- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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.
967,899,445 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of April 30, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
First Union Corporation (the "Corporation" or "FUNC") may from time to time
make written or oral "forward-looking statements", including statements
contained in the Corporation's filings with the Securities and Exchange
Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto
and thereto), in its reports to stockholders and in other communications by the
Corporation, which are made in good faith by the Corporation pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include, among others, statements with
respect to the Corporation's beliefs, plans, objectives, goals, guidelines,
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 that expressed in
such forward-looking statements: the strength of the United States economy in
general and the strength of the local economies in which the Corporation
conducts operations; the effects of, and changes in, trade, monetary and fiscal
policies 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 competitive new products and services of
the Corporation and the acceptance of these products and services by new and
existing customers; the willingness of customers to substitute competitors'
products and services for the Corporation's products and services and vice
versa; the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
technological changes; the effect of acquisitions, including, without
limitation, the failure to achieve the expected revenue growth and/or expense
savings from such acquisitions; the growth and profitability of the
Corporation's noninterest or fee income being less than expected; unanticipated
regulatory or judicial proceedings; changes in consumer spending and saving
habits; and the success of the Corporation at managing the risks involved in the
foregoing.
The Corporation cautions that the foregoing list of important factors is
not exclusive. The Corporation 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
March 31, 1999, March 31, 1998, and December 31, 1998, respectively, set forth
on page T-22 of the Corporation's First Quarter Financial Supplement for the
three months ended March 31, 1999 (the "Financial Supplement"), are incorporated
herein by reference.
The Consolidated Statements of Income of the Corporation and subsidiaries
for the three months ended March 31, 1999 and 1998, set forth on page T-23 of
the Financial Supplement, are incorporated herein by reference.
The Consolidated Statements of Cash Flows of the Corporation and
subsidiaries for the three months ended March 31, 1999 and 1998, set forth on
page T-24 of the Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
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 20 and T-1 through T-24 of the Financial
Supplement and is incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
2
<PAGE>
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
In the first quarter of 1999, in connection with its stock repurchase
program, the Corporation sold 14 million shares of its common stock at a price
of $50.00 per share to an investment banking firm. In connection therewith, the
Corporation agreed to repurchase the 14 million shares or otherwise settle the
contract, at the Corporation's option, at $50.00 per share (subject to
adjustment for interest costs) later in 1999. The offer and sale of the shares
of common stock by the Corporation were exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof because
such offer and sale did not involve a public offering.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of the Stockholders of the Corporation held on April
20, 1999, the following proposals were approved by the holders of the
Corporation's common stock voting as indicated:
1. Proposal to elect the following individuals as directors of the Corporation:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Class I directors:
Erksine B. Bowles ........... 806,358,031 14,955,606
Robert J. Brown ............. 807,980,311 13,333,326
Edward E. Crutchfield ....... 812,565,543 8,748,094
James E.S. Hynes ............ 813,152,857 8,160,781
Herbert Lotman .............. 812,517,919 8,795,718
Patricia A. McFate .......... 812,678,717 8,634,920
Joseph Neubauer ............. 813,027,370 8,286,125
Ruth G. Shaw ................ 812,749,099 8,564,396
Charles M. Shelton, Jr. ..... 808,587,561 12,725,934
Class II director:
R. Stuart Dickson ........... 813,024,793 8,288,703
</TABLE>
2. Proposal to ratify the appointment of KPMG LLP as auditors for the
Corporation in 1999:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
815,342,211 2,010,361 3,967,099
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- ----------------------------------------------------------------------------
<S> <C>
(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's First Quarter 1999 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 March 31, 1999, Current Reports on Form 8-K, dated
January 26, 1999, and March 19, 1999, 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: May 5, 1999
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>
(4) Instruments defining the rights of security holders, including indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed Charges.
(19) The Corporation's First Quarter 1999 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.
<TABLE>
Exhibit (12)
FIRST UNION CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
- ------------------------------------------------------------------------------------------------------------------------------------
Three
Months
Ended Years Ended December 31,
----------------------------------------------------------------
Mar. 31,
(In millions) 1999 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EXCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 1,057 3,965 3,793 3,534 3,409 2,747
Fixed charges, excluding capitalized
interest 828 3,504 2,526 2,224 1,821 1,110
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (A) $ 1,885 7,469 6,319 5,758 5,230 3,857
- -----------------------------------------------------------------------------------------------------------------------------------
Interest, excluding interest on deposits $ 800 3,395 2,420 2,120 1,716 1,013
One-third of rents 28 109 106 104 105 97
Capitalized interest - - - 5 4 1
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed charges (B) $ 828 3,504 2,526 2,229 1,825 1,111
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, excluding interest
on deposits (A)/(B) 2.28 X 2.13 2.50 2.58 2.87 3.47
- -----------------------------------------------------------------------------------------------------------------------------------
INCLUDING INTEREST
ON DEPOSITS
Pretax income from continuing
operations $ 1,057 3,965 3,793 3,534 3,409 2,747
Fixed charges, excluding capitalized
interest 1,820 7,820 6,674 6,255 5,837 3,836
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (C) $ 2,877 11,785 10,467 9,789 9,246 6,583
- -----------------------------------------------------------------------------------------------------------------------------------
Interest, including interest on deposits $ 1,792 7,711 6,568 6,151 5,732 3,739
One-third of rents 28 109 106 104 105 97
Capitalized interest - - - 5 4 1
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed charges (D) $ 1,820 7,820 6,674 6,260 5,841 3,837
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated ratios of earnings to
fixed charges, including interest
on deposits (C)/(D) 1.58 X 1.51 1.57 1.56 1.58 1.72
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT 19
FIRST QUARTER 1999
FIRST UNION
CORPORATION
AND SUBSIDIARIES
Management's Analysis of Operations
Quarterly Financial Supplement
Three Months Ended March 31, 1999
Dividend Growth
Current dividend annualized
(In dollars)
(A line chart appears here. See the table for plot points.)
<TABLE>
78 79 80 81 82 83 84 85 86 87 88
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.145 0.155 0.165 0.18 0.20 0.225 0.245 0.29 0.325 0.385 0.43
89 90 91 92 93 94 95 96 97 98 Current
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.50 0.54 0.56 0.64 0.75 0.86 0.98 1.10 1.22 1.58 1.88
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST UNION CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------------
PAGE
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
Financial Highlights 1
Management's Analysis of Operations 2
Consolidated Summaries of Income, Per Share, Balance Sheet and Other Data T-1
Merger-Related and Restructuring Charges T-2
Business Segments T-3
Selected Performance, Dividend Payout and Other Ratios T-7
Securities Available for Sale T-8
Investment Securities T-9
Loans T-10
Interest-Only and Residual Certificates T-11
Allowance for Loan Losses and Nonperforming Assets T-12
Intangible Assets T-13
Deposits T-13
Time Deposits in Amounts of $100,000 or More T-13
Long-Term Debt T-14
Changes in Stockholders' Equity T-16
Capital Ratios T-16
Off-Balance Sheet Derivative Financial Instruments T-17
Off-Balance Sheet Derivatives - Expected Maturities T-19
Off-Balance Sheet Derivatives Activity T-19
Net Interest Income Summaries T-20
Consolidated Balance Sheets T-22
Consolidated Statements of Income T-23
Consolidated Statements of Cash Flows T-24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
<S> <C> <C>
(Dollars in millions, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Net income before merger-related and restructuring
charges (Operating earnings) $ 965 809
After tax merger-related and restructuring charges 259 19
- ------------------------------------------------------------------------------------------------------------------
Net income after merger-related and restructuring charges $ 706 790
- ------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Diluted earnings
Net income before merger-related and restructuring charges $ 1.00 0.83
Net income after merger-related and restructuring charges 0.73 0.81
Basic earnings
Net income before merger-related and restructuring charges 1.00 0.84
Net income after merger-related and restructuring charges 0.73 0.82
Cash dividends 0.47 0.37
Book value 16.76 16.31
Period-end price $ 53.4375 56.8125
Dividend payout ratio (Based on operating earnings) 47.00 % 42.26
Average shares (In thousands)
Diluted 968,626 977,155
Basic 959,833 965,120
Actual shares (In thousands) 968,139 972,775
- ------------------------------------------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges
Return on average assets (a) 1.74 % 1.56
Return on average stockholders' equity (a) (b) 24.30 21.22
Overhead efficiency ratio 56.13 56.39
Net charge-offs as a percentage of
Average loans, net (a) 0.49 0.39
Average loans, net, excluding Bankcard (a) 0.36 0.24
Nonperforming assets to loans, net, and foreclosed properties 0.71 0.75
Net interest margin (a) 3.74 % 4.08
- ------------------------------------------------------------------------------------------------------------------
CASH EARNINGS (Excluding other
intangible amortization)
Before merger-related and restructuring charges
Net income $ 1,046 865
Diluted earnings per share $ 1.08 0.89
Return on average tangible assets (a) 1.93 % 1.69
Return on average tangible stockholders' equity (a) (b) 38.20 28.03
Overhead efficiency ratio 53.58 % 54.05
- ------------------------------------------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET DATA
Securities available for sale $ 39,417 34,252
Investment securities 2,006 3,227
Loans, net of unearned income 133,416 133,814
Earning assets 194,806 192,642
Total assets 222,955 219,944
Noninterest-bearing deposits 31,757 32,184
Interest-bearing deposits 102,467 105,751
Long-term debt 24,858 13,738
Stockholders' equity $ 16,231 15,806
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Excludes average net unrealized gains or losses on debt and equity
securities.
(c) The overhead efficiency ratio is equal to noninterest expense divided by
the sum of tax-equivalent net interest income and noninterest income.
1
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Financial Supplement
contain various forward-looking statements. Please refer to our 1999 First
Quarter Report on Form 10-Q for a discussion of various factors that could cause
our actual results to differ materially from those expressed in such
forward-looking statements.
EARNINGS HIGHLIGHTS
First Union's operating earnings in the first quarter of 1999 were $965
million compared with $809 million in the first quarter of 1998. On a per share
basis, operating earnings amounted to $1.00 in the first quarter of 1999,
including a $0.12 per share after-tax gain resulting from the acquisition by
Concord EFS, Inc., of Electronic Payment Services, Inc., an electronic
transaction processor in which First Union held a 20 percent interest. Operating
earnings per share in the first quarter of 1998 amounted to $0.83.
Operating earnings exclude merger-related and restructuring charges of
$259 million after tax in the first quarter of 1999, or $0.27 per share, and $19
million after tax, or $0.02 per share, in the first quarter of 1998. These
charges in the first quarter of 1999 were primarily associated with a
restructuring plan announced in March 1999 related to streamlining operations
and reducing noninterest expense. After these charges, earnings per share were
$0.73 in the first quarter of 1999 and $0.81 in the first quarter of 1998.
Growth in operating earnings in the first quarter of 1999 compared with
the first quarter of 1998 was led by a 41 percent increase in fee income, which
represents noninterest income excluding securities gains. Key contributions to
the growth in fee income came from our Capital Markets Group and our Capital
Management Group. Capital Markets fee income increased 71 percent to $483
million in the first quarter of 1999 from the first quarter of 1998, led by
growth in trading and investment banking activities. Capital Management fee
income increased 16 percent to $499 million in the first quarter of 1999 from
the first quarter of 1998, primarily the result of strong growth in retail
brokerage activities and trust.
Noninterest expense was $2.5 billion in the first quarter of 1999 and $1.8
billion in the first quarter of 1998. Much of the increase was attributable to
the June 30, 1998, purchase accounting acquisition of The Money Store and to the
merger-related and restructuring charges, as well as higher personnel costs and
continued investments essential to our long-term growth. The operating overhead
efficiency ratio before merger-related and restructuring charges was 56.13
percent in the first quarter of 1999 and 56.39 percent in the first quarter of
1998.
Nonperforming assets were $950 million, or 0.71 percent of net loans and
foreclosed properties at March 31, 1999, $844 million, or 0.62 percent at
December 31, 1998, and $1.0 billion, or 0.75 percent at March 31, 1998.
Annualized net charge-offs were 0.49 percent of average net loans in the first
quarter of 1999, 0.50 percent in the fourth quarter of 1998 and 0.39 percent in
the first quarter of 1998.
The first quarter of 1999 included the full impact of the purchase
accounting acquisitions of Bowles Hollowell Conner & Co. and The Money Store
Inc., both completed after the first quarter of 1998.
We have established a new income statement presentation on a comparative
basis to better define our sources of fee and other income, particularly from
categories associated with our Capital Markets Group and our residential
mortgage business.
OUTLOOK
We continue to be in the building phase of what we envision as a prototype
financial services institution that will more effectively serve our customers.
As we go through this transition period, we expect to incur substantial
continued investments essential to our long-term strategic growth in our Capital
Markets and Capital Management businesses and in our Future Bank initiative; in
electronic delivery channels such as the Internet and First Union Direct (our
telephone sales and servicing channel); and in other areas.
The strategic investments of the past several years have been designed to
create a financial services company with diversified sources of revenue and
earnings. A growing proportion of our revenue is generated by fee-producing
businesses that complement traditional lending activities. In the first quarter
of 1999, 51 percent of our net tax-equivalent revenue came from fee income,
excluding securities transactions, compared with 42 percent in the first quarter
of 1998. The Capital Markets Group and the Capital Management Group produced
almost one-half of the fee income in the first quarter of 1999. We are
encouraged by the increasing cross-sales opportunities developing among our
lines of business.
2
<PAGE>
At the same time that we are investing to increase revenues over the long
term, we are implementing a more disciplined approach by reducing our cost
structure and streamlining operations. With the implementation of our
restructuring plan well under way, our primary management attention is focused
on developing our existing business base as we continue to invest in new
technology, new delivery channels and revenue-generating lines of business. All
of these factors lead us to believe that the rest of 1999 will be a challenging
year for First Union.
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. The ACCOUNTING AND REGULATORY MATTERS section provides more
information about legislative, accounting and regulatory matters that have
recently been adopted or proposed.
MERGER AND CONSOLIDATION ACTIVITY
In April 1999, we signed a definitive agreement to acquire EVEREN Capital
Corporation, a full-service brokerage and asset management firm based in
Chicago, Illinois. This transaction will provide First Union with a nationwide
brokerage distribution platform and augment our equity capital markets
capabilities. The acquisition, which will be accounted for as a purchase, is an
all-stock transaction with a fixed exchange ratio of 0.555 shares of First Union
common stock for each EVEREN share, which values the acquisition for accounting
purposes at $1.1 billion, or $30.19 per EVEREN share. This excludes the present
value of an employee retention pool of approximately $87 million, with the final
amount to be determined on the consummation date, in restricted shares of First
Union common stock, which will be issued over a three-year period to certain
EVEREN employees, primarily brokers. We estimate that we will incur
approximately $60 million in merger-related charges, principally in the last two
quarters of 1999. Merger-related charges are those charges that are directly
related to the acquisitions but which do not qualify for recognition until they
are incurred. Merger-related charges consist principally of transaction costs;
expenses related to systems conversions; and integration costs. First Union
expects to repurchase on the open market the number of shares equal to those
issued in this transaction. Such share repurchases would be in addition to our
previously announced 50 million share repurchase program. The LIQUIDITY AND
FUNDING SOURCES-STOCKHOLDERS' EQUITY section has further information. The
transaction is expected to close in the third quarter of 1999, subject to EVEREN
shareholder and regulatory approvals and other conditions of closing.
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.
3
<PAGE>
BUSINESS SEGMENTS
BUSINESS FOCUS
First Union's operations are divided into five business segments
encompassing more than 50 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank, Capital
Markets and Treasury/Nonbank. Additional information can be found in Table 3.
We have developed an internal performance reporting model to measure the
results of operations of these five business segments. Because of the complexity
of the corporation, we have used various estimates and allocation methodologies
in the preparation of the Business Segments financial information. If these
estimates or allocation methodologies change significantly, prior period amounts
are restated to conform with the current period. In the first quarter of 1999,
refinements have been made to certain allocation methodologies. Segment net
interest income and noninterest income are no longer expressed on a
tax-equivalent basis and refinements were made to the commercial credit risk
allocation methodology. In addition, International was separately displayed
within the Capital Markets segment. The first quarter of 1998 was restated to
reflect these changes.
Our management structure combines this internal performance reporting with
a matrix management approach, which integrates product management with our
various distribution channels. 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 with each business segment. Credit risk
allocations are intended to provide sufficient equity to cover 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 normal volatility in revenue
associated with 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 consolidated equity. The
Treasury/Nonbank segment retains all unallocated equity. This mismatch in
consolidated versus allocated equity may result in an unexpectedly high or low
return on equity in 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. Our methodology does
transfer expenses from one segment to another based on which segment recognizes
the related revenue stream.
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. Most 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 can be more volatile than the other business
segments.
General corporate expenses, with certain exceptions, 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 other special charges including merger-related and
restructuring charges. The NOINTEREST EXPENSE section provides information on
the impact of the first quarter 1999 restructuring charge on the segments.
4
<PAGE>
CONSUMER BANK
The Consumer Bank, our primary deposit-taking operation, 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 products, 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, electronic and Internet banking capabilities,
support this approach. 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), First Union
Home Equity Bank (FUHEB) and The Money Store, Inc.
The Consumer Bank generated $250 million in net income in the first
quarter of 1999 compared with $230 million in first quarter of 1998. Net
interest income was $873 million in the first quarter of 1999 compared with $870
million in the first quarter of 1998. Fee income was $540 million in the first
quarter of 1999 compared with $385 million in the first quarter of 1998, with
the increase primarily attributable to securitization gains. Noninterest expense
was $915 million in the first quarter of 1999 compared with $779 million in the
first quarter of 1998, largely related to the addition of The Money Store.
Average Consumer Bank loans in the first quarter of 1999 were $56 billion
compared with $58 billion in the first quarter of 1998. The decrease in the
consumer loan portfolio reflects the sale or securitization of certain loans,
including residential fixed and adjustable rate mortgages (ARMs), home equity
loans, student loans, community reinvestment loans, credit card receivables and
other unsecured consumer credit. In the first quarter of 1999, we reevaluated
our business strategy for funding subprime home equity loan products and decided
that we will use other strategies that are not accounted for as sales, and
accordingly, no gain in recognized. The SECURITIES AVAILABLE FOR SALE and the
ASSET SECURITIZATIONS sections provide further information. The total managed
portfolio of consumer loans at March 31, 1999, consisted of $32 billion in home
equity loans, $21 billion in residential mortgages, $11 billion in auto lending,
$5 billion in card products; $5 billion in student loans; and $4 billion in
other consumer lending products.
In connection with the first quarter 1999 restructuring plan, we have
ceased indirect auto origination activity, and we are currently comparing
alternative strategies for disposition of the portfolio. Exiting this business
will not have a material impact on our results of operations. Exiting the
indirect auto finance business does not affect our direct auto lending business.
We will continue to originate direct auto loans through various delivery
channels. The corporation's restructuring charge in the first quarter of 1999
included $17 million related to exiting this business.
CAPITAL MANAGEMENT
We have created a growing asset management business within our Capital
Management Group, which is the link between traditional banking and investing
for retail and institutional customers. We had $152 billion in assets under
management and $633 billion in assets under care at March 31, 1999. Assets under
management include proprietary mutual funds of $71 billion, with the remaining
$81 billion in assets related to trust and institutional accounts. These
products and services are distributed through three key channels: First Union
Brokerage Services, the Wheat First Union retail brokerage division of First
Union Capital Markets Corp. and our retail full-service financial centers
throughout our 12-state and Washington, D.C., marketplace.
The Capital Management Group produced net income of $112 million in the
first quarter of 1999 compared with $95 million in the first quarter of 1998.
Net interest income amounted to $122 million in the first quarter of 1999
compared with $97 million in the first quarter of 1998. Capital Management
businesses and products primarily generate fee income. Fee income in the first
quarter of 1999 increased 16 percent to $499 million, driven by strong
contributions from retail brokerage, trust and mutual funds. Noninterest expense
in the first quarter of 1999 was $439 million compared with $373 million in the
first quarter of 1998 reflecting higher personnel costs, primarily incentives
associated with revenue growth.
The Private Client Banking Group provides high net worth retail clients
with a single point of access to First Union's investment products, mortgages,
personal loans, trusts, financial planning, brokerage services and other
products and services. In the first quarter of 1999, the Private Client Banking
Group had $3.5 billion of average net loans compared with $3.3 billion in the
first quarter of 1998, and $3.0 billion of average deposits in the first quarter
of 1999 compared with $2.5 billion in the first quarter of 1998. Private Client
Banking Group amounts in Table 3 reflect the income and expense related to their
lending and deposit-taking activities.
5
<PAGE>
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 the Capital Management Group's lines of business, including Mutual
Funds and Retail Brokerage Services. CAP Account amounts in Table 3 reflect CAP
Account annual fees and the spread attributed to the on-balance sheet deposits.
CAP Account assets increased to $44 billion at March 31, 1999, compared with $38
billion at year-end 1998. We are seeing increased investment activity through
this product, and as an example, the number of brokerage trades increased nearly
100 percent in the first quarter of 1999 compared with the first quarter of
1998.
Retail Brokerage Services also includes insurance products sold through
First Union Insurance Group. In addition, insurance products also are sold in
other areas of the corporation, including Wheat First Union.
We anticipate increased growth in all of the Capital Management business
lines as we introduce products and services throughout our multistate network
and as we enhance relationships with new and existing customers.
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 and above); commercial customers (annual sales of $10 million to $50
million); and small-business customers (annual sales up to $10 million). We have
an integrated relationship approach that leverages the capabilities of the
Capital Markets Group to provide complex financing solutions, risk management
products and international services, and the capabilities of the Capital
Management Group to provide property and casualty insurance, pension plans and
401(k) plans.
The Commercial Bank had net income of $146 million in the first quarter of
1999 compared with $135 million in the first quarter of 1998. Net interest
income was $419 million in the first quarter of 1999 compared with $424 million
in the first quarter of 1998. Fee income increased 15 percent to $148 million in
the first quarter of 1999, led by cash management activity. Noninterest expense
increased 2 percent to $324 million in the first quarter of 1999.
Average commercial loans in the first quarter of 1999 declined to $34
billion from $37 billion in the first quarter of 1998 due to reduced loan
originations and renewals, as well as to the transfer of corporate customer
relationships to the Capital Markets Group.
In Table 3 the Commercial Bank includes the lending activities of our
Small Business Banking Division and excludes insurance, investment and
retirement services, and commercial deposit services for small business
customers. Average small business loans increased 14 percent to $2.9 billion in
the first quarter of 1999 compared with the first quarter of 1998.
CAPITAL MARKETS
Our Capital Markets Group provides corporate and institutional clients
with a complete selection 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. 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 specialized industry expertise in such areas as
communications and technology; health care; insurance; utilities; textiles and
home furnishings; retail and specialty finance; oil and gas; financial
institutions; real estate; and other specializations. 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 domestic customers and
correspondent financial institutions around the world, and to provide commercial
banking and capital markets products to financial institutions and corporate
clients overseas.
Capital Markets has six business units: (1) Investment Banking, which
includes loan syndications, investment grade and high yield debt, equity
underwriting, merger and acquisition advisory services, and Capital Partners,
our merchant banking unit; (2) Real Estate Finance, primarily commercial real
estate finance, structured product servicing and affordable housing; (3) Risk
Management, primarily fixed-income and equity derivatives and foreign exchange;
(4) Traditional Banking, which encompasses Debt Finance; (5) Commercial Leasing
and Rail, which includes operating, finance and leveraged leasing, and the
nation's second largest general purpose railcar leasing operation; and (6)
International.
6
<PAGE>
These growing businesses enabled Capital Markets to produce net income of
$274 million in the first quarter of 1999 compared with $184 million in the
first quarter of 1998. Net interest income increased 25 percent to $315 million
in the first quarter of 1999, with average loans up 20 percent. The increase in
the provision for loan losses was due to one single credit, which is discussed
further in the ASSET QUALITY section. Fee income increased 50 percent to $371
million in the first quarter of 1999, reflecting strong performance in
investment banking activities. The increase in investment banking fees primarily
reflects an $80 million increase in merchant banking income as well as solid
performance by our loan syndication and third party asset securitization
businesses. In addition, trading account profits increased from $35 million in
the first quarter of 1998 to $112 million in the first quarter of 1999, due to
solid contributions from derivatives, foreign exchange and fixed income trading,
as well as commercial mortgage-backed securities. Trading activities are
undertaken primarily to satisfy the investment and risk management needs of our
customers and secondarily to enhance our earnings through profitable trading for
the corporation's own account. Market making and position taking activities
across a wide array of financial instruments add to our ability to optimally
serve our customers. Trading account assets were $10.3 billion at March 31,
1999, compared with $9.8 billion at December 31, 1998. Noninterest expense was
$355 million in the first quarter of 1999 compared with $258 million in the
first quarter of 1998 attributable primarily to increases in personnel and
incentives.
Average net loans were $36 billion in the first quarter of 1999 and $30
billion in the first quarter of 1998. Loan growth between the two periods was
generated primarily in the Specialized Industries unit, and it was related to
new relationships and to the realignment of certain corporate customer
relationships from the Commercial Bank.
In April 1999, we sold the net assets associated with our factoring
business and we expect to record a pretax gain of approximately $100 million.
The effect on future results of operations from the sale of this business is
immaterial.
First Union's Capital Markets Group will continue to expand its
relationship banking efforts, including increased industry segment coverage and
an expanded international presence. In addition, because our international
strategy is to support the trade finance needs of our domestic customers and
correspondent financial institutions around the world, rather than to lend to
sovereign nations or foreign companies, we have limited credit exposure to
emerging markets. Our exposure to emerging markets at March 31, 1999, had an
average maturity of approximately 100 days and amounted to 1.2 percent of total
assets.
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 certain other corporate charges. 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.
RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
NET INTEREST INCOME
Tax-equivalent net interest income of $1.8 billion in the first quarter of
1999 compared with $1.9 billion in the first quarter of 1998 declined due to a
changing earning asset mix and a narrowing of the net interest margin.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In the first quarter of 1999, $27
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 recorded on these assets
in the first quarter of 1999 was $3 million.
NET INTEREST MARGIN
The net interest margin, which is the difference between the
tax-equivalent yield on earning assets and the rate paid on funds to support
those assets, was 3.74 percent in the first quarter of 1999 compared with 4.08
percent in the first quarter of 1998 and 3.63 percent in the fourth quarter of
1998. The net interest margin narrowed from the first quarter of 1998 because of
a narrowing of loan and deposit spreads as a result of
7
<PAGE>
competitive factors and the interest rate environment. The margin also was
affected negatively by increases in relatively lower spread assets such as
short-term investments, trading assets and commercial loans. Deposit
divestitures also contributed to a declining margin as lower cost deposit
funding was replaced with higher cost borrowings. The margin improved from the
fourth quarter of 1998 due to a reduction in short-term investments and trading
assets. Changes in the composition of our earning asset mix and a lower interest
rate environment resulted in a decrease in the average rate on earning assets
from 7.99 percent in the first quarter of 1998 to 7.46 percent in the first
quarter of 1999. Our average rate paid on liabilities decreased from 4.53
percent to 4.31 percent over this same period due to the lower interest rate
environment. It should be noted that we focus on net income and economic
contribution when evaluating corporate strategies and that we place less
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.
FEE AND OTHER INCOME
We are continually 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 Group and the Capital Management
Group, to provide additional sources of fee income that complement our
long-standing banking products and services. These investments were reflected in
a 41 percent increase in fee and other income, excluding securities
transactions, to $1.9 billion in the first quarter of 1999 from $1.3 billion in
the first quarter of 1998. We have also established a new income statement
presentation on a comparative basis to better define our sources of fee and
other income, particularly from categories associated with our Capital Markets
Group and our residential mortgage business.
Fee income from Capital Markets and Capital Management activities amounted
to approximately one-half of fee income in the first quarter of 1999. Capital
Markets fee income increased 71 percent to $483 million in the first quarter of
1999 from the first quarter of 1998, led by growth in trading and investment
banking activities. Capital Management fee income increased 16 percent to $499
million in the first quarter of 1999 from the first quarter of 1998, primarily
related to strong growth in retail brokerage activities, trust and mutual funds.
These activities are discussed further in the BUSINESS SEGMENTS section.
In addition, strong growth in residential mortgage, securitization and
sundry income contributed to the increase in fee income. Residential mortgage
income in the first quarter of 1999 included $126 million of gains from the
securitization and sale of $4.2 billion of residential mortgage loans.
Securitization income increased by $54 million primarily resulting from
securitization and sale of credit card receivables and student loans in the
first quarter of 1999. In early 1999, we reevaluated our business strategy for
funding subprime home equity products, which had involved securitization and
sale, and decided to use other strategies that are not accounted for as sales,
and accordingly, no gain is recognized. This change in strategy was implemented
in the first quarter of 1999. Sundry income increased by $99 million in the
first quarter of 1999 compared with the first quarter of 1998. Sundry income in
the first quarter of 1999 included a gain of $182 million from the acquisition
by Concord EFS, Inc. (Concord), of Electronic Payment Services, Inc., in which
First Union held a 20 percent interest. As a result of this transaction, we now
hold an investment in Concord representing less than a 5 percent interest. In
the first quarter of 1998, sundry income included branch sales gains of $55
million. There were no branch sales in the first quarter of 1999.
Portfolio-related securities gains included a $19 million impairment loss
on retained interests in certain securitizations of home improvement loans. This
write-down was the result of the impact of revised loss assumptions on the
valuation of the retained interests. More information related to interest-only
and residual certificates is included in the SECURITIES AVAILABLE FOR SALE
section.
NONINTEREST EXPENSE
Noninterest expense was $2.5 billion in the first quarter of 1999 and $1.8
billion in the first quarter of 1998. Much of the increase was attributable to
the June 30, 1998, purchase accounting acquisition of The Money Store and to
$398 million of merger-related and restructuring charges in the first quarter of
1999 compared with $29 million in the first quarter of 1998. This included net
merger-related charges of $51 million related to the
8
<PAGE>
CoreStates acquisition and $347 million related to the restructuring plan we
announced in March 1999. The restructuring charge included costs associated with
employee termination benefits, occupancy, asset write-offs and contract
cancellations. Employee termination benefits included severance payments and
related benefits and outplacement services for employees terminated in
connection with the restructuring. Occupancy included write-downs to market
value of owned premises that were held for disposition as a result of the
restructuring. Occupancy also included cancellation payments or the present
value of the remaining lease obligations for leased premises, or portions
thereof, that were vacated as a result of the restructuring. Asset write-offs
consisted primarily of computer hardware and software and other equipment that
will no longer be used as a result of the restructuring. Contract cancellation
costs represented the cost to buy out the remaining term or the present value of
the remaining payments on contracts that provided no future benefit to the
corporation as a result of the restructuring. Table 2 summarizes information
about the restructuring charges.
The restructuring plan is expected to produce cost savings of
approximately $400 million in 1999, with the majority of these cost savings
expected to be realized in the third and fourth quarters. The cost savings will
primarily affect non-core businesses and non-revenue producing functions. We
will continue to make significant investments in high-growth businesses such as
Capital Markets, Capital Management and the retail delivery network. As a
result, we do not expect the restructuring plan to adversely affect revenue
growth. In addition to The Money Store and to the merger-related and
restructuring charges, expenses in the first quarter of 1999 reflected higher
personnel costs, primarily incentives associated with revenue growth in the
Capital Markets Group and the Capital Management Group, and continued spending
related to our Future Bank retail model. The operating overhead efficiency ratio
before merger-related and restructuring charges was 56.13 percent in the first
quarter of 1999 and 56.39 percent in the first quarter of 1998.
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. The increase in amortization
expense in the first quarter of 1999 from the first quarter of 1998 was
attributable to The Money Store. We had $5.0 billion in other intangible assets
at March 31, 1999, and at December 31, 1998.
The IMPACT OF YEAR 2000 section provides information about our Year 2000
readiness and associated expenses.
BALANCE SHEET REVIEW
SECURITIES AVAILABLE FOR SALE
The securities available for sale portfolio consists primarily of U.S.
Treasury, U.S. Government agency, municipal and asset-backed securities, which
includes interest-only and residual certificates. At March 31, 1999, we had
securities available for sale with a market value of $39 billion compared with
$37 billion at year-end 1998.
On January 1, 1999, we adopted Statement of Financial Accounting Standards
No. 134 (see the ACCOUNTING AND REGULATORY MATTERS section). In adopting this
Standard, we classified all interest-only and residual certificates as
securities available for sale. Interest-only and residual certificates are
interests retained in securitization transactions that are accounted for as
sales. The fair value of the interest-only and residual certificates at March
31, 1999, was $1.5 billion, which approximated amortized cost. If at any time
the estimated fair value of an individual interest-only or residual certificates
indicates that the yield is below a risk-free rate of return, a loss is
recognized in earnings for the amount by which the fair value exceeds the
carrying value.
We use complex modeling techniques to estimate the fair value of
interest-only and residual certificates. These modeling techniques estimate the
amount and timing of cash flows over the estimated life of the interest-only or
residual certificate using assumptions for discount rates, collateral
prepayment, delinquency and loss trends, and servicing effectiveness. The
valuation process is subjective, and minor changes in assumptions can have a
significant impact on the fair value of an individual interest-only or residual
certificate and the timing of recognition in earnings of an impairment loss.
Securities available for sale transactions resulted in realized gains of
$77 million in the first quarter of 1999 compared with $23 million in the first
quarter of 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.
9
<PAGE>
The average rate earned on securities available for sale was 6.60 percent
in the first quarter of 1999 and 6.68 percent in the first quarter of 1998. The
average maturity of the portfolio was 6.81 years at March 31, 1999.
INVESTMENT SECURITIES
The investment securities portfolio consists primarily of U.S. Government
agency, corporate, municipal and mortgage-backed securities, and collateralized
mortgage obligations. Our investment securities amounted to $2.0 billion at
March 31, 1999, and at December 31, 1998.
The average rate earned on investment securities was 8.30 percent in the
first quarter of 1999 and 7.57 percent in the first quarter of 1998. The average
maturity of the portfolio was 5.26 years at March 31, 1999.
LOANS
The loan portfolio, which represents our largest asset class, is a
significant source of interest income 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.
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.
Net loans at March 31, 1999, were $133 billion compared with $135 billion
at December 31, 1998. The loan portfolio at March 31, 1999, was composed of 57
percent in commercial loans and 43 percent in consumer loans. In 1998 turmoil in
the global financial markets effectively closed down several capital markets
financing alternatives and customers turned to more traditional lending
products. As the global financial markets have stabilized, our customers again
are seeking alternative financing and as a result loans have declined from
year-end 1998. In addition, our balance sheet management strategy of maximizing
return on investment through the securitization and the sale of certain loans
also offsets origination volume.
At March 31, 1999, unused loan commitments related to commercial and
consumer loans were $87 billion and $31 billion, respectively. Commercial and
standby letters of credit were $11 billion at March 31, 1999. At March 31, 1999,
loan participations sold to other lenders amounted to $3 billion. They were
recorded as a reduction of gross loans.
Average net loans were $134 billion in the first quarter of 1999 and in
the fourth quarter of 1998. The average rate earned on loans was 8.06 percent in
the first quarter of 1999 compared with 8.16 percent in the fourth quarter of
1998. The primary factor contributing to the decline was the restructuring of
our unsecured consumer loan portfolio.
The ASSET QUALITY section provides information about geographic exposure
in the loan portfolio.
COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans amounted to 8 percent of the total portfolio
at March 31, 1999, and at December 31, 1998. This portfolio included commercial
real estate mortgage loans of $8 billion at March 31, 1999, and $9 billion at
December 31, 1998. The decline reflects amortization and payoffs resulting from
customers obtaining term financing.
10
<PAGE>
ASSET SECURITIZATIONS
In an asset securitization transaction that meets the applicable criteria
to be accounted for as a sale, loans are securitized and sold, and a gain is
recognized at the time of the sale. For student loans, SBA loans, credit card
receivables and certain other consumer loans, asset securitizations are the
primary funding strategy. Residential mortgage loans may be either securitized
and sold as they are originated or retained on-balance sheet, based on an
analysis of various factors at the time of origination or purchase. In
connection with our interest rate risk management activities, we periodically
sell certain loans that had been retained on-balance sheet. When a decision is
made to sell these loans, they are reclassified as held-for-sale and recorded at
the lower of cost or market. In 1998 asset securitizations were the primary
funding strategy for certain types of home equity loans. In the first quarter of
1999, we reevaluated our business strategy for funding subprime home equity loan
products and decided to pursue other strategies that are not accounted for as
sales, and accordingly, do not result in gain recognition.
Table 8 summarizes the activity 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 March 31, 1999, nonperforming assets were $950 million, or 0.71 percent
of net loans and foreclosed properties, compared with $844 million, or 0.62
percent, at December 31, 1998. The increase largely reflected a single corporate
credit that was placed on nonaccrual status in February 1999.
Loans or properties of less than $5 million each made up 72 percent, or
$685 million, of nonperforming assets at March 31, 1999. Of the rest, eleven
loans or properties each between $5 million and $10 million accounted for $75
million; and seven loans or properties each over $10 million accounted for $190
million.
Thirty-eight percent of nonperforming assets were collateralized primarily
by real estate at March 31, 1999, and 42 percent at December 31, 1998.
PAST DUE LOANS
Accruing loans 90 days past due were $344 million at March 31, 1999,
compared with $385 million at December 31, 1998. Of the past dues at March 31,
1999, $110 million were commercial loans or commercial real estate loans and
$234 million were consumer loans.
NET CHARGE-OFFS
Net charge-offs amounted to $164 million in the first quarter of 1999 and
$166 million in the fourth quarter of 1998. Net charge-offs were 0.49 percent of
average net loans in the first quarter of 1999 compared with 0.50 percent in the
fourth quarter of 1998.
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 where
necessary we have taken steps we believe are appropriate.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The loan loss provision was $164 million in the first quarter of 1999
compared with $135 million in the first quarter of 1998. The allowance for loan
losses was $1.8 billion at March 31, 1999, and at December 31, 1998. The
allowance as a percentage of loans was essentially unchanged in the first
quarter of 1999 compared with year-end 1998. In the first quarter of 1999, we
placed a large commercial credit on nonaccrual status. This borrower has
experienced credit quality deterioration attributed to the third quarter 1998
financial markets disruption. As discussed in the 1998 Annual Report to
Stockholders, we considered the potential impact of the third quarter 1998
financial markets disruption in determining the third and fourth quarter 1998
provisions and the adequacy of the allowance for loan losses at December 31,
1998. At March 31, 1999, the overall portfolio credit quality remained stable
compared with December 31, 1998, and we consider the allowance for loan losses
adequate to cover probable credit losses inherent in the loan portfolio.
11
<PAGE>
Our methodology for determining the allowance for loan losses establishes
both an allocated and unallocated component. The allocated portion of the
allowance represents the allowance needed for specific loans and specific
portfolios. The allocated portion of the allowance for commercial loans is based
principally on current loan grades, historical loan loss rates, borrowers'
creditworthiness, as well as analyses of other factors that might affect 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 given borrowers' collateral values and cash flows. The
allocated portion of the allowance for consumer loans is based principally on
delinquencies and historical and projected loss rates. The unallocated portion
of our allowance for loan losses represents the results of other analyses, which
are intended to ensure the allowance is adequate for other probable losses
inherent in our portfolio. These analyses include consideration of changes in
credit risk resulting from the changing underwriting criteria, including
acquired loan portfolios, changes in the types and mix of loans originated,
industry concentrations and evaluations, allowance levels relative to selected,
overall credit criteria and other loss-predictive economic indicators.
Impaired loans, which are included in nonaccrual loans, amounted to $499
million at March 31, 1999, compared with $424 million at December 31, 1998. A
loan is considered to be impaired when, based on current information, we believe
it is probable that we will not collect all amounts due in accordance with the
contractual terms of the loan. Included in the allowance for loan losses at
March 31, 1999, was $107 million related to $454 million of impaired loans. The
remaining impaired loans were recorded at or below fair value. In the first
quarter of 1999, the average recorded investment in impaired loans was $450
million, and $5 million of interest income was recognized on impaired loans.
This income was recognized using a cash-basis method of accounting.
GEOGRAPHIC EXPOSURE
The loan portfolio in the East Coast region of the United States is spread
primarily across 106 metropolitan areas with diverse economies. Our largest
markets are: Atlanta, Georgia; Charlotte, North Carolina; Miami and
Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia,
Pennsylvania; and Washington, D.C. Substantially all of the $11 billion
commercial real estate portfolio at March 31, 1999, 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 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, student and mortgage loans. Other
off-balance sheet sources of liquidity exist as well.
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 March 31, 1999, compared with $133 billion at December 31, 1998.
The portion of core deposits in higher-rate, other consumer time deposits
was 27 percent at March 31, 1999, and at December 31, 1998. 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 quarter of
1999 and $128 billion in the fourth quarter of 1998. In the first quarter of
1999 and in the fourth quarter of 1998, average noninterest-bearing deposits
12
<PAGE>
were 25 percent of average core deposits. The first quarter of 1999 average
balances in savings and NOW and noninterest-bearing deposits were higher when
compared with the fourth quarter of 1998, while money market and other consumer
time deposits were lower. Deposits can be affected by numerous factors,
including branch closings and consolidations, seasonal factors and the rates
being offered compared to other investment opportunities. The NET INTEREST
INCOME SUMMARIES section provides additional information about average core
deposits.
PURCHASED FUNDS
Purchased funds at March 31, 1999, were $46 billion compared with $51
billion at year-end 1998. The decrease reflects our strategy to reduce the
balance of low-yielding assets on our balance sheet. In addition, purchased
funds were higher in the fourth quarter of 1998 reflecting our decision to
temporarily warehouse student and SBA loans, which were subsequently securitized
and sold in the first quarter of 1999. We reduced low-yielding assets by
shrinking our short-term investment portfolio, altering hedging strategies and
modifying certain trading strategies. These strategies were pursued to maximize
our capacity to repurchase our common stock in the first quarter of 1999.
Average purchased funds in the first quarter of 1999 were $49 billion compared
with $56 billion in the fourth quarter of 1998. Purchased funds are acquired
primarily through our large branch network by issuing $100,000 and over
certificates of deposit and receipt of public funds and treasury deposits, and
through 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 results primarily from net income adjusted for noncash
accounting items, primarily the provision for loan losses and depreciation. This
cash was available in the first quarter of 1999 to increase earning assets, to
make discretionary investments and to reduce borrowings.
LONG-TERM DEBT
Long-term debt amounted to $25 billion at March 31, 1999, and $23 billion
at year-end 1998. The level of long-term debt was increased to take advantage of
favorable market conditions and to provide a funding alternative to purchased
funds.
At March 31, 1999, and at December 31, 1998, long-term debt included $1.7
billion of trust capital securities. Subsidiary trusts issued these capital
securities and used the proceeds to purchase junior subordinated debentures from
the corporation. These capital securities are considered tier 1 capital for
regulatory purposes.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we currently have $1.9 billion of senior or subordinated
debt securities, common stock or preferred stock available for issuance. The
sale of any additional debt or equity securities will depend on future market
conditions, funding needs and other factors.
Our principal banking subsidiary, First Union National Bank, has available
a global note program for the issuance of up to $20 billion of senior and
subordinated notes. Under the program, $7 billion of the notes had been issued
at March 31, 1999. The sale of any additional notes will depend on future market
conditions, funding needs and other factors.
In the last nine months of 1999, long-term debt of $8 billion will mature.
Funds for the payment of long-term debt will come from operations or, if
necessary, additional borrowings.
CREDIT LINES
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.
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.
13
<PAGE>
Stockholders' equity was $16 billion at March 31, 1999, and $17 billion at
December 31, 1998. Common shares outstanding amounted to 968 million at March
31, 1999, compared with 982 million at December 31, 1998. In connection with a
50 million share buyback program announced in November 1998, we repurchased 10
million shares at a cost of $617 million by year-end 1998, and we repurchased an
additional 30 million shares at a cost of $1.6 billion by the end of the first
quarter of 1999. From April 1, 1999, through May 3, 1999, we repurchased an
additional 5 million shares at a cost of $264 million. In the first quarter of
1999, we also sold 14 million shares of common stock to an investment banking
firm for $700 million under an agreement that entitles us to either repurchase
these shares or otherwise settle the contract later this year at $50.00 per
share (subject to adjustment for interest costs). This sale transaction was
recorded as a reduction of the shares repurchased. In the first quarter of 1998,
we repurchased 8 million shares of common stock at a cost of $531 million.
We paid $450 million in dividends to common stockholders in the first
quarter of 1999 compared with $342 million in the first quarter of 1998. This
represented an operating dividend payout ratio of 47.00 percent in the first
quarter of 1999.
At March 31, 1999, stockholders' equity included $8 million in accumulated
other comprehensive income, net. The SECURITIES AVAILABLE FOR SALE section
provides additional information about debt and equity securities.
SUBSIDIARY DIVIDENDS
First Union National Bank is the largest source of parent company
dividends. Capital requirements established by regulators limit dividends that
this subsidiary 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
$1.4 billion available for dividends at March 31, 1999, without prior regulatory
approval. Our subsidiaries paid $697 million in dividends to the parent company
in the first quarter of 1999. In addition, the consolidation of our principal
bank in our northern region with our North Carolina-based bank resulted in a
reduction of its capital of $600 million, which was paid to the parent company.
REGULATORY CAPITAL
Federal banking regulations require that bank holding companies and their
subsidiary banks maintain minimum levels of capital. These banking regulations
measure capital using three formulas including tier 1 capital, total capital and
leverage capital. The minimum level for the ratio of total capital to
risk-weighted assets, including certain off-balance sheet financial instruments,
is currently 8 percent. At least half of total capital must be composed of
common equity, retained earnings and a limited amount of qualifying preferred
stock, less certain intangible assets (tier 1 capital). The remainder of total
capital may consist of a limited amount of subordinated debt, nonqualifying
preferred stock and a limited amount of the allowance for loan losses. At March
31, 1999, the tier 1 and total capital ratios were 7.03 percent and 11.34
percent, respectively, compared with 6.94 percent and 11.12 percent at December
31, 1998.
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 4 to 5 percent. The
leverage ratio at March 31, 1999, was 6.00 percent, and at December 31, 1998, it
was 6.02 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
14
<PAGE>
ratio of 10 percent. At March 31, 1999, 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.
15
<PAGE>
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 a pattern of rate movements that we believe to be reasonably
possible. Our methodology measures the impact that 200 basis point rate changes
would have on earnings per share over the subsequent 12 months.
Our earnings simulation model reflects a number of variables that we
identify as being affected by interest rates. For example our model captures
rate of change differentials, such as federal funds rates versus savings account
rates; maturity effects, such as calls on securities; and rate barrier effects,
such as caps and floors on loans. It also captures changing balance sheet
levels, such as commercial and consumer loans (both floating and fixed rate),
noninterest-bearing deposits and investment securities. In addition, our model
considers leads and lags that occur in long-term rates as short-term rates move
away from current levels; the elasticity in the repricing characteristics of
savings and money market deposits; and the effects of prepayment volatility on
various fixed-rate assets such as residential mortgages, mortgage-backed
securities and consumer loans. These and certain other effects are evaluated in
developing the scenarios from which sensitivity of earnings to changes in
interest rates is determined.
We use two separate measures that each include three standard scenarios in
analyzing interest rate sensitivity for policy measurement. Each of these
measures compares our forecasted earnings per share in both a "high rate" and
"low rate" scenario to a base-line scenario. One base-line scenario is our
estimated most likely path for future short-term interest rates over the next 24
months. The second base-line scenario holds short-term rates flat at their
current level over our forecast horizon. The "high rate" and "low rate"
scenarios assume gradual 200 basis point increases or decreases in the federal
funds rate from the beginning point of each base-line scenario over the most
current 12-month period. Our policy limit for the maximum negative impact on
earnings per share resulting from "high rate" or "low rate" scenarios is 5
percent. The policy limit applies to both the "most likely rate" scenario and
the "flat rate" scenario. The policy measurement period is 12 months in length,
beginning with the first month of the forecast.
EARNINGS SENSITIVITY
Our April 1999 estimate for future short-term interest rates (our "most
likely rate" scenario) projects the federal funds rate declining from its
current rate of 4.75 percent to 4.50 percent by August 2000 and then remaining
constant through March 2001. Our "flat rate" scenario holds the federal funds
rate constant at 4.75 percent through March 2001.
Based on the April 1999 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 2.7 percent. Our model
indicates that earnings would benefit by 1.6 percent in our "low rate" scenario
(i.e., a 200 basis point decline in short-term rates from our "flat rate"
scenario).
Compared to our "most likely rate" scenario, earnings would increase 2.0
percent over the policy measurement period if rates fall gradually by 200 basis
points, and they would decrease by 2.2 percent if rates gradually rise by 200
basis points.
16
<PAGE>
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 April 1999 outlook, if interest rates in calendar year
2000 were 200 basis points lower than our "most likely rate" scenario, earnings
would increase by 4.9 percent. If rates were 200 basis points higher than our
"most likely rate" scenario in 2000, those earnings would be negatively affected
by 3.4 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, we use
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 risk management include various interest rate swap, futures and option
structures 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 interest rate risk management will not have
any significant unintended effect on corporate earnings. As a matter of practice
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.
As a result of interest rate fluctuations, off-balance sheet transactions
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 assets and liabilities as part of our overall interest rate risk
management strategy, will generally offset 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 net fair value of off-balance sheet derivative financial instruments
used to manage our interest rate sensitivity was $829 million at March 31, 1999,
compared with $1.1 billion at December 31, 1998.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Such gains and losses at March 31, 1999, were not significant.
Although off-balance sheet derivative financial instruments do not expose
the corporation to credit risk equal to the notional amount, we are exposed to
credit risk equal to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize the credit risk in these instruments by dealing only with high-quality
counterparties. Each transaction is specifically approved for applicable credit
exposure.
In addition our policy is 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 market risk 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 financial strength of the individual counterparty,
and they are bilateral. As of March 31, 1999, the total mark-to-market related
credit risk for derivative transactions in excess of counterparty thresholds was
$583 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
17
<PAGE>
diversified trading positions in both the fixed income and foreign exchange
markets. Risk is controlled through the imposition of value-at-risk (VAR) limits
and an active, independent monitoring process.
We use the VAR 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 the interrelationships among the various trading instruments to
determine how much risk is eliminated by offsetting positions. The VAR analysis
is supplemented by stress testing on a daily basis. 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 252 business days. The total VAR amount at March 31, 1999, was $13
million, compared to $19 million at December 31, 1998, substantially all of
which related to interest rate risk.
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
technology 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. This Year 2000
information is designated as Year 2000 Readiness Disclosures related to the Year
2000 Information and Readiness Disclosure Act.
We have 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
affect First Union, but would not cause the failure of core operation; Medium
Risk - those areas where lack of compliance would not have a major impact to our
customer; or Low Risk - those areas that do not affect customers and that could
be delayed or otherwise processed on an exception basis.
The Planning and Assessment phase, which includes the identification of
potential points of failure requiring focused Year 2000 efforts, was
substantially completed in 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,
remediation testing, and certification. Analysis and remediation includes the
modification of program code to address date-related issues. Remediation testing
includes limited integration testing and unit testing in various test
environments to validate remediation. In this phase, applications are tested for
Year 2000 compliance to verify that the application executes correctly with Year
2000 changes included. We consider information technology systems to be Year
2000 compliant when the analysis and remediation and remediation testing phases
of the Year 2000 project have been completed.
As of March 31, 1999, we had completed the analysis and remediation and
remediation testing phases on approximately 99 percent of the major business
applications that are rated mission critical and high risk. All remaining major
business applications, including medium and low risk applications, are scheduled
for completion by June 30, 1999, with the exception of one application scheduled
for completion by August 1999, due to the application conversion schedule. This
includes all of the major applications from entities we acquired in 1998. We had
originally anticipated completing this testing in 1998; however, acquired
systems conversion activity has delayed completion of this phase.
With respect to personal computers, we have identified which versions of
software and which models of hardware the manufacturers have identified as Year
2000 compliant, and we continually reassess manufacturers' representations.
Currently, approximately 90 percent of the personal computer hardware has been
certified as Year 2000 compliant, with the rest expected to be substantially
complete by June 30, 1999, including the additional equipment from acquired
entities. We had originally anticipated completing this certification in 1998;
however, the integration of acquisitions, and the resulting increase in personal
computers, delayed this effort.
18
<PAGE>
The goal of the certification phase is to obtain reasonable assurance that
the corporation-wide production environment is capable of the integrated
processing of future dates and that they have 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 external
interfaces. Certification also includes user acceptance testing and testing with
customers and other key counterparties.
The certification phase began in late-1998 and consists of six sub-phases.
As of March 31, 1999, sub-phases I and II were complete. Sub-phases III through
V will be completed by September 1999. Sub-phase VI, during the fourth quarter
of 1999, will include a strict change control process to ensure that information
technology systems will 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. As of March 31, 1999, there were approximately 70
facilities and the related building services that have been identified as
Mission Critical or High Risk. Since December 31, 1998, approximately 20
additional facilities have been classified as Mission Critical or High Risk,
primarily due to continuous reassessment. Testing of these Mission Critical and
High-Risk facilities and the related building services was approximately 35
percent complete on March 31, 1999. We expect that testing of these facilities
and the related business services will be complete by June 30, 1999. We had
originally anticipated completing this testing by March 31, 1999; however,
acquisition integration has delayed this effort.
BUSINESS RELATIONSHIPS
We have requested warranties from our vendors certifying that their
products will be Year 2000 compliant. Vendors who were not compliant by
September 30, 1998, who have not responded to our requests or who have not
adequately demonstrated they can make their products Year 2000 compliant are
being separately identified and monitored on an ongoing basis.
First Union is evaluating the Year 2000 readiness of its borrowers and the
resulting effect on the credit quality of its loan portfolio. We have developed
a Year 2000 credit risk policy, which 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 had been assigned a Year
2000 risk rating.
External customer testing began in January 1999 and will continue
throughout 1999. This testing will verify the Year 2000 readiness of
transmissions, file exchanges, and input and output transaction capabilities
between First Union and participating customers and third party agencies.
Regarding testing with third parties, this is occurring based on published
schedules by each third party and First Union is participating in all third
party mandatory testing dates. Wire transfer testing with the Federal Reserve,
CHIPS and SWIFT have been successfully completed. All ATM networks have been
tested and certified.
POTENTIAL DISRUPTIONS
While First Union is making every effort to prepare for potential Year
2000 disruptions, there can be no guarantee that unforeseen internal or external
Year 2000 failures or disruptions may occur which could have operational or
financial impact. We anticipate that the most reasonably likely worst case
scenario that we could face may include third party year 2000 disruption.
First Union has taken action to anticipate, and react to, potential Year
2000 disruptions. This includes the development of business continuity plans and
contingency plans. These plans support the 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. We had originally anticipated that all of the plans would be
completed by December 31, 1998; however, we adjusted the timing of our process
based on current regulatory guidance. As of March 31, 1999, approximately 90
percent of the business continuity plans were submitted and approximately 40
percent have been determined to be adequate by the Year 2000 project team.
Critical business continuity plans will be validated as defined by current
regulatory guidance by June 30, 1999.
19
<PAGE>
As part of First Union's contingency planning actions, a Year 2000 Central
Control Center is being created that will monitor, escalate and report the
overall First Union Year 2000 effort. The Control Center will serve as the
primary contact point for bank management, branches and offices, as well as
outside agencies. The Control Center will be in contact with critical business
units to ensure optimal operability and to expeditiously enact contingency plans
and corrective actions when Year 2000 disruptions occur.
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 projects, which is excluded from the
costs included herein, is expected to be significantly less than the incremental
cost. In the first quarter of 1999, $10 million was incurred on the Year 2000
project, and as of March 31, 1999, $36 million has been incurred since project
inception.
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, conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
with the subsequent accounting for securities retained after the securitization
of other types of assets. Under this Standard, retained interests resulting from
the securitization of mortgage loans held for sale are classified either in
securities available for sale or in trading account assets based on intent. The
corporation adopted this Standard on January 1, 1999, and as a result, we
reclassified all interest-only and residual certificates to securities available
for sale.
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, establishes accounting and
reporting standards for derivatives and hedging activities. This Standard
requires that all derivatives be recognized as assets or liabilities in the
balance sheet and that such instruments be measured at fair value through
adjustments to either other comprehensive income or current earnings or both,
depending on the purpose for which the derivative is held. This Standard
significantly changes the accounting for hedge-related derivatives. For the
corporation, the Standard is effective January 1, 2000. The corporation is in
the process of assessing the impact of 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.
20
<PAGE>
<TABLE>
<CAPTION>
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER SHARE, BALANCE SHEET AND OTHER DATA
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Twelve
Months 1999 1998
----------- -----------------------------------------------
Ended
Mar. 31, First Fourth Third Second First
(In millions, except per share data) 1999 Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 14,958 3,572 3,768 3,891 3,727 3,602
- -------------------------------------------------------------------------------------------------------------------------
Interest income (a) $ 15,078 3,603 3,799 3,922 3,754 3,630
Interest expense 7,732 1,792 1,970 2,048 1,922 1,771
- -------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,346 1,811 1,829 1,874 1,832 1,859
Provision for loan losses 720 164 167 239 150 135
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses (a) 6,626 1,647 1,662 1,635 1,682 1,724
Securities transactions (b) 511 77 98 228 108 23
Other noninterest income 6,525 1,873 1,644 1,585 1,423 1,326
Merger-related and restructuring charges (c) 1,581 398 205 24 954 29
Other noninterest expense 8,146 2,111 2,282 1,898 1,855 1,809
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 3,935 1,088 917 1,526 404 1,235
Income taxes 1,008 351 29 500 128 417
Tax-equivalent adjustment 120 31 31 31 27 28
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 2,807 706 857 995 249 790
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic $ 2.89 0.73 0.87 1.02 0.27 0.82
Diluted 2.87 0.73 0.87 1.01 0.26 0.81
Cash dividends $ 1.68 0.47 0.42 0.42 0.37 0.37
Average shares - Basic (In thousands) - 959,833 980,006 981,659 949,750 965,120
Average shares - Diluted (In thousands) - 968,626 990,890 993,208 962,160 977,155
Average stockholders' equity (d)
Quarter-to-date $ - 16,058 16,732 16,383 14,607 15,455
Year-to-date - 16,058 15,800 15,485 15,029 15,455
Book value 16.76 16.76 17.48 17.54 16.72 16.31
Common stock price
High 65 11/16 65 1/16 63 15/16 65 11/16 63 58 1/4
Low 44 11/16 48 5/8 44 11/16 47 9/16 55 1/4 47 1/16
Period-end $ 53 7/16 53 7/16 60 13/16 51 3/16 58 1/4 56 13/16
To earnings ratio (e) 18.62 X 18.62 20.61 19.10 23.78 19.66
To book value 319 % 319 348 292 348 348
BALANCE SHEET DATA
Assets 222,955 222,955 237,363 234,580 228,996 219,944
Long-term debt $ 24,858 24,858 22,949 18,776 14,985 13,738
OTHER DATA
ATMs 3,849 3,849 3,690 3,645 3,613 3,631
Employees 70,775 70,775 71,486 71,307 72,159 69,416
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Tax-equivalent.
(b) Securities transactions include an investment security gain of $4 million
in the second quarter of 1998.
(c) After tax merger-related and restructuring charges amounted to $259 million
in the first quarter of 1999; $136 million in the fourth quarter of 1998;
$16 million in the third quarter of 1998; $634 million in the second
quarter of 1998; and $19 million in the first quarter of 1998.
(d) Excludes average net unrealized gains or losses on debt and equity
securities.
(e) Based on diluted earnings per share.
T-1
<PAGE>
TABLE 2
MERGER-RELATED AND RESTRUCTURING CHARGES
- -----------------------------------------------------------------------------
1999
----------
FIRST
(IN MILLIONS) QUARTER
- -----------------------------------------------------------------------------
MERGER-RELATED CHARGES
CoreStates acquisition $ 75
Reversal of prior CoreStates accruals related primarily to
employee termination benefits, occupancy and other (24)
- -----------------------------------------------------------------------------
Total merger-related charges 51
- -----------------------------------------------------------------------------
RESTRUCTURING CHARGES
Employee termination benefits 196
Occupancy 54
Asset write-offs 69
Contract cancellations 25
Other 3
- -----------------------------------------------------------------------------
Total restructuring charges 347
- -----------------------------------------------------------------------------
Total merger-related and restructuring charges $ 398
- -----------------------------------------------------------------------------
After-tax merger-related and restructuring charges $ 259
- -----------------------------------------------------------------------------
1999
----------
FIRST
(IN MILLIONS) QUARTER
- -----------------------------------------------------------------------------
ACTIVITY IN THE RESTRUCTURING ACCRUAL
Balance, December 31, 1998 $ 398
Restructuring charges 347
Cash payments (93)
Reversal of prior CoreStates accruals related primarily to
employee termination benefits, occupancy and other (24)
Noncash write-downs (41)
- -----------------------------------------------------------------------------
Balance, March 31, 1999 (a) $ 587
- -----------------------------------------------------------------------------
(a) The March 31, 1999, balance includes $340 million related to First Union's
restructuring plan announced in the first quarter of 1999 and $247 million
related to the CoreStates and Signet mergers.
T-2
<PAGE>
TABLE 3
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31, 1999
HOME
EQUITY &
FIRST THE RETAIL
UNION MONEY CARD BRANCH
(IN MILLIONS) MORTGAGE STORE PRODUCTS PRODUCTS TOTAL
- --------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 23 121 59 670 873
Provision for loan losses -- 10 46 39 95
Fee and other income 108 87 57 288 540
Noninterest expense 81 157 70 607 915
Income tax expense 20 15 (1) 119 153
- --------------------------------------------------------------------------------------------------------
Net income $ 30 26 1 193 250
- --------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 69.66% 8.20 0.95 33.02 23.97
Average loans, net $2,026 11,500 2,598 39,492 55,616
Average deposits 1,340 2 10 72,333 73,685
Average attributed stockholders'
equity $ 176 1,265 414 2,369 4,224
- --------------------------------------------------------------------------------------------------------
RETAIL
PRIVATE BROKERAGE &
MUTUAL CLIENT CAP INSURANCE
(IN MILLIONS) TRUST FUNDS BANKING ACCOUNT SERVICES OTHER TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 16 1 43 45 17 -- 122
Provision for loan losses -- -- 1 -- -- -- 1
Fee and other income 163 107 3 26 222 (22) 499
Noninterest expense 115 62 27 32 203 -- 439
Income tax expense 24 18 7 15 14 (9) 69
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 40 28 11 24 22 (13) 112
- ---------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 61.38% 47.82 18.90 67.90 26.17 -- 40.56
Average loans, net $ 182 -- 3,489 -- 1,512 -- 5,183
Average deposits 2,760 -- 3,034 14,143 -- -- 19,937
Average attributed stockholders'
equity $ 263 155 244 141 346 (29) 1,120
- ---------------------------------------------------------------------------------------------------------------------------------
SMALL REAL CASH MGT. &
BUSINESS ESTATE DEPOSIT
(IN MILLIONS) BANKING LENDING BANKING SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 24 91 51 253 419
Provision for loan losses 1 12 6 -- 19
Fee and other income -- -- -- 148 148
Noninterest expense 11 79 20 214 324
Income tax expense 5 (8) 9 72 78
- -----------------------------------------------------------------------------------------------------------
Net income $ 7 8 16 115 146
- -----------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 14.87% 2.19 10.54 58.66 19.57
Average loans, net $ 2,896 22,806 8,745 -- 34,447
Average deposits -- -- -- 27,066 27,066
Average attributed stockholders'
equity $ 193 1,427 600 796 3,016
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED)
T-3
<PAGE>
TABLE 3
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31, 1999
REAL COMMERCIAL
INVESTMENT ESTATE RISK TRADITIONAL LEASING &
(IN MILLIONS) BANKING FINANCE MGT. BANKING RAIL INTERNATIONAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 34 11 -- 161 60 49 315
Provision for loan losses 2 -- -- 47 -- -- 49
Trading account profits 31 23 58 -- -- -- 112
Fee and other income 268 (10) -- 19 44 50 371
Noninterest expense 153 29 42 45 30 56 355
Income tax expense 56 (20) 6 34 28 16 120
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 122 15 10 54 46 27 274
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 58.99% 19.57 36.37 8.77 99.20 12.37 22.97
Average loans, net $2,898 2,408 -- 21,025 5,023 4,922 36,276
Average deposits 2,246 468 432 3,633 2 5,389 12,170
Average attributed stockholders'
equity $ 839 309 109 2,502 187 888 4,834
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER CAPITAL COMMERCIAL CAPITAL TREASURY/
(IN MILLIONS) BANK MGT. BANK MARKETS NONBANK TOTAL
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 873 122 419 315 51 1,780
Provision for loan losses 95 1 19 49 -- 164
Trading account profits -- -- -- 112 -- 112
Fee and other income 540 499 148 371 280 1,838
Noninterest expense 915 439 324 355 476 2,509
Income tax expense 153 69 78 120 (69) 351
- -------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 250 112 146 274 (76) 706
After-tax merger-related and
restructuring charges -- -- -- -- 259 259
- -------------------------------------------------------------------------------------------------------------------------
Net income before
merger-related and
restructuring charges $ 250 112 146 274 183 965
- -------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 23.97% 40.56 19.57 22.97 23.86 24.30
Average loans, net $55,616 5,183 34,447 36,276 2,386 133,908
Average deposits 73,685 19,937 27,066 12,170 3,404 136,262
Average attributed stockholders'
equity $4,224 1,120 3,016 4,834 3,111 16,305
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED)
T-4
<PAGE>
TABLE 3
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31, 1998
FIRST RETAIL
UNION HOME CARD BRANCH
(IN MILLIONS) MORTGAGE EQUITY PRODUCTS PRODUCTS TOTAL
- -----------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 19 38 95 718 870
Provision for loan losses 1 2 53 47 103
Fee and other income 81 9 69 226 385
Noninterest expense 99 27 60 593 779
Income tax expense -- 7 19 117 143
- -----------------------------------------------------------------------------------------------------------
Net income $ -- 11 32 187 230
- -----------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) (0.78)% 30.51 31.29 29.65 28.63
Average loans, net $ 1,901 5,064 3,884 46,954 57,803
Average deposits 1,109 -- 15 77,887 79,011
Average attributed stockholders'
equity $ 136 150 413 2,564 3,263
- -----------------------------------------------------------------------------------------------------------
RETAIL
PRIVATE BROKERAGE &
MUTUAL CLIENT CAP INSURANCE
(IN MILLIONS) TRUST FUNDS BANKING ACCOUNT SERVICES OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 15 -- 37 35 10 -- 97
Provision for loan losses -- -- 1 -- -- -- 1
Fee and other income 140 96 2 17 194 (20) 429
Noninterest expense 106 51 21 26 169 -- 373
Income tax expense 19 17 6 10 13 (8) 57
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 30 28 11 16 22 (12) 95
- -----------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 51.58% 55.73 19.20 69.56 29.74 -- 39.49
Average loans, net $ 127 -- 3,338 -- 739 -- 4,204
Average deposits 1,995 -- 2,509 10,867 -- -- 15,371
Average attributed stockholders'
equity $ 238 138 230 95 294 (27) 968
- -----------------------------------------------------------------------------------------------------------------------------------
SMALL REAL CASH MGT. &
BUSINESS ESTATE DEPOSIT
(IN MILLIONS) BANKING LENDING BANKING SERVICES TOTAL
- ----------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 21 119 55 229 424
Provision for loan losses 1 16 2 -- 19
Fee and other income -- -- -- 129 129
Noninterest expense 10 84 16 207 317
Income tax expense 4 6 14 58 82
- ----------------------------------------------------------------------------------------------------------
Net income $ 6 13 23 93 135
- ----------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 16.01% 3.66 14.44 56.34 18.91
Average loans, net $2,534 25,297 9,613 -- 37,444
Average deposits -- -- -- 24,363 24,363
Average attributed stockholders'
equity $ 163 1,422 652 670 2,907
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED)
T-5
<PAGE>
TABLE 3
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED MARCH 31, 1998
REAL COMMERCIAL
INVESTMENT ESTATE RISK TRADITIONAL LEASING &
(IN MILLIONS) BANKING FINANCE MGT. BANKING RAIL INTERNATIONAL TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 25 17 -- 160 19 31 252
Provision for loan losses -- 1 -- 6 1 1 9
Trading account profits 10 2 23 -- -- -- 35
Fee and other income 127 (3) 7 8 50 58 247
Noninterest expense 91 26 17 46 34 44 258
Income tax expense 22 (16) 4 44 12 17 83
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 49 5 9 72 22 27 184
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 28.28% 6.84 43.43 15.16 58.88 15.05 19.20
Average loans, net $ 2,208 1,823 -- 17,906 4,244 4,083 30,264
Average deposits 1,477 590 109 3,573 21 3,506 9,276
Average attributed stockholders'
equity $ 701 278 83 1,921 148 739 3,870
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER CAPITAL COMMERCIAL CAPITAL TREASURY/
(IN MILLIONS) BANK MGT. BANK MARKETS NONBANK TOTAL
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 870 97 424 252 188 1,831
Provision for loan losses 103 1 19 9 3 135
Trading account profits -- -- -- 35 -- 35
Fee and other income 385 429 129 247 124 1,314
Noninterest expense 779 373 317 258 111 1,838
Income tax expense 143 57 82 83 52 417
- ------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 230 95 135 184 146 790
After-tax merger-related and
restructuring charges -- -- -- -- 19 19
- ------------------------------------------------------------------------------------------------------------------------
Net income before
merger-related and
restructuring charges $ 230 95 135 184 165 809
- ------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 28.63% 39.49 18.91 19.20 14.05 21.22
Average loans, net $57,803 4,204 37,444 30,264 1,499 131,214
Average deposits 79,011 15,371 24,363 9,276 6,553 134,574
Average attributed stockholders'
equity $ 3,263 968 2,907 3,870 4,763 15,771
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Average attributed stockholders' equity excludes merger-related and
restructuring charges and average net unrealized gains or losses on debt and
equity securities. See the "Business Segments" discussion in Management's
Analysis of Operations for further information about the methodology and
assumptions used herein. The return on average attributed stockholders' equity
for the Capital Management Mutual Funds unit is net of the amount included in
Other.
T-6
<PAGE>
<TABLE>
<CAPTION>
TABLE 4
SELECTED PERFORMANCE, DIVIDEND PAYOUT AND OTHER RATIOS
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
----------- ----------------------------------------------------
<S> <C>
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 13.78 X 13.49 13.67 14.71 13.37
Return on assets 1.27 % 1.47 1.72 0.46 1.52
Return on stockholders' equity (b) 17.83 20.32 24.10 6.83 20.74
Internal capital growth (b) 6.35 % 10.51 14.08 (2.89) 11.77
- -----------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings 47.00 % 42.00 41.18 40.22 42.26
Net income 64.38 % 48.28 41.58 142.31 43.25
- -----------------------------------------------------------------------------------------------------------------------
OTHER RATIOS ON
Operating earnings
Return on assets 1.74 % 1.70 1.75 1.62 1.56
Return on stockholders' equity (b) 24.30 % 22.59 23.50 23.91 21.22
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on average balances and net income.
(b) Excludes average net unrealized gains or losses on debt and equity
securities.
T-7
<PAGE>
<TABLE>
<CAPTION>
Table 5
SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1999
-------------------------------------------------------------------------------------------------------------------
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 $ 66 1 2,371 320 2,758 82 5 2,681 10.58
U.S. Government agencies 98 5,018 20,074 - 25,190 94 151 25,247 6.69
Asset-backed 417 2,313 4,578 138 7,446 31 108 7,523 6.15
State, county and municipal - 1 41 137 179 1 - 178 19.31
Sundry 103 1,947 294 1,500 3,844 115 61 3,790 5.18
- ------------------------------------------------------------------------------------------------------------------------
Total $ 684 9,280 27,358 2,095 39,417 323 325 39,419 6.81
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 684 9,280 27,358 861 38,183 222 296 38,257
Equity securities - - - 1,234 1,234 101 29 1,162
- ------------------------------------------------------------------------------------------------------------------------
Total $ 684 9,280 27,358 2,095 39,417 323 325 39,419
- -------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 680 9,238 27,457 882 38,257
Equity securities - - - 1,162 1,162
- -------------------------------------------------------------------------------------------
Total $ 680 9,238 27,457 2,044 39,419
- -------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.70 % 4.95 6.04 5.89 6.04
U.S. Government agencies 5.95 6.39 6.40 - 6.39
Asset-backed 8.53 8.89 6.81 7.06 7.55
State, county and municipal - 6.70 6.21 6.70 6.59
Sundry 5.22 10.92 6.57 4.18 7.86
Consolidated 7.48 % 7.97 6.44 4.82 6.73
- ------------------------------------------------------------------------------------------------
</TABLE>
Included in "U.S. Government agencies" and "Sundry" at March 31, 1999, are
$280 million of securities denominated in currencies other than the U.S.
dollar. At March 31, 1999, these securities had a weighted average maturity of
2.76 years and a weighted average yield of 5.78 percent. For comparative
purposes, the weighted average U.S. dollar equivalent yield of these securities
was 6.81 percent based on a weighted average funding cost differential of (1.03)
percent.
Expected maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Average maturity excludes equity securities and money
market funds.
Yields related to securities exempt from federal and state income taxes
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 applicable state tax rates.
At March 31, 1999, there were forward commitments to purchase securities
at a cost which approximates market value of $4.0 billion, and commitments to
sell securities at a cost which approximates market value of $1.1 billion.
Gross gains and losses realized on the sale of debt securities for the
three months ended March 31, 1999, were $62 million and $41 million,
respectively, and there were gross gains realized on equity securities of $56
million.
T-8
<PAGE>
<TABLE>
<CAPTION>
Table 6
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1999
------------------------------------------------------------------------------------------------
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 $ 4 7 1 - 12 - - 12 1.14
U.S. Government agencies 20 841 241 1 1,103 21 3 1,121 4.41
CMOs 105 - - - 105 2 - 107 0.70
State, county and municipal 100 165 229 238 732 103 - 835 7.48
Sundry 23 27 2 2 54 - 1 53 2.07
- -----------------------------------------------------------------------------------------------------------------------
Total $ 252 1,040 473 241 2,006 126 4 2,128 5.26
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 255 1,069 514 290 2,128
- ----------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.09 % 4.65 4.70 - 4.82
U.S. Government agencies 6.81 6.79 6.25 10.73 6.68
CMOs 8.75 - - - 8.75
State, county and municipal 10.00 9.94 11.55 11.97 11.11
Sundry 7.16 7.34 7.21 5.82 7.19
Consolidated 8.89 % 7.29 8.82 11.90 8.41
- ----------------------------------------------------------------------------------------
</TABLE>
Expected maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Yields related to securities exempt from federal and state income taxes 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
applicable state tax rates.
There were no commitments to purchase or sell investment securities at March
31, 1999.
There were no gains or losses realized on repurchase agreement
underdeliveries and calls of investment securities for the three months ended
March 31, 1999.
T-9
<PAGE>
<TABLE>
<CAPTION>
Table 7
LOANS
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
------------ -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 52,798 53,961 52,179 50,972 49,060
Real estate - construction and other 2,602 2,628 2,884 3,033 2,957
Real estate - mortgage 8,489 8,565 8,977 9,718 10,223
Lease financing 10,525 9,730 9,388 9,155 8,413
Foreign 4,084 4,805 4,289 4,365 3,843
- ------------------------------------------------------------------------------------------------------------------------
Total commercial 78,498 79,689 77,717 77,243 74,496
- ------------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 20,901 21,729 25,522 26,221 27,997
Installment loans - Bankcard (a) 2,579 2,779 2,700 4,043 3,842
Installment loans - other 29,585 29,050 27,564 27,982 25,448
Vehicle leasing 6,257 6,162 5,955 5,692 5,490
- ------------------------------------------------------------------------------------------------------------------------
Total retail 59,322 59,720 61,741 63,938 62,777
- ------------------------------------------------------------------------------------------------------------------------
Total loans 137,820 139,409 139,458 141,181 137,273
Unearned income 4,404 4,026 3,769 3,791 3,459
- ------------------------------------------------------------------------------------------------------------------------
Loans, net $ 133,416 135,383 135,689 137,390 133,814
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice.
T-10
<PAGE>
<TABLE>
<CAPTION>
Table 8
INTEREST-ONLY AND RESIDUAL CERTIFICATES
- ------------------------------------------------------------------------------------------------------------------------------------
March 31, 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home
Equity
Home Credit Lines of
(In millions) Equity (a)(b) SBA (b) Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
ACTIVITY
Balance, December 31, 1998 $ 1,095 118 119 16 159 12
Originated residual interests - 8 11 - 54 1
Servicer and other advances 30 - - - - -
Net accretion (amortization) (26) 1 1 (3) (73) (1)
Impairment loss (19) - - (4) - -
Unrealized gain (loss) 8 (8) 4 (1) (5) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 1,088 119 135 8 135 12
- ------------------------------------------------------------------------------------------------------------------------------------
Home
Home Equity Equity
------------------------------
Fixed Variable Credit Lines of
Rate Rate SBA Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
VALUATION ESTIMATES
Discount rate 11.00% 11.00 11.00 9.50 11.00 10.08 11.00
Prepayment rate CPR-24.00% CPR-34.00 CPR-24.30 CPR-4.92 ABS-1.55 9 Months CPR-3.95
Weighted average life 35.2 months 26.8 months 32.8 months 65.8 months 14.5 months 9 Months 54 Months
Weighted average cumulative
net loss 494 bps 442 490 19 288 498 270
Weighted average coupon rate 11.17 % 10.47 9.88 8.13 10.34 17.96 9.47
Excess annual spread 296 bps 194 281 181 168 570 247
- ------------------------------------------------------------------------------------------------------------------------------------
Home Equity Home
------------------------------ Equity
Fixed Variable Credit Lines of
(Dollars in millions) Rate Rate SBA Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA
Securitized principal serviced $ 8,585 2,982 708 3,182 649 3,524 199
Contractual delinquency ratios
30 - 59 days 2.06 % 2.07 0.97 3.22 2.74 10.25 0.39
60 - 89 days 0.80 0.60 0.50 1.98 0.80 0.66 0.19
90 - 179 days 0.89 0.46 0.99 2.11 0.73 1.27 0.12
180 - 359 days 0.66 0.74 0.93 0.53 0.05 - 0.12
Defaults
Foreclosures in process (c) 4.46 8.38 2.34 n/a n/a n/a -
Real estate owned 0.96 % 1.92 0.20 n/a n/a n/a 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The March 31, 1999, Home Equity balance includes servicer advances of $163
million, for which the corporation is the servicer.
(b) The December 31, 1998, Home Equity and Small Business Administration (SBA)
balances have been restated to reflect the final June 30, 1998, valuations for
acquired retained interests.
(c) Foreclosures in process includes loans that are delinquent 360 days or
more.
n/a - Data is not available or not meaningful.
T-11
<PAGE>
<TABLE>
<CAPTION>
Table 9
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998
----------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $ 1,826 1,882 1,870 1,863 1,847
Provision for loan losses 164 167 239 150 135
Allowance relating to loans acquired, transferred to
accelerated disposition or sold - (57) (40) 13 10
Loan losses, net (164) (166) (187) (156) (129)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,826 1,826 1,882 1,870 1,863
- ------------------------------------------------------------------------------------------------------------------------------
as a % of loans, net 1.37 % 1.35 1.39 1.36 1.39
- ------------------------------------------------------------------------------------------------------------------------------
as a % of nonaccrual and restructured loans 217 % 246 267 235 210
- ------------------------------------------------------------------------------------------------------------------------------
as a % of nonperforming assets 192 % 217 228 206 186
- ------------------------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 78 83 98 63 37
Real estate - commercial construction and mortgage 1 3 1 2 9
Real estate - residential mortgage 5 2 8 6 11
Installment loans - Bankcard 49 60 58 67 56
Installment loans - other and vehicle leasing 65 63 53 52 67
- ------------------------------------------------------------------------------------------------------------------------------
Total 198 211 218 190 180
- ------------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 13 25 9 7 24
Real estate - commercial construction and mortgage 1 3 3 - 5
Real estate - residential mortgage - - - - 1
Installment loans - Bankcard 4 2 6 4 4
Installment loans - other and vehicle leasing 16 15 13 23 17
- ------------------------------------------------------------------------------------------------------------------------------
Total 34 45 31 34 51
- ------------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 164 166 187 156 129
- ------------------------------------------------------------------------------------------------------------------------------
as % of average loans, net (a) 0.49 % 0.50 % 0.55 0.47 0.39
- ------------------------------------------------------------------------------------------------------------------------------
as % of average loans, net, excluding Bankcard (a) 0.36 % 0.33 % 0.41 0.29 0.24
- ------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 434 362 294 368 410
Commercial real estate loans 74 67 121 141 130
Consumer real estate loans 181 184 181 190 234
Installment loans 152 128 108 94 114
- ------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 841 741 704 793 888
Restructured loans and foreclosed properties (b) 109 103 121 116 115
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 950 844 825 909 1,003
- ------------------------------------------------------------------------------------------------------------------------------
as % of loans, net, and foreclosed properties 0.71 % 0.62 % 0.61 0.66 0.75
- ------------------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 344 385 279 248 328
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Annualized.
(b) Restructured loans do not exceed $2 million for any period presented.
T-12
<PAGE>
<TABLE>
<CAPTION>
Table 10
INTANGIBLE ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998
----------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $ 4,354 4,376 4,410 4,439 2,484
Deposit base premium 335 360 392 421 442
Other 294 300 303 309 5
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 4,983 5,036 5,105 5,169 2,931
- -------------------------------------------------------------------------------------------------------------------------------
MORTGAGE AND OTHER SERVICING ASSETS $ 700 637 554 511 444
- -------------------------------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 12 14 16 19 21
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 11
DEPOSITS
- --------------------------------------------------------------------------------------------------------------------------
1999 1998
------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 31,757 35,614 30,504 33,169 32,184
Savings and NOW accounts 38,131 38,649 33,344 33,938 35,104
Money market accounts 21,622 22,762 25,215 24,520 23,875
Other consumer time 34,339 35,809 36,805 38,053 37,930
- --------------------------------------------------------------------------------------------------------------------------
Total core deposits 125,849 132,834 125,868 129,680 129,093
Foreign 3,234 3,487 2,500 2,881 2,083
Other time 5,141 6,146 6,160 6,037 6,759
- --------------------------------------------------------------------------------------------------------------------------
Total deposits $ 134,224 142,467 134,528 138,598 137,935
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 12
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE (a)
- --------------------------------------------------------------------------------------------------
<S> <C>
March 31, 1999
-------------------------
(In millions) Time Certificates
- --------------------------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 4,270
Over 3 months through 6 months 2,442
Over 6 months through 12 months 2,015
Over 12 months 1,945
- --------------------------------------------------------------------------------------------------
Total $ 10,672
- --------------------------------------------------------------------------------------------------
</TABLE>
(a) There were no other time deposits in amounts of $100,000 or more at March
31, 1999.
T-13
<PAGE>
<TABLE>
<CAPTION>
Table 13
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES ISSUED BY THE
PARENT COMPANY
Notes
<S> <C> <C> <C> <C> <C> <C> <C>
Floating rate extendible, due June 15, 2005 $ 10 10 10 10 10
6.60%, due June 15, 2000 250 250 249 249 249
Subordinated notes
6.30%, Putable/Callable, due April 15, 2028 200 200 200 200 -
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 298 297 297 297 -
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 249 249 249 248 248
6-5/8%, due July 15, 2005 249 249 249 249 249
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 - - - 37 54
9.45%, due June 15, 1999 250 250 250 250 249
Subordinated debentures
6.55%, due October 15, 2035 249 249 249 249 249
7-1/2%, due April 15, 2035 247 247 247 247 247
6.824%/7.574%, due August 1, 2026 298 298 298 298 298
- ------------------------------------------------------------------------------------------------------------------------------------
Total notes and debentures issued by the Parent Company 4,669 4,668 4,667 4,703 4,222
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-14
<PAGE>
<TABLE>
<CAPTION>
Table 13
LONG-TERM DEBT
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998
---------- ----------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes
<S> <C> <C> <C>
9-3/4% senior - - - 118 119
Medium-term, varying rates and terms to September 15, 2006 12,695 10,775 7,206 3,026 2,511
Varying rates and terms to January 26, 2004 63 70 79 82 161
Floating rate - - - - 500
Senior notes from acquired companies, varying
rate and terms to April 15, 2004 569 569 569 1,059 150
Subordinated notes
Bank, varying rates and terms to December 15, 2036 1,200 1,200 650 650 650
7.95%, due December 1, 2007 100 100 100 100 -
6-3/4%, due November 15, 2006 200 200 200 200 198
6-5/8%, due March 15, 2005 175 175 175 175 174
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 150 150 150 150 149
7.30%, due December 1, 2002 150 150 150 150 -
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
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
- ---------------------------------------------------------------------------------------------------------------------------------
Total notes of subsidiaries 16,401 14,488 10,378 6,809 5,811
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Trust preferred securities 1,736 1,736 1,736 1,735 1,735
Advances from the Federal Home Loan Bank 987 986 1,186 1,685 1,928
4.556% auto securitization financing, due September 30, 2008 1,021 1,023 759 - -
Mortgage notes and other debt of subsidiaries,
varying rates and terms 7 8 9 10 10
Capitalized leases 37 40 41 43 32
- ---------------------------------------------------------------------------------------------------------------------------------
Total other debt 3,788 3,793 3,731 3,473 3,705
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 24,858 22,949 18,776 14,985 13,738
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-15
<PAGE>
<TABLE>
<CAPTION>
Table 14
CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
Twelve 1999 1998
Months ----------- ----------------------------------------------
Ended
Mar. 31, First Fourth Third Second First
(In millions) 1999 Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 15,806 17,173 17,370 16,526 15,806 15,269
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 2,807 706 857 995 249 790
Net unrealized gain (loss) on debt and
equity securities (298) (415) (149) 222 44 4
- -----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,509 291 708 1,217 293 794
Purchase of common stock (3,379) (854) (617) - (1,908) (531)
Common stock issued for
Stock options exercised 560 49 108 23 380 340
Dividend reinvestment plan 76 22 19 20 15 27
Acquisitions 2,291 - - - 2,291 249
Cash dividends paid (1,632) (450) (415) (416) (351) (342)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 16,231 16,231 17,173 17,370 16,526 15,806
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 15
CAPITAL RATIOS
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
----------- ----------------------------------------------------
First Fourth Third Second First
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
<S> <C> <C> <C> <C> <C> <C>
Tier 1 capital $ 13,186 13,603 13,610 12,854 14,500
Total capital 21,288 21,794 21,401 20,731 21,911
Adjusted risk-weighted assets 187,679 196,033 182,105 182,643 167,348
Adjusted leverage ratio assets $ 219,904 225,830 224,189 213,866 207,973
Ratios
Tier 1 capital 7.03 % 6.94 7.47 7.04 8.66
Total capital 11.34 11.12 11.75 11.35 13.09
Leverage 6.00 6.02 6.07 6.01 6.97
STOCKHOLDERS' EQUITY TO ASSETS
Quarter-end 7.28 7.23 7.40 7.22 7.19
Average 7.26 % 7.42 7.32 6.80 7.48
- -------------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 7.33 % 7.48 7.49 7.16 7.49
First Union Bank of Delaware 13.11 11.44 16.11 50.55 13.75
First Union Home Equity Bank 13.41 11.91 13.51 12.27 11.41
Total capital
First Union National Bank 10.28 10.38 10.38 10.06 10.64
First Union Bank of Delaware 14.62 12.82 16.56 50.97 14.27
First Union Home Equity Bank 15.51 13.82 15.78 14.48 13.61
Leverage
First Union National Bank 6.63 6.69 6.35 6.23 5.90
First Union Bank of Delaware 8.18 6.96 18.90 23.87 6.63
First Union Home Equity Bank 10.53 % 10.86 11.22 10.75 10.48
- -------------------------------------------------------------------------------------------------------------------------
</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 percent to 4.00
percent.
T-16
<PAGE>
<TABLE>
<CAPTION>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
-----------------------------------------------
Maturity
March 31, 1999 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- --------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
<S> <C> <C> <C> <C> <C>
Interest rate swaps $ 18,951 6.41 % 4.94 % 2.68 $17.5 billion converts floating
Carrying amount $ 93 rate loans to fixed rate. Adds to
Unrealized gross gain 285 liability sensitivity. $1.5
Unrealized gross loss (31) billion converts fixed rate available
for sale securities to floating
---------- rate.
Total 347
----------
Interest rate collars 6,000 - - 9.47 Converts floating rate loans to
Carrying amount 121 fixed rate when LIBOR is below
Unrealized gross gain - 6.00 percent (purchased floor)
Unrealized gross loss (99) or above 7.00 percent (sold cap)
----------
Total 22
----------
Interest rate floors 367 - - 1.18 Converts floating rate loans to
Carrying amount 4 fixed rate when LIBOR is below
Unrealized gross gain 1 6.60 percent.
Unrealized gross loss -
----------
Total 5
----------
Other derivatives 439 - - 6.48 Includes interest rate caps and
Carrying amount 5 purchased options on forward
Unrealized gross gain - swaps that convert fixed rate
Unrealized gross loss (5) assets to floating rate with a
weighted average strike rate of
7.81 percent.
----------
----------
Total -
- ------------------------------------------ ----------
Total asset rate
conversions $ 25,757 - - 4.30 $ 374
- -----------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 14,795 6.66 % 5.48 % 7.53 Converts $6.6 billion of fixed
Carrying amount $ 32 rate long-term debt, $1.5 billion
Unrealized gross gain 408 of fixed rate bank notes and
Unrealized gross loss (48) $703 million of fixed rate CDs
to variable rate. Converts $6.0
billion of floating rate deposits
liabilities to fixed rate.
----------
Total 392
----------
Interest rate collars 6,000 - - 2.72 Converts floating rate deposits
Carrying amount 10 to fixed rate when LIBOR
Unrealized gross gain 24 is between 5.50 percent (purchased
Unrealized gross loss - cap) and 6.50 percent (sold cap)
or below 4.50 percent (sold floor).
- ---------------------------- ----------
Total 34
- ---------------------------- ----------
(Continued)
</TABLE>
T-17
<PAGE>
<TABLE>
Table 16
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
------------------------------------------
Maturity
March 31, 1999 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
(Continued)
<S> <C> <C>
Interest rate caps $ 5,000 - - 1.96 Converts floating rate deposits
Carrying amount $ 18 to fixed rate when LIBOR is above
Unrealized gross gain 3 5.44 percent.
Unrealized gross loss -
----------
Total 21
----------
Other derivatives 170 - - 4.32 Includes primarily interest rate
Carrying amount 1 floors that offset corresponding
Unrealized gross gain - floors in floating rate long-term
Unrealized gross loss (1) debt.
----------
----------
Total -
- ---------------------------------------------- ----------
Total liability rate
conversions $ 25,965 - - 5.32 $ 447
- ----------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Basis swaps $ 783 4.93 % 4.87 % 7.81 Converts LIBOR reset rates on pay
Carrying amount $ - variable swaps under asset rate
Unrealized gross gain - conversions to commercial paper
- rates.
Unrealized gross loss
----------
Total -
----------
Interest rate caps 12,134 - - 1.08 $9.9 billion locks in reset rates
Carrying amount 30 on pay variable swaps under asset or
Unrealized gross gain - liability rate conversions when LIBOR
Unrealized gross loss (24) is above 6.26 percent. $2.2 billion
locks in 1-year CMT rates at 5.70
percent to cap pay variable swaps under
liability rate conversions.
----------
Total 6
----------
Short eurodollar futures 14,654 - - 0.25 Locks in LIBOR reset rates on pay
Carrying amount - variable swaps under asset or liability
Unrealized gross gain - rate conversions. $4.7 billion
Unrealized gross loss - effective June and September 1999 and
$5.2 billion effective December 1999.
----------
----------
Total -
----------
Collar on eurodollar futures 6,000 - - 0.71 Purchased call options and written put
Carrying amount - options on eurodollar futures that offset
Unrealized gross gain 2 the December 1999 short eurodollar
Unrealized gross loss - futures contracts.
----------
Total 2
- ---------------------------------------------- ----------
Total rate sensitivity
hedges $ 33,571 - - 0.81 $ 8
- ----------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Weighted average receive rates are fixed rates set at the time the contract
was transacted. Weighted average pay rates are generally based on one-to-six
month LIBOR, and they are pay rates in effect as of March 31, 1999.
(c) Estimated maturity approximates average life.
(d) Carrying amount includes accrued interest receivable or payable and
unamortized premiums paid or received.
T-18
<PAGE>
<TABLE>
<CAPTION>
Table 17
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ------------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount--swaps $ 3,516 9,854 3,590 1,207 784 18,951
Notional amount--other 300 - 228 6,278 - 6,806
Weighted average receive rate (b) 6.92 % 6.55 6.04 5.37 5.71 6.41
Estimated fair value $ 48 205 69 21 31 374
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount--swaps $ 913 803 1,550 11,374 155 14,795
Notional amount--other - 5,000 6,170 - - 11,170
Weighted average receive rate (b) 7.13 % 6.65 6.63 6.61 6.18 6.66
Estimated fair value $ 13 36 97 302 (1) 447
- ------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount--swaps $ - - - 783 - 783
Notional amount--other 30,545 - 2,243 - - 32,788
Weighted average receive rate (b) - % - - 4.93 - 4.93
Estimated fair value $ 2 - 6 - - 8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Weighted average receive rates include the impact of interest rate swaps
only.
<PAGE>
<TABLE>
Table 18
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- -------------------------------------------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 25,908 9,068 14,454 49,430
Additions 1,526 17,550 25,372 44,448
Maturities/Amortizations (1,397) (653) (4,755) (6,805)
Terminations/Redesignations (280) - (1,500) (1,780)
- --------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 25,757 25,965 33,571 85,293
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-19
<PAGE>
<TABLE>
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 1999 FOURTH QUARTER 1998
------------------------------- ----------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing bank balances $ 1,322 17 5.42 % $ 1,749 25 5.72 %
Federal funds sold and securities
purchased under resale agreements 11,332 123 4.40 13,558 157 4.62
Trading account assets (a) 7,984 118 5.97 10,596 189 7.05
Securities available for sale (a) 38,074 628 6.60 38,287 625 6.52
Investment securities (a)
U.S. Government and other 1,240 22 6.97 1,290 24 7.35
State, county and municipal 735 19 10.55 765 20 10.40
- ------------------------------------------------------------------------------ --------------------------
Total investment securities 1,975 41 8.30 2,055 44 8.48
- ------------------------------------------------------------------------------ --------------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 53,418 996 7.55 52,473 996 7.53
Real estate - construction and other 2,613 49 7.61 2,756 56 8.04
Real estate - mortgage 8,532 167 7.94 8,745 181 8.21
Lease financing 4,792 150 12.49 4,590 134 11.74
Foreign 4,393 64 5.94 4,797 77 6.37
- ------------------------------------------------------------------------------ --------------------------
Total commercial 73,748 1,426 7.83 73,361 1,444 7.82
- ------------------------------------------------------------------------------ --------------------------
Retail
Real estate - mortgage 21,774 394 7.25 24,561 454 7.38
Installment loans - Bankcard (c) 2,650 88 13.22 2,708 92 13.52
Installment loans - other and vehicle leasing 35,736 768 8.67 33,844 769 9.04
- ------------------------------------------------------------------------------ --------------------------
Total retail 60,160 1,250 8.36 61,113 1,315 8.57
- ------------------------------------------------------------------------------ --------------------------
Total loans 133,908 2,676 8.06 134,474 2,759 8.16
- ------------------------------------------------------------------------------ --------------------------
Total earning assets 194,595 3,603 7.46 200,719 3,799 7.53
----------------------- ----------------------
Cash and due from banks 10,134 9,491
Other assets 19,958 20,515
- ----------------------------------------------------------------- -------------
Total assets $ 224,687 $ 230,725
- ----------------------------------------------------------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing deposits
Savings and NOW accounts 37,953 244 2.60 36,101 246 2.71
Money market accounts 22,298 179 3.26 23,790 210 3.49
Other consumer time 35,114 448 5.18 36,341 487 5.31
Foreign 3,367 38 4.61 3,423 41 4.79
Other time 5,534 83 6.04 6,205 90 5.79
- ------------------------------------------------------------------------------ -------------------------
Total interest-bearing deposits 104,266 992 3.86 105,860 1,074 4.03
Federal funds purchased and securities
sold under repurchase agreements 26,782 309 4.68 31,340 385 4.87
Commercial paper 1,982 23 4.73 2,071 25 4.77
Other short-term borrowings 11,280 135 4.86 13,128 174 5.26
Long-term debt 23,968 333 5.55 20,944 312 5.96
- ------------------------------------------------------------------------------ -------------------------
Total interest-bearing liabilities 168,278 1,792 4.31 173,343 1,970 4.52
----------------------- ---------------------
Noninterest-bearing deposits 31,996 31,600
Other liabilities 8,108 8,673
Stockholders' equity 16,305 17,109
- ----------------------------------------------------------------- -------------
Total liabilities and stockholders' equity$ 224,687 $ 230,725
- ----------------------------------------------------------------- -------------
Interest income and rate earned $ 3,603 7.46 % $ 3,799 7.53 %
Interest expense and equivalent rate paid 1,792 3.72 1,970 3.90
- ------------------------------------------------------------------------------------------ ---------------------
Net interest income and margin $ 1,811 3.74 % $ 1,829 3.63 %
- ------------------------------------------------------------------------------------------ ---------------------
</TABLE>
(a) Yields related to securities and loans exempt from federal and state income
taxes 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 applicable state tax rates. Lease financing amounts include related
deferred income taxes.
T-20
<PAGE>
<TABLE>
-----------------------------------------------------------------------------------------------------------------
THIRD QUARTER 1998 SECOND QUARTER 1998 FIRST QUARTER 1998
-----------------------------------------------------------------------------------------------------------------
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>
$ 1,752 25 5.76 % $ 2,872 43 5.88 % $ 2,971 41 5.65%
14,331 189 5.19 11,842 151 5.18 9,728 129 5.35
10,235 167 6.50 7,655 109 5.76 5,835 90 6.20
36,677 609 6.64 35,593 589 6.61 30,046 499 6.68
1,366 25 7.26 1,866 32 6.89 2,403 40 6.69
812 21 10.40 907 23 10.04 986 24 9.72
------------------------ ------------------------- -------------------------
2,178 46 8.43 2,773 55 7.92 3,389 64 7.57
------------------------ ------------------------- -------------------------
50,049 984 7.80 49,717 991 7.99 48,035 955 8.06
2,921 62 8.50 3,001 63 8.49 2,973 64 8.63
9,523 210 8.75 9,988 212 8.52 10,414 218 8.50
4,563 131 11.48 4,407 124 11.22 4,249 113 10.65
4,257 75 7.02 4,123 69 6.69 4,003 66 6.68
------------------------ ------------------------- -------------------------
71,313 1,462 8.14 71,236 1,459 8.21 69,674 1,416 8.23
------------------------ ------------------------- -------------------------
26,072 488 7.48 26,300 495 7.54 27,555 531 7.71
3,957 156 15.80 3,931 149 15.14 3,951 169 17.10
33,708 780 9.20 30,679 704 9.19 30,034 691 9.30
------------------------ ------------------------- -------------------------
63,737 1,424 8.91 60,910 1,348 8.86 61,540 1,391 9.09
------------------------ ------------------------- -------------------------
135,050 2,886 8.50 132,146 2,807 8.51 131,214 2,807 8.63
------------------------ ------------------------- -------------------------
200,223 3,922 7.80 192,881 3,754 7.80 183,183 3,630 7.99
----------------------- ----------------------- --------------------
8,780 9,282 8,976
20,120 16,777 18,650
----------- ------------ ------------
$ 229,123 $ 218,940 $ 210,809
----------- ------------ ------------
33,874 229 2.68 34,358 226 2.64 35,336 236 2.70
25,037 224 3.54 24,605 213 3.48 23,070 190 3.34
37,501 506 5.36 37,927 505 5.35 37,403 489 5.30
3,354 45 5.30 2,523 32 5.05 2,856 38 5.44
6,068 93 6.05 6,596 110 6.67 6,507 106 6.62
------------------------ ------------------------- -------------------------
105,834 1,097 4.11 106,009 1,086 4.11 105,172 1,059 4.08
35,902 473 5.23 34,775 445 5.13 30,425 373 4.98
1,742 24 5.44 2,066 27 5.33 1,939 26 5.43
14,642 201 5.47 9,273 121 5.21 7,289 99 5.48
16,070 253 6.24 14,344 243 6.77 13,635 214 6.28
------------------------ ------------------------- -------------------------
174,190 2,048 4.65 166,467 1,922 4.63 158,460 1,771 4.53
----------------------- ----------------------- --------------------
30,380 31,032 29,402
7,787 6,560 7,176
16,766 14,881 15,771
----------- ------------ ------------
$ 229,123 $ 218,940 $ 210,809
----------- ------------ ------------
$ 3,922 7.80 % $ 3,754 7.80 % $ 3,630 7.99%
2,048 4.06 1,922 4.00 1,771 3.91
----------------------- ----------------------- --------------------
$ 1,874 3.74 % $ 1,832 3.80 % $ 1,859 4.08%
----------------------- ----------------------- --------------------
</TABLE>
(b) The loan averages are stated net of unearned income, and the averages
include loans on which the accrual of interest has been discontinued.
(c) Installment loans - Bankcard include credit card, ICR, signature and
First Choice.
T-21
<PAGE>
<TABLE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------- -------------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 9,968 11,192 9,491 9,708 10,554
Interest-bearing bank balances 699 2,916 1,872 2,139 2,708
Federal funds sold and securities
purchased under resale agreements 8,988 14,529 15,090 11,753 11,656
- --------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 19,655 28,637 26,453 23,600 24,918
- --------------------------------------------------------------------------------------------------------------------------------
Trading account assets 10,280 9,759 12,123 9,774 6,985
Securities available for sale 39,417 37,434 38,052 36,798 34,252
Investment securities 2,006 2,025 2,121 2,229 3,227
Loans, net of unearned income 133,416 135,383 135,689 137,390 133,814
Allowance for loan losses (1,826) (1,826) (1,882) (1,870) (1,863)
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net 131,590 133,557 133,807 135,520 131,951
- --------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 5,098 5,067 5,079 5,088 5,037
Due from customers on acceptances 769 1,268 1,026 1,091 1,156
Other intangible assets 4,983 5,036 5,105 5,169 2,931
Other assets 9,157 14,580 10,814 9,727 9,487
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 222,955 237,363 234,580 228,996 219,944
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 31,757 35,614 30,504 33,169 32,184
Interest-bearing deposits 102,467 106,853 104,024 105,429 105,751
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 134,224 142,467 134,528 138,598 137,935
Short-term borrowings 37,377 41,438 51,807 48,897 43,521
Bank acceptances outstanding 769 1,281 1,037 1,106 1,151
Other liabilities 9,496 12,055 11,062 8,884 7,793
Long-term debt 24,858 22,949 18,776 14,985 13,738
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 206,724 220,190 217,210 212,470 204,138
- --------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2 billion shares 3,227 3,274 3,301 3,294 3,243
Paid-in capital 4,906 4,305 4,226 4,190 1,439
Retained earnings 8,106 9,187 9,287 8,708 10,834
Accumulated other comprehensive income, net (8) 407 556 334 290
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,231 17,173 17,370 16,526 15,806
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 222,955 237,363 234,580 228,996 219,944
- --------------------------------------------------------------------------------------------------------------------------------
MEMORANDA
Securities available for sale - amortized cost $ 39,419 36,798 37,185 36,280 33,934
Investment securities - market value $ 2,128 2,162 2,265 2,365 3,315
Shares outstanding (In thousands) 968,139 982,223 990,373 988,150 972,775
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-22
<PAGE>
<TABLE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998
------------- --------------------------------------------------
First Fourth Third Second First
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Interest and fees on loans $ 2,656 2,741 2,869 2,794 2,792
Interest and dividends on securities available for sale 624 621 604 583 496
Interest and dividends on investment securities 35 38 39 48 57
Trading account interest 117 186 165 108 87
Other interest income 140 182 214 194 170
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 3,572 3,768 3,891 3,727 3,602
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 992 1,074 1,097 1,086 1,059
Interest on short-term borrowings 467 584 698 593 498
Interest on long-term debt 333 312 253 243 214
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,792 1,970 2,048 1,922 1,771
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,780 1,798 1,843 1,805 1,831
Provision for loan losses 164 167 239 150 135
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,616 1,631 1,604 1,655 1,696
- -----------------------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Capital markets
Trading account profit (loss) 112 93 (73) 69 35
Securities transactions - equity investments 52 - 17 83 -
Investment banking 205 140 74 120 124
Other capital markets income 114 109 134 108 123
- -----------------------------------------------------------------------------------------------------------------------------------
Total capital markets 483 342 152 380 282
Capital management 499 474 454 448 429
Residential mortgage 195 172 183 145 33
Service charges on deposit accounts 287 290 275 273 273
Fees for other banking services 90 86 94 105 91
Securities transactions - portfolio 25 98 211 25 23
Securitization 71 120 93 18 17
Sundry (a) 300 160 351 137 201
- -----------------------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,950 1,742 1,813 1,531 1,349
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,184 1,180 1,042 1,044 984
Occupancy 142 135 150 139 137
Equipment 203 194 174 172 183
Advertising 61 68 69 49 37
Communications and supplies 123 136 127 110 107
Professional and consulting fees 66 91 67 63 90
Other intangible amortization 96 98 99 76 75
Merger-related and restructuring charges 398 205 24 954 29
Sundry expense 236 380 170 202 196
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,509 2,487 1,922 2,809 1,838
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,057 886 1,495 377 1,207
Income taxes (b) 351 29 500 128 417
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 706 857 995 249 790
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 0.73 0.87 1.02 0.27 0.82
Diluted earnings 0.73 0.87 1.01 0.26 0.81
Cash dividends $ 0.47 0.42 0.42 0.37 0.37
AVERAGE SHARES (In thousands)
Basic 959,833 980,006 981,659 949,750 965,120
Diluted 968,626 990,890 993,208 962,160 977,155
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The first quarter of 1999 includes a gain of $182 million ($118 million
after tax) on the sale of our investment in Electronic Payment Services, Inc.
(b) 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 1998.
T-23
<PAGE>
<TABLE>
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
------------------------
(In millions) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 706 790
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 107 39
Provision for loan losses 164 135
Securitization gains (71) (17)
Gain on sale of mortgage servicing rights (3) (2)
Securities available for sale transactions (77) (23)
Depreciation and amortization 245 247
Trading account assets, net (2,019) (1,003)
Mortgage loans held for resale 1,457 (912)
Gain on sales of premises and equipment (2) (5)
Other assets, net 5,645 3,288
Other liabilities, net (2,559) 179
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,593 2,716
- --------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 7,129 3,438
Maturities of securities available for sale 1,485 528
Purchases of securities available for sale (8,848) (14,791)
Maturities of investment securities 149 496
Purchases of investment securities (132) (151)
Origination of loans, net (496) (1,320)
Sales of premises and equipment 38 52
Purchases of premises and equipment (225) (305)
Other intangible assets, net (43) (11)
Purchase of bank-owned separate account life insurance (4) (31)
Cash equivalents acquired, net of purchases of banking organizations - 80
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (947) (12,015)
- --------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net (8,243) 810
Securities sold under repurchase agreements and other short-term borrowings, net (4,061) 11,729
Issuances of long-term debt 2,592 1,647
Payments of long-term debt (683) (1,351)
Sales of common stock 71 367
Purchases of common stock (854) (531)
Cash dividends paid (450) (342)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (11,628) 12,329
- --------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (8,982) 3,030
Cash and cash equivalents, beginning of year 28,637 21,888
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 19,655 24,918
- --------------------------------------------------------------------------------------------------------------------------------
NONCASH ITEMS
Increase in securities available for sale and a decrease in trading accounts $ 1,498 -
Increase in securities available for sale and a decrease in loans 917 -
Increase in foreclosed properties and a decrease in loans 4 2
Issuance of common stock for purchase accounting acquisitions $ - 249
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
T-24
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,968
<INT-BEARING-DEPOSITS> 699
<FED-FUNDS-SOLD> 8,988
<TRADING-ASSETS> 10,280
<INVESTMENTS-HELD-FOR-SALE> 39,417
<INVESTMENTS-CARRYING> 2,006
<INVESTMENTS-MARKET> 2,128
<LOANS> 137,820
<ALLOWANCE> (1,826)
<TOTAL-ASSETS> 222,955
<DEPOSITS> 134,224
<SHORT-TERM> 37,377
<LIABILITIES-OTHER> 9,496
<LONG-TERM> 24,858
0
0
<COMMON> 3,227
<OTHER-SE> 13,004
<TOTAL-LIABILITIES-AND-EQUITY> 222,955
<INTEREST-LOAN> 2,656
<INTEREST-INVEST> 659
<INTEREST-OTHER> 140
<INTEREST-TOTAL> 3,572
<INTEREST-DEPOSIT> 992
<INTEREST-EXPENSE> 1,792
<INTEREST-INCOME-NET> 1,780
<LOAN-LOSSES> 164
<SECURITIES-GAINS> 77
<EXPENSE-OTHER> 2,509
<INCOME-PRETAX> 1,057
<INCOME-PRE-EXTRAORDINARY> 1,057
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 706
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 3.74
<LOANS-NON> 841
<LOANS-PAST> 344
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,826
<CHARGE-OFFS> 198
<RECOVERIES> 34
<ALLOWANCE-CLOSE> 1,826
<ALLOWANCE-DOMESTIC> 1,284
<ALLOWANCE-FOREIGN> 17
<ALLOWANCE-UNALLOCATED> 525
</TABLE>
