized gross loss --
-------
Total 3
-------
Portfolio swaps 100 8.19 5.78 6.00 Converts 3 month floating rate treasury
Carrying amount -- bill-based portfolio assets to 1 month
Unrealized gross gain 12 floating rate LIBOR assets.
Unrealized gross loss --
-------
Total 12
-------
Mortgage swap 9 5.70 8.09 5.40 Offsets interest rate risk in a portion
Carrying amount -- of the fixed rate long-term mortgage
Unrealized gross gain -- portfolio.
Unrealized gross loss --
-------
Total --
-------
Interest rate caps 12 8.50 6.99 0.60 Offsets corresponding rate caps in
Carrying amount -- commercial loans.
Unrealized gross gain --
Unrealized gross loss --
-------
Total --
- ------------------------------------------ -------
Total asset rate
conversions $ 19,129 6.52% 5.70% 3.86 $ 265
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
T-19
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Rate Estimated
-------------------------- ------------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years(b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 10,428 6.73% 6.08% 7.03 Converts $5.4 billion of fixed rate
Carrying amount $ 24 long-term debt to floating rate by
Unrealized gross gain 306 matching the terms of the swap to the
Unrealized gross loss (16) debt issue. Also converts $1.2 billion
of fixed rate CDs to variable rate,
$1.5 billion of fixed rate bank notes
to floating rate, $1.0 billion of fixed
rate capital trust securities to
variable rate, and $1.3 billion of
deposits to variable rate.
-------
Total 314
-------
Forward interest rate swaps 494 6.75 -- 2.80 Converts fixed rate deposit liabilities
Carrying amount -- to floating rate in future periods.
Unrealized gross gain 6
Unrealized gross loss --
-------
Total 6
-------
Interest rate floors 295 4.57 -- 2.73 $250 million and $45 million offset
Carrying amount 1 corresponding rate purchased floors
Unrealized gross gain -- in long-term debt and 2 year floating
Unrealized gross loss (1) rate retail deposits, respectively.
-------
Total --
- ------------------------------------------ -------
Total liability rate
conversions $ 11,217 6.67% 6.08% 6.73 $ 320
- --------------------------------------------------------------------------------
</TABLE>
(Continued)
T-20
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Rate Estimated
------------------------- ------------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years(b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
-------
Call options on forward swaps 200 -- -- 6.40 Paid a premium for the right to extend
Carrying amount 3 interest rate swaps hedging $50
Unrealized gross gain 1 million of deposits and other
Unrealized gross loss -- borrowings if LIBOR rates rise above a
certain level, and to execute interest
rate swaps to convert $150 million of
long-term fixed rate debt into
floating rate.
-------
Total 4
-------
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 --
-------
Periodic caps 383 -- 7.85 8.16 Paid a premium for the right to lock
Carrying amount 5 in 1 year LIBOR reset rates for the
Unrealized gross gain -- purpose of converting floating rate
Unrealized gross loss -- liabilities to fixed rate.
-------
Total 5
-------
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
-------
Interest rate floors 525 6.94 -- 1.30 Paid a premium for the right to
Carrying amount 2 receive a fixed rate if LIBOR is
Unrealized gross gain 5 below 6.94 percent. Adds to
Unrealized gross loss liability sensitivity when rates are
-- below 6.94 percent.
-------
Total 7
-------
Interest rate caps 100 -- 6.00 1.00 Received a premium for the
Carrying amount -- obligation to pay a fixed rate when
Unrealized gross gain -- rates are above 6.00 percent. Adds
Unrealized gross loss -- to liability sensitivity when rates are
above 6.00 percent.
-------
Total --
-------
</TABLE>
(Continued)
T-21
<PAGE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Average Rate Estimated
------------------------- ------------------
Maturity
March 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years(b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVITY
HEDGES (continued)
Forward rate locks 185 -- -- 0.30 Offsets interest rate risk and
Carrying amount -- corresponding price risk associated
Unrealized gross gain -- with the anticipated sale of 10- and
Unrealized gross loss -- 15-year fixed rate home equity loans.
-------
Total --
-------
Short eurodollar futures 7,594 -- 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 2,170 6.56 -- 1.03 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,
June and September 1999. $170
million converts 1 month floating
rate loans to 3 month fixed rate loans.
-------
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 $ 14,742 6.62% 6.16% 1.28 $ 37
- --------------------------------------------------------------------------------
</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-22
<PAGE>
Table 17
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
March 31, 1998 1 Year 1 - 2 2 - 5 5 - 10 After 10
(In millions) or Less Years Years Years Years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSET RATE CONVERSIONS
Notional amount $ 2,374 1,024 11,088 4,641 2 19,129
Weighted average receive rate 5.89% 6.87 6.57 6.70 6.80 6.52
Estimated fair value $ 10 13 206 36 -- 265
- -------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 2,723 901 2,353 3,352 1,888 11,217
Weighted average receive rate 5.79% 7.39 6.88 6.76 7.29 6.67
Estimated fair value $ (8) 22 77 128 101 320
- -------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 10,566 1,400 2,270 466 40 14,742
Weighted average receive rate 6.50% 6.39 5.71 8.30 7.77 6.62
Estimated fair value $ (2) 6 22 11 -- 37
- -------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
Table 18
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 17,713 11,422 20,781 49,916
Additions 1,753 549 135 2,437
Maturities/Amortizations (337) (754) (6,074) (7,165)
Terminations -- -- (100) (100)
- -----------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 19,129 11,217 14,742 45,088
- -----------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-23
<PAGE>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 2,915 41 5.73% $ 3,718 55 5.75%
Federal funds sold and securities
purchased under resale agreements 9,704 128 5.35 7,609 106 5.46
Trading account assets (a) 5,878 96 6.66 6,736 109 6.45
Securities available for sale (a) 30,523 504 6.70 21,590 363 6.76
Investment securities (a)
U.S. Government and other 2,051 38 7.43 2,257 43 7.07
State, county and municipal 990 23 9.56 1,034 27 9.46
- ----------------------------------------------------------------------------------- ---------------------
Total investment securities 3,041 61 8.13 3,291 70 7.82
- ----------------------------------------------------------------------------------- ---------------------
Loans
Commercial
Commercial, financial and agricultural 45,552 897 7.99 44,948 891 7.86
Real estate - construction and other 2,973 63 8.63 3,124 68 8.56
Real estate - mortgage 12,898 266 8.35 13,020 288 8.80
Lease financing 4,249 114 10.83 4,380 115 10.45
Foreign 4,003 66 6.68 3,668 61 6.64
- ----------------------------------------------------------------------------------- ---------------------
Total commercial 69,675 1,406 8.18 69,140 1,423 8.17
- ----------------------------------------------------------------------------------- ---------------------
Retail
Real estate - mortgage 29,618 571 7.82 29,890 579 7.68
Installment loans - Bankcard (c) 3,726 159 17.34 6,646 273 16.28
Installment loans - other and
Vehicle leasing 28,015 664 9.61 28,443 686 9.57
- ----------------------------------------------------------------------------------- ---------------------
Total retail 61,359 1,394 9.21 64,979 1,538 9.39
- ----------------------------------------------------------------------------------- ---------------------
Total loans 131,034 2,800 8.66 134,119 2,961 8.76
- ----------------------------------------------------------------------------------- ---------------------
Total earning assets 183,095 3,630 8.04 177,063 3,664 8.21
---------------- ---------------
Cash and due from banks 8,936 8,880
Other assets 18,470 13,982
- ---------------------------------------------------------------------- ---------
Total assets $210,501 $199,925
- ---------------------------------------------------------------------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 33,428 233 2.83 32,023 234 2.90
Money market accounts 26,225 192 2.96 25,553 193 2.99
Other consumer time 37,425 488 5.29 37,583 496 5.23
Foreign 2,914 38 5.35 2,351 34 5.73
Other time 6,556 106 6.54 6,611 102 6.14
- ----------------------------------------------------------------------------------- ---------------------
Total interest-bearing deposits 106,548 1,057 4.03 104,121 1,059 4.03
Federal funds purchased and securities
sold under repurchase agreements 29,818 370 5.03 24,010 306 5.06
Commercial paper 1,939 26 5.43 1,931 33 6.81
Other short-term borrowings 7,567 104 5.56 6,341 96 6.00
Long-term debt 11,914 185 6.31 11,636 187 6.38
- ----------------------------------------------------------------------------------- ---------------------
Total interest-bearing liabilities 157,786 1,742 4.48 148,039 1,681 4.51
---------------- ---------------
Noninterest-bearing deposits 27,968 28,865
Other liabilities 7,242 6,275
Guaranteed preferred beneficial interests 1,734 1,733
Stockholders' equity 15,771 15,013
- ---------------------------------------------------------------------- ---------
Total liabilities and
stockholders' equity $210,501 $199,925
- ---------------------------------------------------------------------- ---------
Interest income and rate earned $ 3,630 8.04% $ 3,664 8.21%
Interest expense and equivalent rate paid 1,742 3.86 1,681 3.77
- ---------------------------------------------------------------------------------------------- ----------------------------------
Net interest income and margin $ 1,888 4.18% $ 1,983 4.44%
- ---------------------------------------------------------------------------------------------- ----------------------------------
</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-24
<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>
$ 3,413 49 5.70% $ 2,848 41 5.65% $ 2,741 37 5.57%
7,691 106 5.48 7,268 101 5.55 6,288 86 5.57
5,618 94 6.65 4,606 78 6.80 3,696 60 6.52
21,122 366 6.87 21,688 378 7.00 18,952 316 6.75
2,418 42 7.12 2,527 47 7.36 2,713 47 7.07
1,069 25 9.38 1,103 26 9.50 1,135 27 9.64
- ---------------------- ---------------------- ---------------------
3,487 67 7.81 3,630 73 8.01 3,848 74 7.83
- ---------------------- ---------------------- ---------------------
43,430 880 8.05 42,892 873 8.16 41,154 820 8.08
3,231 74 9.19 3,380 77 9.12 3,448 74 8.68
13,518 296 8.68 13,623 298 8.79 14,003 298 8.62
4,398 113 10.19 4,254 106 9.99 3,789 89 9.57
3,415 55 6.35 3,384 54 6.46 2,921 45 6.20
- ---------------------- ---------------------- ---------------------
67,992 1,418 8.28 67,533 1,408 8.36 65,315 1,326 8.23
- ---------------------- ---------------------- ---------------------
30,671 598 7.74 31,604 611 7.76 33,109 638 7.82
6,997 272 15.44 7,187 262 14.61 7,191 251 14.16
29,189 713 9.69 28,954 696 9.64 28,200 678 9.75
- ---------------------- ---------------------- ---------------------
66,857 1,583 9.40 67,745 1,569 9.29 68,500 1,567 9.28
- ---------------------- ---------------------- ---------------------
134,849 3,001 8.83 135,278 2,977 8.82 133,815 2,893 8.77
- ---------------------- ---------------------- ---------------------
176,180 3,683 8.30 175,318 3,648 8.34 169,340 3,466 8.30
----------------------- ---------------------- ----------------------
8,499 8,673 8,729
12,835 12,433 12,318
- ---------- -------- --------
$ 197,514 $ 196,424 $190,387
- ---------- --------- --------
33,170 229 2.74 33,769 221 2.63 33,474 214 2.60
23,936 181 3.01 23,313 164 2.81 23,306 156 2.72
39,407 517 5.21 40,349 521 5.18 41,717 533 5.18
2,629 35 5.20 4,281 56 5.29 3,119 39 5.03
5,518 85 6.12 4,786 72 6.07 4,569 66 5.82
- ---------------------- ---------------------- ---------------------
104,660 1,047 3.97 106,498 1,034 3.90 106,185 1,008 3.85
23,523 301 5.08 23,433 295 5.04 20,015 245 4.97
2,073 28 5.47 2,152 30 5.50 1,633 21 5.23
6,951 104 5.95 5,488 84 6.15 3,899 54 5.63
10,694 177 6.51 10,543 170 6.51 10,783 173 6.50
- ---------------------- ---------------------- ---------------------
147,901 1,657 4.44 148,114 1,613 4.37 142,515 1,501 4.27
----------------------- ---------------------- ----------------------
27,500 26,966 26,600
5,988 5,568 5,451
1,733 1,733 1,517
14,392 14,043 14,304
- ---------- --------- ---------
$ 197,514 $ 196,424 $ 190,387
- ---------- --------- ---------
$ 3,683 8.30% $ 3,648 8.34% $ 3,466 8.30%
1,657 3.73 1,613 3.69 1,501 3.60
----------------------- ---------------------- ----------------------
$ 2,026 4.57% $ 2,035 4.65% $ 1,965 4.70%
----------------------- ---------------------- ----------------------
</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-25
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
--------- ---------------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 10,528 10,275 9,827 10,092 9,205
Interest-bearing bank balances 2,646 3,832 3,248 3,259 2,590
Federal funds sold and securities
purchased under resale agreements 11,656 7,781 7,037 7,784 6,535
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 24,830 21,888 20,112 21,135 18,330
- ------------------------------------------------------------------------------------------------------------------------------------
Trading account assets 7,008 5,952 8,152 5,720 4,395
Securities available for sale 34,388 23,524 21,135 20,931 19,059
Investment securities 3,172 3,526 3,681 3,891 4,024
Loans, net of unearned income 133,092 131,687 135,966 136,676 134,839
Allowance for loan losses (1,862) (1,847) (2,175) (2,181) (2,191)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net 131,230 129,840 133,791 134,495 132,648
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 5,007 4,863 4,855 4,861 4,936
Due from customers on acceptances 945 1,496 1,629 1,521 1,354
Other intangible assets 2,930 2,948 3,026 3,102 3,183
Other assets 10,556 11,698 6,385 5,986 5,578
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 220,066 205,735 202,766 201,642 193,507
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 30,530 31,005 29,676 30,374 28,935
Interest-bearing deposits 107,604 106,072 103,468 104,828 104,434
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 138,134 137,077 133,144 135,202 133,369
Short-term borrowings 43,524 31,681 33,784 32,892 27,349
Bank acceptances outstanding 940 1,496 1,627 1,516 1,353
Other liabilities 7,911 6,725 6,445 5,645 5,092
Long-term debt 12,010 11,752 11,209 10,559 10,767
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 202,519 188,731 186,209 185,814 177,930
- ------------------------------------------------------------------------------------------------------------------------------------
Guaranteed preferred beneficial interests in
junior subordinated deferrable interest debentures 1,741 1,735 1,734 1,734 1,734
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock -- -- -- -- --
Common stock, $3.33-1/3 par value;
authorized 2,000,000,000 shares 3,243 3,203 3,197 3,183 3,214
Paid-in capital 1,439 1,582 1,484 1,194 1,186
Retained earnings 10,834 10,198 9,926 9,635 9,563
Accumulated other comprehensive income (loss), net 290 286 216 82 (120)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,806 15,269 14,823 14,094 13,843
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 220,066 205,735 202,766 201,642 193,507
- ------------------------------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale-amortized cost $ 33,934 23,080 20,797 20,795 19,241
Investment securities-market value 3,315 3,670 3,829 4,026 4,138
Stockholders' equity, net of unrealized
gain (loss) on debt and equity securities $ 15,806 15,269 14,823 14,094 13,843
Shares outstanding (In thousands) 972,775 960,984 958,977 954,902 964,186
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-26
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997
-------- ----------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,787 2,946 2,992 2,966 2,883
Interest and dividends on securities available for sale 501 361 364 374 313
Interest and dividends on investment securities
Taxable income 38 42 41 46 47
Nontaxable income 16 18 17 17 18
Trading account interest 91 107 94 76 59
Other interest income 169 161 155 142 123
- --------------------------------------------------------------------------------------------------------------------
Total interest income 3,602 3,635 3,663 3,621 3,443
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,057 1,059 1,047 1,034 1,008
Interest on short-term borrowings 500 435 433 409 320
Interest on long-term debt 185 187 177 170 173
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 1,742 1,681 1,657 1,613 1,501
- --------------------------------------------------------------------------------------------------------------------
Net interest income 1,860 1,954 2,006 2,008 1,942
Provision for loan losses 135 445 225 228 205
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,725 1,509 1,781 1,780 1,737
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 35 100 36 75 41
Service charges on deposit accounts 283 290 283 275 271
Mortgage banking income 69 76 62 60 58
Capital management income 413 278 272 267 261
Securities available for sale transactions 23 18 15 10 9
Investment security transactions -- -- 2 1 --
Fees for other banking services 70 56 64 69 74
Equipment lease rental income 46 43 48 46 50
Sundry income 438 304 300 238 270
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,377 1,165 1,082 1,041 1,034
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 822 783 711 720 695
Other benefits 162 150 156 162 173
- --------------------------------------------------------------------------------------------------------------------
Personnel expense 984 933 867 882 868
Occupancy 137 131 138 138 137
Equipment 183 165 167 157 160
Advertising 37 36 33 37 35
Telecommunications 46 45 40 40 43
Travel 40 40 30 30 25
Postage, printing and supplies 61 59 53 53 60
FDIC assessment 6 8 7 7 7
Professional fees 70 97 71 67 57
External data processing 20 22 25 23 24
Other intangible amortization 75 80 78 78 79
Merger-related and restructuring charges 29 225 -- 59 --
Sundry expense 207 325 202 200 193
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,895 2,166 1,711 1,771 1,688
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 1,207 508 1,152 1,050 1,083
Income taxes (benefits) (a) 417 (68) 404 368 380
- --------------------------------------------------------------------------------------------------------------------
Net income $ 790 576 748 682 703
- --------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 0.82 0.61 0.79 0.72 0.72
Diluted earnings 0.81 0.60 0.78 0.70 0.72
Cash dividends $ 0.37 0.32 0.32 0.29 0.29
AVERAGE SHARES (In thousands)
Basic 965,120 960,596 946,354 953,612 969,669
Diluted 977,155 972,051 959,013 964,518 981,174
- --------------------------------------------------------------------------------------------------------------------
</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-27
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 790 703
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 135 205
Gain on sale of mortgage servicing rights (2) --
Securities available for sale transactions (23) (9)
Depreciation and amortization 247 219
Trading account assets, net (1,003) 215
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 3,201 240
Other liabilities, net 179 (529)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,645 1,189
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 3,438 3,045
Maturities of securities available for sale 528 727
Purchases of securities available for sale (14,791) (3,858)
Calls and underdeliveries of investment securities -- 1
Maturities of investment securities 496 364
Purchases of investment securities (151) (204)
Origination of loans, net (1,337) (585)
Sales of premises and equipment 52 24
Purchases of premises and equipment (305) (201)
Other intangible assets, net (11) (8)
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 (12,032) (695)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net 810 (3,060)
Securities sold under repurchase agreements and other short-term borrowings, net 11,729 (270)
Issuances of guaranteed preferred beneficial interests -- 945
Issuances of long-term debt 1,647 26
Payments of long-term debt (1,351) (75)
Sales of common stock 366 133
Purchases of common stock (531) (1,196)
Cash dividends paid (341) (279)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 12,329 (3,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,942 (3,282)
Cash and cash equivalents, beginning of year 21,888 21,612
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 24,830 18,330
- ------------------------------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 2 9
Issuance of common stock for acquisitions 249 3
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale (18) (192)
Other assets (deferred income taxes) $ 22 43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-28
