<PAGE>
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10000
First Union Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
North Carolina 56-0898180
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288-0013
(Address of principal executive offices)
(Zip Code)
(704) 374-6565
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
990,755,404 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of October 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
First Union Corporation (the "Corporation") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Corporation's filings with the Securities and Exchange Commission
(including this Quarterly Report on Form 10-Q and the Exhibits hereto and
thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include, among others, statements with
respect to the Corporation's beliefs, plans, objectives, goals, expectations,
anticipations, estimates and intentions that are subject to significant risks
and uncertainties, and are subject to change based on various factors (many of
which are beyond the Corporation's control). The words "may", "could", "should",
"would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and
similar expressions are intended to identify forward-looking statements. The
following factors, among others, could cause the Corporation's financial
performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements: the
strength of the United States economy in general and the strength of the local
economies in which the Corporation conducts operations; the effects of, and
changes in, trade, monetary and fiscal policies and laws, including interest
rate policies of the Board of Governors of the Federal Reserve System;
inflation, interest rate, market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Corporation
and the perceived overall value of these products and services by users,
including the features, pricing and quality compared to competitors' products
and services; the willingness of users to substitute competitors' products and
services for the Corporation's products and services; the success of the
Corporation in gaining regulatory approval of its products and services, when
required; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; acquisitions; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation incorporates by reference those factors included
in the Corporation's previously filed Current Reports on Form 8-K and the
Corporation's Registration Statement on Form S-4 (Reg. No. 333-44015). The
Corporation does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Corporation.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited consolidated financial statements of the
Corporation within Item 1 include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for
fair presentation of such consolidated financial statements for the periods
indicated.
1
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Balance Sheets of the Corporation and subsidiaries at
September 30, 1998, September 30, 1997, and December 31, 1997, respectively,
set forth on page T-25 of the Corporation's Third Quarter Financial Supplement
for the nine months ended September 30, 1998 (the "Financial Supplement"), are
incorporated herein by reference.
The Consolidated Statements of Income of the Corporation and subsidiaries
for the three and nine months ended September 30, 1998 and 1997, set forth on
pages T-26 and T-27, respectively, of the Financial Supplement, are
incorporated herein by reference.
The Consolidated Statements of Cash Flows of the Corporation and
subsidiaries for the nine months ended September 30, 1998 and 1997, set forth
on page T-28 of the Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information related to the Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Deferrable Interest Debentures can be found
in Exhibit (99)(a) of the Corporation's 1997 Supplemental Annual Report
contained in the Corporation's Current Report on Form 8-K dated May 26, 1998,
in Notes to Consolidated Financial Statements in Note 11 on page C-26, and is
incorporated herein by reference.
2
<PAGE>
Part II. OTHER INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 2 through 25 and T-1 through T-28 of the Financial
Supplement and is incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------
<S> <C>
(3) The Corporation's Amended and Restated Articles of Incorporation.
(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Third Quarter 1998 Financial Supplement.
(27) The Corporation's Financial Data Schedule.**
</TABLE>
- ---------
* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders
of the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
(b) Reports on Form 8-K.
During the quarter ended September 30, 1998, no Current Reports on Form
8-K were filed with the Commission by the Corporation.
3
<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: November 13, 1998
By: /s/ JAMES H. HATCH
----------------------------------
James H. Hatch
Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------
<S> <C>
(3) The Corporation's Amended and Restated Articles of Incorporation.
(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's Third Quarter 1998 Financial Supplement.
(27) The Corporation's Financial Data Schedule.**
</TABLE>
- ---------
* The Corporation agrees to furnish to the Commission upon request, copies of
the instruments, including indentures, defining the rights of the holders
of the long-term debt of the Corporation and its consolidated subsidiaries.
** Filing by Electronic Data Gathering, Analysis and Retrieval System only.
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
FIRST UNION CORPORATION
1. The name of the corporation is FIRST UNION CORPORATION.
2. The period of duration of the corporation shall be perpetual.
3. The purposes for which the corporation is organized are: To act as a
holding company of one or more banks and other corporations and to exercise all
the rights, powers, and privileges incident to the ownership and control of such
bank or banks and other corporations, including furnishing services to and for
such bank or banks and other corporations.
4. The aggregate number of shares which the corporation shall have
authority to issue is Two Billion, Fifty Million (2,050,000,000) shares, divided
into three (3) classes. The designation of each class, the number of authorized
shares of each class, and the par value of each class, is as follows:
Par Value
Class No. of Shares Per Share
----- ------------- ---------
Common Stock 2,000,000,000 $3.33 1/3
Preferred Stock 10,000,000 No-par
Class A Preferred Stock 40,000,000 No-par
Except as otherwise set forth in these Articles of Incorporation, the
preferences, privileges, limitations and relative rights applicable to the
shares of each class of the capital stock hereinabove authorized shall be fixed
and determined by the Board of Directors of the corporation, and when so fixed
and determined a statement of such preferences, privileges, limitations, and
relative rights and entitled "Statement of Classification of Shares" or
"Articles of Amendment" shall be executed by the corporation and filed with the
Secretary of State of the State of North Carolina as provided by law.
(A) The Preferred Stock hereinabove authorized may be issued from time to
time in one or more series, as determined by the Board of Directors. All shares
of each particular series of Preferred Stock shall be alike (except as to the
date from which dividends shall commence to accrue) and all shares of Preferred
Stock shall be of equal rank and shall have the same powers, preferences, and
rights, and shall be subject to the same qualifications, limitations and
restrictions, without distinction between the shares of different series
thereof, except only in regard to the following particulars, which may vary in a
different series:
1
<PAGE>
(a) The annual rate or rates of dividends payable on shares of such
series and the dates from which such dividends shall commence to
accrue;
(b) The amount or amounts payable upon redemption thereof and the
manner in which the same may be redeemed, if redeemable;
(c) The amount or amounts payable to holders thereof upon any
voluntary or involuntary liquidation, dissolution, or winding-up of
the business of the corporation;
(d) The terms and rates of conversion or exchange thereof, if
convertible or exchangeable; and
(e) The provisions as to voting rights, if any.
Provided that the shares of any series of Preferred Stock having voting rights
[may] not have more than one (1) vote per share, and if the stated dividends and
amounts payable on liquidation are not paid in full, the shares of all series of
the Preferred Stock shall share ratably in the payment of dividends including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, and in any
distribution of assets, other than by way of dividends, in accordance with the
sums which would be payable on such distribution if all sums payable were
discharged in full.
The designation of each series of Preferred Stock, and its term in respect
of the particulars set forth under subparagraphs (a), (b), (c), (d) and (e)
hereof, shall be fixed and determined by the Board of Directors and stated in
the resolution or instrument providing for the issue of such stock adopted by
the Board of Directors pursuant to the authority hereby conferred, before any
shares of such series are issued, and shall be set forth in full or summarized
on the share certificates for such series.
(B) The Class A Preferred Stock (including any shares of Class A Preferred
Stock restored to the status of authorized but unissued Class A Preferred Stock
undesignated as to series pursuant to this article 4(B)) may be divided into one
or more series and issued from time to time with such preferences, privileges,
limitations, and relative rights as shall be fixed and determined by the Board
of Directors of the corporation. Without limiting the generality of the
foregoing, the Board of Directors is also expressly authorized to the fullest
extent permitted from time to time by law to fix:
2
<PAGE>
(i) the distinctive serial designations and the division of shares of
Class A Preferred Stock into one or more series and the number of shares
of a particular series, which may be increased or decreased (but not below
the number of shares thereof then outstanding);
(ii) the rate or amount (or the method of determining the rate or amount)
and times at which, the form in which, and the preferences and conditions
under which, dividends shall be payable on shares of a particular series,
the status of such dividends as cumulative, partially cumulative, or
noncumulative, the date or dates from which dividends, if cumulative,
shall accumulate, and the status of such series as participating or
nonparticipating with shares of other classes or series;
(iii) the price or prices at which, the consideration for which, the
period or periods within which and the terms and conditions, if any, upon
which the shares of a particular series may be redeemed, in whole or in
part, at the option of the corporation or otherwise;
(iv) the amount or amounts and rights and preferences, if any, to which
the holders of shares of a particular series are entitled or shall have
upon any involuntary or voluntary liquidation, dissolution or winding-up
of the corporation;
(v) the rights and preferences over or otherwise in relation to any other
class (other than over the Preferred Stock or any series thereof as
hereinafter provided) or series (including other series of Class A
Preferred Stock), as to the right to receive dividends and/or the right to
receive payments out of the net assets of the corporation upon any
involuntary or voluntary liquidation, dissolution or winding-up of the
corporation;
(vi) the right, if any, of the holders of a particular series, the
corporation or another person to convert or cause conversion of shares of
such series into shares of other classes or series or into other
securities, cash, indebtedness or other property, or to exchange or cause
exchange of such shares for shares of other classes or series or other
securities, cash, indebtedness or other property, and the terms and
conditions, if any, including the price or prices or the rate or rates of
conversion and exchange, and the terms and conditions of adjustments, if
any, at which such conversion or exchange may be made or caused;
(vii) the obligation, if any, of the corporation to redeem, purchase or
otherwise acquire, in whole or in part, shares of a particular series for
a sinking fund or otherwise, the terms and conditions thereof, if any,
including the price or prices and the nature of the consideration payable
for such shares so redeemed, purchased or otherwise acquired;
(viii) the voting rights, if any, including special, conditional or
limited voting rights, of the shares of a particular series in addition to
those required by law, including the number of votes per share and any
requirement for the approval by the holders of shares of all series of
Class A Preferred Stock, or of the shares of one or more series thereof,
or of
3
<PAGE>
both, in an amount greater than a majority up to such amount as is in
accordance with applicable law or these Articles of Incorporation, as a
condition to specified corporate action or amendments to the Articles of
Corporation; and
(ix) any other preferences, limitations and relative rights which may be
so determined by resolution or resolutions of the Board of Directors.
Shares of Class A Preferred Stock shall rank prior or superior to the
Common Stock, and, as may be determined by resolution or resolutions of the
Board of Directors when creating any series of Class A Preferred Stock, on a
parity with or junior to (but not prior or superior to) the Preferred Stock or
any series thereof, in respect of the right to receive dividends and/or the
right to receive payments out of the net assets of the corporation upon any
involuntary or voluntary liquidation, dissolution or winding-up of the
corporation. No shares of Class A Preferred Stock shall be given the right to
vote with the shares of the Corporation's Series 1990 Preferred Stock for
purposes of electing two directors in the event of dividend arrearages. All
shares of Class A Preferred Stock redeemed, purchased or otherwise acquired by
the corporation (including shares surrendered for conversion or exchange) shall
be cancelled and thereupon restored to the status of authorized but unissued
shares of Class A Preferred Stock undesignated as to series.
(C) The Common Stock shall be entitled to vote as provided by law, and the
holders of Common Stock shall be entitled to receive, after payment to the
holders of all shares of Preferred Stock and Class A Preferred Stock of the full
preferential amounts to which such holders are respectively entitled, the net
assets of the corporation upon any involuntary or voluntary liquidation,
dissolution or winding-up of the corporation.
(D) The Corporation is hereby expressly authorized and empowered, to the
fullest extent permitted from time to time by law, from time to time, by
resolution or resolutions of its Board of Directors, to create and issue, in one
or more series, warrants entitling the holders thereof to purchase or acquire
from the Corporation shares of its Common Stock, Preferred Stock or Class A
Preferred Stock, such warrants to be evidenced by instruments as shall be
approved by the Board of Directors. The terms upon which, the time or times,
which may be limited or unlimited in duration, at or within which, and the price
or prices at which any shares may be purchased through the exercise of said
warrants shall be such as shall be fixed in a resolution or resolutions adopted
by the Board of Directors providing for the creation and issue of said warrants
and as shall be permitted from time to time by law. The Board of Directors is
hereby authorized and empowered to authorize the creation and issue of said
warrants from time to time, for such consideration as the Board of Directors may
determine. Except as otherwise provided by law, the Board of Directors shall
have full power and discretion to prescribe and regulate from time to time the
procedure to be followed in, and all other matters concerning, the creation,
issue, and exercise of any warrant, and the setting aside of shares or other
securities for the purpose thereof, and the issuance of such Common Stock,
Preferred Stock or Class A Preferred Stock, upon the exercise of the same. The
Board of Directors is further authorized to issue warrants in conjunction with
any Common Stock, Preferred Stock, Class A Preferred Stock, or debt
4
<PAGE>
obligations and to set the rights and terms of the same except as limited by the
terms of these Articles of Incorporation or any other applicable law.
5. The stated capital of the corporation is $3,293,830,000.00 (as of June
30, 1998).
6. [Deleted.]
7. The number of directors shall be determined from time to time by the
affirmative vote of a majority of the directors then in office, but the number
of directors shall not be less than nine or more than 30, provided that no
decrease in the number of directors shall shorten the term of any director then
in office.
The board of directors shall be divided into three classes, as determined
by the affirmative vote of a majority of the directors then in office, each
class to be as nearly equal in number as possible to each other class. At the
annual meeting of shareholders in 1989, one class of directors shall be elected
to hold office initially for a term expiring at the 1990 annual meeting of
shareholders, a second class of directors shall be elected to hold office
initially for a term expiring at the 1991 annual meeting of shareholders, and a
third class of directors shall be elected to hold office initially for a term
expiring at the 1992 annual meeting of shareholders, in each case to hold office
until their successors have been duly elected and qualified. At each annual
meeting of shareholders, the successors to the class of directors whose term
expires at such meeting shall be elected to hold office for a term expiring at
the annual meeting of shareholders held in the third year following the year of
their election and until their successors have been duly elected and qualified.
Vacancies in the board of directors that occur between annual meetings of
shareholders at which directors are elected, including vacancies resulting from
an enlargement of the board within the authorized number of nine to 30
directors, shall be filled by the affirmative vote of a majority of the
remaining directors even though less than a quorum or by a sole remaining
director, except that any vacancies resulting from removal from office by a vote
of shareholders may be filled by a vote of shareholders at the same meeting at
which such removal occurs. The directors elected to fill such vacancies shall
hold office for a term expiring at the next annual meeting of shareholders at
which the term of the class of directors to which they have been elected expires
and until their successors have been duly elected and qualified.
Any director or directors may be removed from office only for cause and
only by the affirmative vote of the holders of a majority of the outstanding
shares of capital stock of the corporation entitled to vote in the election of
directors, voting together as a single class.
The foregoing provisions of this Article 7 shall not apply to any director
who may be elected under specified circumstances by holders of any class or
series of stock having a preference over the common stock as to dividends or
upon liquidation.
5
<PAGE>
Special meetings of shareholders, other than special meetings called under
specified circumstances for holders of any class or series of stock of the
corporation having a preference over the common stock as to dividends or upon
liquidation, may be called only by the Board of Directors, the Chairman of the
Board, or the President of the corporation.
Notwithstanding any other provisions of this Charter or the By-laws of the
corporation (and as permitted under North Carolina law to require higher voting
percentages than otherwise prescribed by law), the affirmative vote of the
holders of not less than 80% of the outstanding shares of capital stock of the
corporation entitled to vote in the election of directors, voting together as a
single class, shall be required to amend or repeal, or to adopt any provision
(in this Charter, the By-laws of the corporation or otherwise) or take any
action inconsistent with or (as to any matter covered by this Article 7) in a
manner other than as prescribed by, this Article 7.
8. The names and addresses of all of the incorporators are:
Names Addresses
----- ---------
Charles C. Cameron 301 South Tryon Street
Charlotte, North Carolina
C. C. Hope 301 South Tryon Street
Charlotte, North Carolina
W. J. Smith 301 South Tryon Street
Charlotte, North Carolina
9. In addition to the general powers granted corporation under the laws of
the State of North Carolina, the corporation shall have full power and authority
to do the following:
(a) To acquire, by purchase or otherwise, the good will, business,
property rights, franchises and assets of every kind, with or without
undertaking, either wholly or in part, the liabilities of any person,
firm, association or corporation; and to acquire any property or business
as a going concern or otherwise (i) by purchase of the assets thereof
wholly or in part, (ii) by acquisition of the shares or any part thereof,
or (iii) in any other manner, and to pay for the same in cash or in shares
or bonds or other evidences of indebtedness of this corporation, or
otherwise; to hold, maintain and operate, or in any manner dispose or, the
whole or any part of the good will, business, rights and property so
acquired, and to conduct in any lawful manner the whole or any part of any
business so acquired; and to exercise all the powers necessary or
convenient in and about the management of such business.
(b) To subscribe or cause to be subscribed for, and to take,
purchase and otherwise acquire, own, hold, use, sell, assign, transfer,
exchange, distribute and
6
<PAGE>
otherwise dispose of, the whole or any part of the shares of the capital
stock, bonds, coupons, mortgages, deeds of trust, debentures, securities,
obligations, evidences of indebtedness, notes, good will, rights, assets
and property of any and every kind, or any part thereof, of any other
corporation or corporations, association or associations, firm or firms,
or person or persons, together with shares, rights, units or interest in,
or in respect of, any trust estate, now or hereafter existing, and whether
created by the laws of the State of North Carolina or any other state,
territory or country; and to operate, manage and control such properties,
or any of them either in the name of such other corporation or
corporations or in the name of this corporation, and while the owners of
any of said shares of capital stock to exercise all the rights, powers and
privileges of ownership of every kind and description, including the right
to vote thereon, with power to designate some person or persons for that
purpose from time to time, and to the same extent as natural persons might
or could do.
(c) To promote or to aid in any manner, financially or otherwise,
any person, firm, corporation or association of which any shares of stock,
bonds, notes, debentures or other securities or evidences of indebtedness
are held directly or indirectly by this corporation, and for this purpose
to guarantee the contracts, dividends, shares, bonds, debentures, notes
and other obligations of such other persons, firms, corporations or
associations; and to do any other act or things designed to protect,
preserve, improve or enhance the value of such shares, bonds, notes,
debentures, or other securities or evidences of indebtedness.
(d) To borrow and lend money, but nothing herein contained shall be
construed as authorizing the corporation to engage in the banking, loan,
building and loan, brokerage, factorage, insurance, indemnity, savings or
trust business.
10. The shareholders of the Corporation shall have no preemptive right to
acquire additional or treasury shares of any class of the Corporation, whether
now or hereafter authorized, or to acquire any obligations convertible into
shares of the Corporation.
11. The personal liability of each director of the Corporation is
eliminated to the fullest extent permitted by the provisions of the Business
Corporation Act of the State of North Carolina, as presently in effect or as the
same may hereafter from time to time be in effect. No amendment, modification or
repeal of this Article 11 shall adversely affect any right or protection of a
director that exists at the time of such amendment, modification or repeal.
7
EXHIBIT (12)
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
- --------------------------------------------------------------------------------
Nine
Months
Ended Years Ended December 31,
Sept. 30, ------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 3,079 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding capitalized
interest 2,578 2,526 2,224 1,821 1,110 835
- --------------------------------------------------------------------------------------------------------------------------
Earnings (A)$ 5,657 6,319 5,758 5,230 3,857 3,400
- --------------------------------------------------------------------------------------------------------------------------
Interest, excluding interest on deposits $ 2,398 2,304 2,120 1,716 1,013 737
Distributions on guaranteed preferred
beneficial interests 101 116 - - - -
One-third of rents 79 106 104 105 97 98
Capitalized interest - - 5 4 1 -
- --------------------------------------------------------------------------------------------------------------------------
Fixed charges (B)$ 2,578 2,526 2,229 1,825 1,111 835
- --------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, excluding interest
on deposits (A)/(B)2.19 X 2.50 2.58 2.87 3.47 4.07
- --------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 3,079 3,793 3,534 3,409 2,747 2,565
Fixed charges, excluding capitalized
interest 5,820 6,674 6,255 5,837 3,836 3,474
- --------------------------------------------------------------------------------------------------------------------------
Earnings (C)$ 8,899 10,467 9,789 9,246 6,583 6,039
- --------------------------------------------------------------------------------------------------------------------------
Interest, including interest on deposits $ 5,640 6,452 6,151 5,732 3,739 3,376
Distributions on guaranteed preferred
beneficial interests 101 116 - - - -
One-third of rents 79 106 104 105 97 98
Capitalized interest - - 5 4 1 -
- --------------------------------------------------------------------------------------------------------------------------
Fixed charges (D)$ 5,820 6,674 6,260 5,841 3,837 3,474
- --------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, including interest
on deposits (C)/(D)1.53 X 1.57 1.56 1.58 1.72 1.74
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
THIRD QUARTER 1998
FIRST UNION CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATIONS
QUARTERLY FINANCIAL SUPPLEMENT
Nine Months Ended September 30, 1998
<PAGE>
FIRST UNION CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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PAGE
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<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-6
Securities Available for Sale T-7
Investment Securities T-8
Loans T-9
Interest-Only and Residual Certificates T-9
Allowance for Loan Losses and Nonperforming Assets T-10
Intangible Assets T-11
Foreclosed Properties T-11
Deposits T-12
Time Deposits in Amounts of $100,000 or More T-12
Long-Term Debt T-13
Changes in Stockholders' Equity T-15
Capital Ratios T-15
Off-Balance Sheet Derivative Financial Instruments T-16
Off-Balance Sheet Derivatives - Expected Maturities T-19
Off-Balance Sheet Derivatives Activity T-20
Net Interest Income Summaries
Five Quarters Ended September 30, 1998 T-21
Year-to-Date September 30, and June 30, 1998; December 31, and September 30, 1997 T-23
Consolidated Balance Sheets T-25
Consolidated Statements Of Income
Five Quarters Ended September 30, 1998 T-26
Year-to-Date September 30, 1998 and 1997 T-27
Consolidated Statements Of Cash Flows T-28
</TABLE>
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FINANCIAL HIGHLIGHTS
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Three Months Ended Nine Months Ended
September 30, September 30,
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(Dollars in millions, except per share data) 1998 1997 1998 1997
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FINANCIAL HIGHLIGHTS
Net income before merger-related and restructuring
charges (Operating earnings) $ 1,011 748 $ 2,703 2,170
After tax merger-related and restructuring charges 16 - 669 37
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Net income after merger-related and restructuring charges $ 995 748 $ 2,034 2,133
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PER SHARE DATA
Diluted earnings
Net income before merger-related and restructuring charges $ 1.02 0.78 $ 2.77 2.24
Net income after merger-related and restructuring charges 1.01 0.78 2.08 2.20
Basic earnings
Net income before merger-related and restructuring charges 1.03 0.79 2.80 2.27
Net income after merger-related and restructuring charges 1.02 0.79 2.11 2.23
Cash dividends 0.42 0.32 1.16 0.90
Book value 17.54 15.51 17.54 15.51
Period-end price $ 51.1875 50.0625 $ 51.1875 50.0625
Average shares (In thousands)
Diluted 993,208 959,013 976,826 967,755
Basic 981,659 946,354 965,506 956,476
Actual shares (In thousands) 990,373 958,977 990,373 958,977
Dividend payout ratios (Based on operating earnings) 41.18 % 38.29 37.29 % 38.63
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PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges
Return on average assets (a) 1.75 % 1.50 1.64 % 1.49
Return on average stockholders' equity (a) (b) 23.50 20.31 22.89 20.69
Overhead efficiency ratio (excludes expenses on trust 52 55 55 55
capital securities) (c)
Net charge-offs to
Average loans, net (a) 0.55 0.68 0.47 0.67
Average loans, net, excluding Bankcard (a) 0.41 0.30 0.32 0.30
Nonperforming assets to loans, net and foreclosed properties 0.61 0.73 0.61 0.73
Net interest margin (a) 3.79 % 4.57 3.94 % 4.65
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CASH EARNINGS (EXCLUDING OTHER
INTANGIBLE AMORTIZATION)
Before merger-related and restructuring charges
Net income $ 1,074 821 $ 2,890 2,355
Earnings per share - diluted $ 1.09 0.85 $ 2.96 2.43
Return on average tangible assets (a) 1.90 % 1.67 1.79 % 1.64
Return on average tangible stockholders' equity (a) (b) 35.69 28.22 32.06 28.94
Overhead efficiency ratio (excludes expenses on trust
capital securities) (c) 49 % 52 52 % 53
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PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 38,052 21,135
Investment securities 2,121 3,681
Loans, net of unearned income 135,689 135,966
Earning assets 204,947 179,219
Total assets 234,580 202,766
Noninterest-bearing deposits 30,504 29,676
Interest-bearing deposits 104,024 103,468
Long-term debt 17,040 11,209
Guaranteed preferred beneficial interests 1,736 1,734
Stockholders' equity $ 17,370 14,823
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(a) Quarterly amounts annualized.
(b) Based on net income and average stockholders' equity excluding average net
unrealized gains or losses on debt and equity securities.
(c) The overhead efficiency ratio is equal to noninterest expense divided by net
operating revenue. Net operating revenue is equal to the sum of
tax-equivalent net interest income and noninterest income, including
investment securities transactions.
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MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Quarterly Financial
Report contain various forward-looking statements. Please refer to our 1998
Third Quarter Report on Form 10-Q for a discussion of various factors that could
cause our actual results to differ materially from those expressed in such
forward-looking statements.
EARNINGS HIGHLIGHTS
First Union's operating earnings in the first nine months of 1998 increased
25 percent to $2.7 billion from $2.2 billion in the first nine months of 1997.
On a diluted per share basis, operating earnings in the first nine months of
1998 increased 24 percent to $2.77 from $2.24 in the first nine months of 1997.
Operating earnings were $1.0 billion, or $1.02 per share, in the third quarter
of 1998, compared with $748 million, or $0.78, in the third quarter of 1997.
Operating earnings represent earnings before after tax merger-related and
restructuring charges of $669 million in the first nine months of 1998 and $37
million in the first nine months of 1997. Such charges in 1998 were primarily
associated with the April 28, 1998, pooling of interests acquisition of
CoreStates Financial Corp. After these charges, diluted earnings per share were
$2.08 in the first nine months of 1998 compared with $2.20 in the first nine
months of 1997, and $1.01 in the third quarter of 1998 compared with $0.78 in
the third quarter of 1997.
These operating results represent a return on average stockholders' equity
of 22.89 percent and a return on average assets of 1.64 percent in the first
nine months of 1998, and 23.50 percent and 1.75 percent, respectively, in the
third quarter of 1998.
Growth in operating earnings was led by a 45 percent increase in
noninterest income in the first nine months of 1998 compared with the first nine
months of 1997, excluding securities transactions. Securities gains of $259
million in the first nine months of 1998, which include available for sale and
investment securities transactions, are discussed in the Outlook and Securities
Available for Sale sections. Capital Management fee income increased 60 percent
in the first nine months of 1998, led by growth in retail brokerage and
insurance services volume and mutual fund fees. Capital Markets fee income
increased 58 percent, led by growth in Specialized Industries, International,
Congress Financial and risk management products. Mortgage banking income of $281
million in the first nine months of 1998 reflected strong originations
(including refinancings) as residential mortgage rates fell. Noninterest income
during this period also included $117 million in net gains related to the
securitization of $2.8 billion of home equity loans. It also included $79
million in net gains on $1.7 billion of credit card loans securitized in the
third quarter of 1998 and $60 million related to the recognition of a deferred
gain associated with equity method investments. Additionally, noninterest income
included $115 million in branch sale gains as we continue to enhance our retail
delivery network in connection with the implementation of the Future Bank model.
Noninterest expense, excluding merger-related and restructuring charges,
increased to $5.7 billion in the first nine months of 1998 from $5.1 billion in
the first nine months of 1997, primarily due to the addition of The Money Store,
including goodwill amoritization; revenue-driven incentive pay and higher
staffing levels in Capital Markets; spending related to our Future Bank
initiative and advertising expense related to our new corporate branding
campaign; and ongoing expense related to acquired entities. The operating
overhead
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efficiency ratio before special charges was 54.59 percent, compared with 55.23
percent in the first nine months of 1997.
Nonperforming assets declined to $825 million, or 0.61 percent of net loans
and foreclosed properties, compared with $991 million, or 0.75 percent, at
December 31, 1997, and $1 billion, or 0.73 percent, at September 30, 1997.
Annualized net charge-offs were 0.47 percent in the first nine months of 1998
compared with 0.67 percent in the first nine months of 1997.
Outlook
For many years, First Union has invested in a strategy of creating a
financial services company with diversified sources of revenue and earnings.
Further, a longstanding strategy that focuses on our middle-market client base
has enabled us to limit our credit exposures to areas of recent public concern,
such as emerging markets and hedge funds. The greatest impact of the quarter's
market movements was seen in our commercial real estate loans held for
securitization. If the financial markets continue to be volatile, we would
expect to be modestly impacted in the future.
However, the global flight to quality also created a $2 billion aggregate
unrealized gain in our interest-bearing on-balance sheet and off-balance sheet
portfolios. We realized 10 percent of these gains, or $211 million (pre-tax), as
securities gains in the third quarter of 1998, as discussed further in the
Securities Available for Sale section.
Two of the businesses in which we have invested in recent years, Capital
Management and Capital Markets, accounted for almost one-half of noninterest
income (excluding trading account profits, available for sale and investment
securities transactions) in the first nine months of 1998.
We have completed the integration of CoreStates. Customer sales and
retention strategies are well under way, as well as efforts to achieve expense
efficiency targets by the end of 1998. As such, we are very pleased with our
prospects for revenue growth and expense reductions stemming from this and other
recently consolidated acquisitions.
Our primary management attention is focused on developing our existing
business base as we continue to invest in new technology and fee
income-generating lines of business. The 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.
Legislation passed by the U.S. Congress in October of this year has
clarified certain tax benefits to be realized from the reorganization of certain
corporate and interstate banking entities. As a result, fourth quarter 1998
federal income tax expense may be significantly reduced.
The Impact of Year 2000 section provides information about First Union's
initiatives related to Year 2000 readiness and to expenses associated with these
initiatives.
Merger and Consolidation Activity
In the first nine months of 1998, we also completed the pooling of
interests acquisition of Wheat First Butcher Singer, Inc., a Richmond, Virginia
based broker/dealer, as well as the purchase accounting acquisitions of Bowles
Hollowell Conner & Co., a Charlotte, North
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Carolina based investment banking firm, and Covenant Bancorp, Inc., a
Haddonfield, New Jersey based bank holding company, and The Money Store, Inc.
The corporation's financial statements have been restated to reflect the
April 28, 1998, acquisition of CoreStates. Such financial statements have not
been restated to reflect the other acquisitions.
With the June 30, 1998, $2.2 billion purchase accounting acquisition of The
Money Store, we recorded $1.9 billion of goodwill and an intangible asset
related to The Money Store's origination network of $304 million. This is based
on The Money Store's closing equity of $489 million and preliminary fair value
adjustments, net of tax effects, related to certain interest-only and residual
certificates related to asset-backed securities issued by The Money Store of
$237 million, long-term debt of $47 million, professional fees and other
acquisition-related expenses of $23 million, deferred taxes related to the
origination network intangible of $120 million and other miscellaneous
adjustments amounting to $103 million. The estimated periods of future benefit
related to goodwill and the network intangible is twenty-five years and fifteen
years, respectively.
We continue to evaluate acquisition opportunities that we believe would
provide access to customers and markets that 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.
BUSINESS SEGMENTS
Business Focus
First Union's operations are divided into four primary business segments
encompassing more than 50 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank and Capital
Markets. Additional information can be found in Table 2.
We have developed an internal performance reporting model to measure the
results of these four business segments and the Treasury/Nonbank segment.
Because of the complexity of the corporation and the interrelationships of these
business segments, we have used various estimates and allocation methodologies
in the preparation of the Business Segments financial information. Restatements
of various periods may occasionally occur because these estimates and
methodologies could be refined over time.
Our management structure combines this internal performance reporting with
a matrix management approach, which integrates product management with our
various distribution channels. Additionally First Union's management structure
and internal reporting methodologies 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
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with each business segment. Credit risk allocations are intended to provide
sufficient equity to cover revenue volatility and the unexpected losses for each
asset portfolio. Provisions for loan losses in excess of each business segment's
net charge-offs are included in the Treasury/Nonbank segment. 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. The
Treasury/Nonbank segment retains all unallocated equity. 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 Bank segment
and the interest rate swap would be reflected in the risk management unit of the
Capital Markets segment.
Exposure to market risk is managed centrally within the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment, our
model employs a funds transfer pricing (FTP) system. The FTP system matches the
duration of the funding used by each segment to the duration of the assets and
liabilities contained in each segment. Matching the duration, or the effective
term until an instrument can be repriced, allocates interest income and/or
expense to each segment so its resulting net interest income is insulated from
interest rate risk. The majority of the interest rate risk resulting from the
mismatch in durations of assets and liabilities held by the business segments
resides in the Treasury/Nonbank segment. The Treasury/Nonbank segment also holds
the corporation's investment portfolio and off-balance sheet portfolio, which
are used to enhance corporate earnings and to manage exposure to interest rate
risk. Because most market risk is held in the Treasury/Nonbank segment, the
profitability of this segment is expected to be more volatile than for the other
business segments.
General corporate expenses, with the exception of goodwill amortization,
are fully allocated to each segment in a pro rata manner based on the direct and
attributable indirect expenses for each segment. Noninterest expense remaining
in the Treasury/ Nonbank segment reflects the costs of portfolio management
activities, goodwill amortization and merger-related and 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. State-of-the-art technology including
centralized customer information centers, smart cards, electronic and Internet
banking capabilities support this approach.
The Consumer Bank segment generated $368 million in net income in the third
quarter of 1998 compared with $244 million in the third quarter of 1997. In
addition to contributions
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from The Money Store, as discussed in Earnings Highlights, primary contributors
to the Consumer Bank segment were record production in residential first
mortgage loans (including refinancings) and home equity loans. Mortgage
production volume increased 109 percent to $4.2 billion in the third quarter of
1998 from $2.0 billion in the third quarter of 1997. Home equity originations
were $4.4 billion in the third quarter of 1998 compared with $1.5 billion in the
third quarter of 1997, and included $823 million from First Union Home Equity
Bank (FUHEB), $1.7 billion through the retail delivery system, and $1.8 billion
through The Money Store. Noninterest income was $647 million in the third
quarter of 1998 compared with $389 million in the third quarter of 1997.
Noninterest expense was $923 million in the third quarter of 1998 compared
with $857 million in the third quarter of 1997. Expenses in the third quarter of
1998 included the addition of The Money Store to our expense base; costs related
to the implementation of our Future Bank retail delivery strategy, as well as
expenses related to the increased mortgage volume and write-downs of mortgage
servicing rights. By the end of 1998, we will complete the implementation of our
new Future Bank retail delivery model across 12 states and Washington, D.C. The
Future Bank model increases service options and access for our customers,
improves sales capacity for employees, and it ultimately is expected to reduce
costs.
Average Consumer Bank loans in the third quarter of 1998 were $60 billion
compared with $62 billion in the third quarter of 1997. 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 have securitized or sold $13 billion of consumer loans since
the second quarter of 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. During the fourth
quarter of 1998, we anticipate retaining a larger percentage of consumer loan
originations. Accordingly, we expect proportionate increases in consumer loan
interest income, fees, interest expense and provisions for loan losses, as well
as lower securitization gains. The managed credit card portfolio was $5.6
billion at September 30, 1998, including $2.9 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 and
direct lending through the full-service bank branches and home equity loans
through The Money Store, FUHEB and full-service branches. 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 FUHEB. Our home equity lending business is the second
largest in the nation based on originations. FUMC is the nation's 11th largest
mortgage servicer, with a mortgage servicing portfolio of $63 billion at
September 30, 1998.
Capital Management
The Capital Management Group combines our banking and investment offerings
for retail and institutional customers, and it provides products and services
that primarily produce fee income. At September 30, 1998, this group had $134
billion in assets under management. These assets include proprietary mutual
funds of $63 billion, with the remaining $71 billion in assets composed of trust
and institutional accounts.
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The Capital Management Group produced net income of $130 million in the
third quarter of 1998 compared with $88 million in the third quarter of 1997. In
the third quarter of 1998, fee income was $450 million compared with $279
million in the third quarter of 1997. Growth in fee income was primarily related
to retail brokerage and insurance services, trust and mutual funds. Expenses in
the third quarter of 1998 were $354 million compared with $231 million in the
third quarter of 1997.
Retail brokerage is the primary distribution center for Capital Management
products. This segment also includes insurance products. However, it does not
reflect sales of credit life or other insurance products sold in other areas of
the corporation.
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. CAP Account amounts in Table 2 reflect direct CAP Account fee income
only. CAP Account assets increased to $32 billion at September 30, 1998,
compared with $26 billion at year-end 1997. We are realizing an increase in
investment activity through these accounts.
The Private Client Banking Group provides high net worth retail 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
third quarter of 1998, the Private Client Banking Group had $3.6 billion of
average net loans compared with $3.1 billion in the third quarter of 1997, and
$2.8 billion of average deposits in the third quarter of 1998 compared with $2.2
billion in the third quarter of 1997. Private Client Banking Group amounts in
Table 2 reflect only the income and expense related to lending and deposit
taking activities. Other fee income is located within other business lines or
segments.
We anticipate increased growth in all of the Capital Management business
lines as we introduce new products and services throughout our multistate
network and as we begin to enhance our relationships with the new customers from
our acquisitions.
Commercial Bank
The Commercial Bank provides a comprehensive array of financial solutions
primarily focused on corporate customers (annual sales of $50 million to $2
billion); commercial customers (annual sales of $10 million to $50 million); and
small-business customers (annual sales up to $10 million). Products and services
go beyond traditional commercial banking to areas such as risk management
products, property and casualty insurance, leasing, treasury services,
international services, pension plans and 401(k) plans.
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 $190 million in the third quarter of
1998 compared with $174 million in the third quarter of 1997. Net interest
income was $492 million in the third quarter of 1998 compared with $508 million
in the third quarter of 1997. Noninterest income increased slightly compared
with the third quarter of 1997, and it continues to be led by service charge
income from the cash management segment. Expenses in the third quarter of 1998
were $284 million compared with $323 million in the third quarter of 1997.
Average commercial loans in the third quarter of 1998 decreased 5 percent
from the third quarter of 1997, due to selective new loan originations and
renewals, as well as to the
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transfer of customer relationships to the Capital Markets Group. Average small
business loans increased 13 percent to $2.6 billion in the third quarter of 1998
from $2.3 billion in the third quarter of 1997. Table 2 reflects only the
lending activities of our Small Business Banking Division, which 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.
Capital Markets
Our Capital Markets Group provides corporate and institutional clients with
a complete menu 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, as in the rest of the First Union organization, the
strategy is the same: the focus is on providing customized solutions that are in
each of our client's best interests.
Within Capital Markets, our primary focus has been to bring a full line of
business products to middle-market customers. Our large banking franchise
provides a strong platform for the delivery of Capital Markets products and
services to meet customer needs.
Our relationship coverage begins in our East Coast banking markets, and it
extends nationwide through industry expertise 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 and utilize 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 traces its roots in international finance for nearly two centuries.
The Capital Markets Group produced net income of $106 million in the third
quarter of 1998 compared with $167 million in the third quarter of 1997. Net
interest income was $303 million in the third quarter of 1998 compared with $275
million in the third quarter of 1997. Noninterest income decreased 20 percent
from $221 million in the third quarter of 1997 to $177 million in the third
quarter of 1998. The decrease was primarily the result of a $159 million
mark-to-market writedown of commercial mortgages warehoused for securitization
and their associated hedges. This writedown was the result of the global flight
to quality discussed in the Outlook section. Expenses in the third quarter of
1998 were $245 million compared with $215 million in the third quarter of 1997.
Average net loans were $33 billion in the third quarter of 1998 compared
with $28 billion in the third quarter of 1997. Loan growth between the two
periods was generated primarily in the Specialized Industries, Diversified
Finance and International units related to new relationships and the alignment
of customers from the Commercial Bank.
First Union's Capital Markets Group will continue to expand its
relationship banking efforts, including increased industry segment coverage and
an expanded international presence.
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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 also includes the income and
expense related to the restructuring of the credit card receivables and other
unsecured loans.
RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
Net Interest Income
Tax-equivalent net interest income was $5.7 billion in the first nine
months of 1998 compared with $6.0 billion in the first nine months 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 nine months of 1998,
$64 million in gross interest income would have been recorded if all nonaccrual
and restructured loans had been current in accordance with their original terms
and if they had been outstanding throughout the period (or since origination if
held for part of the period). The amount of interest income related to these
assets and included in income in the first nine months of 1998 was $15 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
3.94 percent in the first nine months of 1998 compared with 4.65 percent in the
first nine months of 1997. The primary factors contributing to the reduction in
the net interest margin were: the restructuring of our unsecured consumer loan
portfolio; an $8 billion increase in short-term investments related to trading
and hedging activities; a $14 billion increase in our securities available for
sale portfolio related to the rebalancing of our portfolio in response to our
consumer loan portfolio restructuring and to our acquisition of CoreStates; and
an increase in deposit costs related to our strategy of migrating customers to
market-priced accounts. Changes in the composition of our earning asset mix
resulted in a decrease in the average rate earned on earning assets from 8.32
percent in the first nine months of 1997 to 7.86 percent in the first nine
months of 1998. Our average rate paid on liabilities increased from 4.36 percent
to 4.58 percent over this same nine-month period. It should be noted that we
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focus on net income and economic contribution when evaluating corporate
strategies and that we place a low level of importance on the net interest
margin impact of such decisions.
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 developing products to meet the challenges of increasing
competition, changing customer demands and demographic shifts. We have pursued
strategic investments to build high-growth lines of business to increase fee
income. For example, we have significantly broadened our product lines,
particularly in the Capital Markets and the 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 45 percent
increase in noninterest income, excluding available for sale and investment
securities transactions, to $4.5 billion in the first nine months of 1998 from
$3.1 billion in the first nine months of 1997. Certain amounts included in
noninterest income are discussed further in the Earnings Highlights section.
Most categories of noninterest income increased in the first nine months of
1998 from a year earlier. Fee income from Capital Management and Capital Markets
activities made up almost one-half of noninterest income, excluding trading
account profits, available for sale and investment securities transactions, in
the first nine months of 1998. These two groups are discussed further in the
Business Segments section.
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. The global flight to quality in the third quarter of 1998 had a
negative impact on some segments of our trading activities. As U.S. Treasuries
became the asset of choice for investors, the widening of spreads to treasuries
negatively affected our hedging related to some trading accounts. This resulted
in a trading account net loss of $55 million in the third quarter of 1998.
Trading account profits were $46 million in the first nine months of 1998,
compared with $152 million in the first nine months of 1997. Trading account
assets were $12 billion at September 30, 1998, compared with $6 billion at
December 31, 1997.
Noninterest Expense
Noninterest expense was $6.8 billion in the first nine months of 1998
compared with $5.2 billion in the first nine months of 1997. In the first nine
months of 1998, noninterest expense included $1.0 billion of merger-related and
restructuring charges compared with $59 million in the first nine months of
1997. In addition to merger-related and restructuring charges, expenses in the
first nine months of 1998 reflected revenue-driven incentive pay and higher
staffing levels in Capital Markets; spending related to our Future Bank
implementation; advertising expense related to our branding campaign; and
ongoing expenses related to acquired entities. The operating overhead efficiency
ratio before special charges was 54.59 percent, compared with 55.23 percent in
the first nine months of 1997.
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The $1.0 billion of 1998 pre-tax merger-related expenses and restructuring
charges are associated primarily with the mergers of Wheat First and CoreStates,
and they represent (i) merger-related expenses, which are recorded as incurred,
such as costs and losses of combining the companies, instituting efficiencies,
professional fees, systems conversions and communications, and (ii) accrued
restructuring charges, such as severance and change in control obligations,
fixed asset write-downs and vacant space accruals, accelerated disposition of
owned real estate net, service contract terminations and other miscellaneous
costs. In the third quarter of 1998, merger-related expenses and restructuring
charges of $24 million were incurred. This amount consisted primarily of $169
million of merger-related expenses and $40 million of additional restructuring
charges which were offset by $185 million in gains on regulatory mandated branch
sales. At September 30, 1998, $288 million of such charges had been paid and
$404 million of such charges were related to noncash charges. Most of the
remaining accrual of $315 million of such charges at September 30, 1998, is
expected to be paid by the end of 1999. It is currently estimated that an
additional $146 million in after tax merger-related expenses may be recorded by
the end of 1998, in addition to the charges previously taken.
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 $5.1 billion in other
intangible assets at September 30, 1998, and $2.9 billion at December 31, 1997.
The increase was primarily related to The Money Store acquisition. Costs related
to environmental matters were not material.
The Impact of Year 2000 section provides information about First Union's
initiatives related to Year 2000 readiness and to expenses associated with these
initiatives.
BALANCE SHEET REVIEW
Securities Available for Sale
The available for sale portfolio primarily consists of U.S. Treasury, U.S.
Government agency, 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 $255
million in the first nine months of 1998 and $34 million in the first nine
months of 1997.
At September 30, 1998, we had securities available for sale with a market
value of $38 billion compared with $24 billion at year-end 1997. The market
value of securities available for sale was $867 million above amortized cost at
September 30, 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. In the third
quarter of 1998, we took advantage of market conditions to reposition a portion
of our securities portfolio. Primarily, we sold securities where investor demand
for a safe haven had driven prices up and reinvested the proceeds in
higher-yielding securities. As a result of our reinvestment strategies, we
believe we will be able to replace a majority of the future income we would have
received on the securities sold, in addition to realizing the gain.
The average rate earned on securities available for sale in the first nine
months of 1998 was 6.63 percent compared with 6.88 percent in the first nine
months of 1997. The average maturity of the portfolio was 5.28 years at
September 30, 1998.
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Investment Securities
The investment securities portfolio primarily consists of U.S. Government
agency, corporate, municipal and mortgage-backed securities, and collateralized
mortgage obligations. Our investment securities amounted to $2.1 billion at
September 30, 1998, and $3.5 billion at December 31, 1997.
The average rate earned on investment securities was 7.93 percent in the
first nine months of 1998 and 7.86 percent in the first nine months of 1997. The
average maturity of the portfolio was 4.73 years at September 30, 1998.
Loans
The loan portfolio, which represents our largest asset class, is a
significant source of interest and fee income. Elements of the loan portfolio
are subject to differing levels of credit and interest rate risk. Our lending
strategy stresses quality growth and portfolio diversification by product,
geography and industry. A common credit underwriting structure is in place
throughout the corporation.
The commercial loan portfolio includes general commercial loans, both
secured and unsecured, and commercial real estate loans. Commercial loans are
typically either working capital loans, which are used to finance the inventory,
receivables and other working capital needs of commercial borrowers, or term
loans, which are generally used to finance fixed assets or acquisitions.
Commercial real estate loans are typically used to finance the construction or
purchase of commercial real estate.
Our commercial lenders focus principally on middle-market companies, which
we believe reduces the risk of credit loss from any single borrower or group of
borrowers. 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 September 30, 1998, was composed of 56 percent in
commercial loans and 44 percent in consumer loans, which did not represent a
significant change from December 31, 1997.
Net loans at September 30, 1998, were $136 billion compared with $132
billion at December 31, 1997. Average net loans were $133 billion in the first
nine months of 1998 compared with $135 billion in the first nine months of 1997.
The decrease primarily reflects loans that were securitized, sold or transferred
to assets held for sale as part of our strategy of balance sheet management to
maximize our return on investment. Commercial loan originations in the first
nine months of 1998 were led by Capital Markets. Consumer loan originations were
strong in mortgages (including refinancings) and home equity.
At September 30, 1998, unused loan commitments related to commercial and
consumer loans were $75 billion and $33 billion, respectively. Commercial and
standby letters of credit were $11 billion at September 30, 1998. At September
30, 1998, loan participations sold to other lenders amounted to $2 billion. They
were recorded as a reduction of gross loans.
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The average rate earned on loans was 8.55 percent in the first nine months
of 1998 compared with 8.81 percent in the first nine months 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
growth in high yielding leveraged leases.
The Asset Quality section provides information about geographic exposure in
the loan portfolio.
Commercial Real Estate Loans
Commercial real estate loans amounted to 9 percent of the total portfolio
at September 30, 1998, and 12 percent at December 31, 1997. This portfolio
included commercial real estate mortgage loans of $9 billion at September 30,
1998, and $13 billion at December 31, 1997.
Asset Securitizations
Asset securitizations are utilized as the primary funding method for fixed
and variable rate home equity loans and as an alternative funding method for SBA
loans, student loans and certain other consumer loans. In a securitization
transaction, a pool of loans is generally sold to a trust, which simultaneously
sells interests in the underlying cash flows of the pool to third-party
investors. In its securitization transactions, First Union typically receives
cash proceeds, retains interest-only and residual certificates as an investment
and retains the servicing rights to the loans.
The interest-only and residual certificates retained are initially recorded
at their allocated carrying value based on relative fair value. Fair value is
determined by computing the present value of the estimated cash flows retained,
using the dates that such cash flows are expected to be released to First Union,
at a discount rate considered to be commensurate with the risks associated with
the cash flows. The amounts and timing of the cash flows are estimated after
considering various economic factors including prepayment, delinquency, default
and loss assumptions. The valuation also considers loan-related factors such as
loan type, amount, date of origination, interest rate, term, underlying
collateral value and geographic location.
First Union maintains a disciplined valuation process whereby on a monthly
basis a risk management committee reviews actual cash flows and the factors that
affect the amounts and timing of the cash flows from each of the underlying
static pools relative to the assumptions used in estimating fair value. Based on
this analysis, assumptions are validated or revised as deemed necessary, and the
amounts and timing of cash flows are estimated and fair value is determined.
Table 8 summarizes the activity-related changes in the balance sheet amounts for
the interest-only and residual certificates, the related valuation estimates and
the related collateral data.
ASSET QUALITY
Nonperforming Assets
At September 30, 1998, nonperforming assets were $825 million, or 0.61
percent of net loans and foreclosed properties, compared with $991 million, or
0.75 percent, at December 31, 1997.
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Loans or properties of less than $5 million each made up 83 percent, or
$686 million, of nonperforming assets at September 30, 1998. Of the rest:
(bullet) Three loans or properties between $5 million and $10 million each
accounted for $21 million; and
(bullet) Six loans or properties over $10 million each accounted for $118
million.
Fifty-one percent of nonperforming assets were collateralized primarily by
real estate at September 30, 1998, and 49 percent at December 31, 1997.
Past Due Loans
Accruing loans 90 days past due were $279 million at September 30, 1998,
compared with $326 million at December 31, 1997. Of the past dues at September
30, 1998, $47 million were commercial loans or commercial real estate loans and
$232 million were consumer loans. At September 30, 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 $472 million in the first nine months of 1998
compared with $678 million in the first nine months of 1997, and in the third
quarter of 1998, $187 million compared with $231 million in the third quarter of
1997. Annualized net charge-offs were 0.47 percent of average net loans in the
first nine months of 1998 compared with 0.67 percent in the first nine months of
1997.
Net charge-offs declined significantly due primarily to the restructuring
of the credit card portfolio, in which certain vintages that experienced higher
charge-off rates have been sold. Card solicitations are largely focused on
customers and prospects within our marketplace and nationally to those with
potential for building 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 $524 million in the first nine months of 1998
compared with $658 million in the first nine months of 1997. The allowance for
loan losses was $1.9 billion at September 30, 1998, and $1.8 billion at December
31, 1997.
We establish reserves based on various factors, including results of
analyses of the quality of commercial loans and commercial real estate loans.
Reserves for commercial loans 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 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. Additionally, a longstanding strategy that focuses on our middle-market
client base has enabled us to limit our credit exposures to areas of recent
public concern, such as emerging markets and hedge funds.
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Impaired loans, which are included in nonaccrual loans, amounted to $404
million at September 30, 1998, compared with $485 million at December 31, 1997.
A loan is considered to be impaired when, based on current information, we
believe it is probable that we will not receive all amounts due in accordance
with the contractual terms of the loan. Included in the allowance for loan
losses at September 30, 1998, was $63 million related to $351 million of
impaired loans. The remaining impaired loans were recorded at or below fair
value. In the first nine months of 1998, the average recorded investment in
impaired loans was $440 million, and $21 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 $12 billion
commercial real estate portfolio at September 30, 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 available 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 book value approximated the estimated fair
value at September 30, 1998.
Core Deposits
Core deposits are a fundamental and cost-effective source of funding. Core
deposits include savings, negotiable order of withdrawal (NOW), money market,
noninterest-bearing and other consumer time deposits. Core deposits were $126
billion at September 30, 1998, compared with $127 billion at December 31, 1997.
The portion of core deposits in higher-rate, other consumer time deposits
was 29 percent at September 30,1998, and at 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 $127 billion in the first nine months of
1998 and $124 billion in the first nine months of 1997. In the first nine
months of 1998 and in the first
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nine months of 1997, average noninterest-bearing deposits were 24 percent and
22 percent, respectively, of average core deposits. Average balances in savings
and NOW, money market and noninterest-bearing deposits were higher when
compared with the first nine months of 1997, while other consumer time deposits
were lower. Deposits can be affected by numerous factors, including branch
closings or consolidations, seasonal factors and the rates being offered
compared to other investment opportunities. The Net Interest Income Summaries
provide additional information about average core deposits.
Purchased Funds
Purchased funds at September 30, 1998, were $60 billion compared with $42
billion at year-end 1997, largely reflecting the effects of loan growth, branch
sales and the acquisition of The Money Store. Average purchased funds in the
first nine months of 1998 were $55 billion compared with $38 billion in the
first nine months 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 nine months of 1998 to increase earning assets, to make
discretionary investments and to reduce borrowings.
Long-Term Debt
Long-term debt was 98 percent of stockholders' equity at September 30,
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.
Debt Obligations
We have $350 million in committed back-up lines of credit, $175 million of
which expires in July 1999 and the remaining $175 million of which expires in
July 2002. These credit facilities contain 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 these lines of credit. In the last three months of
1998, long-term debt of $483 million will mature. Funds for the payment of
long-term debt will come from operations or, if necessary, additional
borrowings.
Guaranteed Preferred Beneficial Interests
At September 30, 1998, $1.7 billion of trust capital securities was
outstanding. Subsidiary trusts issued these capital securities and used the
proceeds to purchase junior subordinated debentures from the corporation. These
capital securities are considered tier
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1 capital for regulatory purposes. Expenses of $101 million in the first nine
months 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 $17 billion at September 30, 1998, and $15
billion at December 31, 1997. Common shares outstanding amounted to 990 million
at September 30, 1998, compared with 961 million at December 31, 1997. In the
first nine months of 1998, we repurchased 40 million shares of our common stock
in the open market at a cost of $2.4 billion, substantially all of which was
related to The Money Store acquisition. The corporation recently announced that
it may repurchase from time to time up to 50 million additional shares of its
common stock.
We paid $1.0 billion in dividends to common stockholders in the first nine
months of 1998 compared with $838 million in the first nine months of 1997. This
represented an operating dividend payout ratio of 37.29 percent in the first
nine months of 1998.
At September 30, 1998, stockholders' equity included a $556 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 $1.3
billion available for dividends at September 30, 1998, without prior regulatory
approval. Our subsidiaries paid $413 million in dividends to the parent company
in the first nine months of 1998. In addition, the consolidation of our banks in
our northern region with our North Carolina-based bank resulted in a reduction
of capital of $1.4 billion, 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,
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total capital). At September 30, 1998, the tier 1 and total capital ratios were
7.47 percent and 11.75 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 September 30, 1998, was 6.07 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 September 30, 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.
MARKET RISK MANAGEMENT
Interest Rate Risk Methodology
Managing interest rate risk is fundamental to banking. The inherent
maturity and repricing characteristics of our day-to-day lending and deposit
activities create a naturally asset-sensitive structure. By using a combination
of on- and off-balance sheet financial instruments, we manage the sensitivity of
earnings to changes in interest rates within our established policy guidelines.
The Credit/Market Risk Committee of the corporation's board of directors
reviews overall interest rate risk management activity. The Funds Management
Committee of the corporation oversees the interest rate risk management process
and approves policy guidelines. Balance sheet management and finance personnel
monitor the day-to-day exposure to changes in interest rates in response to loan
and deposit flows. They make adjustments within established policy guidelines.
Our methodology for measuring exposure to interest rate risk for policy
measurement is intended to ensure we include a sufficiently broad range of rate
scenarios and pattern of rate movements that we believe to be reasonably
possible. Our methodology measures the
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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 reflects more
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 includes 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 October 1998 estimate for future short-term interest rates (our "most
likely" scenario) reflects the federal funds rate declining from its current
rate of 5.00 percent to 4.25 percent by October 1999 and remaining at that level
through September 2000. Our flat rate scenario holds the federal funds rate
constant at 5.00 percent through September 2000.
Based on the October 1998 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 2.2 percent. Our model
indicates that earnings would benefit by 1.9 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 slightly more detrimental than the same rise from our
"flat rate" scenario.
Compared to our "most likely" scenario, earnings would increase 2.5 percent
over the policy measurement period if rates fall gradually by 200 basis points,
and they would decrease by 2.3 percent if rates gradually rise by 200 basis
points. The primary cause for the difference in sensitivity between using the
"flat rate" scenario or the "most likely" scenario as the baseline for our
measurements results from assumptions about how the
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level and slope of the Treasury yield curve would be affected under the rising
and falling rate scenarios.
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. These
alternate "what if" scenarios may include interest rate paths both higher, lower
and more volatile than those used for policy measurement. We also perform our
analysis for time periods that reach beyond the 12-month policy period. For
example, based on our October 1998 outlook, if interest rates in calendar year
1999 were 200 basis points lower than our "most likely" scenario, earnings would
increase by 3.9 percent. If rates were 200 basis points higher than our "most
likely" scenario in 1999, those earnings would be negatively impacted by 3.7
percent.
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 we implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, management
will continue to formulate strategies aimed at protecting earnings from the
potential negative effects of changes in interest rates.
Off-Balance Sheet Derivatives for Interest Rate Risk Management.
As part of our overall interest rate risk management strategy, for many
years we have used off-balance sheet derivatives as a cost- and
capital-efficient way to modify the repricing or maturity characteristics of
on-balance sheet assets and liabilities. Our off-balance sheet derivative
transactions used for interest rate sensitivity management include interest rate
swaps, futures and options with indices that relate to the pricing of specific
financial instruments of the corporation. We believe we have appropriately
controlled the risk so that derivatives used for rate sensitivity management
will not have any significant unintended effect on corporate earnings. As a
matter of policy we do not use highly leveraged derivative instruments for
interest rate risk management. The impact of derivative products on our earnings
and rate sensitivity is fully incorporated in the earnings simulation model in
the same manner as on-balance sheet instruments.
Our overall goal is to manage our rate sensitivity such that earnings are
not adversely affected materially whether rates go up or down. As a result of
interest rate fluctuations, off-balance sheet transactions (and securities) will
from time to time develop unrealized appreciation or depreciation in market
value when compared with their cost. The impact on net interest income
attributable to these off-balance sheet transactions, all of which are linked to
specific financial instruments as part of our overall interest rate risk
management strategy, will generally be offset by net interest income from
on-balance sheet assets and liabilities. The important consideration is not the
shifting of unrealized appreciation or depreciation between and among on- and
off-balance sheet instruments, but the prudent management of interest rate
sensitivity so that corporate earnings are not unduly at risk as interest rates
move up or down.
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $1.5 billion at
September 30, 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 September 30, 1998, were not significant.
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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 generally to require that swaps and options be
governed by an International Swaps and Derivatives Association Master Agreement.
Bilateral collateral arrangements are in place for substantially all dealer
counterparties used in our Asset/Liability Management activities. Derivative
collateral arrangements for dealer transactions and trading activities are based
on established thresholds of acceptable credit risk by counterparty. Thresholds
are determined based on the strength of the individual counterparty, and they
are bilateral. As of September 30, 1998, the total mark-to-market related credit
risk for derivative transactions in excess of counterparty thresholds was $810
million. The fair value of collateral held approximated the total mark-to-market
related credit risk in excess of counterparty thresholds as of such date. 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 the
most recent 260 business days. The total value-at-risk amount at September 30,
1998, was $16 million. Value-at-risk amounts related to interest rate risk,
equity risk and currency risk at September 30, 1998, were $14 million, $2
million and $1 million, respectively.
IMPACT OF YEAR 2000
In February 1996, First Union initiated a Year 2000 project to address the
issues associated with its computer systems and business functions through the
turn of the century. The project is under the overall direction of the chief
information officer, and it consists of a project team representing all areas
within First Union. The progress of the work related to Year 2000 compliance is
reported to a Year 2000 steering committee on a monthly basis and to the Audit
Committee of the Board of Directors on a bimonthly basis.
21
<PAGE>
First Union has assessed the Year 2000 risk of Information Technology
Systems, Non-Information Technology Systems and Business Relationships as:
Mission Critical - those areas where lack of compliance could cause major
operational risk to First Union; High Risk - those areas where lack of
compliance could impact First Union, but would not cause the failure of core
operations; Medium Risk - those areas where lack of compliance would not have a
major impact to First Union's customers; or Low Risk - those areas that do not
affect customers and that could be delayed or otherwise processed on an
exception basis.
The first phase of First Union's Year 2000 effort is Planning and
Assessment, which includes the identification of potential points of failure
requiring focused Year 2000 efforts. As of September 30, 1998, First Union has
completed the Planning and Assessment phase of the Year 2000 project, with the
exception of interfaces with customers and other counterparties used to
communicate and process transactions with First Union. For these interfaces,
Planning and Assessment is expected to be complete by December 31, 1998.
Information Technology Systems
Information Technology Systems include proprietary and vendor supported
business applications. The most significant phases of the Year 2000 project
related to Information Technology Systems are Analysis and Remediation,
Partition Testing, and Certification. Analysis and Remediation includes the
modification of program code to address date related problems. Partition Testing
includes limited integrated testing to validate remediation. This phase enables
each application to test for Year 2000 compliance in an isolated and fully
functional environment and verifies that the application executes correctly with
Year 2000 changes included. First Union considers all major Information
Technology Systems to be Year 2000 compliant when they have completed these
phases of the Year 2000 project, which is consistent with bank regulatory
guidelines.
As of September 30, 1998, the Analysis and Remediation and Partition
Testing phases have been completed on approximately 60 percent of the major
business applications rated Mission Critical and High Risk, and accordingly,
they are deemed to be Year 2000 compliant. First Union anticipates that by
December 31, 1998, the Analysis and Remediation and Partition Testing phases
will be complete for approximately 90 percent of all major business applications
rated Mission Critical and High Risk, with these phases for the remainder of
these applications expected to be substantially complete by March 31, 1999. All
major business applications rated Medium Risk and Low Risk are subject to the
same processes described above. Of these approximately 50 percent were Year 2000
compliant as of September 30, 1998, with substantially all of the remainder
expected to be Year 2000 compliant by March 31, 1999.
With respect to personal computers, First Union has identified which
versions of software and models of hardware the manufacturer has identified as
Year 2000 compliant and continually reassesses manufacturers' representations.
As of September 30, 1998, 60 percent of the personal computer hardware has been
certified as Year 2000 compliant, with the remainder expected to be
substantially complete by December 31, 1998.
The goal of the Certification phase is to obtain reasonable assurance that
the corporate-wide production environment is capable of the integrated
processing of future dates and that it has not been adversely affected by Year
2000 remediation and testing efforts. First Union's Certification phase
addresses all frequencies of processing and all major computing platforms. Every
effort has been made to emulate a production environment, including
applications, system software, hardware and critical internal and
22
<PAGE>
external interfaces. Certification also includes user acceptance testing and
testing with customers and other key counterparties.
The Certification phase has commenced and First Union expects to be
approximately 50 percent complete by March 31, 1999, with all aspects expected
to be complete by September 30, 1999. During the fourth quarter of 1999, a
strict change control process will be implemented to ensure that Information
Technology Systems remain Year 2000 compliant.
Non-Information Technology Systems
First Union's Year 2000 project encompasses embedded technology in
Non-Information Technology areas, including facilities and related building
services, such as utilities, security systems, general business equipment and
non-computer office equipment. There are approximately 50 facilities and the
related building services that have been identified as Mission Critical or High
Risk. First Union expects that testing of these Mission Critical and High Risk
facilities and the related building services will be approximately 25 percent
complete by December 31, 1998. These facilities and the related building
services are expected to be fully tested and Year 2000 compliant by March 31,
1999.
Business Relationships
First Union has requested warranties from its vendors certifying that their
products will be Year 2000 compliant. Vendors who were not compliant by
September 30, 1998, who have not responded to First Union's requests or who have
not adequately demonstrated they can make their products Year 2000 compliant are
being separately identified and monitored.
First Union is evaluating the Year 2000 readiness of its borrowers and the
resulting effect on the credit quality of its loan portfolio. A Year 2000 credit
risk policy has been developed, and it requires that a risk assessment be
performed on all new and existing borrowers subject to certain criteria. As of
September 30, 1998, all borrowers covered by the policy have been assigned a
Year 2000 risk rating.
Business Continuity Planning
Another significant aspect of the Year 2000 project is Business Continuity
Planning, which is a process to ensure that First Union can continue operations
in the event that information technology systems, non-information technology
systems or business relationships are not Year 2000 compliant. By December 31,
1998, all business continuity plans will be completed. Validation of business
continuity plans is expected to be completed by March 31, 1999. Business
Continuity Planning will include consideration of the most reasonably likely
worst case scenario that First Union could encounter.
Cost
First Union currently estimates the cost for the Year 2000 project will
amount to $60 million to $65 million pretax. This amount includes only the costs
associated with the core Year 2000 project office team, incremental personnel
and contractors hired specifically to participate in the Year 2000 project and
direct expenses incurred on the project. The cost associated with the
redeployment of personnel to the Year 2000 project is expected to be
significantly less than the incremental cost. In the third quarter of 1998, $6
million was incurred on the Year 2000 project and $19 million has been incurred
since project inception.
23
<PAGE>
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," establishes accounting and
reporting standards for certain mortgage banking activities. It conforms the
subsequent accounting for securities retained after the securitization of other
types of assets. The corporation is in the process of assessing the impact of
this Standard. The Standard is effective for financial statements for the first
fiscal quarter beginning after December 15, 1998.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and hedging activities. It requires that all
derivatives be included as assets or liabilities in the balance sheet and that
such instruments be carried at fair market value through adjustments to either
other comprehensive income or current earnings or both, as appropriate. The
corporation is in the process of assessing the impact of this Standard. The
Standard is effective for financial statements issued for all fiscal quarters of
fiscal years beginning after June 15, 1999.
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 15, 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 is 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
24
<PAGE>
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.
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.
25
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA
- -------------------------------------------------------------------------------------------------------------------------------
Twelve
Months 1998 1997
Ended ------------------------------- -------------------
Sept. 30, Third Second First Fourth Third
(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 $ 14,855 3,891 3,727 3,602 3,635 3,663
- -------------------------------------------------------------------------------------------------------------------------------
Interest income (a) $ 14,971 3,922 3,755 3,630 3,664 3,683
Interest expense 7,321 2,018 1,880 1,742 1,681 1,657
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,650 1,904 1,875 1,888 1,983 2,026
Provision for loan losses 969 239 150 135 445 225
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 6,681 1,665 1,725 1,753 1,538 1,801
Securities available for sale transactions 273 211 21 23 18 15
Investment security transactions 4 - 4 - - 2
Noninterest income 5,666 1,633 1,532 1,354 1,147 1,065
Merger-related and restructuring charges (b) 1,232 24 954 29 225 -
Noninterest expense 7,689 1,959 1,923 1,866 1,941 1,711
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 3,703 1,526 405 1,235 537 1,172
Income taxes 977 500 128 417 (68) 404
Tax-equivalent adjustment 116 31 28 28 29 20
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,610 995 249 790 576 748
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic $ 2.72 1.02 0.27 0.82 0.61 0.79
Diluted 2.68 1.01 0.26 0.81 0.60 0.78
Cash dividends $ 1.48 0.42 0.37 0.37 0.32 0.32
Average shares - Basic (In thousands) - 981,659 949,750 965,120 960,596 946,354
Average shares - Diluted (In thousands) - 993,208 962,160 977,155 972,051 959,013
Average stockholders' equity (c)
Quarter-to-date $ - 16,383 14,607 15,455 14,806 14,575
Year-to-date - 15,485 15,029 15,455 14,365 14,010
Common stock price
High 65 11/16 65 11/16 63 58 1/4 52 7/8 50 11/16
Low 46 15/16 47 9/16 55 1/4 47 1/16 46 15/16 45 7/8
Period-end $ 51 3/16 51 3/16 58 1/4 56 13/16 51 1/4 50 1/16
To earnings ratio (d) 19.10 X 19.10 23.78 19.66 18.30 17.26
To book value 292 % 292 348 348 321 323
Book value $ 17.54 17.54 16.72 16.31 15.95 15.51
BALANCE SHEET DATA
Assets 234,580 234,580 228,996 219,944 205,735 202,766
Long-term debt $ 17,040 17,040 13,250 12,003 11,752 11,209
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Tax-equivalent.
(b) Merger-related and restructuring charges amounted to $16 million after tax
in the third quarter of 1998, $634 million after tax in the second quarter
of 1998, $19 million after tax in the first quarter of 1998 and $167 million
after tax in the fourth quarter of 1997.
(c) Quarter-to-date and year-to-date average stockholders' equity excludes
average net unrealized gains or losses on debt and equity securities.
(d) Based on diluted earnings per share.
T-1
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Home
Equity
First and The Retail
Union Money Card Branch
(In millions) Mortgage Store Products Products Total
- --------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 28 94 102 745 969
Provision for loan losses - 3 42 51 96
Noninterest income 101 158 191 197 647
Noninterest expense 101 174 92 556 923
Income tax expense 11 29 61 128 229
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 17 46 98 207 368
- --------------------------------------------------------------------------------------------------------
PERFORMANCE AND OTHER DATA
Return on average attributed
stockholders' equity (a) 47.13 % 17.80 65.46 31.58 33.49
Average loans, net $ 2,173 7,164 3,648 47,181 60,166
Average deposits 1,413 2 24 76,024 77,463
Average attributed stockholders'
equity $ 145 1,028 597 2,598 4,368
========================================================================================================
Retail
Private Brokerage & Internal
Mutual Client CAP Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- --------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 14 (1) 44 41 20 - 118
Provision for loan losses - - 1 - - - 1
Noninterest income 152 105 3 20 190 (20) 450
Noninterest expense 94 47 19 28 166 - 354
Income tax expense 28 22 10 13 17 (7) 83
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 44 35 17 20 27 (13) 130
- --------------------------------------------------------------------------------------------------------
PERFORMANCE AND OTHER DATA
Return on average attributed
stockholders' equity (a) 81.01 % 54.37 27.01 68.43 25.55 - 44.57
Average loans, net $ 118 - 3,598 - 1,364 - 5,080
Average deposits 2,334 - 2,798 11,533 - - 16,665
Average attributed stockholders'
equity $ 219 163 249 118 422 - 1,171
========================================================================================================
Small Real Cash Mgt.
Business Estate and Deposit
(In millions) Banking Lending Banking Services Total
- --------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 23 137 61 271 492
Provision for loan losses 1 24 - - 25
Noninterest income - - - 124 124
Noninterest expense 9 72 10 193 284
Income tax expense 5 16 19 77 117
- --------------------------------------------------------------------------------------------------------
Net Income $ 8 25 32 125 190
- --------------------------------------------------------------------------------------------------------
Performance and other data
return on average attributed
stockholders' equity (a) 16.65% 5.89 16.75 62.70 22.01
Average loans, net $ 2,594 24,365 9,430 - 36,389
Average deposits - - - 25,935 25,935
Average attributed stockholders'
equity $ 197 1,684 745 790 3,416
========================================================================================================
(Continued)
</TABLE>
T-2
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- --------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 28 9 (2) 220 48 303
Provision for loan losses - - - 62 - 62
Trading account profit (loss) 28 (160) 58 - - (74)
Noninterest income 95 12 (1) 101 44 251
Noninterest expense 110 15 22 74 24 245
Income tax expense 16 (59) 13 71 26 67
- --------------------------------------------------------------------------------------------------------
Net income $ 25 (95) 20 114 42 106
- --------------------------------------------------------------------------------------------------------
Performance and other data
return on average attributed
stockholders' equity (a) 13.08% (136.16) 80.24 16.26 111.56 10.49
Average loans, net $ 2,967 1,557 - 24,901 3,942 33,367
Average deposits 3,289 2 241 8,272 21 11,825
Average attributed stockholders'
equity $ 783 276 103 2,787 150 4,099
========================================================================================================
CONSUMER CAPITAL COMMERCIAL CAPITAL TREASURY/
(In millions) BANK MGT. BANK MARKETS NONBANK TOTAL
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 969 118 492 303 (9) 1,873
Provision for loan losses 96 1 25 62 55 239
Trading account profit (loss) - - - (74) 19 (55)
Noninterest income 647 450 124 251 427 1,899
Noninterest expense 923 354 284 245 177 1,983
Income tax expense 229 83 117 67 4 500
- --------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 368 130 190 106 201 995
After-tax merger-related and
restructuring charges - - - - 16 16
- --------------------------------------------------------------------------------------------------------
Net incomoe before
merger-related and
restructuring charges $ 368 130 190 106 217 1,011
- --------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 33.49% 44.57 22.01 10.49 21.45 23.50
Average loans, net $ 60,166 5,080 36,389 33,367 48 135,050
Average deposits 77,463 16,665 25,935 11,825 4,326 136,214
Average attributed stockholders'
equity $ 4,368 1,171 3,416 4,099 4,013 17,067
========================================================================================================
(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. The return on average attributed stockholders' equity for the Capital Management Mutual Funds
unit is net of the Internal Management Elimination.
(CONTINUED)
</TABLE>
T-3
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 16 33 179 829 1,057
Provision for loan losses 1 3 146 46 196
Noninterest income 77 10 100 202 389
Noninterest expense 88 17 116 636 857
Income tax expense 1 9 6 133 149
- ------------------------------------------------------------------------------------------------------
Net income $ 3 14 11 216 244
- ------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 9.24% 50.72 5.65 31.54 26.58
Average loans, net $ 1,249 4,013 6,718 49,767 61,747
Average deosits 974 1 12 79,151 80,138
Average attributed stockholders'
equity $ 80 112 704 2,708 3,604
======================================================================================================
Retail
Private Brokerage & Internal
Mutual Client CAP Insurance Mgt.
(In millions) Trust Funds Banking Account Services Elimination Total
- ------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 16 1 38 35 5 - 95
Provision for loan losses - - - - - - -
Noninterest income 141 66 2 14 68 (12) 279
Noninterest expense 93 35 19 19 65 - 231
Income tax expense 25 12 8 11 3 (4) 55
- ------------------------------------------------------------------------------------------------------
Net income $ 39 20 13 19 5 (8) 88
- ------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 70.82% 48.64 25.10 70.77 13.35 - 45.33
Average loans, net $ 113 - 3,054 - 271 - 3,438
Average deposits 2,340 - 2,219 10,383 - - 14,942
Average attributed stockholders'
equity $ 224 101 203 103 143 - 774
=======================================================================================================
Small Real Cash Mgt.
Business Estate and Deposit
(In millions) Banking Lending Banking Services Total
- ------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 21 167 67 253 508
Provision for loan losses 1 19 - - 20
Noninterest income - - - 119 119
Noninterest expense 10 86 13 214 323
Income tax expense 4 24 21 61 110
- ------------------------------------------------------------------------------------------------------
Net income $ 6 38 33 97 174
- ------------------------------------------------------------------------------------------------------
Performance and other data
return on average attributed
stockholders equity (a) 14.64% 8.10 17.08 48.67 19.14
Average loans, net $ 2,290 25,827 10,178 - 38,295
Average deposits - - - 23,742 23,742
Average attributed stockholders'
equity $ 161 1,904 780 791 3,636
======================================================================================================
(Continued)
</TABLE>
T-4
<PAGE>
<TABLE>
<CAPTION>
TABLE 2
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- --------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 33 13 2 200 27 275
Provision for loan losses 2 1 - 7 1 11
Trading account profit (loss) 11 (6) 28 - - 33
Noninterest income 54 38 - 48 48 188
Noninterest expense 61 12 15 87 40 215
Income tax expense 12 12 6 59 14 103
- --------------------------------------------------------------------------------------------------------
Net income $ 23 20 9 95 20 167
- --------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 18.79% 38.63 48.69 19.68 61.00 23.63
Average loans, net $ 2,266 1,484 - 20,186 3,939 27,875
Average deposits 919 61 100 5,959 22 7,061
Average attributed stockholders'
equity $ 479 205 79 1,919 129 2,811
========================================================================================================
CONSUMER CAPITAL COMMERCIAL CAPITAL TREASURY/
(In millions) BANK MGT. BANK MARKETS NONBANK TOTAL
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 1,057 95 508 275 71 2,006
Provision for loan losses 196 - 20 11 (2) 225
Trading account profit - - - 33 3 36
Noninterest income 389 279 119 188 71 1,046
Noninterest expense 857 231 323 215 85 1,711
Income tax expense 149 55 110 103 (13) 404
- --------------------------------------------------------------------------------------------------------
Net income after
Merger-related and
Restructuring charges $ 244 88 174 167 75 748
After-tax merger-related and
restructuring charges - - - - - -
- --------------------------------------------------------------------------------------------------------
Net income before
merger-related and
restructuring charges $ 244 88 174 167 75 748
- --------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 26.58% 45.33 19.14 23.63 7.86 20.31
Average loans, net $ 61,747 3,438 38,295 27,875 3,494 134,849
Average deposits 80,138 14,942 23,742 7,061 6,277 132,160
Average attributed stockholders'
equity $ 3,604 774 3,636 2,811 3,787 14,612
========================================================================================================
(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.
The return on average attributed stockholders' equity for the Capital Management Mutual Funds unit is net of
the Internal Management Elimination.
</TABLE>
T-5
<PAGE>
<TABLE>
<CAPTION>
TABLE 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, 1998 1997
----------------- ------------------------------ ------------------
Third Second First Fourth Third
1998 1997 Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 13.90 X 13.67 13.67 14.71 13.37 13.32 13.72
X
Return on assets 1.24 % 1.46 1.72 0.46 1.52 1.14 1.50
- --------------------------------------------------------------------------------------------------------------
Return on stockholders' equity (b) 17.56 % 20.35 24.10 6.83 20.74 15.44 20.36
X
Earnings retained 50.46 % 60.70 58.42 (42.31) 56.75 47.43 61.71
- --------------------------------------------------------------------------------------------------------------
Internal capital growth (b) 8.86 % 12.36 14.08 (2.89) 11.77 7.32 12.56
- --------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings 37.29 % 38.63 41.18 40.22 42.26 40.77 38.29
Net income 49.54 % 39.30 41.58 142.31 43.25 52.57 38.29
- --------------------------------------------------------------------------------------------------------------
SELECTED RATIOS ON
Operating earnings
Return on assets 1.64 % 1.49 1.75 1.62 1.56 1.47 1.50
Return on stockholders' equity (b) 22.89 20.69 23.50 23.91 21.22 19.82 20.31
Net income
Return on stockholders' equity (b) 17.56 % 20.35 24.10 6.83 20.74 15.44 20.36
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on average balances.
(b) The determination of these ratios excludes average net unrealized gains or
losses on debt and equity securities.
<PAGE>
<TABLE>
<CAPTION>
TABLE 4
SELECTED QUARTERLY DATA
- -----------------------------------------------------------------------------------------------
1998 1997
-------------------------- -----------------
Third Second First Fourth Third
(Dollars in millions) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 1,820 2,065 1,805 1,450 1,220
Wholesale 2,418 1,949 2,175 1,393 981
- -----------------------------------------------------------------------------------------------
Total $ 4,238 4,014 3,980 2,843 2,201
- -----------------------------------------------------------------------------------------------
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 62,799 64,591 64,218 64,231 64,322
- -----------------------------------------------------------------------------------------------
FIRST UNION CORPORATION
OTHER DATA
ATMs 3,645 3,613 3,631 3,701 3,645
Employees 71,307 72,159 69,416 65,943 66,355
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Includes originations of affiliated banks.
T-6
<PAGE>
<TABLE>
<CAPTION>
TABLE 5
SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 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 $ 65 462 3,707 355 4,589 (385) - 4,204 9.61
U.S. Government agencies 207 18,471 4,649 2 23,329 (415) 1 22,915 4.46
CMOs 294 2,938 2,715 94 6,041 (100) 30 5,971 6.00
State, county and municipal 5 2 19 63 89 (1) 1 89 16.36
Other 1,920 576 287 1,221 4,004 (39) 41 4,006 3.71
- ------------------------------------------------------------------------------------------------------------------------
Total $ 2,491 22,449 11,377 1,735 38,052 (940) 73 37,185 5.28
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 2,491 22,449 11,376 792 37,108 (923) 58 36,243
Sundry securities - 1 943 944 (17) 15 942
- ------------------------------------------------------------------------------------------------------------------------
Total $ 2,491 22,449 11,377 1,735 38,052 (940) 73 37,185
- ------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 2,493 22,135 10,828 787 36,243
Sundry securities - - 1 941 942
- -----------------------------------------------------------------------------------------
Total $ 2,493 22,135 10,829 1,728 37,185
- -----------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.57 % 6.13 6.10 6.50 6.14
U.S. Government agencies 5.77 7.12 6.54 6.66 6.99
CMOs 4.22 6.72 6.41 8.48 6.49
State, county and municipal 9.29 6.97 6.86 6.95 7.06
Other 5.04 7.02 8.51 5.94 5.84
Consolidated 5.05 % 7.04 6.42 6.22 6.69
- -----------------------------------------------------------------------------------------
</TABLE>
Included in "U.S. Government agencies" and "Other" at September 30, 1998,
are $205 million of securities that are denominated in currencies other than the
U.S. dollar. The currency exchange rates were hedged utilizing both on- and
off-balance sheet instruments to minimize the exposure to currency revaluation
risks. At September 30, 1998, these securities had a weighted average maturity
of 3.34 years and a weighted average yield of 5.78 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.52
percent based on a weighted average funding cost differential of (.74) percent.
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The aging of mortgage-backed securities is based on
their weighted average maturities at September 30, 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 $6.8
billion that had a market value of $6.9 billion at September 30, 1998. There
were forward commitments to sell securities at a cost of $5.9 billion that had a
market value of $6.0 billion at September 30, 1998. Gross gains and losses
realized on the sale of debt securities for the nine months ended September 30,
1998, were $294 million and $54 million, respectively, and there was a $15
million gain related to sundry securities.
T-7
<PAGE>
<TABLE>
<CAPTION>
TABLE 6
INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 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 $ 5 10 3 4 22 - - 22 4.89
U.S. Government agencies - 1,000 5 1 1,006 29 - 1,035 3.53
CMOs 131 91 - - 222 4 - 226 1.03
State, county and municipal 69 224 227 282 802 112 (1) 913 7.50
Other 34 29 3 3 69 - - 69 1.85
- -------------------------------------------------------------------------------------------------------------------------
Total $ 239 1,354 238 290 2,121 145 (1) 2,265 4.73
- -----------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
Debt securities $ 239 1,354 238 290 2,121 145 (1) 2,265
Sundry securities - - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------
Total $ 239 1,354 238 290 2,121 145 (1) 2,265
- -------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 241 1,397 278 349 2,265
Sundry securities - - - - -
- --------------------------------------------------------------------------------------
Total $ 241 1,397 278 349 2,265
- --------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.41 % 5.19 6.10 6.23 5.56
U.S. Government agencies - 6.99 6.31 10.74 6.99
CMOs 8.61 7.07 - - 7.98
State, county and municipal 9.26 9.98 11.23 11.90 10.95
Other 7.19 7.27 7.14 5.18 7.14
Consolidated 8.53 % 7.48 11.00 11.75 8.58
- --------------------------------------------------------------------------------------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The aging of mortgage-backed securities is based on
their weighted average maturities at September 30, 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
September 30, 1998. Gross gains realized on repurchase agreement underdeliveries
and calls of investment securities for the nine months ended September 30, 1998,
were $4 million.
T-8
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
LOANS
- -------------------------------------------------------------------------------------------------
1998 1997
--------------------------- ------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL
Commercial, financial and agricultural $ 52,179 50,972 49,060 46,117 45,007
Real estate - construction and other 2,884 3,033 2,957 3,037 3,156
Real estate - mortgage 8,977 9,718 10,223 13,160 13,228
Lease financing 9,388 9,155 8,413 8,610 8,307
Foreign 4,289 4,365 3,843 3,885 3,278
- -------------------------------------------------------------------------------------------------
Total commercial 77,717 77,243 74,496 74,809 72,976
- -------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 25,522 26,221 27,997 28,998 30,131
Installment loans - Bankcard (a) 2,700 4,043 3,842 3,914 6,824
Installment loans - other 27,564 27,982 25,448 22,271 24,589
Vehicle leasing 5,955 5,692 5,490 5,331 4,971
- -------------------------------------------------------------------------------------------------
Total retail 61,741 63,938 62,777 60,514 66,515
- -------------------------------------------------------------------------------------------------
Total loans 139,458 141,181 137,273 135,323 139,491
Unearned income 3,769 3,791 3,459 3,636 3,525
- -------------------------------------------------------------------------------------------------
Loans, net $ 135,689 137,390 133,814 131,687 135,966
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
INTEREST-ONLY AND RESIDUAL CERTIFICATES
- -----------------------------------------------------------------------------------------------------------------------------------
September 30, 1998
-------------------------------------------------------------------------------------------
Home
Equity
Home Credit Lines of
(In millions) Equity SBA Student Auto Card Credit
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ACTIVITY
Balance, June 30, 1998 (a) $ 989 185 74 27 48 14
Originated residual interests 158 - - - 116 1
Purchased residual interests - - - - - -
Net accretion (amortization) (39) (9) 2 (5) (31) (2)
Net gain (loss) (15) - (1) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 1,093 176 75 22 133 13
- -----------------------------------------------------------------------------------------------------------------------------------
Home Equity Home
---------------------------- Equity
Fixed Variable Credit Lines of
Rate Rate SBA Student Auto Card Credit
- -----------------------------------------------------------------------------------------------------------------------------------
VALUATION ESTIMATES
Discount rate 11.00 % 11.00 11.00 10.10 11.20 10.19 11.00
Prepayment rate CPR-27.00% CPR-38.00 CPR-9.50 CPR-7.00 ABS-1.50 9 Months CPR-3.95
Weighted average cumulative
net loss assumption 350 bps 405 900 11 235 308 270
Weighted average coupon rate 11.49 % 10.30 10.62 8.11 10.31 18.50 9.47
Excess annual spread 388 bps 343 368 125 350 653 247
- -----------------------------------------------------------------------------------------------------------------------------------
Home Equity Home
------------------------- Equity
Fixed Variable Credit Lines of
(Dollars in millions) Rate Rate SBA Student Auto Card Credit
- -----------------------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA
Securitized principal serviced $ 9,875 3,603 721 2,271 920 3,592 257
Contractual delinquency ratios
30 - 59 days 2.49 % 2.91 1.05 2.72 1.97 9.98 0.44
60 - 89 days 1.08 1.36 0.33 1.75 0.74 0.46 0.10
90 - 179 days 1.37 1.94 0.79 1.80 0.77 0.75 0.13
180 - 359 days 0.92 0.10 0.89 1.01 0.09 - 0.16
Defaults
Foreclosures in process 2.69 4.05 1.68 n/a n/a n/a -
Real estate owned 0.78 % 1.04 0.51 n/a n/a n/a 0.03
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The June 30, 1998, Home Equity balance has been restated to reflect
subsequent refinements to the valuations.
n/a - Data not available or not meaningful.
T-9
<PAGE>
<TABLE>
<CAPTION>
TABLE 9
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ---------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------ ------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of quarter $ 1,870 1,863 1,847 2,175 2,181
Provision for loan losses 239 150 135 445 225
Allowance relating to loans acquired, transferred to
accelerated disposition or sold (40) 13 10 (579) -
Loan losses, net (187) (156) (129) (194) (231)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of quarter $ 1,882 1,870 1,863 1,847 2,175
- ---------------------------------------------------------------------------------------------------------------
(as a % of loans, net) 1.39 % 1.36 1.39 1.40 1.60
- ---------------------------------------------------------------------------------------------------------------
(as a % of nonaccrual and restructured loans) 267 % 235 210 211 247
- ---------------------------------------------------------------------------------------------------------------
(as a % of nonperforming assets) 228 % 206 186 186 218
- ---------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 98 63 37 70 37
Real estate - commercial construction and mortgage 1 2 9 11 12
Real estate - residential mortgage 8 6 11 15 9
Installment loans - Bankcard 58 67 56 90 144
Installment loans - other and Vehicle leasing 53 52 67 64 75
- ---------------------------------------------------------------------------------------------------------------
Total 218 190 180 250 277
- ---------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 9 7 24 26 13
Real estate - commercial construction and mortgage 3 - 5 7 5
Real estate - residential mortgage - - 1 2 3
Installment loans - Bankcard 6 4 4 7 11
Installment loans - other and Vehicle leasing 13 23 17 14 14
- ---------------------------------------------------------------------------------------------------------------
Total 31 34 51 56 46
- ---------------------------------------------------------------------------------------------------------------
Loan losses, net $ 187 156 129 194 231
- ---------------------------------------------------------------------------------------------------------------
(as % of average loans, net) (a) 0.55 % 0.47 0.39 0.58 0.68
- ---------------------------------------------------------------------------------------------------------------
(as % of average loans, net, excluding Bankcard) (a) 0.41 % 0.29 0.24 0.35 0.30
- ---------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 294 368 410 384 346
Commercial real estate loans 121 141 130 135 158
Consumer real estate loans 181 190 234 233 233
Installment loans 108 94 114 124 143
- ---------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 704 793 888 876 880
Restructured loans 2 1 1 2 1
Foreclosed properties 119 115 114 113 119
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 825 909 1,003 991 1,000
- ---------------------------------------------------------------------------------------------------------------
(as % of loans, net and foreclosed properties) 0.61 % 0.66 0.75 0.75 0.73
- ---------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 279 248 328 326 416
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
T-10
<PAGE>
<TABLE>
<CAPTION>
TABLE 10
INTANGIBLE ASSETS
- ----------------------------------------------------------------------------------------------
1998 1997
-------------------------- -----------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MORTGAGE AND OTHER SERVICING ASSETS $ 554 511 444 427 384
- ----------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 16 19 21 24 26
- ----------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 4,410 4,439 2,484 2,465 2,502
Deposit base premium 392 421 442 473 512
Other 303 309 5 10 12
- ----------------------------------------------------------------------------------------------
Total $ 5,105 5,169 2,931 2,948 3,026
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 11
FORECLOSED PROPERTIES
- ---------------------------------------------------------------------------------------------------------
1998 1997
----------------- --------------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreclosed properties $ 133 129 129 129 135
- ---------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, beginning of quarter 14 15 16 16 17
Provision for foreclosed properties - (1) - 1 -
Dispositions, net - - (1) (1) (1)
- ---------------------------------------------------------------------------------------------------------
Allowance for foreclosed properties, end of quarter 14 14 15 16 16
- ---------------------------------------------------------------------------------------------------------
FORECLOSED PROPERTIES, NET $ 119 115 114 113 119
- ---------------------------------------------------------------------------------------------------------
</TABLE>
T-11
<PAGE>
<TABLE>
<CAPTION>
TABLE 12
DEPOSITS
- ------------------------------------------------------------------------------------------------
1998 1997
--------------------------- -----------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CORE DEPOSITS
Noninterest-bearing $ 30,504 33,169 32,184 31,005 29,676
Savings and NOW accounts 33,344 33,938 35,104 37,281 36,432
Money market accounts 25,215 24,520 23,875 21,240 20,383
Other consumer time 36,805 38,053 37,930 37,324 38,806
- ------------------------------------------------------------------------------------------------
Total core deposits 125,868 129,680 129,093 126,850 125,297
Foreign 2,500 2,881 2,083 3,928 2,147
Other time 6,160 6,037 6,759 6,299 5,700
- ------------------------------------------------------------------------------------------------
Total deposits $ 134,528 138,598 137,935 137,077 133,144
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 13
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- -------------------------------------------------------------------------------------------
September 30, 1998
-------------------------
Time Other
(In millions) Certificates Time
- -------------------------------------------------------------------------------------------
<S> <C> <C>
MATURITY OF
3 months or less $ 6,234 -
Over 3 months through 6 months 2,330 -
Over 6 months through 12 months 3,028 -
Over 12 months 2,149 -
- -------------------------------------------------------------------------------------------
Total $ 13,741 -
- -------------------------------------------------------------------------------------------
</TABLE>
T-12
<PAGE>
<TABLE>
<CAPTION>
TABLE 14
LONG-TERM DEBT
- ----------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------- ----------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOTES AND DEBENTURES ISSUED BY THE
PARENT COMPANY
Notes
Floating rate extendible, due June 15, 2005 $ 10 10 10 10 10
6.60%, due June 15, 2000 249 249 249 249 249
Floating rate - - - 300 300
6-3/4% - - - 250 250
Subordinated notes
6.30%, Putable/Callable, due April 15, 2028 200 200 - - -
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
6.40%, due April 1, 2008 297 297 - - -
7-1/2%, due July 15, 2006 298 298 298 298 298
7%, due March 15, 2006 199 199 199 199 199
6-7/8%, due September 15, 2005 249 249 249 249 249
7.05%, due August 1, 2005 249 248 248 248 248
6-5/8%, due July 15, 2005 249 249 249 249 248
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 149 149 149 149 149
Fixed rate medium-term, varying rates and terms
to June 5, 2001 - 37 54 54 54
9.45%, due June 15, 1999 250 250 249 249 249
Subordinated debentures
6.55%, due October 15, 2035 249 249 249 249 249
7-1/2%, due April 15, 2035 247 247 247 246 246
6.824%/7.574%, due August 1, 2026 298 298 298 298 298
- ----------------------------------------------------------------------------------------------------------
Total notes and debentures issued by the Parent Company 4,667 4,703 4,222 4,771 4,770
- ----------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
T-13
<PAGE>
<TABLE>
<CAPTION>
Table 14
LONG-TERM DEBT
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------ -------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOTES OF SUBSIDIARIES
Notes
9-3/4%, due September 1, 2003 - 118 119 120 121
Variable rate medium-term, varying rates and terms
to November 5, 2001 1,144 1,309 1,550 1,640 1,615
Varying rates and terms to January 26, 2004 79 82 161 62 59
Floating rate - - 500 500 -
Senior notes from acquired companies, varying
rate and terms to April 15, 2004 569 1,059 150 150 150
Subordinated notes
Bank, varying rates and terms to December 15, 2036 6,712 2,367 1,611 1,205 973
7.95%, due December 1, 2007 100 100 - - -
6-3/4%, due November 15, 2006 200 200 198 199 199
6-5/8%, due March 15, 2005 175 175 174 174 174
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 150 150 149 149 149
7.30%, due December 1, 2002 150 150 - - -
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 150 150 150 150 150
9-5/8%, due June 1, 1999 100 100 100 100 100
Floating rate - - 100 100 100
Subordinated capital notes
9-5/8%, due June 15, 1999 75 75 75 75 75
9-7/8%, due May 15, 1999 75 75 75 75 75
8-1/2% - - - 149 149
10-1/2% collateralized mortgage obligations - - - - 31
- -------------------------------------------------------------------------------------------------------------------------
Total notes of subsidiaries 10,378 6,809 5,811 5,547 4,819
- -------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,186 1,685 1,928 1,385 1,570
4.556% auto securitization financing, due September 30, 2008 759 - - - -
Mortgage notes and other debt 9 10 10 16 17
Capitalized leases 41 43 32 33 33
- -------------------------------------------------------------------------------------------------------------------------
Total other debt 1,995 1,738 1,970 1,434 1,620
- -------------------------------------------------------------------------------------------------------------------------
Total $ 17,040 13,250 12,003 11,752 11,209
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-14
<PAGE>
<TABLE>
<CAPTION>
TABLE 15
CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Twelve 1998 1997
Months ---------------------------- ------------------
Ended
Sept. 30, Third Second First Fourth Third
(In millions) 1998 Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 14,823 16,526 15,806 15,269 14,823 14,094
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 2,610 995 249 790 576 748
Unrealized gain on debt and
equity securities, net 340 222 44 4 70 134
- -----------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,950 1,217 293 794 646 882
- -----------------------------------------------------------------------------------------------------------------
Purchase of common stock (2,765) - (1,908) (531) (326) (312)
Common stock issued for stock options exercised 1,055 23 279 340 413 79
Common stock issued through dividend
reinvestment plan 78 20 15 27 16 8
Common stock issued through public offering - - - - - 358
Common stock issued for acquisitions 2,540 - 2,291 249 - -
Cash dividends paid (1,311) (416) (250) (342) (303) (286)
- -----------------------------------------------------------------------------------------------------------------
Balance, end of period $ 17,370 17,370 16,526 15,806 15,269 14,823
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE 16
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------
1998 1997
------------------------------ -------------------
Third Second First Fourth Third
(In millions) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 13,610 12,854 14,500 13,972 12,604
Total capital 21,401 20,731 21,911 21,585 20,231
Adjusted risk-based assets 182,105 182,643 167,348 165,802 153,278
Adjusted leverage ratio assets $ 224,189 213,866 207,973 197,075 183,359
Ratios
Tier 1 capital 7.47 % 7.04 8.66 8.43 8.22
Total capital 11.75 11.35 13.09 13.02 13.20
Leverage 6.07 6.01 6.97 7.09 6.87
STOCKHOLDERS' EQUITY TO ASSETS (a)
Quarter-end 7.40 7.22 7.19 7.42 7.31
Average 7.32 % 6.80 7.48 7.51 7.29
- ----------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank 7.49 % 7.16 7.49 6.97 7.13
First Union Bank of Delaware 16.11 50.55 13.75 11.83 13.72
First Union Home Equity Bank 13.51 12.27 11.41 10.95 10.23
Total capital
First Union National Bank 10.38 10.06 10.64 10.20 10.83
First Union Bank of Delaware 16.56 50.97 14.27 13.09 14.97
First Union Home Equity Bank 15.78 14.48 13.61 13.20 12.39
Leverage
First Union National Bank 6.35 6.23 5.90 6.02 5.88
First Union Bank of Delaware 18.90 23.87 6.63 6.24 8.31
First Union Home Equity Bank 11.22 % 10.75 10.48 10.16 9.12
- ----------------------------------------------------------------------------------------------------
</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 CoreStates acquisition.
(b) The amounts presented herein have not been restated to reflect acquired
banks.
T-15
<PAGE>
<TABLE>
<CAPTION>
TABLE 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (A)
- --------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------- ------------------
Maturity
September 30, 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 $ 18,194 6.50 % 5.51 % 2.69 Converts floating rate loans to fixed
Carrying amount $ 78 rate. Adds to liability sensitivity.
Unrealized gross gain 494 Similar characteristics to a fixed
Unrealized gross loss (4) income security funded with
variable rate liabilities. Includes
$2.1 billion of callable swaps
expected to mature in or before
December 1999 if swap rates are below
6.99 percent and $350 million in
foreign rate swaps, $240 million
maturing in September 2000 and $110
million maturing in September 2001.
-------
Total 568
-------
Forward interest rate swaps 986 6.37 - 2.33 Converts floating rate loans to fixed
Carrying amount - rates in future periods. Effective
Unrealized gross gain 29 December 1998 with $725 million
Unrealized gross loss - of purchased put options on forward
swaps referenced under "Rate
Sensitivity Hedges" linked to this
item.
-------
Total 29
-------
Interest rate floors 995 6.27 5.65 0.87 Paid a premium to convert floating
Carrying amount 8 rate loans to fixed rate when 3
Unrealized gross gain 3 month LIBOR is below an average
Unrealized gross loss - of 6.27 percent.
-------
Total 11
-------
Periodic caps 352 - 7.87 7.67 Paid a premium to convert capped
Carrying amount 4 adjustable rate mortgage loans to
Unrealized gross gain - floating rate.
Unrealized gross loss (4)
-------
Total -
-------
Purchased options on
Forward swaps 130 - 7.74 4.95 Paid a premium to convert fixed rate
Carrying amount 2 assets to floating rate if the 3 year
Unrealized gross gain - swap rate is above 7.74 percent in
Unrealized gross loss (2) August 2003.
-------
Total -
-------
Interest rate collars 6,100 7.03/6.00 5.50 9.81 Paid a premium to purchase $6.0
Carrying amount 127 billion of collars to convert floating
Unrealized gross gain 102 rate loans to fixed rate when 3
Unrealized gross loss - month LIBOR is below 6.00 percent
(purchased floor) or above 7.00
percent (sold cap). Purchased a zero
cost collar to convert $100 million of
floating rate loans to fixed rate when
3 month LIBOR is below 6.00 percent
(purchased floor) or above 8.80
percent (sold cap).
-------
Total 229
- ------------------------------------ -------
Total asset rate
conversions $ 26,757 6.49 % 5.55 % 4.31 $ 837
- -----------------------------------------------------------------------
</TABLE>
(Continued)
T-16
<PAGE>
<TABLE>
<CAPTION>
TABLE 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (A)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------------- -------------------
Maturity
September 30, 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 $ 9,057 6.79 % 5.65 % 5.33 Converts $4.7 billion of fixed rate
Carrying amount $ 17 long-term debt to floating rate by
Unrealized gross gain 640 matching the terms of the swap to
Unrealized gross loss (32) the debt issue. Also converts $1.0
billion of fixed rate CDs to
variable rate, $2.4 billion of fixed
rate bank notes to floating rate and
$1.0 billion of fixed rate capital
trust securities to variable rate.
-------
Total 625
-------
Interest rate floors 150 4.00 - 4.81 Offsets a corresponding rate floor
Carrying amount 1 in long-term debt.
Unrealized gross gain -
Unrealized gross loss -
-------
Total 1
-------
Purchased options on
Forward swaps 20 - 7.75 4.92 Paid a premium to convert floating
Carrying amount - rate debt to fixed rate if the 3 year
Unrealized gross gain - swap rate is above 7.75 percent in
Unrealized gross loss - August 2003.
-------
Total -
-------
Forward interest rate swaps 49 6.10 - 2.29 Converts fixed rate debt to floating
Carrying amount - rate in future periods. Effective
Unrealized gross gain 1 in January 1999.
Unrealized gross loss -
-------
Total 1
- ----------------------------------------------- -------
Total liability rate
conversions $ 9,276 6.74 % 5.65 % 5.30 $ 627
- --------------------------------------------------------------------------------------------
(Continued)
</TABLE>
T-17
<PAGE>
<TABLE>
<CAPTION>
TABLE 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -----------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate Estimated
--------------- ----------------
Maturity
September 30, 1998 Notional In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVITY
HEDGES
Purchased put options on
forward swaps $ 725 - % 5.10 % 0.22 Paid a premium for the right to
Carrying amount $ 1 terminate $725 million of forward
Unrealized gross gain - interest rate swaps based on
Unrealized gross loss (1) interest rates in effect in December
1998. Reduces liability sensitivity.
-------
Total -
-------
Interest rate caps (LIBOR) 9,969 - 6.26 1.21 Paid a premium for the right to lock
Carrying amount 8 in 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps.
Unrealized gross loss (8)
-------
TOTAL -
-------
Interest rate caps (CMT) 2,200 - 5.70 3.21 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 (25) liabilities to fixed rate.
-------
Total 1
-------
Long eurudollar futures 2,000 6.62 - 0.58 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 - fixed income security funded with
variable rate liabilities. $500 million
effective December 1998, March,
June and September 1999.
-------
Total 10
- ------------------------------------------------------ -------
Total rate sensitivity
hedges $ 14,894 6.62 % 6.10 % 1.37 $ 11
- -----------------------------------------------------------------------------------------
</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 September
30, 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-18
<PAGE>
<TABLE>
<CAPTION>
TABLE 18
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (A)
- ---------------------------------------------------------------------------------------------------------------------
September 30, 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 $ 3,213 11,619 3,804 7,641 480 26,757
Weighted average receive rate 6.07 % 6.71 6.29 6.41 6.49 6.49
Estimated fair value $ 26 353 138 267 53 837
- ---------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 1,379 789 1,929 4,829 350 9,276
Weighted average receive rate 6.07 % 7.21 6.55 6.95 6.06 6.74
Estimated fair value $ 9 25 110 461 22 627
- ---------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 2,785 9,866 2,243 - - 14,894
Weighted average receive rate 4.86 % - - - - 6.62
Estimated fair value $ 10 - 1 - - 11
- ---------------------------------------------------------------------------------------------------------------------
</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
17.
T-19
<PAGE>
<TABLE>
<CAPTION>
TABLE 19
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (A)
- ---------------------------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 17,714 11,422 20,880 50,016
Additions 10,623 1,361 9,976 21,960
Maturities/Amortizations (1,765) (2,140) (14,555) (18,460)
Terminations/Redesignations 185 (1,367) (1,407) (2,589)
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $ 26,757 9,276 14,894 50,927
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-20
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- -----------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1998 SECOND QUARTER 1998
---------------------------- ----------------------------------
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 $ 1,752 25 5.76 % $ 2,872 43 5.88 %
Federal funds sold and securities
purchased under resale agreements 14,331 189 5.19 11,842 151 5.18
Trading account assets (a) 10,235 168 6.51 7,655 109 5.76
Securities available for sale (a) 36,677 608 6.64 35,593 590 6.61
Investment securities (a)
U.S. Government and other 1,366 25 7.26 1,866 32 6.89
State, county and municipal 812 21 10.41 907 23 10.06
- ----------------------------------------------------------------------- ---------------------
Total investment securities 2,178 46 8.43 2,773 55 7.92
- ----------------------------------------------------------------------- ---------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 50,049 984 7.80 49,717 991 7.99
Real estate - construction and other 2,921 62 8.50 3,001 63 8.49
Real estate - mortgage 9,523 210 8.75 9,988 212 8.52
Lease financing 4,563 131 11.48 4,407 124 11.22
Foreign 4,257 75 7.02 4,123 69 6.69
- ----------------------------------------------------------------------- ---------------------
Total commercial 71,313 1,462 8.14 71,236 1,459 8.21
- ----------------------------------------------------------------------- ---------------------
Retail
Real estate - mortgage 26,072 488 7.48 26,300 495 7.54
Installment loans - Bankcard (c) 3,957 156 15.80 3,931 149 15.14
Installment loans - other and
Vehicle leasing 33,708 780 9.20 30,679 704 9.19
- ----------------------------------------------------------------------- ---------------------
Total retail 63,737 1,424 8.91 60,910 1,348 8.86
- ----------------------------------------------------------------------- ---------------------
Total loans 135,050 2,886 8.50 132,146 2,807 8.51
- ----------------------------------------------------------------------- ---------------------
Total earning assets 200,223 3,922 7.80 192,881 3,755 7.80
---------------- -----------------
Cash and due from banks 8,780 9,282
Other assets 20,120 16,777
- ------------------------------------------------------------ ---------
Total assets $ 229,123 $ 218,940
- ------------------------------------------------------------ ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 33,874 229 2.68 34,358 226 2.64
Money market accounts 25,037 224 3.54 24,605 213 3.48
Other consumer time 37,501 506 5.36 37,927 505 5.35
Foreign 3,354 45 5.30 2,523 32 5.05
Other time 6,068 93 6.05 6,596 110 6.67
- ----------------------------------------------------------------------- ---------------------
Total interest-bearing deposits 105,834 1,097 4.11 106,009 1,086 4.11
Federal funds purchased and securities
sold under repurchase agreements 35,902 473 5.23 34,775 445 5.13
Commercial paper 1,742 24 5.44 2,066 27 5.33
Other short-term borrowings 14,642 201 5.47 9,273 121 5.21
Long-term debt 14,335 223 6.24 12,609 201 6.36
- ----------------------------------------------------------------------- ---------------------
Total interest-bearing liabilities 172,455 2,018 4.65 164,732 1,880 4.57
---------------- -----------------
Noninterest-bearing deposits 30,380 31,032
Other liabilities 7,787 6,560
Guaranteed preferred beneficial interests 1,735 1,735
Stockholders' equity 16,766 14,881
- ------------------------------------------------------------ ---------
Total liabilities and $
stockholders' equity $ 229,123 218,940
- ------------------------------------------------------------ ---------
Interest income and rate earned $ 3,922 7.80 % $ 3,755 7.80 %
Interest expense and equivalent rate paid 2,018 4.01 1,880 3.91
- -------------------------------------------------------------------------------- -------------------------------
Net interest income and margin $ 1,904 3.79 % $ 1,875 3.89 %
- -------------------------------------------------------------------------------- -------------------------------
</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-21
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
FIRST QUARTER 1998 FOURTH QUARTER 1997 THIRD 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>
$ 2,971 41 5.65 % $ 3,718 55 5.75 % $ 3,413 49 5.70 %
9,728 129 5.35 7,609 106 5.46 7,691 106 5.48
5,835 90 6.20 6,736 109 6.45 5,618 94 6.65
30,046 499 6.68 21,590 363 6.76 21,122 366 6.87
2,403 40 6.69 2,257 43 7.07 2,418 42 7.12
986 24 9.74 1,034 27 9.46 1,069 25 9.38
---------------- ----------------- ----------------
3,389 64 7.57 3,291 70 7.82 3,487 67 7.81
---------------- ----------------- ----------------
48,035 955 8.07 44,948 891 7.86 43,430 880 8.05
2,973 64 8.63 3,124 68 8.56 3,231 74 9.19
10,414 218 8.50 13,020 288 8.80 13,518 296 8.68
4,249 113 10.65 4,380 115 10.45 4,398 113 10.19
4,003 66 6.68 3,668 61 6.64 3,415 55 6.35
---------------- ----------------- ----------------
69,674 1,416 8.23 69,140 1,423 8.17 67,992 1,418 8.28
---------------- ----------------- ----------------
27,555 531 7.71 29,890 579 7.68 30,671 598 7.74
3,951 169 17.10 6,646 273 16.28 6,997 272 15.44
30,034 691 9.30 28,443 686 9.57 29,189 713 9.69
---------------- ----------------- ----------------
61,540 1,391 9.09 64,979 1,538 9.39 66,857 1,583 9.40
---------------- ----------------- ----------------
131,214 2,807 8.63 134,119 2,961 8.76 134,849 3,001 8.83
---------------- ----------------- ----------------
183,183 3,630 7.99 177,063 3,664 8.21 176,180 3,683 8.30
8,976 ---------------- 8,880 ------------------ 8,499 --------------
18,650 13,982 12,835
------- -------- --------
$ 210,809 $ 199,925 $ 197,514
------- -------- --------
35,336 236 2.70 32,023 234 2.90 33,170 229 2.74
23,070 190 3.34 25,553 193 2.99 23,936 181 3.01
37,403 489 5.30 37,583 496 5.23 39,407 517 5.21
2,856 38 5.44 2,351 34 5.73 2,629 35 5.20
6,507 106 6.62 6,611 102 6.14 5,518 85 6.12
---------------- ----------------- ----------------
105,172 1,059 4.08 104,121 1,059 4.03 104,660 1,047 3.97
30,425 373 4.98 24,010 306 5.06 23,523 301 5.08
1,939 26 5.43 1,931 33 6.81 2,073 28 5.47
7,289 99 5.48 6,341 96 6.00 6,951 104 5.95
11,900 185 6.23 11,636 187 6.38 10,694 177 6.51
---------------- ----------------- ----------------
156,725 1,742 4.50 148,039 1,681 4.51 147,901 1,657 4.44
29,402 --------------- 28,865 ------------------ 27,500 --------------
7,176 6,275 5,988
1,735 1,733 1,733
15,771 15,013 14,392
------- -------- --------
$ $ 199,925 $ 197,514
-------- --------
210,809
-------
$ 3,630 7.99 % $ 3,664 8.21 % $ 3,683 8.30 %
1,742 3.85 1,681 3.77 1,657 3.73
---------------- ------------------ ---------------
$ 1,888 4.14 % $ 1,983 4.44 % $ 2,026 4.57 %
---------------- ------------------ ---------------
</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-22
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED 1998 SIX MONTHS ENDED 1998
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 2,527 109 5.76 % $ 2,921 84 5.77 %
Federal funds sold and securities
purchased under resale agreements 11,984 469 5.23 10,791 280 5.26
Trading account assets (a) 7,925 367 6.19 6,750 199 5.95
Securities available for sale (a) 34,129 1,697 6.63 32,835 1,089 6.64
Investment securities (a)
U.S. Government and other 1,875 97 6.90 2,134 72 6.78
State, county and municipal 901 68 10.06 946 47 9.90
- ----------------------------------------------------------------------------- ----------------------
Total investment securities 2,776 165 7.93 3,080 119 7.74
- ----------------------------------------------------------------------------- ----------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 49,274 2,930 7.95 48,880 1,946 8.03
Real estate - construction and other 2,964 189 8.54 2,987 127 8.56
Real estate - mortgage 9,972 640 8.58 10,200 430 8.51
Lease financing 4,408 368 11.12 4,328 237 10.94
Foreign 4,129 210 6.80 4,064 135 6.69
- ----------------------------------------------------------------------------- ----------------------
Total commercial 70,747 4,337 8.19 70,459 2,875 8.22
- ----------------------------------------------------------------------------- ----------------------
Retail
Real estate - mortgage 26,637 1,514 7.58 26,924 1,026 7.63
Installment loans - Bankcard (c) 3,946 474 16.01 3,941 318 16.12
Installment loans - other and
Vehicle leasing 31,487 2,175 9.23 30,358 1,395 9.25
- ----------------------------------------------------------------------------- ----------------------
Total retail 62,070 4,163 8.95 61,223 2,739 8.98
- ----------------------------------------------------------------------------- ----------------------
Total loans 132,817 8,500 8.55 131,682 5,614 8.57
- ----------------------------------------------------------------------------- ----------------------
Total earning assets 192,158 11,307 7.86 188,059 7,385 7.89
Cash and due from banks 9,012 ---------------------- 9,129 ------------------
Other assets 18,521 17,709
- -------------------------------------------------------------- -----------
Total assets $ 219,691 $ 214,897
- -------------------------------------------------------------- -----------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 34,518 691 2.68 34,845 462 2.67
Money market accounts 24,244 627 3.46 23,842 403 3.41
Other consumer time 37,611 1,500 5.33 37,666 994 5.32
Foreign 2,913 115 5.27 2,689 70 5.26
Other time 6,388 309 6.46 6,551 216 6.65
- ----------------------------------------------------------------------------- ----------------------
Total interest-bearing deposits 105,674 3,242 4.10 105,593 2,145 4.10
Federal funds purchased and securities
sold under repurchase agreements 33,721 1,291 5.12 32,612 818 5.06
Commercial paper 1,915 77 5.40 2,003 53 5.38
Other short-term borrowings 10,428 421 5.40 8,287 220 5.33
Long-term debt 12,957 609 6.27 12,256 386 6.29
- ----------------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 164,695 5,640 4.58 160,751 3,622 4.54
Noninterest-bearing deposits 30,275 --------------------- 30,222 ------------------
Other liabilities 7,176 6,866
Guaranteed preferred beneficial interests 1,735 1,735
Stockholders' equity 15,810 15,323
- -------------------------------------------------------------- -----------
Total liabilities and
stockholders' equity $ 219,691 $ 214,897
- -------------------------------------------------------------- -----------
Interest income and rate earned $ 11,307 7.86 % $ 7,385 7.89 %
Interest expense and equivalent rate paid 5,640 3.92 3,622 3.88
- ------------------------------------------------------------------------------------------ -----------------------------------
Net interest income and margin $ 5,667 3.94 % $ 3,763 4.01 %
- ------------------------------------------------------------------------------------------ -----------------------------------
</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-23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
YEAR ENDED 1997 NINE MONTHS ENDED 1997
- -------------------------------- ------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,184 182 5.68 % $ 3,003 127 5.65 %
7,219 399 5.51 7,088 293 5.53
5,174 341 6.59 4,647 232 6.67
20,844 1,423 6.83 20,600 1,060 6.88
2,478 179 7.22 2,545 136 7.15
1,085 105 9.67 1,104 78 9.51
- ---------------------- ---------------------
3,563 284 7.97 3,649 214 7.86
- ---------------------- ---------------------
43,118 3,464 8.03 42,500 2,573 8.10
3,295 293 8.89 3,352 225 8.99
13,619 1,180 8.67 13,638 892 8.74
4,199 423 10.09 4,138 308 9.96
3,349 215 6.43 3,243 154 6.34
- ---------------------- ---------------------
67,580 5,575 8.25 66,871 4,152 8.30
- ---------------------- ---------------------
31,241 2,426 7.77 31,880 1,847 7.75
7,005 1,058 15.11 7,124 785 14.74
28,691 2,773 9.66 28,776 2,087 9.70
- ---------------------- ---------------------
66,937 6,257 9.35 67,780 4,719 9.31
- ---------------------- ---------------------
134,517 11,832 8.80 134,651 8,871 8.81
- ---------------------- ---------------------
174,501 14,461 8.29 173,638 10,797 8.32
8,695 ----------------- 8,633 ----------------
12,897 12,530
- ----------- -----------
$ 196,093 $ 194,801
- ----------- -----------
33,104 898 2.71 33,469 664 2.66
24,033 694 2.89 23,521 501 2.85
39,752 2,067 5.20 40,482 1,571 5.19
3,092 164 5.29 3,341 130 5.19
5,377 325 6.05 4,962 223 6.01
- ---------------------- ---------------------
105,358 4,148 3.94 105,775 3,089 3.91
22,759 1,147 5.04 22,336 841 5.03
1,948 112 5.76 1,953 79 5.41
5,680 338 5.96 5,458 242 5.94
10,916 707 6.47 10,673 520 6.51
- ---------------------- ---------------------
146,661 6,452 4.40 146,195 4,771 4.36
27,489 ----------------- 27,025 ---------------
5,823 5,672
1,680 1,662
14,440 14,247
- ----------- -----------
$ 196,093 $ 194,801
- ----------- -----------
$ 14,461 8.29 % $ 10,797 8.32 %
6,452 3.70 4,771 3.67
-------------------- --------------------
$ 8,009 4.59 % $ 6,026 4.65 %
-------------------- --------------------
</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-24
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------- -------------------
Third Second First Fourth Third
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 9,491 9,708 10,554 10,275 9,827
Interest-bearing bank balances 1,872 2,139 2,708 3,832 3,248
Federal funds sold and securities
purchased under resale agreements 15,090 11,753 11,656 7,781 7,037
- -----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 26,453 23,600 24,918 21,888 20,112
- -----------------------------------------------------------------------------------------------------------------
Trading account assets 12,123 9,774 6,985 5,952 8,152
Securities available for sale 38,052 36,798 34,252 23,524 21,135
Investment securities 2,121 2,229 3,227 3,526 3,681
Loans, net of unearned income 135,689 137,390 133,814 131,687 135,966
Allowance for loan losses (1,882) (1,870) (1,863) (1,847) (2,175)
- -----------------------------------------------------------------------------------------------------------------
Loans, net 133,807 135,520 131,951 129,840 133,791
- -----------------------------------------------------------------------------------------------------------------
Premises and equipment 5,079 5,088 5,037 4,863 4,855
Due from customers on acceptances 1,026 1,091 1,156 1,496 1,629
Other intangible assets 5,105 5,169 2,931 2,948 3,026
Other assets 10,814 9,727 9,487 11,698 6,385
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 234,580 228,996 219,944 205,735 202,766
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 30,504 33,169 32,184 31,005 29,676
Interest-bearing deposits 104,024 105,429 105,751 106,072 103,468
- -----------------------------------------------------------------------------------------------------------------
Total deposits 134,528 138,598 137,935 137,077 133,144
Short-Term borrowings 51,807 48,897 43,521 31,681 33,784
Bank acceptances outstanding 1,037 1,106 1,151 1,496 1,627
Other liabilities 11,062 8,884 7,793 6,725 6,445
Long-term debt 17,040 13,250 12,003 11,752 11,209
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 215,474 210,735 202,403 188,731 186,209
- -----------------------------------------------------------------------------------------------------------------
Guaranteed prederred beneficial interests in
junior subordinated deferrable interest debentures 1,736 1,735 1,735 1,735 1,734
- -----------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2 billion shares 3,301 3,294 3,243 3,203 3,197
Paid-in capital 4,125 4,089 1,439 1,582 1,484
Retained earnings 9,388 8,809 10,834 10,198 9,926
Accumulated other comprehensive income, net 556 334 290 286 216
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,370 16,526 15,806 15,269 14,823
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 234,580 228,996 219,944 205,735 202,766
- -----------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale-amortized cost $ 37,185 36,280 33,934 23,080 20,797
Investment securities-market value 2,265 2,365 3,315 3,670 3,829
Stockholders' equity, net of unrealized
gain on debt and equity securities $ 17,370 16,526 15,806 15,269 14,823
Shares outstanding (In thousands) 990,373 988,150 972,775 960,984 958,977
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
T-25
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------- --------------------
Third Second First Fourth Third
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,869 2,794 2,792 2,946 2,992
Interest and dividends on securities available for sale 604 583 496 361 364
Interest and dividends on investment securities
Taxable income 24 32 40 42 41
Nontaxable income 15 16 17 18 17
Trading account interest 165 108 87 107 94
Other interest income 214 194 170 161 155
- -------------------------------------------------------------------------------------------------------------------
Total interest income 3,891 3,727 3,602 3,635 3,663
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,097 1,086 1,059 1,059 1,047
Interest on short-term borrowings 698 593 498 435 433
Interest on long-term debt 223 201 185 187 177
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 2,018 1,880 1,742 1,681 1,657
- -------------------------------------------------------------------------------------------------------------------
Net interest income 1,873 1,847 1,860 1,954 2,006
Provision for loan losses 239 150 135 445 225
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,634 1,697 1,725 1,509 1,781
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profit (loss) (55) 66 35 100 36
Service charges on deposit accounts 284 281 283 290 283
Mortgage banking income 91 121 69 76 62
Capital management income 431 423 413 278 272
Securities available for sale transactions 211 21 23 18 15
Investment security transactions - 4 - - 2
Fees for other banking services 64 70 70 56 64
Equipment lease rental income 43 42 46 43 48
Sundry income 775 529 438 304 300
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,844 1,557 1,377 1,165 1,082
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 877 862 822 783 711
Other benefits 165 182 162 150 156
- -------------------------------------------------------------------------------------------------------------------
Personnel expense 1,042 1,044 984 933 867
Occupancy 150 139 137 131 138
Equipment 174 172 183 165 167
Advertising 69 49 37 36 33
Telecommunications 60 47 46 45 40
Travel 55 50 40 40 30
Postage, printing and supplies 67 63 61 59 53
Professional fees 42 40 70 97 71
External data processing 25 23 20 22 25
Other intangible amortization 99 76 75 80 78
Merger-related and restructuring charges 24 954 29 225 -
Sundry expense 176 220 213 333 209
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 1,983 2,877 1,895 2,166 1,711
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 1,495 377 1,207 508 1,152
Income taxes (benefits) (a) 500 128 417 (68) 404
- -------------------------------------------------------------------------------------------------------------------
Net income $ 995 249 790 576 748
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 1.02 0.27 0.82 0.61 0.79
Diluted earnings 1.01 0.26 0.81 0.60 0.78
Cash dividends $ 0.42 0.37 0.37 0.32 0.32
AVERAGE SHARES (In thousands)
Basic 981,659 949,750 965,120 960,596 946,354
Diluted 993,208 962,160 977,155 972,051 959,013
- -------------------------------------------------------------------------------------------------------------------
</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-26
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------
Nine Months Ended Six Months Ended
September 30, June 30,
----------------------------------------
(In millions, except per share data) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 8,455 8,841 5,586 5,849
Interest and dividends on securities available for sale 1,683 1,051 1,079 687
Interest and dividends on investment securities
Taxable income 96 134 72 93
Nontaxable income 48 52 33 35
Trading account interest 360 229 195 135
Other interest income 578 420 364 265
- -------------------------------------------------------------------------------------------------------
Total interest income 11,220 10,727 7,329 7,064
- -------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,242 3,089 2,145 2,042
Interest on short-term borrowings 1,789 1,162 1,091 729
Interest on long-term debt 609 520 386 343
- -------------------------------------------------------------------------------------------------------
Total interest expense 5,640 4,771 3,622 3,114
- -------------------------------------------------------------------------------------------------------
Net interest income 5,580 5,956 3,707 3,950
Provision for loan losses 524 658 285 433
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,056 5,298 3,422 3,517
- -------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 46 152 101 116
Service charges on deposit accounts 848 829 564 546
Mortgage banking income 281 180 190 118
Capital management income 1,267 800 836 528
Securities available for sale transactions 255 34 44 19
Investment security transactions 4 3 4 1
Fees for other banking services 204 207 140 143
Equipment lease rental income 131 144 88 96
Sundry income 1,742 808 967 508
- -------------------------------------------------------------------------------------------------------
Total noninterest income 4,778 3,157 2,934 2,075
- -------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 2,561 2,126 1,684 1,415
Other benefits 509 491 344 335
- -------------------------------------------------------------------------------------------------------
Personnel expense 3,070 2,617 2,028 1,750
Occupancy 426 413 276 275
Equipment 529 484 355 317
Advertising 155 105 86 72
Telecommunications 153 123 93 83
Travel 145 85 90 55
Postage, printing and supplies 191 166 124 113
Professional fees 152 195 110 124
External data processing 68 72 43 47
Other intangible amortization 250 235 151 157
Merger-related and restructuring charges 1,007 59 983 59
Sundry expense 609 616 433 407
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 6,755 5,170 4,772 3,459
- -------------------------------------------------------------------------------------------------------
Income before income taxes 3,079 3,285 1,584 2,133
Income taxes 1,045 1,152 545 748
- -------------------------------------------------------------------------------------------------------
Net income $ 2,034 2,133 1,039 1,385
- -------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 2.11 2.23 1.09 1.44
Diluted earnings 2.08 2.20 1.07 1.42
Cash dividends $ 1.16 0.90 0.74 0.58
AVERAGE SHARES (In thousands)
Basic 965,506 956,476 957,430 961,612
Diluted 976,826 967,755 969,180 972,830
- -------------------------------------------------------------------------------------------------------
</TABLE>
T-27
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,034 2,133
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 145 19
Provision for loan losses 524 658
Provision for foreclosed properties (6) 1
Gain on sale of mortgage servicing rights (17) -
Securities available for sale transactions (255) (34)
Investment securities transactions (4) (3)
Depreciation and amortization 783 687
Trading account assets, net (4,956) (3,527)
Mortgage loans held for resale (511) (212)
Gain on sale of premises and equipment (9) -
Gain on sale of assets held for sale (2) (5)
Other assets, net 1,883 (610)
Other liabilities, net 2,721 645
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,330 (248)
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 12,602 7,855
Maturities of securities available for sale 3,602 1,733
Purchases of securities available for sale (30,165) (11,195)
Calls and underdeliveries of investment securities 387 4
Maturities of investment securities 1,275 1,137
Purchases of investment securities (255) (619)
Origination of loans, net (1,326) (1,935)
Sales of premises and equipment 238 155
Purchases of premises and equipment (783) (486)
Other intangible assets, net (147) 30
Purchase of bank owned separate account life insurance (76) -
Cash equivalents acquired, net of purchases of banking organizations 366 6
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (14,282) (3,315)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net (2,800) (3,314)
Securities sold under repurchase agreements and other short-term borrowings, net 17,894 6,165
Issuances of guaranteed preferred beneficial interests - 945
Issuances of long-term debt 6,986 1,980
Payments of long-term debt (2,820) (1,585)
Sales of common stock 704 744
Purchases of common stock (2,439) (2,034)
Cash dividends paid (1,008) (838)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,517 2,063
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,565 (1,500)
Cash and cash equivalents, beginning of year 21,888 21,612
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 26,453 20,112
- --------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 3 8
Issuance of common stock for acquisitions 2,540 4
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale 423 290
Other assets (deferred income taxes) $ 153 103
- --------------------------------------------------------------------------------------------------------------
</TABLE>
T-28
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,491
<INT-BEARING-DEPOSITS> 1,872
<FED-FUNDS-SOLD> 15,090
<TRADING-ASSETS> 12,123
<INVESTMENTS-HELD-FOR-SALE> 38,052
<INVESTMENTS-CARRYING> 2,121
<INVESTMENTS-MARKET> 2,265
<LOANS> 139,458
<ALLOWANCE> (1,882)
<TOTAL-ASSETS> 234,580
<DEPOSITS> 134,528
<SHORT-TERM> 51,807
<LIABILITIES-OTHER> 11,062
<LONG-TERM> 17,040
0
0
<COMMON> 3,301
<OTHER-SE> 14,069
<TOTAL-LIABILITIES-AND-EQUITY> 234,580
<INTEREST-LOAN> 8,455
<INTEREST-INVEST> 1,827
<INTEREST-OTHER> 578
<INTEREST-TOTAL> 11,220
<INTEREST-DEPOSIT> 3,242
<INTEREST-EXPENSE> 5,640
<INTEREST-INCOME-NET> 5,580
<LOAN-LOSSES> 524
<SECURITIES-GAINS> 259
<EXPENSE-OTHER> 6,755
<INCOME-PRETAX> 3,079
<INCOME-PRE-EXTRAORDINARY> 3,079
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,034
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 2.08
<YIELD-ACTUAL> 3.94
<LOANS-NON> 704
<LOANS-PAST> 279
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,847
<CHARGE-OFFS> 588
<RECOVERIES> 116
<ALLOWANCE-CLOSE> 1,882
<ALLOWANCE-DOMESTIC> 1,096
<ALLOWANCE-FOREIGN> 18
<ALLOWANCE-UNALLOCATED> 768
</TABLE>
