-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BGKbQ13VHHWv4yTG/PqSChTzQjZ8B6GXzwC1zX1Szd87XX/e+FTZtgwDJQFpsv0f 147zuN3w314WySuw7v7ZDw== 0000950168-98-000818.txt : 19980324 0000950168-98-000818.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950168-98-000818 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST UNION CORP CENTRAL INDEX KEY: 0000036995 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560898180 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10000 FILM NUMBER: 98570915 BUSINESS ADDRESS: STREET 1: ONE FIRST UNION CTR CITY: CHARLOTTE STATE: NC ZIP: 28288-0630 BUSINESS PHONE: 7043746565 MAIL ADDRESS: STREET 1: ONE FIRST UNION CENTER STREET 2: 301 S TRYON ST CITY: CHARLOTTE STATE: NC ZIP: 28288-0137 FORMER COMPANY: FORMER CONFORMED NAME: CAMERON FINANCIAL CORP DATE OF NAME CHANGE: 19750522 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION NATIONAL BANCORP INC DATE OF NAME CHANGE: 19721115 10-K 1 FIRST UNION CORPORATION 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ----------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT") for the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT for the transition period from to Commission file number 1-10000 First Union Corporation (Exact name of registrant as specified in its charter) North Carolina 56-0898180 (State of incorporation) (I.R.S. Employer Identification No.) One First Union Center Charlotte, North Carolina 28288-0013 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (704) 374-6565 Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of exchange on which registered - -------------------------------------------------------- ------------------------------------------- Common Stock, $3.33 1/3 par value (including rights New York Stock Exchange, Inc. (the "NYSE") attached thereto)
Securities registered pursuant to Section 12(g) of the Exchange Act: None ----------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act subsequent to the distribution of securities under a plan confirmed by a court. Yes No -- -- (APPLICABLE ONLY TO CORPORATE REGISTRANTS) As of January 31, 1998, there were 648,595,299 shares of the registrant's Common Stock outstanding, $3.33 1/3 par value per share, and based on the last reported sale price of $47.875 per share on the NYSE on such date, the aggregate market value of the registrant's Common Stock held by those persons deemed by the registrant to be nonaffiliates was approximately $31 billion. ----------- DOCUMENTS INCORPORATED BY REFERENCE IN FORM 10-K
Incorporated Documents Where Incorporated in Form 10-K --------------------------------------------------- -------------------------------------------------- 1. Certain portions of the Corporation's Annual Part I -- Items 1 and 2; Part II -- Items 5, 6, 7, 7A Report to Stockholders for the year ended and 8. December 31, 1997 ("Annual Report"). 2. Certain portions of the Corporation's Proxy Part III -- Items 10, 11, 12 and 13. Statement for the Annual Meeting of Stockholders to be held on April 21, 1998 ("Proxy Statement").
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I First Union Corporation (the "Corporation") may from time to time make written or oral "forward-looking statements", including statements contained in the Corporation's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the Exhibits hereto and thereto), in its reports to stockholders and in other communications by the Corporation, which are made in good faith by the Corporation pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Corporation's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties and are subject to change based on various factors (some of which are beyond the Corporation's control). The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Corporation's financial performance to differ materially from that expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Corporation conducts operations; the effects of, and changes in, trade, monetary and fiscal policies, including interest rate policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"); inflation; interest rate, market and monetary fluctuations; the timely development of competitive new products and services by the Corporation and the acceptance of such products and services by customers; the willingness of customers to substitute competitors' products and services for the Corporation's products and services and vice versa; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; future acquisitions; the expense savings and revenue enhancements from the Signet (as defined below) and CoreStates (as defined below) acquisitions being less than expected; the growth and profitability of the Corporation's noninterest or fee income being less than expected; unanticipated regulatory or judicial proceedings; changes in consumer spending and saving habits; and the success of the Corporation at managing the risks involved in the foregoing. The Corporation cautions that the foregoing list of important factors is not exclusive. The Corporation incorporates by reference those factors included in the Corporation's Current Reports on Form 8-K dated July 21, 1997, August 20, 1997, November 18, 1997, November 28, 1997, and December 2, 1997 (the "1997 Current Reports"). The Corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation. Item 1. Business. General The Corporation was incorporated under the laws of North Carolina in 1967 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Pursuant to a corporate reorganization in 1968, First Union National Bank ("FUNB") and First Union Mortgage Corporation, a mortgage banking firm acquired by FUNB in 1964, became subsidiaries of the Corporation. The Corporation provides a wide range of commercial and retail banking and trust services through full-service banking offices in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. Such offices are operated by FUNB in Charlotte, North Carolina, except in Delaware, where such offices are operated by First Union Bank of Delaware. See "; Interstate Banking and Branching Legislation". The Corporation also provides various other financial services, including mortgage banking, credit card, investment banking, home equity lending, leasing, insurance and securities brokerage services, through other subsidiaries. The Corporation's principal executive offices are located at One First Union Center, Charlotte, North Carolina 28288-0013 (telephone number (704) 374-6565). Since the 1985 Supreme Court decision upholding regional interstate banking legislation, the Corporation has concentrated its efforts on building a large banking organization in the eastern region of the United States. Since November 1985, the Corporation has completed over 70 banking-related acquisitions and has three banking-related acquisitions pending, including the more significant acquisitions (i.e., involving the acquisition of $3.0 billion or more of assets or deposits) set forth in the following table. 1
Assets/ Consideration/ Name (1) Headquarters Deposits (2)(3) Accounting Treatment Completion Date - ----------------------------------------------- ---------------- ----------------- ---------------------- ---------------- Atlantic Bancorporation ....................... Florida $3.8 billion common stock/ November 1985 pooling Northwestern Financial Corporation ............ North Carolina 3.0 billion common stock/ December 1985 pooling First Railroad & Banking Company of 3.7 billion common stock/ November 1986 Georgia ..................................... Georgia pooling Florida National Banks of Florida, Inc. ....... Florida 7.9 billion cash/preferred January 1990 stock/purchase Southeast Banking Corporation subsidiary 9.9 billion cash/notes/ September 1991 banks ("Southeast") ......................... Florida preferred stock/ purchase Resolution Trust Corporation ("RTC") 5.3 billion cash/purchase 1991-1994 acquisitions ................................ Florida, Georgia, Virginia Dominion Bankshares Corporation ............... Virginia 8.9 billion common stock/ March 1993 preferred stock/ pooling Georgia Federal Bank, FSB ..................... Georgia 4.0 billion cash/purchase June 1993 First American Metro Corp. .................... Virginia 4.6 billion cash/purchase June 1993 American Savings of Florida, F.S.B. ........... Florida 3.6 billion common stock/ July 1995 purchase First Fidelity Bancorporation ("FFB") (1) ..... New Jersey 35.3 billion common stock/ January 1996 preferred stock/ pooling Center Financial Corporation .................. Connecticut 4.0 billion common stock/ November 1996 purchase Signet Banking Corporation ("Signet") (1) ..... Virginia 11.3 billion common stock/ November 1997 pooling CoreStates Financial Corp ("CoreStates") (1) ........................... Pennsylvania 48.5 billion common stock/ Pending pooling The Money Store Inc. ("TMSI")(1) .............. New Jersey $3.1 billion common stock/ Pending preferred stock/ purchase
- --------- (1) Additional information (i) with respect to the CoreStates acquisition is set forth on pages P-1 through P-5 in the Annual Report and incorporated herein by reference, and (ii) with respect to the CoreStates acquisition and certain other acquisitions is set forth in the Annual Report in Note 2 on pages C-12 and C-13 and incorporated herein by reference. Additional information with respect to the Signet acquisition, the CoreStates acquisition, and the acquisitions of Wheat First Butcher Singer, Inc., an investment banking firm based in Richmond, Virginia, and Covenant Bancorp, Inc., a bank holding company based in Haddonfield, N.J., which were acquired in January 1998, is set forth in the 1997 Current Reports. See " -- THE MONEY STORE INC. PENDING ACQUISITION" for additional information with respect to the TMSI acquisition. (2) The dollar amounts indicated represent assets of the related organization as of the last reporting period prior to acquisition, except (i) the dollar amount relating to the RTC acquisitions, which represents deposits acquired from the RTC, (ii) the dollar amount relating to Southeast, which represents the assets of the two banking subsidiaries of Southeast Banking Corporation acquired from the Federal Deposit Insurance Corporation (the "FDIC"), and (iii) the dollar amount relating to CoreStates is as of December 31, 1997. (3) In addition, the Corporation acquired (i) Lieber & Company, a mutual fund advisory company with $3.4 billion in assets under management, in June 1994, and (ii) Keystone Investments, Inc., a mutual fund advisory company with $11.6 billion in assets under management, in December 1996. The consideration paid by the Corporation was common stock. The Lieber & Company acquisition was accounted for as a pooling of interests and the Keystone Investments, Inc. acquisition was accounted for as a purchase. 2 The Corporation is continually evaluating acquisition opportunities and frequently conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities can be expected. Acquisitions typically involve the payment of a premium over book and market values, and therefore some dilution of the Corporation's book value and net income per common share may occur in connection with future transactions. Additional information relating to the business of the Corporation and its subsidiaries is set forth on pages 10 through 15 and in Table 4 on pages T-3 and T-4 in the Annual Report and incorporated herein by reference. Information relating to the Corporation only is set forth in Note 18 on pages C-36 through C-39 in the Annual Report and incorporated herein by reference. The Money Store Inc. Pending Acquisition On March 4, 1998, the Corporation entered into an Agreement and Plan of Merger (the "Merger Agreement") with TMSI and FUNB, providing for, among other things, the merger (the "Merger") of a direct, wholly owned subsidiary of FUNB with and into TMSI. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each outstanding share of TMSI common stock, no par value (the "TMSI Common Stock"), will be converted into the right to receive that number of shares of the Corporation's common stock (the "FUNC Common Stock") equal to the result (the "Exchange Ratio") of dividing $34.00 by the average of the per share closing sales price of FUNC Common Stock on the NYSE for each of the five trading days in the period ending on the trading day prior to the Effective Time. At the Effective Time, each outstanding share of TMSI $1.72 Mandatory Convertible Preferred Stock (the "TMSI Preferred Stock") will be converted into the right to receive the number of shares of FUNC Common Stock equal to the product of the Exchange Ratio and 0.92. If any approval of the holders of TMSI Preferred Stock that may be required in order to deliver FUNC Common Stock in exchange therefor shall not be received, then each share of TMSI Preferred Stock outstanding at the Effective Time shall instead be converted into the right to receive a share of a new series of the Corporation's convertible preferred stock containing substantially similar terms as the TMSI Preferred Stock, as adjusted to reflect the Merger. The total purchase price is approximately $2.1 billion. In connection with the transaction, the Corporation expects to repurchase a number of its outstanding shares of FUNC Common Stock equal to the number of such shares to be issued in the Merger, which the Corporation currently estimates will be approximately 41 million shares, based on the recent market price of FUNC Common Stock. The transaction will be accounted for as a purchase. In his capacity as a stockholder of TMSI, Marc J. Turtletaub, Chief Executive Officer of TMSI, entered into a stock option and voting agreement dated as of March 4, 1998, with the Corporation pursuant to which, among other things, Mr. Turtletaub granted the Corporation an option, exercisable following the occurrence of certain contingencies set forth therein, to purchase up to 14,547,261 shares of TMSI Common Stock (approximately 24.9 percent of the outstanding shares of TMSI Common Stock) owned by him at a price, subject to certain adjustments, of $34.00 per share, payable in FUNC Common Stock. Competition The Corporation's subsidiaries face substantial competition in their operations from banking and nonbanking institutions, including savings and loan associations, credit unions, money market funds and other investment vehicles, mutual fund advisory companies, brokerage firms, insurance companies, leasing companies, credit card issuers, mortgage banking companies, investment banking companies, finance companies and other types of financial services providers. Supervision and Regulation The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to the Corporation. The regulatory framework is intended primarily for the protection of depositors and the federal deposit insurance funds and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on the business of the Corporation. 3 General As a bank holding company, the Corporation is subject to regulation under the BHCA and its examination and reporting requirements. Under the BHCA, bank holding companies may not directly or indirectly acquire the ownership or control of more than five percent of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval, or a waiver of the requirement for such approval, by the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHCA from engaging in nonbanking activities, subject to certain exceptions. The earnings of the Corporation's subsidiaries, and therefore the earnings of the Corporation, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the Federal Reserve Board, the Comptroller of the Currency (the "Comptroller") and the FDIC. In addition, there are numerous governmental requirements and regulations which affect the activities of the Corporation and its subsidiaries. Payment of Dividends The Corporation is a legal entity separate and distinct from its banking and other subsidiaries. A major portion of the revenues of the Corporation result from amounts paid as dividends to the Corporation by its national bank subsidiaries. The prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of such bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends which would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan losses. Under the foregoing dividend restrictions and certain restrictions applicable to certain of the Corporation's nonbanking subsidiaries, as of December 31, 1997, the Corporation's subsidiaries, without obtaining affirmative governmental approvals, could pay aggregate dividends of $426 million to the Corporation during 1998. In 1997, the Corporation's subsidiaries paid $1.3 billion in cash dividends to the Corporation. In addition, the Corporation and its banking subsidiaries are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The appropriate federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank or bank holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate federal regulatory authorities have indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsound and unsafe banking practice and that banking organizations should generally pay dividends only out of current operating earnings. Borrowings by the Corporation There are also various legal restrictions on the extent to which the Corporation and its nonbank subsidiaries can borrow or otherwise obtain credit from its banking subsidiaries. In general, these restrictions require that any such extensions of credit must be secured by designated amounts of specified collateral and are limited, as to any one of the Corporation or such nonbank subsidiaries, to ten percent of the lending bank's capital stock and surplus, and as to the Corporation and all such nonbank subsidiaries in the aggregate, to 20 percent of such lending bank's capital stock and surplus. Capital Adequacy Under the risk-based capital requirements for bank holding companies, the minimum requirement for the ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) is eight percent. At least half of the total capital is to be composed of common stockholders' equity, retained earnings, a limited amount of qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles ("tier 1 capital" and together with tier 2 capital "total capital"). The remainder of total capital may consist of mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock and loan loss allowance ("tier 2 capital"). At December 31, 1997, the Corporation's tier 1 capital and total capital ratios were 8.41 percent and 13.40 percent, respectively. In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets less certain amounts ("leverage ratio") equal to three percent for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required to maintain a leverage ratio 4 of from at least four to five percent. The Corporation's leverage ratio at December 31, 1997, was 6.81 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible tier 1 leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised the Corporation of any specific minimum leverage ratio or tier 1 leverage ratio applicable to it. Each of the Corporation's subsidiary banks is subject to similar capital requirements adopted by the Comptroller or other applicable regulatory agency. Neither the Comptroller nor such applicable regulatory agency has advised any of the Corporation's subsidiary banks of any specific minimum leverage ratios applicable to it. The capital ratios of the bank subsidiaries of the Corporation are set forth in Table 18 on page T-15 in the Annual Report and incorporated herein by reference. Support of Subsidiary Banks The Federal Deposit Insurance Act, as amended ("FDIA"), among other things, imposes liability on an institution the deposits of which are insured by the FDIC, such as the Corporation's subsidiary banks, for certain potential obligations to the FDIC incurred in connection with other FDIC-insured institutions under common control with such institution. Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Comptroller is authorized to require payment of the deficiency by assessment upon the bank's stockholders, pro rata, and to the extent necessary, if any such assessment is not paid by any stockholder after three months notice, to sell the stock of such stockholder to make good the deficiency. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financial strength to each of its subsidiary banks and to commit resources to support each of such subsidiaries. This support may be required at times when, absent such Federal Reserve Board policy, the Corporation may not find itself able to provide it. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Prompt Corrective Action The FDIA, among other things, requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" and "critically undercapitalized". A depository institution's capital tier will depend upon where its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. Federal regulatory authorities have adopted regulations establishing relevant capital measures and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the total capital ratio, the tier 1 capital ratio and the leverage ratio. Under the regulations, an FDIC-insured bank will be: (i) "well capitalized" if it has a total capital ratio of ten percent or greater, a tier 1 capital ratio of six percent or greater and a leverage ratio of five percent or greater and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) "adequately capitalized" if it has a total capital ratio of eight percent or greater, a tier 1 capital ratio of four percent or greater and a leverage ratio of four percent or greater (three percent in certain circumstances) and is not "well capitalized"; (iii) "undercapitalized" if it has a total capital ratio of less than eight percent, a tier 1 capital ratio of less than four percent or a leverage ratio of less than four percent (three percent in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than six percent, a tier 1 capital ratio of less than three percent or a leverage ratio of less than three percent; and (v) "critically undercapitalized" if its tangible equity is equal to or less than two percent of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 1997, all of the Corporation's deposit-taking subsidiary banks had capital levels that qualify them as being "well capitalized" under such regulations. The FDIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized". "Undercapitalized" depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other 5 things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to five percent of the depository institution's total assets at the time it became "undercapitalized", and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized". "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized", requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. A bank that is not "well capitalized" is subject to certain limitations relating to so-called "brokered" deposits. Depositor Preference Statute Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. Interstate Banking and Branching Legislation The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA"), authorized interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, it authorized, beginning June 1, 1997, a bank to merge with a bank in another state as long as neither of the states opted out of interstate branching between the date of enactment of the IBBEA and May 31, 1997. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo branching. It was pursuant to authority from IBBEA that the Corporation reorganized certain of its subsidiary banks in 1997 and in February 1998, as a result of which FUNB, based in Charlotte, North Carolina, operates in 11 states and Washington, D.C. Additional Information Additional information related to certain regulatory and accounting matters is set forth on pages 26 and 27 in the Annual Report and incorporated herein by reference. Item 2. Properties. As of December 31, 1997, the Corporation and its subsidiaries owned or leased 2,997 locations in 38 states, Washington, D.C., and 7 foreign countries from which their business is conducted, including a multi-story office complex in Charlotte, North Carolina, which serves as the administrative headquarters of the Corporation. Listed below are the number of banking and nonbanking locations that are leased or owned, as of December 31, 1997.
Leased Owned -------- -------- First Union National Bank .............. 1,394 1,406 First Union Bank of Delaware ........... 2 -- First Union Home Equity Bank, N.A. ..... 130 -- Nonbanking locations ................... 63 2 ----- ----- Total ................................. 1,589 1,408 ===== =====
Additional information relating to the Corporation's lease commitments is set forth in Note 16 on page C-33 in the Annual Report and incorporated herein by reference. Item 3. Legal Proceedings. The Corporation and certain of its subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which varying amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, based upon the opinions of counsel, any such liability will not have a material effect on the consolidated financial position of the Corporation and its subsidiaries. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. 6 PART II Item 5. Market For Registrant's Common Equity And Related Stockholder Matters. FUNC Common Stock is listed on the NYSE. Table 6 on page T-6 in the Annual Report sets forth information relating to the quarterly prices of, and quarterly dividends paid on, FUNC Common Stock for the two-year period ended December 31, 1997, and incorporated herein by reference. Prices shown represent the high, low and quarter-end sale prices of FUNC Common Stock as reported on the NYSE Composite Transactions tape for the periods indicated. Such prices have been adjusted to reflect a two-for-one stock split effected in the form of a 100 percent common stock dividend paid on July 31, 1997, to stockholders of record on July 1, 1997. As of December 31, 1997, there were 120,437 holders of record of FUNC Common Stock. Subject to the prior rights of holders of any outstanding shares of the Corporation's Preferred Stock or Class A Preferred Stock, holders of FUNC Common Stock are entitled to receive such dividends as may be legally declared by the Board of Directors of the Corporation (the "FUNC Board") and, in the event of dissolution and liquidation, to receive the net assets of the Corporation remaining after payment of all liabilities, in proportion to their respective holdings. Additional information concerning certain limitations on the payment of dividends by the Corporation and its subsidiaries is set forth above under "Business -- Supervision and Regulation; Payment of Dividends" and in Note 18 on page C-36 in the Annual Report and incorporated herein by reference. Each outstanding share of FUNC Common Stock currently has attached to it one right (a "Right") issued pursuant to an Amended and Restated Shareholder Protection Rights Agreement (the "Rights Agreement"). Each Right entitles its registered holder to purchase one one-hundredth of a share of a junior participating series of the Corporation's Class A Preferred Stock designed to have economic and voting terms similar to those of one share of FUNC Common Stock, for $105.00, subject to adjustment (the "Rights Exercise Price"), but only after the earlier to occur (the "Separation Time") of: (i) the tenth business day (subject to extension) after any person (an "Acquiring Person") (x) commences a tender or exchange offer, which, if consummated, would result in such person becoming the beneficial owner of 15 percent or more of the outstanding shares of FUNC Common Stock, or (y) is determined by the Federal Reserve Board to "control" the Corporation within the meaning of the BHCA, subject to certain exceptions; and (ii) the tenth business day after the first date (the "Flip-in Date") of a public announcement by the Corporation that a person has become an Acquiring Person. The Rights will not trade separately from the shares of FUNC Common Stock unless and until the Separation Time occurs. The Rights Agreement provides that a person will not become an Acquiring Person under the BHCA control test described above if either (i) the Federal Reserve Board's control determination would not have been made but for such person's failure to make certain customary passivity commitments, or such person's violation of such commitments made, to the Federal Reserve Board, so long as the Federal Reserve Board determines that such person no longer controls the Corporation within 30 days (or 60 days in certain circumstances), or (ii) the Federal Reserve Board's control determination was not based on such a failure or violation and such person (x) obtains a noncontrol determination within three years, and (y) is using its best efforts to allow the Corporation to make any acquisition or engage in any legally permissible activity notwithstanding such person's being deemed to control the Corporation for purposes of the BHCA. The Rights will not be exercisable until the business day following the Separation Time. The Rights will expire on the earliest of: (i) the Exchange Time (as defined below); (ii) the close of business on December 28, 2000; and (iii) the date on which the Rights are redeemed or terminated as described below (in any such case, the "Expiration Time"). The Rights Exercise Price and the number of Rights outstanding, or in certain circumstances the securities purchasable upon exercise of the Rights, are subject to adjustment upon the occurrence of certain events. In the event that prior to the Expiration Time a Flip-in Date occurs, the Corporation will take such action as shall be necessary to ensure and provide that each Right (other than Rights beneficially owned by an Acquiring Person or any affiliate, associate or transferee thereof, which Rights shall become void) shall constitute the right to purchase, from the Corporation, shares of FUNC Common Stock having an aggregate market price equal to twice the Rights Exercise Price for an amount in cash equal to the then current Rights Exercise Price. In addition, the FUNC Board may, at its option, at any time after a Flip-in Date, elect to exchange all of the then outstanding Rights for shares of FUNC Common Stock, at an exchange ratio of two shares of FUNC Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the Separation Time (the "Rights Exchange Rate"). Immediately upon such action by the 7 FUNC Board (the "Exchange Time"), the right to exercise the Rights will terminate, and each Right will thereafter represent only the right to receive a number of shares of FUNC Common Stock equal to the Rights Exchange Rate. If the Corporation becomes obligated to issue shares of FUNC Common Stock upon exercise of or in exchange for Rights, the Corporation, at its option, may substitute therefor shares of junior participating Class A Preferred Stock upon exercise of each Right at a rate of two one-hundredths of a share of junior participating Class A Preferred Stock upon the exchange of each Right. The Rights may be canceled and terminated without any payment to holders thereof at any time prior to the date they become exercisable and are redeemable by the Corporation at $0.01 per right, subject to adjustment upon the occurrence of certain events, at any date between the date on which they become exercisable and the Flip-in Date. The Rights have no voting rights and are not entitled to dividends. The Rights will not prevent a takeover of the Corporation. The Rights, however, may cause substantial dilution to a person or group that acquires 15 percent or more of FUNC Common Stock (or that acquires "control" of the Corporation within the meaning of the BHCA) unless the Rights are first redeemed or terminated by the FUNC Board. Nevertheless, the Rights should not interfere with a transaction that is in the best interests of the Corporation and its stockholders because the Rights can be redeemed or terminated, as hereinabove described, before the consummation of such transaction. The complete terms of the Rights are set forth in the Rights Agreement. The foregoing description of the Rights and the Rights Agreement is qualified in its entirety by reference to such document. A copy of the Rights Agreement can be obtained upon written request to the Rights Agent, First Union National Bank, Two First Union Center, Charlotte, North Carolina 28288-1154. Additional information relating to FUNC Common Stock is set forth in Note 13 on page C-25 in the Annual Report and incorporated herein by reference. Item 6. Selected Financial Data. In response to this Item, the information set forth in Table 1 on page T-1 in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. In response to this Item, the information set forth on pages 8 through 30, pages P-1 through P-5 and pages T-1 through T-24 in the Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. In response to this Item, the information set forth on pages 23 through 26, pages T-16 through T-21 and pages C-31 through C-33 in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. In response to this Item, the information set forth in Table 6 on page T-6 and on pages C-1 through C-39 in the Annual Report is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 8 PART III Item 10. Directors and Executive Officers of the Registrant. The executive officers of the Corporation are elected to their offices for one year terms at the meeting of the FUNC Board in April of each year. The terms of any executive officers elected after such date expire at the same time as the terms of the executive officers elected on such date. The names of each of the executive officers of the Corporation in office on December 31, 1997, their ages, their positions with the Corporation on such date, and, if different, their business experience during the past five years, are as follows: Edward E. Crutchfield (56). Chairman and Chief Executive Officer. Also, a director of the Corporation. John R. Georgius (53). Vice Chairman, since January 1, 1996. President, from June 1990 to January 1, 1996. Mr. Georgius was elected President of the Corporation upon the retirement of Mr. Terracciano on December 31, 1997. Also, a director of the Corporation. Anthony P. Terracciano (59). President, since January 1, 1996. Formerly Chairman of the Board, President and Chief Executive Officer of FFB. Mr. Terracciano retired from the Corporation on December 31, 1997. Also, a director of the Corporation. B. J. Walker (67). Vice Chairman. Also, a director of the Corporation. Robert T. Atwood (57). Executive Vice President and Chief Financial Officer. Marion A. Cowell, Jr. (63). Executive Vice President, Secretary and General Counsel. In addition to the foregoing, the information set forth in the Proxy Statement under the heading "General Information and Nominees", and under the subheading "Section 16(a) Beneficial Ownership Reporting Compliance" under the heading "Other Matters Relating to Executive Officers and Directors " is incorporated herein by reference. Item 11. Executive Compensation. In response to this Item, the information set forth in the Proxy Statement under the heading "Executive Compensation", excluding the information under the subheadings "HR Committee Report on Executive Compensation" and "Performance Graph", is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. In response to this Item, the information set forth in the Proxy Statement relating to the ownership of Common Stock by the directors, executive officers and principal stockholders of the Corporation under the headings "Voting Securities and Principal Holders" and "General Information and Nominees" is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. In response to this Item, the information set forth in the Proxy Statement under the subheadings "General" and "Certain Other Relationships" under the heading "Other Matters Relating to Executive Officers and Directors" is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Pro forma financial information and the consolidated financial statements of the Corporation, including the notes thereto and independent auditors' report thereon, are set forth on pages P-1 through P-5 and pages C-1 through C-39, respectively, of the Annual Report, and are incorporated herein by reference. In addition, the audited historical financial statements of CoreStates, including the notes thereto, set forth in Exhibit 99(a) to this Form 10-K, and certain related independent auditors' reports set forth in Exhibits 99(b) and 99(c) to this Form 10-K, are incorporated herein by reference. All financial statement schedules are omitted since the required information is either not applicable, is immaterial or is included in the consolidated financial statements of the Corporation and notes thereto. A list of the exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference. (b) During the quarter ended December 31, 1997, Current Reports on Form 8-K, dated November 18, 1997, November 28, 1997, and December 2, 1997, were filed by the Corporation with the Securities and Exchange Commission. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST UNION CORPORATION Date: March 23, 1998 By: Marion A. Cowell, Jr. ------------------------------------- Marion A. Cowell, Jr. Executive Vice President, Secretary and General Counsel Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
Signature Capacity - ------------------------------------ ---------------------------------------------------------- EDWARD E. CRUTCHFIELD* Chairman and Chief Executive Officer and Director - ---------------------------------- Edward E. Crutchfield ROBERT T. ATWOOD* Executive Vice President and Chief Financial Officer - ---------------------------------- Robert T. Atwood JAMES H. HATCH* Senior Vice President and Corporate Controller (Principal - ---------------------------------- Accounting Officer) James H. Hatch - ---------------------------------- Edward E. Barr Director G. ALEX BERNHARDT* Director - ---------------------------------- G. Alex Bernhardt W. WALDO BRADLEY* Director - ---------------------------------- W. Waldo Bradley ROBERT J. BROWN* Director - ---------------------------------- Robert J. Brown A. DANO DAVIS* Director - ---------------------------------- A. Dano Davis R. STUART DICKSON* Director - ---------------------------------- R. Stuart Dickson B. F. DOLAN* Director - ---------------------------------- B. F. Dolan RODDEY DOWD, SR.* Director - ---------------------------------- Roddey Dowd, Sr.
10
Signature Capacity - ------------------------------------ --------- JOHN R. GEORGIUS* Director - ---------------------------------- John R. Georgius Director - ---------------------------------- Arthur M. Goldberg WILLIAM H. GOODWIN, JR.* Director - ---------------------------------- William H. Goodwin, Jr. HOWARD H. HAWORTH* Director - ---------------------------------- Howard H. Haworth FRANK M. HENRY* Director - ---------------------------------- Frank M. Henry LEONARD G. HERRING* Director - ---------------------------------- Leonard G. Herring JACK A. LAUGHERY* Director - ---------------------------------- Jack A. Laughery MAX LENNON* Director - ---------------------------------- Max Lennon RADFORD D. LOVETT* Director - ---------------------------------- Radford D. Lovett MACKEY J. MCDONALD* Director - ---------------------------------- Mackey J. McDonald MALCOLM S. MCDONALD* Director - ---------------------------------- Malcolm S. McDonald JOSEPH NEUBAUER* Director - ---------------------------------- Joseph Neubauer RANDOLPH N. REYNOLDS* Director - ---------------------------------- Randolph N. Reynolds RUTH G. SHAW* Director - ---------------------------------- Ruth G. Shaw CHARLES M. SHELTON, SR.* Director - ---------------------------------- Charles M. Shelton, Sr.
11
Signature Capacity - ---------------------------------------------- --------- LANTY L. SMITH* Director - ---------------------------------- Lanty L. Smith ANTHONY P. TERRACCIANO* Director - ---------------------------------- Anthony P. Terracciano Director - ---------------------------------- Dewey L. Trogdon JOHN D. UIBLE* Director - ---------------------------------- John D. Uible B. J. WALKER* Director - ---------------------------------- B. J. Walker *By Marion A. Cowell, Jr., Attorney-in-Fact MARION A. COWELL, JR. - ---------------------------------- Marion A. Cowell, Jr.
Date: March 23, 1998 12 EXHIBIT INDEX
Exhibit No. Description Location - ------------- ------------------------------------------------------- ------------------------------------------ (2)(a) CoreStates acquisition agreement. Incorporated by reference to Exhibit (2) to the Corporation's Current Report on Form 8-K dated November 28, 1997. Omitted exhibits to be filed upon request of the Securities and Exchange Commission. (2)(b) Signet acquisition agreement. Incorporated by reference to Exhibit (2) to the Corporation's Current Report on Form 8-K dated July 21, 1997. Omitted exhibits to be filed upon request of the Securities and Exchange Commission. (3)(a) Articles of Incorporation of the Corporation, as Incorporated by reference to Exhibit (4) amended. to the Corporation's 1990 First Quarter Report on Form 10-Q, to Exhibit (99)(a) to the Corporation's 1993 First Quarter Report on Form 10-Q, to Exhibit (4) to the Corporation's Current Report on Form 8-K dated January 10, 1996, and to the Articles of Amendment dated March 4, 1998 filed herewith. (3)(b) Bylaws of the Corporation, as amended. Incorporated by reference to Exhibit (3)(b) to the Corporation's 1995 Annual Report on Form 10-K. (4)(a) Instruments defining the rights of the holders of the * Corporation's long-term debt. (4)(b) The Corporation's Amended and Restated Shareholder Incorporated by reference to Exhibit (4) Protection Rights Agreement. to the Corporation's Current Report on Form 8-K dated October 16, 1996. (10)(a) The Corporation's Amended and Restated Management Incorporated by reference to Exhibit Incentive Plan. (10)(a) to the Corporation's 1995 Annual Report on Form 10-K. (10)(b) The Corporation's Deferred Compensation Plan for Incorporated by reference to Exhibit Officers. (10)(b) to the Corporation's 1988 Annual Report on Form 10-K. (10)(c) The Corporation's Deferred Compensation Plan for Incorporated by reference to Exhibit Non-Employee Directors. (10)(c) to the Corporation's 1989 Annual Report on Form 10-K. (10)(d) The Corporation's Contract Executive Deferred Filed herewith. Compensation Plan. (10)(e) The Corporation's Supplemental Executive Long-Term Incorporated by reference to Exhibit Disability Plan. (10)(d) to the Corporation's 1988 Annual Report on Form 10-K. (10)(f) The Corporation's Supplemental Retirement Plan. Incorporated by reference to Exhibit (10)(f) to the Corporation's 1988 Annual Report on Form 10-K. (10)(g) The Corporation's Retirement Plan for Non-Employee Incorporated by reference to Exhibit Directors. (10)(g) to the Corporation's 1988 Annual Report on Form 10-K. (10)(h) The Corporation's 1984 Master Stock Compensation Incorporated by reference to Exhibit (28) Plan. to the Corporation's Registration Statement No. 33-47447.
(10)(i) The Corporation's 1988 Master Stock Compensation Incorporated by reference to Exhibit (28) Plan. to the Corporation's Registration Statement No. 33-47447. (10)(j) The Corporation's 1992 Master Stock Compensation Incorporated by reference to Exhibit (28) Plan. to the Corporation's Registration Statement No. 33-47447. (10)(k) Employment Agreement between the Corporation and Incorporated by reference to Exhibit Edward E. Crutchfield. (10)(k) to the Corporation's 1994 Annual Report on Form 10-K. (10)(l) Management Restricted Stock Award Agreement. Incorporated by reference to Exhibit (10) to the Corporation's 1997 Second Quarter Report on Form 10-Q. (10)(m) The Corporation's Management Long-Term Cash Incorporated by reference to Exhibit Incentive Plan. (10)(m) to the Corporation's 1992 Annual Report on Form 10-K. (10)(n) Employment Agreement between the Corporation and Incorporated by reference to Exhibit Anthony P. Terracciano. (99)(c) to the Corporation's Registration Statement No. 33-62307. (10)(o) Employment Agreement between the Corporation and Incorporated by reference to Exhibit (10) John R. Georgius. to Amendment No. 1 to the Corporation's Registration Statement No. 33-60835. (10)(p) The Corporation's Elective Deferral Plan. Incorporated by reference to Exhibit (4) to the Corporation's Registration Statement No. 33-60913. (10)(q) The Corporation's 1996 Master Stock Compensation Incorporated by reference to Exhibit (10) Plan. to the Corporation's 1996 First Quarter Report on Form 10-Q. (10)(r) Employment Agreement between the Corporation and Incorporated by reference to Exhibit Malcolm S. McDonald. (99)(d) to the Corporation's Registration Statement No. 333-36839. (10)(s) Employment Agreement between the Corporation and Incorporated by reference to Exhibit Terrance A. Larsen. (99)(c) to the Corporation's Registration Statement No. 333-44015. (12) Computations of Consolidated Ratios of Earnings to Filed herewith. Fixed Charges. (13) The Corporation's 1997 Annual Report to Filed herewith. Stockholders.** (21) List of the Corporation's subsidiaries. Filed herewith. (23)(a) Consent of KPMG Peat Marwick LLP. Filed herewith. (23)(b) Consent of Ernst & Young LLP. Filed herewith. (23)(c) Consent of KPMG Peat Marwick LLP. Filed herewith. (23)(d) Consent of KPMG Peat Marwick LLP. Filed herewith. (24) Power of Attorney. Filed herewith. (27)(a) The Corporation's Financial Data Schedule- 1997.*** (27)(b) The Corporation's Financial Data Schedule- 1996.*** (27)(c) The Corporation's Financial Data Schedule- 1995.*** (99)(a) CoreStates Historical Financial Information. Filed herewith. (99)(b) Independent Auditors' Report of KPMG Peat Marwick Filed herewith. LLP.
(99)(c) Independent Auditors' Report of KPMG Peat Filed herewith. Marwick LLP.
- --------- * The Corporation agrees to furnish to the Securities and Exchange Commission upon request, copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its subsidiaries. ** Except for those portions of the Annual Report which are expressly incorporated by reference in this Form 10-K, the Annual Report is furnished for the information of the Securities and Exchange Commission only and is not to be deemed "filed" as part of such Form 10-K. *** Filing by Electronic Data Gathering, Analysis and Retrieval System only. EX-3 2 EXHIBIT (3)(A) Exhibit (3)(a) ARTICLES OF AMENDMENT OF FIRST UNION CORPORATION The undersigned corporation hereby submits these Articles of Amendment for the purpose of amending its Articles of Incorporation: 1. The name of the corporation is First Union Corporation. 2. The following amendment to the first paragraph of Article 4 of the Articles of Incorporation of the corporation was adopted by its stockholders on the 27th day of February, 1998, in the manner prescribed by law: "4. The aggregate number of shares which the corporation shall have authority to issue is Two Billion, Fifty Million (2,050,000,000) shares, divided into three (3) classes. The description of each class, the number of authorized shares of each class, and the par value of each class, is as follows:
Class No. of Shares Par Value Per Share ----- ------------- ------------------- Common Stock 2,000,000,000 $3.33 1/3 Preferred Stock 10,000,000 No-par Class A Preferred Stock 40,000,000 No-par"
3. The number of shares of the corporation outstanding and entitled to be cast thereon was 636,385,071 shares of common stock, each of such shares being entitled to one vote; and the number of votes of the holders of common stock indisputably represented at the meeting of stockholders was 471,275,466. 4. The total number of undisputed votes cast by the holders of common stock for the amendment was 446,347,497, which number was sufficient for approval of the amendment. This the 4th day of March, 1998. FIRST UNION CORPORATION By: /s/ Kent S. Hathaway ________________________ Kent S. Hathaway Senior Vice President EX-10 3 EXHIBIT (10)(D) Exhibit (10)(d) FIRST UNION CORPORATION CONTRACT EXECUTIVE DEFERRED COMPENSATION PLAN February 17, 1998 Section 1. Establishment and Purpose 1.1 Establishment. First Union Corporation hereby establishes, effective as of December 31, 1997, an unfunded deferred Compensation plan for certain of its or its subsidiaries employees and their beneficiaries as described herein, known as the "FIRST UNION CORPORATION CONTRACT EXECUTIVE DEFERRED COMPENSATION PLAN" (hereinafter called the "Plan"). 1.2 Purpose. The purpose of this Plan is to provide a means whereby Compensation payable by the Company or its Subsidiaries to certain selected Employees may be deferred for a period of not less than five Years. 1.3 Application of Plan. The terms of this Plan are applicable only to eligible Employees who are in the employ of the Company or a Subsidiary as a result of a Contract entered into on or after July 1, 1997. Section 2. Definitions 2.1 Definitions. Whenever used herein, the following terms shall have the meanings set forth below: (a) "Account Balance" means an amount equal to the sum of (a) all Compensation deferred by an Employee pursuant to Section 4.1; and (b) accumulated Growth Additions. (b) "Board" means the Board of Directors of the Company. (c) "Committee" means the Human Resources Committee of the Board. (d) "Company" means FIRST UNION CORPORATION. (e) "Compensation" means the sum of an eligible Employee's (a) base salary and (b) any bonus, incentive award, or similar payment payable under a Contract. (f) "Contract" means an employment agreement by and between the Company or its Subsidiaries and the Employee. (g) "Disability" means total Disability as a result of injury or sickness as defined in "The Long Term Disability Plan for Employees of First Union Corporation," designated as Plan 502 by First Union Corporation. (h) "Employee" means an individual receiving Compensation under a Contract who is eligible to participate in the Plan. (i) "Good Reason" means the definition and provisions under an Employee's Contract of specific events that permit termination of the employment of the Employee by the Employee and the payment of Compensation as determined in accordance with the Employee's Contract. (j) "Growth Addition" means an amount equal to the Employee's average monthly ending balance in his account during a Year multiplied by an interest rate equal to (i) the average prime rate of interest charged on commercial loans as of the last day of each calendar quarter (March 31, June 30, September 30, and December 31), or (ii) such other interest rate as the Committee may otherwise determine on an individual participant basis. (k) "Retirement" means retirement under the terms of the Company's Pension Plan. 1 (l) "Subsidiary" means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in all of the other corporations in such chain. (m) "Year" means the twelve-month period beginning January 1 and ending December 31. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology when used in the Plan shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. Section 3. Eligibility for Participation 3.1 Eligibility. Any Employee of the Company or of any Subsidiary who is compensated under a Contract, and who is selected to participate by the Committee will be eligible to participate in this Plan. Section 4. Election to Defer 4.1 Deferral Election. Prior to December 31 of each Year while the Employee is employed by the Company or Subsidiary any eligible Employee may elect to defer for a period of not less than five Years all, or any part of his Compensation earned in the following Year or Years. Deferral periods that extend beyond ten Years will be subject to the approval of the Committee. At the time any deferral election is made pursuant to this Section 4.1, the Employee shall also elect the manner in which payments are to be made under Section 6.1. 4.2 Deferral Election by New Participant. Any Employee who becomes eligible to participate in the Plan pursuant to Section 3.1 after the commencement of a Year may make a deferral election under Section 4.1 at any time within 30 days after the date such Employee becomes so eligible to participate in this Plan. 4.3 Deferral Period. Payment of an Employee's Account Balance shall commence: (a) On or before 90 days after the last day of the fifth Year following the payment of the Compensation being deferred, or such subsequent Year as the Employee shall have designated and the Committee has approved, if Committee approval is required, or (b) On or before 90 days after the date of an Employee's termination by reason of death or Disability, whichever is earlier, subject to the provisions of Section 6 of this Plan. Section 5. Deferred Accounts 5.1 Employee Accounts. The Company shall establish and maintain a bookkeeping account for each Employee to be credited as of the date the amount of the Compensation that is deferred otherwise would have been payable. 5.2 Growth Additions. Throughout the period of deferral and until the final distribution is made each Employee's account shall be credited on the last day of each Year or prior thereto with a Growth Addition. 5.3 Charge Against Accounts. There shall be charged against each Employee's account any payments and any forfeitures made to the Employee or to his beneficiary in accordance with Section 6 hereof. 5.4 General Obligation. Payment of Account Balances shall be made out of the general funds of the Company, or Subsidiary, if applicable. 5.5 Unsecured Interest. No Employee or beneficiary shall have any interest whatsoever in any specific asset of the Company, or any of its Subsidiaries. To the extent that any person acquires a right to receive payments under this Plan, such right shall be no 2 greater than the right of any unsecured general creditor of the Company, or any Subsidiary. Section 6. Method of Payment of Deferred Amounts 6.1 Method of Payment of Deferred Amounts. An Employee's Account Balance shall be paid in a lump sum payment or in annual installments over a minimum period of five Years, or such subsequent Year as the Employee shall have selected pursuant to Section 4.1; provided, however, this election shall be made on the same date as the Employee's election to defer under Section 4.1 of this Plan. If an Employee elects the installment method of payment, the amount to be paid with each installment shall be the Employee's Account Balance as of the immediately preceding annual crediting date multiplied by a fraction, the numerator of which is one and the denominator of which shall be the number of installment payments remaining. If the Employee elects the installment method of payment and the deferral period ends by reason of termination, as set forth in Section 4.3(b) of this Plan, the first installment payment of an Employee's Account Balance shall be made on or before 90 days following the date on which the deferral period ends by reason of termination. Payments after the first installment payment shall be made on or before 90 days following the first day of each Year subsequent to the Year in which the deferral period ends by reason of termination; provided, however, that in no event shall more than one installment payment be made in any one Year. 6.2 Final Installment or Lump Sum Payment. As to the final installment payment or any lump sum payment made under this Section, such payment shall include a pro-rata Growth Addition for the period from the immediately preceding annual crediting date of payment based upon the interest rate applied for the immediately preceding Year. 6.3 Financial Hardship. If an Employee or beneficiary establishes, to the satisfaction of the Committee, that he is confronted by a severe financial hardship, the Committee, in its sole discretion, may alter the timing or manner of payment of deferred amounts in the manner and subject to the conditions set forth hereafter: (a) A severe financial hardship will be deemed to exist only if it arises out of an emergency caused by circumstances or events which are beyond the control of the Employee. A severe financial hardship will be deemed to have occurred in the event of the Employee's impending bankruptcy, serious illness of the Employee or a dependent of the Employee, or such other circumstances or events as may be determined by the Committee to affect severely the financial affairs of the Employee or his immediate family. (b) In the event that the Committee determines that the Employee is confronted by a severe financial hardship, the Committee may provide that all or a portion of the amounts previously deferred by the Employee may be paid immediately in a lump sum cash payment, or provide that all or a portion of the installments payable over a period of time may be paid immediately in a lump sum cash payment, or provide such other payment schedule as the Committee deems appropriate under the circumstances. (c) In no event shall any distribution made by the Committee under the Subsection be in excess of the amount necessary to alleviate the Employee's severe financial hardship. (d) The Committee's decision in passing on the severe financial hardship of the Employee, and the manner in which, if at all, the payment of deferred amounts shall be altered or modified shall be final, conclusive, and not-subject to appeal. 6.4 Payment of Deferred Amounts when Employee Becomes Affiliated with Competitor. In the event that an Employee ceases to be an Employee of the Company or any of its Subsidiaries and thereafter becomes a proprietor, officer, partner, employee, or otherwise becomes affiliated with any business that is in competition with the Company or any of its Subsidiaries, or becomes an employee of any federal, state, or municipal agency, office, subdivision, or other component having jurisdiction over any activity of the Company or any of its Subsidiaries, the entire balance of such Employee's deferred account shall be immediately paid to such Employee in a lump sum. In the event that the affiliation with a competitor described in the preceding sentence is not in violation of the Employee's Contract the Employee will be allowed to participate in the Plan as if the Employee had not affiliated with a competitor. The determination of whether an Employee has been affiliated with a business in competition with the Company or any of its Subsidiaries, or with a governmental component having jurisdiction over any activity of the Company or any of its Subsidiaries shall rest solely with the Committee and such determination shall be final, conclusive and not subject to appeal. 3 6.5 Payment of Deferred Amounts when Employee Voluntarily Terminates Employment with the Company. In the event that an Employee voluntarily terminates employment with the Company for reasons other than Retirement, death, Disability, or Good Reason, the entire balance of such Employee's deferred account shall be immediately paid to such Employee in a lump sum. The determination of whether an Employee has voluntarily terminated employment with the Company for reasons other than Retirement, death, Disability, or Good Reason, shall rest solely with the Committee and such determination shall be final, conclusive, and not subject to appeal. 6.6 Forfeiture Upon Misconduct or Crime. If an Employee is discharged from employment by the Company or any of its Subsidiaries for dishonesty, conviction of a felony, unauthorized disclosure of confidential material information of the Company or any of its Subsidiaries to a business in competition with the Company or its Subsidiaries within the meaning and application of Section 6.4 of this Plan, or other willful, deliberate or gross misconduct of similar magnitude, such Employee's entire Account Balance shall be immediately paid to him in a lump sum and further participation in this Plan will be discontinued. The determination of whether an Employee has been discharged for any of the foregoing reasons shall rest solely with the Committee and such determination shall be final, conclusive, and not subject to appeal. Section 7. Beneficiary 7.1 Beneficiary. An Employee shall designate a beneficiary or beneficiaries who, upon the Employee's death, are to receive the amounts that otherwise would have been paid to the Employee. All designations shall be in writing and shall be effective only if and when delivered to the Committee during the lifetime of the Employee; provided, however, that a beneficiary designation shall be effective if the Committee is satisfied that an Employee made an otherwise valid beneficiary designation except for the failure to deliver such designation to the Committee during the Employee's lifetime. If an Employee designates a beneficiary without providing in the designation that a beneficiary must be living at the time of such payment, the designation shall vest in the beneficiary the entire Account Balance, whether otherwise payable before or after the beneficiary's death. Any amounts remaining unpaid upon the beneficiary's death shall be paid in a lump sum to the beneficiary's estate. An Employee may from time to time during his lifetime change his beneficiary or beneficiaries by a written instrument delivered to the Committee. In the event an Employee shall not designate a beneficiary or beneficiaries pursuant to this Section, or if for any reason such designation shall be ineffective, in whole or in part, the payments that otherwise would have been paid to such Employee shall be paid to the Employee's estate, and in such event, the term "beneficiary" shall include his estate. Section 8. Administration 8.1 Administration. This Plan shall be administered by the Committee. The Committee may from time to time establish rules for the administration of this Plan that are not inconsistent with the provisions of this Plan. 8.2 Finality of Determination. The determination of the Committee as to any disputed questions arising under this Plan, including questions of construction and interpretation, shall be final, binding, and conclusive upon all persons, except, with respect to an Employee to the extent any such determination is contrary to the express provisions of the Employee's Contract. 8.3 Expenses. The cost of payment from this plan and the expenses of administering the plan shall be borne by the Company. 8.4 Tax Withholding. The Company or its Subsidiaries may withhold, or require the withholding of, from any payment which is required to make any federal, state, or local taxes required by law to be withheld with respect to such payment and such sum as the Company or its Subsidiaries may estimate as necessary to cover any taxes for which the Company or its Subsidiaries may be liable and which may be assessed with regard to such payment. Upon discharge or settlement of such tax liability, the Company shall distribute the balance of such sum, if any, to the Employee from whose payment it was withheld, or if such Employee is then deceased, to the beneficiary of such Employee. Prior to making any payment hereunder, the Company may require such documents from any taxing authority, or may require such indemnities or surety bond as the Company shall reasonably deem necessary for its protection. 4 Section 9. Miscellaneous 9.1 Nontransferability. In no event shall the Company make any payment under this Plan to any assignee or creditor of an Employee or of a beneficiary. Prior to the time of a payment hereunder, an Employee or a beneficiary shall have no rights by way of anticipation or otherwise to assign or otherwise dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law. 9.2 Merger, Consolidation, or Acquisition. In the event of a merger, consolidation, or acquisition where the Company is not the surviving corporation, unless the successor or acquiring corporation shall elect to continue and carry on the Plan, all amounts deferred, plus Growth Additions, shall become immediately payable in full, subject only to withholding requirements. The successor or acquiring corporation shall be required to dispose of this Plan in a manner similar to all other executive deferred compensation plans of the Company. 9.3 Amendment and Termination. The Company expects the Plan to be permanent but, since future conditions affecting the Company cannot be anticipated or foreseen, the Company must necessarily and does hereby reserve the right to amend, modify, or terminate the Plan at any time by action of the Board. No amendment or termination shall operate to decrease any existing Account Balances of Employees. 9.4 Applicable Law. This plan shall be governed and construed in accordance with the laws of the State of North Carolina. 5 EX-12 4 EXHIBIT (12) EXHIBIT (12)
FIRST UNION CORPORATION AND SUBSIDIARIES COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES - --------------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- (IN MILLIONS) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 2,710 2,499 2,389 2,088 1,795 Fixed charges, excluding capitalized interest 2,068 1,880 1,426 816 608 - --------------------------------------------------------------------------------------------------------------------------------- Earnings (A) $ 4,778 4,379 3,815 2,904 2,403 - --------------------------------------------------------------------------------------------------------------------------------- Interest, excluding interest on deposits $ 1,926 1,805 1,349 747 538 Distributions on guaranteed preferred beneficial interests 66 - - - - One-third of rents 76 74 76 69 70 Capitalized interest - 5 4 1 - - --------------------------------------------------------------------------------------------------------------------------------- Fixed charges (B) $ 2,068 1,884 1,429 817 608 - --------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, excluding interest on deposits (A)/(B) 2.31 X 2.32 2.67 3.55 3.95 - --------------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 2,710 2,499 2,389 2,088 1,795 Fixed charges, excluding capitalized interest 5,332 5,070 4,502 2,862 2,552 - --------------------------------------------------------------------------------------------------------------------------------- Earnings (C) $ 8,042 7,569 6,891 4,950 4,347 - --------------------------------------------------------------------------------------------------------------------------------- Interest, including interest on deposits $ 5,190 4,995 4,425 2,793 2,482 Distributions on guaranteed preferred beneficial interests 66 - - - - One-third of rents 76 74 76 69 70 Capitalized interest - 5 4 1 - - --------------------------------------------------------------------------------------------------------------------------------- Fixed charges (D) $ 5,332 5,074 4,505 2,863 2,552 - --------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, including interest on deposits (C)/(D) 1.51 X 1.49 1.53 1.73 1.70 - ---------------------------------------------------------------------------------------------------------------------------------
EX-13 5 EXHIBIT 13 1997 ANNUAL REPORT FIRST UNION http://www.firstunion.com/ Customers for Life Contents At a Glance.............................................. i Letter to Our Shareholders............................... 1 Index to Special Topics.................................. 7 Management's Analysis of Operations...................... 8 Glossary of Terms........................................30 Board of Directors.......................................31 Across the Nation........................................32 Pro Forma Financial Information.........................P-1 Financial Tables........................................T-1 Management's Statement of Financial Responsibility................................C-1 Independent Auditors' Report............................C-2 Audited Financial Statements............................C-3 Stockholder Information...................Inside Back Cover First Union announced dividend increases twice in 1997. Including its predecessor, Union National Bank, First Union has paid a dividend every year since 1914 and has increased the dividend annually for the past 20 consecutive years. [GRAPHIC APPEARS HERE] (graphic appears here.) At A Glance First Union Corporation, with headquarters in Charlotte, North Carolina, is the nation's sixth largest banking company based on assets of $157 billion and fifth largest based on market capitalization of $33 billion at December 31, 1997. After completion of the CoreStates Financial Corp acquisition we expect to have assets of $208 billion and the largest domestic deposit share from Florida to Connecticut. First Union has a nationwide presence as the eighth largest securities brokerage company, based on 4,300 registered representatives; 18th largest mutual fund provider; 2nd largest home equity lender; and 12th largest mortgage servicing company. We are among the nation's largest middle-market commercial lenders. Our goal is to complement our traditional banking products with a complete selection of fully integrated investment banking products offered in our Capital Markets Group and a lifetime array of asset management offerings in our Capital Management Group. We rank among the Top 10 in several key Capital Markets products and services, including commercial mortgage securitizations, leveraged finance and loan syndication transactions. First Union also has sizable small business and cash management operations, which will rank among the Top 3 when the CoreStates acquisition is consummated. First Union serves 14 million customers. Customers may access their account information and purchase financial products at any of more than 2,000 retail offices (the nation's second largest branch network); nearly 2,800 automated teller machines (the nation's sixth largest ATM network); through the Internet at www.firstunion.com; or through our Direct Bank at 1-800-413-7898. Providing the best access to the best products (picture of man and child appears here.) in each customer's best interests. Corporate Overview ii First Union's long-standing commitment to customer service means that we must be ready to offer our customers the service and products they want - - when, where and how they want them. More and more of our customers are demanding quick, technological solutions to their financial service needs. Some even say they never want to go into a branch office again. Still other customers require, and will continue to receive, the face-to-face service they prefer, in a branch setting. One of the key components of our corporate strategy is meeting the needs of both kinds of customers. - ------------------------------------------------------------------------------- Strategic Priorities (bullet) Consistently meet our financial performance objectives and create unparalleled shareholder value; (bullet) Build fee-based lines of business that complement our traditional banking businesses; and (bullet) Provide the best access to the best products in each customer's best interests. - -------------------------------------------------------------------------------- Contributions to Profitability by Business Segment (pie chart appears here with plot points.) Capital Management 10% Capital Markets 18% Treasury/Nonbank 1% Commercial Bank 26% Consumer Bank 45% Key Statistical Data Assets $157 billion Loans $97 billion Deposits $103 billion Total Stockholders' Equity $12 billion Market Capitalization $33 billion Customer Relationships 14 million Asset Ranking 6th largest in nation Corporate Headquarters Charlotte, North Carolina WORKING CAPITAL SECURED LOANS WHOLESALE RETAIL (picture appears here of (picture appears here young lady at an ATM machine.) of a pen in hand.) AUTO LOANS CHECKING SAVINGSS iii (picture of map appears here with plot points.) Metropolitan Market Share New Haven, CT 3 Middlesex, County, NJ 1 Newark, NJ 1 Allentown, PA 1 Philadelphia, PA 1 Monmouth County, NJ 2 Washington, D.C. 3 Richmond, VA 1 Roanoke, VA 1 Johnson City, TN 3 Greensboro, NC 3 Charlotte, NC 1 Jacksonville, FL 2 Tampa, FL 2 Orlando, FL 3 Sarasota, FL 3 West Palm Beach, FL 2 Fort Lauderdale, FL 2 Miami, FL 2 (graph appears here with plot points.) Greatest Concentration of Companies (with Annual Sales $20mm-$250mm+) First Union's regions account for 36 percent of the nation's middle-market companies* First Union South 19% First Union Atlantic 17 East North Central 17 Pacific 14 West South Central 11 West North Central 7 Mountain 5 East South Central 4 New England 4% *First Union is primarily located in the South Atlantic region (DE, FL, GA, MD, DC, NC, SC, VA) and Middle Atlantic region (NJ, NY, PA), as well as Connecticut and Tennessee, which are in other regions as defined by the U.S. Statistical Abstract. Source: Dun & Bradstreet 1997. Per Capita Income by Metropolitan Area Seven of the ten metro areas with highest per capita income are in First Union's marketplace. - ------------------------------------------------------------------- Per Capita % of U.S. Personal Income Average - ------------------------------------------------------------------- San Francisco, CA $ 36,989 159.46% West Palm Beach - Boca Raton, FL 36,057 155.44 New Haven - Bridgeport - Stamford - Danbury - Waterbury, CT 35,400 152.61 Bergen - Passaic, NJ 33,931 146.28 Naples, FL 32,878 141.74 Trenton, NJ 32,633 140.68 Middlesex - Somerset - Hunterdon, NJ 32,507 140.14 Newark, NJ 32,346 139.45 Nassau-Suffolk, NY 32,108 138.42 San Jose, CA $ 31,487 135.74% Banking Units Florida Branches: 634 ATMs: 694 Market Share: 16.20% Ranking: No. 2 North Carolina Branches: 235 ATMs: 313 Market Share: 16.68% Ranking: No. 2 (tie) Pennsylvania Branches: 148 ATMs: 157 Market Share: 17.90% Ranking: No. 1 Virginia Branches: 266 ATMs: 319 Market Share: 17.23% Ranking: No. 1 New Jersey Branches: 315 ATMs: 373 Market Share: 15.14% Ranking: No. 2 Georgia Branches: 133 ATMs: 351 Market Share: 9.27% Ranking: No. 4 Connecticut Branches: 107 ATMs: 122 Market Share: 7.61% Ranking: No. 4 Maryland Branches: 132 ATMs: 164 Market Share: 7.57% Ranking: No. 5 South Carolina Branches: 59 ATMs: 76 Market Share: 7.54% Ranking: No. 4 Tennessee Branches: 44 ATMs: 59 Market Share: 2.86% Ranking: No. 7 Washington, D.C. Branches: 39 ATMs: 65 Market Share: 18.11% Ranking: No. 2 New York Branches: 58 ATMs: 73 Market Share: 0.62% Ranking: No. 22 Delaware Branches: 2 ATMs: 2 Market Share: 2.10% Ranking: No. 10 Market share data represents deposits at June 30, 1997, adjusted for Signet and for the pending CoreStates acquisition. STRATEGIC ADVICE ASSET-BASED LOANS UNDERWRITING (picture of HOME FOR SALE (picture of power line.) (picture of graduate and and family in front of home.) and lady.) CYBERBANKING INSURANCE FINANCIAL PLANNING Business Segments iv Consumer Bank Key Statistics (bullet) No. 1 deposit share in the Connecticut to Florida marketplace (bullet) Nation's 2nd largest branch network (bullet) Nation's 6th largest automated teller machine network (bullet) Nation's 2nd largest home equity lender (bullet) Nation's 12th largest mortgage servicer (bullet) Nation's 6th largest debit and ATM card issuer Products and Services First Union's Consumer Bank is focused on providing a complete selection of products and services to meet a lifetime of customers' financial needs, including deposit and savings accounts; first and second residential mortgages; installment loans; credit cards; auto loans and leases; and student loans. The Consumer Bank's approach is fully integrated with our other business segments, making our retail branches a major distribution point for mutual funds, insurance and small business loans. The Consumer Bank combines traditional deposit and lending products with innovative financial solutions all supported by state-of-the-art technology to provide quality customer service. Delivery Channels (bullet) Full-service retail branch network located in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. (bullet) Direct access 24 hours a day, seven days a week through technology-based delivery channels including the telephone, personal computer and automated teller machine (ATM). (bullet) Card products such as stored value cards, smart cards, ATM cards and debit cards. (bullet) Centralized customer information centers in Charlotte, North Carolina; Jacksonville, Florida; Upper Darby, Pennsylvania; Trapp Falls, Connecticut; and Roanoke, Virginia. Additional call centers expect to be fully functional in Allentown, Pennsylvania, and Richmond, Virginia, in 1998. Strategy First Union's retail strategy is based on building lifetime relationships with customers through an integrated product focus, innovative teamwork and quality service. Our customers have told us what that looks like: fast, easy and error-free. Industry observers have remarked that First Union's strategy is unusual because the focus is on customers' needs and not making the customer "accept what the bank has to offer." Initiatives (bullet) Future Bank implementation (bullet) Expanded network of enhanced ATMs that split deposits between accounts and cash checks to the penny (bullet) Electronic bill payment through popular financial planning computer software, including First Union's own "Cyberbanking" (bullet) New chip card partnerships with federal agencies, the military, corporate campuses and college campuses (chart appears here with the following information:] Selected Financial Data (Dollars in millions) Net Interest Income $ 3,083 Noninterest Income 1,238 Noninterest Expense 2,452 Net Income $ 854 ROE 30.78% EQUITY OFFERINGS PRIVATE PLACEMENTS HIGH YIELD (picture of tall buildings (picture of couple (picture of an oil and a man in an rig at sea.) office setting.) MORTGAGES HOME EQUITY LOANS FUNDING EDUCATION v Capital Management Key Statistics (bullet) $50 billion in total trust assets - Top 10 ranking in the First Union marketplace (bullet) $52 billion in First Union-advised mutual funds (including Wheat First)- the nation's 18th largest mutual fund family (bullet) 35 Evergreen Funds rated "4" or "5" star by Morningstar rating service (bullet) $26 billion in CAP account assets; 290,000 accounts (bullet) $11 billion in total IRA customer assets - 2nd largest bank-based IRA provider Products and Services For First Union's retail and institutional customers, the Capital Management Group is the primary link between traditional banking and investing. We are focused on building a major asset management organization with a comprehensive selection of products and services that anticipates clients' needs. Banks have traditionally offered customers such products as checking and savings accounts, auto loans and home mortgages. As life events generate other needs, our products and services help customers invest and manage their assets; plan for financial needs such as educating their children; save for and manage their retirement; and manage their estates and inheritance plans. We have grown to $80 billion in assets under management, which encompassed $50 billion in total trust and institutional assets, including $12 billion in mutual funds. Including the mutual funds held in trust, the First Union - advised mutual funds amounted to $42 billion at December 31, 1997. An additional $10 billion in mutual fund assets were added with the January 1998 acquisition of the Richmond, Virginia-based brokerage firm Wheat First Butcher Singer, which expanded our marketing power with a combined sales force of more than 4,300 registered representatives in 20 states and more than 2,000 brokerage locations. For those who have accumulated substantial assets, we provide trust services, private client services, tax deferment strategies and other services. For the generation in their 20s and early 30s who are just beginning to focus on their accumulation plans, we offer systematic investment plans (SIPs) requiring low minimum balances; self-directed IRAs as well as bank-managed IRAs; and other services. First Union is a leading provider of asset management accounts. Our CAP Account enables customers to move easily between traditional banking and brokerage products by combining investment products, insured deposits and other services into one account. On the institutional side, corporate trust, with $38 billion in customer assets, was the fourth largest trustee of municipal bonds in 1997. Strategy We are capitalizing on our link between innovative retail products and an extensive delivery network. The Capital Management Group's revenue is generated primarily through fee income, which has helped to diversify First Union's earnings stream. (chart appears here with the following information.) Selected Financial Data (Dollars in millions) Net Interest Income $ 263 Noninterest Income 920 Noninterest Expense 887 Net Income $ 186 ROE 33.25% DEBT SYNDICATED LOANS ASSET - BACKED SECURITIZATION (picture of a man, woman and (picture of a train.) (picture of a man and laptop computer.) woman.) ACCUMULATING WEALTH INVESTMENT FOR THE FUTURE Business Segments vi Commercial Bank Key Statistics (bullet) Top 5 middle-market lender (bullet) Top 3 small business lender (bullet) Top 3 cash management bank based on revenue; Top 10 ranking in 8 of our 10 cash management products (including CoreStates) Products and Services As our clients have grown, we have expanded our commercial banking capabilities in partnership with First Union's Capital Markets Group to meet the demand for investment banking, advisory services and to provide access to more complex financing solutions. In addition we have an integrated product approach to provide property and casualty insurance, pension and retirement planning, investment products and other services. Relationship Approach Our relationship managers are committed to serving the full financial needs of our nearly 700,000 commercial clients. The relationship managers work in partnership with commercial underwriters and portfolio managers. These team members are backed by customer service representatives at regional service centers. This support allows relationship managers to spend more time finding new opportunities and bringing new ideas to help our customers expand their businesses. We have relationships with 21 percent of the commercial businesses in our marketplace. (bullet) The Small Business Banking Division is focused primarily on meeting the loan origination and servicing needs of companies with annual sales up to $10 million and loan requests for $25,000 to $1 million. Referrals from our retail financial centers and commercial bankers are directed to our small business lenders in Charlotte, North Carolina; Tampa, Florida; and Philadelphia, Pennsylvania. These locations are staffed by experienced lenders who are committed to providing responses to customers within 24 hours. The division also has a centralized telephone sales channel to cross-sell First Union's small business products and services. The division originated more than $1 billion in loans in 1997. (bullet) Cash Management offers corporate customers a complete selection of treasury management services, including electronic commerce, disbursement and information reporting. This division supports the relationship sales effort of the Commercial Bank through sales consultants who are located throughout our marketplace and a sales team dedicated to Capital Markets clients. First Union has more than 22,000 cash management customers using multiple services. In 1997 Cash Management revenue growth was three times the industry average and commanded a 5 percent market share. Strategy The Commercial Bank intends to provide its clients with the most convenient service, with single-view access to their accounts throughout the entire First Union market area. (chart appears here with the following information:] Selected Financial Data (Dollars in millions) Net Interest Income $ 1,505 Noninterest Income 338 Noninterest Expense 1,013 Net Income $ 488 ROE 19.87% INTERNATIONAL BANKING LEVERAGED FINANCE (picture of a satelite dish.) (picture of a family.) (picture of a boat and port.) TRUST MANAGEMENT RETIREMENT ESTATE PLANNING vii Capital Markets Key Statistics (bullet) No. 1 in middle-market lead-bank relationships in the First Union marketplace (bullet) No. 4 in commercial mortgage securitizations (bullet) No. 4 in asset securitizations among commercial banks' Section 20 subsidiaries (bullet) No. 7 in leveraged finance volume ("agent-only") (bullet) No. 8 in private debt placements (bullet) No. 10 in number of loan syndication transactions ("agent-only") Products and Services Our Capital Markets Group is focused on meeting the specific, individualized needs of our corporate clients and institutional investors through fully integrated products and services. Our client relationships are supported by teams of investment bankers, industry specialists and capital market professionals. We have in-depth specialized industry expertise in health care; media and communications; financial institutions; oil and gas; utilities; forest products; textiles; carpet and home furnishings; retailing; transportation; leasing; and real estate investment trusts. First Union, through First Union Capital Markets Corp. (FUCMC), received federal approval in May 1997 to underwrite equity securities. We gained significant momentum with the 1998 addition of Wheat First. This moved us forward in our business plan at a much faster pace than if we had built this business internally, and it will allow First Union to continue to grow along with our client base. Relationship Approach Our Capital Markets approach is supported by relationship managers in our banking states, as well as by specialized industries and diversified finance specialists nationwide. We are focused on building long-term relationships, rather than on engaging in one-time transactions. We intend to meet financial needs at every phase of our clients' corporate life cycle, from raising capital to operations; corporate liquidity to asset management; risk management to restructuring; and expansion. As companies grow, their needs become more complex. A relationship that begins with cash management and bank loans will evolve into more sophisticated - and increasingly more profitable - financing solutions ranging from syndicated loans to equity needs and to mergers and acquisitions advice offered by our Capital Markets Group. Strategy Our Capital Markets Group is committed to serving the complete financial needs of middle-market corporate clients. We recruit and work to retain top industry talent who share First Union's client focus. Our goals are to continue to grow and to strengthen existing product capabilities based on client demand. We intend to distinguish ourselves as the leading full-service financial company that is ahead of the competition in combining the best of banking and the best of the securities business. (chart appears here with the following information:] Selected Financial Data (Dollars in millions) Net Interest Income $ 435 Noninterest Income 793 Noninterest Expense 679 Net Income $ 348 ROE 24.99% (picture of people.) WE'RE BUILDING CUSTOMERS FOR LIFE. Financial Highlights viii
Years Ended December 31, Percent - -------------------------------------------------------------------------------------------------------- Increase (Dollars in millions, except per share data) 1997 1996 (Decrease) - ----------------------------------------------------------------------------------------------------------------------- Financial Highlights Net income $ 1,896 1,624 17% Dividends on preferred stock - 9 (100) - -------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after merger- related and restructuring charges and SAIF special assessment 1,896 1,615 17 After-tax merger-related and restructuring charges and SAIF special assessment 194 268 (28) - ------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before merger- related and restructuring charges and SAIF special assessment $ 2,090 1,883 11% ========================================================================================================================== Per Common Share Data Basic earnings per share Net income after merger-related and restructuring charges and SAIF special assessment $ 3.03 2.61 16% Net income before merger-related and restructuring charges and SAIF special assessment 3.34 3.04 10 Diluted earnings per share Net income after merger-related and restructuring charges and SAIF special assessment 2.99 2.58 16 Net income before merger-related and restructuring charges and SAIF special assessment 3.30 3.01 10 Cash dividends 1.22 1.10 11 Book value 18.91 17.06 11 Period-end price $ 51.25 37.00 39 Average common shares (In thousands) Basic 625,649 619,237 1 Diluted 633,772 625,224 1 Actual common shares (In thousands) 636,394 640,782 (1) Dividend payout ratio (based on operating earnings) 35.86% 35.06 -% =============================================================================================================================== Performance Highlights Before merger-related and restructuring charges and SAIF special assessment Return on average assets 1.39% 1.30 - Return on average common equity 18.90 18.50 - Overhead efficiency ratio 57 58 - Net charge-offs as a percentage of Average loans, net 0.63 0.65 - Average loans, net, excluding Bankcard 0.28 0.35 - Nonperforming assets to loans, net and foreclosed properties 0.75 0.78 - Net interest margin 4.36% 4.25 - ================================================================================================================================ Cash Earnings (Excluding Other Intangible Amortization) Before merger-related and restructuring charges and SAIF special assessment Net income applicable to common stockholders $ 2,320 2,084 11% Net income per common share - basic $ 3.71 3.37 10 Return on average tangible assets 1.57% 1.46 - Return on average tangible common equity 28.14 27.17 - Overhead efficiency ratio 54% 55 -% ================================================================================================================================== Year-End Balance Sheet Items Securities available for sale $ 21,415 16,805 27% Investment securities 2,175 2,501 (13) Loans, net of unearned income 96,873 102,316 (5) Earning assets 134,370 134,223 - Total assets 157,274 151,847 4 Noninterest-bearing deposits 21,753 20,383 7 Interest-bearing deposits 81,136 82,319 (1) Long-term debt 8,042 8,060 - Guaranteed preferred beneficial interests 991 495 100 Stockholders' equity $ 12,032 10,932 10% =================================================================================================================================
(picture of silver dollar appears in the background) Dear Shareholders (Letter to our Shareholders appears 90 degrees on right side of page.) By almost any measure, the performance of your company was extraordinary in 1997. We met our financial targets, producing an 11 percent operating earnings increase, an 18.90 percent return on average common equity and a 1.39 percent return on average assets. We raised common dividends twice during the year, and we increased our dividend payout ratio guideline to 40 to 45 percent. In new business initiatives, we gained additional equity underwriting powers; we implemented new technology-based marketing and sales development approaches; and we strengthened our market leadership and gained new customers with new merger partners. In short, your company was active on a number of fronts in 1997 to ensure our momentum for the long term. The results reflect the success of our strategy to offer our customers one of the nation's broadest financial product lines as we continue to grow the scale of our business. We earned a record $2.1 billion in operating earnings before special charges, an 11 percent increase from $1.9 billion in 1996. On a per common share basis, operating earnings were $3.30 compared with $3.01 in 1996. Special charges include merger-related and restructuring charges in both years and a special assessment related to the Savings Association Insurance Fund in 1996. These special charges are discussed in more detail in the Management's Analysis of Operations section of this report. Our financial results in 1997, 1996 and 1995 include the November 28, 1997, pooling of interests acquisition of Signet Banking Corporation. Our strong performance in 1997 includes the increasing contributions from our Capital Markets and Capital Management businesses, which generated 28 percent of First Union's net income. These two businesses are natural extensions of our strong commercial and consumer banking operations. We are committed to offering our customers everything that Wall Street has to offer. The growth of our Capital Markets and Capital Management Groups provides strong evidence that we have correctly anticipated customers' needs and that we have delivered quality products and services to them. In 1997 we added to First Union's already strong product line and advanced technology through strategically and financially attractive acquisitions in our banking states of Virginia, Pennsylvania, New Jersey, Maryland, Delaware and Washington, D.C. We also gained critical mass in a key growth business with the acquisition of the regional brokerage firm Wheat First Butcher Singer, which was consummated January 31, 1998. In terms of size, the pending acquisition of Philadelphia, Pennsylvania-based CoreStates Financial Corp will be our largest, representing nearly a third of our asset base. Most significantly it will produce critical mass on the commercial side of our organization. Combined, we will be among the Top 5 middle-market lenders in the nation. CoreStates has market leadership in several key lines of business with depth and expertise in commercial banking operations. This acquisition will enable us to provide a full selection of Capital Markets and consumer products to CoreStates' extensive customer base. It will provide First Union with new opportunities in asset-based lending through CoreStates' Congress Financial business unit and with additional expertise in the international arena with CoreStates' strong presence in international trade (chart appears here with the following plot points.) Operating Earnings Per Diluted Common Share (Dollars) 92 93 94 95 96 97 $1.22 2.09 2.25 2.49* 3.01* $3.30* * Excluding special charges. (This paragraph appears 90 degrees on left side of page.) Strategic Direction First Union is creating a new kind of financial services company with customer-driven products, services, and delivery channels designed to combine the best aspects of a traditional bank, an investment bank and an asset management company. First Union operates the nation's second largest branch delivery system in a marketplace that covers more than a third of the population of the United States. The branch network is complemented by fast-growing business that serve individual and institutional investors, as well as capital markets businesses that are focused on the mid-sized commercial market we have served for so long. (picture of John R. Georguis (picture of Edward E. Crutchfield John R. Georguis.) President Edward E. Chairman and Crutchfield.) Chief Executive Officer finance. In addition, CoreStates has a leading position in attractive markets for First Union's well-developed Capital Management products and services, such as trust, brokerage, mutual funds, insurance and our popular asset management product called the CAP Account. With the Wheat acquisition, we moved far ahead in building the equity underwriting component of First Union's Capital Markets business. We have relationships with 42 percent of the middle-market and corporate businesses in our marketplace, and equity underwriting powers are crucial to simplifying life for clients who can benefit from "one-stop"financing. This partnership also provides a new platform for growth in our Capital Management business by creating one of the nation's largest brokerage networks. This combination creates a good fit between two companies that share the same geographical marketplace, customer relationship philosophy and business focus on the middle-market. In addition, both companies have focused on high-growth industries such as health care, media and communications, financial institutions and real estate. With the acquisition of Signet Banking Corporation of Richmond, Virginia, we gained the leading market share in Virginia and expanded our marketing power along the Richmond to Washington to Baltimore corridor. We believe there is great potential to create cross-selling opportunities by leveraging Signet's direct marketing technology and First Union's broader product selection, particularly in Capital Management and Capital Markets. Maximizing Our Performance With strong earnings momentum at our back and the pending acquisition of CoreStates ahead, in December 1997 we again raised our financial performance targets to higher levels to guide us through the year 2000, as indicated in the chart to the left. As we said when we announced new financial performance guidelines in 1996, we have provided a range of performance levels because, while we will strive to perform within these ranges each year, there may be trade-offs in any given year. Let me emphasize: our year 2000 goal is to achieve all eight of these financial performance guidelines consistently. In fact, we believe our new goals will propel First Union to overall financial performance that is among the very best in the industry. First Union's earnings have been strong both over the short and the long term. On an originally reported basis, First Union's earnings have grown a compounded 11 percent over the past 15 years; 10 percent over the past 10 years; and 12 percent over the past 5 years. Total return (stock price appreciation, dividends and (chart appears here with the following plot points.) Financial Performance Guidelines - ---------------------------------------------------- Prior New - ---------------------------------------------------- ROE 18-20% 20-22% EPS Growth 10-13% 10-14% ROA 1.30-1.50% 1.60-1.90% Overhead Efficiency 53-57% 50-54% Fee Income/Revenue 40% 40-45% Tier 1 Leverage 6- 7% 6- 7% NCO/Average Loans 50-65bps 55-70bps Dividends Payouts 30-35% 40-45% Note: Exclude special charges. 2 reinvested dividends) has exceeded the S&P Major Regional Bank Index and the S&P 500 throughout the 1990s. First Union's total return during the decade of the '90s has been 580 percent - significantly better than the average for the 25 largest banking companies. In fact, First Union's total return has outpaced the S&P Major Regional Bank Index in five of the last eight years. While stock price movements can be volatile, with both up and down years, it was gratifying to see the price of First Union's stock rise above $100 for the first time on July 16, 1997. We issued a two-for-one stock split in July. At $51.25 per share at year-end 1997, the stock price remained above the $100 level on a pre-split basis. Significantly, our two dividend increases in 1997 represented the seventh fastest growth rate in dividends per common share among the nation's 25 largest banking companies. We increased our guidelines for the dividend payout ratio to 40 to 45 percent. We expect that will move First Union into the top tier in the industry in this performance measure while achieving superior earnings per share growth. Accelerating Pace of Industry Consolidation This performance was achieved against a backdrop of an industry in flux, with continuing consolidation and new competitors on the horizon. In today's environment, we are competing for customers not only with other banks, but also with the major mutual fund companies, brokerage houses, credit card companies and insurers. In 1997 the blurring of the lines in the financial services industry began accelerating. Not only did banks join together, but also numerous mergers of banks and brokerage houses, insurance companies and brokerages, and banks and credit card companies were announced or completed. We believe this trend will continue, and ultimately a dozen or so companies will hold a dominant share of the financial services business. The leaders in this new financial services industry will be those companies that find the most innovative ways to help customers (both businesses and individuals) simplify their financial lives. In this environment, First Union increased the flexibility of our company geographically, strategically and functionally through the acquisitions discussed earlier, which we believe will help build lasting value for stockholders. Further discussion of our 1997 transactions is included in the Merger and Consolidation Activity section of the Management's Analysis of Operations. However, I'd like to briefly address the strategic reasons behind these acquisitions. In the mid-1980s through the mid-1990s, the acquisition trend was about gaining size in order to survive. Today's acquisitions are being pursued to add customers and products or to achieve scale in key growth lines of business or attractive growth markets. Let me explain why achieving scale is important. In the mutual fund industry, the ten largest companies control 42 percent of the industry's assets. The ten largest mortgage companies control nearly a third of that business. The same is true in other industry segments - the dozen or so largest, best-known companies dominate the business. To be in the game in any of these businesses requires scale to remain competitive on both costs and pricing. In this environment, First Union has pursued acquisitions to leverage our product strengths, to expand our distribution capabilities and to enter attractive growth markets. To that end, First Union is well on its way to attaining competitive scale in a broad selection of key businesses that will help us meet our customers' lifetime needs. We evaluate acquisitions, like any other capital investment your company would choose to make, on the basis of their economic return to stockholders over time. I would like to point out that even during our heavy acquisition phase in the mid-1980s to early 1990s, First Union's earnings per share on an originally reported basis increased at a rate of 9.1 percent compared with a Top 25 average of 8.7 percent. We believe our acquisition strategy has built a company that is differentiating itself from the competition and that will outpace the industry's growth rate. Technology-Based Marketing and Alternative Delivery One area where your company has distinguished itself in the industry is in our commitment to operational quality and especially our approach to advanced technology. In the (The following graph(s) appear on the right side of page.) Compound Annual Growth Originally Reported Operating Earnings per Basic Common Share {Percent) 1982-1997 1987-1997 1992-1997 15 Years 10 Years 5 Years 11 10 12 Total Return During the 1990s FTU S & P Banks S & P --- ----------- ----- 1992 143.91 62.54 35.90 1993 138.26 72.15 49.50 1994 148.69 62.82 51.53 1995 248.03 156.06 108.27 1996 378.78 249.59 155.97 1997 580.63 426.31 241.26 Total Return on Common Stock Compound Annual Growth Rate (Assumes Dividends Reinvested) (Dollars) 94 97 92 97 87 97 3 Year 39% 5 Year 23% 10 Year 23% $1,000 2,699 1,000 2,766 1,000 $7,695 3 (The following graph(s) appear on the left side of page.) Share of Business Credit (Percent) 82 85 88 91 94 97 Nonbanks 53.46 56.77 59.52 62.24 64.43 61.51 Commercial Banks 46.54 43.23 40.48 37.76 35.57 38.49 Market Share of Household Assets (Percent) 82 85 88 91 94 97 Bank Deposits 49.48 47.30 42.83 34.54 26.90 20.79 Mutual and Money Market Funds 7.06 8.16 10.26 11.65 13.51 17.36 mid-1980s, First Union focused its technology-related investments largely on creating a "single systems" platform. By that, I mean unlike most other large, multistate banking companies, we have a single general ledger system, deposit system, commercial credit system, human resources system, and so on. Banking analysts have noted our track record in rapidly integrating acquisitions. First Union's average time from consummation to systems conversion has been less than three months in the past four years. Our aggressive approach to technology has given us a distinct marketing edge because we are able to cost-effectively offer new computer-based options that may well become the delivery channels of choice in the future. We have rapidly built a "data warehouse" that we believe will help us more effectively anticipate which products and services customers want and when they want them. Our single systems strategy has also provided another clear competitive advantage as companies address the "Year 2000" computer issue that has received widespread attention. This issue centers on the inability of today's computer hardware and software, if left unaltered, to recognize the year 2000. First Union's single systems infrastructure gives us a strong advantage in addressing this. We have been recognized by industry experts and others as being well-prepared for meeting this challenge. Growing Businesses: Capital Markets and Capital Management The competitive field and the demographic trends of the past two decades have not diminished. In fact, they present increasing challenges. We have new competitors from Wall Street to Cyberspace that are gaining increasing shares of the market for business credit and household assets once controlled by the banking industry, as the charts on this page clearly show. Our strategy to take advantage of these trends has been to build new, innovative businesses that are less capital-intensive and that generate more fee income than traditional banking businesses. We are building a company that will operate about 50 percent like a traditional banking company and 50 percent like an investment bank/asset management company. To that end, our Capital Markets Group, which provides corporate financing solutions, and our Capital Management Group, which provides a host of asset management products and services, accounted for 50 percent of First Union's fee income in 1997. We believe we are further ahead in developing these kinds of new products and nontraditional, fee income - generating businesses than most of our competitors in the banking industry. An Actively Engaged Sales Culture While we have been building new, innovative lines of business, we also have streamlined and updated our traditional businesses to make sure they are relevant to today's customer needs. These more mature businesses must operate at peak efficiency - both for our customers' benefit and for our benefit - in order to remain competitive. We have worked hard for several years to rationalize and expand the capacity of our retail channel, and in 1997 we implemented a model that we are calling "The Future Bank." Pundits have predicted the demise of the traditional bank branch for many years, but in the "Future Bank," we are revitalizing and redefining what happens in branches- which we now call "financial centers." These financial centers offer a broad array of sales features and products. They also combine face-to-face customer service with access to electronic and remote delivery methods such as automated teller machines, personal computer banking, interactive video and card products. While we believe we cannot force a change in customer preferences, we are working in our financial centers to educate and encourage customers to use less-costly delivery channels. We believe that customers are rational and discriminating, and they will change how they do business if we offer better value, such as speed, convenience and pricing incentives. Our philosophy is that our customers will tell us how they want to do business with us - not the other way around. Our retail strategy is based on our vision of becoming "the world's most innovative financial services company." We intend to differentiate ourselves by focusing on what that means from the customers' point of view - not for the sake of back-office productivity. Our customers have told us what "innovative" feels like to them - and it is service that 4 (The following graph(s) appear on right side of page.) Book Value Per Share (Dollars) 92 93 94 95 96 97 $11.68 13.36 14.10 15.66 17.06 $18.91 First Union Stock Price vs. Book Value (Dollars) 92 93 94 95 96 97 Stock Price 21.75 20.625 20.625 27.75 37.00 51.25 Book Value 11.68 13.36 14.10 15.66 17.06 18.91 Stock Price Performance Since year-end 1996 (Dollars) 12/96 3/97 6/97 9/97 12/97 37.00 40.56 46.25 50.06 51.25 Stock Price Performance 5-year trend (Dollars) 92 93 94 95 96 97 21.81 20.63 20.69 27.81 37.00 51.25 is fast, easy and error-free. It is convenient from the customers' point of view - - whenever, wherever and however they want to interact with us. A lot of people have a similar vision. But we truly believe that First Union's strategies of the past 12 years have given us a clear and commanding lead in this arena. We believe that no one else - bank, insurer or brokerage firm - offers the complete selection of products and services in the comprehensive, integrated way that First Union does. On the commercial side of our company, our vision, philosophy and operating strategies parallel those on our retail side: our goal is to provide a lifetime of financial solutions to customers' needs. As a company grows, it requires different products beginning with traditional commercial deposit accounts, commercial lending and cash management to 401(k) plans and pension management, to innovative financial solutions and access to the capital markets. Rather than focusing on finite transactions that end when a loan is repaid, our approach is to provide value-added advisory services and financing solutions that are in the client's best interest. We intend to build long-term relationships with our commercial customers through a fully integrated relationship approach that grows as the company grows. Revenue Growth and Expense Control The result of our strategies and heavy investment spending over the past five years is a clear differentiation between First Union and the vast majority of banks in the United States. We have been able to produce strong revenue growth while we have kept strict control on expenses. The chart below shows the revenue growth rate of the nation's 10 most efficient banking companies is about half that of First Union's. In fact, First Union had the second fastest growth rate in fee income among the nation's 25 largest banking companies excluding the effects of purchase acquisitions. We firmly believe that major investments in advanced technology, new businesses, products and marketing are the best way to enhance our prospects for the future. Unlike manufacturing companies, banks do not have a line item in their income statements for research and development. But if you summed up First Union's research and development investment in 1997, it would amount to more than $300 million. We believe this ability to invest for the future will keep us from hitting the "revenue wall" that faces many banking companies today, and which is a significant factor in the amount of industry consolidation that you will see in the next few years. These companies are learning a hard truth: You cannot cost-cut your way to profitability forever. As for First Union, we will continue to make prudent investments, disciplined by our Financial Performance Guidelines, to produce continued revenue growth. Seeds of the First Union "Culture" I have discussed in detail the results of our operating strategy and philosophy. But let me briefly discuss something less tangible, but equally important in transforming First Union into a company that we believe is uniquely prepared to continue growing, changing and innovating. Over the years, First Union as a company has internalized the vision and philosophies of its key leaders, many of whom have joined us through acquisition. My immediate predecessor as chairman and chief executive officer, Cliff Cameron, came to First Union in the mid-1960s when we joined with Cameron-Brown Company, a mortgage banking firm. Our legacy from Cliff, who retired in 1985, is an atmosphere of readiness for change. When someone would say "banks don't do that," he would invariably answer, "Is there any reason we shouldn't be the first?" (graph appears here with plot points.) Revenue Growth and Expense Control* First Union Average Top 10 Most Efficient Banks (Percent) Efficiency Revenue Ratio Growth First Union 57% 13 Average Top 10 Most Efficient Banks 53 6% * Excludes merger/restructuring charges, nonrecurring gains/losses, capital securities expense and investment securities transactions. 5 The late Ben Craig, who came to First Union with the Northwestern merger in 1985, was president until his death in 1988. A longtime literacy and education champion, he is the namesake for our annual Ben Craig Awards to outstanding local educators. He guided us with words like "Banking is the only business in which the more you do for the community, the better off you'll be." Tony Terracciano, who joined First (picture of Union when we combined with First Fidelity, Anthony P. Terracciano) likes to say, "Don't ask me whether I want loan growth or credit quality. Don't ask me Retiring President whether I want to control expenses or grow revenues. It doesn't have to be either/or. I want both." Tony decided that 1997 was an appropriate time for him to retire, with the merger of First Fidelity and First Union having been completed and running exceptionally well. His leadership contributed immeasurably to the ease with which the consolidation of these two companies was accomplished and the unleashing of the incredible sales power in his region. This is a tremendous legacy for him, on which those who follow will be inspired to build. On a personal level, I will miss Tony on a daily basis for the deeply intellectual framework that he has instilled in mapping our strategic direction. But I expect First Union to benefit from Tony's advice, counsel and friendship for years to come. These are perfect examples of the wise counsel and stellar guidance benefiting your company from a committed and active corporate board of directors. In addition to Tony, Howard H. Haworth, Leonard G. Herring, Jack A. Laughery, Max Lennon, Dewey L. Trogdon and John D. Uible are also retiring effective with the April 1998 corporate board meeting. I wholeheartedly thank each of them for their steadfast service to First Union. I also want to express sincere appreciation to our customers for their trust and continuing patronage. And I would especially like to thank the employees who continue to amaze me with their hard work and dedication, day in and day out. First Union is committed to nurturing the talents and honoring the contributions of our employees. It was, in fact, employees who pushed First Union to enter nontraditional areas so they could have more products to better serve their customers. We are blessed to have a work force that brings the same level of caring to their relationships with customers as they do to giving back to the communities we serve. Education and schools are a priority for First Union, and in 1997, more than 20,000 employees volunteered 656,000 hours of their own time to their communities' schools. Wherever you find First Union, you will find the leaders in United Way, Habitat for Humanity, chambers of commerce and other organizations that work for the betterment of the community. We are proud of our commitment and record of contributing to the growth of all of the communities we serve. In 1997, the Office of the Comptroller of the Currency rated all nine of our national bank subsidiaries as having an "outstanding record of meeting community credit needs." These are the values that we will work hard to maintain as we strive to build the successful model of the financial services company of the future. No matter how large our company, my hope is that it remains a company that listens and responds to each individual customer, and one that listens and values each employee as an individual. That is the best way to ensure our success in the future and that is the best way to create and increase value for stockholders for the long term. Thank you for your interest in First Union. Sincerely, /s/ Edward E. Crutchfield Edward E. Crutchfield Chairman and Chief Executive Officer February 23, 1998 6
Index to Special Topics General Information Annual Meeting...............................................................................Inside Back Cover Description of Business.................................................................................... i Employees.................................................................................................T-7 Market Share.....................................................................i, iii, iv, v, vi, vii, 1, 2 Capital Resources Regulatory Capital...................................................................................22, T-15 Stockholders' Equity........................................................viii, 22, P-1, P-2, T-1, C-3, C-5 Common Stock Book Value.......................................................................................viii, 5, T-1 Dividends..............................................Inside Front Cover, viii, 3, 9, 22, T-6, C-4, C-5, C-7 Market Price........................................................................viii, 3, 5, P-3, T-1, T-6 Shares, Number Outstanding..................................................viii, 22, P-3, T-1, C-3, C-4, C-5 Stockholders, Number of ..................................................................................T-7 Liquidity Debt Ratings................................................................................ Inside Back Cover Loans Average Balances...................................................................... 19, P-1, T-3, T-4, T-23 Commercial Real Estate................................................................................. 18, 19 Consumer Loan Portfolio.................................................................................... 19 Industry Concentrations.................................................................................... 18 Loan Loss Allowance................................................ 20, P-2, T-12, T-13, C-3, C-19, C-34, C-37 Loan Loss Provision............................. 20, P-3, T-1, T-3, T-4, T-6, T-12, C-4, C-7, C-19, C-38, C-39 Mix at Year-End........................................................................................ 18, 19 Net Charge-Offs.................................................................. viii, 8, 20, P-1, T-12, C-19 Nonperforming Assets................................................................... viii, 8, 19, P-1, T-12 Project Type............................................................................................... 18 Profitability Earnings Performance........................... iv, v, vi, vii, viii, 1, 8, P-3, T-1, T-3, T-4, T-6, C-4, C-38 Income Per Share............................................................ viii, 1, 3, 8, P-3, T-1, T-6, C-4 Net Interest Income........................ iv, v, vi, vii, 16, P-3, T-1, T-3, T-4, T-6, T-22, T-23, C-4, C-38 Net Interest Margin............................................................................ viii, 16, T-23 Noninterest Expense........................................... 16, 17, P-3, T-1, T-2, T-3, T-4, T-6, C-4, C-38 Noninterest Income....................................... 4, 5, 8, 16, P-3, T-1, T-2, T-3, T-4, T-6, C-4, C-38 Results of Operations................................................ viii, 1, 8, 16, P-3, T-1, T-6, C-4, C-38 Return on Average Assets.................................................................... viii, 9, T-5, T-6 Return on Average Stockholders' Equity .......................... iv, v, vi, vii, viii, 9, T-3, T-4, T-5, T-6 Risk Management Asset Quality.................................................................... viii, 8, 19, P-1, T-12, C-19 Derivative Transactions.......................................... 25, T-16, T-17, T-18, T-19, T-20, T-21, C-31 Market Risk Management............................................................................... 23, C-31 Securities Available For Sale............. viii, 17, 18, P-1, P-2, T-2, T-8, T-22, T-23, C-3, C-7, C-14, C-34, C-37, C-39 Investment........................ viii, 18, P-1, P-2, T-2, T-10, T-22, T-23, C-3, C-7, C-16, C-34, C-37, C-39 Trading Activities..................................................... 16, 25, P-2, T-2, T-23, C-3, C-7, C-34
7 (The following graph(s) appears 90 degrees on left side of page.) Operating Earnings Per Basic Common Share (Dollars) 92 93 94 95 96 97 $1.27 2.15 2.30 2.56* 3.04* $3.34* * Excluding special charges. Operating Earnings Per Diluted Common Share (Dollars) 92 93 94 95 96 97 $1.22 2.09 2.25 2.49* 3.01* $3.30* * Excluding special charges. Net Income (Dollars in billions) 92 93 94 95 96 97 $.7 1.2 1.4 1.6* 1.9* $2.1* * Excluding special charges. Management's Analysis of Operations The following discussion and other portions of this Annual Report contain various forward-looking statements. Please refer to our 1997 Annual Report on Form 10-K for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements. Earnings Highlights First Union's basic operating earnings in 1997 (which represents earnings before special charges) were a record $2.1 billion, or $3.34 per common share compared with $1.9 billion or $3.04 per share in 1996. Diluted operating earnings per common share were $3.30 in 1997 and $3.01 in 1996. Basic earnings per common share are calculated by dividing net income applicable to common stockholders by average common shares outstanding. Diluted earnings per common share are calculated by dividing net income applicable to common stockholders by the sum of average common shares outstanding and common stock equivalents related to employee stock options including restricted stock awards. Unless otherwise indicated, financial information for 1995, 1996 and 1997 has been restated to reflect the November 28, 1997, pooling of interests acquisition of Richmond, Virginia-based Signet Banking Corporation. Financial information related to Signet prior to 1995 is not considered reflective of the continuing operations of Signet, and accordingly, such information has not been restated. Additionally, all per common share data has been restated for all periods to reflect a two-for-one stock split, which was paid on July 31, 1997. Special charges excluded from operating earnings are after-tax merger-related and restructuring charges of $194 million, or 31 cents per share, in 1997 related to the acquisition of Signet, and $181 million, or 29 cents per share, in 1996 related to the January 1, 1996, acquisition of First Fidelity Bancorporation. Operating earnings in 1996 also exclude a special charge related to an after-tax Savings Association Insurance Fund (SAIF) special assessment of $87 million, or 14 cents per common share. After the special charges, basic earnings in 1997 were $1.9 billion or $3.03 per common share compared with $1.6 billion or $2.61 per common share in 1996. Diluted earnings per common share were $2.99 in 1997 and $2.58 in 1996. In the fourth quarter of 1997, First Union's net income applicable to common stockholders before restructuring charges was $519 million, or 82 cents on a basic per common share basis, and after restructuring charges, $362 million, or 57 cents per common share. Related diluted per common share amounts were 81 cents and 56 cents, respectively. This compares with earnings of $493 million, or 80 cents on a basic per common share basis and 79 cents on a diluted basis in the fourth quarter of 1996. There were no special charges in the fourth quarter of 1996. Growth in 1997 operating earnings was led by a 30 percent increase in non-interest income (excluding securities transactions), including a 58 percent increase in Capital Markets fee income and a 45 percent increase in Capital Management fee income. Solid expense control resulted in an operating overhead efficiency ratio (excluding special charges and capital securities expense) of 57 percent in 1997 and 58 percent in 1996. This efficiency was maintained even with increased levels of discretionary investments for the future. In addition, credit quality continued to improve, with nonperforming assets declining to $723 million, or 0.75 percent of net loans and foreclosed properties, from $802 million, or 0.78 percent, in 1996. Net charge-offs as a percentage of average net loans improved to 0.63 percent in 1997 compared with 0.65 percent in 1996. Outlook In addition to producing strong financial momentum in 1997, First Union also took several actions to position itself for 1998. (bullet) In the fourth quarter of 1997, the unsecured consumer portfolio was significantly restructured to position the company for higher credit quality in 1998. This restructuring will result in the sale of $3 billion of credit card receivables and other unsecured loans. The sales reflect the repositioning of the portfolio in line with our Consumer Bank's strategy of expanding relationships within our growing customer base on the East Coast. (bullet) The investment portfolio was repositioned in the fall of 1997 to maximize income in the face of declining interest rates and a flattening yield curve. 8 (The following graph(s) appear on right side of page.) Return on Average Assets (Percent) 92 93 94 95 96 97 .77% 1.22 1.29 1.25* 1.30* 1.39%* * Excluding special charges. Return on Average Common Equity (Percent) 92 93 94 95 96 97 11.28% 17.26 16.38 17.13* 18.50* 18.90%* * Excluding special charges. Asset Growth (Dollars in billion) 92 93 94 95 96 97 $95 105 114 143 152 $157 * Excluding special charges. (bullet) In addition, we increased the annual dividend 11 percent to $1.22 per common share, representing the 20th consecutive year of dividend increases. In December 1997, we again announced a dividend increase of 16 percent to 37 cents on a quarterly basis, or $1.48 on an annualized basis. (bullet) Also in 1997, we announced the pending acquisition of CoreStates Financial Corp as well as the acquisitions of Signet, Wheat First and Covenant, all of which are discussed below. First Union continues to diversify its business mix in order to meet client demands and to decrease the corporation's reliance on interest income, which can be affected by volatility in economic conditions and movements in interest rates. First Union's goal is to increase noninterest income in proportion to total revenue to 40 to 45 percent by the year 2000. We have made significant progress toward that goal with noninterest income to total revenue of 37 percent in 1997 compared with 32 percent in 1996. To help us meet this goal, we continue to invest in high-growth business lines such as the investment banking, brokerage services and asset management businesses in our Capital Markets and Capital Management Groups. These nontraditional businesses complement our loan and deposit activities. We also are applying nontraditional approaches to our more mature lines of business, primarily by streamlining processes, by adding electronic and remote banking alternatives and by implementing our Future Bank retail branch model. The goals are to improve customer service, increase sales and generate efficiencies. We expect strong sales momentum in light of demographic trends, a robust economy and our market expansion. Our primary management attention is focused on leveraging our existing business base as we invest in new technology and fee income-generating lines of business. The significant investments we have made in acquisitions, in technology and in expanded products and services have positioned us to better serve our 14 million customers in a diverse geographic marketplace and to reduce the impact of adverse changes in the business cycle. In 1997 First Union leveraged these internal investments through three significant mergers that will greatly enhance our key businesses and expand our share of markets that can benefit from our product mix. Merger and Consolidation Activity The pending acquisition of CoreStates, of Philadelphia, Pennsylvania, will create new opportunities to leverage our growing Capital Management and Capital Markets businesses in states that generate 36 percent of the nation's gross state product and in attractive consumer markets in which per capita income is 12 percent above the national average. We currently estimate that approximately 330 million shares of First Union's common stock will be issued in this pooling of interests accounting transaction. The merger agreement provides for the issuance of 1.62 shares of First Union common stock for each share of CoreStates common stock, subject to increase under certain circumstances. Using First Union's closing price of $52.4375 on November 17, 1997, the last business day before public announcement of the merger, the transaction would have been valued at approximately $17 billion. At December 31, 1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and net income of $813 million. First Union expects to take after-tax, merger-related and restructuring charges of $795 million in 1998 in connection with the CoreStates merger. In addition, six directors of CoreStates are expected to be nominated for election or appointed to the First Union board of directors following consummation of the merger. More information is available in our Current Reports on Form 8-K, which we filed with the Securities and Exchange Commission (SEC) dated November 18, 1997, November 28, 1997, and December 2, 1997, and in our registration statement on Form S-4, filed with the SEC on January 9, 1998. Additionally, pro forma financial information related to CoreStates is presented elsewhere in this report. On February 27, 1998, stockholders of First Union and CoreStates approved the merger agreement and the stockholders of First Union also approved increasing the authorized shares of First Union common stock from 750 million to 2.0 billion. The Signet acquisition was consummated on November 28, 1997, and is included in the combined data, as mentioned 9 earlier. Signet, with assets of $11 billion, net loans of $7 billion, deposits of $8 billion, stockholders' equity of $990 million and net income of $73 million for the nine months ended September 30, 1997, moved First Union into the leading deposit share position in Virginia. First Union issued 1.10 shares of its common stock for each share of Signet common stock, or 67 million shares, to consummate the merger. In addition, the acquisition of Covenant Bancorp, Inc., based in Haddonfield, New Jersey, was consummated on January 15, 1998. Covenant had assets of $415 million, net loans of $254 million, deposits of $294 million and stockholders' equity of $31 million at December 31, 1997. First Union issued 1.6 million shares in this purchase accounting transaction, substantially all of which we repurchased in the open market at a cost of $79 million. The acquisition of Wheat First, based in Richmond, Virginia, was consummated on January 31, 1998. We expect this partnership will enhance the equity securities business of First Union's Capital Markets Group, as well as create one of the nation's largest brokerage networks. The merger was accounted for as a pooling of interests. However, financial information related to Wheat First is not considered material to the historical results of First Union, and such financial statements will not be restated. First Union issued 10.3 million shares of its common stock in exchange for Wheat First shares. Wheat First had assets of $1 billion and stockholders' equity of $171 million at December 31, 1997. We continue to evaluate acquisition opportunities that will provide access to customers and markets that we believe complement our long-term goals. Acquisition opportunities are evaluated as a part of our ongoing capital allocation decision-making process. Decisions to pursue acquisitions will be measured in conjunction with financial performance guidelines adopted in 1997 and other financial objectives. Acquisition discussions and in some cases negotiations may take place from time to time, and future acquisitions involving cash, debt or equity securities may be expected. In addition, First Union is taking advantage of the opportunity afforded by the Riegle-Neal Interstate Banking and Branching Efficiency Act to operate national banks across state lines by consolidating our banks. In 1997 all banks in the southern region of First Union and in Connecticut were consolidated into First Union National Bank, based in Charlotte, North Carolina. With the exception of Delaware, the final consolidation in the rest of the northern region occurred in February 1998. The Accounting and Regulatory Matters section provides more information about Riegle-Neal and provides information about legislative, accounting and regulatory matters that have recently been adopted or proposed. BUSINESS SEGMENTS Business Focus First Union's operations are divided into four primary business segments encompassing more than 40 distinct product and service units. These segments include the Consumer Bank, Capital Management, the Commercial Bank and Capital Markets. Additional information can be found in Table 4. We have developed an internal performance reporting model to measure the results of these four business segments and the Treasury/Nonbank segment. Because of the complexity of the corporation and the interrelationships of these business segments, we have used various estimates and allocation methodologies in the preparation of the Business Segments financial information. Restatements of various periods may occasionally occur because these estimates and methodologies could be refined over time. Our management structure combines this internal performance reporting with a matrix management approach, which integrates product management with our various distribution channels. Additionally First Union's management structure and internal reporting methodologies will produce business segment results that are not necessarily comparable to presentations by other bank holding companies or stand-alone entities in similar industry segments. Our internal performance reporting model was implemented in 1997. Prior periods have not been restated because of practical limitations. The model isolates the net income contribution and measures the return on capital for each business segment by allocating equity, funding credit and 10 (The following graph appears on right side of page.) Consumer Bank Contributions to Group Profitability Net Income (Percent) Retail Branch Products 85% First Union Home Equity 6% Card Products 5% First Union Mortgage 4% expense and corporate expenses to each segment. We use a risk-based methodology to allocate equity based on the credit, market and operational risks associated with each business segment. Credit risk allocations provide sufficient equity to cover both expected and unexpected losses for each asset portfolio. Operational capital is allocated based on the level of noninterest expense for each segment. In addition capital is allocated to segments with deposit products to reflect the risk of unanticipated disintermediation. Through this process, the aggregate amount of equity allocated to all business segments may differ from the corporation's book equity. All unallocated equity is retained by the Treasury/ Nonbank segment. This mismatch in book versus allocated equity may result in an unexpectedly high or low return on equity for the Treasury/Nonbank segment for extended periods of time. Our method of reporting does not allow for discrete reporting of the profitability or synergies arising from our integrated approach to product sales. For example, a commercial customer might have loans, deposits and an interest rate swap. The loan and deposit relationship would be included in the commercial segment and the interest rate swap would be reflected in the risk management unit of the Capital Markets segment. Exposure to market risk is managed centrally within the Treasury/Nonbank segment. In order to remove interest rate risk from each business segment our model employs a funds transfer pricing (FTP) system. The FTP system matches the duration of the funding used by each segment to the duration of the assets and liabilities contained in each segment. Matching the duration, or the effective term until an instrument can be repriced, allocates interest income and/or expense to each segment so its resulting net interest income is insulated from interest rate risk. The majority of the interest rate risk resulting from the mismatch in durations of assets and liabilities held by the business segments resides in the Treasury/Nonbank segment. The Treasury/Nonbank segment also holds the corporation's investment portfolio and off-balance sheet portfolio, which are used to enhance corporate earnings and to manage exposure to interest rate risk. Because most market risk is held in the Treasury/Nonbank segment, the profitability of this segment is expected to be more volatile than for the other business segments. General corporate expenses, with the exception of goodwill amortization, are allocated to each segment in a pro rata manner based on the direct and attributable indirect expenses for each segment. Residual corporate expense remaining in the Treasury/ Nonbank segment reflects the costs of portfolio management activities, goodwill amortization and merger-related restructuring charges. In general this approach should not result in significant volatility to business segment returns. Consumer Bank The Consumer Bank, our primary deposit-taking entity, provides an attractive source of funding for our secured and unsecured consumer loans, first and second residential mortgages, installment loans, credit cards, auto loans and leases, and student loans. The Consumer Bank combines traditional deposit and lending products with innovative financial solutions all supported by state-of-the-art technology - - including smart cards, electronic banking and Internet access - to provide quality customer service. Our new Future Bank retail branch model, rolled out initially in Atlanta, Georgia, will be implemented in 1998 throughout our full-service branch network in 12 states and Washington, D.C. The Future Bank model increases service options and access for our customers, improves sales capacity for employees and ultimately reduces costs. Through our First Union Direct Bank, N.A., centralized customer information centers manage the majority of the servicing and administrative tasks for the branches, freeing the Future Bank financial consultants to focus on building relationships and tailoring financial solutions to meet customer needs. First Union Direct also provides direct telephone sales and servicing for all our consumer lending products. First Union's mortgage origination and home equity offices across the nation also are included in the Consumer Bank through our operating subsidiaries First Union Mortgage Corporation (FUMC) and First Union Home Equity Bank, N.A. (FUHEB). Our equity lending business, including FUHEB and branch-based lending, is the second largest in the nation, while FUMC was the nation's 12th largest 11 (The following graph appears on left side of page.) Capital Management Contributions to Group Profitability Net Income (Percent) Trust/Evergreen Funds 52% CAP Account 23% Private Client 15% Retail Brokerage Services 10% mortgage servicer, with a mortgage servicing portfolio of $61 billion at December 31, 1997. In addition, FUHEB is a major participant in both the "A" credit quality market as well as in the sub-prime market. FUHEB securitized and sold $914 million in sub-prime originations through our Capital Markets Group in 1997. Consumer loans in 1997 exclude $5 billion in securitized adjustable rate mortgages (ARMs), home equity loans, student loans, indirect auto loans and community reinvestment loans, as well as $3 billion in credit card receivables and Signet's loan-by-check portfolio, which were transferred to assets held for sale. Loan originations in the consumer portfolio were led by mortgage and home equity loans. The managed credit card portfolio was $7 billion at December 31, 1997. This amount includes $2 billion of securitized credit cards and $2 billion in credit card receivables that were transferred to assets held for sale. Capital Management The Capital Management Group unites our banking and investment offerings for retail and institutional customers, providing products and services that primarily produce fee income. At December 31, 1997, this group had $80 billion in assets under management, which encompassed $50 billion in total trust and institutional assets, including $12 billion in mutual funds held in trust. Including the mutual funds held in trust, the First Union-advised mutual funds amounted to $42 billion at December 31, 1997. An additional $10 billion in mutual fund assets were added in 1998 with Wheat First, which expanded our marketing power with a combined sales force of more than 4,300 registered representatives in 20 states and more than 2,000 brokerage locations. The trust unit anticipates continued growth with the addition of new products and services. On the personal trust side, a Family Trust program was introduced in September 1997 to assist trust and investment management customers in providing elder care. Corporate Trust has added structured finance trust services and an investment holding company subsidiary, Delaware Financial Services Corporation. Capital Management results in 1997 reflect the December 1996 purchase accounting acquisition of Keystone Investments, Inc., the Boston, Mass.-based investment adviser to the Keystone family of mutual funds, now combined with the Evergreen Funds. Evergreen manages $42 billion in assets for more than 1 million shareholders, and offers over 70 mutual funds. Thirty-five Evergreen portfolios were rated "four" or "five" stars by the Morningstar ratings service at December 31, 1997. We are also introducing a new family of First Union-advised mutual funds designed for the institutional and corporate marketplace. Our CAP Accounts are an asset management product that enables customers to manage their securities trading and banking activities in a single, consolidated account. Income related to the CAP Account is therefore reflected in several of our lines of business, including mutual funds and retail brokerage services. The CAP Account item in Table 4 reflects direct CAP Account fee income only. At year-end 1997, CAP Account assets were $26 billion and there were 290,000 accounts. CAP customers generally hold balances split evenly between deposits and securities. Trading activity by customers through their CAP Accounts also increased in 1997. We also have introduced variations of the CAP Account designed to appeal to a broader mass of investors and to attract first-time investors, including the CAP1 Account with a lower minimum balance and a CAP for Business Account targeted primarily toward small businesses, professional associations and nonprofit groups. The Private Client Group (formerly Private Banking) provides high net worth clients with a single point of access to First Union's investments, mortgages, personal loans, trusts, financial planning, brokerage services and other services. At December 31, 1997, the Private Client Group managed $2 billion of average net loans and $2 billion of average deposits, in addition to a variety of fee-generating capital markets and investment products. Retail brokerage services are the primary distribution center for investment and insurance products. This segment does not reflect sales of credit, life or other insurance products sold in other areas of the corporation. Retail brokerage revenues were $282 million. Mutual fund sales through the brokerage unit reached $3 billion and annuity sales exceeded $1 billion. Brokerage expenses in 1997 largely reflected significant investment in reengineering our processes to 12 (The following graph appears on right side of page with graphic.) Commercial Bank Deposit Products 55% Lending 17% Real Estate Banking 15% Cash Management 10% Small Business Banking 3% implement a new operating system designed to support future growth and to provide enhanced customer service features, including cost basis investment reporting and dividend reinvestment. New brokerage products introduced in 1997 include a fee-based account that offers access to Schwab OneSource mutual funds. The expanded operating system positions retail brokerage to pursue an expanded Internet sales distribution channel in 1998. We anticipate increased growth in all of the Capital Management business lines as we introduce new products and services throughout our multistate network and with the addition of new customers from our acquisitions. Commercial Bank Our Commercial Bank's products and services go beyond traditional commercial banking to areas such as asset-based financing, risk management products, property and casualty insurance, leasing, treasury services, international services, pension plans and 401(k)s. As a result, the Commercial Bank is increasing its proportion of fee income along with the rest of the corporation as customers demand more innovative products and transaction efficiency. The Commercial Bank provides a comprehensive array of financial products to corporate, middle-market, commercial and small - business customers. Specialized relationship teams throughout our region focus on sales and service. In addition, we have an integrated approach that leverages the capabilities of First Union's Capital Markets Group for the more complex financing solutions. The increase in Commercial Bank fee income was led by its Cash Management unit. Service charge volume has increased as a result of higher sales volume and improved collection policies and procedures. In addition, we have streamlined the processes in the Commercial Bank, which has increased efficiency. Revenue per relationship manager increased in 1997 to $1 million. Cash Management offers corporate customers a comprehensive selection of treasury management services, including a full range of electronic commerce, collection, disbursement and information reporting services. These products are designed and priced based on the diverse needs of companies of various sizes and industries. When combined with CoreStates, First Union will be the nation's third largest cash management bank based on revenue, ranking in the Top 10 for all core cash management products, and leading the nation in corporate check clearing. The pending combination also would add significantly to First Union's commercial cash management offerings, including Internet-based electronic commerce services, a nationwide lockbox network and expanded international cash management capabilities. Cash management products stimulate the gathering of commercial deposit balances. Deposit balances and their economic profitability are reflected in both the Commercial Bank and Capital Markets segments. Cash Management in Table 4 reflects only the direct service charge income from cash management products. Small Business Banking provides a comprehensive selection of proprietary and joint venture financial products including insurance, investment services and retirement planning services as well as loans and commercial deposit services to entrepreneurs, professionals and companies with annual sales ranging up to $10 million. Small Business Banking loan volume in 1997 was $1 billion and average net loans were $2 billion in 1997. Small Business Banking reflects only lending activities. Capital Markets In 1997 our Capital Markets Group produced strong momentum with record transaction volume and earnings, capped by the announcement of our merger with Wheat First. With this transaction, we are able to provide a crucial product to First Union's Capital Markets clients. We also have enhanced the competitive products and service offerings available to Wheat First's more than 950,000 brokerage customers. Our institutional business has a sales force of more than 100 traders covering 1,000 institutional clients, and we are a market maker in more than 300 NASDAQ stocks. We have 30 equity research analysts covering more than 300 companies with a focus on key specialized industries: communications and technology; financial services; consumer; furnishings, textiles and building; health care; and industrial. 13 (The following graph appears on left side of page.) Capital markets Contributions to Group Profitability Net Income (Percent) Traditional Banking 36% Real Estate Finance 20% Commercial Leasing & Rail 20% Investment Banking 16% Risk Management 8% The announcement of the merger with Wheat First followed the May 1997 Federal Reserve Board approval of public equity underwriting through First Union's Section 20 subsidiary, First Union Capital Markets Corp. (FUCMC), renamed Wheat First Securities, Inc. Wheat First moved First Union far ahead in its business plan to make this service available to customers. With the addition of equity underwriting, sales and trading capabilities, our Capital Markets Group provides corporate and institutional clients one-stop shopping for a full range of investment banking products and services. These products and services are fully integrated with our wholesale delivery strategy, and they are a natural extension of our Commercial Bank. We have the capability to help a company grow from its first checking account to its initial public offering. In the Capital Markets Group, the Commercial Bank and the bank and nonbank brokerage units, the strategy is the same: the focus is on providing customized solutions that are in our clients' best interests. Our primary focus has been to bring a full line of business products to middle-market customers who have been underserved by other capital markets providers. We believe this strategy, coupled with new powers, provides a rewarding platform for long-term growth. We have relationships with 42 percent of the middle-market and corporate businesses in our regional marketplace. Our relationship coverage begins in our East Coast banking markets and extends nationwide through industry-specific specialization in such areas as health care; financial institutions; real estate; media and communications; utilities; energy; forest products; and specialty finance. In addition our International unit continues to develop strong correspondent banking relationships overseas. The primary focus of the International unit is to meet the trade finance and foreign exchange needs of our corporate customers and to provide commercial banking and capital markets products to the United States subsidiaries of foreign corporations. This unit is expected to expand significantly following consummation of the merger with CoreStates, which has been involved in the international arena for a century. Capital Markets has five primary units: Investment Banking; Real Estate Finance; Risk Management; Commercial Leasing and Rail; and Traditional Banking. The Investment Banking unit provides loan syndications, high-yield debt and equity underwriting, private finance, merger and acquisition advisory services, merchant banking and asset securitizations. Loan syndications are significant contributors to earnings in the Investment Banking unit. The Loan Syndications unit, which spreads the risk of large credit facilities among several lenders, served as agent on 63 leveraged transactions amounting to $12 billion in 1997. The High-Yield unit, which underwrites below-investment grade debt and preferred stock securities, completed its first sole-managed high yield transaction in 1997 - a $100 million offering for a communications company. This unit completed 18 high-yield bond offerings amounting to $3 billion in 1997. The Private Finance unit structures and places senior and subordinated debt, preferred and common stock, and other hybrid securities with institutional investors. This unit closed 17 transactions in 1997 with transaction volume of $309 million. The Mergers and Acquisition Advisory unit offers full advisory services to companies engaged in corporate sales and divestitures, acquisitions, fairness opinions and takeover defenses. In 1997 the M&A unit was involved in 21 closed or announced transactions with an aggregate value of nearly $3 billion. The Merchant Banking unit, or Capital Partners, was established in 1987 to make equity and subordinated debt investments in growing companies. This unit currently has committed and funded investments amounting to $625 million in 65 companies. The Asset Securitization unit undertakes the pooling and underwriting of corporate receivables and other financial assets, which are then sold in the form of securities to investors. In 1997 this unit securitized and sold to investors $6 billion of assets and securities. The Real Estate Finance unit expanded into a variety of commercial real estate finance activities in 1997. In addition to its commercial conduit operations, the Real Estate Finance unit offers credit tenant lease financings, real estate investment trust (REIT) lending, 14 affordable housing debt and equity financings and off-balance sheet lending products for corporate real estate clients. In 1997 the Commercial Real Estate Finance unit expanded to the West, Midwest and Southwest by opening offices in Irvine, California, Chicago and Houston. The unit, which provides loan origination capabilities for mortgage loans secured by multi-family and commercial properties, originated $2 billion in loans in 1997. In November 1997 FUCMC and Lehman Bros. completed a $2 billion offering of securities backed by commercial mortgage loans, representing the industry's largest commercial mortgage loan securitization. In December 1997 the Mortgage Finance unit priced a $407 million offering of securities backed by sub-prime home equity loans - representing First Union's largest lead-managed home equity securitization. This transaction, coupled with two other securitizations earlier in the year, underscores the synergies within FUHEB in leveraging our capabilities in the home equity securities market. The Mortgage Finance unit issued new securities amounting to $1 billion in 1997. Our Risk Management unit creates customized solutions to risk management needs that allow customers to manage a wide variety of market risks, including interest rate risk, foreign exchange risk and commodity risk. The derivatives desk makes markets and trades in a large variety of derivative products and spot and forward exchange markets. The interest rate derivatives group completed more than 2,100 transactions with a notional principal value of $58 billion in 1997. The unit contributed $103 million in gross revenues in 1997. The unit expects to introduce equity derivatives for customers in the first quarter of 1998. Our Commercial Leasing and Rail unit includes First Union Rail which, with three major acquisitions in 1996, became the second largest general railcar leasing company in the United States with a fleet of more than 60,000 rail cars. First Union Rail also has developed innovative fleet management and logistics services, using the latest computer technologies to manage programs for customers and to provide insurance coverage and car accounting systems. The Traditional Banking unit includes Specialized Industries, Diversified Finance and International Finance. Specialized Industries delivers custom-tailored corporate finance advice to customers in six industry segments. Relationship managers from Diversified Finance, which includes leveraged finance and asset-based lending, also call on middle-market customers nationally. The relationship banking areas are the primary source for many of our Investment Banking products. The unit had $9 billion in average net loans in 1997. First Union will continue to expand its relationship banking efforts, including increased industry segment coverage and an expanded international presence when combined with CoreStates. Treasury/Nonbank Segment The Treasury/Nonbank segment includes First Union's Central Money Book (CMB) and certain expenses that are not allocated to the business segments, including goodwill amortization and corporate restructuring costs. The CMB is responsible for the management of our securities portfolios, our overall funding requirements and our asset and liability management functions. The Securities Available for Sale, Investment Securities, Liquidity and Funding Sources and Market Risk Management sections provide information about our securities portfolios, funding sources and asset and liability management functions. Additionally the Treasury/Nonbank segment includes amortization expense and capital not allocated to business segments related to other intangible assets (excluding deposit base premium and mortgage and other servicing assets) and charges that are unusual and infrequent, including merger-related and restructuring charges. The Treasury/Nonbank segment includes the income and expense related to the restructuring of the credit card receivables and other unsecured loans. 15 (The following graph appears on left side of page.) Net Interest Income (Tax-equivalent) (Dollars in billion) 92 93 94 95 96 97 $3.8 4.3 4.6 5.2 5.6 $5.8 Noninterest Income (Dollars in billions) 92 93 94 95 96 97 $1.4 1.6 1.6 2.2 2.6 $3.4 Components of Noninterest Income - ------------------------------------------------ In Millions 1997 1996 - ------------------------------------------------ Trading account profits $204 131 Service charges on deposits accounts 854 734 Mortgage banking income 247 194 Capital management income 882 607 Securities available 31 36 for sale transactions Investment security transactions 3 4 Fees for other banking services 151 172 Equipment lease rental income 187 112 Sundry income $ 837 646 Results of Operations Income Statement Review Net Interest Income Tax-equivalent net interest income increased 5 percent to $5.8 billion in 1997 from $5.6 billion in 1996. The increase in tax-equivalent net interest income was primarily the result of increased earning assets. Nonperforming loans reduce interest income because the contribution from these loans is eliminated or sharply reduced. In 1997, $51 million in gross interest income would have been recorded if all nonaccrual and restructured loans had been current in accordance with their original terms and if they had been outstanding throughout the period (or since origination if held for part of the period). The amount of interest income related to these assets and included in income in 1997 was $21 million. Net Interest Margin The net interest margin, which is the difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, was 4.36 percent in 1997 compared with 4.25 percent in 1996. The margin increase in 1997 was partially a result of upward repricing of credit card loans and an increase in lease financings. The average rate earned on earning assets was 8.25 percent in 1997 and 8.06 percent in 1996. The average rate paid on interest-bearing liabilities was 4.49 percent in 1997 and 4.36 percent in 1996. It should be noted that the margin is not our primary management focus or goal. Our focus is on increasing revenues. We use securities and off-balance sheet transactions to manage interest rate sensitivity. More information on these transactions is included in the Market Risk Management section. Noninterest Income We are meeting the challenges of increasing competition, changing customer demands and demographic shifts by making discretionary investments to enhance revenue growth. We have significantly broadened our product lines, particularly in the Capital Markets and Capital Management Groups, to provide additional sources of fee income that complement our long-standing banking products and services. These investments were reflected in a 30 percent increase in noninterest income, excluding investment securities transactions, to $3.4 billion in 1997 from $2.6 billion in 1996. Almost all categories of noninterest income increased in 1997 from a year earlier. Fee income from Capital Management and Capital Markets activities made up one-half of noninterest income in 1997. These two groups are discussed further in the Business Segments section. Service charges on deposit accounts increased 16 percent from 1996 and mortgage banking income increased 27 percent, reflecting primarily purchase accounting acquisitions completed in 1996. Equipment leasing rental income increased 67 percent primarily reflecting the full year of railcar leasing activity. Trading Activities Our Capital Markets Group also makes a key contribution to noninterest income through trading profits. Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through profitable trading for the corporation's own account. Market making and position taking activities across a wide array of financial instruments add to our ability to optimally serve our customers. Trading profits increased 56 percent to $204 million in 1997 compared with $131 million in 1996. The increase was largely related to asset securitization activity and to increased customer transactions. Trading account assets were $5 billion at December 31, 1997, compared with $4 billion at year-end 1996. Noninterest Expense Noninterest expense was $5.6 billion in 1997 compared with $5.2 billion in 1996. Noninterest expense in 1997 included $269 million in pre-tax, merger-related and restructuring charges. Noninterest expense in 1996 included pre-tax, merger-related and restructuring charges of $281 million and the SAIF special assessment of $135 million pre-tax. The increase from 1996 also included the incremental impact of the fourth quarter 1996 purchase accounting acquisitions and expenses associated with our capital securities issues. More information on these capital securities is in the Guaranteed Preferred Beneficial Interests section. 16 (The following graphs appear on right side of page.) Noninterest Expense (Dollars in billions) 92 93 94 95 96 97 $3.4 3.5 3.7 4.7 5.2 $5.6 Overhead Efficiency Ratio (Percent) 92 93 94 95 96 97 66% 61 61 61* 58* 57%* *Excluding special charges Year-End Earning Assets (Dollars in billions) 92 93 94 95 96 97 -- -- -- -- -- -- Year-End Earning Assets $84 $93 101 127 134 $134 Loans, net 60 68 78 97 102 97 Investment Securities 12 8 8 3 2 2 Securities Available for Sale 6 14 12 21 17 21 Other 6 3 4 7 13 14 ------------------------------------------ The increases in various categories of noninterest expense reflect our continued investments in fee-income generating businesses such as those managed by the Capital Management and the Capital Markets Groups, in which expenses move more in tandem with revenues, and in technology and retail branch transformation. Our overhead efficiency ratio continued to improve even while we increased our discretionary investments. This ratio was 57 percent in 1997, an improvement from 58 percent in 1996. These ratios exclude amounts related to the capital securities issues, merger-related and restructuring charges, and SAIF. Amortization of other intangible assets predominantly represents the amortization of goodwill and deposit base premium related to purchase accounting acquisitions. These intangibles are amortized over periods ranging from six to 25 years. Amortization is a noncash charge to income; therefore, liquidity and funds management activities are not affected. We had $2.7 billion in other intangible assets at December 31, 1997, compared with $2.9 billion at December 31, 1996. Costs related to environmental matters were not material. We are well aware of the ramifications of the change from December 31, 1999, to January 1, 2000. In February 1996 we assembled a corporate project team and engaged a leading technology firm to begin an initial assessment of the scope of the project. We determined early on that our single system platform would help minimize expenses related to the year 2000 project. Also minimizing the impact is the fact that our Emerald deposit system and essentially all of our Capital Markets systems are already year 2000 compliant. We have analyzed our computer hardware platforms and software programs and expect to have virtually all of the systems and application modifications in place and tested by the end of 1998, allowing time in 1999 for any system refinements that may be needed. Our relationship with third-party vendors, counterparties and customers also present year 2000 challenges, and we are assessing and monitoring their progress. Our process regarding vendors and counterparties includes direct access with the entity, surveys and testing procedures to assess whether such parties will be able to successfully interact with First Union in the year 2000. In addition we are assessing the needs of our customers and the possible effects of their inability to become year 2000 compliant. Excluding any such expenses related to future acquisitions, First Union currently estimates total cumulative expenses for making its computer systems year 2000 compliant will be between $42 million and $45 million pretax. Income Taxes Income taxes were $814 million in 1997 compared with $875 million in 1996. The decrease resulted primarily from an after-tax benefit of $155 million realized in 1997 from the reorganization of certain corporate and interstate banking entities. The tax benefit had the result of reducing the corporation's effective tax rate to 30 percent from 35 percent. This benefit was principally offset by a higher provision for loan losses related to the restructuring of the unsecured consumer loan portfolio. BALANCE SHEET REVIEW Earning Assets Earnings from our primary earning assets, securities and loans, are subject to two principal kinds of risks: interest rate risk and credit risk. Interest rate risk could result if rate indices related to sources and uses of funds were mismatched. Our Funds Management Committee manages interest rate risk, as well as credit risks associated with securities, under specific policy standards, which are discussed in more detail in the Market Risk Management section. In addition to certain securities, off-balance sheet transactions such as interest rate swaps have been used to maintain interest rate risk at acceptable levels in accordance with our policy standards. The loan portfolio carries the potential credit risk of past due, nonperforming or, ultimately, charged-off loans. We manage this risk primarily through credit approval standards, which are discussed in the Loans section. Average earning assets in 1997 were $134 billion, a 2 percent increase from $131 billion in 1996. Securities Available For Sale The available for sale portfolio consists of U.S. Treasury, municipal and mortgage-backed and asset-backed securities as well as collateralized mortgage obligations, corporate, foreign and equity securities. 17 [PIE CHARTS APPEAR WITH THE FOLLOWING INFORMATION:] Year-End Securities Available For Sale (Percent) U.S. Government Agencies 62% Other 16 U.S. Treasury Securities 12 Collaterized Mortgage Obligations 10 Year-End Investment Securities (Percent) U.S. Government Agencies 47% Municipals 33 Collaterized Mortgage Obligations 17 Other 3 Securities available for sale transactions resulted in gains of $31 million in 1997 and $36 million in 1996. At December 31, 1997, we had securities available for sale with a market value of $21 billion compared with $17 billion at year-end 1996. The market value of securities available for sale was $395 million above amortized cost at December 31, 1997. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. The average rate earned on securities available for sale in 1997 was 6.94 percent compared with 6.69 percent in 1996. The average maturity of the portfolio was 5.61 years at December 31, 1997. Investment Securities The investment securities portfolio consists of U.S. Government agency, corporate, municipal and mortgage-backed securities, and collateralized mortgage obligations. Our investment securities amounted to $2.2 billion at December 31, 1997, and $2.5 billion at December 31, 1996. The average rate earned on investment securities was 8.63 percent in 1997 and 8.68 percent in 1996. The average maturity of the portfolio was 5.46 years at December 31, 1997. Loans The loan portfolio, which represents our largest asset class, is a significant source of interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Our lending strategy stresses quality growth and portfolio diversification by product, geography and industry. A common credit underwriting structure is in place throughout the corporation. The commercial loan portfolio includes general commercial loans, both secured and unsecured, and commercial real estate loans. Commercial loans are typically either working capital loans, which are used to finance the inventory, receivables and other working capital needs of commercial borrowers, or term loans, which are typically used to finance fixed assets or acquisitions. Commercial real estate loans typically are used to finance the construction or purchase of commercial real estate. Our commercial lenders focus principally on middle-market companies, which we believe reduces the risk of credit loss from any single borrower or group of borrowers. A majority of our commercial loans are for less than $10 million. Consis-tent with our longtime standard, we generally look for two repayment sources for commercial real estate loans: cash flows from the project and other resources of the borrower. Consumer lending through our full-service bank branches is managed using an automated underwriting system that combines statistical predictors of risk and industry standards for acceptable levels of customer debt capacity and collateral valuation. These guidelines are continually monitored for overall effectiveness and for compliance with fair lending practices. The loan portfolio at December 31, 1997, was composed of 48 percent in commercial loans and 52 percent in consumer loans compared with 44 percent and 56 percent, respectively, in 1996. Net loans at December 31, 1997, were $97 billion compared with $102 billion [Two tables appear with the following information:] YEAR-END COMMERCIAL LOANS - --------------------------------------------- Industry Classification In Millions - --------------------------------------------- Manufacturing $ 5,767 Retail trade 2,397 Wholesale trade 2,179 Services 6,457 Financial services 4,059 Insurance 579 Real estate-related 1,922 Communication 1,162 Transportation 2,238 Public Utilities 653 Agriculture 419 Construction 582 Mining 515 Individuals 1,298 Public Administration 1,578 Other 5,793 - --------------------------------------------- Total $ 37,598 - --------------------------------------------- Year-End Commercial Real Estate Loans - ----------------------------------------------------- Project Type In Millions Number of Loans - ----------------------------------------------------- Apartments $ 1,686 1,465 Condominiums 146 185 Land-improved 653 1,053 Land-unimproved 277 473 Lodging 256 166 Office Building 1,812 2,638 Industrial 1,423 2,454 Retail 1,729 1,702 Single Family 473 2,788 Other 2,507 3,990 - ----------------------------------------------------- Total $ 10,962 16,914 - ----------------------------------------------------- 18 [The following charts appear on the right side of the page:] Year-End Loans (Percent) Commerical, Financial and Agricultural 28% Real Estate - Mortgage 25 Installment Loans - Other 19 Commercial Real Estate - Mortage 9 Lease Financing 8 Vehicle Leasing 4 Other 4 Installment Loans - Bankcard 3 Year-End Consumer Loans (Percent) Mortgage Loans to Individuals 46% Direct Lending 19 Second Mortgages 19 Vehicle Leasing 7 Bankcard 5 Mortgage Warehouse and Securitized Mortgages 4 Nonperforming Assets (Dollars in billions) 92 93 94 95 96 97 $2.0 1.4 .89 .88 .80 $.72 at December 31, 1996. Average net loans were $100 billion in 1997 and $97 billion in 1996. First Union transferred to assets held for sale $3 billion in loans in 1997 as part of its strategy of balance sheet management to maximize its return on investment. The increase in average loans was primarily attributable to the fourth quarter 1996 purchase accounting acquisitions and growth in both our consumer and Capital Markets portfolios. At December 31, 1997, unused loan commitments related to commercial and consumer loans were $40 billion and $24 billion, respectively. Commercial and standby letters of credit were $6 billion at December 31, 1997. At December 31, 1997, loan participations sold to other lenders amounted to $2 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.77 percent in 1997 compared with 8.58 percent in 1996. Factors contributing to the increase in the rate on loans included a reduction in lower-yielding mortgage loans, the upward repricing of credit card loans and growth in high-yielding leveraged leases. The 1997 reduction in mortgage loans resulted from the sale of $1 billion of ARMs and from the natural runoff of our mortgage portfolio. The improvement in the yield on credit cards reflected the repricing of loans originated with lower introductory rates and the targeted repricing of certain accounts to improve overall profitability. The reduction in installment loans-other was primarily attributable to the securitization of student loans, indirect auto loans and community reinvestment loans. The Asset Quality section provides information about geographic exposure in the loan portfolio. Commercial Real Estate Loans Commercial real estate loans amounted to 11 percent of the total port- folio at December 31, 1997, and 12 percent at December 31, 1996. This portfolio included commercial real estate mortgage loans of $9 billion at December 31, 1997, compared with $10 billion at December 31, 1996. Asset Quality Nonperforming Assets At December 31, 1997, nonperforming assets were $723 million, or 0.75 percent of net loans and foreclosed properties, compared with $802 million, or 0.78 percent, at December 31, 1996. Loans or properties of less than $5 million each made up 81 percent, or $585 million, of nonperforming assets at December 31, 1997. Of the rest: (bullet) Five loans or properties between $5 million and $10 million each accounted for $41 million; and (bullet) Four loans or properties over $10 million each accounted for $97 million. Fifty percent of nonperforming assets were collateralized primarily by real estate at December 31, 1997, and 55 percent at year-end 1996. Past Due Loans Accruing loans 90 days past due were $232 million at December 31, 1997, compared with $361 million at December 31, 1996. Of the past dues, $11 million were commercial and commercial real estate loans and $221 million were consumer loans. At December 31, 1997, we were closely monitoring certain loans for which borrowers were experiencing [Two tables appear with the following information:] YEAR-END NONACCURAL COMMERCIAL LOANS Excluding commercial loans - --------------------------------------------- Industry Classification In Millions - --------------------------------------------- Manufacturing $ 16 Retail trade 19 Wholesale trade 5 Services 113 Financial services 13 Real estate-related 7 Transportation 15 Public Utilities 4 Agriculture 11 Construction 6 Individuals 16 Other 11 - --------------------------------------------- Total $ 236 - --------------------------------------------- Year-End Nonperforming Assets - ------------------------------------ Industry Classification In Millions - ------------------------------------ Apartments $ 5 Condominiums 1 Industrial 15 Land-improved 5 Land-unimproved 16 Lodging 1 Office Building 13 Retail 11 Single Family 329 Other 91 - ------------------------------------ Total $ 487 - ------------------------------------ 19 increased levels of financial stress. None of these loans were included in nonperforming assets or in accruing loans past due 90 days, and the aggregate amount of these loans was not significant. Net Charge-Offs Net charge-offs amounted to $635 million in both 1997 and 1996. Net charge-offs were 0.63 percent of average net loans in 1997 compared with 0.65 percent in 1996. Excluding net charge-offs related to the credit card portfolio, net charge-offs were 0.28 percent compared with 0.35 percent in 1996. At December 31, 1997, the owned credit card portfolio represented 3 percent of the loan portfolio. We do not believe that the higher levels of net charge-offs in the credit card portfolio are indicative of any significant deterioration in the credit quality of the total loan portfolio. The higher credit card-related net charge-offs were concentrated in certain vintages that were transferred to assets held for sale. We are carefully monitoring trends in both the commercial and consumer loan portfolios for signs of credit weakness. Additionally we have evaluated our credit policies in light of changing economic trends, and we have taken appropriate steps where necessary. All of these steps have been taken with the goals of minimizing future credit losses and deterioration and of allowing for maximum profitability. Provision and Allowance for Loan Losses The loan loss provision was $840 million in 1997 compared with $449 million in 1996. We increased the loan loss provision to facilitate the restructuring of the unsecured consumer loan portfolio, which will result in the sale of $3 billion of credit card receivables and other unsecured loans. The allowance for loan losses was $1.2 billion at December 31, 1997, and $1.5 billion at December 31, 1996. The decrease was commensurate with the reduction in the credit card portfolio. We establish reserves based on various factors, including results of quantitative analyses of the quality of commercial loans and commercial real estate loans. Reserves for commercial and commercial real estate loans are based principally on loan grades, historical loss rates, borrowers' creditworthiness, underlying cash flows from the project and from the borrowers, and analysis of other less quantifiable factors that might influence the portfolio. We analyze all loans in excess of $1 million that are being monitored as potential credit problems to determine whether supplemental, specific reserves are necessary. Reserves for consumer loans are based principally on delinquencies and historical and projected loss rates. At December 31, 1997, impaired loans, which are included in nonaccrual loans, amounted to $301 million compared with $370 million at December 31, 1996. A loan is considered to be impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of a loan agreement. Included in the allowance for loan losses at December 31, 1997, was $43 million related to $253 million of impaired loans. The remaining impaired loans were recorded at or below fair value. In 1997 the average recorded investment in impaired loans was $306 million, and $22 million of interest income was recognized on loans while they were impaired. This income was recognized using a cash-basis method of accounting. Geographic Exposure The loan portfolio in the East Coast region of the United States is spread primarily across 106 metropolitan areas with diverse economies. Atlanta, Georgia; Charlotte, North Carolina; Miami and Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C., are our largest markets. Substantially all of the $11 billion commercial real estate portfolio at December 31, 1997, was located in our East Coast banking region. Liquidity and Funding Sources Liquidity planning and management are necessary to ensure we maintain the ability to fund operations cost-effectively and to meet current and future obligations such as loan commitments and deposit outflows. In this process we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the corporation's needs. Funding sources primarily include customer-based core deposits but also include purchased funds and cash flows 20 (The following graphs appear on the right side of the page:) Core Deposits (Dollars in billions) 92 93 94 95 96 97 $73 78 81 94 98 $97 Comparison of Funding Sources (Percent) 95 96 97 Long-Term Debt 6% 6% 6% Short-Term Borrowings 17% 18% 20% Deposits 77% 76% 74% from operations. First Union is one of the nation's largest core deposit-funded banking institutions. Our large consumer deposit base, which is spread across the economically strong South Atlantic region and high per-capita income Middle Atlantic region, creates considerable funding diversity and stability. Asset liquidity is maintained through maturity management and through our ability to liquidate assets, primarily securities held for sale. Another significant source of asset liquidity is the ability to securitize assets such as credit card receivables and auto, home equity, student and mortgage loans. Other off-balance sheet sources of liquidity exist as well, including a mortgage servicing portfolio for which the estimated fair value exceeded book value by $44 million at December 31, 1997. Core Deposits Core deposits are a fundamental and cost-effective source of funding. Core deposits include savings, negotiable order of withdrawal (NOW), money market, noninterest-bearing and other consumer time deposits. Core deposits were $97 billion at December 31, 1997, compared with $98 billion at December 31, 1996. The decline largely reflected runoff that is typical following acquisitions, in addition to customers' movement into investment products. The portion of core deposits in higher-rate, other consumer time deposits was 30 percent at December 31, 1997, and 34 percent at year-end 1996. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they generally are not available for immediate withdrawal, and they are less expensive to process. Average core deposit balances were $94 billion in 1997 and $93 billion in 1996. In 1997 and 1996, average noninterest- bearing deposits were 20 percent of average core deposits. Average balances in savings and NOW, money market and noninterest-bearing deposits were higher when compared with 1996, while other consumer time deposits were lower. Deposits can be affected by branch closings or consolidations, seasonal factors and the rates being offered compared to other investment opportunities. The Net Interest Income Summaries provide additional information about average core deposits. Purchased Funds Purchased funds at December 31, 1997, were $34 billion compared with $30 billion at year-end 1996, largely reflecting funding needs related to the increased securities available for sale portfolio and the decrease in core deposits. Average purchased funds in 1997 were $32 billion compared with $31 billion in 1996. Purchased funds are acquired primarily through (i) our large branch network, consisting principally of $100,000 and over certificates of deposit, public funds and treasury deposits, and (ii) national market sources, consisting of relatively short-term funding sources such as federal funds, securities sold under repurchase agreements, eurodollar time deposits, short-term bank notes and commercial paper, and longer-term funding sources such as term bank notes, Federal Home Loan Bank borrowings and corporate notes. Cash Flows Cash flows from operations are a significant source of liquidity. Net cash provided from operations primarily results from net income adjusted for the following noncash accounting items: the provisions for loan losses and foreclosed properties; depreciation and amortization; and deferred income taxes or benefits. This cash was available in 1997 to increase earning assets, to make discretionary investments and to reduce borrowings. Long-Term Debt Long-term debt was 67 percent of total stockholders' equity at December 31, 1997, compared with 74 percent at year-end 1996. Under a shelf registration statement filed with the Securities and Exchange Commission, we currently have available for issuance $2.4 billion of senior or subordinated debt securities, common stock or preferred stock. The sale of any additional debt or equity securities will depend on future market conditions, funding needs and other factors. Debt Obligations We have a $350 million, committed back-up line of credit that expires in December 1998. This credit facility contains financial covenants that require First Union to maintain a minimum level of tangible net 21 (The following chart appears on left side of page:) Regulatory Capital to Assets (Percent) Tier 1 Total Capital 1997 Regulatory Minimum 6.00% 10.00 First Union 8.41 13.40% worth, restrict double leverage ratios and require capital levels at subsidiary banks to meet regulatory standards. First Union has not used this line of credit. In 1998, $2 billion of long-term debt will mature. Funds for the payment of long-term debt will come from operations or, if necessary, additional borrowings. Guaranteed Preferred Beneficial Interests In January 1997 we issued $495 million of trust capital securities. As a result, $991 million of capital securities were outstanding as of December 31, 1997. A subsidiary trust of the corporation issued these capital securities, and the corporation received the proceeds by issuing junior subordinated debentures to the trust. These capital securities are considered tier 1 capital for regulatory purposes. Expenses of $66 million in 1997 related to the issuance of capital securities are included in sundry expense. Stockholders' Equity The management of capital in a regulated banking environment requires a balance between maximizing leverage and return on equity to stockholders while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. We have historically generated attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios. Total stockholders' equity was $12 billion at December 31, 1997, and $11 billion at December 31, 1996. Common shares outstanding amounted to 636 million at December 31, 1997, compared with 641 million at December 31, 1996. In 1997 we repurchased 24 million shares of our common stock at a cost of $1 billion compared with 31 million shares at a cost of $968 million in 1996. In addition in 1997 we issued 7.5 million shares and received $358 million in proceeds, which were used for general corporate purposes. We paid $749 million in dividends to common stockholders in 1997 compared with $660 million in 1996. At December 31, 1997, stockholders' equity was increased by a $254 million unrealized after-tax gain related to debt and equity securities. The Securities Available for Sale section provides additional information about debt and equity securities. Subsidiary Dividends Our banking subsidiaries are the largest source of parent company dividends. Capital requirements established by regulators limit dividends that these and certain other of our subsidiaries can pay. Banking regulators generally limit a bank's dividends in two principal ways: first, dividends cannot exceed the bank's undivided profits, less statutory bad debt in excess of a bank's allowance for loan losses; and second, in any year dividends cannot exceed a bank's net profits for that year, plus its retained earnings from the preceding two years, less any required transfers to surplus. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well capitalized level, our subsidiaries had $426 million available for dividends at December 31, 1997, without prior regulatory approval. Our subsidiaries paid $1.3 billion in dividends to the parent company in 1997. In addition the consolidation of our banks in our southern region and Connecticut into First Union National Bank, based in Charlotte, North Carolina, resulted in a reduction of capital of $835 million, which was paid to the parent company. Regulatory Capital Federal banking regulations require that bank holding companies and their subsidiary banks maintain minimum levels of capital. These banking regulations measure capital using three formulas including tier 1 capital, total capital and leverage capital. The minimum level for the ratio of total capital to risk-weighted assets (including certain off-balance sheet financial instruments, such as standby letters of credit and interest rate swaps) is currently 8 percent. At least half of total capital is to be composed of common equity, retained earnings and a limited amount of qualifying preferred stock, less certain intangible assets (tier 1 capital). The rest may consist of a limited amount of subordinated debt, nonqualifying preferred stock and a limited amount of the loan loss allowance (together with tier 1 capital, total capital). At December 31, 1997, the tier 1 and total capital ratios were 8.41 percent and 13.40 percent, respectively, compared with 7.33 percent and 12.33 percent at December 31, 1996. Amounts prior to 1997 are not restated for the Signet acquisition. 22 In addition the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets equal to 3 percent for bank holding companies that meet specified criteria, including having the highest regulatory rating. All other bank holding companies are generally required to maintain a leverage ratio of at least 4 to 5 percent. The leverage ratio at December 31, 1997, was 6.81 percent and at December 31, 1996, it was an unrestated 6.13 percent. The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board has indicated it will continue to consider a tangible tier 1 leverage ratio (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. Each subsidiary bank is subject to similar capital requirements. None of our subsidiary banks has been advised of any specific minimum capital ratios applicable to it. The regulatory agencies also have adopted regulations establishing capital tiers for banks. Banks in the highest capital tier, or well capitalized, must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a total capital ratio of 10 percent. At December 31, 1997, our deposit-taking subsidiary banks met the capital and leverage ratio requirements for well capitalized banks. We expect to maintain these ratios at the required levels by the retention of earnings and, if necessary, the issuance of additional capital. Failure to meet certain capital ratio or leverage ratio requirements could subject a bank to a variety of enforcement remedies, including termination of deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking banks. The Accounting and Regulatory Matters section provides more information about proposed changes in risk-based capital standards. The Merger and Consolidation Activity and the Accounting and Regulatory Matters sections provide additional information about the consolidation of our regional banks. Market Risk Management Interest Rate Risk Methodology Managing interest rate risk is fundamental to banking. The inherent maturity and repricing characteristics of our day-to-day lending and deposit activities create a naturally asset-sensitive structure. By using a combination of on- and off-balance sheet financial instruments, we manage the sensitivity of earnings to changes in interest rates within our established policy guidelines. The Credit/Market Risk Committee of the corporation's board of directors reviews overall interest rate risk management activity. The Funds Management Committee of the corporation oversees the interest rate risk management process and approves policy guidelines. Balance sheet management and finance personnel monitor the day-to-day exposure to changes in interest rates in response to loan and deposit flows. They make adjustments within established policy guidelines. In 1997 we modified our methodology for measuring exposure to interest rate risk for policy measurement. This change in methodology is intended to ensure we include a sufficiently broad range of rate scenarios and pattern of rate movements that we believe to be reasonably possible. The fundamental difference between our previous and our new methodologies is in the absolute amount of change in interest rates we incorporate in our alternative scenarios and the rapidity with which these rate changes occur. Previously we measured the impact that 100 basis point rate changes over a three-month period had on earnings per share over the subsequent 12 months. Our new methodology uses 200 basis point changes over a 12-month period. We retained our 5 percent policy limit described below because our change in methodology was intended to focus on the pattern of rate change rather than on the average amount of change in rates between the two methodologies. We believe our earnings simulation model is a more relevant depiction of interest rate risk than traditional gap tables because it captures multiple effects excluded in less sophisticated presentations, and it includes significant variables that we identify 23 (The following graph appears on the left side of page:) Net Interest Income Growth vs. Unrealized Gains/Losses (Dollars in billions) 94 95 96 97 Net Interest Income Growth (Tax-Equivalent) 4.6 5.2 5.6 5.8 Unrealized Gains/Losses (On- and Off-balance Sheet) (1.1) .9 .4 1.0 as being affected by interest rates. For example our model captures rate of change differentials, such as federal funds rates versus savings account rates; maturity effects, such as calls on securities; and rate barrier effects, such as caps and floors on loans. It also captures changing balance sheet levels, such as commercial and consumer loans (both floating and fixed rate); noninterest- bearing deposits and investment securities. In addition our model considers leads and lags that occur in long-term rates as short-term rates move away from current levels; the elasticity in the repricing characteristics of savings and money market deposits; and the effects of prepayment volatility on various fixed-rate assets such as residential mortgages, mortgage-backed securities and consumer loans. These and certain other effects are evaluated in developing the scenarios from which sensitivity of earnings to changes in interest rates is determined. We use two separate measures that each include three standard scenarios in analyzing interest rate sensitivity for policy measurement. Each of these measures compares our forecasted earnings per share in both a "high rate" and "low rate" scenario to a base-line scenario. The base-line scenario is our estimated most likely path for future short-term interest rates over the next 24 months. The second base-line scenario holds short-term rates flat at their current level over our forecast horizon. The "high rate" and "low rate" scenarios assume gradual 200 basis point increases or decreases in the federal funds rate from the beginning point of each base-line scenario over the most current 12-month period. Our policy limit for the maximum negative impact on earnings per share resulting from "high rate" or "low rate" scenarios is 5 percent. The policy limit applies to both the "most likely rate" scenario and the "flat rate" scenario. The policy measurement period is 12 months in length, beginning with the first month of the forecast. Earnings Sensitivity Our January 1998 estimate for future short-term interest rates (our "most likely" scenario) includes an average federal funds rate declining gradually from 5.50 percent in January 1998 to 5.38 percent by December 1998, then declining to 5.25 percent by December 1999. Our "flat rate" scenario holds the federal funds rate at 5.50 percent over this same horizon. Based on the January outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200 basis point increase in short-term rates from our "flat rate" scenario), the model indicates that earnings during the policy measurement period would be negatively affected by 1.0 percent. Our model indicates that earnings would benefit by 0.8 percent in our "low rate" scenario (i.e., a 200 basis point decline in short-term rates from our "flat rate" scenario). Our model indicates that a 200 basis point rise in rates from our "most likely" scenario is less detrimental than the same rise from our "flat rate" scenario. Over the next year, earnings would increase by 0.4 percent if rates fall gradually by 200 basis points, and would decrease by 0.8 percent if rates gradually rise 200 basis points, compared to our "most likely" scenario. In 1999, earnings would fall below those earned in our "most likely" scenario by 0.1 percent if rates were 200 basis points lower than our "most likely" scenario. If rates were 200 basis points higher than our "most likely" scenario in 1999, then earnings would be negatively affected by 2.5 percent. The pending CoreStates acquisition is incorporated in these estimates. Without considering CoreStates, earnings during the policy measurement period under any of our three scenarios would not increase by more than 2.4 percent if rates were to fall, and they would not decrease by more than 2.8 percent if rates were to rise. In addition to the three standard scenarios used to analyze rate sensitivity over the policy measurement period, we regularly analyze the potential impact of other remote, more extreme interest rate scenarios and time periods. These alternate "what if" scenarios may include interest rate paths both higher, lower and more volatile than those used for policy measurement and extend to periods beyond the policy measurement period. While our interest rate sensitivity modeling assumes that management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, management will continue to formulate strategies to protect earnings from the potential negative effects of changes in interest rates. 24 Off-Balance Sheet Derivatives For Interest Rate Risk Management As part of our overall interest rate risk management strategy, for many years we have used off-balance sheet derivatives as a cost- and capital- efficient way to modify the repricing or maturity characteristics of on-balance sheet assets and liabilities. Our off-balance sheet derivative transactions used for interest rate sensitivity management include interest rate swaps, futures and options with indices that relate to the pricing of specific financial instruments of the corporation. We believe we have appropriately controlled the risk so that derivatives used for rate sensitivity management will not have any significant unintended effect on corporate earnings. As a matter of policy we do not use highly leveraged derivative instruments for interest rate risk management. The impact of derivative products on our earnings and rate sensitivity is fully incorporated in the earnings simulation model in the same manner as on-balance sheet instruments. Our overall goal is to manage our rate sensitivity such that earnings are not adversely affected materially whether rates go up or down. As a result of interest rate fluctuations, off-balance sheet transactions (and securities) will from time to time develop unrealized appreciation or depreciation in market value when compared with their cost. The impact on net interest income attributable to these off-balance sheet transactions, all of which are linked to specific financial instruments as part of our overall interest rate risk management strategy, will generally be offset by net interest income from on-balance sheet assets and liabilities. The important consideration is not the shifting of unrealized appreciation or depreciation between and among on- and off-balance sheet instruments, but the prudent management of interest rate sensitivity so that corporate earnings are not unduly at risk as interest rates move up or down. Despite significant year-to-year fluctuations in the market value of both on- and off-balance sheet positions and related fluctuations in net interest income contribution from these positions, tax-equivalent net interest income continued to increase. This is the outcome we strive to achieve in using portfolio securities and off-balance sheet products to balance the income effects of core loans and deposits from changing interest rate environments. The fair value appreciation of off- balance sheet derivative financial instruments used to manage our interest rate sensitivity was $412 million at December 31, 1997, compared with fair value appreciation of $209 million at December 31, 1996. The carrying amount of financial instruments used for interest rate risk management includes amounts for deferred gains and losses related to terminated positions. The amount of deferred gains and losses was $13 million and $7 million, respectively, at December 31, 1997. Net gains of $3 million will increase net interest income in 1998. Net gains of $3 million will increase net interest income in subsequent years. Although off-balance sheet derivative financial instruments do not expose the corporation to credit risk equal to the notional amount, we are exposed to credit risk equal to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize the credit risk in these instruments by dealing only with high-quality counterparties. Each transaction is specifically approved for applicable credit exposure. In addition our policy is to require that all swaps and options be governed by an International Swaps and Derivatives Association Master Agreement. Bilateral collateral arrangements are in place for substantially all dealer counterparties used in our Asset/Liability Management activities. Derivative collateral arrangements for dealer transactions and trading activities are based on established thresholds of acceptable credit risk by counterparty. Thresholds are determined based on the strength of the individual counterparty, and they are bilateral. As of December 31, 1997, the total credit risk in excess of thresholds was $301 million. The fair value of collateral held approximated the total credit risk in excess of thresholds. For nondealer transactions the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. Trading Risk Management Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through 25 profitable trading for the corporation's own account. We trade a variety of debt securities and foreign exchange, as well as financial and foreign currency derivatives, in order to provide customized solutions for the risk management challenges faced by our customers. We maintain diversified trading positions in both the fixed income and foreign exchange markets. Risk is controlled through the imposition of value-at-risk limits and an active, independent monitoring process. We use the value-at-risk methodology for measuring the market risk of the corporation's trading positions. This statistical methodology uses recent market volatility to estimate the maximum daily trading loss that the corporation would expect to incur, on average, 97.5 percent of the time. The model also measures the effect of correlation among the various trading instruments to determine how much risk is eliminated by "offsetting" positions. The analysis captures all financial assets and liabilities that are considered trading positions (including loan trading activities), foreign exchange and financial and foreign currency derivative instruments. The calculation uses historical data from either the most recent 180 or 260 business days, depending on the activity. Value-at-risk amounts related to interest rate risk and currency risk at December 31, 1997, were $11 million and $2 million, respectively. Accounting and Regulatory Matters Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about change in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. This Standard is effective for financial statements issued for periods beginning after December 31, 1997. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards and disclosure requirements for the way companies report information about operating segments both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and assessing performance. Information such as segment earnings, certain revenue and expense items and certain segment assets are required to be presented, and such amounts are required to be reconciled to the company's financial statements. Certain information related to this Standard is included in the Business Segments section. The corporation will assess the current methodologies and reporting for compliance with the Standard. This Standard is effective for financial statements issued for periods beginning after December 15, 1997. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and the presentation of comprehensive income, which is defined as the change in equity transactions with nonowners. It includes net income and other comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. Generally, other comprehensive income includes transactions not typically recorded as a component of net income such as foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain debt and equity securities. This Standard requires that such items be presented with equal prominence on a comparative basis in the appropriate financial statements for fiscal years beginning after December 15, 1997, including interim periods. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), among other provisions, imposes liability on a bank insured by the FDIC for certain obligations to the FDIC incurred in connection with other insured banks under common control with such bank. The Federal Deposit Insurance Corporation Improvement Act, among other things, requires a revision of risk-based capital standards. The new standards are required to incorporate interest rate risk, concentration of credit risk and the risks of nontraditional activities and to reflect the actual performance and expected risk of loss of multifamily mortgages. The Risk-Based Capital section provides information on risk assessment classifications. 26 Legislation has been enacted providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) authorized interstate acquisitions of banks and bank holding companies without geographic limitation beginning September 27, 1995. Beginning June 1, 1997, a bank was allowed to merge with a bank in another state as long as neither of the states opt out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provided that a state may enact laws permitting interstate merger transactions before June 1, 1997. Certain states in which First Union conducts banking operations have enacted such legislation. Information about First Union's consolidation under this legislation is in the Merger and Consolidation Activity section. Various other legislative and accounting proposals concerning the banking industry are pending in Congress and with the Financial Accounting Standards Board, respectively. Given the uncertainty of the proposal process, we cannot assess the impact of any such proposals on our financial condition or results of operations. Earnings and Balance Sheet Analysis (1996 compared with 1995) First Union's operating earnings in 1996, before special charges, were a record $1.9 billion, or basic earnings per common share of $3.04. Diluted operating earnings per common share were $3.01 in 1996. The special charges were after-tax merger-related and restructuring charges of $181 million and an after-tax SAIF special assessment of $87 million. Operating earnings in 1995 were $1.6 billion, or basic earnings per share of $2.56 before restructuring charges of $73 million after-tax, or 12 cents per share, taken in the fourth quarter of 1995. Diluted operating earnings per common share were $2.49 in 1995. After the special charges, net income applicable to common stockholders was $1.6 billion, or basic earnings per share of $2.61, in 1996 compared with $1.5 billion, or $2.44 per share, in 1995. Diluted earnings per common share were $2.58 in 1996 and $2.38 in 1995. The restructuring charges were taken in connection with the January 1, 1996, First Fidelity pooling of interests acquisition. The SAIF special assessment resulted from 1996 legislation to recapitalize the SAIF. Tax-equivalent net interest income increased 6 percent to $5.6 billion in 1996 from $5.2 billion in 1995. The increase was primarily the result of assets acquired in purchase accounting acquisitions, an increase in the securities available for sale portfolio and the repricing of variable rate assets. Nonperforming loans reduce interest income because the contribution from these loans is eliminated or sharply reduced. In 1996, $57 million in gross interest income would have been recorded if all nonaccrual and restructured loans had been current in accordance with their original terms and had been outstanding throughout the period, or since origination if held for part of the period. The amount of interest income related to these assets and included in income in 1996 was $13 million. The net interest margin was 4.25 percent in 1996 compared with 4.51 percent in 1995. The margin decline was primarily related to the securitization of credit card receivables; the addition of lower spread investment securities in the early months of 1996; the addition of acquired banks and thrifts with lower margins; the reduction in the prime rate from 1995; and the purchase of lower-spread assets related to Capital Markets activities. The average rate earned on earning assets was 8.06 percent in 1996 and 8.32 percent in 1995. The average rate paid on interest-bearing liabilities was 4.36 percent in 1996 and 4.42 percent in 1995. Noninterest income, excluding investment securities transactions, increased to $2.6 billion in 1996 from $2.1 billion in 1995. Virtually all categories of noninterest income increased in 1996. Securities available for sale transactions resulted in gains of $36 million in 1996 and $45 million in 1995. Trading profits were $131 million in 1996 compared with $81 million in 1995. Trading account assets were $4.5 billion at year-end 1996 compared with $2.4 billion at year-end 1995. The increase was the result of general market conditions and expanded trading volume. Noninterest expense increased in 1996 to $5.2 billion from $4.7 billion in 1995. The 27 1996 results include $281 million in pre-tax, merger-related and restructuring charges and a $135 million pre-tax SAIF special assessment. The 1995 results include pre-tax restructuring charges of $94 million. In addition to the special charges, the increase in noninterest expense was primarily related to purchase accounting acquisitions that resulted in higher personnel costs, an increase in equipment expense and an increase in external data processing expense. At December 31, 1996, we had $2.9 billion in other intangible assets compared with $2.5 billion at December 31, 1995. Costs related to environmental matters were not material. Income taxes were $875 million in 1996 compared with $848 million in 1995. The increase resulted primarily from increased income before income taxes. Average earning assets in 1996 were $131 billion, a 13 percent increase from $116 billion in 1995. At December 31, 1996, we had securities available for sale with a market value of $17 billion compared with $21 billion at year-end 1995. The market value of securities available for sale was $6 million above amortized cost at December 31, 1996. The average rate earned on securities available for sale in 1996 was 6.69 percent compared with 6.53 percent in 1995. The average maturity of the portfolio was 5.0 years at December 31, 1996. Our investment securities amounted to $2.5 billion at December 31, 1996, compared with $3.1 billion at year-end 1995. This decline resulted from scheduled maturities, prepayments and issuer calls. The average rate earned on investment securities was 8.68 percent in 1996 and 7.59 percent in 1995. The increase in yield was primarily related to the year-end 1995 transfer of lower-yielding securities to the available for sale portfolio. The average maturity of the portfolio was 5.93 years at December 31, 1996. Net loans at December 31, 1996, were $102 billion compared with $97 billion at year-end 1995. Average net loans in 1996 increased 8 percent to $97 billion from $90 billion in 1995. Demand for credit slowed in 1996, and branch sales campaigns focused more heavily on investment products rather than on lending products. Commercial loans increased slightly in 1996, primarily due to additional lease financings. The loan portfolio at December 31, 1996, was composed of 44 percent in commercial loans and 56 percent in consumer loans, which did not represent a significant change from year-end 1995. At December 31, 1996, unused loan commitments related to commercial and consumer loans were $52 billion. Commercial and standby letters of credit were $5 billion. At December 31, 1996, loan participations sold to other lenders amounted to $1 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.58 percent in 1996 and 8.78 percent in 1995. Factors affecting loan rates in 1996 compared with 1995 included a general decrease in market rates used to price loans. For example the prime rate decreased to an average of 8.27 percent in 1996 from 8.44 percent in 1995. Other factors included the 1995 credit card securitization, as well as a larger portfolio of fixed and adjustable rate mortgages as a result of bank and thrift acquisitions. These factors were offset somewhat by the upward repricing of adjustable rate mortgages and credit card portfolio introductory rates. Commercial real estate loans amounted to 12 percent of the total portfolio at December 31, 1996, compared with 13 percent at December 31, 1995. This portfolio included commercial real estate mortgage loans of $10 billion at December 31, 1996, and at December 31, 1995. At December 31, 1996, nonperforming assets were $802 million, or 0.78 percent of net loans and foreclosed properties, compared with $880 million, or 0.91 percent, at December 31, 1995. Fifty-five percent of nonperforming assets were collateralized primarily by real estate at December 31, 1996, compared with 52 percent at year-end 1995. Accruing loans 90 days past due were $361 million and $356 million, respectively, at December 31, 1996 and December 31, 1995. Of these past dues, $28 million were related to commercial and commercial real estate loans and $333 million were related to retail loans at December 31, 1996, compared with $21 million and $335 million, respectively, at December 31, 1995. Net charge-offs as a percentage of average net loans were 0.65 percent in 1996 compared with 0.44 percent in 1995. Net charge-offs,excluding credit cards, were 0.35 percent in 1996 compared with 0.25 percent in 1995. The loan loss provision was $449 million in 28 1996 compared with $259 million in 1995. The allowance for loan losses was $1.5 billion at December 31, 1996, compared with $1.6 billion at year-end 1995. In 1996 we reallocated the acquired First Fidelity allowance for loan losses based on First Union's policies and procedures. The ratio of the allowance for loan losses to nonaccrual and restructured loans was 215 percent at December 31, 1996, and 239 percent at December 31, 1995. The ratio of the allowance to net loans was 1.47 percent at December 31, 1996, compared with 1.69 percent at December 31, 1995. At December 31, 1996, impaired loans, which are included in nonaccrual loans, amounted to $370 million. Included in the allowance for loan losses was $36 million related to $237 million of impaired loans. The remaining impaired loans are recorded at or below fair value. In 1996 the average recorded investment in impaired loans was $477 million, and $19 million of interest income was recognized on loans while they were impaired. All of this income was recognized using a cash-basis method of accounting. Core deposits were $98 billion at December 31, 1996, compared with $94 billion at December 31, 1995. Average core deposit balances were $93 billion in 1996, an increase of $5 billion from 1995 that was primarily related to acquisitions. In 1996 and 1995, average noninterest-bearing deposits were 20 percent and 19 percent, respectively, of average core deposits. Average balances in savings and NOW, other consumer time and noninterest-bearing deposits were higher when compared with 1995, while money market deposits were lower. Purchased funds at December 31, 1996, were $30 billion, compared with $28 billion at year-end 1995. Average purchased funds in 1996 were $31 billion, an increase of 41 percent from $22 billion in 1995. The increase was used primarily to fund loans and to purchase available for sale portfolio securities earlier in the year. Long-term debt was 74 percent of total stockholders' equity at December 31, 1996 and December 31, 1995. In 1996 we added $1 billion of subordinated notes and debentures with rates ranging from 6.824 percent to 7.80 percent and maturities of 10 years to 30 years. Proceeds from these debt issues were used for general corporate purposes. At December 31, 1996, total stockholders' equity was $11 billion, compared with $10 billion at December 31, 1995, and 641 million common shares were outstanding compared with 621 million shares at December 31, 1995. In conjunction with stock-for-stock acquisitions of banks and thrifts in 1996, we purchased 24 million shares of common stock at a cost of $764 million. Additionally we purchased 6 million shares of common stock in 1996 at a cost of $204 million to offset issuances of common stock related to First Union's employee stock compensation plans, dividend reinvestment plan and the conversion of shares of the corporation's convertible preferred stock. This compares with purchases of 40 million shares at a cost of $965 million in 1995. In 1996 First Union redeemed the outstanding shares of its Series D and Series F preferred stock at a cost of $109 million. In 1996 First Union also redeemed its Series B convertible preferred stock, substantially all of which converted into 6 million shares of common stock. We paid $669 million in dividends to preferred and common stockholders in 1996. Preferred dividends were $9 million in 1996 compared with $26 million in 1995. At December 31, 1996, stockholders' equity was increased by a $2 million unrealized after-tax gain related to debt and equity securities. At December 31, 1996, the tier 1 and total capital ratios were 7.33 percent and 12.33 percent, respectively, compared with 6.70 percent and 11.45 percent at December 31, 1995. The leverage ratio at December 31, 1996, was 6.13 percent compared with 5.49 percent at December 31, 1995. These ratios have not been restated for the Signet acquisition. The fair value appreciation of off-balance sheet derivative financial instruments used to manage our interest rate sensitivity was $209 million at December 31, 1996, compared with fair value appreciation of $437 million at December 31, 1995. 29 Glossary of Terms Asset Sensitivity When a company's asset, liability and off-balance sheet financial instrument mix results in diminished net interest income in a declining interest rate environment. Collateralized Mortgage Obligation (CMO) A mortgage-backed bond that is divided into separate maturity classes called tranches. The cash flows for each tranche are paid out in a specific order to investors based on the prepayment characteristics of the underlying mortgages. Debit Cards A method of payment that is tied to a customer's checking account. When used to make a purchase, the bank-issued debit card (which looks like a credit card) acts as a "plastic check," and money is deducted directly from the customer's checking account. Derivatives A term used to include a broad base of financial instruments that are, for the most part, "derived" from underlying securities traded in the cash markets. Examples include interest rate swaps, index amortizing interest rate swaps, swaptions, options and futures contracts. Earnings Per Common Share - Basic Net income, adjusted for preferred stock dividends, divided by the average common shares outstanding. Earnings Per Common Share - Diluted Net income, adjusted for preferred dividends, divided by the sum of average common shares outstanding and common stock equivalents including restricted stock awards related to employee stock options and convertible securities. Futures Contract An agreement to buy or sell a specific amount of a commodity or financial instrument at a particular price on a stipulated future date. Index Amortizing Interest Rate Swap An interest rate swap in which the final maturity date may contract, and the "notional amount" may decrease, based on changes in certain interest rate indices. Interest Rate Swap A contractual transaction between two parties in which each agrees to exchange interest rate payments for a specified period of time. These payments are calculated on a "notional amount," and no exchange of principal occurs. Such a transaction is commonly used to manage the asset or liability sensitivity of a balance sheet by converting fixed rate assets or liabilities to floating rates, or vice versa. Internet A global network of computers providing access to information worldwide. Liability Sensitivity When a company's asset, liability and off-balance sheet financial instrument mix results in diminished net interest income in a rising interest rate environment. Managed Card Portfolio Owned and securitized credit card receivables. Mark-To-Market A method of accounting for a corporation's assets or liabilities by recording them at their current market values, rather than at their historical costs. Mortgage Banking Income Noninterest income related to mortgage banking activity. Mortgage Servicing Portfolio Mortgage loans owned by investors for which a company manages payment processing, remittance and escrow accounts. Net Charge-Offs The amount of loans written off as uncollectible, net of the recovery of loans previously written off as uncollectible. Net Interest Margin The difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, divided by average earning assets. Net Operating Revenue The sum of tax-equivalent net interest income and noninterest income. Noninterest Expense All expenses other than interest. Noninterest Income All income other than interest and dividend income. Nonperforming Assets Assets on which income is not being accrued for financial reporting purposes; restructured loans on which interest rates or terms of repayment have been materially revised; and other real estate that has been acquired through loan foreclosures, in-substance foreclosures or deeds received in lieu of loan payments. Notional Amount The principal amount of a financial instrument on which a derivative transaction is based. In an interest rate swap, for example, the "notional amount" is used to calculate the interest rate cash flows to be exchanged. No exchange of principal occurs. Option A contractual agreement that allows, but does not require, a holder to buy (or sell) a financial instrument at a predetermined price for a specified time. Overhead Efficiency Ratio Noninterest expense divided by net operating revenue. Pooling Of Interests An accounting method that may restate historical financial information of the surviving company in a merger as if the two entities were always one, depending on the material significance of the acquired company to the surviving company. Purchase Accounting An accounting method that adds the fair market value of assets and liabilities of the company acquired to those of the acquiror at the time of acquisition. Historical financial information of the acquiror is not restated. Return On Assets (ROA) Net income as a percentage of average assets. Return On Common Equity (ROE) Net income applicable to common stockholders as a percentage of average common stockholders' equity, excluding unrealized gains and losses on certain securities. Security Gains Or Losses A gain or loss resulting from the sale of a security at a price above or below the security's carrying value. Smart Cards A plastic card containing microchips that store data. Although many kinds of information can be embedded on a smart card (which looks like a credit card), most issuers are primarily interested in storing cash value. Stockholders' Equity A balance sheet amount that represents the total investment in the corporation by holders of preferred and common stock. Stored Value Cards Plastic cards embedded with computer chip technology and used in place of cash or checks. Swaptions Options on interest rate swaps. 30 Board of Directors First Union Corporation Board of Directors Executive Officers Edward E. Crutchfield Chairman and Chief Executive Officer Anthony P. Terracciano Retiring President John R. Georgius President B.J. Walker Vice Chairman Robert T. Atwood Executive Vice President and Chief Financial Officer Marion A. Cowell Jr. Executive Vice President, Secretary and General Counsel First Union Corporation Board of Directors Edward E. Barr Chairman, Sun Chemical Corporation Fort Lee, New Jersey G. Alex Bernhardt Chairman and Chief Executive Officer, Bernhardt Furniture Company Lenoir, North Carolina W. Waldo Bradley Chairman, Bradley Plywood Corporation Savannah, Georgia Robert J. Brown Chairman, President and Chief Executive Officer, B&C Associates, Inc. High Point, North Carolina Edward E. Crutchfield Chairman and Chief Executive Officer, First Union Corporation Charlotte, North Carolina A. Dano Davis Chairman and Principal Executive Officer, Winn-Dixie Stores Inc. Jacksonville, Florida R. Stuart Dickson Chairman of Executive Committee, Ruddick Corporation Charlotte, North Carolina B.F. Dolan Investor Charlotte, North Carolina Roddey Dowd Sr. Chairman, Charlotte Pipe and Foundry Company Charlotte, North Carolina John R. Georgius President, First Union Corporation Charlotte, North Carolina Arthur M. Goldberg Executive Vice President and President of Gaming Operations, Hilton Hotels Corporation Beverly Hills, California William H. Goodwin Jr. Chairman, CCA Industries Inc. Richmond, Virginia Howard H. Haworth President, The Haworth Group Charlotte, North Carolina Frank M. Henry Chairman, Frank Martz Coach Company Wilkes-Barre, Pennsylvania Leonard G. Herring Investor North Wilkesboro, North Carolina Jack A. Laughery Chairman, Laughery Investments Rocky Mount, North Carolina Max Lennon President, Mars Hill College Mars Hill, North Carolina Radford D. Lovett Chairman, Commodores Point Terminal Corporation Jacksonville, Florida Mackey J. McDonald President and Chief Executive Officer, VF Corporation Wyomissing, Pennsylvania Malcolm S. McDonald Chairman and Chief Executive Officer of the Virginia, Maryland and Washington, D.C. banking operations of First Union National Bank Richmond, Virginia Joseph Neubauer Chairman and Chief Executive Officer, ARAMARK Corporation Philadelphia, Pennsylvania Randolph N. Reynolds Vice Chairman, Reynolds Metals Company Richmond, Virginia Ruth G. Shaw Executive Vice President and Chief Administrative Officer, Duke Energy Corporation Charlotte, North Carolina Charles M. Shelton Sr. General Partner, The Shelton Companies Charlotte, North Carolina Lanty L. Smith Chairman, Precision Fabrics Group, Inc. Greensboro, North Carolina Anthony P. Terracciano Retiring President, First Union Corporation Summit, New Jersey Dewey L. Trogdon Chairman, Cone Mills Corporation Greensboro, North Carolina John D. Uible Investor Jacksonville, Florida B.J. Walker Vice Chairman, First Union Corporation Jacksonville, Florida Committees of the Corporate Board of Directors Executive Committee B.F. Dolan, Chairman Edward E. Crutchfield R. Stuart Dickson Arthur M. Goldberg William H. Goodwin Jr. Leonard G. Herring Radford D. Lovett Joseph Neubauer Lanty L. Smith Anthony P. Terracciano B.J. Walker Audit Committee G. Alex Bernhardt, Chairman Howard H. Haworth, Vice Chairman Robert J. Brown Frank M. Henry Mackey J. McDonald Randolph N. Reynolds James H. Hatch (staff) Peter J. Schild (staff) Credit/Market Risk Committee Lanty L. Smith, Chairman Ruth G. Shaw, Vice Chairman A. Dano Davis Roddey Dowd Sr. John R. Georgius Arthur M. Goldberg Anthony P. Terracciano Malcolm T. Murray Jr. (staff) Louis A. Schmitt Jr. (staff) Financial Services Committee William H. Goodwin Jr., Chairman Charles M. Shelton Sr., Vice Chairman John R. Georgius Jack A. Laughery Max Lennon Joseph Neubauer John D. Uible Anthony P. Terracciano Robert T. Atwood (staff) G. Kennedy Thompson (staff) Human Resources Committee R. Stuart Dickson, Chairman Leonard G. Herring, Vice Chairman Edward E. Barr W. Waldo Bradley B.F. Dolan Radford D. Lovett Dewey L. Trogdon Don R. Johnson (staff) Nominating Committee B.F. Dolan, Chairman R. Stuart Dickson, Vice Chairman Edward E. Crutchfield William H. Goodwin Jr. Leonard G. Herring Radford D. Lovett Anthony P. Terracciano 31 First Union Across The Nation Foreign Offices Nassau Branch First Union National Bank Nassau, Bahamas First Union Bank And Trust (Cayman) Ltd. Cayman Islands First Union National Bank London, England First Union National Bank Mumbai, India (formerly Bombay, India) First Union HKCB Asia Ltd. Hong Kong, Hong Kong First Union National Bank Johannesburg, South Africa First Union National Bank Jakarta, Indonesia Headquarters First Union National Bank A full-service commercial bank. One First Union Center Charlotte, North Carolina 28288 704-374-6161 Regional Headquarters First Union - Atlantic A full-service commercial bank. 102 Pennsylvania Avenue Avondale, Pennsylvania 19311 215-985-6000 First Union - Connecticut A full-service commercial bank. 300 Main Street Stamford, Connecticut 06904 203-348-6211 First Union - Florida A full-service commercial bank. 225 Water Street Jacksonville, Florida 32202 904-361-2265 First Union - Georgia A full-service commercial bank. 999 Peachtree Street Suite 1200 Atlanta, Georgia 30309 404-827-7100 First Union - North Carolina A full-service commercial bank. One First Union Center Charlotte, North Carolina 28288 704-374-6161 First Union - South Carolina A full-service commercial bank. Insignia Financial Plaza One Insignia Place Greenville, South Carolina 29601 864-255-8000 First Union - Tennessee A full-service commercial bank. 150 Fourth Avenue North Nashville, Tennessee 37219 615-251-9200 First Union - Virginia, Maryland and Washington, D.C. A full-service commercial bank. 7 North 8th Street P.O. Box 25970 Richmond, Virginia 23260-5970 804-771-7729 Principal Subsidiaries First Union Bank Of Delaware A full-service commercial bank. One Rodney Square Tenth and King Streets Wilmington, Delaware 19801 302-888-7500 First Union Brokerage Services Inc. Securities brokerage firm. One First Union Center Charlotte, North Carolina 28288 704-374-6927 First Union Capital Partners, Inc. Investment and merchant banking. One First Union Center Charlotte, North Carolina 28288 704-374-4615 First Union Commercial Corporation Provides equipment lease financing. One First Union Center Charlotte, North Carolina 28288 704-374-4900 First Union Direct Bank, N.A. Card products, including credit and debit cards, remote and electronic delivery channels. 699 Broad Street Augusta, Georgia 30903 800-413-7898 First Union Home Equity Bank, N.A. Offers home equity loans. 1000 Louis Rose Place Charlotte, North Carolina 28262 704-593-9300 First Union Mortgage Corporation Offers a variety of mortgage banking and insurance services. Two First Union Center Charlotte, North Carolina 28288 704-374-6161 First Union Rail Corporation Railcar leasing. 6250 River Road Suite 5000 Rosemont, Illinois 60018 847-318-7575 Wheat First Securities, Inc. Provides a wide range of investment banking, brokerage and securities products and services through its principal divisions First Union Capital Markets Group and Wheat First Union. First Union Capital Markets Group One First Union Center Charlotte, North Carolina 28288 704-383-8757 Wheat First Union Riverfront Plaza, West Tower 901 East Byrd Street Richmond, Virginia 23219 804-649-2311 [MAP OF UNITED STATES APPEARS BELOW DENOTING FIRST UNION LOCATIONS ACROSS THE NATION] 32 PRO FORMA FINANCIAL INFORMATION FIRST UNION CORPORATION CORESTATES FINANCIAL CORP PRO FORMA FINANCIAL INFORMATION (Unaudited) - -------------------------------------------------------------------------------- The following unaudited pro forma combined selected statistical data, balance sheet and condensed statements of income present combined financial information for First Union Corporation (the "Corporation") and CoreStates Financial Corp ("CoreStates") assuming the Corporation and CoreStates had been combined for each period presented on a pooling of interests accounting basis (the "Merger").
December 31, ---------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- COMBINED BALANCE SHEET DATA Securities available for sale $ 23,524 19,199 23,100 12,498 14,402 Investment securities 3,526 4,190 6,200 14,215 15,703 Loans, net of unearned income 131,687 134,647 127,905 107,965 97,375 Earning assets 176,303 173,712 167,036 141,543 132,061 Total assets 205,735 197,341 188,855 159,577 148,759 Noninterest-bearing deposits 31,005 29,713 27,706 24,542 24,976 Interest-bearing deposits 106,072 106,716 106,406 98,097 90,773 Long-term debt 11,746 10,809 9,586 6,405 5,686 Guaranteed preferred beneficial interests 1,741 795 - - - Common stockholders' equity 15,269 14,628 13,600 11,775 11,137 Total stockholders' equity $ 15,269 14,628 13,783 12,005 11,651 ======================================================================================================= COMBINED AVERAGE BALANCE SHEET DATA Securities available for sale $ 20,801 21,869 14,905 14,708 8,327 Investment securities 3,607 4,867 12,304 13,915 20,900 Loans, net of unearned income 134,517 129,120 121,245 100,836 92,159 Earning assets 174,502 170,069 156,419 135,328 127,423 Total assets 196,093 189,285 173,981 150,244 143,046 Noninterest-bearing deposits 27,489 24,514 23,240 21,395 20,582 Interest-bearing deposits 105,358 104,925 102,922 90,393 87,715 Long-term debt 10,915 10,386 8,334 6,049 5,492 Guaranteed preferred beneficial interests 1,681 57 - - - Common stockholders' equity 14,367 13,801 12,978 11,452 10,228 Total stockholders' equity $ 14,367 13,909 13,189 11,954 10,748 ======================================================================================================= COMBINED PERCENTAGE DATA Allowance for loan losses to Loans, net 1.40 % 1.64 1.80 2.09 2.32 Nonperforming assets 186 211 201 170 111 Net charge-offs to average loans, net 0.65 0.64 0.45 0.53 0.72 Net charge-offs to average loans, net, excluding Bankcard 0.31 0.35 0.27 0.46 0.69 Nonperforming assets to loans, net and foreclosed properties 0.75 % 0.78 0.90 1.23 2.08 ======================================================================================================= See accompanying Notes to Pro Forma Financial Information.
P-1 PRO FORMA FINANCIAL INFORMATION FIRST UNION CORPORATION CORESTATES FINANCIAL CORP PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited) - --------------------------------------------------------------------------------
December 31, 1997 ---------------------------------------------------- Pro Forma Pro Forma (In millions) Corporation CoreStates Adjustments Combined - -------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 6,445 3,830 - 10,275 Interest-bearing bank balances 710 3,122 - 3,832 Federal funds sold and securities purchased under resale agreements 7,740 41 - 7,781 - -------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 14,895 6,993 - 21,888 - -------------------------------------------------------------------------------------------------------- Trading account assets 5,457 496 - 5,953 Securities available for sale 21,415 2,109 - 23,524 Investment securities 2,175 1,351 - 3,526 Loans, net of unearned income 96,873 34,814 - 131,687 Allowance for loan losses (1,212) (634) - (1,846) - -------------------------------------------------------------------------------------------------------- Loans, net 95,661 34,180 - 129,841 - -------------------------------------------------------------------------------------------------------- Premises and equipment 4,233 630 - 4,863 Due from customers on acceptances 854 642 - 1,496 Other intangible assets 2,674 280 - 2,954 Other assets 9,910 1,780 - 11,690 - -------------------------------------------------------------------------------------------------------- Total assets $ 157,274 48,461 - 205,735 ======================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 21,753 9,252 - 31,005 Interest-bearing deposits 81,136 24,936 - 106,072 - -------------------------------------------------------------------------------------------------------- Total deposits 102,889 34,188 - 137,077 Short-term borrowings 27,357 4,323 - 31,680 Bank acceptances outstanding 855 642 - 1,497 Other liabilities 5,108 1,617 - 6,725 Long-term debt 8,042 3,704 - 11,746 - -------------------------------------------------------------------------------------------------------- Total liabilities 144,251 44,474 - 188,725 - -------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures 991 750 - 1,741 - -------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock - - - - Common stock 2,121 224 858 3,203 Paid-in capital 1,384 1,262 (1,065) 1,581 Retained earnings 8,273 3,053 (1,127) 10,199 Unrealized gain on debt and equity securities, net 254 32 - 286 Treasury stock - (1,282) 1,282 - Unallocated shares held by ESOP - (52) 52 - - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 12,032 3,237 - 15,269 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 157,274 48,461 - 205,735 ======================================================================================================== See accompanying Notes to Pro Forma Financial Information.
P-2 PRO FORMA FINANCIAL INFORMATION FIRST UNION CORPORATION CORESTATES FINANCIAL CORP PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (Unaudited) - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------------------------------------- (In millions, except per share data) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Interest income $ 14,362 13,758 13,028 10,245 9,507 Interest expense 6,452 6,151 5,732 3,739 3,376 - --------------------------------------------------------------------------------------------------------------- Net interest income 7,910 7,607 7,296 6,506 6,131 Provision for loan losses 1,103 678 403 458 559 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,807 6,929 6,893 6,048 5,572 Securities available for sale transactions 52 96 76 24 76 Investment security transactions 3 4 6 4 7 Noninterest income 4,267 3,435 2,976 2,336 2,332 Merger-related and restructuring charges 284 421 233 107 - SAIF special assessment - 149 - - - Noninterest expense 7,052 6,360 6,309 5,558 5,430 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 3,793 3,534 3,409 2,747 2,557 Income taxes 1,084 1,261 1,213 938 818 - --------------------------------------------------------------------------------------------------------------- Net income 2,709 2,273 2,196 1,809 1,739 Dividends on preferred stock - 9 26 46 46 - --------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before redemption premium 2,709 2,264 2,170 1,763 1,693 Redemption premium on preferred stock - - - 41 - - --------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after redemption premium $ 2,709 2,264 2,170 1,722 1,693 =============================================================================================================== PER COMMON SHARE DATA Basic earnings $ 2.84 2.33 2.21 1.86 1.85 Diluted earnings $ 2.80 2.30 2.17 1.83 1.81 AVERAGE COMMON SHARES (In thousands) Basic 955,241 973,712 979,852 927,941 913,621 Diluted 966,792 982,755 1,001,145 946,969 940,167 =============================================================================================================== CORPORATION HISTORICAL PER COMMON SHARE DATA Basic earnings $ 3.03 2.61 2.44 2.30 2.15 Diluted earnings $ 2.99 2.58 2.38 2.25 2.09 AVERAGE COMMON SHARES (In thousands) Basic 625,649 619,237 619,777 561,442 543,321 Diluted 633,772 625,224 637,186 577,709 565,239 =============================================================================================================== See accompanying Notes to Pro Forma Financial Information.
P-3 PRO FORMA FINANCIAL INFORMATION FIRST UNION CORPORATION CORESTATES FINANCIAL CORP NOTES TO PRO FORMA FINANCIAL INFORMATION (Unaudited) - -------------------------------------------------------------------------------- (1) The unaudited pro forma information presented herein is not necessarily indicative of the results of operations or the combined financial position that would have resulted had the Merger been consummated at the beginning of the applicable periods indicated, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. Pro forma financial information with respect to the Merger assumes the Merger was consummated as of the beginning of each period presented. Average common and total stockholders' equity excludes net unrealized gains or losses on debt and equity securities. (2) It is assumed that the Merger will be accounted for on a pooling of interests accounting basis, and accordingly, the related pro forma adjustments herein reflect, where applicable, an exchange ratio of 1.62 shares of the Corporation's common stock for each of the 198,216,000 shares of CoreStates common stock which were outstanding at December 31, 1997. The 1.62 exchange ratio is subject to possible adjustment under certain circumstances. As a result, information was adjusted for the Merger by the (i) addition of 321,110,000 shares of the Corporation's common stock amounting to $1.1 billion (excluding the shares of the Corporation's common stock to be issued in exchange for an estimated 3.5 million shares of CoreStates common stock that CoreStates expects to issue in order to qualify the Merger as a pooling of interests); (ii) elimination of 198,216,000 shares of outstanding CoreStates common stock amounting to $224 million; (iii) elimination of the cost of CoreStates treasury stock of $1.3 billion; (iv) reclassification of the cost of unallocated shares held by the CoreStates ESOP of $52 million; and (v) recordation of the remaining amount of $1.1 billion as a reduction of paid-in capital at December 31, 1997. As of December 31, 1997, the Corporation and CoreStates had 51,580,000 and 16,490,000 shares of common stock reserved for issuance primarily for stock option plans, respectively, (excluding, as to the Corporation, shares reserved for issuance in connection with the Merger, or upon exercise of the rights attached to the Corporation's common stock), which are not included in the unaudited pro forma financial information presented herein. For the year ended December 31, 1997, CoreStates had net income applicable to common stockholders of $813 million. In 1993, CoreStates changed its method of accounting for postemployment benefits, and in 1993 CoreStates reported additional expense as a cumulative effect of a change in accounting principle, net of tax of $16 million in 1993. Such amount has been reclassified to noninterest expense and income taxes in 1993 in the pro forma financial information presented herein. (3) On November 28, 1997, the Corporation acquired Signet Banking Corporation ("Signet"), which was accounted for as a pooling of interests. The financial information presented herein includes Signet as of and for the three years ended December 31, 1997. (4) The pro forma financial information presented herein does not include financial information related to the Corporation's (i) January 15, 1998, purchase accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which had assets of $415 million, net loans of $254 million, deposits of $294 million and stockholders' equity of $31 million at December 31, 1997; and (ii) January 31, 1998, pooling of interests acquisition of Wheat First Butcher Singer, Inc. ("Wheat First"), which had assets of $1.1 billion and stockholders' equity of $171 million at December 31, 1997. P-4 PRO FORMA FINANCIAL INFORMATION - -------------------------------------------------------------------------------- The Corporation issued 1.6 million shares of its common stock to stockholders of Covenant, substantially all of which were repurchased in the open market at a cost of $79 million, and 10.3 million shares of its common stock to stockholders of Wheat First. Financial information related to Wheat First is not considered material to the historical results of the Corporation, and accordingly, such financial information will not be combined with the historical results of the Corporation. (5) Earnings per share data has been computed based on the combined historical net income applicable to common stockholders of the Corporation and CoreStates using the combined (i) historical weighted average shares outstanding with respect to basic earnings per share, and (ii) sum of the historical weighted average shares outstanding and common stock equivalents related to employee stock options including restricted stock awards with respect to diluted earnings per share, adjusted to equivalent shares of the Corporation's common stock with respect to CoreStates, as of the earliest applicable period presented, as appropriate. (6) Certain insignificant reclassifications have been included herein to conform to financial statement presentations. Transactions conducted in the ordinary course of business between the Corporation and CoreStates are immaterial, and accordingly, they have not been eliminated. (7) The unaudited pro forma financial information does not include any material merger-related expenses or any material expenses related to the Merger. The Corporation currently estimates after-tax merger-related and restructuring charges of approximately $795 million related to the Merger, or $0.81 per share of the Corporation's common stock, expected to be recorded in the second quarter of 1998. In addition, the Corporation expects to incur an estimated $75 million in pre-tax merger-related and restructuring charges in the 12-month period following the Merger. (8) The Corporation expects to realize significant revenue enhancements and cost savings from the Merger. The pro forma financial information, which does not reflect any revenue enhancements, direct costs or potential savings from the consolidation of operations of the Corporation and CoreStates, is not indicative of the results of future operations. No assurance can be given with respect to the ultimate level of such revenue enhancements or cost savings. As indicated by the foregoing unaudited pro forma financial information and based solely on the foregoing assumptions, consummation of the Merger would have diluted each of the Corporation's historical basic and diluted earnings per common share amounts for the year ended December 31, 1997, by 6 percent. P-5 FINANCIAL TABLES Table 1 CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA - --------------------------------------------------------------------------------
Years Ended December 31, --------------------------------------------------------------- (In millions, except per share data) 1997 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- SUMMARIES OF INCOME Interest income $ 10,933 10,460 9,553 7,231 6,602 6,609 ============================================================================================================== Interest income (a) $ 11,009 10,552 9,669 7,352 6,736 6,753 Interest expense 5,190 4,995 4,424 2,793 2,482 2,942 - -------------------------------------------------------------------------------------------------------------- Net interest income (a) 5,819 5,557 5,245 4,559 4,254 3,811 Provision for loan losses 840 449 259 179 370 643 - -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (a) 4,979 5,108 4,986 4,380 3,884 3,168 Securities available for sale transactions 31 36 45 6 33 39 Investment security transactions 3 4 6 4 7 (3) Noninterest income 3,362 2,596 2,125 1,566 1,542 1,360 Merger-related and restructuring charges (b) 269 281 94 - - - SAIF special assessment (c) - 135 - - - - Noninterest expense 5,320 4,737 4,563 3,747 3,536 3,443 - -------------------------------------------------------------------------------------------------------------- Income before income taxes (a) 2,786 2,591 2,505 2,209 1,930 1,121 Income taxes 814 875 848 712 579 278 Tax-equivalent adjustment 76 92 116 121 134 144 - -------------------------------------------------------------------------------------------------------------- Net income 1,896 1,624 1,541 1,376 1,217 699 Dividends on preferred stock - 9 26 46 46 53 - -------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before redemption premium 1,896 1,615 1,515 1,330 1,171 646 Redemption premium on preferred stock - - - 41 - - - -------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after redemption premium $ 1,896 1,615 1,515 1,289 1,171 646 ============================================================================================================== PER COMMON SHARE DATA Basic earnings $ 3.03 2.61 2.44 2.30 2.15 1.27 Diluted earnings 2.99 2.58 2.38 2.25 2.09 1.22 Cash dividends $ 1.22 1.10 0.98 0.86 0.75 0.64 Average common shares (In thousands) Basic 625,649 619,237 619,777 561,442 543,321 508,730 Diluted 633,772 625,224 637,186 577,709 565,239 536,603 Average common stockholders' equity (d) $ 11,030 9,937 9,266 7,870 6,782 5,724 Common stock price High 52 7/8 28 1/2 29 3/8 23 3/4 25 3/4 22 3/8 Low 36 5/8 25 3/4 20 5/8 19 5/8 18 7/8 14 3/4 Period-end $ 51 1/4 37 27 3/4 20 5/8 20 5/8 21 3/4 To earnings 17.14 X 14.34 11.66 9.17 9.87 17.83 To book value 271 % 217 177 146 154 186 Book value $ 18.91 17.06 15.66 14.10 13.36 11.68 BALANCE SHEET DATA Assets 157,274 151,847 142,858 113,529 104,550 95,308 Long-term debt $ 8,042 8,060 7,374 4,242 3,675 3,733 ==============================================================================================================
(a) Tax-equivalent. (b) Merger-related and restructuring charges amounted to $194 million after tax in 1997, $181 million after tax in 1996 and $73 million after tax in 1995. (c) The SAIF special assessment amounted to $87 million after tax in 1996. (d) Average common stockholders' equity excludes average net unrealized gains or losses on debt and equity securities. T-1 FINANCIAL TABLES Table 2 NONINTEREST INCOME - --------------------------------------------------------------------------------
Years Ended December 31, --------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------ Trading account profits $ 204 131 81 52 60 40 Service charges on deposit accounts 854 734 684 580 573 525 Mortgage banking income 247 194 180 88 151 165 Capital management income 882 607 461 330 306 264 Securities available for sale transactions 31 36 45 6 33 39 Investment security transactions 3 4 6 4 7 (3) Fees for other banking services 151 172 172 131 100 80 Equipment lease rental income 187 112 32 22 20 15 Sundry income 837 646 515 363 332 271 - ------------------------------------------------------------------------------------------------ Total noninterest income $3,396 2,636 2,176 1,576 1,582 1,396 ================================================================================================
Table 3 NONINTEREST EXPENSE - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 1992 - ----------------------------------------------------------------------------------------------- Salaries $2,221 1,994 1,811 1,436 1,321 1,219 Other benefits 495 457 396 337 303 255 - ----------------------------------------------------------------------------------------------- Personnel expense 2,716 2,451 2,207 1,773 1,624 1,474 Occupancy 401 389 394 353 342 346 Equipment 524 448 352 270 234 208 Advertising 103 61 90 65 44 38 Telecommunications 121 113 101 76 71 70 Travel 110 99 84 61 50 40 Postage, printing and supplies 170 178 161 123 124 104 FDIC assessment 23 41 129 184 182 164 Professional fees 134 102 196 169 95 98 External data processing 94 146 101 72 90 79 Other intangible amortization 277 250 235 163 131 106 Merger-related and restructuring charges 269 281 94 - - - SAIF special assessment - 135 - - - - Sundry expense 647 459 513 438 549 716 - ----------------------------------------------------------------------------------------------- Total noninterest expense $5,589 5,153 4,657 3,747 3,536 3,443 =============================================================================================== Overhead efficiency ratio (a) 61 % 63 63 61 61 66 Overhead efficiency ratio, adjusted (b) 57 % 58 61 61 61 66 ===============================================================================================
(a) The overhead efficiency ratio is equal to noninterest expense divided by net operating revenue. Net operating revenue is equal to the sum of tax-equivalent net interest income and noninterest income. (b) These ratios are the result of reducing noninterest expense by the 1997, 1996 and 1995 merger-related and restructuring charges and the 1996 SAIF special assessment. Additionally, net operating revenue and noninterest expense are reduced by trust capital securities expense included in sundry expense. T-2 FINANCIAL TABLES Table 4 BUSINESS SEGMENTS - --------------------------------------------------------------------------------
Year Ended December 31, 1997 -------------------------------------------------------------------------------------------- First First Union Retail Union Home Card Branch (In millions) Mortgage Equity Products Products Total - ---------------------------------------------------------------------------------------------------------------------------------- CONSUMER BANK Income statement data Net interest income $ 58 124 476 2,425 3,083 Provision for loan losses 3 9 363 147 522 Noninterest income 302 44 245 647 1,238 Noninterest expense 302 77 290 1,783 2,452 Income tax expense 20 30 25 418 493 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 35 52 43 724 854 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 30.28% 57.87 10.15 33.74 30.78 Average loans, net $ 1,182 3,928 4,731 42,669 52,510 Average deposits 826 - - 59,597 60,423 Average attributed common equity $ 114 91 424 2,145 2,774 ================================================================================================================================== Retail Internal Evergreen Private CAP Brokerage Mgt. (In millions) Trust Funds Client Account Services Elimination Total - ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL MANAGEMENT Income statement data Net interest income $ 33 2 98 116 14 - 263 Provision for loan losses - - 3 - - - 3 Noninterest income 369 252 7 55 268 (31) 920 Noninterest expense 303 167 58 105 254 - 887 Income tax expense 36 32 16 24 10 (11) 107 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 63 55 28 42 18 (20) 186 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 44.25 % 82.56 17.68 44.82 17.83 - 33.25 Average loans, net $ 17 - 1,880 - 252 - 2,149 Average deposits 1,381 - 1,577 10,300 - - 13,258 Average attributed common equity $ 142 67 155 93 101 - 558 ================================================================================================================================== Small Real Business Cash Estate Deposit (In millions) Banking Mgt. Banking Lending Products Total - ---------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL BANK Income statement data Net interest income $ 57 36 209 449 754 1,505 Provision for loan losses 3 - 11 46 - 60 Noninterest income - 236 - - 102 338 Noninterest expense 27 196 75 280 435 1,013 Income tax expense 10 28 48 42 154 282 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 17 48 75 81 267 488 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 16.95 % 61.64 13.27 6.30 63.67 19.87 Average loans, net $ 1,620 - 8,145 18,184 - 27,949 Average deposits - - - - 18,608 18,608 Average attributed common equity $ 101 78 565 1,296 419 2,459 ==================================================================================================================================
(Continued) T-3 FINANCIAL TABLES Table 4 BUSINESS SEGMENTS - --------------------------------------------------------------------------------
Year Ended December 31, 1997 -------------------------------------------------------------- Real Commercial Investment Estate Risk Traditional Leasing (In millions) Banking Finance Mgt. Banking & Rail Total - -------------------------------------------------------------------------------------------------- CAPITAL MARKETS Income statement data Net interest income $ 79 21 9 230 96 435 Provision for loan losses 1 (1) - 1 - 1 Noninterest income 226 178 94 93 202 793 Noninterest expense 214 92 60 124 189 679 Income tax expense 33 39 16 72 40 200 - -------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 57 69 27 126 69 348 - -------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 16.13 % 45.19 50.44 18.39 46.33 24.99 Average loans, net $ 2,326 646 - 8,546 3,369 14,887 Average deposits 818 212 111 2,658 21 3,820 Average attributed common equity $ 353 152 54 684 149 1,392 ================================================================================================== Consumer Capital Commercial Capital Treasury/ (In millions) Bank Mgt. Bank Markets Nonbank Total - -------------------------------------------------------------------------------------------------- CONSOLIDATED Income statement data Net interest income $ 3,083 263 1,505 435 457 5,743 Provision for loan losses 522 3 60 1 254 840 Noninterest income 1,238 920 338 793 107 3,396 Noninterest expense 2,452 887 1,013 679 558 5,589 Income tax expense 493 107 282 200 (268) 814 - -------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after merger-related and restructuring charges $ 854 186 488 348 20 1,896 After-tax merger-related and restructuring charges - - - - 194 194 - -------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before merger-related and restructuring charges $ 854 186 488 348 214 2,090 - -------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 30.78 % 33.25 19.87 24.99 5.52 18.90 Average loans, net $52,510 2,149 27,949 14,887 2,934 100,429 Average deposits 60,423 13,258 18,608 3,820 3,771 99,880 Average attributed common equity $ 2,774 558 2,459 1,392 3,875 11,058 ==================================================================================================
(a) Average attributed common equity excludes merger-related and restructuring charges and average net unrealized gains or losses on debt and equity securities. See the "Business Segments" discussion in Management's Analysis of Operations for further information about the methodology and assumptions used herein. T-4 FINANCIAL TABLES Table 5 INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS - --------------------------------------------------------------------------------
Years Ended December 31, ------------------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ INTERNAL CAPITAL GROWTH (a) Assets to stockholders' equity 13.58 X 14.53 13.73 12.86 13.64 14.43 X Return on assets 1.26 % 1.12 1.19 1.29 1.22 0.77 - ------------------------------------------------------------------------------------------------------------------- Return on total stockholders' equity (b) 17.19 % 16.17 16.26 16.44 16.66 11.13 X Earnings retained 60.47 % 58.80 62.65 63.57 67.14 54.88 - ------------------------------------------------------------------------------------------------------------------- Internal capital growth (b) 10.39 % 9.51 10.19 10.45 11.18 6.11 =================================================================================================================== DIVIDEND PAYOUT RATIOS ON Operating earnings Common shares 35.86 % 35.06 34.60 34.16 30.25 40.61 Preferred and common shares 35.86 35.36 35.67 36.43 32.86 45.12 Net income Common shares 39.53 40.88 36.26 34.16 30.25 40.61 Preferred and common shares 39.53 % 41.20 37.35 36.43 32.86 45.12 =================================================================================================================== SELECTED RATIOS ON Operating earnings Return on assets 1.39 % 1.30 1.25 1.29 1.22 0.77 Return on common stockholders' equity (b) (c) 18.90 18.50 17.13 16.38 17.26 11.28 Net income Return on common stockholders' equity (b) (c) 17.19 % 16.25 16.35 16.38 17.26 11.28 ===================================================================================================================
(a) Based on average balances and net income. (b) The determination of these ratios exclude average net unrealized gains or losses on debt and equity securities. (c) Based on average balances and net income applicable to common stockholders. T-5 FINANCIAL TABLES Table 6 SELECTED QUARTERLY DATA - --------------------------------------------------------------------------------
1997 1996 --------------------------------------- ------------------------------------ (In millions, except per share data) Fourth Third Second First Fourth Third Second First - --------------------------------------------------------------------------------------------------------------- Interest income $ 2,746 2,791 2,771 2,625 2,648 2,634 2,637 2,541 Interest expense 1,330 1,328 1,311 1,221 1,276 1,251 1,256 1,212 - --------------------------------------------------------------------------------------------------------------- Net interest income 1,416 1,463 1,460 1,404 1,372 1,383 1,381 1,329 Provision for loan losses 325 175 178 162 150 124 94 81 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,091 1,288 1,282 1,242 1,222 1,259 1,287 1,248 Securities available for sale transactions 12 10 5 4 16 2 3 15 Investment security transactions - 2 1 - 1 - 2 1 Noninterest income 905 835 809 813 757 667 605 567 Merger-related and restructuring charges (a) 210 - 59 - - - - 281 SAIF special assessment (b) - - - - - 135 - - Noninterest expense 1,450 1,292 1,295 1,283 1,238 1,199 1,173 1,127 - --------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) 348 843 743 776 758 594 724 423 Income taxes (benefits) (14) 296 260 272 264 208 254 149 - --------------------------------------------------------------------------------------------------------------- Net income 362 547 483 504 494 386 470 274 Dividends on preferred stock - - - - 1 1 3 4 - --------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 362 547 483 504 493 385 467 270 =============================================================================================================== PER COMMON SHARE DATA Basic earnings $ 0.57 0.88 0.78 0.80 0.80 0.63 0.75 0.43 Diluted earnings 0.56 0.87 0.77 0.79 0.79 0.62 0.74 0.43 Cash dividends 0.32 0.32 0.29 0.29 0.29 0.29 0.26 0.26 Common stock price High 52 7/8 50 11/16 47 7/8 47 3/4 38 1/2 33 7/8 32 1/4 31 3/8 Low 46 15/16 45 7/8 39 1/8 36 5/8 33 1/2 30 1/2 28 3/4 25 3/4 Period-end $51 1/4 50 1/16 46 1/4 40 1/2 37 33 3/8 30 3/8 30 1/8 =============================================================================================================== SELECTED RATIOS (c) After merger-related and restructuring charges and SAIF special assessment Return on assets (d) 0.94 % 1.43 1.28 1.40 1.33 1.06 1.28 0.78 Return on common stockholders' equity (e) 12.29 19.63 18.09 19.15 19.23 15.70 18.73 11.14 Stockholders' equity to assets 7.77 % 7.38 7.03 7.27 6.93 6.71 6.81 7.10 =============================================================================================================== SELECTED RATIOS (c) Before merger-related and restructuring charges and SAIF special assessment Return on assets (d) 1.35 % 1.43 1.38 1.40 1.33 1.30 1.28 1.29 Return on common stockholders' equity (e) 17.53 % 19.56 19.47 19.15 18.61 18.73 18.26 18.38 ===============================================================================================================
(a) Merger-related restructuring charges amounted to $194 million after tax in 1997 and $181 million after tax in 1996. (b) The SAIF special assessment amounted to $87 million after tax in 1996. (c) Based on average balances. (d) Based on net income. (e) Based on net income applicable to common stockholders, excluding average net unrealized gains or losses on debt and equity securities. T-6 FINANCIAL TABLES Table 7 SELECTED SIX-YEAR DATA (a) - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------------------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- FIRST UNION MORTGAGE CORPORATION PERMANENT LOAN ORIGINATIONS Residential Direct (b) $ 4,240 5,065 3,630 3,570 6,277 4,549 Wholesale 3,845 399 428 933 2,431 2,642 - --------------------------------------------------------------------------------------------------------------------- Total $ 8,085 5,464 4,058 4,503 8,708 7,191 ===================================================================================================================== VOLUME OF RESIDENTIAL LOANS SERVICED $ 60,738 58,098 55,745 32,677 32,786 22,528 ===================================================================================================================== FIRST UNION CORPORATION OTHER DATA ATMs 2,768 2,677 2,376 1,242 1,189 847 Employees 47,096 48,679 49,021 31,858 32,861 23,459 Common stockholders 120,437 103,538 89,257 54,236 58,670 37,955 =====================================================================================================================
(a) 1992-1994 are not restated for pooling of interests acquisitions. (b) Includes originations of affiliated banks. T-7 FINANCIAL TABLES Table 8 SECURITIES AVAILABLE FOR SALE - --------------------------------------------------------------------------------
December 31, 1997 ------------------------------------------------------------------------------------ Gross Unrealized Average 1 Year 1-5 5-10 After 10 --------------- Amortized Maturity (In millions) or Less Years Years Years Total Gains Losses Cost in Years - ------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 175 785 1,420 178 2,558 (116) - 2,442 7.89 U.S. Government agencies 1 5,542 7,702 4 13,249 (232) 3 13,020 5.49 CMOs 317 1,794 142 - 2,253 (25) 7 2,235 3.65 State, county and municipal 6 3 20 63 92 - - 92 16.31 Other 83 2,147 176 857 3,263 (42) 10 3,231 5.35 - --------------------------------------------------------------------------------------------------------- Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020 5.61 ================================================================================================================== MARKET VALUE Debt securities $ 582 10,205 9,460 394 20,641 (404) 19 20,256 Sundry securities - 66 - 708 774 (11) 1 764 - ------------------------------------------------------------------------------------------------------ Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020 ====================================================================================================== AMORTIZED COST Debt securities $ 569 10,077 9,224 386 20,256 Sundry securities - 66 - 698 764 ------------------------------------------------------------------------ Total $ 569 10,143 9,224 1,084 21,020 ======================================================================== WEIGHTED AVERAGE YIELD U.S. Treasury 5.95 % 6.23 7.01 7.07 6.69 U.S. Government agencies 4.70 7.15 7.05 6.56 7.09 CMOs 7.52 6.62 5.66 - 6.68 State, county and municipal 11.42 8.79 6.52 6.47 6.86 Other 7.13 5.66 7.19 6.56 6.02 Consolidated 7.01 % 6.67 7.03 6.63 6.84 ======================================================================== December 31, 1996 ------------------------------------------------------------------------------------ Gross Unrealized Average 1 Year 1-5 5-10 After 10 --------------- Amortized Maturity (In millions) or Less Years Years Years Total Gains Losses Cost in Years - ------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 183 1,868 50 2 2,103 (9) 14 2,108 2.23 U.S. Government agencies 9 2,490 8,969 26 11,494 (43) 60 11,511 5.82 CMOs 32 928 - - 960 (5) 5 960 3.56 State, county and municipal 13 7 13 26 59 (1) - 58 10.48 Other 97 1,050 89 953 2,189 (42) 15 2,162 4.31 - ---------------------------------------------------------------------------------------------------------- Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799 5.10 ================================================================================================================= MARKET VALUE Debt securities $ 334 6,326 9,121 187 15,968 (84) 94 15,978 Sundry securities - 17 - 820 837 (16) - 821 - ------------------------------------------------------------------------------------------------------ Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799 ====================================================================================================== AMORTIZED COST Debt securities $ 333 6,298 9,149 198 15,978 Sundry securities - 16 - 805 821 - -------------------------------------------------------------------------- Total $ 333 6,314 9,149 1,003 16,799 ========================================================================== WEIGHTED AVERAGE YIELD U.S. Treasury 6.79 % 5.93 7.26 7.93 6.04 U.S. Government agencies 6.07 6.86 6.98 8.04 6.95 CMOs 7.86 7.34 - - 7.35 State, county and municipal 10.12 12.01 8.41 7.30 8.68 Other 7.76 6.14 8.08 5.64 6.08 Consolidated 7.28 % 6.54 6.99 5.76 6.75 ==========================================================================
T-8 FINANCIAL TABLES - -------------------------------------------------------------------------------- Included in "U.S. Government agencies" and "Other" at December 31, 1997, are $2.7 billion of securities that are denominated in currencies other than the U.S. dollar. The currency exchange rates were hedged utilizing both on- and off-balance sheet instruments to minimize the exposure to currency revaluation risks. At December 31, 1997, these securities had a weighted average maturity of 3.75 years and a weighted average yield of 5.31 percent. The weighted average U.S. equivalent yield for comparative purposes of these securities was 6.57 percent based on a weighted average funding cost differential of (1.26) percent. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The aging of mortgage-backed securities is based on their weighted average maturities at December 31, 1997. Average maturity in years excludes preferred and common stocks and money market funds. Yields related to securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5 percent in Connecticut. There were forward commitments to purchase securities at a cost of $6.4 billion that had a market value of $6.4 billion at December 31, 1997. Gross gains and losses realized on the sale of debt securities in 1997 were $51 million and $43 million, respectively, and gross gains on sundry securities $23 million. Gross gains and losses realized on the sale of debt securities in 1996 were $159 million and $125 million, respectively, and gross gains on sundry securities $2 million. T-9 FINANCIAL TABLES Table 9 INVESTMENT SECURITIES - --------------------------------------------------------------------------------
December 31, 1997 ------------------------------------------------------------------------------------ Gross Unrealized Average 1 Year 1-5 5-10 After 10 --------------- Amortized Maturity (In millions) or Less Years Years Years Total Gains Losses Cost in Years - ----------------------------------------------------------------------------------------------------------- CARRYING VALUE U.S. Government agencies $ - 703 313 - 1,016 25 (1) 1,040 4.33 CMOs 30 337 - - 367 9 - 376 2.92 State, county and municipal 63 172 187 302 724 112 - 836 8.31 Other 2 12 34 20 68 2 - 70 5.98 - --------------------------------------------------------------------------------------------------------- Total $ 95 1,224 534 322 2,175 148 (1) 2,322 5.46 ========================================================================================================= CARRYING VALUE Debt securities $ 95 1,224 534 303 2,156 148 (1) 2,303 Sundry securities - - - 19 19 - - 19 - ---------------------------------------------------------------------------------------------- Total $ 95 1,224 534 322 2,175 148 (1) 2,322 ============================================================================================== MARKET VALUE Debt securities $ 96 1,262 576 369 2,303 Sundry securities - - - 19 19 - ---------------------------------------------------------------------- Total $ 96 1,262 576 388 2,322 ====================================================================== WEIGHTED AVERAGE YIELD U.S. Government agencies - % 7.71 6.98 - 7.48 CMOs 7.61 7.66 - - 7.66 State, county and municipal 10.68 10.81 11.65 11.69 11.38 Other 7.83 8.15 9.66 5.03 7.99 Consolidated 9.66 % 8.13 8.78 11.28 8.83 ======================================================================
December 31, 1996 ---------------------------------------------------------------------------------- Gross Unrealized Average 1 Year 1-5 5-10 After 10 --------------- Market Maturity (In millions) or Less Years Years Years Total Gains Losses Value in Years - ---------------------------------------------------------------------------------------------------------------- CARRYING VALUE U.S. Government agencies $ - 776 318 - 1,094 22 (3) 1,113 4.68 CMOs 67 414 - - 481 8 - 489 2.72 State, county and municipal 61 219 145 380 805 105 (1) 909 8.73 Other 1 11 9 100 121 4 - 125 15.84 - ------------------------------------------------------------------------------------------------------- Total $ 129 1,420 472 480 2,501 139 (4) 2,636 5.93 ================================================================================================================= CARRYING VALUE Debt securities $ 129 1,420 472 426 2,447 139 (4) 2,582 Sundry securities - - - 54 54 - - 54 - --------------------------------------------------------------------------------------------------- Total $ 129 1,420 472 480 2,501 139 (4) 2,636 =================================================================================================== MARKET VALUE Debt securities $ 130 1,456 494 502 2,582 Sundry securities - - - 54 54 - ------------------------------------------------------------------------ Total $ 130 1,456 494 556 2,636 ======================================================================== WEIGHTED AVERAGE YIELD U.S. Government agencies - % 7.95 7.18 - 7.72 CMOs 7.47 7.67 - - 7.64 State, county and municipal 10.29 10.74 11.11 11.68 11.22 Other 7.59 7.72 7.81 7.43 7.49 Consolidated 8.80 % 8.29 8.40 10.80 8.82 ========================================================================
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The aging of mortgage-backed securities is based on their weighted average maturities at December 31, 1997. Yields related to securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5 percent in Connecticut. There were no commitments to purchase or sell investment securities at December 31, 1997. Gross gains realized on calls of sundry securities in 1997 were $3 million. In 1996, gross gains and losses realized on repurchase agreement underdeliveries and calls of investment securities were $5 million and $1 million, respectively. T-10 FINANCIAL TABLES Table 10 LOANS - --------------------------------------------------------------------------------
Years Ended December 31, -------------------------------------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 28,111 25,997 26,812 22,053 19,691 16,751 Real estate - construction and other 2,386 2,919 2,742 2,052 2,138 2,489 Real estate - mortgage 8,576 9,758 10,359 9,473 9,282 8,699 Lease financing 8,056 5,951 4,116 1,921 1,287 1,442 Foreign 1,431 1,087 653 527 417 392 - --------------------------------------------------------------------------------------------------------------------------- Total commercial 48,560 45,712 44,682 36,026 32,815 29,773 - --------------------------------------------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 25,382 29,108 27,493 21,062 18,206 14,323 Installment loans - Bankcard (a) 2,708 5,620 3,830 4,345 2,155 - Installment loans - other 19,297 20,827 19,759 15,492 14,497 15,965 Vehicle leasing 4,312 3,480 2,664 1,889 1,161 855 - --------------------------------------------------------------------------------------------------------------------------- Total retail 51,699 59,035 53,746 42,788 36,019 31,143 - --------------------------------------------------------------------------------------------------------------------------- Total loans 100,259 104,747 98,428 78,814 68,834 60,916 - --------------------------------------------------------------------------------------------------------------------------- UNEARNED INCOME Loans 627 521 477 420 335 384 Lease financing 2,759 1,910 1,221 563 236 231 - --------------------------------------------------------------------------------------------------------------------------- Total unearned income 3,386 2,431 1,698 983 571 615 - --------------------------------------------------------------------------------------------------------------------------- Loans, net $ 96,873 102,316 96,730 77,831 68,263 60,301 ===========================================================================================================================
(a) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts. Data is not available prior to 1993. Table 11 CERTAIN COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES - --------------------------------------------------------------------------------
December 31, 1997 ---------------------------------------------------------------------- Real Commercial, Estate- Financial Construction Real and and Estate- (In millions) Agricultural Other Mortgage Foreign Total - --------------------------------------------------------------------------------------- FIXED RATE 1 year or less $ 1,352 33 603 197 2,185 1-5 years 2,300 99 1,813 - 4,212 After 5 years 1,354 107 1,130 - 2,591 - ---------------------------------------------------------------------------------------- Total 5,006 239 3,546 197 8,988 - ---------------------------------------------------------------------------------------- ADJUSTABLE RATE 1 year or less 9,422 688 780 1,120 12,010 1-5 years 11,091 1,178 2,625 112 15,006 After 5 years 2,592 281 1,625 2 4,500 - ---------------------------------------------------------------------------------------- Total 23,105 2,147 5,030 1,234 31,516 - ---------------------------------------------------------------------------------------- Total $ 28,111 2,386 8,576 1,431 40,504 =======================================================================================
T-11 FINANCIAL TABLES Table 12 ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS - --------------------------------------------------------------------------------
Years Ended December 31, ---------------------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES Balance, beginning of year $ 1,502 1,638 1,578 1,622 1,551 1,461 Provision for loan losses 840 449 259 179 370 643 Allowance relating to loans acquired, transferred to accelerated disposition or sold (495) 50 193 59 191 51 Loan losses, net (635) (635) (392) (282) (490) (604) - ------------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 1,212 1,502 1,638 1,578 1,622 1,551 ======================================================================================================================== as % of loans, net 1.25 % 1.47 1.69 2.03 2.38 2.57 ======================================================================================================================== as % of nonaccrual and restructured loans 195 % 215 239 248 151 105 ======================================================================================================================== as % of nonperforming assets 168 % 187 186 178 115 76 ======================================================================================================================== LOAN LOSSES Commercial, financial and agricultural $ 83 148 114 151 232 277 Real estate - construction and other 31 65 23 16 76 108 Real estate - mortgage 37 28 71 80 134 109 Installment loans - Bankcard (a) 396 315 195 73 64 - Installment loans - Bankcard special adjustment (b) - 34 - - - - Installment loans - other and Vehicle leasing 206 204 123 95 107 208 - ------------------------------------------------------------------------------------------------------------------------ Total 753 794 526 415 613 702 - ------------------------------------------------------------------------------------------------------------------------ LOAN RECOVERIES Commercial, financial and agricultural 42 77 67 68 47 41 Real estate - construction and other 10 16 8 3 9 2 Real estate - mortgage 1 1 12 16 19 6 Installment loans - Bankcard (a) 27 33 17 12 10 - Installment loans - other and Vehicle leasing 38 32 30 34 38 49 - ------------------------------------------------------------------------------------------------------------------------ Total 118 159 134 133 123 98 - ------------------------------------------------------------------------------------------------------------------------ Loan losses, net $ 635 635 392 282 490 604 ======================================================================================================================== as % of average loans, net 0.63 % 0.65 0.44 0.40 0.78 1.03 ======================================================================================================================== as % of average loans, net, excluding Bankcard (a) 0.28 % 0.35 0.25 0.32 0.72 - ======================================================================================================================== NONPERFORMING ASSETS Nonaccrual loans Commercial loans $ 236 227 340 280 423 642 Commercial real estate loans 76 135 - - - - Consumer real estate loans 186 199 - - - - Installment loans 124 123 82 - - - Real estate loans - - 260 337 610 735 - ------------------------------------------------------------------------------------------------------------------------ Total nonaccrual loans 622 684 682 617 1,033 1,377 Restructured loans 2 14 4 19 40 105 Foreclosed properties 99 104 194 251 338 565 - ------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 723 802 880 887 1,411 2,047 ======================================================================================================================== as % of loans, net and foreclosed properties 0.75 % 0.78 0.91 1.14 2.06 3.36 ======================================================================================================================== Accruing loans past due 90 days $ 232 361 356 272 213 240 ========================================================================================================================
(a) Data is not available prior to 1993. (b) Installment loans - Bankcard special adjustment includes a 1996 one-time charge-off related to an anticipated regulatory change that would reduce the period delinquent loans could be held before charge-off. Any loans classified by regulatory examiners as loss, doubtful, substandard or special mention that have not been disclosed herein or under the "Loans" or "Asset Quality" narrative discussions in Management's Analysis of Operations do not (i) represent or result from trends or uncertainties that management expects will materially affect future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. T-12 FINANCIAL TABLES Table 13 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (a) - --------------------------------------------------------------------------------
Years Ended December 31, ----------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- ---------------- ----------------- ----------------- --------------- Loans Loans Loans Loans Loans % to % to % to % to % to Total Total Total Total Total (In millions) Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt. Loans - ------------------------------------------------------------------------------------------------------------------------------------ Commercial, financial and agricultural $ 245 28 % $ 267 25 % $ 431 27 % $ 504 28 % $ 413 28 % Real estate - Construction and other 25 2 61 3 70 3 93 3 171 3 Mortgage 96 34 217 37 325 38 292 39 370 40 Installment loans - Bankcard 158 3 354 5 246 4 188 5 101 3 Other and Vehicle leasing 141 24 229 23 271 23 194 22 220 23 Lease financing 8 8 33 6 17 4 7 2 7 2 Foreign 5 1 4 1 35 1 24 1 8 1 Unallocated 534 - 337 - 243 - 276 - 332 - - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,212 100 % $ 1,502 100 $ $ 1,638 100 % $ 1,578 100 % $ 1,622 100 % ====================================================================================================================================
(a) The allocation of the allowance for loan losses to the respective classifications is not necessarily indicative of future losses or future allocations. First Fidelity allocated all allowance amounts to specific loan classifications in 1993 through 1995, and as a result, conforming reclassifications of allocated amounts to the unallocated portion of the allowance occurred in 1996. See the "Loans" and the "Provision and Allowance for Loan Losses" discussions in Management's Analysis of Operations and the "Allowance for Loan Losses" discussion in Note 1 of Notes to Consolidated Financial Statements. Table 14 INTANGIBLE ASSETS - --------------------------------------------------------------------------------
Years Ended December 31, -------------------------------------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------ MORTGAGE AND OTHER SERVICING ASSETS $ 421 282 208 134 91 187 ======================================================================================================================== CREDIT CARD PREMIUM $ 24 35 44 58 76 71 ======================================================================================================================== OTHER INTANGIBLE ASSETS Goodwill $ 2,247 2,406 1,937 1,382 1,038 840 Deposit base premium 421 488 547 535 367 285 Other 6 11 13 20 27 35 - ------------------------------------------------------------------------------------------------------------------------ Total $ 2,674 2,905 2,497 1,937 1,432 1,160 ========================================================================================================================
T-13
FINANCIAL TABLES Table 15 FORECLOSED PROPERTIES - -------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, -------------------------------------------------------- (In millions) 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- Foreclosed properties $ 115 121 219 293 - -------------------------------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, beginning of year 17 25 42 63 Provision for foreclosed properties 2 (1) (3) 14 Transfer from allowance for segregated assets - 1 - 2 Dispositions, net (3) (8) (14) (37) - -------------------------------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, end of year 16 17 25 42 - -------------------------------------------------------------------------------------------------------------------------------- Foreclosed properties, net $ 99 104 194 251 ================================================================================================================================ FORECLOSED PROPERTIES - --------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------ (In millions) 1993 1992 - --------------------------------------------------------------------------------------------------------- Foreclosed properties 401 674 - --------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, beginning of year 109 38 Provision for foreclosed properties 46 132 Transfer from allowance for segregated assets 5 - Dispositions, net (97) (61) - --------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, end of year 63 109 - --------------------------------------------------------------------------------------------------------- Foreclosed properties, net 338 565 ===========================================================================================================
Table 16 DEPOSITS - ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------------------------------- (In millions) 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- CORE DEPOSITS Noninterest-bearing $ 21,753 20,383 18,769 15,917 Savings and NOW accounts 30,118 28,869 26,795 23,263 Money market accounts 15,494 14,899 14,452 14,376 Other consumer time 29,231 33,541 33,795 27,403 - ----------------------------------------------------------------------------------------------------------------------------------- Total core deposits 96,596 97,692 93,811 80,959 Foreign 2,483 1,897 3,577 4,803 Other time 3,810 3,113 2,760 2,103 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits $ 102,889 102,702 100,148 87,865 =================================================================================================================================== DEPOSITS - --------------------------------------------------------------------------- Years Ended December 31, --------------------- (In millions) 1993 1992 - --------------------------------------------------------------------------- CORE DEPOSITS Noninterest-bearing 16,208 14,583 Savings and NOW accounts 21,661 17,653 Money market accounts 15,025 13,836 Other consumer time 25,534 27,212 - --------------------------------------------------------------------------- Total core deposits 78,428 73,284 Foreign 1,457 513 Other time 2,000 2,359 - --------------------------------------------------------------------------- Total deposits 81,885 76,156 ===========================================================================
Table 17 TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE - --------------------------------------------------------------------------------------------------------------- December 31, 1997 ------------------------- Time Other (In millions) Certificates Time - --------------------------------------------------------------------------------------------------------------- MATURITY OF 3 months or less $ 3,029 - Over 3 months through 6 months 1,552 - Over 6 months through 12 months 1,126 - Over 12 months 2,029 - - ----------------------------------------------------------------------------------------------------------------- Total $ 7,736 - ================================================================================================================
T-14 FINANCIAL TABLES
Table 18 CAPITAL RATIOS - -------------------------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- CONSOLIDATED CAPITAL RATIOS (a) Qualifying capital Tier 1 capital $ 10,215 7,633 6,551 Total capital 16,279 12,842 11,198 Adjusted risk-based assets 121,503 104,126 97,830 Adjusted leverage ratio assets $ 149,921 124,419 119,421 Ratios Tier 1 capital 8.41% 7.33 6.70 Total capital 13.40 12.33 11.45 Leverage 6.81 6.13 5.49 Stockholders' equity to assets Year-end 7.65 7.14 6.86 Average 7.37% 6.82 7.23 ============================================================================================================== BANK CAPITAL RATIOS (b) Tier 1 capital First Union National Bank (North Carolina) 6.97% 6.43 6.46 First Union National Bank (New Jersey) 10.70 8.98 9.16 First Union Bank of Delaware 11.83 13.61 25.45 First Union Home Equity Bank 10.95 8.40 7.50 Total capital First Union National Bank (North Carolina) 10.20 10.20 10.15 First Union National Bank (New Jersey) 13.99 12.22 10.95 First Union Bank of Delaware 13.09 14.87 26.74 First Union Home Equity Bank 13.20 10.77 10.09 Leverage First Union National Bank (North Carolina) 6.02 5.95 5.72 First Union National Bank (New Jersey) 7.06 7.06 7.43 First Union Bank of Delaware 6.24 10.60 17.20 First Union Home Equity Bank 10.16% 7.84 6.48 ============================================================================================================== CAPITAL RATIOS - ---------------------------------------------------------------------------------------------------------- Years Ended December 31, ----------------------------------- (In millions) 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- CONSOLIDATED CAPITAL RATIOS (a) Qualifying capita Tier 1 capital 4,467 4,343 3,189 Total capital 7,451 6,961 4,948 Adjusted risk-based assets 57,594 47,529 34,574 Adjusted leverage ratio assets 73,011 70,786 48,672 Ratios Tier 1 capital 7.76 9.14 9.22 Total capital 12.94 14.64 14.31 Leverage 6.12 6.13 6.55 Stockholders' equity to assets Year-end 6.98 7.36 6.99 Average 7.52 7.11 6.89 ============================================================================================================= BANK CAPITAL RATIOS (b) Tier 1 capital First Union National Bank (North Carolina) 7.32 8.24 7.22 First Union National Bank (New Jersey) - - - First Union Bank of Delaware - - - First Union Home Equity Bank 7.60 - - Total capital First Union National Bank (North Carolina) 10.69 11.35 10.60 First Union National Bank (New Jersey) - - - First Union Bank of Delaware - - - First Union Home Equity Bank 12.10 - - Leverage First Union National Bank (North Carolina) 6.10 5.52 5.46 First Union National Bank (New Jersey) - - - First Union Bank of Delaware - - - First Union Home Equity Bank 7.22 - - =============================================================================================================
a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 to 5.00 percent. The 1992-1996 capital ratios presented herein have not been restated to reflect the Signet pooling of interests acquisition. (b) By the end of 1997, all First Union bank affiliates were merged into First Union National Bank (North Carolina), except those included herein. Accordingly, historical information related to such affiliates is not presented, and historical ratios for First Union National Bank (North Carolina) are not restated. On February 26, 1998, First Union National Bank (New Jersey) and First Union National Bank (North Carolina) were combined. The combined banks will operate as First Union National Bank. T-15 FINANCIAL TABLES
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ------------------------------------------------------------------------------------------------------------------ Weighted Average Rate Estimated ------------------------------ ---------------------------- Maturity December 31, 1997 Notional In Fair (In millions) Amount Receive Pay Years (b) Value - ----------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Interest rate swaps $ 11,655 6.46 % 5.87 % 3.59 Carrying amount $ 4 Unrealized gross gain 121 Unrealized gross loss (7) ---------- Total 118 ---------- Forward interest rate swaps 725 6.20 - 2.97 Carrying amount - Unrealized gross gain 1 Unrealized gross loss - ---------- Total 1 ---------- Interest rate floors 500 6.07 5.84 1.19 Carrying amount 3 Unrealized gross gain - Unrealized gross loss (1) ---------- Total 2 - ---------------------------------------------- ---------- Total asset rate conversions $ 12,880 6.43 % 5.86 % 3.46 $ 121 ================================================================================================================== Comments ---------------------------------------- Interest rate swaps Converts floating rate loans to fixed rate. Adds to liability sensitivity. Similar characteristics to a fixed income security funded with variable rate liabilities. Includes $1.4 billion of callable swaps expected to mature in December 1999 if swap rates are below 6.99 percent. Forward interest swaps Converts floating rate loans to fixed rates in future periods. Effective December 1998 with put options on forward swaps referenced under "Rate Sensitivity Hedges" linked to this item. Interest rate floors Paid a premium to convert floating rate loans to fixed rate when 3 month LIBOR is below an average of 6.07 percent.
LIABILITY RATE CONVERSIONS Interest rate swaps $ 6,883 7.05 % 5.93 % 9.37 Carrying amount $ 12 Unrealized gross gain 258 Unrealized gross loss (7) Total 263 ---------- Interest rate floors 250 4.43 - 3.45 Carrying amount 1 Unrealized gross gain - Unrealized gross loss (1) ---------- Total - - ---------------------------------------------- ---------- Total liability rate conversions $ 7,133 6.96 % 5.93 % 9.17 $ 263 ================================================================================================================= Interest rate swaps Converts $4.6 billion of fixed rate long-term debt to floating rate by matching the terms of the swap to the debt issue. Also converts $648 million of fixed rate CDs to variable rate, $650 million of fixed rate bank notes to floating rate and $1 billion of fixed rate trust capital securities to variable rate. Interest rate floors $250 million floor offsets a corresponding rate purchased floor in long-term debt.
(Continued) T-16 FINANCIAL TABLES
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ------------------------------------------------------------------------------------------------------------------ Weighted Average Rate Estimated ------------------------------ ---------------------------- Maturity December 31, 1997 Notional In Fair (In millions) Amount Receive Pay Years (b) Value - ------------------------------------------------------------------------------------------------------------------ RATE SENSITIVITY HEDGES Put options on forward swaps $ 725 - % 6.20 % 0.95 Carrying amount $ 5 Unrealized gross gain - Unrealized gross loss - ---------- Total 5 ---------- Interest rate caps (LIBOR) 158 5.88 7.03 1.86 Carrying amount 1 Unrealized gross gain - Unrealized gross loss (1) ---------- Total - ---------- Interest rate caps (CMT) 2,200 - 5.70 3.96 Carrying amount 26 Unrealized gross gain - Unrealized gross loss - ---------- Total 26 ---------- Short eurodollar futures 12,301 - 6.13 0.42 Carrying amount - Unrealized gross gain - Unrealized gross loss (10) ---------- Total (10) ---------- Short Deutschemark futures 56 - 3.94 0.21 Carrying amount - Unrealized gross gain - Unrealized gross loss - ---------- Total - ---------- Long eurodollar futures 2,000 6.62 - 1.33 Carrying amount - Unrealized gross gain 3 Unrealized gross loss - ---------- Total 3 ---------- Call Options on eurodollar futures 768 6.79 - 0.46 Carrying amount - Unrealized gross gain 2 Unrealized gross loss - ---------- Total 2 ---------- CMT Floor 100 6.42 5.84 3.34 Carrying amount 1 Unrealized gross gain 1 Unrealized gross loss - ---------- Total 2 - ------------------------------------------------ ---------- Total rate sensitivity hedges $ 18,308 6.61 % 6.07 % 1.00 $ 28 - ---------------------------------------------------------------------------------------------------------------- Comments --------------------------------------- Put options on forward swaps Paid a premium for the right to terminate $725 million of forward interest rate swaps based on interest rates in effect in December 1998. Reduces liability sensitivity. Interest rate caps (LIBOR) Paid a premium for the right to lock in 3 month LIBOR reset rates on pay variable rate swaps. Interest rate caps (CMT) Paid a premium for the right to lock in 1 year Treasury rates for the purpose of converting floating rate liabilities to fixed rate. Short eurodollar futures Locks in 3 month LIBOR reset rates on pay variable rate swaps. $4.8 billion effective March 1998 and June 1998 and $2.8 billion effective September 1998. Short Deutschemark futures Locks in 3 month Deutschemark funding levels in March 1998 for a portion of the German bonds in the foreign bond portfolio. Long eurodollars futures Converts floating rate LIBOR-based loans to fixed rate. Adds to liability sensitivity. Similar characteristics to fixed income security funded with variable rate liabilities. $500 million effective December 1998, March 1999, June 1999 and September 1999. Call Options on eurodollars futures Paid a premium for the right to buy Eurodollar futures that convert floating rate LIBOR-based loans to fixed rate. Interest rate risk limited to premium paid. $256 million effective March 1998, June 1998 and September 1998. CMT Floors First Union Mortgage Corporation paid a premium for a CMT floor in order to offset the decline in value of mortgage servicing in a falling rate environment.
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (b) Estimated maturity approximates average life except for eurodollar futures, average life of .25 years. London Interbank Offered Rates (LIBOR) - The average of interbank offered rates on dollar deposits in the London market, based on quotations at five major banks. Weighted average pay rates are generally based on one to six month LIBOR. Pay rates reset at predetermined reset dates over the life of the contract. Rates shown are the pay rates in effect as of December 31, 1997. Weighted average receive rates are fixed rates set at the time the contract was transacted. Carrying amount includes accrued interest receivable/payable and unamortized premiums paid/received. (Continued) T-17 FINANCIAL TABLES
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ---------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated ------------------------------ -------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years (b) Value - ------------------------------------------------------------------------------------------------------------------ ASSET RATE CONVERSIONS Interest rate swaps $ 20,330 6.24 % 5.52 % 1.89 Carrying amount $ 3 Unrealized gross gain 129 Unrealized gross loss (23) ---------- Total 109 ---------- Interest rate floors 550 5.98 5.50 1.96 Carrying amount 5 Unrealized gross gain - Unrealized gross loss - ---------- Total 5 ---------- Forward bullet interest rate swaps 57 7.83 - 1.21 Carrying amount - Unrealized gross gain 1 Unrealized gross loss - ---------- Total 1 - ---------------------------------------------- ---------- Total asset rate conversions $ 20,937 6.24 % 5.50 % 1.89 $ 115 ==================================================================================================================== Comments --------------------------------------- Interest rate swaps Converts floating rate loans to fixed rate. Adds to liability sensitivity. Similar characteristics to a fixed income security funded with variable rate liabilities. Includes $4.8 billion of indexed amortizing swaps, with $1.3 billion maturing within 1 year and $3.5 billion within 4 years. Interest rate floors Paid a premium to convert floating rate loans to fixed rate when 3 month LIBOR is below 6.00 percent (approximately). Forward bullet interest rate swaps Converts floating rate loans to fixed rates in future periods. Effective March 1997. LIABILITY RATE CONVERSIONS Interest rate swaps $ 7,811 6.81 % 5.68 % 5.57 Carrying amount $ 21 Unrealized gross gain 122 Unrealized gross loss (53) ---------- Total 90 ---------- Other financial instruments 250 4.42 - 4.45 Carrying amount 2 Unrealized gross gain - Unrealized gross loss (2) ---------- Total - - ---------------------------------------------- ---------- Total liability rate conversions $ 8,061 6.74 % 5.50 % 5.54 $ 90 ================================================================================================================= ASSET HEDGES Forward sale of Treasury notes $ 662 - % 5.74 % 0.03 Carrying amount $ - Unrealized gross gain 5 Unrealized gross loss - ---------- Total 5 - ---------------------------------------------- ---------- Total asset hedges $ 662 - % 5.74 % 0.03 $ 5 ================================================================================================================= Interest rate swaps Converts $4.2 billion of fixed rate long-term debt to floating rate by matching the terms of the swap to the debt issue. Rate sensitivity remains unchanged due to the direct linkage of the swap to the debt issue. Also converts $2.6 billion of fixed rate CDs to variable rate and $1.1 billion of fixed rate bank notes to floating rate. Other financial instruments $150 million floor offsets a corresponding rate floor in long- term debt. Forward sale of treasury notes Sold U.S. Treasury notes forward to hedge the market value of similar U.S. Treasury notes in the available for sale portfolio.
(Continued) T-18 FINANCIAL TABLES
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ----------------------------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated ------------------------------ -------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years (b) Value - ----------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Put options on eurodollar futures $ 12,678 - % 6.37% 0.31 Carrying amount $ 6 Unrealized gross gain - Unrealized gross loss (5) ---------- Total 1 ---------- Interest rate caps 168 5.54 7.03 2.70 Carrying amount 1 Unrealized gross gain - Unrealized gross loss - ---------- Total 1 ---------- Short futures 15,062 - 5.84 0.22 Carrying amount - Unrealized gross gain - Unrealized gross loss (11) ---------- Total (11) ---------- CMT floor 100 6.42 6.37 4.34 Carrying amount 1 Unrealized gross gain 1 Unrealized gross loss - ---------- Total 2 ---------- Long eurodollar futures 14,550 6.29 - 1.28 Carrying amount - Unrealized gross gain 8 Unrealized gross loss (2) ---------- Total 6 - ---------------------------------------------- ---------- Total rate sensitivity hedges $ 42,558 6.28 % 6.09 % 0.63 $ (1) ======================================================================================================================= Comments ---------------------------------------- Put options on eurodollar futures Paid a premium for the right to lock in the 3 month LIBOR reset rates on pay variable rate swaps. $7.6 billion effective March 1997; $5.1 billion effective June 1997. Interest rate caps Paid a premium for the right to lock in 3 month LIBOR reset rates on pay variable rate swaps. Short futures Locks in 3 month LIBOR reset rates on pay variable rate swaps. $15.0 billion effective March 1997; $89 million effective June 1997. CMT floor First Union Mortgage Corporation paid a premium for a CMT floor in order to offset the decline in value of mortgage servicing in a falling rate environment. Long eurodollar futures Converts floating rate LIBOR-based loans to fixed rate. Adds to liability sensitivity. Similar characteristics to fixed income security funded with variable rate liabilities. $4.6 billion effective September 1997; $2.0 billion effective December 1997, March 1998, June 1998 and September 1998; $500 million effective December 1998, March 1999, June 1999 and September 1999.
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (b) Estimated maturity approximates duration except for forward bullets, average duration of 1.0 years; and long eurodollar futures, average duration of .25 years. London Interbank Offered Rates (LIBOR) - The average of interbank offered rates on dollar deposits in the London market, based on quotations at five major banks. Weighted average pay rates are generally based on one to six month LIBOR. Pay rates related to forward interest rate swaps are set on the future effective date. Pay rates reset at predetermined reset dates over the life of the contract. Rates shown are the rates in effect as of December 31, 1996. Weighted average receive rates were set at the time the contract was transacted. Carrying amount includes accrued interest receivable/payable, unamortized premiums paid/received and any related margin accounts. T-19 FINANCIAL TABLES
Table 20 OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a) - ------------------------------------------------------------------------------------------------------------------------- December 31, 1997 1 Year 1 -2 2 -5 5 -10 After 10 (In millions) or Less Years Years Years Years Total - ------------------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Notional amount $ 1,072 601 8,429 2,778 -- 12,880 Weighted average receive rate 5.44% 5.96 6.59 6.41 -- 6.43 Estimated fair value $ (6) 1 116 10 -- 121 - ------------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 953 338 954 3,300 1,588 7,133 Weighted average receive rate 6.01% 7.83 7.41 6.82 7.35 6.96 Estimated fair value $ 1 10 45 123 84 263 - ------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 13,680 1,560 3,068 -- -- 18,308 Weighted average receive rate 6.66% 6.60 6.26 -- -- 6.61 Estimated fair value $ (7) 3 32 -- -- 28 ========================================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1996 1 Year 1 -2 2 -5 5 -10 After 10 (In millions) or Less Years Years Years Years Total - ------------------------------------------------------------------------------------------------------------------------ ASSET RATE CONVERSIONS Notional amount $ 11,083 1,532 8,322 -- -- 20,937 Weighted average receive rate 6.12% 5.28 6.57 -- -- 6.24 Estimated fair value $ 34 (21) 102 -- -- 115 -------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 1,370 1,414 767 3,950 560 8,061 Weighted average receive rate 6.59% 5.98 7.44 6.93 6.74 6.74 Estimated fair value $ 11 5 30 58 (14) 90 -------------------------------------------------------------------------------------------------------------------- ASSET HEDGES Notional amount $ 662 -- -- -- -- 662 Weighted average receive rate -% -- -- -- -- -- Estimated fair value $ 5 -- -- -- -- 5 -------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 34,300 6,555 1,703 -- -- 42,558 Weighted average receive rate 5.90% 6.58 6.55 -- -- 6.28 Estimated fair value $ (10) 6 3 -- -- (1) =========================================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. Pay rates are generally based on one to six month LIBOR and reset at predetermined reset dates. Current pay rates are not necessarily indicative of future pay rates, and therefore, they have been excluded from the above table. Weighted average pay rates are indicated in Table 19. T-20 FINANCIAL TABLES
Table 21 OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a) - ----------------------------------------------------------------------------------------------------------------------------------- Asset Liability Rate Rate Rate Asset Sensitivity (In millions) Conversions Conversions Hedges Hedges Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $ 18,543 7,432 1,016 29,674 56,665 Additions 7,740 2,583 662 80,229 91,214 Maturities/Amortizations (5,241) (1,954) (697) (41,023) (48,915) Terminations (105) - (319) (26,322) (26,746) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 20,937 8,061 662 42,558 72,218 Additions 3,694 1,628 - 41,480 46,802 Maturities/Amortizations (11,251) (1,725) (662) (51,744) (65,382) Terminations (500) (831) - (13,986) (15,317) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 12,880 7,133 - 18,308 38,321 ===================================================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. T-21 FINANCIAL TABLES
Table 22 INTEREST DIFFERENTIAL - -------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 ---------------------------------------------- Interest Income/ Variance Expense Attributable to (b) -------------------------------- (In millions) Variance Rate Volume - -------------------------------------------------------------------------------------------------------- EARNING ASSETS Interest-bearing bank balances $ 12 (1) 13 Federal funds sold and securities purchased under resale agreements 31 14 17 Trading account assets (a) 6 (7) 13 Securities available for sale (a) (18) 47 (65) Investment securities (a) U.S. Government and other (16) (1) (15) State, county and municipal (21) 1 (22) - -------------------------------------------------------------------------------------------------------- Total investment securities (37) - (37) - -------------------------------------------------------------------------------------------------------- Loans (a) 463 181 282 - -------------------------------------------------------------------------------------------------------- Total earning assets $ 457 234 223 ======================================================================================================== INTEREST-BEARING LIABILITIES Deposits 74 72 2 Short-term borrowings 96 44 52 Long-term debt 25 19 6 - -------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 195 135 60 ======================================================================================================== Net interest income $ 262 99 163 - -------------------------------------------------------------------------------------------------------- 1996 Compared to 1995 -------------------------------------- Interest Income/ Variance Expense Attributable to (b) ------------------------ (In millions) Variance Rate Volume - ---------------------------------------------------------------------------------------------- EARNING ASSETS Interest-bearing bank balances (21) - (21) Federal funds sold and securities purchased under resale agreements 189 (26) 215 Trading account assets (a) 185 11 174 Securities available for sale (a) 451 26 425 Investment securities (a) U.S. Government and other (300) 29 (329) State, county and municipal (59) (2) (57) - ---------------------------------------------------------------------------------------------- Total investment securities (359) 27 (386) - ---------------------------------------------------------------------------------------------- Loans (a) 438 (187) 625 - ---------------------------------------------------------------------------------------------- Total earning assets 883 (149) 1,032 ============================================================================================== INTEREST-BEARING LIABILITIES Deposits 115 (6) 121 Short-term borrowings 370 (151) 521 Long-term debt 86 (30) 116 - ---------------------------------------------------------------------------------------------- Total interest-bearing liabilities 571 (187) 758 ============================================================================================== Net interest income 312 38 274 =============================================================================================
(a) Income related to securities and loans exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense assuming a federal tax rate of 35 percent; and state tax rates of 7.5 percent in 1997, and 7.75 percent in 1996 in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in Connecticut. (b) Changes attributable to rate/volume are allocated to both rate and volume on an equal basis. T-22 FINANCIAL TABLES
FIRST UNION CORPORATION NET INTEREST INCOME SUMMARIES - ----------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1997 YEAR ENDED 1996 ---------------------------------------------- ---------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ (In millions) Balances Expense Paid Balances Expense Paid - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing bank balances $ 384 19 5.05% $ 135 7 5.64% Federal funds sold and securities purchased under resale agreements 7,082 390 5.50 6,772 359 5.30 Trading account assets (a) (d) 4,892 318 6.49 4,699 312 6.64 Securities available for sale (a) (d) 18,415 1,278 6.94 19,360 1,296 6.69 Investment securities (a) (d) U.S. Government and other 1,545 116 7.46 1,754 132 7.51 State, county and municipal 756 83 11.00 960 104 10.81 - ------------------------------------------------------------------------ ------------------------ Total investment securities 2,301 199 8.63 2,714 236 8.68 - ------------------------------------------------------------------------- ------------------------ Loans (a) (b) (d) Commercial Commercial, financial and agricultural 26,514 2,016 7.61 25,347 1,971 7.78 Real estate - construction and other 2,695 229 8.49 2,973 255 8.58 Real estate - mortgage 9,188 793 8.63 9,929 843 8.49 Lease financing 3,844 397 10.31 2,742 242 8.83 Foreign 1,228 77 6.31 757 47 6.24 - ------------------------------------------------------------------------ ----------------------- Total commercial 43,469 3,512 8.08 41,748 3,358 8.04 - ------------------------------------------------------------------------- ------------------------ Retail Real estate - mortgage 26,984 2,115 7.84 27,652 2,143 7.75 Installment loans - Bankcard (c) 5,330 820 15.38 4,922 665 13.51 Installment loans - other and Vehicle leasing 24,646 2,358 9.57 22,859 2,176 9.52 - ------------------------------------------------------------------------ ------------------------ Total retail 56,960 5,293 9.29 55,433 4,984 8.99 - ------------------------------------------------------------------------- ------------------------ Total loans 100,429 8,805 8.77 97,181 8,342 8.58 - ------------------------------------------------------------------------- ------------------------ Total earning assets 133,503 11,009 8.25 130,861 10,552 8.06 ========================= ================ Cash and due from banks 5,871 5,775 Other assets 11,001 8,855 - ------------------------------------------------------------ Total assets $ 150,375 $ 145,491 ============================================================= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Savings and NOW accounts 29,072 850 2.92 27,359 732 2.68 Money market accounts 14,958 457 3.06 14,593 422 2.89 Other consumer time 31,269 1,631 5.22 33,159 1,732 5.22 Foreign 1,785 99 5.53 2,273 119 5.25 Other time 3,607 227 6.28 3,252 185 5.69 - ------------------------------------------------------------------------- ------------------------ Total interest-bearing deposits 80,691 3,264 4.04 80,636 3,190 3.96 Federal funds purchased and securities sold under repurchase agreements 21,272 1,067 5.01 21,194 1,051 4.96 Commercial paper 1,034 61 5.90 903 46 5.08 Other short-term borrowings 4,666 280 6.01 3,853 215 5.58 Long-term debt 7,942 518 6.52 7,860 493 6.28 - ------------------------------------------------------------------------- ------------------------ Total interest-bearing liabilities 115,605 5,190 4.49 114,446 4,995 4.36 ====================== =============== Noninterest-bearing deposits 19,189 18,273 Other liabilities 3,534 2,710 Guaranteed preferred beneficial interests 971 47 Stockholders' equity 11,076 10,015 - ------------------------------------------------------------- ----------- Total liabilities and stockholders' equity $ 150,375 $ 145,491 ============================================================= =========== Interest income and rate earned $ 11,009 8.25% $ 10,552 8.06% Interest expense and equivalent rate paid 5,190 3.89 4,995 3.81 - ---------------------------------------------------------------------------------------- --------------------- Net interest income and margin $ 5,819 4.36% $ 5,557 4.25% ======================================================================================== ====================
(a) Yields related to securities and loans exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and state tax rates of 7.5 percent in 1997, 7.75 percent in 1995 and 1996, 7.8275 percent in 1994, and 7.905 percent in 1993 in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in 1995 through 1997, and 10.25 percent in 1993 and 1994 in Washington, D.C.; 4.87 percent in 1996 and 1997 in Delaware; 6.5 percent in 1996 and 1997 in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in Connecticut. Lease financing amounts include related deferred income taxes. T-23
FINANCIAL TABLES ------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED 1995 YEAR ENDED 1994 YEAR ENDED 1993 ------------------------------------------ ----------------------------------------------- ---------------------------------- Average Average Average Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balances Expense Paid Balances Expense Paid Balances Expense Paid ------------------------------------------------------------------------------------------------------------------------------- $ 510 28 5.49% $ 1,273 65 5.11% $ 2,008 88 4.36% 2,909 170 5.83 1,391 57 4.09 1,045 33 3.15 2,014 127 6.33 1,154 68 5.87 1,075 48 4.43 12,939 845 6.53 13,542 750 5.54 8,327 418 5.02 6,353 432 6.81 5,912 355 6.01 11,147 701 6.29 1,488 163 10.94 1,806 202 11.21 1,720 198 11.51 ----------------------- ------------------------ ----------------------- 7,841 595 7.59 7,718 557 7.23 12,867 899 6.99 ----------------------- ------------------------ ----------------------- 24,675 1,960 7.94 19,797 1,549 7.82 17,631 1,364 7.73 2,491 234 9.39 1,980 154 7.77 2,543 152 5.98 10,279 917 8.92 9,441 766 8.12 8,475 661 7.80 2,076 176 8.48 861 77 8.90 793 77 9.69 619 44 7.04 548 30 5.40 385 18 4.85 ----------------------- ------------------------ ----------------------- 40,140 3,331 8.30 32,627 2,576 7.89 29,827 2,272 7.62 ----------------------- ------------------------ ----------------------- 23,696 1,811 7.64 19,172 1,407 7.34 14,864 1,168 7.86 4,960 701 14.12 2,949 416 14.09 2,129 325 15.24 21,182 2,061 9.73 15,978 1,456 9.12 16,176 1,485 9.18 ----------------------- ------------------------ ----------------------- 49,838 4,573 9.17 38,099 3,279 8.61 33,169 2,978 8.98 ----------------------- ------------------------ ----------------------- 89,978 7,904 8.78 70,726 5,855 8.28 62,996 5,250 8.33 ----------------------- ------------------------ ----------------------- 116,191 9,669 8.32 95,804 7,352 7.67 88,318 6,736 7.63 ======================== ========================= ====================== 5,527 4,862 5,093 7,558 5,747 6,199 ----------- ----------- ----------- $ 129,276 $ 106,413 $ 99,610 =========== =========== =========== 25,364 663 2.62 21,786 464 2.13 18,858 408 2.16 14,631 435 2.98 14,620 352 2.41 14,264 328 2.30 31,634 1,620 5.12 25,216 1,042 4.13 26,444 1,091 4.13 3,195 184 5.77 1,969 91 4.61 798 28 3.48 2,768 173 6.24 1,963 97 4.95 2,078 89 4.30 ----------------------- ------------------------ ----------------------- 77,592 3,075 3.96 65,554 2,046 3.12 62,442 1,944 3.11 12,396 706 5.69 8,869 382 4.31 8,207 295 3.59 1,053 60 5.71 849 35 4.15 484 13 2.64 2,878 176 6.11 1,463 79 5.36 810 32 3.93 6,072 407 6.71 4,009 251 6.26 3,598 198 5.51 ----------------------- ------------------------ ----------------------- 99,991 4,424 4.42 80,744 2,793 3.46 75,541 2,482 3.29 ========================= ========================= ====================== 17,050 15,206 14,388 2,821 2,190 2,379 - - - 9,414 8,273 7,302 ----------- ----------- ----------- $ 129,276 $ 106,413 $ 99,610 ============= ============ =========== $ 9,669 8.32% $ 7,352 7.67% $ 6,736 7.63% 4,424 3.81 2,793 2.92 2,482 2.81 ---------------------- ---------------------- ------------------- $ 5,245 4.51% $ 4,559 4.75% $ 4,254 4.82% ======================== ========================== ======================
(b) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. (c) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts for all years. (d) Tax-equivalent adjustments included in trading account assets, securities available for sale, investment securities, commercial, financial and agricultural loans, and lease financing are (in millions) $3, $11, $28, $29 and $5, respectively, in 1997; and $10, $14, $36, $29 and $3, respectively, in 1996. T-24 STATEMENT OF FINANCIAL RESPONSIBILITY FIRST UNION CORPORATION AND SUBSIDIARIES MANAGEMENT'S STATEMENT OF RESPONSIBILITY - -------------------------------------------------------------------------------- Management of First Union Corporation and its subsidiaries (the "Corporation") is committed to the highest standards of quality customer service and the enhancement of stockholder value. Management expects the Corporation's employees to respect its customers and to assign the highest priority to customer needs. The accompanying consolidated financial statements were prepared in conformity with generally accepted accounting principles and include, as necessary, best estimates and judgments by management. Other financial information contained in this annual report is presented on a basis consistent with the consolidated financial statements unless otherwise indicated. To ensure the integrity, objectivity and fairness of the information in these consolidated financial statements, management of the Corporation has established and maintains internal control supplemented by a program of internal audits. The internal control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed, recorded and reported in accordance with management's intentions and authorizations and to comply with applicable laws and regulations. To enhance the reliability of internal control, management recruits and trains highly qualified personnel, and maintains sound risk management practices. The consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, in accordance with generally accepted auditing standards. KPMG Peat Marwick LLP reviews the results of its audit with both management and the Audit Committee of the Board of Directors of the Corporation. The Audit Committee, composed entirely of outside directors, meets periodically with management, internal auditors and KPMG Peat Marwick LLP to determine that each is fulfilling its responsibilities and to support actions to identify, measure and control risks and augment internal controls. Edward E. Crutchfield Chairman and Chief Executive Officer Robert T. Atwood Executive Vice President and Chief Financial Officer January 21, 1998 C-1 INDEPENDENT AUDITOR'S REPORT FIRST UNION CORPORATION AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- Board of Directors and Stockholders First Union Corporation We have audited the consolidated balance sheets of First Union Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Union Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Charlotte, North Carolina January 21, 1998 C-2
AUDITED FINANCIAL STATEMENTS FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------------------------------------------------- December 31, ------------------------ (In millions, except per share data) 1997 1996 - ---------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 6,445 7,076 Interest-bearing bank balances 710 319 Federal funds sold and securities purchased under resale agreements 7,740 7,802 - -------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 14,895 15,197 - -------------------------------------------------------------------------------------------------------- Trading account assets 5,457 4,480 Securities available for sale (amortized cost $21,020 in 1997; $16,799 in 1996) 21,415 16,805 Investment securities (market value $2,322 in 1997; $2,636 in 1996) 2,175 2,501 Loans, net of unearned income ($3,386 in 1997; $2,431 in 1996) 96,873 102,316 Allowance for loan losses (1,212) (1,502) - -------------------------------------------------------------------------------------------------------- Loans, net 95,661 100,814 - -------------------------------------------------------------------------------------------------------- Premises and equipment 4,233 4,257 Due from customers on acceptances 854 764 Other intangible assets 2,674 2,905 Other assets 9,910 4,124 - -------------------------------------------------------------------------------------------------------- Total assets $ 157,274 151,847 ========================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 21,753 20,383 Interest-bearing deposits 81,136 82,319 - -------------------------------------------------------------------------------------------------------- Total deposits 102,889 102,702 Short-term borrowings 27,357 24,987 Bank acceptances outstanding 855 765 Other liabilities 5,108 3,906 Long-term debt 8,042 8,060 - -------------------------------------------------------------------------------------------------------- Total liabilities 144,251 140,420 - -------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 991 495 - -------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock -- -- Common stock, $3.33-1/3 par value; authorized 750,000,000 shares, outstanding 636,393,722 shares in 1997; 640,781,862 shares in 1996 2,121 2,136 Paid-in capital 1,384 1,668 Retained earnings 8,273 7,126 Unrealized gain on debt and equity securities, net 254 2 - -------------------------------------------------------------------------------------------------------- Total stockholders' equity 12,032 10,932 - -------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 157,274 151,847 ========================================================================================================
See accompanying Notes to Consolidated Financial Statements C-3
AUDITED FINANCIAL STATEMENTS FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - ---------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------- (In millions, except per share data) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 8,771 8,310 7,866 Interest and dividends on securities available for sale 1,267 1,282 833 Interest and dividends on investment securities Taxable income 114 130 416 Nontaxable income 57 70 118 Trading account interest 315 302 122 Other interest income 409 366 198 - ------------------------------------------------------------------------------------------------------------------------------- Total interest income 10,933 10,460 9,553 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 3,264 3,190 3,075 Interest on short-term borrowings 1,408 1,312 942 Interest on long-term debt 518 493 407 - ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 5,190 4,995 4,424 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income 5,743 5,465 5,129 Provision for loan losses 840 449 259 - ------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 4,903 5,016 4,870 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trading account profits 204 131 81 Service charges on deposit accounts 854 734 684 Mortgage banking income 247 194 180 Capital management income 882 607 461 Securities available for sale transactions 31 36 45 Investment security transactions 3 4 6 Fees for other banking services 151 172 172 Equipment lease rental income 187 112 32 Sundry income 837 646 515 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 3,396 2,636 2,176 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,221 1,994 1,811 Other benefits 495 457 396 - ------------------------------------------------------------------------------------------------------------------------------- Personnel expense 2,716 2,451 2,207 Occupancy 401 389 394 Equipment 524 448 352 Advertising 103 61 90 Telecommunications 121 113 101 Travel 110 99 84 Postage, printing and supplies 170 178 161 FDIC assessment 23 41 129 Professional fees 134 102 196 External data processing 94 146 101 Other intangible amortization 277 250 235 Merger-related and restructuring charges 269 281 94 SAIF special assessment - 135 - Sundry expense 647 459 513 - ------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 5,589 5,153 4,657 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,710 2,499 2,389 Income taxes 814 875 848 - ------------------------------------------------------------------------------------------------------------------------------- Net income 1,896 1,624 1,541 Dividends on preferred stock - 9 26 - ------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 1,896 1,615 1,515 =============================================================================================================================== PER COMMON SHARE DATA Basic earnings $ 3.03 2.61 2.44 Diluted earnings 2.99 2.58 2.38 Cash dividends $ 1.22 1.10 0.98 AVERAGE COMMON SHARES (In thousands) Basic 625,649 619,237 619,777 Diluted 633,772 625,224 637,186 ===============================================================================================================================
See accompanying Notes to Consolidated Financial Statements. C-4
AUDITED FINANCIAL STATEMENTS FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Unrealized Gain (Loss) on (Shares in thousands, Preferred Stock Common Stock Paid-in Retained Debt and ---------------------------------------------- Equity dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994, as originally reported 5,213 $ 230 285,361 $ 951 2,361 5,022 (290) 8,274 Common stock issued in 1997 two-for-one stock split - - 285,361 951 (951) - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994, as restated 5,213 230 570,722 1,902 1,410 5,022 (290) 8,274 Stockholders' equity of pooled bank not restated prior to 1995 - - 64,501 215 277 641 (22) 1,111 Net income - - - - - 1,541 - 1,541 Purchase of common stock primarily for acquisitions - - (51,154) (171) (1,037) - - (1,208) Common stock issued for stock options exercised - - 13,791 46 215 (51) - 210 Common stock issued through dividend reinvestment plan - - 2,368 7 44 1 - 52 Common stock issued for purchase accounting acquisitions - - 25,090 84 527 - - 611 Converted preferred stock (1,574) (40) 3,316 12 53 (25) - - Pre-merger transactions of pooled bank (251) (7) (7,812) (26) (161) (383) - (577) Cash dividends paid by First Union Corporation 8.90% per Series 1990 preferred share - - - - - (7) - (7) $0.98 per common share - - - - - (336) - (336) Acquired banks Preferred shares - - - - - (19) - (19) Common shares - - - - - (213) - (213) Unrealized gain on debt and equity securities - - - - - - 468 468 ==================================================================================================================================== Balance, December 31, 1995 3,388 183 620,822 2,069 1,328 6,171 156 9,907 Net income - - - - - 1,624 - 1,624 Redemption of preferred stock (433) (109) - - - - - (109) Purchase of common stock primarily for purchase accounting acquisitions - - (30,568) (100) (868) - - (968) Common stock issued for stock options exercised - - 10,930 36 217 - - 253 Common stock issued through dividend reinvestment plan - - 1,380 5 35 - - 40 Common stock issued for purchase accounting acquisitions - - 31,994 106 902 - - 1,008 Converted preferred stock (2,955) (74) 6,224 20 54 - - - Cash dividends paid by First Union Corporation Preferred shares - - - - - (9) - (9) $1.10 per common share - - - - - (611) - (611) Acquired bank Common shares - - - - - (49) - (49) Unrealized loss on debt and equity securities - - - - - - (154) (154) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 - - 640,782 2,136 1,668 7,126 2 10,932 - ------------------------------------------------------------------------------------------------------------------------------------
C-5 AUDITED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------------------- Unrealized Gain (Loss) on Debt and (Shares in thousands, Preferred Stock Common Stock Paid-in Retained Equity ------------------- --------------------- dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 - - 640,782 2,136 1,668 7,126 2 10,932 Net income - - - - - 1,896 - 1,896 Purchase of common stock - - (23,973) (80) (944) - - (1,024) Common stock issued for stock options exercised - - 11,344 38 301 - - 339 Common stock issued through dividend reinvestment plan - - 624 2 23 - - 25 Common stock issued through public offerings - - 7,500 25 333 - - 358 Common stock issued for purchase accounting acquisitions - - 117 - 3 - - 3 Cash dividends paid by First Union Corporation $1.22 per common share - - - - - (711) - (711) Acquired bank Common shares - - - - - (38) - (38) Unrealized gain on debt and equity securities - - - - - - 252 252 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 - $ - 636,394 $ 2,121 1,384 8,273 254 12,032 ==================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. C-6
AUDITED FINANCIAL STATEMENTS FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------ (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 1,896 1,624 1,541 Adjustments to reconcile net income to net cash provided (used) by operating activities Accretion and amortization of securities discounts and premiums, net 40 37 (34) Provision for loan losses 840 449 259 Provision for foreclosed properties 2 (1) (3) Gain on sale of mortgage servicing rights (1) (49) (1) Securities available for sale transactions (31) (36) (45) Investment security transactions (3) (4) (5) Depreciation and amortization 795 668 582 Deferred income taxes 545 540 396 Trading account assets, net (977) (2,092) (677) Mortgage loans held for resale (568) (102) (386) (Gain) loss on sales of premises and equipment 5 (3) 11 Gain on sale of segregated assets (7) (12) (18) Other assets, net (797) 1,021 186 Other liabilities, net 657 (254) 102 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,396 1,786 1,908 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 9,121 19,953 8,943 Maturities of securities available for sale 1,471 3,307 2,294 Purchases of securities available for sale (14,806) (18,059) (10,089) Calls and underdeliveries of investment securities 4 10 33 Maturities of investment securities 505 803 2,640 Purchases of investment securities (190) (172) (3,668) Origination of loans, net 1,688 (1,816) (6,697) Sales of premises and equipment 160 60 47 Purchases of premises and equipment (558) (1,047) (667) Other intangible assets, net (44) (18) (72) Purchase of bank-owned separate account life insurance (2,011) - - Cash equivalents acquired, net of purchases of banking organizations 6 (484) 2,527 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities (4,654) 2,537 (4,709) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase (decrease) in cash realized from Purchases (sales) of deposits, net 160 (2,593) (3,230) Securities sold under repurchase agreements and other short-term borrowings, net 2,370 2,423 6,983 Issuance of guaranteed preferred beneficial interests 495 495 - Issuances of long-term debt 1,148 1,817 3,346 Increase in long-term debt due to a spin-off of an acquired company - - 1,388 Payments of long-term debt (1,166) (1,421) (777) Sales of common stock 722 293 262 Purchases of preferred stock - - (7) Redemption of preferred stock - (109) - Purchases of common stock (1,024) (968) (1,208) Cash dividends paid (749) (669) (575) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 1,956 (732) 6,182 - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents (302) 3,591 3,381 Cash and cash equivalents, beginning of year 15,197 11,606 8,225 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 14,895 15,197 11,606 - ------------------------------------------------------------------------------------------------------------------------------------ CASH PAID FOR Interest $ 5,960 5,040 4,338 Income taxes 308 242 471 NONCASH ITEMS Increase in securities available for sale - 289 6,983 Decrease in investment securities - - (6,304) Increase in other assets - - 15 Increase in assets available for sale and a decrease in loans 3,200 - - Increase in foreclosed properties and a decrease in loans 8 39 67 Conversion of preferred stock to common stock - 74 40 Issuance of common stock for purchase accounting acquisitions 3 1,008 611 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Securities available for sale 389 (262) 664 Other assets (deferred income taxes) $ 137 (108) 196 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. C-7 AUDITED FINANCIAL STATEMENTS FIRST UNION CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL First Union Corporation (the "Parent Company") is a bank holding company whose principal wholly owned subsidiaries are national banking associations using the name First Union National Bank; First Union Capital Markets Corp., an investment banking firm; First Union Mortgage Corporation, a mortgage banking firm; First Union Brokerage Services, Inc., a securities brokerage firm; and certain business trusts as more fully described in Note 11. The accounting and reporting policies of First Union Corporation and subsidiaries (the "Corporation") are in accordance with generally accepted accounting principles and conform to general practices within the banking, investment banking and mortgage banking industries. The consolidated financial statements include accounts of the Parent Company and all its subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The Corporation is a diversified financial services company with principal operations in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. Its foreign banking operations are immaterial. Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from banks, interest-bearing bank balances and federal funds sold and securities purchased under resale agreements. Generally, both cash and cash equivalents are considered to have maturities of three months or less, and accordingly, the carrying amount of such instruments is deemed to be a reasonable estimate of fair value. SECURITIES The classification of securities is determined at the date of commitment or purchase. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis. Trading account assets, primarily debt securities, and trading derivatives, which include interest rate futures, options, caps, floors and forward contracts, are recorded at market value. Included in noninterest income are realized and unrealized gains and losses resulting from such market value adjustments and from recording the results of sales of trading account securities. Securities available for sale, primarily debt securities, are recorded at market value with a corresponding adjustment net of tax recorded as a component of stockholders' equity. Securities available for sale are used as a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk and other factors. Investment securities, primarily debt securities, are stated at cost, net of the amortization of premium and the accretion of discount. The Corporation intends and has the ability to hold such securities until maturity. The market value of securities, including securities sold not owned, is generally based on quoted market prices or dealer quotes. If a quoted market price is not available, market value is estimated using quoted market prices for similar securities. INTEREST RATE SWAPS, FLOORS AND CAPS The Corporation uses interest rate swaps, floors and caps for interest rate risk management, in connection with providing risk management services to customers and for trading for its own account. Interest rate swaps, floors and caps used to achieve interest rate risk management objectives are designated as hedges of specific assets and liabilities. The net interest payable or receivable on swaps, floors and caps is accrued and recognized as an adjustment to interest income or interest expense of the related asset or liability. Premiums paid for purchased floors and caps are amortized over the term of the floors and caps as a yield adjustment of the related asset or liability. Floors and caps are written only to adjust the amount or term of purchased floors and caps to more effectively reduce interest rate risk, and a net written position is not created. Premiums received on floors and caps offset the premium paid on the floors and caps they adjust. On the early termination of swaps, floors and caps, the net proceeds received or paid, including premiums, are deferred and included in other assets or liabilities, and they are amortized over the shorter of the remaining contract life or the maturity of the related asset or liability. C-8 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- On disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any deferred amount is recognized in earnings. Additionally, the fair value of the swap, floor and cap agreements, and changes in fair value as a result of changes in market interest rates, are not recognized in the consolidated financial statements. These hedges are designed to be effective hedges of the hedged items, and if determined to be ineffective, they are recorded at market value. The rate indices specified in the floors and caps have been, and they are expected to be, highly correlated with the interest rates of the hedged items. Interest rate swaps, floors and caps entered into for trading purposes and sold to customers are recorded at market value with both realized and unrealized gains and losses recognized as trading profits. The fair value of these financial instruments represents the estimated amount the Corporation would receive or pay to terminate the contracts or agreements, and it is determined using a valuation model that considers current market yields, quoted prices and other relevant variables. INTEREST RATE FUTURES, FORWARD AND OPTION CONTRACTS The Corporation uses interest rate futures, forward and option contracts for interest rate risk management and in connection with hedging interest rate products sold to customers. Interest rate futures and option contracts are used to hedge interest rate risk arising from specific financial instruments. Gains and losses on interest rate futures are (i) deferred and included in the carrying value of the related assets or liabilities, and (ii) amortized over the estimated lives of those assets and liabilities as a yield adjustment. Premiums paid for option contracts are included in other assets, and they are amortized over the option term as a yield adjustment of the related asset or liability. On the early termination of futures contracts, the deferred amounts are amortized over the remaining maturity of the related asset or liability. On disposition or settlement of the asset or liability being hedged, deferral accounting is discontinued and any deferred amount is recognized in earnings. Additionally, interest rate futures and forwards that are designed as hedges are expected to reduce overall interest rate risk, and they have been, and they are expected to be, highly correlated with the interest rate risk of the hedged items. Interest rate futures and forwards that do not reduce overall interest rate risk or that are not highly correlated are recorded at market value. Interest rate futures, forward and option contracts used to hedge risk management products sold to customers are recorded at market value, and both the realized and unrealized gains and losses are recognized as trading profits. The market value of these financial instruments is based on dealer or exchange quotes. LOANS Commercial, financial and agricultural loans include industrial revenue bonds, highly leveraged transaction loans and certain other loans that are made primarily on the strength of the borrower's general credit standing and ability to generate repayment cash flows from income sources even though such bonds and loans may be secured by real estate or other assets. Commercial real estate construction and mortgage loans represent interim and permanent financing of commercial properties that are secured by real estate. Retail real estate mortgage loans represent 1-4 family first mortgage loans. Bankcard installment loans include credit card, instant cash reserve, signature and First Choice unsecured revolving lines of credit. Retail installment loans represent all other consumer loans, including home equity and second mortgage loans. Mortgage notes held for sale are valued at the lower of cost or market value as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis. Gains or losses resulting from sales of mortgage loans are recognized when the proceeds are received from investors. In many lending transactions, collateral is taken to provide an additional measure of security. Generally, the cash flow or earning power of the borrower represents the primary source of repayment, and collateral liquidation is a secondary source of repayment. The Corporation determines the need for collateral on a case-by-case or product-by-product basis. Factors considered include the current and prospective creditworthiness of the customer, terms of the instrument and economic conditions. Unearned income is generally accreted to interest income using the constant yield method. Interest income is recorded on an accrual basis. A loan is considered to be impaired when based on current information, it is probable the Corporation will not receive all amounts due in accordance with the contractual terms of a loan agreement. Discounted cash flows using stated loan rates or the estimated collateral fair value are used in determining the value of impaired loans. C-9 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then they are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement. A loan is also considered impaired if its terms are modified in a troubled debt restructuring after January 1, 1995. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting. As of December 31, 1997 and 1996, there were no accruing impaired loans. The accrual of interest is generally discontinued on all loans, except consumer loans, that become 90 days past due as to principal or interest unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Generally, loans past due 180 days or more are placed on nonaccrual status regardless of security. Consumer loans and bankcard products that become approximately 120 days and 180 days past due, respectively, are generally charged to the allowance for loan losses. When borrowers demonstrate over an extended period the ability to repay a loan in accordance with the contractual terms of a loan the Corporation has classified as nonaccrual, such loan is returned to accrual status. Fair values are estimated for loans with similar financial characteristics. These loans are segregated by type of loan, considering credit risk and prepayment characteristics. Each loan category is further segmented into fixed and adjustable rate categories. The fair values of performing loans for all portfolios are calculated by discounting estimated cash flows through expected maturity dates. These cash flows are discounted using estimated market yields that reflect the credit and interest rate risks inherent in each category of loans. Such market yields also reflect a component for the estimated cost of servicing the portfolio. A prepayment assumption is used as an estimate of the number of loans that will be repaid prior to their scheduled maturity. For performing residential mortgage loans, fair values are estimated using a discounted cash flow analysis utilizing yields of comparable mortgage-backed securities. The loan portfolio is segmented into homogeneous pools based on loan types, coupon rates, maturities, prepayment characteristics and credit risk. These pools are compared with similar mortgage-backed securities to arrive at an appropriate discount rate; whole loan liquidity and risk characteristics are considered within the comparison. The fair value of nonperforming loans is calculated by estimating the timing and amount of cash flows. These cash flows are discounted using estimated market yields commensurate with the risk associated with such cash flows. Estimates of cash flows are made using knowledge of the borrower and available market data. The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Generally, for fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of commitments and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is the amount considered adequate to provide for potential losses in the portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, recent loss experience, current economic conditions, the risk characteristics of the various classifications of loans, the fair value of underlying collateral and other factors. Management believes the allowances for losses on loans and real estate owned are adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowances may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's bank subsidiaries' allowances for losses on loans and real estate owned. Such agencies may require such subsidiaries to recognize changes to the allowances based on their judgments about information available to them at the time of their examination. C-10 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis for financial purposes and on straight-line and accelerated bases for tax purposes, using estimated lives generally as follows: buildings, 10 to 50 years; furniture and equipment, 3 to 10 years; and leasehold improvements and capitalized leases, over the lives of the respective leases. INTANGIBLE ASSETS Generally, goodwill is amortized on a straight-line basis over periods ranging from 15 to 25 years. The Corporation's unamortized goodwill is periodically reviewed to ensure that there are no conditions which exist indicating that the recorded amount of goodwill is not recoverable from future undiscounted cash flows. The review process includes an evaluation of the earnings history of each subsidiary, its contribution to the Corporation, capital levels and other factors. If events or changes in circumstances indicate further evaluation is warranted, the undiscounted net cash flows of the operations to which goodwill relates are estimated. If the estimated undiscounted net cash flows are less than the carrying amount of goodwill, a loss is recognized to reduce goodwill's carrying value to fair value, and when appropriate, the amortization period is also reduced. Unamortized goodwill associated with disposed assets is charged to current earnings. Credit card premiums are amortized principally over the estimated period of benefit not to exceed 10 years using the sum-of-the-years' digits method. Deposit base premiums are amortized principally over a 10-year period using accelerated methods. Annually, the fair value of the unamortized balance of such premiums is estimated on a discounted cash flow basis, and if such value is less than such balance, the difference is charged to noninterest expense. FORECLOSED PROPERTIES Foreclosed properties are included in other assets, and they represent other real estate that has been acquired through loan or in-substance foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised annually, and they are recorded at the lower of cost or fair value less estimated selling costs. When appropriate, adjustments to cost are charged or credited to the allowance for foreclosed properties. TRANSFERS AND SERVICING OF FINANCIAL ASSETS The Corporation records the securitization or transfer of assets as sales when the assets securitized or transferred have been isolated from the Corporation and the transferee obtains the unconditional right to pledge or exchange the assets, or the transferee is a qualifying special purpose entity. Transfers not meeting these criteria are generally treated as secured borrowings. Gains or losses on the securitization or transfer of assets determined to be sales are based on the fair value of the assets obtained and liabilities assumed less the carrying value of the assets sold. Any servicing assets or other interests retained remain on the balance sheet at their allocated carrying value based on relative fair value. Servicing assets purchased are initially recorded at fair value. Gains or losses resulting from the securitization or transfer of assets are recorded in noninterest income. Retained residual interests subject to prepayment risk are recorded as trading account assets or as securities available for sale. Servicing assets and liabilities are included in other assets and other liabilities, and they are amortized to noninterest income in proportion to net servicing income. Servicing assets are evaluated for impairment based on the fair value of those assets. Fair values are estimated based on market prices for similar servicing assets and on the discounted estimated future net cash flows based on market consensus loan prepayment estimates, historical prepayment rates, interest rates, and other economic factors. For purposes of impairment evaluation, the servicing assets are stratified based on predominant risk characteristics of the underlying loans, including loan type (conventional or government), amortization type (fixed or adjustable), note rate, and in certain instances, period of origination. To the extent the carrying value of the servicing asset exceeds fair value by individual stratum, a valuation allowance is established. Servicing assets amounted to $421 million and $282 million at December 31, 1997 and 1996, respectively. PENSION AND SAVINGS PLANS Substantially all employees with one year of service are eligible for participation in a non-contributory, defined benefit pension plan and a matching savings plan. Pension cost is determined annually by an actuarial valuation, which includes service costs for the current year and amortization of amounts related to prior years. The Corporation's funding policy is to contribute to the pension plan the amount required to fund the benefits expected to be earned for the current year and to amortize amounts related to prior years using the projected unit credit valuation method. The difference between the pension cost included in current income and the funded amount is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated annually. C-11 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The matching savings plan permits eligible employees to make basic contributions to the plan of up to six percent of base compensation and supplemental contributions of up to nine percent of base compensation. Annually, on approval of the Board of Directors, employee basic contributions may be matched up to six percent of the employee's base compensation. INCOME TAXES The operating results of the Parent Company and its eligible subsidiaries are included in a consolidated federal income tax return. Each subsidiary pays its allocation of federal income taxes to the Parent Company or receives payment from the Parent Company to the extent tax benefits are realized. Where state income tax laws do not permit consolidated income tax returns, applicable state income tax returns are filed. INCOME PER COMMON SHARE Basic earnings per share is computed by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing such net income by the sum of such weighted average number of shares and the potentially dilutive shares, including restricted stock awards, that could occur through the issuance of common stock options or convertible securities. - -------------------------------------------------------------------------------- NOTE 2: ACQUISITIONS On November 28, 1997, the Corporation acquired Signet Banking Corporation ("Signet"), a bank holding company based in Virginia. The merger was accounted for as a pooling of interests, and accordingly, all historical financial information for the Corporation has been restated to include Signet historical information for all periods presented herein. At September 30, 1997, Signet had assets of $11 billion, net loans of $7 billion, deposits of $8 billion and net income applicable to common stockholders of $73 million. As a result of the merger, each of the 61 million net outstanding shares of Signet common stock was converted into 1.10 shares of the Corporation's common stock and common stock equivalents, except that cash was paid for fractional share interests. Additionally, merger-related and restructuring charges associated with the Signet merger of $269 million ($194 million after tax) are included as a component of noninterest expense in 1997. The remaining unpaid balance of the initial accrual of $269 million is $169 million at December 31, 1997. The remaining restructuring charges will be paid primarily in 1998, and they include $17 million of noncash charges. At December 31, 1997, the Corporation had two pending acquisitions, both of which were consummated in January 1998. The first relates to the purchase accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which at December 31, 1997, had assets of $415 million, for 1.6 million shares of the Corporation's common stock, substantially all of which were repurchased in the open market at a cost of $79 million. The second relates to the pooling of interests accounting acquisition of Wheat First Butcher Singer, Inc. ("Wheat First"), which at December 31, 1997 had assets of $1 billion and stockholders' equity of $171 million for 10.3 million shares of the Corporation's common stock. Financial information related to Wheat First is not considered material to the historical results of the Corporation, and accordingly, the Corporation's financial statements will not be restated. The Corporation entered into an Agreement and Plan of Mergers on November 18, 1997, providing for the pooling of interests acquisition of CoreStates Financial Corp ("CoreStates"), a multi-bank holding company based in Pennsylvania, and for the exchange of 1.62 shares of the Corporation's common stock for each share of CoreStates common stock, subject to increase under certain circumstances. The Corporation expects to take an after-tax, merger-related and restructuring charge of $795 million in 1998. Additionally, the Corporation expects to consummate the merger in the first half of 1998, subject to regulatory approvals and other conditions of closing. At December 31, 1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and net income applicable to common stockholders of $813 million. Certain pro forma financial information related to the Corporation and CoreStates and which does not include information related to Covenant or Wheat First follows. C-12 AUDITED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Years Ended December 31, ------------------------------------- (In millions, except per share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- (Unaudited) Interest income $ 14,362 13,758 13,028 Interest expense 6,452 6,151 5,732 Provision for loan losses 1,103 678 403 Noninterest income 4,322 3,535 3,058 Noninterest expense 7,336 6,930 6,542 Income taxes 1,084 1,261 1,213 - ----------------------------------------------------------------------------------------------------- Net income 2,709 2,273 2,196 Dividends on preferred stock - 9 26 - ----------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 2,709 2,264 2,170 ===================================================================================================== Basic earning per share $ 2.84 2.33 2.21 Diluted earning per share $ 2.80 2.30 2.17 ===================================================================================================== Assets $ 205,735 197,341 188,855 Loans, net of unearned income 131,687 134,647 127,905 Deposits 137,077 136,429 134,112 Stockholders' equity $ 15,269 14,628 13,783 =====================================================================================================
On January 1, 1996, the Corporation acquired First Fidelity Bancorporation ("First Fidelity"), a multi-bank holding company based in New Jersey. The merger was accounted for as a pooling of interests, and accordingly, all historical financial information for the Corporation has been restated to include First Fidelity historical information for all periods presented herein. At December 31, 1995, First Fidelity had assets of $35 billion, net loans of $25 billion, deposits of $28 billion and net income applicable to common stockholders of $398 million. As a result of the merger, each of the 79 million net outstanding shares of First Fidelity common stock was converted into 1.35 shares of the Corporation's common stock and common stock equivalents, except that cash was paid for fractional share interests. In addition, the 3 million net outstanding shares of First Fidelity Series B Convertible Preferred Stock were converted into a like number of shares of the Corporation's Series B Convertible Class A Preferred Stock (the "Series B Stock") having substantially identical terms as the First Fidelity Series B, the 350,000 outstanding shares of First Fidelity Series D Adjustable Rate Cumulative Preferred Stock were converted into a like number of shares of the Corporation's Series D Adjustable Rate Cumulative Class A Preferred Stock (the "Series D Stock") having substantially identical terms as the First Fidelity Series D, and the 3 million net outstanding First Fidelity Depository Receipts (each representing a 1/40th interest in a share of First Fidelity Series F 10.64% Preferred Stock (74,130 net outstanding shares) were converted into a like number of the Corporation's Depository Receipts (each representing a 1/40th interest in the Corporation's Series F 10.64% Class A Preferred Stock (the "Series F Stock") having substantially identical terms as the First Fidelity Series F. See Note 12 for information related to the redemption of the Series B Stock, the Series D Stock and the Series F Stock. Additionally, merger-related and restructuring charges associated with the First Fidelity merger of $281 million ($181 million after tax) and $94 million ($73 million after tax) are included as a component of noninterest expense in 1996 and 1995, respectively. The remaining unpaid balance of the initial accrual of $375 million was $29 million at December 31, 1996 , and it was paid in 1997. In 1996, various banking subsidiaries of the Parent Company also acquired twelve financial institutions and certain other assets which in the aggregate amounted to the addition of $7.8 billion in assets, $4.8 billion in net loans and $5.1 billion in deposits. The purchase method of accounting, which requires (i) no restatement of the Corporation's historical financial statements, and (ii) the inclusion of the acquired company's financial information on a fair value basis only from the date of consummation, was used in these transactions. With respect to these transactions, the Parent Company issued 32 million shares of its common stock in exchange for the common stock of certain of the acquired financial institutions, and it paid cash for the other financial institutions and assets, which in the aggregate amounted to $1.1 billion. These transactions resulted in an increase to stockholders' equity of $1.0 billion, and the increase was reduced by the Parent Company's purchase in the open market of 24 million shares of its common stock for $764 million in 1996. These transactions also resulted in an increase in goodwill of $595 million, which will be amortized on a straight-line basis over 25 years, and in deposit base premium of $70 million, which will be amortized on an accelerated basis over 10 years. C-13 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3: SECURITIES AVAILABLE FOR SALE
December 31, 1997 --------------------------------------------------------------------------------------------- 1 Year 1-5 5-10 After 10 Gross Unrealized Amortized -------------------- (In millions) or Less Years Years Years Total Gains Losses Cost - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 175 785 1,420 178 2,558 (116) - 2,442 U.S. Government agencies 1 5,542 7,702 4 13,249 (232) 3 13,020 Collateralized mortgage obligations 317 1,794 142 - 2,253 (25) 7 2,235 State, county and municipal 6 3 20 63 92 - - 92 Other 83 2,147 176 857 3,263 (42) 10 3,231 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020 ================================================================================================================================== MARKET VALUE Debt securities $ 582 10,205 9,460 394 20,641 (404) 19 20,256 Sundry securities - 66 - 708 774 (11) 1 764 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 582 10,271 9,460 1,102 21,415 (415) 20 21,020 ================================================================================================================================== AMORTIZED COST Debt securities $ 569 10,077 9,224 386 20,256 Sundry securities - 66 - 698 764 - ------------------------------------------------------------------------------------------------ Total $ 569 10,143 9,224 1,084 21,020 ================================================================================================ December 31, 1996 ------------------------------------------------------------------------------------------- 1 Year 1-5 5-10 After 10 Gross Unrealized Amortized ------------------- (In millions) or Less Years Years Years Total Gains Losses Cost - --------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE U.S. Treasury $ 183 1,868 50 2 2,103 (9) 14 2,108 U.S. Government agencies 9 2,490 8,969 26 11,494 (43) 60 11,511 Collateralized mortgage obligations 32 928 - - 960 (5) 5 960 State, county and municipal 13 7 13 26 59 (1) - 58 Other 97 1,050 89 953 2,189 (42) 15 2,162 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799 ================================================================================================================================== MARKET VALUE Debt securities $ 334 6,326 9,121 187 15,968 (84) 94 15,978 Sundry securities - 17 - 820 837 (16) - 821 - --------------------------------------------------------------------------------------------------------------------------------- Total $ 334 6,343 9,121 1,007 16,805 (100) 94 16,799 ================================================================================================================================== AMORTIZED COST Debt securities $ 333 6,298 9,149 198 15,978 Sundry securities - 16 - 805 821 - ------------------------------------------------------------------------------------------------- Total $ 333 6,314 9,149 1,003 16,799 =================================================================================================
C-14 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Securities available for sale with an aggregate amortized cost of $4.9 billion at December 31, 1997, are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements. Included in "U.S. Government agencies" and "Other" at December 31, 1997, are $2.7 billion of securities that are denominated in currencies other than the U.S. dollar. The currency exchange rates were hedged utilizing both on- and off-balance sheet instruments to minimize the exposure to currency revaluation risks. At December 31, 1997, these securities had a weighted average maturity of 3.75 years and a weighted average yield of 5.31 percent. The weighted average U.S. equivalent yield for comparative purposes of these securities was 6.57 percent based on a weighted average funding cost differential of (1.26) percent. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Generally, the aging of mortgage-backed securities included in U.S. Government agencies and collateralized mortgage obligations is based on their weighted average maturities at December 31, 1997 and 1996. At December 31, 1997 and 1996, collateralized mortgage obligations had a weighted average yield based on amortized cost of 6.68 percent and 7.35 percent, respectively. At December 31, 1997 and 1996, there were forward commitments to purchase securities at a cost of $6.4 billion and $127 million, respectively, that at December 31, 1997 and 1996, had a market value of $6.4 billion and $127 million, respectively. Gross gains and losses realized on the sale of debt securities in 1997 were $51 million and $43 million, respectively, and on sundry securities such gains were $23 million. Gross gains and losses realized on the sale of debt securities in 1996 were $159 million and $125 million, respectively, and on sundry securities such gains were $2 million. Gross gains and losses realized on the sale of debt securities in 1995 were $72 million and $44 million, respectively, and on sundry securities such gains were $17 million. At December 31, 1997, stockholders' equity includes an after-tax amount of $254 million, which is based on net unrealized appreciation in the securities available for sale portfolio of $395 million. At December 31, 1996, stockholders' equity includes an after-tax amount of $2 million, which is based on net unrealized appreciation in the securities available for sale portfolio of $6 million. C-15 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4: INVESTMENT SECURITIES
December 31, 1997 ---------------------------------------------------------------------------------------- 1 Year 1-5 5-10 After 10 Gross Unrealized Market --------------------- (In millions) or Less Years Years Years Total Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE U.S. Government agencies $ - 703 313 - 1,016 25 (1) 1,040 Collateralized mortgage obligations 30 337 - - 367 9 - 376 State, county and municipal 63 172 187 302 724 112 - 836 Other 2 12 34 20 68 2 - 70 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 95 1,224 534 322 2,175 148 (1) 2,322 ================================================================================================================================== CARRYING VALUE Debt securities $ 95 1,224 534 303 2,156 148 (1) 2,303 Sundry securities - - - 19 19 - - 19 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 95 1,224 534 322 2,175 148 (1) 2,322 ================================================================================================================================== MARKET VALUE Debt securities $ 96 1,262 576 369 2,303 Sundry securities - - - 19 19 - -------------------------------------------------------------------------------------------------- Total $ 96 1,262 576 388 2,322 ================================================================================================== December 31, 1996 ---------------------------------------------------------------------------------------- 1 Year 1-5 5-10 After 10 Gross Unrealized Market ------------------ (In millions) or Less Years Years Years Total Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE U.S. Government agencies $ - 776 318 - 1,094 22 (3) 1,113 Collateralized mortgage obligations 67 414 - - 481 8 - 489 State, county and municipal 61 219 145 380 805 105 (1) 909 Other 1 11 9 100 121 4 - 125 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 129 1,420 472 480 2,501 139 (4) 2,636 =================================================================================================================================== CARRYING VALUE Debt securities $ 129 1,420 472 426 2,447 139 (4) 2,582 Sundry securities - - - 54 54 - - 54 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 129 1,420 472 480 2,501 139 (4) 2,636 =================================================================================================================================== MARKET VALUE Debt securities $ 130 1,456 494 502 2,582 Sundry securities - - - 54 54 - -------------------------------------------------------------------------------------------------- Total $ 130 1,456 494 556 2,636 ==================================================================================================
C-16 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Investment securities with an aggregate carrying value of $1.6 billion at December 31, 1997, are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Generally, the aging of mortgage-backed securities included in U.S. Government agencies and collateralized mortgage obligations is based on their weighted average maturities at December 31, 1997 and 1996. At December 31, 1997 and 1996, collateralized mortgage obligations had a weighted average yield of 7.66 percent and 7.64 percent, respectively. There were no commitments to purchase or sell investment securities at December 31, 1997 and 1996. Gross gains realized on calls of sundry securities in 1997 were $3 million. Gross gains and losses realized on repurchase agreement underdeliveries and calls of investment securities in 1996 were $5 million and $1 million, respectively. Gross gains and losses realized on repurchase agreement underdeliveries and calls of investment securities in 1995 were $6 million and $1 million, respectively. C-17 - -------------------------------------------------------------------------------- NOTE 5: LOANS
Years Ended December 31, ------------------------ (In millions) 1997 1996 - ------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 28,111 25,997 Real estate - construction and other 2,386 2,919 Real estate - mortgage 8,576 9,758 Lease financing 8,056 5,951 Foreign 1,431 1,087 - ------------------------------------------------------------------------------------------------------- Total commercial 48,560 45,712 - ------------------------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 25,382 29,108 Installment loans - Bankcard 2,708 5,620 Installment loans - other 19,297 20,827 Vehicle leasing 4,312 3,480 - ------------------------------------------------------------------------------------------------------- Total retail 51,699 59,035 - ------------------------------------------------------------------------------------------------------- Total loans $ 100,259 104,747 =======================================================================================================
Directors and executive officers of the Parent Company and their related interests were indebted to the Corporation in the aggregate amounts of $2.4 billion and $1.3 billion at December 31, 1997 and 1996, respectively. From January 1, 1997, through December 31, 1997, directors and executive officers of the Parent Company and their related interests borrowed $1.5 billion and repaid $376 million. In the opinion of management, these loans do not involve more than the normal risk of collectibility, nor do they present other unfavorable features. At December 31, 1997 and 1996, nonaccrual and restructured loans amounted to $624 million and $698 million, respectively. Interest related to nonaccrual and restructured loans for the years ended December 31, 1997, 1996 and 1995, amounted to $51 million, $57 million and $73 million, respectively. Interest collected on such loans and included in the results of operations for each of the years in the three-year period then ended amounted to $21 million, $13 million and $18 million, respectively. Included in other assets at December 31, 1997, are $3.2 billion of credit card receivables and other unsecured installment loans with a carrying value of $2.8 billion that are being held for accelerated disposition. At December 31, 1997 and 1996, impaired loans, which are included in nonaccrual loans, amounted to $301 million and $370 million, respectively. Included in the allowance for loan losses is $43 million related to $253 million of impaired loans at December 31, 1997, and $36 million related to $237 million of impaired loans at December 31, 1996. The rest of the impaired loans are recorded at or below fair value. For the years ended December 31, 1997 and 1996, the average recorded investment in impaired loans was $306 million and $477 million, respectively; and $22 million and $19 million, respectively, of interest income was recognized on loans while they were impaired. All this income was recognized on loans using a cash-basis method of accounting. C-18 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6: ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 1,502 1,638 1,578 Provision for loan losses 840 449 259 Allowance of loans acquired, transferred to accelerated disposition or sold (495) 50 193 - ------------------------------------------------------------------------------------------------------------ 1,847 2,137 2,030 - ------------------------------------------------------------------------------------------------------------ Loan losses 753 794 526 Loan recoveries 118 159 134 - ------------------------------------------------------------------------------------------------------------ Loan losses, net 635 635 392 - ------------------------------------------------------------------------------------------------------------ Balance, end of year $ 1,212 1,502 1,638 ============================================================================================================ - -------------------------------------------------------------------------------- NOTE 7: PREMISES AND EQUIPMENT Years Ended December 31, --------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Land $ 495 499 487 Buildings 2,269 2,154 1,947 Equipment 3,702 3,508 2,014 Capitalized leases 40 41 40 - ------------------------------------------------------------------------------------------------------------- 6,506 6,202 4,488 Accumulated depreciation and amortization (2,273) (1,945) (1,743) - ------------------------------------------------------------------------------------------------------------- Premises and equipment, net $ 4,233 4,257 2,745 ============================================================================================================ Net premises and equipment pledged as security for mortgage notes $ 26 62 63 ============================================================================================================ Depreciation and amortization $ 444 360 294 ============================================================================================================ - -------------------------------------------------------------------------------- NOTE 8: FORECLOSED PROPERTIES Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Foreclosed properties $ 115 121 219 - ------------------------------------------------------------------------------------------------------------ Allowance for foreclosed properties, beginning of year 17 25 42 Provision for foreclosed properties 2 (1) (3) Transfer from allowance for segregated assets - 1 - Dispositions, net (3) (8) (14) - ------------------------------------------------------------------------------------------------------------ Allowance for foreclosed properties, end of year 16 17 25 - ------------------------------------------------------------------------------------------------------------ Foreclosed properties, net $ 99 104 194 ============================================================================================================
C-19 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 9: SHORT-TERM BORROWINGS Short-term borrowings of the Corporation at December 31, 1997, 1996 and 1995, which includes securities sold under repurchase agreements and accrued interest thereon, and the related maximum amount outstanding at the end of any month during such periods are presented below.
Years Ended December 31, Maximum Outstanding ------------------------------------- ---------------------------------- (In millions) 1997 1996 1995 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements $ 19,772 17,882 12,142 20,457 21,422 12,513 Federal funds purchased 1,996 2,679 4,165 2,626 3,951 4,671 Fixed and variable rate bank notes 268 843 2,586 1,076 2,462 2,586 Interest-bearing demand deposits issued to the U. S. Treasury 323 391 365 398 605 764 Commercial paper 871 1,021 1,162 1,541 1,122 1,382 Other 4,127 2,171 984 4,575 3,573 3,188 - ------------------------------------------------------------------------------------------- Total $ 27,357 24,987 21,404 =================================================================================================================================
At December 31, 1997, 1996 and 1995, the combined weighted average interest rates related to federal funds purchased and securities sold under repurchase agreements were 6.14 percent, 6.06 percent and 5.46 percent, respectively. Maturities related to such instruments in each of the years in the three-year period then ended were not greater than 350 days. At December 31, 1997, 1996 and 1995, the weighted average interest rates for fixed and variable rate bank notes were 5.71 percent, 5.53 percent and 5.70 percent, respectively. Weighted average maturities related to such notes in each of the years in the three-year period then ended were 153 days, 109 days and 90 days, respectively. At December 31, 1997, 1996 and 1995, the weighted average interest rates for commercial paper were 5.59 percent, 5.49 percent and 5.49 percent, respectively. Weighted average maturities related to such commercial paper in each of the years in the three-year period then ended were 4 days, 21 days and 21 days, respectively. Included in "Other" are Federal Home Loan Bank borrowings and securities sold short of $286 million and $3.5 billion, respectively, at December 31, 1997; $211 million and $1.9 billion, respectively, at December 31, 1996; and $230 million and $439 million, respectively, at December 31, 1995. Substantially all short-term borrowings are due within 90 days, and accordingly, the carrying amount of such borrowings is deemed to be a reasonable estimate of fair value. C-20 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10: LONG-TERM DEBT
1997 1996 ------------------------ ------------------------ Estimated Estimated Carrying Fair Carrying Fair (In millions) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------------------------- DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY 7-1/2% debentures $ - - 16 16 Notes Floating rate extendible, due June 15, 2005 (a) 10 10 10 10 6.60%, due June 15, 2000 (par value $250) (b) 249 252 - - Floating rate, due February 24, 1998 (par value $300) (b) 300 300 300 300 6-3/4%, due January 15, 1998 (par value $250) (b) 250 250 250 251 Subordinated notes 7.18%, due April 15, 2011 (par value $60) 59 65 59 60 8%, due August 15, 2009 (par value $150) 149 162 149 155 6-3/8%, due January 15, 2009 (par value $150) (b) 148 148 148 138 6%, due October 30, 2008 (par value $200) (b) 198 192 197 178 7-1/2%, due July 15, 2006 (par value $300) (b) 298 321 297 306 7%, due March 15, 2006 (par value $200) (b) 199 207 198 198 6-7/8%, due September 15, 2005 (par value $250) (b) 249 257 249 246 7.05%, due August 1, 2005 (par value $250) (b) 248 259 248 249 6-5/8%, due July 15, 2005 (par value $250) (b) 249 253 248 240 8.77%, due November 15, 2004 (par value $150) 149 171 149 157 Floating rate, due July 22, 2003 (par value $150) (b) 149 150 149 149 7-1/4%, due February 15, 2003 (par value $150) (b) 149 156 149 152 8%, due November 15, 2002 (par value $225) (b) 224 237 224 236 8-1/8%, due June 24, 2002 (par value $250) (b) 249 267 249 264 9.45%, due August 15, 2001 (par value $150) (b) 149 165 148 164 Fixed rate medium-term, varying rates and terms to June 5, 2001 (c) 54 58 54 62 9.45%, due June 15, 1999 (par value $250) (b) 249 262 249 266 Subordinated debentures 6.55%, due October 15, 2035 (par value $250) 249 256 249 243 7-1/2%, due April 15, 2035 (par value $250) 246 279 246 261 6.824%/7.574%, due August 1, 2026 (par value $300) 298 317 298 304 - ---------------------------------------------------------------------------------------------------------------------------- Total debentures and notes issued by the Parent Company 4,771 4,994 4,533 4,605 - ----------------------------------------------------------------------------------------------------------------------------
C-21 AUDITED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1997 1996 ------------------------ ------------------------ Estimated Estimated Carrying Fair Carrying Fair (In millions) Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------------------------------- DEBENTURES AND NOTES OF SUBSIDIARIES Debentures and notes 9-3/4% senior, due September 1, 2003 (par value $145) 120 140 158 159 Varying rates and terms to November 1, 2002 59 61 65 69 Subordinated notes Bank, varying rates and terms to December 15, 2036 975 986 1,397 1,409 6.80%, due June 15, 2003 (par value $150) (b) 149 153 149 154 9-5/8%, due August 15, 1999 (par value $150) (b) 150 156 149 161 9-5/8%, due June 1, 1999 (par value $100) (b) (d) 100 105 100 107 Floating rate, due April 15, 1998 (c) (d) 100 100 100 100 Floating rate - - 50 50 Floating rate - - 25 25 Subordinated capital notes 9-5/8%, due June 15, 1999 (par value $75) (b) (d) 75 79 74 80 9-7/8%, due May 15, 1999 (par value $75) (b) (d) 75 79 75 82 8-1/2%, due April 1, 1998 (par value $150) (b) 149 150 149 153 10-1/2% collateralized mortgage obligations - - 37 41 - ---------------------------------------------------------------------------------------------------------------------------------- Total debentures and notes of subsidiaries 1,952 2,009 2,528 2,590 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER DEBT Advances from the Federal Home Loan Bank 1,285 1,285 930 930 Mortgage notes and other debt of subsidiaries, varying rates and terms 11 11 44 45 Capitalized leases, rates generally ranging from 7-1/2% to 15.20% 23 23 25 25 - ---------------------------------------------------------------------------------------------------------------------------------- Total other debt 1,319 1,319 999 1,000 - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 8,042 8,322 8,060 8,195 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Redeemable in whole or in part at the option of the Parent Company. (b) Not redeemable prior to maturity. (c) Redeemable at the option of the Parent Company. (d) Assumed by the Parent Company. The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The interest rate on the floating rate extendible notes is 6.0875 percent to March 16, 1998. The interest rate on the floating rate notes due February 24, 1998, is 5.1875 percent. The 7.18 percent subordinated notes are redeemable in whole and not in part at the option of the Parent Company on April 15, 2000 and on each October 15 and April 15 thereafter. The 8 percent subordinated notes due August 15, 2009, are redeemable in whole and not in part at the option of the Parent Company on August 15, 2004. The 8.77 percent subordinated notes are redeemable in whole or in part at the option of the Parent Company on November 15, 1999. The interest rate on the floating rate subordinated notes is 5.93359 percent to January 22, 1998. Fixed rate medium-term senior and subordinated notes can be issued periodically. Interest rates, maturities, redemption and other terms are determined at the date of issuance. At December 31, 1997, the Parent Company had issued medium-term subordinated notes with fixed rates of interest ranging from 9.49 percent to 9.93 percent. Holders of the 6.55 percent subordinated debentures and the 7-1/2 percent subordinated debentures may elect to redeem a part or all of such debentures on October 15, 2005, and April 15, 2005, respectively. Otherwise such debentures are not redeemable prior to maturity. Holders of the 6.824 percent/7.754 percent subordinated debentures may elect to redeem a part or all of such debentures on August 1, 2006, or August 1, 2016. Otherwise such debentures are not redeemable prior to maturity. C-22 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The 9-3/4 percent senior notes were issued by an acquired subsidiary prior to the acquisition, and in accordance with a covenant defeasance related thereto, the subsidiary has announced that it will redeem all such notes on September 2, 1998, the earliest date the notes can be redeemed, at a redemption price equal to 103.375 percent of the principal amount then outstanding plus any accrued and unpaid interest to such date. The subsidiary has deposited with the trustee sufficient cash and securities to effect the redemption of the notes on such date. At December 31, 1997, bank notes of $175 million had floating rates of interest ranging from 5.69 percent to 6.14 percent, and $800 million of the notes had fixed rates of interest ranging from 6.18 percent to 7.80 percent. The interest rate on the floating rate subordinated notes is 5.875 percent to April 15, 1998. In February 1998, $2.4 billion of senior or subordinated debt securities or equity securities remained available for issuance under a shelf registration statement filed with the Securities and Exchange Commission. The weighted average rate paid for long-term debt in 1997, 1996 and 1995 was 6.52 percent, 6.28 percent and 6.71 percent, respectively. Interest rate swap agreements entered into at the time of issuance of certain long-term debt reduced related interest expense. Long-term debt maturing in each of the five years subsequent to December 31, 1997, is as follows (in millions): 1998, $2,072; 1999, $859; 2000, $381; 2001, $196; and 2002, $516. - -------------------------------------------------------------------------------- NOTE 11: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES First Union Institutional Capital I, a statutory business trust (the "Trust") created by the Parent Company had outstanding at December 31, 1997 and 1996, $495 million (par value $500 million) of 8.04% Capital Securities which will mature on December 1, 2026 (the "Capital Securities"). The principal assets of the Trust are $515 million of the Parent Company's 8.04% Junior Subordinated Deferrable Interest Debentures, which will mature on December 1, 2026 (the "Subordinated Debentures"). Additionally, the Trust has issued $15 million of common securities (the "Common Securities") to the Parent Company. The estimated fair value of each of the Capital Securities and the related Subordinated Debentures at December 31, 1997 and 1996, was $536 million and $500 million, respectively. The Capital Securities, the Subordinated Debentures and the Common Securities are redeemable in whole or in part on or after December 1, 2006, or at any time in whole but not in part from the date of issuance on the occurrence of certain events. On January 6, 1997, and January 16, 1997, First Union Institutional Capital II and First Union Capital I, respectively, both statutory business trusts (the "Trusts") created by the Parent Company, issued $250 million of 7.85% Capital Securities and $250 million of 7.935% Capital Securities, Series A, respectively, (together the "Securities") which will mature on January 1, 2027, and January 15, 2027, respectively. The principal combined assets of the Trusts are $515 million of the Parent Company's subordinated debentures with like maturities and like interest rates to the Securities. Additionally, the Trusts have issued $15 million in the aggregate of common securities to the Parent Company. The 7.85% Capital Securities and the 7.935% Capital Securities, Series A, both had $248 million outstanding at December 31, 1997 and estimated fair values of $263 million and $265 million, respectively. The related subordinated debentures had a combined estimated fair value of $528 million. The Securities, the assets of the Trusts and the common securities issued by the Trusts are redeemable in whole or in part on or after January 1, 2007, and January 15, 2007, respectively, or at any time in whole but not in part from the date of issuance on the occurrence of certain events. The Capital Securities and the Securities may be included in tier 1 capital for regulatory capital adequacy determination purposes. Distributions to the holders of the Capital Securities and the Securities are included in sundry expense. The obligations of the Parent Company with respect to the issuance of the Capital Securities and the Securities constitute a full and unconditional guarantee by the Parent Company of the Trusts' obligations with respect to the Capital Securities or Securities. Subject to certain exceptions and limitations, the Parent Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related Capital Securities or Securities. C-23 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12: PREFERRED STOCK
1997 1996 1995 ----------------------- -------------------- -------------------- (Shares in thousands, dollars in millions) Shares Amount Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------------ Series B Stock Balance, beginning of year - $ - 2,964 74 4,788 120 Purchases of preferred stock - - - - (250) (6) Conversions of preferred stock into common stock - - (2,955) (74) (1,574) (40) Redemption of preferred stock - - (9) - - - - ------------------------------------------------------------------------------------------------------------------------------- Balance, end of year - - - - 2,964 74 - ------------------------------------------------------------------------------------------------------------------------------- Series D Stock - - Balance, beginning of year - - 350 35 350 35 Redemption of preferred stock - - (350) (35) - - - ------------------------------------------------------------------------------------------------------------------------------- Balance, end of year - - - - 350 35 - ------------------------------------------------------------------------------------------------------------------------------- Series F Stock - - Balance, beginning of year - - 74 74 75 75 Purchases of preferred stock - - - - (1) (1) Redemption of preferred stock - - (74) (74) - - - ------------------------------------------------------------------------------------------------------------------------------- Balance, end of year - - - - 74 74 - ------------------------------------------------------------------------------------------------------------------------------- Total - $ - - - 3,388 183 ===============================================================================================================================
The Corporation is authorized to issue up to 40 million shares of class A preferred stock, no-par value, and 10 million shares of preferred stock, no-par value, each in one or more series. In connection with the First Fidelity merger, the Corporation issued three new series of preferred stock, which are described in Note 2 and all of which were redeemed or converted into the Corporation's common stock as more fully described herein. On November 15, 1996, the Corporation redeemed all of the outstanding shares of the Series B Stock at a redemption price of $25.00 per share (plus accrued and unpaid dividends), substantially all of which were converted into 3 million shares of common stock. On July 1, 1996, the Corporation redeemed all of the outstanding shares of the Series D Stock and the Series F Stock at an aggregate redemption price of $109 million (plus accrued and unpaid dividends). C-24 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13: COMMON STOCK, CAPITAL RATIOS AND EARNINGS PER COMMON SHARE
Option Weighted Prices or Average Grant Exercise Date Balance, Grants Exercises Forfeitures Balance, Prices, (Options and shares Market Beginning or New or and Other End of End of in thousands) Values of 1997 Shares Purchases Reductions 1997 1997 Exercisable - ------------------------------------------------------------------------------------------------------------------------------------ 1984 Master Stock Plan Options granted - 134 - (127) (7) - $ - - Available 1,034 - - 7 1,041 - - 1988 Master Stock Plan Options granted $7.38-$17.94 1,542 - (477) (2) 1,063 $ 14.39 1,063 Available 2,228 - - 2 2,230 - - 1992 Master Stock Plan Options granted $22.38-$29.25 4,288 - (705) (10) 3,573 $ 23.52 3,573 Restricted stock granted $22.38-$29.25 1,892 - (582) (54) 1,256 - - Available 1,798 - - 10 1,808 - - 1996 Master Stock Plan Options granted $29.25-$40.13 2,724 4,397 (423) (104) 6,594 $ 36.41 2,253 Restricted stock granted $29.25-$43.16 1,808 2,229 (490) (120) 3,427 - - Available 23,434 (6,626) - 104 16,912 - - 1996 Employee Plan $27.26 6,922 - (4,210) (175) 2,537 $ 27.26 2,537 Dividend Reinvestment Plan - 7,014 - (1,207) - 5,807 - - Option plans of acquired companies Options granted $6.17-$26.00 3,870 - (1,277) (114) 2,479 $ 16.24 2,437 Options granted $1.73-$52.07 2,547 931 (1,203) (79) 2,196 $ 21.34 2,196 Options granted $3.41-$31.57 1,852 - (1,291) (35) 526 $ 15.53 526 Options granted $2.99-$4.20 18 - (2) (6) 10 $ 3.90 10 Options granted $51.76-$295.13 136 - - (15) 121 $ 126.67 121 - ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK SPLIT All common stock and per share data has been restated to reflect a two-for one stock split that was paid on July 31, 1997. OPTION AND OTHER PLANS Under the terms of the 1984, 1988, 1992 and 1996 Master Stock Plans (the "Plans"), stock options may be periodically granted to key personnel at a price not less than the fair market value of the shares at the date of grant. The exercise periods for options granted under the Plans are (i) determined at the date of grant, (ii) not exercisable for one year following the date of grant, and (iii) for periods no longer than ten years. Restricted stock may also be granted under the Plans. The stock is subject to certain restrictions over a specified period (generally, five years), during which time the holder is entitled to full voting rights and dividend privileges. Compensation cost recognized for restricted stock during 1997 and 1996 was $43 million and $23 million, respectively. Employees, based on their eligibility and compensation, were granted options to purchase shares of common stock under the 1996 Employee Stock Purchase Plan (the "Plan") at a price equal to 85 percent of the fair market value of the shares as of the Plan date. From the Plan date, and generally for approximately a two-year period thereafter, employees have the option to purchase all or a portion of the optioned shares. The Plan provides that at the end of such two-year period (the "Final Purchase Date"), the option price will be the lesser of 85 percent of the fair market value as of the Plan date or 85 percent of the fair market value as of the Final Purchase Date. Under the terms of the Dividend Reinvestment Plan, a participating stockholder's cash dividends and optional cash payments are used to purchase Parent Company common stock. Under the terms of the Parent Company's merger agreements with certain acquired companies, all options with respect to their common stock were converted into options to purchase Parent Company common stock. In accordance with a Shareholder Protection Rights Agreement dated December 18, 1990, as amended, the Parent Company issued a dividend of one right for each share of Parent Company common stock outstanding as of such date. These continue to attach to all common stock issued after December 18, 1990. The rights will become exercisable if any person or group commences a tender or exchange offer that would result in (i) their becoming the beneficial owner of 15 percent or more of the Parent Company's common stock, or (ii) any person being determined by the Federal Reserve Board to control the Corporation within the meaning of the Bank Holding Company Act of 1956, as amended. C-25 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The rights will also become exercisable if a person or group acquires beneficial ownership of 15 percent or more of the Parent Company's common stock. Each right (other than rights owned by such person or group) will entitle its holder to purchase, for an exercise price of $105.00, a number of shares of the Parent Company's common stock (or at the option of the Board of Directors, shares of junior participating class A preferred stock) having a market value of twice the exercise price. If any person or group acquires beneficial ownership of between 15 percent and 50 percent of the Parent Company's common stock, the Board of Directors may, at its option, exchange for each outstanding right (other than rights owned by such person or group) either two shares of common stock or two one-hundredths of a share of junior participating class A preferred stock having economic and voting terms similar to two shares of common stock. The rights are subject to adjustment if certain events occur, and they will expire on December 28, 2000, if not redeemed or terminated sooner. On January, 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended ("FAS 123"), which requires either the (i) fair value of employee stock-based compensation plans be recorded as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans, or (ii) impact of such fair value on net income and earnings per share be disclosed on a pro forma basis in a footnote to financial statements for awards granted after December 15, 1994, if the accounting for such awards continues to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). The Corporation has elected to continue such accounting under the provisions of APB 25. As determined in accordance with FAS 123, certain pro forma information which is based on the estimated fair value of the Corporation's outstanding stock options for each of the three years ended December 31, 1997, 1996 and 1995, is as follows: pro forma net income, $1.865 billion, $1.552 billion and $1.508 billion, respectively; pro forma basic earnings per common share, $2.98, $2.51 and $2.43, respectively; and pro forma diluted earnings per common share, $2.94, $2.48 and $2.37, respectively. The Black-Scholes option pricing model methodology was used in preparing such pro forma information. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which when changed can materially affect fair value estimates. Accordingly, the model does not necessarily provide a reliable single measure of the fair value of the Corporation's stock options. CAPITAL RATIOS Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4 percent and a minimum ratio of total capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3 percent to 5 percent. At December 31, 1997, the Corporation's tier 1 capital ratio, total capital ratio and leverage ratio were 8.41 percent, 13.40 percent and 6.81 percent, respectively. At December 31, 1996, such ratios were 7.33 percent, 12.33 percent and 6.13 percent, respectively. The Corporation does not anticipate or foresee any conditions that would reduce such ratios to levels at or below minimum or that would cause its deposit-taking banking affiliates to be less than well capitalized. Additional information related to the consolidated capital ratios of the Corporation for each of the years in the two-year period ended December 31, 1997, can be found in "Management's Analysis of Operations" - "Stockholders' Equity; Regulatory Capital" on page 22 and in Table 18 on page T-15, which are incorporated herein by reference. EARNINGS PER COMMON SHARE The reconciliation between basic and diluted earings per common share is below.
Years Ended December 31, ----------------------------------------- (Dollars in millions, except per share data) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Basic Net income $ 1,896 1,624 1,541 Preferred stock dividends - (9) (26) - --------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 1,896 1,615 1,515 =========================================================================================================================== Basic earnings per common share $ 3.03 2.61 2.44 =========================================================================================================================== Average common shares (In thousands) 625,649 619,237 619,777 =========================================================================================================================== Diluted Net income applicable to common stockholders $ 1,896 1,615 1,515 Dividends on convertible preferred stock - - 9 - --------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 1,896 1,615 1,524 =========================================================================================================================== Diluted earnings per common share $ 2.99 2.58 2.38 =========================================================================================================================== Average common shares (In thousands) 625,649 619,237 619,777 Options 8,123 5,987 8,577 Convertible preferred stock - - 8,832 - --------------------------------------------------------------------------------------------------------------------------- Average common shares - diluted (In thousands) 633,772 625,224 637,186 ===========================================================================================================================
C-26 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14: PERSONNEL EXPENSE Personnel expense for each of the years in the three-year period ended December 31, 1997, is presented below.
Years Ended December 31, --------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Salaries $ 2,221 1,994 1,811 Pension cost 51 59 29 Savings plan 66 61 60 Other benefits 378 337 307 - ------------------------------------------------------------------------------------------------------------------ Total $ 2,716 2,451 2,207 - ------------------------------------------------------------------------------------------------------------------
Pension expense for nonqualified plans was $19 million, $13 million and $12 million for the years ended December 31, 1997, 1996 and 1995, respectively. The accumulated benefit obligation for nonqualified plans was $121 million, $101 million and $62 million for the years ended December 31, 1997, 1996 and 1995, respectively, including vested benefits of $120 million, $100 million and $61 million, respectively. Such plans have no assets. The assumed rates used in actuarial computations were the same as those used in the qualified pension plan computations. The Corporation has tax-qualified defined benefit pension plans (together, the "Plan") covering substantially all of its employees with one year of service. The benefits are based on years of service and the employee's highest five-year average compensation. Contributions are made each year to a trust in an amount that is determined by an actuary to meet the minimum requirements of ERISA and to fall at or below the maximum amount that can be deducted on the Corporation's tax return. At December 31, 1997, Plan assets include U.S. Government and Government agency securities, equity securities and other investments. Also included are two million shares of the Parent Company's common stock. All Plan assets are held by First Union National Bank (North Carolina) (the "Bank") in a Bank-administered trust fund. The Plan's funded status for each of the years in the three-year period ended December 31, 1997, is presented below.
Years Ended December 31, ---------------------------------------- (In millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Accumulated benefit obligation including vested benefits of $844, 1997; $746, 1996; and $679, 1995 $ 909 807 739 - ----------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date (1,139) (1,006) (934) Plan assets at fair value 1,400 1,214 1,069 - ----------------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 261 208 135 Prior service cost 33 38 42 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 85 109 154 Unrecognized net transition asset (17) (21) (25) - ----------------------------------------------------------------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 362 334 306 - ----------------------------------------------------------------------------------------------------------------------------------- ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS Discount rate at beginning of year 7.50-7.75% 7.00-7.50 8.25-8.75 Discount rate at end of year 7.25 7.50-7.75 7.00-7.50 Weighted average rate of increase in future compensation levels 4.25 4.50-5.00 4.50-5.00 Long-term average rate of return 8.50-9.00% 8.50 8.50-9.75 - -----------------------------------------------------------------------------------------------------------------------------------
C-27 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Certain components of net pension cost for each of the years in the three-year period ended December 31, 1997, are presented below.
Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- NET PENSION COST Service cost-benefits earned during the period $ 63 64 43 Interest cost on projected benefit obligation 75 67 60 Actual (return) on Plan assets (215) (110) (154) Net amortization and deferral 109 26 68 - -------------------------------------------------------------------------------------------------------- Net pension cost $ 32 47 17 - --------------------------------------------------------------------------------------------------------
The Corporation and its subsidiaries provide certain health care and life insurance benefits for retired employees. Substantially all the Corporation's employees may become eligible for these benefits if they reach retirement age while working for the Corporation. Life insurance benefits are provided through an insurance company. Medical and other benefits are provided through a tax-exempt trust formed by the Corporation. The Corporation recognizes the cost of providing these benefits by expensing annual insurance premiums, trust funding allocations and administrative expenses. The amount expensed for group insurance for active employees in 1997, 1996 and 1995 was $118 million, $117 million and $106 million, respectively. The status of postretirement benefits other than pensions and certain amounts recognized in the Corporation's consolidated financial statements for each of the years in the three-year period ended December 31, 1997, are presented below.
(In millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF POSTRETIREMENT BENEFITS OBLIGATION Retirees $ 179 187 226 Fully eligible active employees 6 5 5 Other active participants 64 51 47 - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation $ 249 243 278 - ----------------------------------------------------------------------------------------------------------------------------------- Plan assets at fair value 4 6 6 Projected benefit obligation in excess of plan assets $ 245 237 272 Unrecognized prior service cost (11) - 10 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 58 41 (18) Unrecognized net transition obligation (60) (66) (84) - ----------------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 232 212 180 - ----------------------------------------------------------------------------------------------------------------------------------- ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS Weighted average discount rate 7.25 % 7.50-7.75 7.00-7.50 Rate of increase in future compensation levels, depending on age 4.25 4.50 4.00-9.00 Health care cost trend rate Prior to age 65 6.00 11.67 5.00- grading 12.25 to 5.50 After age 65 5.00 10.67 5.00- grading % to 5.50 11.25 - ----------------------------------------------------------------------------------------------------------------------------------- EFFECT OF ONE PERCENT INCREASE IN HEALTH CARE COST TREND RATE Service costs $ - - - Interest costs 1 1 1 Accumulated postretirement benefit obligation $ 11 13 19 - ----------------------------------------------------------------------------------------------------------------------------------- POSTRETIREMENT COSTS Service cost-benefits earned during the period $ 5 5 4 Interest cost on projected benefit obligation 19 20 19 Actual (return) on Plan assets - (1) (1) Amortization of transition obligation 4 6 4 - ----------------------------------------------------------------------------------------------------------------------------------- Net cost $ 28 30 26 - -----------------------------------------------------------------------------------------------------------------------------------
C-28 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 15: INCOME TAXES The Corporation accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The provision for income taxes for each of the years in the three-year period ended December 31, 1997, is presented below.
Years Ended December 31, --------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- CURRENT INCOME TAX EXPENSE Federal $ 244 283 416 State 25 52 36 - ---------------------------------------------------------------------------------------------------------------------- Total 269 335 452 - ---------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX EXPENSE Federal 520 535 345 State 25 5 51 - ---------------------------------------------------------------------------------------------------------------------- Total 545 540 396 - ---------------------------------------------------------------------------------------------------------------------- Total $ 814 875 848 - ----------------------------------------------------------------------------------------------------------------------
The reconciliation of federal income tax rates and amounts to the effective income tax rates and amounts for each of the years in the three-year period ended December 31, 1997, is presented below.
Years Ended December 31, -------------------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- Percent of Percent of Percent of Pre-tax Pre-tax Pre-tax (In millions) Amount Income Amount Income Amount Income - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 2,710 $ 2,499 $ 2,389 =========== ============ ========== Tax at federal income tax rate $ 948 35.0 % $ 875 35.0 % $ 836 35.0% Reasons for difference in federal income tax rate and effective tax rate Tax-exempt interest, net of cost to carry (37) (1.4) (45) (1.8) (60) (2.5) Non-taxable distributions from corporate reorganizations (155) (5.7) - - - - State income taxes, net of federal tax benefit 32 1.2 37 1.5 57 2.4 Goodwill amortization 45 1.6 37 1.5 33 1.4 Change in the beginning-of-the-year deferred tax assets valuation allowance (11) (0.4) (12) (0.5) 3 0.1 Other items, net (8) (0.3) (17) (0.7) (21) (0.9) - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 814 30.0 % $ 875 35.0 % $ 848 35.5% ==================================================================================================================================
C-29 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The sources and tax effects of temporary differences that give rise to significant portions of deferred income tax liabilities (assets) for each of the years in the three-year period ended December 31, 1997, are presented below.
Years Ended December 31, --------------------------------------------- (In millions) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX LIABILITIES Depreciation $ 263 96 73 Unrealized gain on debt and equity securities 137 1 84 Intangible assets 114 97 77 Leasing activities 1,922 1,367 857 Loan products 45 24 7 Prepaid pension assets 130 109 90 Loan loss reserve recapture 30 49 72 Other 46 67 66 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 2,687 1,810 1,326 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX ASSETS Provision for loan losses, net (587) (542) (582) Accrued expenses, deductible when paid (416) (291) (286) Foreclosed properties (7) (9) (16) Sale and leaseback transactions (15) (10) (17) Deferred income (8) (15) (16) Purchase accounting adjustments (primarily loans and securities) (79) (144) (63) Net operating loss carryforwards (71) (55) (38) First American segregated assets - (4) (20) Other (115) (87) (57) - --------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax assets (1,298) (1,157) (1,095) - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets valuation allowance 24 35 43 - --------------------------------------------------------------------------------------------------------------------------------- Net deferred income tax liabilities $ 1,413 688 274 - ---------------------------------------------------------------------------------------------------------------------------------
Changes to the deferred tax assets valuation allowance for each of the years in the three-year period ended December 31, 1997, are presented below.
Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets valuation allowance, beginning of year $ 35 43 37 Current year deferred provision, change in deferred tax assets valuation allowance (11) (12) 3 Purchase acquisitions - 4 3 - ------------------------------------------------------------------------------------------------------------------------------------ Deferred tax assets valuation allowance, end of year $ 24 35 43 - ------------------------------------------------------------------------------------------------------------------------------------
A portion of the current year change in the net deferred tax liability (asset) relates to unrealized gains and losses on debt and equity securities available for sale. The related 1997, 1996 and 1995 deferred tax expense (benefit) of $136 million, $(83) million and $252 million, respectively, have been recorded directly to stockholders' equity. Purchase acquisitions also increased (decreased) the net deferred tax liability by $44 million, $(43) million and $1 million in 1997, 1996 and 1995, respectively. The realization of deferred tax assets may be based on the utilization of carrybacks to prior taxable periods, the anticipation of future taxable income in certain periods and the utilization of tax planning strategies. Management has determined that it is more likely than not that the deferred tax assets can be supported by carrybacks to federal taxable income in excess of $1.2 billion in the two-year federal carryback period and by expected future taxable income that will far exceed amounts necessary to fully realize remaining deferred tax assets resulting from net operating loss carryforwards and from the scheduling of temporary differences. The valuation allowance primarily relates to certain state temporary differences and to federal and state net operating loss carryforwards. To the extent that the valuation allowance attributable to purchase acquisitions of $22 million is subsequently recognized, such income tax benefit will reduce goodwill. C-30 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- At December 31, 1997, the Corporation has net operating loss carryforwards of $35 million which are available to offset future federal taxable income through 2007, subject to annual limitations. The Corporation also has net operating loss carryforwards of $1.7 billion, which are available to offset future state taxable income through 2012. Income tax expense related to securities available for sale transactions was $11 million, $14 million, and $14 million in 1997, 1996 and 1995, respectively. Income tax expense related to investment security transactions was $1 million, $1 million, and $2 million in 1997, 1996 and 1995, respectively. The Internal Revenue Service (the "IRS") is examining the Corporation's federal income tax returns for the years 1991 through 1996, and the IRS is examining federal income tax returns for certain acquired subsidiaries for periods prior to acquisition. In 1995, the IRS examination of the Corporation's federal income tax returns for the years through 1990 was settled with no material impact to the Corporation's financial position or results of operations. In 1996 and 1995, tax liabilities for certain acquired subsidiaries for periods prior to their acquisition by the Corporation were settled with the IRS with no significant impact on the Corporation's financial position or results of operations. - -------------------------------------------------------------------------------- NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to conduct lending activities. These financial instruments include commitments to extend credit; standby and commercial letters of credit; forward and futures contracts; interest rate swaps; options, interest rate caps, floors, collars and swaptions; foreign currency and exchange rate swap commitments; commodity swaps; and commitments to purchase and sell securities. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contract amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward and futures contracts, interest rate swaps, options, interest rate caps, floors, collars and swaptions, the contract or notional amounts do not represent the exposure to credit loss. The Corporation controls the credit risk of its forward and futures contracts, interest rate swap agreements, foreign currency and exchange rate swaps, and securities transactions through collateral arrangements, credit approvals, limits and monitoring procedures. Our policy requires all swaps and options to be governed by an International Swaps and Derivatives Association Master Agreement. Bilateral collateral agreements are in place for substantially all dealer counterparties. Collateral for dealer transactions is delivered by either party when the credit risk associated with a particular transaction, or group of transactions to the extent netting exists, exceeds defined thresholds of credit risk. Thresholds are determined based on the strength of the individual counterparty, and they are bilateral. As of December 31, 1997, the total credit risk in excess of thresholds was $301 million. The fair value of collateral held approximated the total credit risk in excess of the thresholds. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. The carrying amount of financial instruments used for interest rate risk management includes amounts for deferred gains and losses. The amount of deferred gains and losses was $13 million and $7 million, respectively, at December 31, 1997. Net gains of $3 million will increase net interest income in 1998. Net gains of $3 million in the aggregate will increase net interest income in subsequent years. Additional information related to derivative financial instruments and financial instruments held or issued for the purposes of trading activity or other than for trading can be found below and in Tables 19 through Table 21 on pages T-16 through T-21, which are incorporated herein by reference. Off-balance sheet derivative and other financial instruments and their related fair values as of December 31, 1997 and 1996, are presented below. C-31 AUDITED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 ------------------------------- ------------------------------- Contract Contract Estimated or Estimated or Carrying Fair Notional Carrying Fair Notional (In millions) Amount Value Amount Amount Value Amount - ----------------------------------------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS WHOSE CONTRACT AMOUNTS REPRESENT CREDIT RISK Commitments to extend credit $ - 208 63,832 - 151 52,243 Standby and commercial letters of credit - 59 5,983 - 49 5,176 FINANCIAL INSTRUMENTS WHOSE CONTRACT OR NOTIONAL AMOUNTS EXCEED THE AMOUNT OF CREDIT RISK Forward and futures contracts Trading and dealer activities 81 81 27,690 62 62 20,740 Interest rate risk management Asset rate conversions - 1 725 - 1 57 Asset hedges - - - - 5 662 Rate sensitivity hedges - (7) 14,301 - (5) 29,612 Interest rate swap agreements Trading and dealer activities (204) (204) 42,424 (45) (45) 24,110 Interest rate risk management Asset rate conversions 4 118 11,655 3 109 20,330 Liability rate conversions 12 263 6,883 21 90 7,811 Purchased options, interest rate caps, floors, collars and swaptions Trading and dealer activities 250 250 10,615 68 68 9,781 Interest rate risk management Asset rate conversions 3 2 500 5 5 550 Liability rate conversions 1 - 250 2 - 250 Rate sensitivity hedges 33 35 3,951 8 4 12,946 Written options, interest rate caps, floors, collars and swaptions Trading and dealer activities (136) (136) 12,692 (56) (56) 9,668 Foreign currency and exchange rate swap commitments Trading and dealer activities 44 44 5,221 2 2 4,149 Foreign currency risk management - - 56 - - - Commodity swaps Trading and dealer activities - - 24 3 3 67 Commitments to purchase trading securities (1) (1) 375 (2) (2) 597 Commitments to sell trading securities $ (1) (1) 1,103 1 1 522 - -----------------------------------------------------------------------------------------------------------------
C-32 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and they may require payment of a fee. Since many of the commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. Standby and commercial letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Except for short-term guarantees of $2.9 billion, guarantees extend for more than one year, and they expire in varying amounts primarily through 2019. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation holds various assets as collateral supporting those commitments for which collateral is deemed necessary. Forward and futures contracts are contracts for delayed deliveries of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. The Corporation enters into a variety of interest rate contracts, including options, interest rate caps, floors, collars and swaptions written, and interest rate swap agreements, in its trading activities and in managing its interest rate exposure. Interest rate caps, floors, collars and swaptions written by the Corporation enable customers to transfer, modify or reduce their interest rate risk. Interest rate options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from the seller or writer of the option. As a writer of options, the Corporation receives a premium at the outset and bears the risk of an unfavorable change in the price of the financial instrument underlying the option. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Corporation also acts as an intermediary in arranging interest rate swap transactions for customers. Generally, futures contracts are exchange traded, and all other off-balance sheet instruments are transacted in the over-the-counter markets. In the normal course of business, the Corporation has entered into certain transactions that have recourse options. These recourse options, if acted on, would not have a material impact on the Corporation's financial position. Substantially all time drafts accepted by December 31, 1997, met the requirements for discount with Federal Reserve Banks. Average daily Federal Reserve Bank balance requirements for the year ended December 31, 1997, amounted to $261 million. Minimum operating lease payments due in each of the five years subsequent to December 31, 1997, are as follows (in millions): 1998, $153; 1999, $136; 2000, $122; 2001, $108; 2002, $101; and subsequent years, $661. Rental expense for all operating leases for the three years ended December 31, 1997, was $227 million, 1997; $223 million, 1996; and $202 million, 1995. The Parent Company and certain of its subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, based on the opinions of counsel, any such liability will not have a material impact on the Corporation's consolidated financial position. C-33 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 17: CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS Information about the fair value of on-balance sheet financial instruments at December 31, 1997 and 1996, which should be read in conjunction with Note 16 and certain other notes to the consolidated financial statements presented elsewhere herein, is set forth below.
December 31, 1997 December 31, 1996 ----------------------------- --------------------------- Estimated Estimated Carrying Fair Carrying Fair (In millions) Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and cash equivalents $ 14,895 14,895 15,197 15,197 Trading account assets 5,457 5,457 4,480 4,480 Securities available for sale 21,415 21,415 16,805 16,805 Investment securities 2,175 2,322 2,501 2,636 Loans Commercial, financial and agricultural 28,046 28,119 25,928 26,239 Real estate - construction and other 2,381 2,407 2,915 2,972 Real estate - commercial mortgage 8,559 8,697 9,745 9,950 Lease financing 5,304 5,304 4,041 4,042 Foreign 1,421 1,420 1,079 1,076 Real estate - mortgage 25,364 25,773 29,098 29,461 Installment loans - Bankcard 2,708 2,751 5,620 5,669 Installment loans - other and Vehicle leasing 23,090 23,111 23,890 23,879 - -------------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 96,873 97,582 102,316 103,288 Allowance for loan losses (1,212) - (1,502) - - -------------------------------------------------------------------------------------------------------------------------------- Loans, net 95,661 97,582 100,814 103,288 - -------------------------------------------------------------------------------------------------------------------------------- Other assets $ 8,472 8,472 3,132 3,140 - -------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 21,753 21,753 20,383 20,383 Interest-bearing deposits Savings and NOW accounts 30,118 30,118 28,869 28,869 Money market accounts 15,494 15,494 14,899 14,899 Other consumer time 29,231 29,648 33,541 33,983 Foreign 2,483 2,483 1,897 1,897 Other time 3,810 3,835 3,113 3,129 - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 102,889 103,331 102,702 103,160 Short-term borrowings 27,357 27,357 24,987 24,987 Other liabilities 3,690 3,690 2,779 2,779 Long-term debt 8,042 8,322 8,060 8,195 Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures $ 991 1,064 495 500 - --------------------------------------------------------------------------------------------------------------------------------
C-34 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Estimated fair values for the commercial loan portfolio were based on weighted average discount rates ranging from 6.62 percent to 7.58 percent and 7.34 percent to 7.68 percent at December 31, 1997 and 1996, respectively, and for the retail portfolio from 8.05 percent to 14.71 percent and 8.35 percent to 14.14 percent, respectively. The fair value of noninterest-bearing deposits, savings and NOW accounts, and money market accounts is the amount payable on demand at December 31, 1997 and 1996. The fair value of fixed-maturity certificates of deposit is estimated based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Corporation has a substantial trust department, which includes mutual fund activities, that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, brokerage network, deferred tax assets, premises and equipment, and goodwill. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates, and they have not been considered in any of the estimates. The fair value of off-balance sheet derivative financial instruments has not been considered in determining on-balance sheet fair value estimates. C-35 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 18: FIRST UNION CORPORATION (PARENT COMPANY) The Parent Company's principal assets are its investments in its subsidiaries, interest-bearing balances with bank subsidiaries, securities purchased under resale agreements, securities available for sale and loans to subsidiaries. The significant sources of income of the Parent Company are dividends from its subsidiary bank holding companies, interest and fees charged on loans made to its subsidiaries, interest on eurodollars purchased from bank subsidiaries, interest on securities available for sale and fees charged to its subsidiaries for providing various services. In addition, the Parent Company serves as the primary source of funding for the mortgage banking and other activities of its nonbank subsidiaries, including First Union Capital Markets Corp. Lines of credit in the aggregate amount of $350 million are available to the Parent Company at an annual facility fee of 8.00 basis points to 18.75 basis points and a utilization fee of 6.25 basis points. The facility fee is based on the daily average commitment amount, and the utilization fee is based on the daily average principal amount outstanding. Generally, interest rates will be determined when credit line usage occurs, and they will vary based on the type of loan extended to the Parent Company. The lines of credit expire in December 1998. Certain regulatory and other requirements restrict the (i) lending of funds by the bank subsidiaries to the Parent Company and to the Parent Company's nonbank subsidiaries, and (ii) amount of dividends that can be paid to the Parent Company by the bank subsidiaries and certain of the Parent Company's other subsidiaries. On December 31, 1997, the Parent Company was indebted to subsidiary banks in the amount of $375 million that, under the terms of revolving credit agreements, was collateralized by certain interest-bearing balances, securities available for sale, loans, premises and equipment and was payable on demand. On such date, a subsidiary bank had loans outstanding to Parent Company nonbank subsidiaries in the amount of $139 million that, under the terms of a revolving credit agreement, were collateralized by securities available for sale and certain loans and were payable on demand. Industry regulators limit dividends that can be paid by the Corporation's subsidiaries. National banks are limited in their ability to pay dividends in two principal ways. First, dividends cannot exceed the bank's undivided profits, less statutory bad debt in excess of the bank's allowance for loan losses; and second, in any year, dividends may not exceed a bank's net profits for that year, plus its retained earnings from the preceding two years, less any required transfers to surplus. The Parent Company's subsidiaries, including its bank subsidiaries, had available retained earnings of $426 million at December 31, 1997, for the payment of dividends to the Parent Company without such regulatory or other restrictions. Subsidiary net assets of $10.7 billion were restricted from being transferred to the Parent Company at December 31, 1997, under such regulatory or other restrictions. Dividends from subsidiaries includes $835 million in equity transfers to the Parent Company related to internal bank consolidations in 1997. At both December 31, 1997 and 1996, the estimated fair value of the Parent Company's loans was $2.7 billion. See Note 11 for information related to the Parent Company's junior subordinated deferrable interest debentures. The Parent Company's condensed balance sheets as of December 31, 1997 and 1996, and the related condensed statements of income and cash flows for the three-year period ended December 31, 1997, are presented below. The condensed financial statements of the Parent Company as of December 31, 1996, and for the two-year period then ended reflect the November 28, 1997, merger of Signet's parent company into the Parent Company on a net basis within the investment in wholly owned subsidiaries and equity in undistributed net income of subsidiaries line classifications, as appropriate. C-36 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS
December 31, -------------------- (In millions) 1997 1996 - ---------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing balances with bank subsidiary $ 4,215 2,160 Securities purchased under resale agreements 381 306 - ---------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 4,596 2,466 - ---------------------------------------------------------------------------------------------------------------- Securities available for sale (amortized cost $436 in 1997; $256 in 1996) 437 265 Investment securities 28 - Loans, net of unearned income ($1 in 1997 and $1 in 1996) 154 108 Allowance for loan losses - (1) - ---------------------------------------------------------------------------------------------------------------- Loans, net 154 107 - ---------------------------------------------------------------------------------------------------------------- Loans due from subsidiaries Banks 1,835 1,785 Bank holding companies 174 311 Other subsidiaries 494 512 Investments in wholly owned subsidiaries Arising from investments in equity in undistributed net income of subsidiaries Banks 9,125 6,168 Bank holding companies 2,357 5,288 Other subsidiaries 619 513 - ---------------------------------------------------------------------------------------------------------------- 12,101 11,969 Arising from purchase acquisitions 101 93 - ---------------------------------------------------------------------------------------------------------------- Total investments in wholly owned subsidiaries 12,202 12,062 - ---------------------------------------------------------------------------------------------------------------- Other assets 585 416 - ---------------------------------------------------------------------------------------------------------------- Total $ 20,505 17,924 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits 1 - Commercial paper 871 1,021 Other short-term borrowings with affiliates 755 651 Other liabilities 704 203 Long-term debt 5,121 4,607 Junior subordinated deferrable interest debentures 1,021 510 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 8,473 6,992 Stockholders' equity 12,032 10,932 - ---------------------------------------------------------------------------------------------------------------- Total $ 20,505 17,924 - ----------------------------------------------------------------------------------------------------------------
C-37 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 177 158 134 Interest and dividends on securities available for sale 26 8 4 Interest and dividends on investment securities 3 - - Other interest income from subsidiaries 172 73 84 - ---------------------------------------------------------------------------------------------------------------- Total interest income 378 239 222 - ---------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on short-term borrowings 82 68 71 Interest on long-term debt 416 278 234 - ---------------------------------------------------------------------------------------------------------------- Total interest expense 498 346 305 - ---------------------------------------------------------------------------------------------------------------- Net interest income (120) (107) (83) Provision for loan losses (1) - - - ---------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (119) (107) (83) - ---------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Dividends from subsidiaries Banks 1,601 610 508 Bank holding companies 452 1,693 275 Other subsidiaries 25 15 10 Securities available for sale transactions 6 - 10 Investment security transactions 3 - - Sundry income 537 362 320 - ---------------------------------------------------------------------------------------------------------------- Total noninterest income 2,624 2,680 1,123 - ---------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE 468 316 279 - ---------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) and equity in undistributed net income of subsidiaries 2,037 2,257 761 Income taxes (benefits) 20 (18) (14) - ---------------------------------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 2,017 2,275 775 Equity in undistributed net income of subsidiaries (121) (651) 766 - ---------------------------------------------------------------------------------------------------------------- Net income 1,896 1,624 1,541 Dividends on preferred stock - 9 26 - ---------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 1,896 1,615 1,515 - ----------------------------------------------------------------------------------------------------------------
C-38 AUDITED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,896 1,499 1,430 Adjustments to reconcile net income to net cash provided (used) by operating activities Equity in undistributed net income of subsidiaries 121 776 (655) Accretion and revaluation losses on securities available for sale 2 1 (4) Provision for loan losses (1) - - Securities available for sale transactions (6) - (10) Investment security transactions (3) - - Depreciation and amortization 13 10 6 Deferred income taxes (benefits) (48) 5 1 Other assets, net (114) 130 (294) Other liabilities, net 497 (82) 1 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 2,357 2,339 475 - ---------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 161 104 99 Purchases of securities available for sale (335) (171) (125) Sales of investment securities 18 - - Purchases of investment securities (43) - - Advances to subsidiaries, net 105 (328) (595) Investments in subsidiaries 6 (851) 363 Longer-term loans originated or acquired (382) (244) (101) Principal repaid on longer-term loans 336 212 97 Purchases of premises and equipment, net (18) (26) (7) - ---------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (152) (1,304) (269) - ---------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in cash realized from Deposits 1 - - Commercial paper (150) 79 546 Other short-term borrowings, net 104 190 161 Issuance of junior subordinated deferrable interest debentures 511 510 - Issuances of long-term debt 525 852 1,292 Payments of long-term debt (15) (287) (272) Sales of common stock 722 279 249 Purchases of preferred stock - - (7) Redemption of preferred stock - (109) - Purchases of common stock (1,024) (968) (1,199) Cash dividends paid (749) (620) (529) - ---------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (75) (74) 241 - ---------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents 2,130 961 447 Cash and cash equivalents, beginning of year 2,466 1,505 1,058 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 4,596 2,466 1,505 - ---------------------------------------------------------------------------------------------------------------- CASH PAID FOR Interest $ 436 321 288 Income taxes 200 225 338 NONCASH ITEMS Increase in investments in subsidiaries as a result of acquisitions of institutions for common stock 3 1,008 611 Assumption of long-term debt of liquidated affiliate - - 74 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Parent Company Securities available for sale (8) (60) 27 Other liabilities 4 3 24 Parent Company subsidiaries Securities available for sale 397 (153) 458 Other assets $ 133 (92) 136 - ----------------------------------------------------------------------------------------------------------------
C-39 [THREE POST CARDS WITH THE FOLLOWING INFORMATION APPEARS HERE] [FRONT OF CARDS:] DUPLICATE MAILINGS Reduce your mail. First Union seeks to eliminate mailing duplicate annual reports to its registered shareholders when possible. However, the annual report is an important document of disclosure that we are required to provide. We may eliminate the mailing of an annual report as outlined at right and with the signature of each registered shareholder named on the account. First Union is unable to change the mailing status of any account held through a bank, brokerage firm or other nominee. Name(s)________________________________ Address________________________________ City/State/ZIP_________________________ Please print all information legibly and exactly as it appears on the stockholder account. [ ] The above is a new address. Please change your records. [ ] I (we) have two stockholder accounts whose registration is identical. Please keep these accounts separate, but eliminate the mailing of an annual report to one of these identically registered accounts. [ ] I (we) have two stockholder accounts whose registration is identical. Please consolidate these accounts so that I (we) will receive only one set of stockholder materials in the future. [ ] There are two or more differently registered accounts receiving First Union stockholder information at the above address. Please eliminate the mailing of an annual report to the stockholder account specified above. [ ] I (we) wish to begin receiving future annual reports via the First Union Web site. I understand that I may incur certain costs for Internet access or on-line time charged by my Internet access provider. Signature(s) ______________________________ ______________________________ Signatures are required for all of these requests. Each stockholder listed on the stockholder account must sign. Should you require other maintenance on your stockholder account, please contact Shareholder Services at 800-347-1246 for assistance. If you hold First Union Corporation through a bank, broker or other nominee, you will be unable to use this card to eliminate duplicate mailings. Please contact your bank or brokerage firm. - -------------------------------------------------------------------------------- ANNUAL REPORT IMPACT SURVEY Rate this report. To help us improve our ability to communicate effectively about your company's performance, progress and strategic plans, we would appreciate your completing and returning this survey about the 1997 Annual Report. Just fill it out and drop it in the mail. No postage is required. Thank you for your investment in First Union. On a scale of 1 to 5 (one being the lowest and five being the highest), please rate the following: How clearly did the 1997 Annual Report tell you what you wanted to know about First Union? - -------------------------------------------------------------------------------- 1 2 3 4 5 - -------------------------------------------------------------------------------- How well did the Annual Report meet your needs as an investor? Some things to consider in answering this question: Do I understand clearly where First Union is heading? Did the Annual Report provide information that was of use to me in making my investment decision? Was it the "right" amount of detail? - -------------------------------------------------------------------------------- 1 2 3 4 5 - -------------------------------------------------------------------------------- How well did this Annual Report help me understand First Union's corporate strategy? - -------------------------------------------------------------------------------- 1 2 3 4 5 - -------------------------------------------------------------------------------- General Comments - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Thank you for your help and time. Please complete the following: [ ] I am an individual investor. [ ] I am an institutional investor. [ ] I am a stock analyst. - -------------------------------------------------------------------------------- CAP ACCOUNT You've put your stock in First Union. Now put it in the CAP Account. The CAP Account gives you access to dozens of brokerage* and banking services in one place -- with the advice you need to make the most of your money. To open a CAP, CAP1 or CAP for Business Account, call 1-888-213-1352, visit a First Union Financial Center or visit CAP online at www.firstunion.com/CAP. You can open a CAP Account with $15,000 or more in any combination of cash, stocks, bonds, mutual funds or certain other investments. Even your First Union self-directed IRA balance can be used to meet the CAP Account minimum balance requirement. The CAP1 Account offers many of the same features as CAP, but with a lower annual fee and only $5,000 to open. 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[ ] Yes [ ] No Investments in stocks, bonds and mutual funds. - --------------------------------------------------- ARE NOT FDIC ARE NOT BANK MAY LOSE INSURED GUARANTEED VALUE - --------------------------------------------------- [BACK OF CARDS:] [BAR CODE ------------- APPEARS NO POSTAGE HERE] NECESSARY IF MAILED IN THE UNITED STATES ------------- - -------------------------------------------------- [BAR CODE BUSINESS REPLY MAIL APPEARS HERE] FIRST-CLASS MAIL PERMIT NO. 1273 CHARLOTTE, NC - -------------------------------------------------- POSTAGE WILL BE PAID BY THE ADDRESSEE FIRST UNION CORPORATION INVESTOR RELATIONS NC0206 301 S. 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Stockholder Information [APPEARING ON RIGHT SIDE OF PAGE ROTATED 90 DEGREES:] Customers for Life How To Reach Us Financial Information Analysts, stockholders and other investors seeking financial information about First Union should contact Alice Lehman, managing director of Corporate Relations and Investor Relations at 704-374-4139. News media and others seeking general information should contact R. Jeep Bryant, senior vice president for Corporate Communications, at 704-374-2957. Print. Printed financial materials including our 1997 Annual Report on Form 10-K may be obtained from Investor Relations by calling 704-383-5401. Internet. First Union's annual report and quarterly financial releases, as well as other company news releases, can be accessed through our website on the Internet at www.firstunion.com. Fax-On-Demand. Call 1-800-283-6214 for the latest news announcements through FAX-On-Demand. Stockholder Assistance General information, including information about our dividend reinvestment program and direct deposit of dividends, may be obtained by calling Investor Relations at 704-374-6782. If you have questions concerning your stockholder account, please call our transfer agent, First Union National Bank, at 1-800-347-1246. This is the place to call if you require a change of address, records or information about lost certificates, dividend checks or dividend reinvestment. Customer Inquiries Mail. If you need to contact our Corporate Headquarters, write First Union Corporation, One First Union Center, 301 South College Street, Suite 4000, 28288, or call 704-374-4880. Internet. Our Internet address is: http://www.firstunion.com or via electronic mail: comments@firstunion.com. Phone. Customers nationwide who wish to open a checking or savings account; transfer funds; apply for a mortgage, home equity or auto loan or lease; request credit cards; pay bills; and conduct other banking transactions may call toll-free at 1-800-413-7898. Duplicate Copies Our goal is to reduce the expense associated with mailing financial reports to stockholders by receiving your authorization to mail only one per address. This authorization is strictly voluntary. Annual Meeting The annual meeting of stockholders will be at 9:30 a.m. on Tuesday, April 21, 1998, in the 12th floor auditorium of Two First Union Center, Charlotte, North Carolina. Equal Opportunity Employer First Union Corporation is an equal opportunity employer. All matters regarding recruiting, hiring, training, compensation, benefits, promotions, transfers and all other personnel policies will continue to be free from discriminatory practices. Securities Markets First Union Corporation common stock is traded on the New York Stock Exchange under the symbol FTU. First Union's debt ratings are: First Union Corporation - -------------------------------------------------------------------------------- Senior Debt Subordinated Debt Commercial Paper - -------------------------------------------------------------------------------- Standard & Poor's A A- A-1 Moody's A1 A2 P-1 Thomson BankWatch A+ A TBW-1 First Union National Bank
- ----------------------------------------------------------------------------------------------------------------- Long-Term Letters Long-Term Certificates Short-Term Letters Short-Term Certificates of Credit of Deposit of Credit of Deposit - ----------------------------------------------------------------------------------------------------------------- Standard & Poor's A+ A+ A-1 A-1 Moody's Aa3 Aa3 P-1 P-1 Thomson BankWatch - - TBW-1 TBW-1
First Union Corporation One First Union Center Charlotte, NC 28288-0570 505097 EX-21 6 EXHIBIT (21) Exhibit (21) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) ABCA, Inc. (3) (Jacksonville, FL) -- 1005 Corp. (Charlotte, NC) -- Citrus County Land Corp. (3) (Jacksonville, FL) -- Citrus County Service Corp. (3) (Jacksonville, FL) -- Melbourne Atlantic Venture Partners (20% -- NV) (Jacksonville, FL) -- Naples Financial Services, Inc. (Jacksonville, FL) Ameribanc Development Corporation (Roanoke, VA) Austin Ventures IV-A, L. P. (6.42% -- NV) (Austin, TX) Butcher & Singer Financial Services Agency of Ohio, Inc. (Youngstown, OH) Boca Raton First National Bank (Boca Raton, FL) Capitol Finance Group, Inc. (Charlotte, NC) Education Financing Services, LLC (19.318%) (Winston-Salem, NC) First American Service Corporation (Roanoke, VA) -- Long, Travers & FASC (40% -- NV) (Springfield, VA) -- New Rivers Towers Limited Partnership (NV) (INACTIVE) (Annandale, VA) -- Woodlawn Joint Venture (INACTIVE) (40% -- NV) (Woodbridge, VA) First Card Corporation (Charlotte, NC) First Union Bank of Delaware (Wilmington, DL) -- Delaware Financial Services Corporation (Wilmington, DL) -- First Fidelity Insurance Services of Delaware, Inc. (Wilmington, DL) -- Taylor & Clark Insurance Services, Incorporated (Fairfax, VA) First Union Capital I (Wilmington, DL) First Union Capital II (Wilmington, DL) First Union Capital III (Wilmington, DL) First Union Community Development Corporation (Charlotte, NC) -- 349-59 Lenox LLC (99.99% -- NV) (Mount Vernon, NY) -- Anacuitas Manor, Ltd. (99% -- NV) (Austin, TX) -- Cherokee Hills Associates LLC (99% -- NV) (Nashville, TN) -- Harlingen Community Development Corporation 1, LP (99% -- NV) (Altamonte Springs, FL) -- Headhouse Retail Associates, L.P. (99.99% -- NV) (Philadelphia, PA) -- Housing Equity Fund of Virginia I, L.P. (6.945% -- NV) (Roanoke, VA) -- Montgomery Homes L. P. IX (99% -- NV) (Kensington, MD) -- Parkchester Limited Partnership (99% -- NV) (Roanoke, VA) -- Pendleton Pines Associates, LLC (99% -- NV) (Nashville, TN) -- Richmond Green Limited Partnership (99.99% -- NV) (Nashville, TN) -- Roanoke Community Development Corporation (27.778%)(7) (INACTIVE) (Roanoke, VA) -- Sable Point Apartments Limited Partnership (99% -- NV) (Altamonte Springs, FL) -- San Benito Housing, Ltd. (99% -- NV) (Altamonte Springs, FL) -- Stoneybrooke Heights Associates LLC (99.99% -- NV) (Nashville, TN) -- Sycamore Row, LLC (99% -- NV) (Bronx, NY) First Union Corporation of New Jersey (Newark, NJ) -- First Fidelity Incorporated (Newark, NJ) -- Brynwood Partners I, L. P. (7.14% -- NV) (Greenwich, CT) -- FCC-PR, Inc. (3) (Philadelphia, PA) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- Fairfield Properties, Inc. (Stamford, CT) -- Fidelcor Business Credit Corporation (New York, NY) -- Comwest Capital Corporation (3) (Los Angeles, CA) -- First Union National Bank (Avondale, PA) -- 2-4 Potter Place Urban Renewal, L.P. (99% -- NV) (Weehawken, NJ) -- AIRPORT ROAD/FIDOREO, INC. (3) (Newark, NJ) -- Andalusia Senior Housing, L. P. (99% -- NV) (Levittown, PA) -- Beaumont Avenue Apartments, L. P. (99% -- NV) (New York, NY) -- BEST PARKING/FIDOREO, INC. (3) (Newark, NJ) -- BGMCO PA, Inc. (3) (Philadelphia, PA) -- BRICK INDUSTRIAL/FIDOREO, INC. (3) (Newark, NJ) -- Bucks/DHS Real Estate, Inc. (3) (Allentown, PA) -- Chambers Bridge Urban Renewal Housing, L. P. (99% -- NV) (Yardville, NJ) -- CHI ES Holding, Inc. (3) (Philadelphia, PA) -- City Affordable Housing LLC (99.99% -- NV) (Charlotte, NC) -- COMMERCE/FIDOREO LS, INC. (3) (INACTIVE) (Newark, NJ) -- Cranford Avenue Apartments, L.P. (99% -- NV) (New York, NY) -- CRAWFORDS CORNER/FIDOREO, INC. (3) (Newark, NJ) -- CRL Real Estate, Inc. (3) (Philadelphia, PA) -- Develcor NJ, Inc. (3) (INACTIVE) (Philadelphia, PA) -- Equitable Realty Associates, L. P. (99% -- NV) (Yonkers, NY) -- FFBIC New York, Inc. (Spring Valley, NY) -- FFBIC New York II, Inc. (Spring Valley, NY) -- FFL Services Corporation (Newark, NJ) -- Fidelity Overseas Investment, Inc. (INACTIVE) (Wilmington, DL) -- First Fidelity Building Corporation (Philadelphia, PA) -- First Fidelity Insurance Services, Inc. (Newark, NJ) -- First Fidelity International Bank (Charlotte, NC) -- First Union I, Inc. (St. Thomas, US Virgin Islands) -- Matthew International Sales, Inc. (St. Thomas, US Virgin Islands) -- First Fidelity Private Capital, Inc. (Philadelphia, PA) -- Actuator and Valve Services, Inc. (100% -- NV; Convertible into 35% Voting) (Woodstock, GA) -- Case Holdings, Inc. (30% -- NV; Convertible into 35% Voting) (Manalapan, NJ) -- Communications Systems Technologies, Inc. (12.5% -- NV; Convertible into 4% Voting) (Columbia, MD) -- Fresh Creek Technologies, Inc. (100% -- NV; Convertible into 22% Voting) (Fairfield, NJ) -- Integra Services Technologies, Inc. (100% -- NV; Convertible into 25% Voting) (Pasadena, TX) -- Larex, Inc. (12% -- NV; Convertible into 3.3% Voting) (6) (St. Paul, MN) -- Lion Laboratories, Inc. (100% -- NV; Convertible into 45% Voting) (6) (Old Saybrooke, CT) -- MaxFlight Technologies, Inc. (100% -- NV; Convertible into 17% Voting) (6) (Bayville, NJ) -- National Resource Directories, Inc. (100% -- NV; Convertible into 40% Voting) (6) (Eatontown, NJ) -- Polycel Acquisition, Inc. (25%) (Somerville, NJ) -- First Fidelity Urban Investment Corporation (Newark, NJ) -- Allentown Development Company, Inc. (24%) (Trenton, NJ) -- First Union Auto Finance, Inc. (Charlotte, NC) -- First Union NOVA Holdings of NJ, Inc. (Newark, NJ) -- NOVA Corporation (8.93%) (4) (Atlanta, GA) -- First Union Real Estate Asset Company of New Jersey (Avondale, PA) -- First Union Real Estate Investment Company of New Jersey (INACTIVE) (Avondale, PA) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- First Union Trust Company, National Association (Wilmington, DE) -- FFBIC, Inc. (Newark, DE) -- FOIL, Inc. (3) (Philadephia, PA) -- FREEHOLD/FIDOREO, INC. (3) (INACTIVE) (Newark, NJ) -- GJA R/E Corp. (3) (New York, NY) -- Hamilton Manor Limited Partnership (99% -- NV) (Stroudsburg, PA) -- HOHOKUS/FIDOREO LS, INC. (3) (Newark, NJ) -- HOVBILT VILLAS/FIDOREO, INC. (3) (Newark, NJ) -- Industrial Valley Real Estate Co. (Philadelphia, PA) -- JERSEY CENTER/FIDOREO, INC. (3) (Newark, NJ) -- KOGEL ISLAND/FIDOREO, INC. (3) (New York, NY) -- LIVINGSTON AVENUE/FIDOREO, INC. (3) (Newark, NJ) -- Maryland Housing Equity Fund III Limited Partnership (7.7647% -- NV) (Columbia, MD) -- MIDDLE ISLAND/FIDOREO, INC. (3) (INACTIVE) (New York, NY) -- MT. EPHRAM/FIDOREO LS, INC. (3) (INACTIVE) (Newark, NJ) -- Multi I/FNY, Inc. (3) (Port Chester, NY) -- Old York Road Real Estate, Inc. (3) (Philadelphia, PA) -- Old York Agency, Inc. (Avondale, PA) -- Orianna Street Limited Partnership (99% -- NV) (Philadelphia, PA) -- PARK AVENUE/FIDOREO, INC. (3) (INACTIVE) (Newark, NJ) -- PAROG, Inc. (3) (Philadelphia, PA) -- PERRY STREET/FIDOREO, INC. (NEVER ACTIVE) (Newark, NJ) -- Sellit, Inc. (3) (INACTIVE) (Philadelphia, PA) -- Senior Cottages of Shippensburg, Ltd. (99% -- NV) (St. Louis Park, MN) -- S.H.E. Urban Renewal Associates, L. P. (99% -- NV) (Newark, NJ) -- Skyhawk Agency, Inc. (Hawthorne, NY) -- St. Joseph's Affordable Housing Limited Partnership (74.25% -- NV) (Wayne, PA) -- SURREY DOWNS/FIDOREO, INC. (3) (Newark, NJ) -- TAYLORR LAKES/FIDOREO, INC. (3) (Newark, NJ) -- The Howard Mortgage Group, Inc. (Newark, NJ) -- VERO/FIDOREO LS, INC. (3) (Plantation, FL) -- Washington Apartments Associates, Limited Partnership (99% -- NV) (Emmaus, PA) -- WATERVIEW/FIDOREO, INC. (3) (Newark, NJ) -- Radnor Venture Partners, L. P. (7.39% -- NV) (Wayne, PA) -- TDH II Limited (5.72% -- NV) (Rosemont, PA) -- Waller House Corporation (Philadelphia, PA) -- National Temple Limited Partnership-II (98.99% -- NV) (Philadelphia, PA) -- HONOR Technologies, Inc. (2.1270%) (5) (Maitland, FL) First Union Development Corporation (Charlotte, NC) -- 425 South Tryon Street, LLC (50%) (Charlotte, NC) -- The First Service Corporation of South Carolina (Greenville, SC) -- Arrowwood Associates (50%) (Columbia, SC) First Union Export Trading Company (INACTIVE) (Charlotte, NC) First Union FPS, Inc. (Charlotte, NC) First Union Futures Corporation (Charlotte, NC) First Union Home Equity Bank, N. A. (Charlotte, NC) First Union Institutional Capital I (Wilmington, DL) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued First Union Institutional Capital II (Wilmington, DL) First Union Investors, Inc. (Charlotte, NC) -- Atlantic Venture Partners II, L.P. (5.44% -- NV) (Roanoke, VA) -- Canaan Ventures II L. P. (19.60% -- NV) (Rowayton, CT) -- Carousel Capital Partners, L. P. (13.62% -- NV) (Charlotte, NC) -- Center Street Capital Partners, L. P. (5.40% -- NV) (Little Rock, AR) -- Chartwell Capital Investors, L. P. (16.03% -- NV) (Jacksonville, FL) -- Chisholm Partners III, L. P. (14.60% -- NV) (Providence, RI) -- Commonwealth Investors II, L. P. (9.09% -- NV) (Richmond, VA) -- DeMuth, Folger & Wetherill II, L. P. (7.5% -- NV) (Teaneck, NJ) -- General Finance Service Corporation (Richmond, VA) -- Global Private Equity III L.P. (5.18% -- NV) (Boston, MA) -- High Ridge Capital, LLC (24.99% -- NV) (Stamford, CT) -- HRC General Partners Limited Partnership (15% -- NV) (Stamford, CT) -- Kinder Morgan Energy Partners, L.P. (7.4% -- NV) (Houston, TX) -- Knightsbridge Capital Fund I, L. P. (10.76% -- NV) (New York, NY) -- McCown De Leeuw & Co. IV, L.P. (7.1182% -- NV) (Menlo Park, CA) -- Pacific Venture Group, L. P. (5.24% -- NV) (Irvine, CA) -- Virginia Baseball Club, L.P. (9.25% -- NV) (Alexandria, VA) First Union Life Insurance Company (Charlotte, NC) First Union Mortgage Corporation (Charlotte, NC) -- Argo Partnership, L. P. (8% -- NV) (New York, NY) -- Farmington, Incorporated (Charlotte, NC) -- Ghent-Farmington Associates (50%) (Norfolk, VA) -- First Union Title Corporation (Atlanta, GA) -- R.B.C. Corporation (Charlotte, NC) -- Slate Stone Hills, Incorporated (Charlotte, NC) -- The Fairfax Corporation (Charlotte, NC) -- Interchange Partners (50% -- NV) (Charlotte, NC) -- Real Estate Consultants of the South, Inc. (Charlotte, NC) -- Water Street Insurance Agency, Inc. (Jacksonville, FL) First Union National Bank (94%) (2) (Charlotte, NC) -- 100 Block Associates Limited Partnership (93.75% -- NV) (Charlotte, NC) -- Concessions, Inc. (100% -- NV) (Raleigh, NC) -- Raleigh Club, Inc. (100% -- NV) (Raleigh, NC) -- 1560 Wilson Boulevard Limited Partnership (28% -- NV) (Washington, DC) -- ACB Services, Inc. (INACTIVE) (Nashville, TN) -- Alden Pond, Inc. (3) (Jacksonville, FL) -- Arbor Glenn L.P. (99% -- NV) (Roanoke, VA) -- Arbor Village, L.P. (99% -- NV) (Winter Park, FL) -- Ashton of Richmond Hill, L. P. (99% -- NV) (Gainesville, FL) -- Athens Rental Housing, L.P. (99% -- NV) (Cordele, GA) -- Bacon Housing, L.P. (99% -- NV) (Richmond, VA) -- Barrett Place Limited Partnership (99% -- NV) (Wake Forest, NC) -- Barrett Place II Limited Partnership (99.99% -- NV) (Raleigh, NC) -- Bart, Inc. (Jacksonville, FL) -- Beechridge Limited Partnership (99% -- NV) (Raleigh, NC) -- BOB Title Holdings, Inc. (3) (Baltimore, MD) -- BOB Title XXX, Inc. (3) (Baltimore, MD) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- Annapolis Overlook Utility, Inc. (3) (Rockville, MD) -- Bowler Housing L.P. (99% -- NV) (Richmond, VA) -- BR Limited Partnership (99% -- NV) (Washington, DC) -- Builders Acceptance Corporation (Raleigh, NC) -- Business Development Corporation of South Carolina (8.7%) (Columbia, SC) -- Camellia Court Apartments Limited Partnership (99.99% -- NV) (Beaufort, NC) -- Cannon/Hearthwood Limited Partnership (99% -- NV) (Culpeper, VA) -- Cantebury of Hilliard, Ltd. (99% -- NV) (Gainesville, FL) -- Cedar Forest Limited Partnership (95% -- NV) (Boston, MA) -- Center Credit Corporation (Waterbury, CT) -- Center Funding Company (Waterbury, CT) -- CFF Financial Corporation (Roanoke, VA) -- CIMC, Inc. (3) (Jacksonville, FL) -- Creative Choice Homes IX, Ltd. (99% -- NV) (Palm Beach Gardens, FL) -- CT I Limited Partnership (99% -- NV) (Raleigh, NC) -- CTB Realty Ventures XIV, Inc. (3) (New Haven, CT) -- CTB Realty Ventures XXI, Inc. (3) (New Haven, CT) -- Danville Community Development Corporation (13% -- NV) ((Danville, VA) -- DF Southeastern Mortgage, Inc. (Atlanta, GA) -- Ellenton Housing Associates, Ltd. (99% -- NV) (Coral Gables, FL) -- Elm Lake Apartments, Ltd. (99% -- NV) (Bradenton, FL) -- Evergreen Apartments, L.P. (99.99% -- NV) (Cordele, GA) -- Evergreen Asset Management Corp. (Charlotte, NC) -- Fairbrooke Apartments Limited Partnership (99% -- NV) (Baltimore, MD) -- Fairfax County Redevelopment and Housing Authority/HCDC One L.P. (99% -- NV) (Fairfax, VA) -- Fairfax County Redevelopment and Housing Authority/HCDC Two L.P. (99% -- NV) (Fairfax, VA) -- FH Crossings, Ltd. (3) (Richmond, VA) -- FIFTEEN/UNIONOREO, INC. (3) (Newark, NJ) -- FIFTY-EIGHT/UNIONOREO, INC. (3) (INACTIVE) (Stamford, CT) -- FIFTY-SEVEN/UNIONOREO, INC. (3) (Stamford, CT) -- FIFTY-SIX/UNIONOREO, INC. (3) (INACTIVE) (Shelton, CT) -- First Union Auto Loan Securitization, Inc. (Charlotte, NC) -- First Union Bank and Trust Company (Cayman) Ltd. (Grand Cayman, British West Indes) -- First Union Brokerage Services, Inc. (Charlotte, NC) -- First Union Capital Partners, Inc. (Charlotte, NC) -- American Information Co., Inc. (33%) (San Francisco, CA) -- Arcon HealthCare, Inc. (6.60%) (Nashville, TN) -- Atlantic Spinners, Inc. (12.5%) (Bessemer City, NC) -- Chattem, Inc. (6.3%) (Chattanooga, TN) -- Cybergenics Holding, Inc. (30.9%) (New York, NY) -- Electronic Manufacturing Systems, Inc. (10.6%) (Longmont, CO) -- Envoy Corporation (6.2%) (Nashville, TN) -- FrontierVision Partners, L. P. (15.05% -- NV) (Denver, CO) -- FVP GP, L.P. (5.01% -- NV) (Denver, CO) -- Genesis Direct, Inc. (5%) (Seaucus, NJ) -- Grapevine Broadcasting of Anchorage, LLC (23%) (Anchorage, AK) -- Grapevine Broadcasting of Austin, LLC (23%) (Austin, MN) -- Grapevine Broadcasting of Joplin, LLC (23%) (Joplin, MO) -- Grapevine Broadcasting of Wyoming, LLC (23%) (Casper, WO) -- Heartland Pork Enterprises, Inc. (20.93%) (Alden, IO) -- HTI Communications, Inc. (25%) (Austin, TX) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- Meigher Communications, L. P. (13.2% -- NV) (New York, NY) -- Renal Disease Management by Physicians, Inc. (17.11%) (Old Lyme, CT) -- Right Source, Inc. (36.19%) (Greenville, SC) -- US Salt Holdings, Inc. (49.3%) (Jacksonville, FL) -- First Union Commercial Corporation (Charlotte, NC) -- First Union Commercial Leasing Group, L.L.C. (1%) (Charlotte, NC) -- First Union Institutional Mortgage Services, LLC (Charlotte, NC) -- First Union/Maher Partners (50%) (Wayne, PA) -- First Union Overseas Investment Corporation (Charlotte, NC) -- Union Hamilton Assurance, Ltd. (Hamilton, Bermuda) -- First Union Rail Corporation (Charlotte, NC) -- Ironbrand Capital LLC (1%) (Charlotte, NC) -- National Auto Finance Company, L.P. (10% -- NV) (Boca Raton, FL) -- RAILEASE, Inc. (Bellevue, WA) -- Transportation Equipment Advisors, Inc. (Arlington Heights, IL) -- First Wells Fargo Leasing Partnership (90% -- NV) (Charlotte, NC) -- Ironbrand Capital LLC (99%) (Charlotte, NC) -- National Auto Finance Company, L.P. (10% -- NV) (Boca Raton, FL) -- Multiplex Leasing Partners (90% -- NV) (Charlotte, NC) -- First Union Commercial Leasing Group, L.L.C. (99%) (Charlotte, NC) -- First Union Commercial Mortgage Securities, Inc. (Charlotte, NC) -- First Union Direct Bank, N. A. (Augusta, GA) -- First Union Real Estate Asset Company of Connecticut (Stamford, CT) -- First Union Real Estate Investment Company of Connecticut (Stamford, CT) -- First Union Holdings, Inc. (Nashville, TN) -- First Union Financial Investments, Inc. (Nashville, TN) -- First Union Insurance Agency of FL, Inc. (Redington, FL) -- First Union Insurance Agency of NC, Inc. (Charlotte, NC) -- First Union International Banking Corporation (Charlotte, NC) -- Besso Holdings Limited (6.55%) (London, England) -- First Union HKCB Asia, Ltd. (50%) (Hong Kong) -- Keystone Management , S. A. (Luxembourg) -- Wheat International, Ltd. (Bermuda) (49.67%) (INACTIVE) (Hamilton, Bermuda) -- First Union Investment Corporation (3) (Charlotte, NC) -- 100 Block Associates Limited Partnership (6.25% -- NV) (Charlotte, NC) -- Concessions, Inc. (100% -- NV) (Raleigh, NC) -- Raleigh Club, Inc. (100% -- NV) (Raleigh, NC) -- ERB, Inc. (Raleigh, NC) -- Concessions, Inc. (Raleigh, NC) -- Raleigh Club, Inc. (Raleigh, NC) -- Southwind Parking Corp. (Raleigh, NC) -- First Union Keystone, Inc. (Charlotte, NC) -- Keystone Investment Management Company (Boston, MA) -- Chronicle Securities Investment Trust Company Ltd. (13.5%)(Taipei, Taiwan) -- Evergreen Investment Services, Inc. (Charlotte, NC) -- Evergreen Service Company (Boston, MA) -- Keystone Financial Consulting GmbH (Frankfurt, Germany) (INACTIVE) -- Keystone Trust Company (Portsmouth, NH) -- First Union NOVA Holdings of Connecticut, Inc. (Stamford, CT) -- NOVA Corporation (1.10%) (4) (Atlanta, GA) -- First Union NOVA Holdings of DC, Inc. (Washington, DC) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- NOVA Corporation (0.24%) (4) (Atlanta, GA) -- First Union NOVA Holdings of FL, Inc. (Jacksonville, FL) -- NOVA Corporation (11.84%) (4) (Atlanta, GA) -- First Union NOVA Holdings of GA, Inc. (Atlanta, GA) -- NOVA Corporation (1.91%) (4) (Atlanta, GA) -- First Union NOVA Holdings of MD, Inc. (Rockville, MD) -- NOVA Corporation (0.18%) (4) ((Atlanta, GA) -- First Union NOVA Holdings of NC, Inc. (Charlotte, NC) -- NOVA Corporation (3.57%) (Atlanta, GA) -- First Union NOVA Holdings of SC, Inc. (Greenville, SC) -- NOVA Corporation (1.12%) (4) (Atlanta, GA) -- First Union NOVA Holdings of TN, Inc. (Nashville, TN) -- NOVA Corporation (0.89%) (4) (Atlanta, GA) -- First Union NOVA Holdings of VA, Inc. (Roanoke, VA) -- NOVA Corporation (2.13%) (4) (Atlanta, GA) -- First Union Real Estate Asset Company of Georgia (Atlanta, GA) -- First Union Real Estate Investment Company of Georgia (INACTIVE) (Atlanta, GA) -- First Union Real Estate Asset Company of North Carolina (Charlotte, NC) -- First Union Real Estate Investment Company of North Carolina ) (INACTIVE) (Charlotte, NC) -- First Union Residential Securitization Transactions, Inc. (Charlotte, NC) -- Flagship Partners, L. P. (99% -- NV) (Knoxville, TN) -- Floral Oaks Apartments, Ltd. ( 99% -- NV)(Gainesville, FL) -- FNB Properties, Inc. (3) (Jacksonville, FL) -- Fountain Place Associates Limited Partnership (99% -- NV) (Annapolis, MD) -- Fox Haven Limited Partnership (99% -- NV) (Raleigh, NC) -- Ft. Lauderdale Hotel Holding Company (Miami, FL) -- GABK Holdings, Inc. (3) (Charlotte, NC) -- Gainsborough Corporation (3) (Charlotte, NC) -- General Homes Corp. (9.205%) (3) (Houston, TX) -- GF Mortgage Corporation (Atlanta, GA) -- GGL, Inc. (3) (INACTIVE)(Charlotte, NC) -- C4 Media Cable South, Limited Partnership (3) (INACTIVE) (99% -- NV) (Charlotte, NC) -- Novaten Communications, Inc. (3) (INACTIVE) (Charlotte, NC) -- C4 Media Cable South, Limited Partnership (3) (INACTIVE) (1% -- NV) (Charlotte, NC) -- Glen Royall Mill Limited Partnership (99% -- NV) (Wake Forest, NC) -- Gold Rush I Apartments Limited Partnership (99% -- NV) (Phoenix, AZ) -- Gold Rush II Apartments Limited Partnership (99% -- NV) (Phoenix, AZ) -- Golfview Associates Limited Partnership (99% -- NV) (Fayetteville, NC) -- Green Gables Apartments, Ltd. (99% -- NV) (Gainesville, FL) -- Green Ridge Associates, LLC (99% -- NV) (Nashville, TN) -- Greenleaf Village of Groveland, Ltd. (89% -- NV) (Gainesville, FL) -- HHS Property Corporation (3) (Atlanta, GA) -- Homes for Fredericksburg Limited Partnership (99% -- NV) (Sterling, VA) -- Horizon Appraisal Services, Inc. (Jacksonville, FL) -- Housing Equity Fund of Virginia II, L.P. (38.5% -- NV) (Roanoke, VA) -- Indian Run Limited Partnership (86% -- NV) (Boston, MA) -- International Progress, Inc. (50%) (Winchester, VA) -- Mountain Falls Park, Inc. (Winchester, VA) -- Jacksonville Affordable Housing, Ltd. (98% -- NV) (Panama City, FL) -- Kaufman, Alsberg & Co. (INACTIVE) (Jacksonville, FL) -- Lafayette Family L.P. (99% -- NV) (Roanoke, VA) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- Landexco, Inc. (Baltimore, MD) -- Lantana Associates, Ltd. (99% -- NV) (Coral Gables, FL) -- Laurel Pointe of Salisbury Limited Partnership (99% -- NV) (Panama City, FL) -- L'Hermitage Developers, Inc. (3) (Waterbury, CT) -- Lieber I Corp. (Charlotte, NC) -- Lieber & Company (99% -- NV) (Purchase, NY) -- Lieber II Corp. (Charlotte, NC) -- Lieber & Company (1% -- NV) (Purchase, NY) -- Manor Ridge Limited Partnership (99.99% -- NV) (Raleigh, NC) -- Martin's Landing Limited Partnership (99% -- NV) (Winter Park, FL) -- Martin's Landing II Limited Partnership (99% -- NV) (Winter Park, FL) -- Mentor Trust Company (Pennsylvania) (Philadelphia, PA) -- Mentor Trust Company (Virginia) (Richmond, VA) -- Montgomery Homes Limited Partnership (99% -- NV) (Kensington, MD) -- MHD, Inc. (3) (Charlotte, NC) -- MWG VII, Inc. (3) (Richmond, VA) -- NNI Bell Street Limited Partnership (99% -- NV) ((Stamford, CT) -- NP Corporation (3) (Baltimore, MD) -- EEI Holdings Corporation, Inc. (3) (Richmond, VA) -- Oak Crest Apartments of Kannapolis, Ltd. (99% -- NV) (Panama City, FL) -- Oldbridge Urban Renewal, L.P. (99% -- NV) (Cherry Hill, NJ) -- One South Place, L.P. (99% -- NV) (Knoxville, TN) -- O.R.E.O., Inc. (3) (Jacksonville, FL) -- Peppermill Partners, L. P. (99% -- NV) (Atlanta, GA) -- Pioneer Development Corporation (Richmond, VA) -- Pioneer Properties I, Inc. (3) (Richmond, VA) -- Ravenwood of Kissimmee, Ltd. (99% -- NV) (Gainesville, FL) -- Reservoir Hill Limited Partnership IX (99% -- NV) (Baltimore, MD) -- Richmond Community Development Corporation (19% -- NV) (Richmond, VA) -- River Reach of Orange County, Ltd. (99% -- NV) (Panama City, FL) -- Roanoke Community Development Corporation (11.11% -- NV)(7) (INACTIVE)(Roanoke, VA) -- Rome Rental Housing, L. P. (99% -- NV) (Cordele, GA) -- Rosemont Manor Ltd. (99% -- NV) (Gainesville, FL) -- Sable Point II Apartments Limited Partnership (99% -- NV) (Martinsburg, WV) -- Salem Run Associates, L. P. (99% -- NV) (Midlothian, VA) -- Salem Run II Associates, L. P. (99% -- NV) (Fredericksburg, VA) -- Sandlewood Terrace of Ludowici L.P. (99% -- NV) (Gainesville, FL) -- Savings Associations Financial Enterprises, Inc. (48.15%) (Washington, DC) -- Shenandoah Valley Properties L.P. (99% -- NV) (Roanoke, VA) -- Craigmont II, L.P. (99% -- NV) (Roanoke, VA) -- Elkmont Partners, L.P. (99% -- NV) (Roanoke, VA) -- Grottoes Partners L.P. (99% -- NV) (Roanoke, VA) -- Willow Lake Partners, L.P. (99% -- NV) (Roanoke, VA) -- Signet Bank (Bahamas) Limited (Nassau, Bahamas) -- Second Eleutheran Investment Company, Ltd. (INACTIVE) (Nassau, Bahamas) -- Signet Business Leasing Corporation (Richmond, VA) -- Signet Equipment Company (Baltimore, MD) -- Signet Loan Company/Pennsylvania (INACTIVE) (Baltimore, MD) -- Signet Mortgage Corporation (Richmond, VA) -- Signet Municipal LeaseCorp, Inc. (Richmond, VA) -- Signet Residential Finance Corporation (Richmond, VA) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued -- Southwoods Limited Partnership (99% -- NV) (Greensboro, NC) -- Spinnaker Reach Apartments of Duval, Ltd. (99% -- NV) (Panama City, FL) -- Spring Gate Manor Limited (99% -- NV) (Gainesville, FL) -- St. Paul Realty, Inc. (INACTIVE) (Baltimore, MD) -- Statesboro Rental Housing, L. P. (99% -- NV) (Cordele, GA) -- Steeplechase Apartments, Ltd. (99% -- NV) (Gainesville, FL) -- Stonecreek Apartments of Mooresville, Ltd. (99% -- NV) (Panama City, FL) -- Sugar Mill Apartments, L. P. (99% -- NV) (Cordele, GA) -- Taroc, Inc. (Jacksonville, FL) -- The Atlanta Business Community Development Corporation (21.7%) (Atlanta, GA) -- The Exchange Building Limited Partnership (99% -- NV) (Portland, ME) -- The Mortgage Corner, Inc. (Waterbury, CT) -- Timberleaf Estates Limited Partnership (99% -- NV) (Martinsburg, WV) -- Tobacco Row Phase II Associates, L.P. (99% -- NV) (Richmond, VA) -- Towsen Service Corporation (3) (Towsen, MD) -- Ashland Joint Venture (50% -- NV) (Baltimore, MD) -- Silver Spring Station Joint Venture (50% -- NV) (Baltimore, MD) -- TWC Eighty-Eight, Ltd. (99% -- NV) (Tampa, FL) -- TWC Ninety-Eight, Ltd. (99% -- NV) (Tampa, FL) -- TWC Ninety-Five, Ltd. (99% -- NV) (Tampa, FL) -- TWC Ninety-Four, Ltd. (98% -- NV) (Tampa, FL) -- TWC Ninety-One, Ltd. (99% -- NV) (Tampa, FL) -- TWC Ninety-Six, Ltd. (99% -- NV) (Tampa, FL) -- Union Trust Brokerage Services, Inc. (INACTIVE) (Stamford, CT) -- UTC Properties No. 4, Inc. (3) (INACTIVE) (Baltimore, MD) -- VCP-Alderman Park Partners, Ltd. (99% -- NV) (Jacksonville, FL) -- Venice Service Corp. (3) (Jacksonville, FL) -- Port Charlotte Service Corp. (3) (Jacksonville, FL) -- Vestcor-WR Associates, Ltd. (99% -- NV) (Jacksonville, FL) -- Villa Biscayne of South Dade, Ltd. (99% -- NV) (Panama City, FL) -- Waterford Manor, L. P. (99% -- NV) (Winter Park, FL) -- West Brickell Apartments, Ltd. (99% -- NV) (Miami, FL) -- Westville, Ltd. (99% -- NV) (Gainesville, FL) -- Wheat Benefit Services, LLC (61.446%) (Richmond, VA) -- William Byrd Hotel Associates, L. P. (99% -- NV) (Richmond, VA) -- WNB Corporation (Roanoke, VA) -- Lone Stone, L. C. (43.946% -- NV) (3) (Albany, NY) -- Woodlawn Joint Venture (30% -- NV) (INACTIVE) (Woodbridge, VA) -- WSI, Inc. (3) (Jacksonville, FL) -- Yorktown Arms Development Limited Partnership (99% -- NV) (Philadelphia, PA) First Union Services, Inc. (Charlotte, NC) Franklin Ventures III, L. P. (6.60% -- NV) (Franklin, TN) GF Title Corporation (Atlanta, GA) HONOR Technologies, Inc. (11.7871%) (5) (Maitland, FL) Kinder Morgan, Inc. (24.9% -- NV; includes 2% voting) (Houston,TX) Media/Communications Partners (5.71% -- NV) (Boston, MA) Morgan Stanley Bridge Fund, LLC (24.99% -- NV) (New York, NY) FIRST UNION CORPORATION LIST OF SUBSIDIARIES AS OF 2/1/98 (1) -- Continued Phillips-Smith Specialty Retail Group III, L. P. (7.14% -- NV) (Dallas, TX) Signet Financial Services, Inc. (Richmond, VA) Signet Insurance Services, Inc. (Richmond, VA) Signet Nequity Corporation (Richmond, VA) Signet Realty, Inc. (Baltimore, MD) Signet Strategic Capital Corporation (Richmond, VA) Signet Student Loan Corporation (Richmond, VA) Signet Trust Company (Richmond, VA) TRSTE, Inc. (Charlotte, NC) TRSTE II, Inc. (Nashville, TN) Tryon Management, Inc. (Charlotte, NC) Virtus Capital Management, Inc. (Richmond, VA) Walden Golf Club, Inc. (3) (Roanoke, VA) -- Walden Golf Club ManagementCompany (3) (Roanoke, VA) WFS Real Estate Investment Corporation (Richmond, VA) -- Huguenot Professional Center Associates, LP (25% -- V; 5.826% -- NV) (Richmond, VA) Wheat First Butcher Singer, Inc. (Richmond, VA) -- Jackson Asset Management Corporation (15%) (Atlanta, GA) -- Jackson Securities Incorporated (15%) (Atlanta, GA) -- Mentor Investment Advisors, LLC (Richmond, VA) (1%) -- Mentor Investment Group, LLC (Richmond, VA) -- Mentor Perpetual Advisors, LLC (Richmond, VA) -- Mentor Investment Advisors, LLC (Richmond, VA) (99%) -- Mentor Services Company, Inc. (Richmond, VA) -- Wheat First Securities, Inc. (Richmond, VA) Wheat Insurance Services, Inc. (Richmond, VA) -- Wheat Insurance Services of Alabama, Inc. (Richmond, VA) Wheat Service & Equipment Corporation (Richmond, VA) -- Energy Search LP (INACTIVE) (7.7% -- NV) -- WBP Associates (INACTIVE) (33% -- NV) Women's Growth Capital Fund I, L.L.L.P. (10% -- NV) (Washington,DC) - --------- (1) 100% of voting securities owned unless otherwise indicated. NV indicates non-voting equity. Does not include companies in which the ownership interest is 5% or less of voting equity nor companies where the sole ownership is through non-voting equity (except for banks and bank holding companies). All partnership interests in excess of 5% are shown. (2) 352,317 shares (6%) of First Union National Bank, Charlotte, NC, (FUNB-NC) were issued to First Fidelity Incorporated, the parent of First Union Bank of Connecticut (FUB-CT) on 7/31/97 as consideration for the merger of FUB-CT into FUNB-NC. (3) Interest acquired or subsidiary formed in connection with debts previously contracted (DPC). (4) Combined ownership percentage by all First Union entities is 31.90%. (5) Combined ownership percentage by all First Union entities is 19.1357%. (6) Votes as on a converted basis. (7) Combined ownership percentage by all First Union entities is 38.888%. EX-23 7 EXHIBIT (23)(A) EXHIBIT (23)(a) CONSENT OF KPMG PEAT MARWICK LLP - -------------------------------------------------------------------------------- Board of Directors First Union Corporation We consent to the incorporation by reference in the Registration Statements of (i) First Union Corporation on: REGISTRATION REGISTRATION STATEMENT STATEMENT FORM NUMBER FORM NUMBER ----------- ------------------ ----------- ------------------ S-3 33-50103 S-8 333-2561 S-8 33-51964 S-8 333-10179 S-8 33-54148 S-8 333-10211 S-8 33-54274 S-8 333-11613 S-8 33-54739 S-8 333-14469 S-3 33-56927 S-3 333-15743 S-8 33-60835 S-3 333-17599 S-8 33-60913 S-4 333-19039-01 S-8 33-62307 S-4 333-20611 S-8 33-62399 S-3 333-34151 S-8 33-63387 S-3 333-35363 S-8 33-65501 S-8 333-36839 S-8 333-2551 S-8 333-37709 (ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital II on Form S-3 (No. 333-15743-02);(iv) First Union Capital III on Form S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No. 333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No. 333-20611-01) of First Union Corporation of our report dated January 21, 1998, relating to the consolidated balance sheets of First Union Corporation and subsidiaries as of December 31,1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 Annual Report to Stockholders which is incorporated by reference in First Union Corporation's 1997 Form 10-K. KPMG PEAT MARWICK LLP Charlotte, North Carolina March 18, 1998 EX-23 8 EXHIBIT (23)(B) EXHIBIT (23)(b) CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- We consent to the inclusion in the 1997 Form 10-K of First Union Corporation and to the incorporation by the reference in the Registration Statements of (i) First Union Corporation on:
REGISTRATION REGISTRATION STATEMENT STATEMENT FORM NUMBER FORM NUMBER ----------- ----------------- ----------- ----------------- S-3 33-50103 S-8 333-2561 S-8 33-51964 S-8 333-10179 S-8 33-54148 S-8 333-10211 S-8 33-54274 S-8 333-11613 S-8 33-54739 S-8 333-14469 S-3 33-56927 S-3 333-15743 S-8 33-60835 S-3 333-17599 S-8 33-60913 S-4 333-19039-01 S-8 33-62307 S-4 333-20611 S-8 33-62399 S-3 333-34151 S-8 33-63387 S-3 333-35363 S-8 33-65501 S-8 333-36839 S-8 333-2551 S-8 333-37709
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No. 333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No. 333-20611-01) of our report dated January 20, 1998, with respect to the consolidated balance sheets of CoreStates Financial Corp as of December 31,1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, which are included in the 1997 Form 10-K of First Union Corporation. /s/ ERNST & YOUNG LLP Philadelphia, Pennsylvania March 17, 1998 EX-23 9 EXHIBIT (23)(C) EXHIBIT (23)(c) CONSENT OF KPMG PEAT MARWICK LLP - -------------------------------------------------------------------------------- Board of Directors CoreStates Financial Corp We consent to the incorporation by reference in the Registration Statements of (i) First Union Corporation on:
REGISTRATION REGISTRATION STATEMENT STATEMENT FORM NUMBER FORM NUMBER ---------- ----------------- ---------- ----------------- S-3 33-50103 S-8 333-2561 S-8 33-51964 S-8 333-10179 S-8 33-54148 S-8 333-10211 S-8 33-54274 S-8 333-11613 S-8 33-54739 S-8 333-14469 S-3 33-56927 S-3 333-15743 S-8 33-60835 S-3 333-17599 S-8 33-60913 S-4 333-19039-01 S-8 33-62307 S-4 333-20611 S-8 33-62399 S-3 333-34151 S-8 33-63387 S-3 333-35363 S-8 33-65501 S-8 333-36839 S-8 333-2551 S-8 333-37709
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No. 333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No. 333-20611-01) of our report dated January 17, 1996, except as to Note 2, which is as of February 23, 1996, with respect to the consolidated balance sheet of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995, which report appears as an exhibit to CoreStates Financial Corp's Form 8-K dated March 23, 1998 and in First Union Corporation's 1997 Form 10-K. KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania March 17, 1998 EX-23 10 EXHIBIT (23)(D) EXHIBIT (23)(d) CONSENT OF KPMG PEAT MARWICK LLP - -------------------------------------------------------------------------------- Board of Directors CoreStates Financial Corp We consent to the incorporation by reference in the Registration Statements of (i) First Union Corporation on:
REGISTRATION REGISTRATION STATEMENT STATEMENT FORM NUMBER FORM NUMBER ----------- ----------------- ----------- ----------------- S-3 33-50103 S-8 333-2561 S-8 33-51964 S-8 333-10179 S-8 33-54148 S-8 333-10211 S-8 33-54274 S-8 333-11613 S-8 33-54739 S-8 333-14469 S-3 33-56927 S-3 333-15743 S-8 33-60835 S-3 333-17599 S-8 33-60913 S-4 333-19039-01 S-8 33-62307 S-4 333-20611 S-8 33-62399 S-3 333-34151 S-8 33-63387 S-3 333-35363 S-8 33-65501 S-8 333-36839 S-8 333-2551 S-8 333-37709
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital II on Form S-3 (No. 333-15743-02); (iv) First Union Capital III on Form S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No. 333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No. 333-20611-01) of our report dated January 16, 1996, except as to Note 20, which is as of February 23, 1996, with respect to the consolidated balance sheet of United Counties Bancorporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1995, which report appears as an exhibit to CoreStates Financial Corp's Form 8-K dated March 23, 1998 and in First Union Corporation's 1997 Form 10-K. KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania March 17, 1998 EX-24 11 EXHIBIT 24 Exhibit (24) FIRST UNION CORPORATION POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers of FIRST UNION CORPORATION (the "Corporation") hereby constitute and appoint Marion A. Cowell, Jr. and Kent S. Hathaway, and each of them severally, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and the attorneys-in-fact, and in any one of them, to sign for the undersigned and in their respective names as directors and officers of the Corporation, the Corporation's Annual Report on Form 10-K for the year ended December 31, 1997, to be filed with the Securities and Exchange Commission, and to sign any and all amendments to such Annual Report.
Signature Capacity - ----------------------------------- ----------------------------------------------------- /s/ EDWARD E. CRUTCHFIELD Chairman and Chief Executive Officer and Director - ---------------------------------- Edward E. Crutchfield /s/ ROBERT T. ATWOOD Executive Vice President and Chief Financial Officer - ---------------------------------- Robert T. Atwood /s/ JAMES H. HATCH Senior Vice President and Controller - ---------------------------------- James H. Hatch (Principal Accounting Officer) Director - ---------------------------------- Edward E. Barr /s/ G. ALEX BERNHARDT Director - ---------------------------------- G. Alex Bernhardt /s/ W. WALDO BRADLEY Director - ---------------------------------- W. Waldo Bradley /s/ ROBERT J. BROWN Director - ---------------------------------- Robert J. Brown /s/ A. DANO DAVIS Director - ---------------------------------- A. Dano Davis /s/ R. STUART DICKSON Director - ---------------------------------- R. Stuart Dickson /s/ B. F. DOLAN Director - ---------------------------------- B. F. Dolan /s/ RODDEY DOWD, SR. Director - ---------------------------------- Roddey Dowd, Sr. /s/ JOHN R. GEORGIUS Director - ---------------------------------- John R. Georgius
Signature Capacity - ------------------------------------ --------- Director - ---------------------------------- Arthur M. Goldberg /s/ WILLIAM H. GOODWIN, JR. Director - ---------------------------------- William H. Goodwin, Jr. /s/ HOWARD H. HAWORTH Director - ---------------------------------- Howard H. Haworth /s/ FRANK M. HENRY Director - ---------------------------------- Frank M. Henry /s/ LEONARD G. HERRING Director - ---------------------------------- Leonard G. Herring /s/ JACK A. LAUGHERY Director - ---------------------------------- Jack A. Laughery /s/ MAX LENNON Director - ---------------------------------- Max Lennon /s/ RADFORD D. LOVETT Director - ---------------------------------- Radford D. Lovett /s/ MACKEY J. MCDONALD Director - ---------------------------------- Mackey J. McDonald /s/ MALCOLM S. MCDONALD Director - ---------------------------------- Malcolm S. McDonald /s/ JOSEPH NEUBAUER Director - ---------------------------------- Joseph Neubauer /s/ RANDOLPH N. REYNOLDS Director - ---------------------------------- Randolph N. Reynolds /s/ RUTH G. SHAW Director - ---------------------------------- Ruth G. Shaw /s/ CHARLES M. SHELTON, SR. Director - ---------------------------------- Charles M. Shelton, Sr. /s/ LANTY L. SMITH Director - ---------------------------------- Lanty L. Smith
Signature Capacity - ----------------------------------- --------- /s/ ANTHONY P. TERRACCIANO Director - ---------------------------------- Anthony P. Terracciano Director - ---------------------------------- Dewey L. Trogdon /s/ JOHN D. UIBLE Director - ---------------------------------- John D. Uible /s/ B. J. WALKER Director - ---------------------------------- B. J. Walker
Dated: February 17, 1998 Charlotte, North Carolina EX-27 12 EXHIBIT (27)(A)
9 12-MOS DEC-31-1997 DEC-31-1997 6,445 710 7,740 5,457 21,415 2,175 2,322 100,259 (1,212) 157,274 102,889 27,357 5,108 8,042 0 0 2,121 9,911 157,274 8,771 1,438 409 10,933 3,264 5,190 5,743 840 34 5,589 2,710 2,710 0 0 1,896 3.03 2.99 4.36 622 232 2 0 1,502 753 118 1,212 673 5 534
EX-27 13 EXHIBIT (27)(B)
9 12-MOS DEC-31-1996 DEC-31-1996 7,076 319 7,802 4,480 16,805 2,501 2,636 104,747 (1,502) 151,847 102,702 24,987 3,906 8,060 0 0 2,136 8,796 151,847 8,310 1,482 366 10,460 3,190 4,995 5,465 449 40 5,153 2,499 2,499 0 0 1,624 2.61 2.58 4.25 684 361 14 0 1,638 794 159 1,502 1,161 4 337
EX-27 14 EXHIBIT (27)(C)
9 12-MOS DEC-31-1995 DEC-31-1995 6,911 82 4,613 2,360 20,528 3,140 3,320 98,428 1,638 142,858 100,148 21,404 3,407 7,374 0 183 2,069 7,655 142,858 7,866 1,367 198 9,553 3,075 4,424 5,129 259 51 4,657 2,389 2,389 0 0 1,541 2.44 2.38 4.51 682 356 4 0 1,578 526 134 1,638 1,360 35 243
EX-99 15 EXHIBIT (99)(A) CoreStates Financial Corp and Subsidiaries
CONTENTS OF FINANCIAL SECTION PAGE ----- FINANCIAL STATEMENTS Management's Report Regarding the Effectiveness of Internal Control Over Financial Reporting........ 43 Report of Independent Auditors....................................................................... 44 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............... 45 Consolidated Balance Sheets as of December 31, 1997 and 1996......................................... 46 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995................................................................ 47-48 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........... 49-50 Notes to the Consolidated Financial Statements....................................................... 51-84 Note: The page numbers set forth herein conform with those presented in information provided by CoreStates Financial Corp.
CORESTATES FINANCIAL CORP AND SUBSIDIARIES Management's Report on Internal Controls Over Financial Reporting Financial Statements CoreStates Financial Corp is responsible for the preparation, integrity, and fair presentation of its published financial statements as of December 31, 1997, and the year then ended. The consolidated financial statements of CoreStates Financial Corp have been prepared in accordance with generally accepted accounting principles and, as such, include some amounts that are based on judgments and estimates of management. Internal Control over Financial Reporting Management is responsible for establishing and maintaining effective internal control over financial reporting. The system contains monitoring mechanisms and actions are taken to correct deficiencies identified. There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time. Management assessed CoreStates Financial Corp's internal control over financial reporting as of December 31, 1997. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that CoreStates Financial Corp maintained effective internal control over financial reporting as of December 31, 1997. Chief Financial Officer /s/ Albert W. Mandia Chairman and Chief Executive Officer /s/ Terrence A. Larsen 43 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders CoreStates Financial Corp We have audited the accompanying consolidated balance sheets of CoreStates Financial Corp as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1995 financial statements of Meridian Bancorp, Inc. and United Counties Bancorporation, which statements reflect combined net interest income constituting 31.3% of the related consolidated total for the year ended December 31, 1995. Those statements were audited by other auditors whose reports thereon have been furnished to us, and our opinion, insofar as it relates to data included for Meridian Bancorp, Inc. and United Counties Bancorporation, is based solely on the reports of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoreStates Financial Corp at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Philadelphia, Pennsylvania January 20, 1998 44 CoreStates Financial Corp and Subsidiaries CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts)
Year Ended December 31, ---------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- INTEREST INCOME Interest and fees on loans: Taxable income..................................................... $2,995,604 $2,845,898 $2,902,265 Tax exempt income.................................................. 20,310 25,335 30,390 Interest on investment securities: Taxable income..................................................... 202,425 254,576 349,138 Tax exempt income.................................................. 18,455 23,190 31,018 Interest on time deposits in banks.................................... 163,454 122,752 121,993 Interest on Federal funds sold, securities purchased under agreements to resell and other............................... 29,067 26,453 40,276 ---------- --------- ---------- Total interest income.............................................. 3,429,315 3,298,204 3,475,080 ---------- --------- ---------- INTEREST EXPENSE Interest on deposits: Domestic savings................................................... 383,333 295,650 396,176 Domestic time...................................................... 436,135 497,956 492,610 Overseas branches and subsidiaries................................. 64,896 48,174 52,261 ---------- --------- ---------- Total interest on deposits...................................... 884,364 841,780 941,047 Interest on short-term funds borrowed................................. 189,835 153,129 214,119 Interest on long-term debt............................................ 239,248 161,811 152,989 ---------- --------- ---------- Total interest expense.......................................... 1,313,447 1,156,720 1,308,155 ---------- --------- ---------- Net interest income................................................ 2,115,868 2,141,484 2,166,925 Provision for losses on loans......................................... 263,000 228,767 144,002 ---------- --------- ---------- Net interest income after provision for losses on loans............ 1,852,868 1,912,717 2,022,923 ---------- --------- ---------- NON-INTEREST INCOME Service charges on deposit accounts................................... 242,285 229,592 233,592 Trust income.......................................................... 186,031 167,138 162,776 Fees for international services....................................... 113,767 101,761 94,396 Debit and credit card fees............................................ 96,983 88,811 94,659 Income from investment in EPS, Inc.................................... 29,486 29,902 30,114 Income from trading activities........................................ 34,445 25,216 35,403 Securities gains...................................................... 21,111 59,512 31,475 Other gains........................................................... - 8,200 26,400 Other operating income................................................ 201,662 188,943 173,407 ----------- --------- ---------- Total non-interest income.......................................... 925,770 899,075 882,222 ----------- --------- ---------- NON-FINANCIAL EXPENSES Salaries, wages and benefits.......................................... 834,184 826,442 904,377 Net occupancy......................................................... 143,112 157,358 159,530 Equipment expenses.................................................... 125,070 120,602 118,532 Restructuring and merger-related charges.............................. 15,000 139,702 138,600 Other operating expenses.............................................. 578,411 532,724 564,489 ----------- --------- ---------- Total non-financial expenses....................................... 1,695,777 1,776,828 1,885,528 ----------- --------- ---------- INCOME BEFORE INCOME TAXES............................................ 1,082,861 1,034,964 1,019,617 Provision for income taxes............................................ 269,582 385,820 364,441 ----------- --------- ---------- NET INCOME............................................................ $ 813,279 $ 649,144 $ 655,176 =========== ========= ========== PER COMMON SHARE DATA Net income: Basic.............................................................. $4.00 $2.97 $2.95 ===== ===== ===== Diluted............................................................ $3.96 $2.94 $2.92 ===== ===== ===== Cash dividends declared............................................... $1.91 $1.73 $1.44 ===== ===== =====
See accompanying notes to the financial statements. 45 CoreStates Financial Corp and Subsidiaries CONSOLIDATED BALANCE SHEET (in thousands)
December 31, -------------------------------- 1997 1996 ------------ ------------ ASSETS Cash and due from banks................................... $ 3,829,893 $ 3,462,287 Time deposits, principally Eurodollars.................... 3,122,444 2,443,154 Federal funds sold and securities purchased under agreements to resell.................................. 41,207 509,694 Trading account assets.................................... 495,472 122,317 Investment securities available-for-sale.................. 2,109,254 2,394,166 Investment securities held-to-maturity (market value: 1997-$1,347,819; 1996-$1,692,243)..................... 1,351,137 1,689,058 Total loans, net of unearned discounts of $249,702 in 1997 and $234,607 in 1996................. 34,813,886 32,331,297 Less: Allowance for loan losses....................... (634,432) (710,327) ------------ ------------ Net loans......................................... 34,179,454 31,620,970 ------------ ------------ Due from customers on acceptances......................... 641,859 738,077 Premises and equipment.................................... 629,965 625,876 Other assets.............................................. 2,060,280 1,888,595 ------------ ------------ Total assets...................................... $ 48,460,965 $ 45,494,194 ============ ============ LIABILITIES Deposits: Domestic: Non-interest bearing.............................. $ 9,252,376 $ 9,330,445 Interest bearing.................................. 23,490,992 22,986,955 Overseas branches and subsidiaries.................... 1,444,522 1,409,756 ------------ ------------ Total deposits.................................... 34,187,890 33,727,156 ------------ ------------ Short-term funds borrowed................................. 4,323,319 2,633,157 Bank acceptances outstanding.............................. 641,464 727,728 Other liabilities......................................... 1,616,624 1,661,162 Long-term debt............................................ 4,454,236 3,049,297 ------------ ------------ Total liabilities................................. 45,223,533 41,798,500 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES SHAREHOLDERS' EQUITY Preferred stock: authorized 10.0 million shares; no shares issued.............................. - - Common stock: $1 par value; authorized 350.0 million shares; issued 223.599 million shares in 1997 and 1996 (including treasury shares of 23.235 million in 1997 and 8.900 million in 1996, and unallocated shares held by Employee Stock Ownership Plan ("ESOP") of 2.148 million in 1997 and 2.267 million in 1996)............ 223,599 223,599 Other common shareholders' equity, net.................... 3,013,833 3,472,095 ------------ ------------ Total shareholders' equity........................ 3,237,432 3,695,694 ------------ ------------ Total liabilities and shareholders' equity........ $ 48,460,965 $ 45,494,194 ============ ============
See accompanying notes to the financial statements. 46 CoreStates Financial Corp and Subsidiaries Page 1 of 2 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands)
Common Capital Retained Treasury Unallocated stock surplus earnings stock ESOP shares Total -------- ---------- ---------- --------- ----------- ---------- Balances at December 31, 1994.......................... $229,827 $1,200,658 $2,360,312 $ (24,297) $ (35,568) $3,730,932 Net income............................................. 655,176 655,176 Net change in unrealized gain on investments available-for-sale, net of tax..................... 41,187 41,187 Treasury shares acquired (10,307 shares)............... (335,528) (335,528) Repurchase and retirement of common stock (595 shares)....................................... (595) (4,093) (12,446) (17,134) Common stock issued under employee benefit plans (1,002 new shares; 3,089 treasury shares).......... 999 26,825 (25,483) 96,670 99,011 Common stock issued under dividend reinvestment plan (417 treasury shares).............................. (9) (2) 12,690 12,679 Purchase of shares for Employee Stock Ownership Plan (876 shares) ...................................... (20,922) (20,922) Employee Stock Ownership Plan shares committed for release (123 shares)............................... 1,786 2,824 4,610 Cash paid for fractional shares........................ (24) (24) Foreign currency translation adjustments............... (29) (29) Common dividends declared.............................. (294,393) (294,393) -------- ---------- ---------- --------- --------- ---------- Balances at December 31, 1995.......................... 230,231 1,225,167 2,724,298 (250,465) (53,666) 3,875,565 Net income............................................. 649,144 649,144 Net change in unrealized gain on investments available-for-sale, net of tax..................... (25,070) (25,070) Treasury shares acquired (11,055 shares)............... (533,932) (533,932) Treasury shares issued in merger (7,300 shares)........ (7,300) (33,288) (192,042) 232,630 - Repurchase and retirement of common stock (1,340 shares)..................................... (1,340) (43,559) (12,804) (57,703) Common stock issued under employee benefit plans (1,824 new shares; 2,330 treasury shares).......... 1,824 75,618 (48,119) 100,826 130,149 Common stock issued under dividend reinvestment plan (184 new shares; 353 treasury shares)............. 184 8,225 (68) 13,361 21,702 Purchase of shares for Employee Stock Ownership Plan (65 shares).................................. (38) (3,509) (3,547) Employee stock ownership plan shares committed for release (126 shares)................. 2,397 3,018 5,415 Cash paid for fractional shares........................ (342) (342) Foreign currency translation adjustments............... 5,448 5,448 Common dividends declared.............................. (371,135) (371,135) -------- ---------- ---------- --------- -------- ---------- Balances at December 31, 1996.......................... 223,599 1,234,522 2,729,310 (437,580) (54,157) 3,695,694
(continued) 47 CoreStates Financial Corp and Subsidiaries Page 2 of 2 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY: continued (in thousands)
Common Capital Retained Treasury Unallocated stock surplus earnings stock ESOP shares Total -------- ---------- ---------- ---------- ----------- ---------- Net income............................................ 813,279 813,279 Net change in unrealized gain on investments available-for-sale, net of tax.................... 5,149 5,149 Treasury shares acquired (17,100 shares).............. (1,007,832) (1,007,832) Common stock issued under employee benefit plans (2,209 treasury shares)........................... 22,665 (70,325) 133,198 85,538 Common stock issued under dividend reinvestment plan (556 treasury shares)............................. 676 (1,058) 30,383 30,001 Employee stock ownership plan shares committed for release (119 shares)................ 4,423 2,846 7,269 Foreign currency translation adjustments.............. (748) (748) Common dividends declared............................. (390,918) (390,918) -------- ---------- ---------- ---------- ----------- ---------- Balances at December 31, 1997......................... $223,599 $1,262,286 $3,084,689 $(1,281,831) $(51,311) $3,237,432 ======== ========== ========== ========== =========== ==========
See accompanying notes to the financial statements. 48 CoreStates Financial Corp and Subsidiaries Page 1 of 2 CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------------------------ OPERATING ACTIVITIES 1997 1996 1995 ------------ ------------ ------------ Net income........................................................... $ 813,279 $ 649,144 $ 655,176 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring and merger-related charges.......................... 15,000 139,702 138,600 Provision for losses on loans..................................... 263,000 228,767 144,002 Provision for losses and writedowns on other real estate owned...................................... 5,500 3,387 15,971 Depreciation and amortization..................................... 126,749 110,512 122,996 Deferred income tax expense....................................... 100,751 9,156 28,420 Securities gains.................................................. (21,111) (59,512) (31,475) Gains on sale of mortgage servicing............................... - - (2,387) Other gains....................................................... - (8,200) (26,400) (Increase) decrease in loans held-for-sale........................ (395,583) 93,039 82,226 (Increase) decrease in trading account assets.................... (373,155) 24,901 200,833 Increase (decrease) in due to factored clients.................... 143,486 1,805 (86,921) (Increase) decrease in interest receivable........................ (34,460) 45,046 2,009 Increase in interest payable...................................... 23,014 10,163 45,044 Decrease in merger-related accrual ............................... (59,451) (100,258) (33,270) Other, net........................................................ (101,623) 216,135 ( 84,141) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 505,396 1,363,787 1,170,683 ------------ ------------ ------------ INVESTING ACTIVITIES Net increase in loans................................................ (3,592,259) (2,989,441) (1,914,405) Proceeds from sales of loans......................................... 898,828 1,577,270 1,087,732 Loans originated or acquired--non-bank subsidiaries.................. (37,198,437) (39,054,032) (35,767,440) Principal collected on loans--non-bank subsidiaries.................. 37,056,155 39,039,627 35,407,667 Net increase in time deposits, principally Eurodollars............... (679,290) (533,894) (33,172) Purchases of investments held-to-maturity............................ (650,362) (490,995) (686,652) Purchases of investments available-for-sale.......................... (568,161) (2,062,012) (589,327) Proceeds from maturities of investments held-to-maturity............. 995,449 1,524,670 2,175,780 Proceeds from maturities of investments available-for-sale........... 807,037 854,898 161,477 Proceeds from sales of investments available-for-sale................ 122,037 1,500,504 546,728 Net decrease in Federal funds sold and securities purchased under agreements to resell................... 468,487 210,243 203,693 Purchases of premises and equipment.................................. (90,085) (101,469) (125,216) Proceeds from sales and paydowns on other real estate owned................................................. 12,896 31,465 66,834 Other, net........................................................... 33,493 141,063 11,303 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES....................................................... (2,384,212) (352,103) 545,002 ------------ ------------ ------------
(continued) 49 CoreStates Financial Corp and Subsidiaries Page 2 of 2 CONSOLIDATED STATEMENT OF CASH FLOWS: continued (in thousands)
Year Ended December 31, ----------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ FINANCING ACTIVITIES Net increase (decrease) in deposits........................... 460,734 172,155 (660,745) Payment for sales of deposits................................. - (368,110) (154,360) Proceeds from issuance of long-term debt...................... 2,033,056 1,340,099 582,251 Retirement of long-term debt.................................. (630,547) (501,165) (533,480) Net increase (decrease) in short-term funds borrowed.......... 1,690,162 (1,043,856) 215,764 Cash dividends paid........................................... (391,781) (328,114) (286,565) Purchases of treasury stock................................... (1,007,832) (533,932) (335,528) Repurchase and retirement of common stock..................... - (57,703) (17,134) Common stock issued under employee benefit plans.............. 62,873 87,726 99,011 Other, net.................................................... 29,757 21,360 12,655 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES...................................... 2,246,422 (1,211,540) (1,078,131) ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS................................................ 367,606 (199,856) 637,554 Cash and due from banks at January 1,......................... 3,462,287 3,662,143 3,024,589 ------------ ------------ ------------ CASH AND DUE FROM BANKS AT DECEMBER 31,....................... $ 3,829,893 $ 3,462,287 $ 3,662,143 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest.................................................. $ 1,290,433 $ 1,146,557 $ 1,263,681 ============ ============ ============ Income taxes.............................................. $ 193,532 $ 331,940 $ 284,987 ============ ============ ============ Net cash received on interest rate swaps...................... $ 54,230 $ 68,103 $ 7,493 ============ ============ ============
See accompanying notes to the financial statements. 50 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The consolidated financial statements include the accounts of CoreStates Financial Corp ("the Corporation") and all of its subsidiaries, including: CoreStates Bank, N.A. ("CBNA"); CoreStates Bank of Delaware, N.A. ("CBD"); Congress Financial Corporation; and CoreStates Capital Corp ("CSCC"). All material intercompany transactions have been eliminated. Certain amounts in prior years have been reclassified for comparative purposes. The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania, primarily operating in the eastern Pennsylvania, northern Delaware and the central and southern New Jersey markets. Through its subsidiaries, the Corporation is engaged in the business of providing global and specialized banking (including international banking services), regional banking, retail credit services, trust and asset management and third party processing services to a diversified customer base. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Changes in accounting principles Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("FAS 125"), was issued in June 1996. FAS 125 requires an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. FAS 125 is applicable to transactions occurring after December 31, 1996, except for provisions dealing with securities lending, repurchase and dollar repurchase agreements, which are deferred by FAS 127 and became effective January 1, 1998. The adoption of FAS 125 did not, and the adoption of FAS 127 is not expected to, have a material impact on the Corporation's results of operations or financial condition. Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") was issued in February 1997. FAS 128, which was adopted on December 31, 1997, required entities to change the method used to compute earnings per share. Under FAS 128, basic earnings per share excludes the dilutive effect of stock options and diluted earnings per share includes the dilutive effect of stock options even if the dilutive effect is immaterial. All periods presented have been restated to comply with FAS 128. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") was adopted by the Corporation in 1996 and establishes accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans ("stock-based plans"). FAS 123 defines a fair value method of accounting for measuring compensation expense for stock-based plans and encourages all entities to adopt that method of accounting. However, FAS 123 also permits entities to continue to measure compensation expense for stock-based plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the fair value method, compensation expense would be measured as the value of an award under a stock-based plan on the date the award is granted, and would be recognized over the vesting period of the award. Under the intrinsic value method, compensation expense is measured as the excess, if any, of the market price of the stock underlying the award on the date the award is granted, over the exercise price. Under the Corporation's stock-based long-term incentive plan, awards have no intrinsic value on the date of grant as the exercise price equals the market price on that date. The Corporation did not adopt the fair value method of accounting for stock-based plans, and will continue to use the intrinsic value method to measure compensation expense. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" ("FAS 118"). FAS 114 addresses accounting for impairment of certain loans and requires that impaired loans within the scope of FAS 114 be measured based on the present value of expected cash flows discounted at the loan's effective interest rate, or be measured at the loan's observable market price or the fair value of its collateral. FAS 118 amended the income recognition policies and clarified disclosure requirements of FAS 114. The adoption of these standards did not have an impact on CoreStates' provision for loan losses or allowance for loan losses, nor change CoreStates' methodology for recognizing income on impaired loans. 51 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Income taxes Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The Corporation and its subsidiaries file a consolidated Federal income tax return. Investments Held-to-maturity securities, consisting primarily of debt securities, are carried at cost adjusted for amortization of premiums and accretion of discounts, both computed on the interest method. The Corporation has both the ability and positive intent to hold these securities until maturity. Trading account assets are carried at market value. Gains on trading account assets include both realized and unrealized gains and losses on the portfolio. All other securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of shareholders' equity. The net unrealized gain on available-for-sale securities included in retained earnings was $31,704 at December 31, 1997 and $26,555 at December 31, 1996. Realized securities gains and losses are determined using the adjusted cost of a specific security sold. Interest and dividends on investment securities are recognized as income when earned. Loans Interest on commercial loans is recognized on the daily principal amounts outstanding. Loan fees are generally considered adjustments of interest rate yields and are amortized into interest income on loans over the terms of the related loans. Interest on installment loans is principally recognized on the interest method. Commercial loans are placed on a non-accrual status, generally recognizing interest as income when received, when, in the opinion of management, the collectability of principal or interest payments becomes doubtful or when such payments are 90 days or more past due, unless the loan is well secured and in the process of collection. The deferral or non-recognition of interest does not constitute forgiveness of the borrower's obligation. Consumer loans, excluding residential mortgage loans and credit card loans, are charged off after reaching 120 days past due. Residential mortgage loans are placed on non-accrual status after reaching 120 days past due and are written down to the fair value of underlying collateral at that time. Credit card loans are charged off after reaching 150 days past due. Prior to the second quarter of 1996, credit card loans were charged off after reaching 180 days past due. Loans classified as held for sale are included in other assets and are carried at their net realizable value. Other real estate owned When a property is acquired through foreclosure of a loan secured by real estate, that property is recorded at the lower of the cost basis in the loan or the estimated fair value of the property less estimated disposal costs. Writedowns at the time of foreclosure are charged against the allowance for loan losses. Subsequent writedowns for changes in the fair value of the property are charged to other non-financial expense. Allowance for loan losses The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Factors included in management's determination of an adequate level of allowance for loan losses are a statistical analysis of historical loss levels throughout an economic cycle and one year of projected charge-offs, establishing a minimum level below which the allowance for loan losses is considered inadequate and a maximum level above which is considered inappropriate. A quarterly evaluation of loss potential on specific credits, products, industries, portfolios and markets, as well as indicators for loan growth, the economic environment and concentrations assist in validating the position of the allowance for loan losses within those boundaries. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. 52 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued The Corporation adopted FAS 114 effective January 1, 1995. Under FAS 114, the allowance for loan losses related to "impaired loans" is based on discounted cash flows using the impaired loan's initial effective interest rate as the discount rate, or the fair value of the collateral for collateral dependent loans. A loan is impaired when it meets the criteria to be placed on non-accrual status or is a renegotiated loan. Loans which are evaluated for impairment pursuant to FAS 114 are assessed on a loan-by-loan basis, and include only commercial non-accrual and renegotiated loans. Large groups of smaller balance homogeneous loans, such as commercial loans less than $250 and credit cards, lease financing receivables, loans secured by first and second liens on residential properties, and other consumer loans are evaluated collectively for impairment. Additions to the allowance arise from the provision for loan losses charged to operations or from the recovery of amounts previously charged off. Loan charge-offs reduce the allowance. Loans are charged off when there has been permanent impairment of the related carrying values. Premises and equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed, generally, on the straight-line method at rates based on the following range of lives: buildings - 10 to 45 years; equipment - 3 to 12 years; and leasehold improvements - 3 to 15 years. Intangible assets (included in other assets) Goodwill and other acquired intangibles, such as core deposits, are amortized over the estimated periods to be benefited generally ranging from 5 to 25 years. An impairment review is performed periodically on these assets. Retirement plans The Corporation maintains non-contributory defined benefit pension plans for substantially all employees. Benefits are primarily based on the employee's years of credited service, average annual salary and primary social security benefit, as defined in the plans. It is the Corporation's policy to fund the plans on a current basis to the extent deductible under existing tax regulations. The Corporation provides postretirement health care and life insurance benefits for substantially all retired employees. In order to participate in the health care plan, an employee must retire with at least 10 years of service. The postretirement health care plan is contributory, with retiree contributions based on years of service. It is the Corporation's policy to fund these plans on a current basis to the extent deductible under existing tax regulations. Employee Stock Ownership Plan ("ESOP") Compensation expense in 1996 and 1995 was recognized based on the average fair value of shares committed to be released to employees. Effective January 1, 1997, the ESOP was combined with the Corporation's 401(k) Savings Plan. The remaining shares in the ESOP will be released to substantially all employees of the Corporation and compensation expense will be recorded as a portion of the Corporation's match of employee contributions to the 401(k) Savings Plan. Shares are released based on the fair value of the shares at the date the compensation expense is recorded. Foreign exchange/currency Forward exchange contracts are valued at current rates of exchange. Gains or losses on forward exchange contracts intended to hedge an identifiable foreign currency commitment, if any, are deferred and included in the measurement of the related foreign currency transaction. All other gains or losses on forward exchange contracts are included in fees for international services. Currency gains and losses in connection with non-dollar denominated loans and deposits, which are included in interest income and expenses, are recognized pro rata over the contract terms. Foreign currency translation adjustments are recorded directly to retained earnings. The cumulative foreign currency translation gain (loss) was $3,100, $3,848 and $(1,600) at December 31, 1997, 1996 and 1995, respectively. 53 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Derivative interest rate contracts The Corporation uses various interest rate contracts such as, interest rate swaps, futures, forward rate agreements, caps and floors, tender option bonds, Treasury float agreements, and forward commitments to purchase and sell loans and securities, primarily to manage the interest rate risk of specific assets, liabilities or anticipated transactions, to manage interest rate risk in securities trading positions and to provide for the needs of its customers. For contracts held for purposes other than trading, gains or losses are deferred and recognized as adjustments to interest income or expense of the underlying assets or liabilities and the interest differentials are recognized as adjustments of the related interest income or expense. Gains or losses resulting from early terminations of these contracts are deferred and amortized over the remaining term of the underlying assets or liabilities. Any fees received or disbursed which represent adjustments to the yield on interest rate contracts are capitalized and amortized over the term of the interest rate contracts. If the underlying assets or liabilities related to a derivative matures, is sold, extinguished, or terminates, the amount of the previously unrecognized gain or loss is recognized at that time in the consolidated income statement. The Corporation's trading and customer-related derivative positions mostly include tender option bonds, Treasury float agreements, and forward commitments to purchase and sell loans and securities, and interest rate caps, floors, and swaps. Gains and losses and net interest spread earned on these products are generally included in non-interest income. Treasury float agreements represent purchased option contracts. Forward commitments to purchase and sell loans and securities consist primarily of forward commitments to sell mortgage-backed securities, which are used to hedge mortgage loans held in the trading account. These commitments are marked to fair value with unrealized gains and losses recorded in income from trading activities. Contracts held or issued for customers are valued at market with gains or losses included in income from trading activities. Earnings per common share Basic earnings per common share for all periods presented are calculated by dividing net income by weighted average common shares outstanding. Diluted earnings per share for all periods presented are calculated by dividing net income by the sum of weighted average common shares outstanding and potentially dilutive shares (primarily stock options). For purposes of computing earnings per share, only shares committed to be released and shares allocated in the ESOP are considered outstanding. Unless otherwise noted, all "per share" amounts are on a diluted basis. Treasury stock The purchase of the Corporation's common stock is recorded at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of shares reissued on a last-in-first-out basis. Cash dividends declared per share Cash dividends declared per share for the periods prior to the acquisition of Meridian Bancorp, Inc. ("Meridian") on April 9, 1996, assume that the Corporation would have declared cash dividends equal to the cash dividends per share actually declared by the Corporation. 2. MERGERS AND ACQUISITIONS Pending merger On November 18, 1997, the Corporation entered into an Agreement and Plan of Mergers (the "Merger Agreement"), which provides, among other things, for the merger (the "Merger") of the Corporation into First Union Corporation ("First Union"). Pursuant to the Merger Agreement, each outstanding share of the Corporation's common stock would be converted into 1.62 shares of First Union's common stock (the "Exchange Ratio"), subject to possible adjustment under certain circumstances. The Merger is intended to be accounted for as a pooling of interests. Consummation of the Merger is subject to various conditions, including: (i) receipt of the approval of the Merger Agreement by the Corporation's and First Union's stockholders, and approval by First Union's stockholders of an amendment to First Union's Articles of Incorporation to increase the number of authorized shares of First Union's common stock from 750,000,000 to 2,000,000,000, which such approvals were obtained on February 27, 1998; (ii) receipt of requisite regulatory approvals from the Board of Governors of the Federal Reserve System and other federal and state regulatory authorities; (iii) receipt of opinions as to the tax and accounting treatment of certain aspects of the Merger; (iv) listing, subject to notice of issuance, of First Union's common stock to be issued in the Merger; and (v) satisfaction of certain other conditions. 54 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 2. MERGERS AND ACQUISITIONS - continued The Merger Agreement may be terminated under certain circumstances, including by the Corporation's Board of Directors by giving notice to First Union if either (x) both (i) the average closing price of First Union's common stock for the ten full trading days ending on the date the Federal Reserve Board approves the Merger (the "Average Closing Price") is less than the product of the closing price of First Union's common stock (the "Starting Price") on the first full trading day after public announcement of execution of the Merger Agreement (the "Starting Date") and 0.85, and (ii) the number obtained by dividing the Average Closing Price by the Starting Price is less than the number obtained by (a) dividing the weighted average of the closing prices of a specified group index of bank stocks during the above-mentioned ten-day period by the weighted average closing prices of such bank stocks on the Starting Date and (b) subtracting 0.15, or (y) the Average Closing Price is less than the product of the Starting Price and 0.75. In the event CoreStates gives notice of its intent to terminate the Merger Agreement pursuant to the conditions set forth in the preceding sentence, First Union may determine, in its sole discretion, to increase the Exchange Ratio to eliminate the Corporation's right to terminate the Merger Agreement. A summary of selected unaudited historical financial information for First Union for the three years ended December 31, 1997 follows (in millions, except per share):
Year ended December 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Net interest income.............................. $5,743 $ 5,465 $ 5,128 Provision for losses on loans.................... 840 449 258 Non-interest income.............................. 3,396 2,636 2,176 Non-financial expenses........................... 5,589 5,153 4,657 Provision for income taxes....................... 814 875 848 Net income....................................... 1,896 1,624 1,541 Per common share: Net income - basic............................ $3.03 $2.61 $2.44 Net income - diluted.......................... 2.99 2.58 2.38 Cash dividends declared....................... 1.22 1.10 0.98
Meridian acquisition On April 9, 1996, the Corporation acquired Meridian Bancorp, Inc. ("Meridian"), a Pennsylvania bank holding company with $15.2 billion in assets and $12.1 billion in deposits. The Corporation issued approximately 81.1 million shares of common stock to shareholders of Meridian based on an exchange ratio of 1.225 shares of the Corporation's common stock for each share of Meridian common stock. On February 23, 1996, Meridian acquired United Counties Bancorporation ("United Counties"), a New Jersey bank holding company with $1.6 billion in assets in a transaction accounted for as a pooling of interests. Accordingly, the consolidated accounts of Meridian include United Counties for all periods presented. 55 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands, except per share amounts) 2. MERGERS AND ACQUISITIONS - continued The Meridian acquisition was accounted for under the pooling of interests method of accounting; accordingly, the consolidated financial statements include the consolidated accounts of Meridian for all periods presented. Financial information on a separate company basis for the year ended December 31, 1995 for the Corporation and Meridian (including United Counties) was as follows (in millions, except per share):
1995 --------------------------- The (Unaudited) Corporation Meridian ------------ ---------- Net interest income............................... $ 1,488,534 $ 678,391 Provision for losses on loans..................... 105,000 38,877 Non-interest income............................... 605,666 276,556 Non-financial expenses............................ 1,274,398 612,695 Provision for income taxes........................ 262,565 101,372 Net income........................................ 452,237 202,003 Per common share: Net income - basic............................. 3.22 3.03 Net income - diluted........................... 3.19 2.98 Cash dividends declared........................ 1.44 1.45
The restated consolidated statement of income for 1995 reflects a conforming accounting adjustment for Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). The Corporation elected to recognize immediately the January 1, 1992 transitional liability of $128,706 pre-tax, $84,946 after-tax, as the cumulative effect of a change in accounting principle in the first quarter of 1992. Meridian adopted FAS 106 on January 1, 1993, the date required under that statement. As permitted by FAS 106, Meridian elected to amortize its liability over 20 years. As permitted under pooling of interests accounting, the restated financial information is prepared as if Meridian adopted FAS 106 effective January 1, 1992 and immediately recognized the $28,827, $18,738 after-tax, transitional liability. Restated salaries, wages and benefits have been adjusted accordingly. 3. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value information about financial instruments, whether or not required to be recognized in the balance sheet, for which it is practicable to estimate that value. FAS 107 defines a financial instrument as cash, evidence of ownership interest in an entity, or a contractual obligation or right that will be settled with another financial instrument. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Fair value estimates derived through those techniques cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. 56 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued The following table summarizes the carrying amount and fair value estimates of financial instruments at December 31, 1997 and 1996.
1997 1996 ----------------------------- ----------------------------- Carrying Carrying or Notional Fair or Notional Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Assets: Cash and short-term assets.................................... $ 6,993,544 $ 6,993,544 $ 6,415,135 $ 6,415,135 Investment securities......................................... 3,460,391 3,457,073 4,083,224 4,086,409 Trading account assets........................................ 495,472 495,472 122,317 122,317 Net loans, excluding leases................................... 32,822,537 33,136,437 30,388,757 30,391,968 Loans held for sale........................................... 841,318 841,318 445,735 445,735 Liabilities: Demand and savings deposits................................... 22,160,650 22,160,650 22,629,513 22,629,513 Time deposits, including overseas branches and subsidiaries... 12,027,240 12,226,204 11,097,643 11,321,471 Short-term borrowings......................................... 4,323,319 4,323,319 2,633,157 2,633,157 Long-term debt................................................ 4,454,236 4,480,927 3,049,297 3,059,173 Off-balance sheet asset (liability): Letters of credit............................................. 3,291,983 (32,920) 2,893,214 (28,931) Commitments to extend credit.................................. 23,875,236 (28,581) 19,569,566 (21,204) Mortgage loans sold and loan servicing acquired with recourse.................................... 299,322 (8,559) 361,410 (9,637) Derivative financial instruments.............................. 22,896,165 147,582 20,173,225 96,629
Fair value estimates, methods, and assumptions for the Corporation's financial instruments are set forth below: Cash and due from banks and short-term instruments The carrying amounts reported in the balance sheet for cash and due from banks and short-term instruments approximate their fair values. Short-term instruments include: time deposits; Federal funds sold; and securities purchased under agreements to resell, all of which generally have original maturities of less than 90 days. Investment securities Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Trading account assets Fair values for the Corporation's trading account assets, which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or are derived from pricing models or formulas using discounted cash flows. Loans Fair values are estimated for loans in groups with similar financial and risk characteristics. Loans are segregated by type including: commercial and industrial; commercial real estate; residential real estate; credit card and other consumer; financial institutions; factoring receivables; and foreign. Each loan type is further segmented into fixed and variable rate interest terms and by performing and non-performing categories in order to estimate fair values. The fair value of fixed-rate performing loans is calculated by discounting scheduled principal and interest cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan type at December 31, 1997 and 1996. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan type, modified by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by referring to secondary market source pricing. 57 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 3. FAIR VALUES OF FINANCIAL INSTRUMENTS - continued For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience and are discounted using secondary market rates adjusted for differences in servicing and credit costs. This estimate does not include the benefit that relates to cash flows which could generate from new loans to existing cardholders over the remaining life of the portfolio. For variable rate loans that reprice frequently and which have experienced no significant change in credit risk, fair values are based on carrying amounts. Fair value for non-performing loans is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding cash flows and discount rates are determined using available market information and specific borrower information. Deposit liabilities The fair values disclosed for demand deposits (non-interest bearing checking accounts, NOW accounts, savings accounts, and money market accounts) are, by FAS 107 definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates offered on certificates at December 31, 1997 and 1996, respectively, to an estimate of aggregate expected maturities for those certificates of deposit. The estimated fair values do not include the benefit that results from funding provided by core deposit liabilities as compared to the cost of borrowing funds in the financial markets. Short-term funds borrowed The carrying amounts of Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings approximate their fair values. Long-term debt The fair values for long-term debt are based on quoted market prices where available. If quoted market prices are not available, fair values are estimated using discounted cash flow analyses based on the Corporation's borrowing rates at December 31, 1997 and 1996 for comparable types of borrowing arrangements. Off-balance sheet derivative financial instruments and commitments Fair values for the Corporation's futures, forwards, interest rate swaps, options, interest rate caps and floors, foreign exchange contracts, tender option bonds and Treasury float contracts are based on quoted market prices (futures); current settlement values (forwards); quoted market prices of comparable instruments (foreign currency exchange contracts); or, if there are no directly comparable instruments, on pricing models or formulas using current assumptions (interest rate swaps, interest rate caps and floors, tender option bonds, Treasury float contracts and options). The fair value of commitments to extend credit, other than credit card lines, is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The value of commitments to extend credit under credit card lines is embodied in the benefit that relates to estimated cash flows from new loans expected to be generated from existing cardholders over the remaining life of the portfolio. The fair value of standby and commercial letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate the agreements or otherwise settle the obligations with the counterparties. 4. LOAN PORTFOLIO The following are summaries of certain loan categories, net of unearned discounts, for the two years ended December 31, 1997 (in thousands):
1997 1996 ------------- ------------ Domestic loans: Commercial, industrial and other......... $15,949,264 $ 13,906,646 Real estate loans: Construction and development........... 651,064 554,924 Residential............................ 3,915,702 4,073,272 Other, primarily commercial mortgages and commercial loans secured by owner-occupied real estate........... 4,284,281 4,541,697 ------------- ------------ Total real estate loans............ 8,851,047 9,169,893 ------------- ------------ Consumer loans: Installment............................ 2,973,719 3,027,943 Credit card............................ 1,205,932 1,674,921 ------------- ------------ Total consumer loans............... 4,179,651 4,702,864 ------------- ------------ Financial institutions................... 1,568,015 1,153,715 Factoring receivables.................... 454,850 411,280 Lease financing.......................... 1,356,917 1,232,213 ------------- ------------ Total domestic loans.............. 32,359,744 30,576,611 ------------- ------------ Foreign loans: Loans to or guaranteed by foreign banks.................................. 1,864,883 1,369,015 Commercial and industrial................ 587,071 385,426 Loans to other financial institutions.... 2,188 245 ------------- ------------ Total foreign loans................ 2,454,142 1,754,686 ------------- ------------ Total loans.................. $34,813,886 $ 32,331,297 =========== ============
The following represents the Corporation's non-accrual loans, renegotiated loans and other real estate owned for the two years ended December 31, 1997 (in thousands):
1997 1996 ---------- --------- Non-accrual loans Domestic........................................ $253,909 $220,770 Foreign......................................... - - ---------- --------- Total non-accrual loans.................... 253,909 220,770 ---------- --------- Renegotiated loans (a).......................... 10 18 ---------- --------- Total non-performing loans................. 253,919 220,788 ---------- --------- Other real estate owned (OREO).................. 14,342 24,175 ---------- --------- Total non-performing assets..................... $268,261 $244,963 ========== ========= Non-performing assets as a percentage of loans plus OREO................. 0.77% 0.76% ==== ==== Non-performing assets as a percentage of total assets.................... 0.55% 0.54% ==== ====
- ------------------- (a) There were no foreign renegotiated loans in any periods presented. The Corporation has traditionally maintained limits on industry, country and borrower concentrations as a way to diversify and manage credit risk. The Corporation manages industry concentrations by applying limits to a family of industries that have common risk characteristics. 58 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 4. LOAN PORTFOLIO - continued At December 31, 1997 and 1996, the Corporation had loans totaling $125,224 and $110,948, respectively, to its officers, directors and companies in which the directors had a 10% or more voting interest. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectability. The 1997 additions and reductions were $373,282 and $359,006, respectively. Included in other assets at December 31, 1997 and 1996 were $841,000 and $446,000, respectively, of loans held for sale and carried at lower of cost or market. The book value of real estate loans transferred to other real estate owned during 1997, 1996 and 1995 was $8,563, $19,536, and $29,337, respectively. The following presents information on derivative financial instruments used to manage interest rate risk associated with loans:
1997 1996 ------------ ------------ At December 31, Notional value......................... $6,283,000 $ 9,118,000 Unrealized gains....................... 71,000 64,000 Unrealized losses...................... 6,000 19,000 Effect on loan yield for the years ended December 31, From................................... 8.78% 8.92% To..................................... 8.89 9.03
59 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 5. INVESTMENT SECURITIES The carrying and fair values of investment securities at December 31, 1997 and 1996 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- 1997 - ---- Held-to-Maturity - ---------------- U.S. Treasury and Government agencies........................ $ 379,968 $ 3,076 $ 793 $ 382,251 State and municipal............................ 292,119 8,247 194 300,172 Mortgage-backed................................ 156,047 175 499 155,723 Other: Domestic................................... 473,738 146 13,476 460,408 Foreign.................................... 49,265 - - 49,265 ----------- ------- -------- ----------- Total held-to-maturity.................. $ 1,351,137 $11,644 $ 14,962 $ 1,347,819 =========== ======= ======== =========== Available-for-Sale - ------------------ U.S. Treasury and Government agencies........................ $ 1,149,771 $ 5,286 $ 751 $ 1,154,306 State and municipal............................ 43,279 493 90 43,682 Mortgage-backed................................ 439,653 4,098 2,072 441,679 Other: Domestic................................... 347,556 10,024 394 357,186 Foreign.................................... 80,197 32,886 682 112,401 ----------- ------- -------- ----------- Total available-for-sale................ $ 2,060,456 $52,787 $ 3,989 $ 2,109,254 =========== ======= ======== =========== 1996 - ---- Held-to-Maturity - ---------------- U.S. Treasury and Government agencies........................ $ 362,736 $ 3,501 $ 815 $ 365,422 State and municipal............................ 366,012 8,548 95 374,465 Mortgage-backed................................ 463,796 52 1,023 462,825 Other: Domestic................................... 442,082 340 7,529 434,893 Foreign................................... 54,432 224 18 54,638 ----------- ------- -------- ----------- Total held-to-maturity.................. $ 1,689,058 $12,665 $ 9,480 $ 1,692,243 =========== ======= ======== =========== Available-for-Sale - ------------------ U.S. Treasury and Government agencies........................ $ 1,512,966 $ 9,207 $ 1,061 $ 1,521,112 State and municipal............................ 59,864 468 335 59,997 Mortgage-backed................................ 505,527 4,494 4,854 505,167 Other: Domestic................................... 186,029 14,096 939 199,186 Foreign.................................... 87,741 20,974 11 108,704 ----------- ------- -------- ----------- Total available-for-sale................ $ 2,352,127 $49,239 $ 7,200 $ 2,394,166 =========== ======= ======== ===========
On November 15, 1995, the FASB issued a Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities", which permitted an enterprise to reassess the appropriateness of the classification of all investment securities held between November 15, 1995 and December 31, 1995. Based on its reassessment, the Corporation reclassified $1,726,739 in investment securities previously classified as held-to-maturity to the available-for-sale category. Unrealized gains on transferred investments were $12,160, unrealized losses were $8,340, and the fair value was $1,730,559. Marketable equity securities are carried in the available-for-sale portfolio and have been written up by $42,052 at December 31, 1997 and $34,808 at December 31, 1996, the aggregate of their excess fair values over cost, through after-tax credits to retained earnings. The Corporation recorded pre-tax gains of $23,668 in 1997, $13,210 in 1996, and $ 7,654 in 1995 on sales of certain domestic equity securities. During 1997 and 1996, the Corporation recorded pre-tax gains of $4,939 and $28,656, on the exchange of certain domestic equity securities. During 1997, 1996 and 1995, the Corporation recorded pre-tax gains of $559, $18,924, and $939 on sales of foreign equity securities. 60 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 5. INVESTMENT SECURITIES - continued At December 31, 1997 and 1996, there were no investments in securities of any single, non-Federal issuer in excess of 10% of shareholders' equity. Securities with a carrying value of $1,998,066 were pledged at December 31, 1997 to secure public deposits, trust deposits, and for certain other purposes as required by law. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
Amortized Fair Cost Value ----------- ----------- Held-to-Maturity - ---------------- Due in one year or less........................ $ 245,009 $ 245,032 Due after one year through five years.......... 315,218 318,726 Due after five years through ten years......... 170,726 174,986 Due after ten years............................ 167,196 169,758 Mortgage-backed securities..................... 156,047 155,723 ----------- ----------- $ 1,054,196 $ 1,064,225 =========== =========== Available-for-Sale - ------------------ Due in one year or less........................ $ 736,623 $ 737,858 Due after one year through five years.......... 565,386 569,185 Due after five years through ten years......... 63,362 63,653 Due after ten years............................ 97,075 97,321 Mortgage-backed securities..................... 439,653 441,679 ----------- ----------- $ 1,902,099 $ 1,909,696 =========== ===========
Proceeds from sales of investments in debt securities during 1997, 1996, and 1995 were $63,587, $1,411,398, and $560,022, respectively. Gross gains of $2,710 in 1997, $4,100 in 1996, and $11,180 in 1995, and gross losses of $422 in 1997, $5,378 in 1996, and $1,894 in 1995, were realized on those sales. 61 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 6. REGULATORY AND CAPITAL MATTERS The Corporation and its subsidiaries are subject to the regulations of certain Federal and state agencies including minimum risk-based and leverage capital guidelines issued by the Federal Reserve Board and Comptroller of the Currency. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. At December 31, 1997, management believes that the Corporation and its principal bank subsidiary, CBNA, meet all capital adequacy requirements to which they are subject. The following table illustrates the Corporation's and CBNA's risk-based and leverage capital ratios at December 31, 1997 and 1996:
Per Regulatory Guidelines ----------------------------------------------------- Actual Minimum "Well-Capitalized" --------------------- --------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ---------- ------- ---------- ------- ---------- ------- December 31, 1997 Tier 1 capital (a): Consolidated.......................... $3,756,680 8.48% $1,771,948 4% $2,657,922 6% CBNA.................................. 2,901,577 6.82 1,700,741 4 2,551,111 6 Total capital (b): Consolidated.......................... 5,306,410 11.98 3,543,897 8 4,429,871 10 CBNA.................................. 4,617,721 10.86 3,401,481 8 4,251,852 10 Tier 1 leverage ratio: Consolidated.......................... 3,756,680 7.97 1,414,618 3 2,357,697 5 CBNA.................................. 2,901,577 6.50 1,340,100 3 2,233,499 5 December 31, 1996 Tier 1 capital (a): Consolidated.......................... $3,725,318 9.45% $1,576,914 4% $2,365,372 6% CBNA.................................. 3,270,045 8.90 1,471,992 4 2,207,987 6 Total capital (b): Consolidated.......................... 5,215,789 13.23 3,153,829 8 3,942,286 10 CBNA.................................. 4,206,434 11.43 2,943,983 8 3,679,979 10 Tier 1 leverage ratio: Consolidated.......................... 3,725,318 8.46 1,321,090 3 2,201,817 5 CBNA.................................. 3,270,045 7.80 1,257,745 3 2,096,241 5
- -------------------- (a) Consists primarily of common shareholders' equity and Trust Capital Securities, less goodwill and certain intangible assets. (b) Consists of Tier 1 capital plus qualifying subordinated debt and the allowance for loan losses, within permitted limits. The primary source of funds for cash dividend payments by the Corporation to its shareholders is dividends received from its banking subsidiaries. The approval of the Comptroller of the Currency is required for a nationally chartered bank to pay dividends if the total of all dividends declared in any calendar year exceeds the bank's net profits (as defined by national banking regulations) for that year combined with its retained net profits for the preceding two calendar years. Under this formula, CBNA can declare dividends without approval of the Comptroller of the Currency of approximately $32,000 plus an additional amount equal to CBNA's retained net profits for 1998 up to the date of any such dividend declaration. Due to the special provision for losses on credit card outstandings recorded in the fourth quarter of 1997, CBD is unable to pay dividends without prior approval of the Comptroller of the Currency. The Federal Reserve Act requires that extensions of credit by CBNA to certain affiliates, including the Corporation, be secured by specified amounts and types of collateral, that extensions of credit to any such affiliate generally be limited to 10% of capital and surplus (as defined in that Act) and that extensions of credit to all such affiliates be limited to 20% of capital and surplus. The Corporation's banking subsidiaries are required to maintain reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the years ended December 31, 1997 and 1996 were approximately $211,000 and $257,000, respectively. 62 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 7. ALLOWANCE FOR LOAN LOSSES The following represents an analysis of changes in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ---------- --------- ---------- Balance at beginning of period..................... $ 710,327 $ 670,265 $ 681,124 Provision charged to operating expense............. 263,000 228,767 144,002 Recoveries of loans previously charged off......... 84,301 92,985 85,226 Loan charge-offs................................... (321,196) (281,690) (240,087) Allowance for loans designated as held for sale.... (102,000) - - ---------- --------- ---------- Balance at end of period........................... $ 634,432 $ 710,327 $ 670,265 ========== ========= ==========
The following presents information on loans that are considered impaired under FAS 114:
At December 31, 1997 1996 1995 ---------- --------- ---------- Recorded investment in impaired loans.............. $183,978 $183,330 Impaired loans against which a portion of the allowance for loan losses is specifically allocated......................... 130,614 74,609 Amount of allowance for loan losses specifically allocated to impaired loans....... 46,436 15,105 For the years ended December 31, Average recorded investment in impaired loans.......................................... 173,375 197,854 $257,746 Interest income recognized on impaired loans.......................................... 15,075 8,977 14,354
8. PREMISES AND EQUIPMENT Premises and equipment on the consolidated balance sheet is presented net of accumulated depreciation and amortization of $536,137 and $667,412 at December 31, 1997 and 1996, respectively. Depreciation and amortization of premises and equipment for the years ended December 31, 1997, 1996, and 1995, was $87,606, $95,897, and $98,033, respectively. 9. OPERATING LEASES Rental expense, reduced by sublease rental income, charged to operations was $89,300, $90,982 and $85,419 for 1997, 1996 and 1995, respectively. 63 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 10. DEPOSITS The following presents a breakdown of deposits at December 31, 1997 and 1996:
1997 1996 ------------ ------------ Domestic: Non-interest bearing checking.............. $ 9,252,376 $ 9,330,445 Savings, NOW and money market accounts......................... 12,908,274 13,299,068 Time deposits.............................. 10,582,718 9,687,887 ------------ ------------ Total domestic deposits................. 32,743,368 32,317,400 Overseas branches and subsidiaries............. 1,444,522 1,409,756 ------------ ------------ Total deposits.......................... $34,187,890 $ 33,727,156 =========== ============
Domestic time deposits in denominations of $100 or more at December 31, 1997, 1996, and 1995 were:
1997 1996 1995 ----------- ----------- ----------- Commercial certificates of deposit............. $2,489,415 $ 754,437 $ 695,970 Other domestic time deposits, principally savings certificates........... 608,968 613,126 501,058 ----------- ----------- ----------- Total........................... $3,098,383 $ 1,367,563 $ 1,197,028 ========== =========== ===========
Interest expense on domestic time deposits in denominations of $100 or more for the years ended December 31, 1997, 1996, and 1995 was:
1997 1996 1995 --------- ------- -------- Interest expense: Commercial certificates of deposit......... $ 98,669 $30,857 $ 36,520 Other domestic time deposits, principally savings certificates................ 31,294 25,451 30,057 --------- ------- -------- Total........................... $129,963 $56,308 $ 66,577 ======== ======= ========
Substantially all of the deposits of overseas branches and subsidiaries were time deposits in denominations of $100 or more for each of the three years presented. The following presents information on derivative financial instruments used to manage interest rate risk associated with deposits:
1997 1996 ---------- ----------- At December 31, Notional value............................. $3,789,000 $ 5,314,000 Unrealized gains........................... 30,000 50,000 Unrealized losses.......................... 6,000 16,000 Effect on deposit interest expense for the year ended December 31, From....................................... 3.68% 3.62% To......................................... 3.60 3.49
64 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 11. SHORT-TERM FUNDS BORROWED Short-term funds borrowed at December 31, 1997, 1996 and 1995 include the following:
Weighted Maximum Average Average Balance outstanding outstanding interest at end of during during rate during year year(e) year year(f) ----------- ---------- ----------- ----------- 1997 - ---- Federal funds purchased (a).......................... $ 1,422,208 $1,550,412 $ 860,000 5.84% Securities sold under agreements to repurchase (b)... 571,804 767,480 627,000 4.86 Commercial paper (c)................................. 865,835 1,147,909 914,000 5.61 Other short-term funds borrowed (d).................. 1,463,472 1,507,363 1,013,000 5.71 ----------- ----------- Total short-term funds borrowed ................ $ 4,323,319 $ 3,414,000 5.56 =========== =========== 1996 - ---- Federal funds purchased (a).......................... $ 532,334 $1,977,950 $ 873,000 5.54% Securities sold under agreements to repurchase (b)... 656,397 836,722 749,000 4.52 Commercial paper (c)................................. 675,181 1,106,078 962,000 5.44 Other short-term funds borrowed (d).................. 769,245 842,410 374,000 4.96 ----------- ----------- Total short-term funds borrowed ................ $ 2,633,157 $ 2,958,000 5.18 =========== =========== 1995 - ---- Federal funds purchased (a).......................... $ 1,129,432 $2,060,375 $ 1,432,000 6.02% Securities sold under agreements to repurchase (b)... 812,281 863,937 771,000 5.03 Commercial paper (c)................................. 1,255,656 1,388,927 1,051,000 5.94 Other short-term funds borrowed (d).................. 479,644 1,005,699 498,000 5.33 ----------- ----------- Total short-term funds borrowed ................ $ 3,677,013 $ 3,752,000 5.71 =========== ===========
(a) Federal funds purchased generally represent the overnight Federal funds transactions of banking subsidiaries with correspondent banks. (b) Securities sold under agreements to repurchase usually mature within one to thirty days or are due on demand. (c) Commercial paper issued by CSCC is used to finance the short-term borrowing requirements of certain banking-related activities. Commercial paper is issued with maturities of not more than nine months and there are no provisions for extension, renewal or automatic rollover. At December 31, 1997, the Corporation had a $700,000 revolving credit facility from unaffiliated banks. The facility was established in support of commercial paper borrowings, Medium Term Note (see Note 12) issuance and general corporate purposes. Unless extended by the Corporation in accordance with the terms of the facility agreement, the facility expires February 2000. There were no borrowings under this facility at December 31, 1997. The interest rate charged for usage of these lines varies with money market conditions. (d) Other short-term funds borrowed include term Federal funds purchased, short-term Bank Notes and demand notes payable to the U.S. Treasury. (e) Represents the maximum amount outstanding at any month end during the year. (f) The weighted average interest rate is calculated primarily on a daily average of short-term funds borrowed. 65 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT Long-term debt at December 31, 1997 and 1996 includes the following:
1997 1996 ----------- ----------- CoreStates Financial Corp: 6 5/8% Notes due 2000 (a).............................. $ 150,000 $ 150,000 7 7/8% Subordinated Notes due 2002 (b)................. 100,000 100,000 8 5/8% Mortgages due 2001.............................. 5,963 6,603 Unamortized Discounts.................................. (221) (271) ----------- ----------- 255,742 256,332 ----------- ----------- CSCC: 6 3/4% Guaranteed Subordinated Notes due 2006 (c)................................... 200,000 200,000 5 7/8% Guaranteed Subordinated Notes due 2003 (c)................................... 200,000 200,000 6 5/8% Guaranteed Subordinated Notes due 2005 (c)................................... 175,000 175,000 9 5/8% Guaranteed Subordinated Notes due 2001 (c)................................... 150,000 150,000 9 3/8% Guaranteed Subordinated Notes due 2003 (c)................................... 100,000 100,000 Medium Term Notes (d).................................. 1,641,000 1,509,000 Unamortized Discounts.................................. (4,003) (4,990) ----------- ----------- 2,461,997 2,329,010 ----------- ----------- Trust Capital Securities: 8% Trust Capital Securities due 2026 (e)............... 300,000 300,000 Libor + .57% Trust Capital Securities due 2027 (f)..... 300,000 - Libor + .65% Trust Capital Securities due 2027 (f)..... 150,000 - Unamortized Discounts.................................. (5,872) (6,491) ----------- ----------- 744,128 293,509 ----------- ----------- Other subsidiaries:` Libor + .05% Eurodollar Notes due 2002 (g)............. 500,000 - Bank Note Program (h).................................. 232,130 - 6 5/8% Subordinated Notes due 2003 (i)................. 150,000 150,000 Federal Home Loan Bank Borrowings (j).................. 100,000 2,888 Various other.......................................... 12,488 18,175 Unamortized Discounts.................................. (2,249) (617) ----------- ----------- 992,369 170,446 ----------- ----------- Total long-term debt (k)............................... $4,454,236 $3,049,297 =========== ===========
(a) The Notes are unsecured and senior in right of payment to all subordinated indebtedness of the Corporation. The Notes are not redeemable by the Corporation or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (b) The Notes are unsecured and subordinate in right of payment to all present and future senior indebtedness of the Corporation. The Notes are not redeemable by the Corporation or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (c) The Notes are not subject to redemption prior to maturity and are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all outstanding senior Corporation indebtedness. 66 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT - continued (d) CSCC can issue Medium Term Notes (Senior and Subordinated) with maturities of nine months or greater from date of issue. The interest rate or interest rate formula on each Note is established by CSCC at the time of issuance. The Senior Notes are unconditionally guaranteed as to payment of principal and interest by the Corporation. The Subordinated Notes are unconditionally guaranteed, on a subordinated basis, as to payment of principal and interest by the Corporation. The Subordinated Notes are subordinated to all existing and future senior CSCC indebtedness and the guarantee is subordinated to all existing and future senior Corporation indebtedness. At December 31, 1997, $1,641,000 of debt is outstanding with maturities up to five years. Interest rates are predominately variable. Under an existing shelf registration statement filed with the Securities and Exchange Commission, the Corporation had debt and capital securities that were registered but unissued of approximately $579,000 at December 31, 1997. (e) The Trust Capital Securities evidence a preferred ownership interest in a trust, of which 100% of the common equity is owned by CBNA. The Trust Capital Securities are unconditionally guaranteed by CBNA. The proceeds from issuance of the Trust Capital Securities are invested in 8% Junior Subordinated Deferrable Interest Debentures of CBNA due 2026. These Subordinated Debt Securities have provisions enabling certain actions such as redemption or the deferment of the semiannual payments of interest, which will impact the Trust Capital Securities. CBNA may redeem the Subordinated Debt Securities in whole or in part, on or after December 15, 2006. In addition, Subordinated Debt Securities may be redeemed by CBNA at any time upon the occurrence of certain events. In the event of such a redemption of the Subordinated Debt Securities, the proceeds of such payment or repayment shall concurrently be applied to redeem the Trust Capital Securities. (f) The Trust Capital Securities evidence a preferred ownership interest in a trust, of which 100% of the common equity is owned by CBNA. The Trust Capital Securities are unconditionally guaranteed by CBNA. The proceeds from issuance of the Trust Capital Securities are invested in Floating Rate Junior Subordinated Deferrable Interest Debentures of CBNA due 2027. These Subordinated Debt Securities have provisions enabling certain actions such as redemption or the deferment of the semiannual payments of interest, which will impact the Trust Capital Securities. CBNA may redeem the Subordinated Debt Securities in whole or in part, on or after February 15, 2007 and January 15, 2007 for the $300,000 and $150,000 Trust Capital Securities, respectively. In addition, Subordinated Debt Securities may be redeemed by CBNA at any time upon the occurrence of certain events. In the event of such a redemption of the Subordinated Debt Securities, the proceeds of such payment or repayment shall concurrently be applied to redeem the Trust Capital Securities. (g) On October 3, 1997, CSCC and CBNA applied to list up to $4.0 billion of debt securities ("the Programme") on the Luxembourg Stock Exchange. Under this Programme, CSCC and CBNA may each issue up to $2.0 billion of debt securities ("the Notes") with maturities from 30 days to 30 years. The Notes are direct, unconditional and unsecured general obligations of the relevant issuer. On October 29, 1997, CBNA issued $500 million 5 year floating rate notes under the Programme. (h) On November 7, 1997, CBNA and CBD established a $3.0 billion Senior and Subordinated Bank Note program ("the Bank Note Program") which accommodates subordinated debt issuance with maturities up to 30 years. In the fourth quarter of 1997, CBNA issued $232 million in senior notes with maturities ranging from one to two years. 67 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 12. LONG-TERM DEBT - continued (i) The Notes were issued by CBNA and are unsecured and subordinate to the claims of depositors and other creditors. The Notes are not redeemable by CBNA or the holders prior to the maturity date and are not entitled to the benefit of any sinking fund. (j) The borrowing matured in January 1998 and carries a fixed interest rate of 5.63%. These borrowings require membership in the Federal Home Loan Bank of Pittsburgh and the maintenance of available collateral with a fair value which approximates the total amount of the outstanding debt. (k) The consolidated aggregate maturities for long-term debt for the years ending December 31, 1998 through 2002 are: $758,417; $831,982; $390,590; $298,477, and $599,782, respectively. The following presents information on derivative financial instruments used to manage interest rate risk associated with long-term debt:
1997 1996 ---------- ----------- At December 31, Notional value............................. $1,531,000 $ 1,019,000 Unrealized gains........................... 34,000 16,000 Unrealized losses.......................... 7,000 13,000 Effect on long-term debt cost for the years ended December 31, From....................................... 6.64% 6.53% To......................................... 6.50 6.38
68 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 13. RETIREMENT AND BENEFIT PLANS The fair value of the assets in the Corporation's defined benefit pension plans exceeded the projected benefit obligation by $126,512 at December 31, 1997, based on current and estimated future salary levels. The excess of the fair value of plan assets is reconciled to the accrued pension cost included in other liabilities as follows:
December 31, ---------------------------- 1997 1996 ---------- --------- Plan assets at fair value(a)................................. $1,046,610 $ 902,947 ---------- --------- Present value of benefit obligation: Accumulated benefits based on salaries to date, including vested benefits of $753,667 in 1997 and $667,536 in 1996................................................. 776,522 688,102 Additional benefits based on estimated future salary levels 143,576 157,687 ----------- --------- Projected benefit obligation................................. 920,098 845,789 ----------- --------- Amount the fair value of plan assets exceeds the projected benefit obligation at December 31,.......... 126,512 57,158 Reconciliation: Unrecognized prior service cost........................... 15,278 30,770 Unrecognized net asset from date of initial application... (13,685) (20,016) Net deferred actuarial gain............................... (156,939) (91,835) ---------- -------- Accrued pension expense included in other liabilities $ (28,834) $(23,923) ========== ========
- --------------- (a) Primarily U.S. Government securities, U.S. agency securities, fixed income securities, common stock, and commingled funds managed by subsidiary banks. Net pension cost for the years ended December 31, 1997, 1996 and 1995 included the following expense (income) components:
1997 1996 1995 ---------- ---------- --------- Service cost benefits earned during the period.............. $ 20,963 $ 29,020 $ 24,492 Interest cost on projected benefit obligation............... 63,290 60,793 54,497 Actual return on plan assets................................ (183,388) (121,868) (162,143) Net amortization and deferral............................... 105,847 53,887 96,484 ---------- ---------- --------- Net pension cost....................................... $ 6,712 $ 21,832 $ 13,330 ========== ========== =========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for the Corporation was 7.25% and 7.5%, respectively, at December 31, 1997 and 1996. The rate of increase on future compensation levels was 5.0% in both 1997 and 1996. The expected long-term rate of return on plan assets was 9.0% in 1997, 8.5% in 1996, and 7.5% - - 9.5% in 1995. The Corporation sponsors a 401(k) savings plan for substantially all its employees whereby the Corporation may make matching contributions equal to a percentage of the contribution made by participants. Contribution expense related to the savings plan for the employer's match was $20,964 in 1997, $18,955 in 1996, and $18,192 in 1995. The ESOP is a leveraged plan funded through a direct loan from the Corporation. The ESOP has acquired a total of 2,515,000 shares of common stock for distribution to eligible employees ratably over a 20 year period. Compensation cost has been recognized based on the fair market value of the shares committed to be released to employees. Total compensation cost recognized was $5,378 in 1996 and $3,600 in 1995. Dividends on allocated shares are paid to participants and are charged to retained earnings. Dividends on unallocated shares are used by the ESOP to reduce its loan. Effective January 1, 1997 the ESOP was combined with the Corporation's 401(k) savings plan and expense related to the ESOP of $7,269 for 1997 was included in the 401(k) savings plan employer's match. 69 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 13. RETIREMENT AND BENEFIT PLANS - continued The Corporation and its subsidiaries provide postretirement health care and life insurance benefits for substantially all retired employees. Postretirement benefits are provided through an insurance company whose premiums are based on the benefits paid during the year. The postretirement health care plan is contributory, with retiree contributions based on years of service. The liability for postretirement benefits included in other liabilities at December 31, 1997 and 1996 was as follows:
1997 1996 ---------- ---------- Accumulated postretirement benefit obligation: Retirees............................................................. $ (56,396) $ (68,702) Fully eligible active plan participants.............................. (2,597) (1,827) Other active plan participants....................................... (42,211) (29,748) --------- --------- Accumulated postretirement benefit obligation........................... (101,204) (100,277) Plan assets at fair value (a)........................................... 62,553 52,591 --------- --------- Unfunded obligation at December 31,..................................... (38,651) (47,686) Unrecognized prior service cost......................................... (43,433) (45,239) Unrecognized net gain................................................... (45,984) (51,157) --------- --------- Accrued postretirement benefit obligation included in other liabilities $(128,068) $(144,082) ========= =========
- ------------------ (a) Primarily municipal bonds and short-term investments. Net periodic postretirement benefit cost for the years ended December 31, 1997, 1996 and 1995 included the following expense (income) components:
1997 1996 1995 ------- ------- ------- Service cost benefits earned during the period............ $ 2,482 $ 2,769 $ 3,044 Interest cost on accumulated postretirement benefit obligation.................................... 7,103 7,947 11,932 Actual return on plan assets.............................. (1,770) (1,527) (1,107) Net amortization and deferral............................. (7,223) (6,069) (1,436) ------- ------- ------- Net periodic postretirement benefit cost.................. $ 592 $ 3,120 $12,433 ======= ======= =======
For measurement purposes, the rate of increase in the per capita cost of covered health care benefits was assumed to be 5.5% per year and remains at that level until a predetermined benefit cap is reached. This fixed dollar cap was established as the per capita projected cost level in 1997 associated with the Corporation's indemnity medical plan. The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $4,355 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by $386. The expected long-term rate of return on plan assets was 6.0%. The weighted-average discount rate used in determining the Corporation's accumulated postretirement benefit obligation was 7.25% and 7.5%, respectively, at December 31, 1997 and 1996. 70 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 14. LONG-TERM INCENTIVE PLAN The Corporation has outstanding options granted under the Corporation's long-term incentive plan (the "Plan"). As provided in the Plan, a variety of incentives can be issued to eligible participants including restricted stock awards, incentive stock options, non-qualified stock options, or stock appreciation rights. Meridian and United Counties had maintained similar plans. Options granted under those plans were assumed by the Corporation upon consummation of their respective acquisitions. The Plan provides for a maximum number of options available to be granted each year equal to 1.5% of outstanding common shares as of January 1 of that year. Options under the Plan are granted to purchase the Corporation's common shares at market value on the date of grant and are exercisable one year from the date of grant for a period not exceeding ten years from the date of grant. Stock appreciation rights may be granted in conjunction with the granting of an option. Information on option activity for 1997 and 1996 follows:
1997 1996 --------------------------------------------------------------------------------- Shares under Weighted-Average Shares Under Weighted-Average Option Exercise Price Option Exercise Price ------------ ---------------- -------------- ------------------ Balance at beginning of year............. 5,789,064 $29.98 8,581,554 $23.86 Options granted.......................... 1,634,052(a) 51.50 1,968,001 (a) 41.49 Options exercised........................ (2,201,107) 28.32 (4,519,411) 23.27 Options canceled......................... (155,110) 50.04 (241,080) 31.84 ------------ -------------- Balance at end of year................... 5,066,899 37.00 5,789,064 29.98 ========= ========= Shares exercisable....................... 3,585,769 31.00 4,405,540 25.37 ========= =========
(a) The fair value of options granted during 1997 and 1996 was $14.5 million and $12.6 million, respectively. The following table summarizes information about options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ------------------------------------------------------------ ---------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Contractual Life Price Exercise Exercisable Exercise Price --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 8.20 to $19.50 195,977 2.8 years $15.30 195,977 $15.30 $20.53 to $29.95 2,306,766 6.2 27.10 2,306,766 27.10 $37.96 to $51.50 2,564,156 8.7 47.55 1,083,026 42.16 ---------- ---------- $ 8.20 to $51.50 5,066,899 7.3 37.00 3,585,769 31.00 ========== ==========
The Corporation uses the intrinsic value method of accounting to measure compensation expense. If the fair value method had been used to measure compensation expense, net income would have been reduced by $9.8 million, or $0.05 per share, $7.4 million, or $0.03 per share, and $7.2 million, or $0.03 per share, to $803.4 million, or $3.91 per share, $641.8 million, or $2.91 per share, and $647.9 million, or $2.88 per share, for the years ended December 31, 1997, 1996 and 1995, respectively. The fair value of options granted in 1997, 1996 and 1995 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions, respectively: risk-free interest rates of 5.49% to 7.80%, dividend yield of 4.0%, volatility factors of the expected market price of the Corporation's common stock of .148 to .223, and a weighted-average expected life of the options of 6 years. 71 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 14. LONG-TERM INCENTIVE PLAN - continued The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Corporation's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments and contingent liabilities which are not reflected in the financial statements. These include various financial instruments with off-balance sheet risk used in connection with the Corporation's asset and liability management, the management of interest rate risk in securities trading positions and to provide for the needs of customers. These involve varying degrees of credit, interest rate and liquidity risk, but do not represent unusual risks for the Corporation and management does not anticipate any significant losses as a result of these transactions. Derivative Financial Instruments Held or Issued for Purposes Other Than Trading The Corporation uses off-balance sheet derivative financial instruments, such as interest rate swaps, futures and caps, to manage interest rate risk. The Corporation's exposure to interest rate risk stems from the mismatch between the sensitivity to movements in interest rates of the Corporation's assets and liabilities and from the spread risk between the rates on those assets and liabilities and financial market rates. The use of derivatives to manage interest rate risk falls into three categories: interest sensitivity adjustments, interest rate spread protection and hedging anticipated asset sales. Interest rate swaps and futures are generally used to lengthen the interest rate sensitivity of short-term assets and to shorten the repricing characteristics of longer term liabilities. Interest rate caps are used to manage spread risk. Interest rate caps are also used to offset the risk of upward interest rate movement on adjustable rate mortgages and other products with imbedded caps as well as to reduce the risk that interest rate spreads narrow on prime based products. Gains or losses are used to adjust the basis of the related asset or liability and interest differentials are adjustments of the related interest income or expense. In connection with anticipated sales of longer term assets acquired through merger or generated in the loan origination process, the Corporation uses interest rate swaps, rate locks and option agreements to reduce interest rate sensitivity as the assets are readied for sale. Hedge gains or losses are used to adjust the basis of the assets held for sale. Derivative financial instruments used in the management of interest rate risk at December 31, 1997 are summarized below (in millions):
Interest Interest Interest rate rate rate caps Other swaps futures and floors derivatives Total ------- ------- ---------- ----------- ------- Interest Sensitivity Adjustment: Assets (primarily loans): Notional amount............... $ 4,668 $1,089 $ 7 $ 5,764 Unrealized gains.............. 80 - - 80 Unrealized losses............. (6) - - (6) Deposits and other borrowings: Notional amount............... 2,829 824 $ 50 3,703 Unrealized gains.............. 24 6 - 30 Unrealized losses............. (6) - - (6) Long-term debt: Notional amount............... 1,381 150 1,531 Unrealized gains.............. 33 1 34 Unrealized losses............. (7) - (7) Spread Protection: Assets (primarily loans): Notional amount............... 76 492 568 Unrealized gains.............. 1 2 3 Unrealized losses............. - - - Deposits and other borrowings: Notional amount............... 86 86 Unrealized gains.............. - - Unrealized losses............. - - Anticipated Asset Sales: Notional amount............... 51 51 Unrealized gains.............. - - Unrealized losses............. - - Total: Notional amount............ $ 8,954 $ 1,089 $ 1,409 $ 251 $ 11,703 ======= ======= ====== ====== ======== Unrealized gains........... $ 138 $ - $ 8 $ 1 $ 147 ======= ======= ======= ====== ======== Unrealized losses.......... $ (19) $ - $ - $ - $ (19) ======= ======= ======= ====== ======== Net unrealized gains....... $ 119 $ - $ 8 $ 1 $ $128 ======= ======= ======= ====== ======== A summary of interest rate swap contracts categorized by whether the Corporation receives or pays fixed rates and stratified by repricing or maturity date is below (in millions): Years -------------------------------------------------------------------- 0-1 1-2 2-3 3-4 4-5 over 5 Total ---------- ---------- --------- -------- ------- --------- ------- Receive Fixed/Pay Floating: Receive Notional................ $1,288 $1,527 $1,385 $1,630 $ 768 $ 894 $7,492 Rate.................... 6.34% 6.74% 6.42% 6.56% 6.38% 6.76% 6.54% Pay Notional................ $7,492 $7,492 Rate.................... 6.03% 6.03% Pay Fixed/Receive Floating: Pay Notional................ $ 14 $ 25 $ 39 Rate.................... 8.27% 9.26% 8.91% Receive Notional................ $ 39 $ 39 Rate.................... 6.00% 6.00% Receive Floating/Pay Floating: (Basis Swaps) Notional................ $ 963 $ 963 Receive Rate.................... 5.91% 5.91% Pay Rate.................... 6.04% 6.04% Receive Fixed/Pay Floating(a): (Forward Start) Receive Notional................ $ 150 $ 189 $ 75 $ 46 $ 460 Rate.................... 7.14% 6.52% 6.86% 7.00% 6.82% Start Date Notional................ $ 150 $ 310 $ 460
- ---------------------------------------- (a) Pay rate will be determined on forward start date. Foreign currency derivatives used for hedging activities have not had a material impact on income or liquidity of the Corporation for any of the years presented. 72 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued Derivative Financial Instruments Held or Issued for Trading Purposes In its business of providing risk management services for its customers, the Corporation purchases and sells certain derivatives including interest rate swaps, caps and floors. In addition, as part of its international business, the Corporation enters into foreign exchange contracts on behalf of customers. These contracts are matched against forward sale or purchase contracts. Customer related derivative financial instrument transactions are generally marked to market and any gains or losses are recorded in the income statement. The Corporation also holds derivatives in connection with its securities trading activities and, at times, as a position taken in the expectation of profiting from favorable movements in interest rates. These products include tender option bonds and Treasury float contracts. Included in the income statement are trading revenues from derivatives of $33,901 of which $25,531 represents net foreign exchange gains included in fees for international services. Outstanding notional amounts and related fair values of trading and customer related derivative financial instruments at December 31, 1997 and 1996 are summarized by type of instrument below (in millions):
1997 -------------------------------------------------------- Positive Negative Notional Net assets Market Market Interest Rate Swaps: amount (liability)(a) Value Value ----------- -------------- --------- --------- CoreStates receives fixed........ $ 1,521 $ 17.7 $21.6 $ (3.9) CoreStates pays fixed............ 2,005 (39.1) 4.1 (43.2) Futures................................... 777 (1.9) 0.1 (2.0) Rate Locks: CoreStates receives fixed........ 130 (0.7) - (0.7) CoreStates pays fixed............ 130 0.8 0.8 - Interest Rate Caps/Floors: Sold............................. 1,491 (3.1) - (3.1) Purchased........................ 1,562 3.0 3.0 - Commitments to purchase/sell whole mortgage loans and securities (including when-issued securities): Sold............................. 145 (1.7) - (1.7) Purchased........................ 64 - - - Other Options: Sold............................. 881 39.8 39.8 - Purchased........................ 247 0.7 0.7 - Foreign exchange contracts (b)............ 2,241 4.0 35.2 (31.2) ------- ------- ------- ------- Total Trading and Customer Related Derivatives...................... $11,194 $ 19.5 $ 105.3 $ (85.8) ======= ======= ======= =======
1996 -------------------------------------------------------- Positive Negative Notional Net assets Market Market Interest Rate Swaps: amount (liability)(a) Value Value ----------- -------------- --------- --------- CoreStates receives fixed........ $ 355 $ 1.5 $ 2.7 $ (1.2) CoreStates pays fixed............ 353 (1.0) 1.3 (2.3) Futures................................... 39 0.4 0.4 - Rate Locks: CoreStates receives fixed........ 30 (0.1) - (0.1) CoreStates pays fixed............ 30 0.1 0.1 - Interest Rate Caps/Floors: Sold............................. 705 (2.7) - (2.7) Purchased........................ 704 2.7 2.7 - Commitments to purchase/sell whole mortgage loans and securities (including when-issued securities): Sold............................. 83 (0.2) 0.1 (0.3) Purchased........................ 19 - - - Other Options: Sold............................. 206 6.5 7.1 (0.6) Purchased........................ 334 0.8 0.8 - Foreign exchange contracts (b)............ 1,766 (0.5) 28.0 (28.5) ------- ------- ------- ------- Total Trading and Customer Related Derivatives...................... $ 4,624 $ 7.5 $ 43.2 $ (35.7) ======= ======= ======= =======
- ------------ (a) Average net assets (liabilities) during 1997 and 1996 were substantially the same as the net assets (liabilities) at December 31, 1997 and 1996, respectively. (b) Foreign exchange contracts purchased and sold at December 31, 1997 were $987 million and $1,254 million, respectively, and at December 31, 1996 were $836 million and $930 million, respectively. The following is a summary of off-balance sheet commitments and derivative financial instruments as of December 31, 1997 and 1996, including fair values. See Note 3 for a discussion of fair value.
1997 1996 ------------------------------ ------------------------------ Notional Fair Notional Fair or Value or Value Contractual of Asset Contractual of Asset Amount (Liability) Amount (Liability) ------------ ----------- ------------ ----------- Standby letters of credit, net of participations (a) $ 1,817,591 $ (18,176) $ 1,630,621 $ (16,306) Commercial letters of credit....................... 1,474,392 (14,744) 1,262,593 (12,625) Commitments to extend credit (b)................... 19,332,394 (28,581) 15,396,553 (21,204) Unused commitments under credit card lines......... 4,542,842 - 4,173,013 - When-issued securities (c): Commitments to purchase...................... 47,838 (5) 1,770 - Commitments to sell.......................... 106,310 (455) 75,120 (140) Commitments to purchase/sell whole mortgage loans and securities (c): Commitments to purchase..................... 15,782 30 17,280 30 Commitments to sell......................... 39,120 (1,254) 7,965 (70) Mortgage loans sold and loan servicing acquired with recourse (d).............................. 299,322 (8,559) 361,410 (9,637) Interest rate futures contracts (e): Commitments to purchase........................ 1,866,100 (1,764) 4,489,800 2,781 Commitments to purchase foreign and U.S. currencies (f)............................ 2,240,895 4,025 1,766,122 (488) Interest rate swaps, notional principal amounts (g).................................... 12,479,564 97,670 9,850,708 67,673 Interest rate caps and floors (h): Written........................................ 1,693,886 (3,091) 908,799 (2,842) Purchased...................................... 2,768,289 11,003 2,039,331 17,383 Tender option bonds (i)............................ 849,854 37,876 148,711 5,976 Treasury float contracts (j)....................... 246,781 646 270,358 682 Other derivatives.................................. 541,746 2,901 597,261 5,644
73 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued (a) Standby letters of credit ("SBLC") are used in various transactions to enhance the credit standing of the Corporation's customers and are subjected to the same risk, credit review and approval process as loans. SBLC's are irrevocable assurances that the Corporation will make payment in the event that a customer cannot perform its contractual obligations to third parties. (b) Commitments to extend credit represent the Corporation's obligation to fund various types of loans, including home equity lines, lines of credit, revolving lines of credit and other types of commitments. (c) The Corporation has commitments to purchase/sell mortgage-backed securities or loans with delivery at a future date but typically within 120 days. The fair value of these instruments is affected by interest rates. In a declining interest rate environment, commitments to sell mortgage-backed securities or loans will decline in value. In a rising interest rate environment, commitments to buy mortgage-backed securities or loans will decrease in value. Forward agreements to sell securities are used in transactions with municipalities that generally have a debt payment due in the future. Under these agreements, the Corporation agrees to deliver primarily United States Treasury securities that will mature on or before the required payment date. The type and associated interest rate of these securities is established when the agreement is entered. The primary risk associated with forward agreements is interest rate risk to the extent the required securities have not been purchased. If interest rates fall, securities yielding the higher agreed upon fixed rate will be more expensive for the Corporation to purchase. When-issued securities and commitments to purchase/sell whole mortgage loans and securities are entirely customer and trading-related products. (d) The Corporation originates and sells residential mortgage loans as part of various mortgage-backed security programs sponsored by the United States government agencies or government-sponsored agencies, such as the Government National Mortgage Association, Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Certain sales and other servicing acquired are subject to recourse provisions in the event of default by the borrower. The Corporation provides for potential losses under these recourse provisions by establishing reserves at the time of sale and evaluates the adequacy of these reserves on an ongoing basis. (e) Exchange traded futures contracts represent agreements to exchange dollar amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount. Credit and market risk exist with respect to these instruments. Exchange traded futures contracts entail daily cash settlement; therefore, the credit risk amount represents a one-day receivable. (f) Commitments to purchase foreign and U.S. currencies are primarily executed for the needs of customers. These foreign exchange contracts are structured similar to interest rate futures and forward contracts. The risk associated with a foreign exchange contract arises from the counterparty's ability to make payment at settlement and that the value of a foreign currency might change in relation to the U.S. dollar. The Corporation's exposure, if any, to counterparty failure equals the current market value of the contract, which at December 31, 1997 and 1996 was $35,257 and $27,962, respectively. Included in fees for international services are net foreign exchange gains of $25,531, $22,557, and $22,943 for the years ended December 31, 1997, 1996 and 1995, respectively. (g) Interest rate swaps generally represent the contractual exchange of fixed and variable rate interest payments based on a notional principal amount and an interest reference rate. Credit risk exists with respect to these instruments arising from the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. The Corporation's exposure to counterparty failure equals the current replacement cost of the contract. At December 31, 1997 and 1996, the replacement cost of the Corporation's interest rate swap contracts was $163,903 and $118,929, respectively. The risk of counterparty failure is controlled by limiting transactions to an approved list of counterparties and requiring collateral in certain instances. Net cash received on interest rate swaps during 1997 and 1996 totaled $54,230 and $68,103, respectively. 74 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 15. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENT LIABILITIES - continued (h) Interest rate caps and floors are written by the Corporation to enable customers to transfer, modify or reduce their interest rate risk. Interest rate caps and floors are similar to interest rate swaps except that payments are made only if current interest rates move above or below a predetermined rate. The risk associated with interest rate caps and floors is an unfavorable change in interest rates. As a writer of interest rate caps and floors, the Corporation receives a premium in exchange for bearing the risk of an unfavorable change in interest rates. The Corporation generally reduces risk by entering into offsetting cap and floor positions that essentially counterbalance each other. The Corporation also enters interest rate caps to offset the risk of upward interest rate movement on assets with embedded caps as well as to limit spread risk. As a purchaser of interest rate caps, the Corporation pays a premium in exchange for the right to receive payments if interest rates rise above predetermined levels. The Corporation has also purchased interest rate floors in which the Corporation has paid a fee for the right to receive payments if rates fall below a predetermined level. Similar to interest rate swaps, credit risk exists with respect to the possible failure of the counterparty to make required payments on those contracts which are favorable to the Corporation. Exposure to counterparty failure equals the current replacement cost of the contract which totaled $11,003 and $17,383, respectively, at December 31, 1997 and 1996. (i) Tender option bonds are instruments associated with tax-free municipal bonds. The Corporation will transfer a tax-free, fixed rate, long-term security into a trust. The trust, in turn, issues short-term securities to third parties. The trust satisfies the short-term interest payments using the interest proceeds from the municipal bond. The Corporation receives the spread between the long-term fixed interest payment and the short- term security. (j) A Treasury float contract is created because a municipality, which has defeased a bond issue with government securities, has a mismatch in the timing of the maturity of the securities and the date the funds are needed to pay the debt service. The Corporation will pay an up-front fee for the right to sell government securities to the municipality, generally at par. The Corporation retains any profit between the sales price and the price at which the Corporation acquired the securities. Contingent Liabilities In the normal course of business, the Corporation and its subsidiaries are subject to numerous pending and threatened legal actions and proceedings, some for which the relief or damages sought are substantial. Management does not believe the outcome of these actions and proceedings will have a materially adverse effect on the consolidated financial position of the Corporation. 75 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES The provision for income taxes for the years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 -------- -------- -------- Current: Federal....................................... $142,688 $344,142 $303,647 State......................................... 14,368 20,401 24,134 -------- -------- -------- Total domestic........................... 157,056 364,543 327,781 Foreign....................................... 11,775 12,121 8,240 -------- -------- -------- Total current............................ 168,831 376,664 336,021 Deferred Federal and state expense............... 100,751 9,156 28,420 -------- -------- -------- Total provision for income taxes......... $269,582 $385,820 $364,441 ======== ======== ========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Deferred tax assets: Allowance for loan losses.................... $270,169 $ 261,180 Postretirement and postemployment benefits... 48,550 57,191 Reserves..................................... 50,186 56,489 Other 80,135 77,181 -------- --------- Total deferred tax assets............... 449,040 452,041 -------- --------- Deferred tax liabilities: Auto leasing portfolio....................... 136,253 142,196 FAS 115 fair value accounting................ 17,094 14,298 Partnership investments...................... 4,558 3,781 Tax over book depreciation................... 43,711 38,446 Affiliate income............................. 38,862 32,873 Other 70,584 71,802 -------- --------- Total deferred tax liabilities.......... 311,062 303,396 -------- --------- Net deferred tax assets.......................... $137,978 $ 148,645 ======== =========
At December 31, 1997, cumulative deductible temporary differences related to the deferred tax asset are approximately $1,283,000. Cumulative taxable temporary differences related to deferred tax liabilities at December 31, 1997 are estimated at $889,000. At December 31, 1997, the Corporation has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is more likely than not that the deferred tax asset of $449,040 will be realized principally through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, future taxable income and to a lesser extent, tax planning strategies. The Corporation's conclusion that it is "more likely than not" that the deferred tax asset will be realized is based on a history of growth in earnings and the prospects for continued growth, including an analysis of potential uncertainties that may affect future operating results. The Corporation will continue to review the tax criteria of "more likely than not" for the recognition of deferred tax assets on a quarterly basis. 76 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 16. PROVISION FOR INCOME TAXES - continued The consolidated effective tax rates are reconciled to the statutory rate as follows:
1997 1996 1995 ----- ----- ----- Statutory rate..................................... 35.0% 35.0% 35.0% Difference resulting from: Tax-exempt income.............................. (1.4) (1.6) (2.0) State, local and foreign income tax............ 1.0 1.6 1.5 Liquidation of affiliate....................... (10.1) - - Other, net..................................... 0.4 2.3 1.2 ----- ----- ----- Effective tax rate................................. 24.9% 37.3% 35.7% ===== ===== =====
Foreign earnings of certain subsidiaries would be taxed only upon their transfer to the United States. No transfers or dividends are contemplated at this time. Taxes payable upon remittance of such accumulated earnings of $21,323 at December 31, 1997 would approximate $7,065. Taxes, other than income taxes, included in other operating expenses for the years ended December 31, 1997, 1996 and 1995 are $107,553, $101,109 and $105,913, respectively. 77 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The following represents summarized quarterly financial data of the Corporation, which, in the opinion of management, reflects all adjustments (comprising only normal recurring accruals) necessary for a fair presentation:
Three Months Ended ----------------------------------------------------------------------- Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- 1997 Interest income............................... $888,593 $873,034 $850,359 $817,329 ======== ======== ======== ======== Interest expense.............................. $363,676 $342,540 $316,006 $291,225 ======== ======== ======== ======== Net interest income........................... $524,917 $530,494 $534,353 $526,104 ======== ======== ======== ======== Provision for losses on loans................. $120,000(a) $ 50,000 $ 50,000 $ 43,000 ======== ======== ======== ======== Securities gains.............................. $ 6,254 $ 5,023 $ 5,015 $ 4,819 ======== ======== ======== ======== Net income ................................... $216,626(b)(c) $198,814 $199,726 $198,113 ======== ======== ======== ======== Net income per common share: Basic...................................... $1.09 $1.00 $0.97 $0.94 ======== ======== ======== ======== Diluted.................................... 1.08 0.98 0.97 0.93 ======== ======== ======== ======== Average common shares outstanding: Basic...................................... 197,920 199,817 204,982 211,276 ======== ======== ======== ======== Diluted.................................... 200,416 202,704 206,712 213,162 ======== ======== ======== ======== Common stock price information: High....................................... $81 3/8 $68 13/16 $57 7/8 $55 Low........................................ 65 11/16 53 1/4 46 1/2 47 1/2 Quarter-end................................ 80 1/2 66 3/16 53 3/4 47 1/2 1996 Interest income............................... $835,649 $823,082 $815,755 $823,718 ======== ======== ======== ======== Interest expense.............................. $298,561 $282,735 $282,360 $293,064 ======== ======== ======== ======== Net interest income........................... $537,088 $540,347 $533,395 $530,654 ======== ======== ======== ======== Provision for losses on loans................. $ 40,000 $ 40,000 $110,000(d) $ 38,767 ======== ======== ======== ======== Securities gains.............................. $ 4,036 $ 31,135 $17,393 $ 6,948 ======== ======== ======== ======== Net income ................................... $195,546 $196,857 $79,597(d)(e) $177,144 ======== ======== ======== ======== Net income per common share: Basic...................................... $0.91 $0.89 $0.36(d)(e) $0.81 ======== ======== ======== ======== Diluted.................................... 0.90 0.88 0.36 0.80 ======== ======== ======== ======== Average common shares outstanding: Basic...................................... 215,866 220,409 219,478 219,512 ======== ======= ======== ======= Diluted.................................... 218,020 222,270 220,621 221,253 ======== ======= ======= ======= Common stock price information: High....................................... $55 3/8 $44 $43 1/8 $44 Low........................................ 42 3/4 35 1/2 35 3/4 36 1/8 Quarter-end................................ 51 7/8 43 1/4 38 1/2 42 3/8
(a) Includes a $70.0 million, $44.9 million after-tax or $0.22 per share, special provision for loan losses primarily related to management's decision to sell approximately $450 million of credit card outstandings. (b) Includes a tax benefit of $109.0 million, or $0.54 per share, related to the liquidation of an affiliate. (c) Includes restructuring and merger-related charges of $15.0 million, $9.6 million after-tax or $0.05 per share, and other significant one-time charges of $57.0 million, $36.5 million after-tax or $0.18 per share. (d) Includes a provision for loan losses of $70.0 million, $45.5 million after-tax or $0.20 per share, related to the Meridian acquisition. (e) Includes net restructuring and merger-related charges of $139.7 million, $105.3 million after-tax or $0.47 per share, primarily recorded in the second quarter and related to costs associated with the Meridian acquisition. 78 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 18. JOINT VENTURE In December 1992, the Corporation entered into a joint venture with three other banking companies creating Electronic Payment Services, Inc. ("EPS"). The joint venture combines the partners' separate consumer electronic transaction processing businesses and provides automated teller machine ("ATM") and electronic point-of-sale ("POS") processing services. The Corporation contributed to EPS its wholly-owned subsidiaries of Money Access Service Inc. ("MAC"), a regional ATM network, and BUYPASS Corporation, a third-party processor of electronic POS transactions. At the formation of EPS, the Corporation had equal ownership with two partners in the joint venture, each with 31%. The fourth partner owned 7%. As part of the 1992 transaction, the Corporation received a cash payment of $79,350 and $245,400 of EPS 5% cumulative redeemable preferred stock. The exchange of assets involved in the transaction resulted in a 1992 pre-tax gain to the Corporation of $41,072, $25,670 after-tax. The exchange also generated a deferred gain of approximately $138,000. In December 1993, the Corporation and EPS mutually agreed to enter into a recapitalization of EPS involving the EPS preferred stock held by the Corporation. In exchange for substantially all of the preferred stock, the Corporation received from EPS a ten-year 6.45% note providing for equal principal payments over the life of the note. The recapitalization did not affect the amount of deferred gain, but changed the timing of deferred gain income recognition from a five-year period beginning in 1996 to a ten-year period which began in 1994. On March 27, 1995, EPS added a new partner and increased the ownership interests of an existing partner to that of a full partner, resulting in a decrease in the Corporation's share of ownership from 31% to 20%. As a direct result of this change in ownership interests, the Corporation recognized a pre-tax gain of $19,000, $11,800 after-tax or $0.05 per share, in 1995. Included in the pre-tax gain amount was $4,000 related to the acceleration of deferred gain recognition. The Corporation's investment in EPS at December 31, 1997, net of $87,000 deferred gain, is $59,156 and is included in other assets. "Income from investment in EPS, Inc.", which is included in non-interest income, reflects the Corporation's share in EPS net income, interest income on the 6.45% note and amortization of the deferred gain. 79 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 19. RESTRUCTURING AND MERGER-RELATED CHARGES A summary of restructuring and merger-related charges for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 --------- --------- ---------- Merger-related restructuring charges............. $ 6,200 $ 161,598 $ 10,000 Strategic technology alliance charges............ 8,800 - - Meridian merger-related implementation costs..... - 29,019 - Process redesign restructuring charges........... - - 142,000 Gains on sales of branches....................... - (43,064) (3,988) Pension curtailment gains........................ - (7,851) (9,412) --------- --------- ---------- Total........................................ $15,000 $ 139,702 $ 138,600 ========= ========= ==========
In 1997, CoreStates recorded pre-tax restructuring and merger-related charges of $15,000, $9,612 after-tax or $0.05 per share, primarily related to costs incurred in the pending First Union merger and costs incurred in the creation of a strategic technology alliance with Andersen Consulting. Cash outflow related to these costs in 1997 was $11,700. In 1996, the Corporation recorded merger-related restructuring charges of $161,598, $120,150 after-tax or $0.54 per share, in connection with the acquisitions of Meridian and United Counties. The charges included direct and incremental costs associated with these acquisitions. The components of the merger-related restructuring charges were as follows:
Requiring Cash Cash Outflow Provision Outflow to Date --------- --------- -------- Severance costs......................... $ 70,469 $ 70,469 $ 65,941 Branch closing costs.................... 33,469 15,102 6,585 Office reconfiguration costs............ 19,059 2,792 (5,764) Merger transaction costs................ 14,624 14,624 13,461 System consolidation writedowns......... 6,391 - - Miscellaneous........................... 17,586 17,593 12,316 -------- -------- -------- Total............................. $161,598 $120,580 $ 92,539 ======== ======== ========
The severance costs relate to severance packages, which were or are expected to be paid to approximately 1,350 employees who have been displaced as a result of the Meridian consolidation. Restructuring and merger-related charges in 1996 also included $29,019, $18,263 after-tax or $0.07 per share, of implementation costs that were incurred in the process of consolidating Meridian and United Counties businesses and operations. The Corporation recorded restructuring credits of $50,915, $33,096 after-tax or $0.14 per share and $13,400, $8,549 after-tax or $0.03 per share in 1996 and 1995, respectively, related to gains on the curtailment of pension benefits associated with employees displaced during 1996 and 1995 and gains on the sale of branches which were sold as a result of consolidating the Meridian and United Counties branches and the process redesigns. Upon consummation of the Meridian merger, the Corporation recorded a $70 million provision for loan losses in connection with a change in strategic direction related to Meridian's problem assets and to conform its consumer lending charge-off policies to those of the Corporation. 80 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 19. RESTRUCTURING AND MERGER-RELATED CHARGES - continued In 1995, the Corporation recorded restructuring charges of $142,000, $90,800 after-tax or $0.40 per share, in connection with process redesigns commenced during that year. The objectives of the process redesigns were: (i) to enhance customer focus; (ii) to accelerate "cultural changes" which were already in progress; and (iii) to improve productivity. The charges included direct and incremental costs associated with the process redesigns. The components of the process redesign restructuring charges were as follows:
Requiring Cash Cash Outflow Provision Outflow to Date ---------- ---------- ---------- Severance costs........................ $ 87,900 $ 87,900 $ 87,328 Office reconfiguration and branch closing costs...................... 44,300 16,600 6,901 Outplacement costs..................... 2,500 2,500 2,358 Miscellaneous.......................... 7,300 5,300 4,653 ---------- ---------- ---------- Total............................. $ 142,000 $ 112,300 $ 101,240 ========== ========== ==========
The following table summarizes the activity in the restructuring and merger-related accrual for the year ended December 31, 1997: 1997 -------- Balance at beginning of year................ $108,205 Provision charged against income............ 15,000 Cash outflow................................ (59,451) Writedowns of assets........................ (30,269) -------- Balance at December 31,..................... $ 33,485 ========= 81 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 20. EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31, --------------------------------------------- 1997 1996 1995 -------- -------- -------- Earnings - -------- (a) Net income.............................. $813,279 $649,144 $655,176 ======== ======== ======== Average Common Shares - --------------------- (b) Average common shares outstanding....... 203,452 218,812 222,268 Average potentially dilutive shares..... 2,116 1,886 2,398 -------- ------- ------- (c) Average common and potentially dilutive shares....................... 205,568 220,698 224,666 ======= ======= ======= Net Income Per Common Share - --------------------------- Basic (a / b)............................... $4.00 $2.97 $2.95 ===== ===== ===== Diluted (a / c)............................. $3.96 $2.94 $2.92 ===== ===== =====
21. FINANCIAL STATEMENTS OF THE PARENT COMPANY
STATEMENT OF INCOME Year ended December 31, ---------------------------------------- 1997 1996 1995 --------- --------- --------- REVENUES - -------- Dividends from subsidiaries: Banks.................................................... $ 625,000 $ 657,744 $ 373,023 Other subsidiaries....................................... 90,940 27,217 91,917 --------- -------- --------- Total dividends from subsidiaries..................... 715,940 684,961 464,940 Management fees and other income from subsidiaries.......... 189,000 178,179 190,027 Securities gains (losses)................................... - (22) 16,343 Other income................................................ 444 3,054 3,241 --------- -------- --------- Total revenues........................................ 905,384 866,172 674,551 --------- -------- --------- EXPENSES - -------- Interest on: Funds borrowed........................................... 13,361 5,606 19,685 Long-term debt........................................... 18,436 22,843 21,578 --------- -------- --------- Total interest expense................................ 31,797 28,449 41,263 Other operating expenses.................................... 181,663 245,836 219,463 --------- -------- --------- Total expenses........................................ 213,460 274,285 260,726 --------- -------- --------- Income before income tax benefit and equity in undistributed income of subsidiaries................... 691,924 591,887 413,825 Income tax benefit.......................................... (6,953) (14,911) (11,977) --------- -------- --------- Income before equity in undistributed income of subsidiaries 698,877 606,798 425,802 --------- -------- --------- Equity in undistributed income (excess dividends) of subsidiaries: Banks.................................................. 62,503 (52,497) 203,909 Other subsidiaries..................................... 51,899 94,843 25,465 --------- -------- --------- 114,402 42,346 229,374 Total equity in undistributed income of subsidiaries.. --------- -------- --------- NET INCOME.................................................. $ 813,279 $649,144 $ 655,176 - ---------- ========= ======== =========
82 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
BALANCE SHEET December 31, -------------------------- 1997 1996 ---------- ---------- ASSETS - ------ Cash ...................................................... $ 1,508 $ 1,374 Time deposits............................................... - 887 Investment-securities available-for-sale.................... 15,512 97,786 Investments and receivables - subsidiaries: Investments in subsidiaries at equity in underlying net assets: Banks.................................................... 3,220,941 3,389,148 Other subsidiaries....................................... 655,274 558,062 ---------- ---------- Total investments in subsidiaries..................... 3,876,215 3,947,210 Receivables - subsidiaries................................ 113,715 40,814 ---------- ---------- Total investments and receivables-subsidiaries........ 3,989,930 3,988,024 Other assets................................................ 42,258 80,039 ---------- ---------- Total assets.......................................... $4,049,208 $4,168,110 ========== ========== LIABILITIES - ----------- Funds borrowed - subsidiaries............................... $ 359,123 $ - Dividends payable and other liabilities..................... 196,911 214,925 Long-term debt.............................................. 255,742 257,491 ---------- ---------- Total liabilities..................................... 811,776 472,416 ---------- ---------- SHAREHOLDERS' EQUITY - -------------------- Total shareholders' equity............................ 3,237,432 3,695,694 ---------- ---------- Total liabilities and shareholders' equity............ $4,049,208 $4,168,110 ========== ==========
The Corporation has guaranteed certain borrowings of its subsidiaries at December 31, 1997 in the amount of $3,331,835 which includes $865,835 for commercial paper. The maturities for parent company long-term debt for the years ending December 31, 1998 through 2002 are: $1,607; $1,751; $151,855; $696 and $99,833, respectively. 83 CoreStates Financial Corp and Subsidiaries NOTES TO THE FINANCIAL STATEMENTS (dollar amounts in thousands) 21. FINANCIAL STATEMENTS OF THE PARENT COMPANY - continued
Statement of Cash Flows Year Ended December 31, ----------------------------------------- 1997 1996 1995 ---------- ----------- ---------- OPERATING ACTIVITIES Net income............................................................. $ 813,279 $ 649,144 $ 655,176 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries............................... (114,402) (42,346) (229,374) Securities losses (gains).......................................... - 22 (16,343) Deferred income tax expense (benefit).............................. 2,644 180 (785) Net decrease (increase) in other assets............................ 29,749 (6,969) 24,265 Net increase (decrease) in other liabilities....................... 2,577 8,454 (22,761) Other, net......................................................... 6,073 7,288 7,840 ---------- ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................ 739,920 615,773 418,018 ---------- ----------- ---------- INVESTING ACTIVITIES Net capital returned from subsidiaries................................. 190,000 270,226 190,900 (Increase) decrease in receivables from subsidiaries................... (72,901) 107,069 (3,593) Purchases of investment securities..................................... (53,493) (707,008) (170,988) Proceeds from maturities and sales of investment securities............ 135,767 717,536 118,483 Other, net............................................................. - - (1,380) ---------- ----------- ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES.......................... 199,373 387,823 133,422 ---------- ----------- ---------- FINANCING ACTIVITIES Repayment of funds borrowed............................................ - - (75,000) Retirement of long-term debt........................................... (1,749) (77,401) (1,471) Proceeds from issuance of long-term debt............................... - - 149,877 Net increase (decrease) in financing from and due to subsidiaries...... 369,329 (115,498) (94,054) Cash dividends paid.................................................... (391,781) (328,114) (286,565) Purchases of treasury stock............................................ (1,007,832) (533,932) (335,528) Repurchase and retirement of common stock.............................. - (57,703) (17,134) Common stock issued under employee benefit plans....................... 62,873 87,726 99,011 Other, net............................................................. 30,001 21,360 6,777 ---------- ----------- ---------- NET CASH USED IN FINANCING ACTIVITIES.................................. (939,159) (1,003,562) (554,087) ----------- ----------- ---------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS....................... 134 34 (2,647) Cash and due from banks at January 1,................................ 1,374 1,340 3,987 ---------- ----------- ---------- CASH AND DUE FROM BANKS AT DECEMBER 31,.............................. $ 1,508 $ 1,374 $ 1,340 ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest............................................................. $ 28,187 $ 25,267 $ 40,745 ========== =========== ========== Income taxes......................................................... $ - $ - $ 43 ========== =========== ==========
84 EX-99 16 EXHIBIT (99)(B) EXHIBIT (99)(b) INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors Merdian Bancorp, Inc.: We have audited the accompanying consolidated balance sheet of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meridian Bancorp, Inc. and subsidiaries as of December 31, 1995 and the results of their operations and their cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. Philadelphia, PA January 17, 1996, Except as to note 2, which is as of February 23, 1996 /s/ KPMG Peat Marwick LLP EX-99 17 EXHIBIT (99)(C) EXHIBIT (99)(c) INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholders United Counties Bancorporation: We have audited the accompanying consolidated balance sheet of United Counties Bancorporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Bancorporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Counties Bancorporation and subsidiaries at December 31, 1995 and the results of their operations and their cash flows for the year ended December 31, 1995 in conformity with generally accepted accounting principles. Short Hills, New Jersey January 16, 1996, except for note 20, which is as of February 23, 1996 /s/ KPMG Peat Marwick LLP -----END PRIVACY-ENHANCED MESSAGE-----