-----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, KRG2gg+jYpPW8JdgJPPVbYob1IAoCRoGOc93mz1T9IvoQHQ1/7LhVHM1YNbrM8ZL Y+JVuXGFfrSmoFv+ay1SwQ== 0000950168-98-001771.txt : 19980527 0000950168-98-001771.hdr.sgml : 19980527 ACCESSION NUMBER: 0000950168-98-001771 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980428 ITEM INFORMATION: FILED AS OF DATE: 19980526 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: 8-K SEC ACT: SEC FILE NUMBER: 001-10000 FILM NUMBER: 98631171 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 8-K 1 FIRST UNION CORP. 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) April 28, 1998 -------------------------------- FIRST UNION CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) North Carolina 1-10000 56-0898180 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) One First Union Center Charlotte, North Carolina 28288-0013 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (704)374-6565 ---------------------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) ITEM 5. OTHER EVENTS. As previously reported by First Union Corporation (the "Corporation") in its Current Report on Form 8-K dated May 7, 1998, the Corporation completed its pooling of interests acquisition of CoreStates Financial Corp ("CoreStates") on April 28, 1998. As a result of such acquisition, the Corporation's historical financial statements have been restated. Attached hereto as exhibits and incorporated herein by reference are (i) the Corporation's 1997 Supplemental Annual Report (the "Supplemental Annual Report"), which sets forth on a restated basis to reflect the CoreStates acquisition, among other things, the audited supplemental consolidated balance sheets of the Corporation as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related notes thereto; (ii) the Corporation's Supplemental Quarterly Financial Report for the Three Months Ended March 31, 1998 (the "Supplemental Quarterly Report"), which sets forth on a restated basis to reflect the oreStates acquisition, among other things, the unaudited supplemental consolidated balance sheet of the Corporation as of March 31, 1998 and 1997, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for the three months ended March 31, 1998 and March 31, 1997; (iii) computations, on a restated basis to reflect the CoreStates acquisition, of the Corporation's (a) consolidated ratios of earnings to fixed charges, and (b) consolidated ratios of earnings to fixed charges and preferred stock dividends; (iv) the consent of KPMG Peat Marwick LLP.; and (v) the Corporation's financial data schedules restated to reflect the CoreStates acquisition. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (c) Exhibits. (2) The Agreement and Plan of Mergers, dated as of November 18, 1997, between CoreStates and the Corporation (without exhibits). (Incorporated by reference to Exhibit (2) to the Corporation's Current Report on Form 8-K dated November 28, 1997.) (12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges. (12)(b) Computations of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. (23)(a) Consent of KPMG Peat Marwick LLP (27)(a) The Corporation's Financial Data Schedules. (27)(b) The Corporation's Financial Data Schedule. (27)(c) The Corporation's Financial Data Schedules. (99)(a) Supplemental Annual Report. (99)(b) Supplemental Quarterly Report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FIRST UNION CORPORATION Date: May 26, 1998 By: /s/ James H. Hatch ------------------- Name: James H. Hatch Title: Senior Vice President and Corporate Controller EXHIBIT INDEX Exhibit No. Description ----------- ----------- (2) The Agreement and Plan of Mergers, dated as of November 18, 1997, between CoreStates and the Corporation (without exhibits). (Incorporated by reference to Exhibit (2) to the Corporation's Current Report on Form 8-K dated November 28, 1997.) (12)(a) Computations of Consolidated Ratios of Earnings to Fixed Charges. (12)(b) Computations of Consolidated Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. (23)(a) Consent of KPMG Peat Marwick LLP. (27)(a) The Corporation's Financial Data Schedules. (27)(b) The Corporation's Financial Data Schedule. (27)(c) The Corporation's Financial Data Schedules. (99)(a) Supplemental Annual Report. (99)(b) Supplemental Quarterly Report. EX-12 2 EXHIBIT (12)(A)
Exhibit (12)(a) FIRST UNION CORPORATION AND SUBSIDIARIES COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES - -------------------------------------------------------------------------------- Three Months Ended Years Ended December 31, --------------------------------------------------------- Mar. 31, (In millions) 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $1,207 3,793 3,534 3,409 2,747 2,565 Fixed charges, excluding capitalized interest 740 2,526 2,224 1,821 1,110 835 - --------------------------------------------------------------------------------------------------------------------------- Earnings (A) $1,947 6,319 5,758 5,230 3,857 3,400 - ---------------------------------------------------------------------------------------------------------------------------- Interest, excluding interest on deposits $ 685 2,304 2,120 1,716 1,013 737 Distributions on guaranteed preferred beneficial interests 29 116 -- -- -- -- One-third of rents 26 106 104 105 97 98 Capitalized interest -- -- 5 4 1 -- - --------------------------------------------------------------------------------------------------------------------------- Fixed charges (B) $ 740 2,526 2,229 1,825 1,111 835 - --------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, excluding interest on deposits (A)/(B) 2.63 X 2.50 2.58 2.87 3.47 4.07 - --------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $1,207 3,793 3,534 3,409 2,747 2,565 Fixed charges, excluding capitalized interest 1,797 6,674 6,255 5,837 3,836 3,474 - --------------------------------------------------------------------------------------------------------------------------- Earnings (C) $3,004 10,467 9,789 9,246 6,583 6,039 - --------------------------------------------------------------------------------------------------------------------------- Interest, including interest on deposits $1,742 6,452 6,151 5,732 3,739 3,376 Distributions on guaranteed preferred beneficial interests 29 116 -- -- -- -- One-third of rents 26 106 104 105 97 98 Capitalized interest -- -- 5 4 1 -- - --------------------------------------------------------------------------------------------------------------------------- Fixed charges (D) $1,797 6,674 6,260 5,841 3,837 3,474 - ---------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, including interest on deposits (C)/(D) 1.67 X 1.57 1.56 1.58 1.72 1.74 - ---------------------------------------------------------------------------------------------------------------------------
EX-12 3 EXHIBIT(12)(B)
Exhibit (12)(b) FIRST UNION CORPORATION AND SUBSIDIARIES COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS - -------------------------------------------------------------------------------- Three Months Years Ended December 31, Ended ------------------------------------------------------------ Mar. 31, (In millions) 1998 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 1,207 3,793 3,534 3,409 2,747 2,565 Fixed charges, excluding preferred stock dividends and capitalized interest 740 2,526 2,224 1,821 1,110 835 - ------------------------------------------------------------------------------------------------------------------------------- Earnings (A) $ 1,947 6,319 5,758 5,230 3,857 3,400 - ------------------------------------------------------------------------------------------------------------------------------- Interest, excluding interest on deposits $ 685 2,304 2,120 1,716 1,013 737 Distributions on guaranteed preferred beneficial interests 29 116 -- -- -- -- One-third of rents 26 106 104 105 97 98 Preferred stock dividends (a) 14 41 133 67 Capitalized interest -- -- 5 4 1 -- - ------------------------------------------------------------------------------------------------------------------------------- Fixed charges (B) $ 740 2,526 2,243 1,866 1,244 902 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, excluding interest on deposits (A)/(B) 2.63 X 2.50 2.57 2.80 3.10 3.77 - ------------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 1,207 3,793 3,534 3,409 2,747 2,565 Fixed charges, excluding preferred stock dividends and capitalized interest 1,797 6,674 6,255 5,837 3,836 3,474 - ------------------------------------------------------------------------------------------------------------------------------- Earnings (C) $ 3,004 10,467 9,789 9,246 6,583 6,039 - ------------------------------------------------------------------------------------------------------------------------------- Interest, including interest on deposits $ 1,742 6,452 6,151 5,732 3,739 3,376 Distributions on guaranteed preferred beneficial interests 29 116 -- -- -- -- One-third of rents 26 106 104 105 97 98 Preferred stock dividends (a) 14 41 133 67 Capitalized interest -- -- 5 4 1 -- - ------------------------------------------------------------------------------------------------------------------------------- Fixed charges (D) $ 1,797 6,674 6,274 5,882 3,971 3,541 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, including interest on deposits (C)/(D) 1.67 X 1.57 1.56 1.57 1.66 1.71 - -------------------------------------------------------------------------------------------------------------------------------
(a) Preferred stock dividends include a redemption premium of $41 million in 1994. EX-23 4 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-8 333-10211 S-8 33-51964 S-8 333-11613 S-8 33-54148 S-8 333-14469 S-8 33-54274 S-3 333-15743 S-8 33-54739 S-3 333-17599 S-3 33-56927 S-4 333-19039-01 S-8 33-60835 S-4 333-20611 S-8 33-60913 S-3 333-34151 S-8 33-62307 S-3 333-35363 S-8 33-62399 S-8 333-36839 S-8 33-63387 S-8 333-37709 S-8 33-65501 S-8 333-44015 S-8 333-2551 S-8 333-50589 S-8 333-2561 S-3 333-50999 S-8 333-10179
(ii) First Union Capital I on Form S-3 (No. 333-15743-01); (iii) First Union Capital II on Form S-3 (No. 333-15743-02);(iv) First Union Capital III on Form S-3 (No. 333-15743-03); (v) First Union Institutional Capital I on Form S-4 (No. 333-19039); and (vi) First Union Institutional Capital II on Form S-4 (No. 333-20611-01) of First Union Corporation of our reports dated January 21, 1998, relating to the consolidated balance sheets of First Union Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 Annual Report to Stockholders which is incorporated by reference in First Union Corporation's 1997 Form 10-K, and dated May 15, 1998, relating to the supplemental consolidated balance sheets of First Union Corporation and subsidiaries as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the 1997 Supplemental Annual Report to Stockholders which is included in First Union Corporation's Form 8-K dated May 26, 1998. KPMG PEAT MARWICK LLP Charlotte, North Carolina May 26, 1998 EX-27 5 EXHIBIT (27) (A)
9 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 10,275 10,538 10,573 3,832 2,762 1,991 7,781 8,312 5,333 5,952 4,602 2,507 23,524 19,199 23,100 3,526 4,190 6,200 3,670 4,328 6,396 135,323 137,313 129,859 1,847 2,212 2,308 205,735 197,341 188,855 137,077 136,429 134,112 31,681 27,620 25,081 6,725 5,567 5,127 11,752 10,815 9,586 0 0 0 0 0 183 3,203 3,295 3,270 12,066 11,333 10,329 205,735 197,341 188,855 11,787 11,181 10,799 1,658 1,760 1,747 581 507 329 14,362 13,758 13,028 4,148 4,031 4,016 6,452 6,151 5,732 7,910 7,607 7,296 1,103 678 403 55 100 82 7,336 6,930 6,542 3,793 3,534 3,409 3,793 3,534 3,409 0 0 0 0 0 0 2,709 2,273 2,196 2.84 2.33 2.21 2.80 2.30 2.17 4.59 4.55 4.76 876 905 905 326 474 445 2 14 11 0 0 0 2,212 2,308 2,259 1,074 1,076 766 202 252 219 1,847 2,212 2,308 1,171 1,741 1,845 49 39 60 627 432 403
EX-27 6 EXHIBIT(27)(B)
9 3-MOS DEC-31-1998 MAR-31-1998 10,528 2,646 11,656 7,008 34,388 3,172 3,315 136,594 (1,862) 220,066 138,134 43,524 7,911 12,010 0 0 3,243 12,563 220,066 2,787 555 169 3,602 1,057 1,742 1,860 135 23 1,895 1,207 1,207 0 0 790 0.82 0.81 4.18 888 328 1 0 1,847 180 51 1,862 1,167 50 645
EX-27 7 EXHIBIT(27)(C)
9 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 9,205 10,092 9,827 2,590 3,259 3,248 6,535 7,784 7,037 4,395 5,720 8,152 19,059 20,931 21,135 4,024 3,891 3,681 4,138 4,026 3,829 137,775 140,234 139,491 (2,191) (2,181) (2,175) 193,507 201,642 202,766 133,369 135,202 133,144 27,349 32,892 33,784 5,092 5,645 6,445 10,767 10,559 11,209 0 0 0 0 0 0 3,214 3,183 3,197 10,629 10,911 11,626 193,507 201,642 202,766 2,883 5,849 8,841 378 815 1,237 123 265 420 3,443 7,064 10,727 1,008 2,042 3,089 1,501 3,114 4,771 1,942 3,950 5,956 205 433 658 9 20 37 1,688 3,459 5,170 1,083 2,133 3,285 1,083 2,133 3,285 0 0 0 0 0 0 703 1,385 2,133 0.72 1.44 2.23 0.72 1.42 2.20 4.70 4.68 4.65 935 901 880 431 428 416 11 2 1 0 0 0 2,212 2,212 2,212 259 548 825 50 101 147 2,191 2,181 2,175 1,610 1,581 1,610 49 47 49 532 553 516
EX-99 8 EXHIBIT(99)(A) Exhibit (99)(a) FIRST UNION CORPORATION AND SUBSIDIARIES 1997 SUPPLEMENTAL ANNUAL REPORT Restated to reflect the pooling of interests accounting acquisition of CoreStates Financial Corp on April 28, 1998 FIRST UNION CORPORATION AND SUBSIDIARIES 1997 SUPPLEMENTAL ANNUAL REPORT DECEMBER 31, 1997 TABLE OF CONTENTS - -------------------------------------------------------------------------------
PAGE - ---------------------------------------------------------------------------------------------- Financial Highlights 1 Management's Analysis of Operations 2 Consolidated Summaries of Income, Per Common Share and Balance Sheet Data T-1 Noninterest Income T-2 Noninterest Expense T-2 Business Segments T-3 Internal Capital Growth and Dividend Payout Ratios T-5 Selected Quarterly Data T-6 Selected Five-Year Data T-7 Securities Available for Sale T-8 Investment Securities T-10 Loans T-11 Certain Commercial Loan Maturities and Sensitivity to Changes in Interest Rates T-12 Allowance for Loan Losses and Nonperforming Assets T-13 Allocation of the Allowance for Loan Losses T-14 Intangible Assets T-14 Foreclosed Properties T-15 Deposits T-16 Time Deposits in Amounts of $100,000 or More T-17 Capital Ratios T-18 Off-Balance Sheet Derivative Financial Instruments T-19 Off-Balance Sheet Derivatives - Expected Maturities T-27 Off-Balance Sheet Derivatives Activity T-28 Interest Differential T-28 Net Interest Income Summaries T-29 Management's Statement of Responsibility C-1 Independent Auditors' Opinion C-2 Supplemental Consolidated Balance Sheets C-3 Supplemental Consolidated Statements of Income C-4 Supplemental Consolidated Statements of Changes in Stockholders' Equity C-5 Supplemental Consolidated Statements of Cash Flows C-7 Notes to Supplemental Consolidated Financial Statements C-8
Financial Highlights - --------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------- Percent Increase (Dollars in millions, except per share data) 1997 1996 (Decrease) - ---------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS Net income $ 2,709 2,273 19 % Dividends on preferred stock - 9 - - -------------------------------------------------------------------------------- Net income applicable to common stockholders after merger-related and restructuring charges and SAIF special assessment 2,709 2,264 20 After-tax merger-related and restructuring charges and SAIF special assessment 204 368 (45) - -------------------------------------------------------------------------------- Net income applicable to common stockholders before merger-related and restructuring charges and SAIF special assessment $ 2,913 2,632 11 % - ------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic earnings per share Net income after merger-related and restructuring charges and SAIF special assessment $ 2.84 2.33 22 % Net income before merger-related and restructuring charges and SAIF special assessment 3.05 2.70 13 Diluted earnings per share Net income after merger-related and restructuring charges and SAIF special assessment 2.80 2.30 22 Net income before merger-related and restructuring charges and SAIF special assessment 3.01 2.68 12 Cash dividends 1.22 1.10 11 Book value 15.95 14.85 7 Period-end price $ 51.25 37.00 39 Average common shares (In thousands) Basic 955,241 973,712 (2) Diluted 966,792 982,755 (2) Actual common shares (In thousands) 960,984 988,594 (3) Dividend payout ratios (based on operating earnings) 39.18 % 39.18 % - ------------------------------------------------------------------------------------------- PERFORMANCE HIGHLIGHTS Before merger-related and restructuring charges and SAIF special assessment Return on average assets 1.49% 1.39 - Return on average common equity 20.24 18.76 - Overhead efficiency ratio 57 56 - Net charge-offs as a percentage of - Average loans, net 0.65 0.64 - Average loans, net, excluding Bankcard 0.31 0.35 - Nonperforming assets to loans, net and - foreclosed properties 0.75 0.78 - Net interest margin 4.59 % 4.55 - - ------------------------------------------------------------------------------------------- CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION) Before merger-related and restructuring charges and SAIF special assessment Net income applicable to common stockholders $ 3,156 2,847 11 % Net income per common share - basic $ 3.30 2.92 13 Return on average tangible assets 1.64 % 1.53 - Return on average tangible common equity 27.97 25.44 - Overhead efficiency ratio 54 % 54 % - ------------------------------------------------------------------------------------------- YEAR-END BALANCE SHEET ITEMS Securities available for sale $ 23,524 19,199 23 Investment securities 3,526 4,190 (16) Loans, net of unearned income 131,687 134,647 (2) Earning assets 176,302 173,712 1 Total assets 205,735 197,341 4 Noninterest-bearing deposits 31,005 29,713 4 Interest-bearing deposits 106,072 106,716 (1) Long-term debt 11,752 10,815 9 Guaranteed preferred beneficial interests 1,735 789 120 Stockholders' equity $ 15,269 14,628 4 - -------------------------------------------------------------------------------------------
1 The following discussion and other portions of this Supplemental Annual Report contain various forward-looking statements. Please refer to our 1997 Annual Report on Form 10-K for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements. The following review is a discussion of the performance and financial condition of First Union Corporation and CoreStates Financial Corp on a combined basis. All First Union historical financial data have been restated for the pooling of interests acquisition of CoreStates, which was consummated on April 28, 1998, except as otherwise noted. EARNINGS HIGHLIGHTS First Union's basic operating earnings in 1997 (which represents earnings before special charges) were $2.9 billion, or $3.05 per common share compared with $2.6 billion or $2.70 per share in 1996. Diluted operating earnings per common share were $3.01 in 1997 and $2.68 in 1996. Basic earnings per common share are calculated by dividing net income applicable to common stockholders by average common shares outstanding. Diluted earnings per common share are calculated by dividing net income applicable to common stockholders by the sum of average common shares outstanding and common stock equivalents related to employee stock options including restricted stock awards. All per common share data have been restated for all periods to reflect a two-for-one stock split, which was paid on July 31, 1997. Special charges excluded from operating earnings are after-tax merger-related and restructuring charges of $204 million, or 21 cents per share, in 1997 primarily related to the November 28, 1997, pooling of interests acquisition of Richmond, Virginia - based Signet Banking Corporation, and $272 million, or 28 cents per share, in 1996 primarily related to 1996 acquisitions. Operating earnings in 1996 also exclude a special charge related to an after-tax Savings Association Insurance Fund (SAIF) special assessment of $96 million, or 10 cents per common share. After the special charges, basic earnings in 1997 were $2.7 billion or $2.84 per common share compared with $2.3 billion or $2.33 per common share in 1996. Diluted earnings per common share were $2.80 in 1997 and $2.30 in 1996. In the fourth quarter of 1997, First Union's net income applicable to common stockholders before restructuring charges was $743 million, or 78 cents on a basic per common share basis, and after restructuring charges, $576 million, or 61 cents per common share. Related diluted per common share amounts were 77 cents and 60 cents, respectively. This compares with earnings of $687 million, or 71 cents on a basic per common share basis and 70 cents on a diluted basis in the fourth quarter of 1996. Growth in 1997 operating earnings was led by a 24 percent increase in noninterest income (excluding securities transactions), including, on an unrestated basis, a 58 percent increase in Capital Markets fee income and a 45 percent increase in Capital Management fee income. Our operating overhead efficiency ratio (excluding special charges and capital securities expense) was 57 percent in 1997 and 56 percent in 1996. In addition, nonperforming assets declined to $991 million, or 0.75 percent of net loans and foreclosed properties, from $1.05 billion, or 0.78 percent, in 1996. Net charge-offs as a percentage of average net loans were 0.65 percent in 1997 compared with 0.64 percent in 1996. Outlook In 1997, First Union also took several actions to better position itself for 1998. o In the fourth quarter of 1997, the unsecured consumer portfolio was significantly restructured to help position the company for higher credit quality in 1998. This restructuring resulted in the sale of $3 billion of credit card receivables and other unsecured loans. The 2 sales reflect the repositioning of the portfolio in line with our Consumer Bank's strategy of expanding relationships within our growing customer base on the East Coast. o The investment portfolio was repositioned in the fall of 1997 to maximize income in the face of declining interest rates and a flattening yield curve. o In addition, we increased the annual dividend 11 percent to $1.22 per common share, representing the 20th consecutive year of dividend increases. In December 1997, we again announced a dividend increase of 16 percent to 37 cents on a quarterly basis, or $1.48 on an annualized basis. o Also in 1997, we announced the pending acquisition of CoreStates Financial Corp as well as the acquisitions of Signet, Wheat First and Covenant, all of which are discussed below. First Union continues to diversify its business mix in order to meet client demands and to decrease the corporation's reliance on interest income, which can be affected by volatility in economic conditions and movements in interest rates. First Union's goal is to increase noninterest income in proportion to total revenue to 40 to 45 percent by the year 2000. We have made significant progress toward that goal with noninterest income to total revenue of 35 percent in 1997 compared with 31 percent in 1996. To help us meet this goal, we continue to invest in high-growth business lines such as the investment banking, brokerage services and asset management businesses in our Capital Markets and Capital Management Groups. These nontraditional businesses complement our loan and deposit activities. We also are applying nontraditional approaches to our more mature lines of business, primarily by streamlining processes, by adding electronic and remote banking alternatives and by implementing our Future Bank retail branch model. The goals are to improve customer service, increase sales and generate efficiencies. We expect strong sales momentum in light of demographic trends, a robust economy and our market expansion. Our primary management attention is focused on leveraging our existing business base as we invest in new technology and fee income-generating lines of business. The significant investments we have made in acquisitions, in technology and in expanded products and services have positioned us to better serve our 16 million customers in a diverse geographic marketplace and to reduce the impact of adverse changes in the business cycle. In 1997 First Union leveraged these internal investments through three significant mergers that will greatly enhance our key businesses and expand our share of markets that can benefit from our product mix. Merger and Consolidation Activity The acquisition of CoreStates, of Philadelphia, Pennsylvania, will create new opportunities to leverage our growing Capital Management and Capital Markets businesses in states that generate 36 percent of the nation's gross state product and in attractive consumer markets in which per capita income is 12 percent above the national average. Approximately 331 million shares of First Union's common stock were issued in this pooling of interests accounting transaction. The merger agreement provided for the issuance of 1.62 shares of First Union common stock for each share of CoreStates common stock. Using First Union's closing price of $52.4375 on November 17, 1997, the last business day before public announcement of the merger, the transaction was valued at approximately $17 billion. At December 31, 1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and net income of $813 million. First Union currently estimates after-tax, merger-related and restructuring expenses of $795 million in 1998 in connection with the CoreStates merger. In addition, six directors of CoreStates are expected to be nominated for election or appointed to the First Union board of directors. More information related to CoreStates is available in our Current Reports on Form 8-K, which we filed with the Securities and Exchange Commission (SEC) dated November 18, 3 1997, November 28, 1997, and December 2, 1997, and in our registration statement on Form S-4, filed with the SEC on January 9, 1998. The Signet acquisition was consummated on November 28, 1997. Signet, with assets of $11 billion, net loans of $7 billion, deposits of $8 billion, stockholders' equity of $990 million and net income of $73 million for the nine months ended September 30, 1997, moved First Union into the leading deposit share position in Virginia. First Union issued 1.10 shares of its common stock for each share of Signet common stock, or 67 million shares, to consummate the merger. The Signet acquisition was accounted for as a pooling of interests. First Union's historical financial statements for periods beginning on and after January 1, 1995, and ended prior to November 28, 1997, were restated to reflect the Signet acquisition. In addition, the acquisition of Covenant Bancorp, Inc., based in Haddonfield, New Jersey, was consummated on January 15, 1998. Covenant had assets of $415 million, net loans of $254 million, deposits of $294 million and stockholders' equity of $31 million at December 31, 1997. First Union issued 1.6 million shares in this purchase accounting transaction, substantially all of which we repurchased in 1997 in the open market at a cost of $79 million. The acquisition of Wheat First, based in Richmond, Virginia, was consummated on January 31, 1998. We expect this partnership will enhance the equity securities business of First Union's Capital Markets Group, as well as create one of the nation's largest brokerage networks. The merger was accounted for as a pooling of interests. However, financial information related to Wheat First is not considered material to the historical results of First Union, and therefore, such historical results will not be restated as a result of the acquisition. First Union issued 10.3 million shares of its common stock in exchange for Wheat First shares. Wheat First had assets of $1 billion and stockholders' equity of $171 million at December 31, 1997. In addition, in the first quarter of 1998, we announced two purchase accounting acquisitions: The Money Store, which we expect to complete in the second or third quarter of 1998, subject to approval by The Money Store's shareholders and applicable regulators and other conditions of closing, and Bowles Hollowell Conner & Co., which we completed on April 30, 1998. The Money Store transaction provides that First Union pay $34 per share in First Union common stock for each share of The Money Store's common stock, with a total indicated purchase price of approximately $2.1 billion. In connection with The Money Store acquisition, we have repurchased in the open market 37 million of the outstanding shares of First Union common stock at a cost of $2 billion, which equals the number of such shares currently expected to be issued in the merger. In The Money Store acquisition, we estimate we will take a merger-related and restructuring expense of approximately $20 million. In connection with the Bowles Hollowell transaction, we issued approximately 1.2 million shares of First Union common stock. Bowles Hollowell had assets of $18 million at January 31, 1998. We continue to evaluate acquisition opportunities that will provide access to customers and markets that we believe complement our long-term goals. Acquisition opportunities are evaluated as a part of our ongoing capital allocation decision-making process. Decisions to pursue acquisitions will be measured in conjunction with financial performance guidelines adopted in 1997 and other financial objectives. Acquisition discussions and in some cases negotiations may take place from time to time, and future acquisitions involving cash, debt or equity securities may be expected. In addition, First Union is taking advantage of the opportunity afforded by the Riegle-Neal Interstate Banking and Branching Efficiency Act to operate national banks across state lines by consolidating our banks. In 1997 all banks in the southern region of First Union and in Connecticut were consolidated into First Union National Bank, based in Charlotte, North Carolina. With the exception of our Delaware bank, the final consolidation in the rest of the northern region occurred in February 1998. 4 The Accounting and Regulatory Matters section provides more information about Riegle-Neal and provides information about legislative, accounting and regulatory matters that have recently been adopted or proposed. BUSINESS SEGMENTS Business Focus First Union's operations are divided into four primary business segments encompassing more than 40 distinct product and service units. These segments include the Consumer Bank, Capital Management, the Commercial Bank and Capital Markets. Additional information can be found in Table 4. Information related to CoreStates is separately discussed below and in Table 4. We have developed an internal performance reporting model to measure the results of these four business segments and the Treasury/Nonbank segment. Because of the complexity of the corporation and the interrelationships of these business segments, we have used various estimates and allocation methodologies in the preparation of the Business Segments financial information. Restatements of various periods may occasionally occur because these estimates and methodologies could be refined over time. Our management structure combines this internal performance reporting with a matrix management approach, which integrates product management with our various distribution channels. Additionally First Union's management structure and internal reporting methodologies will produce business segment results that are not necessarily comparable to presentations by other bank holding companies or stand-alone entities in similar industry segments. Our internal performance reporting model was implemented in 1997. Prior periods have not been restated because of practical limitations. The model isolates the net income contribution and measures the return on capital for each business segment by allocating equity, funding credit and expense and corporate expenses to each segment. We use a risk-based methodology to allocate equity based on the credit, market and operational risks associated with each business segment. Credit risk allocations provide sufficient equity to cover unexpected losses for each asset portfolio. Operational capital is allocated based on the level of noninterest expense for each segment. In addition capital is allocated to segments with deposit products to reflect the risk of unanticipated disintermediation. Through this process, the aggregate amount of equity allocated to all business segments may differ from the corporation's book equity. All unallocated equity is retained by the Treasury/ Nonbank segment. This mismatch in book versus allocated equity may result in an unexpectedly high or low return on equity for the Treasury/Nonbank segment for extended periods of time. Our method of reporting does not allow for discrete reporting of the profitability or synergies arising from our integrated approach to product sales. For example, a commercial customer might have loans, deposits and an interest rate swap. The loan and deposit relationship would be included in the commercial segment and the interest rate swap would be reflected in the risk management unit of the Capital Markets segment. Exposure to market risk is managed centrally within the Treasury/Nonbank segment. In order to remove interest rate risk from each business segment our model employs a funds transfer pricing (FTP) system. The FTP system matches the duration of the funding used by each segment to the duration of the assets and liabilities contained in each segment. Matching the duration, or the effective term until an instrument can be repriced, allocates interest income and/or expense to each segment so its resulting net interest income is insulated from interest rate risk. The majority of the interest rate risk resulting from the mismatch in durations of assets and liabilities held by the business segments resides in the Treasury/Nonbank segment. The Treasury/Nonbank segment also holds the corporation's investment portfolio and off-balance sheet portfolio, which are used to enhance corporate earnings and to manage 5 exposure to interest rate risk. Because most market risk is held in the Treasury/Nonbank segment, the profitability of this segment is expected to be more volatile than for the other business segments. General corporate expenses, with the exception of goodwill amortization, are allocated to each segment in a pro rata manner based on the direct and attributable indirect expenses for each segment. Residual corporate expense remaining in the Treasury/ Nonbank segment reflects the costs of portfolio management activities, goodwill amortization and merger-related restructuring charges. In general this approach should not result in significant volatility to business segment returns. Consumer Bank The Consumer Bank, our primary deposit-taking entity, provides an attractive source of funding for our secured and unsecured consumer loans, first and second residential mortgages, installment loans, credit cards, auto loans and leases, and student loans. The Consumer Bank combines traditional deposit and lending products with innovative financial solutions all supported by state-of-the-art technology -- including smart cards, electronic banking and Internet access -- to provide quality customer service. Our new Future Bank retail branch model, rolled out initially in Atlanta, Georgia, will be implemented in 1998 throughout our full-service branch network in 12 states and Washington, D.C. The Future Bank model increases service options and access for our customers, improves sales capacity for employees and ultimately reduces costs. Through our First Union Direct Bank, N.A., centralized customer information centers manage the majority of the servicing and administrative tasks for the branches, freeing the Future Bank financial consultants to focus on building relationships and tailoring financial solutions to meet customer needs. First Union Direct also provides direct telephone sales and servicing for all our consumer lending products. First Union's mortgage origination and home equity offices across the nation also are included in the Consumer Bank through our operating subsidiaries First Union Mortgage Corporation (FUMC) and First Union Home Equity Bank, N.A. (FUHEB). Our equity lending business, including FUHEB and branch-based lending, is the second largest in the nation, while FUMC was the nation's 12th largest mortgage servicer, with a mortgage servicing portfolio of $61 billion at December 31, 1997. In addition, FUHEB is a major participant in both the "A" credit quality market as well as in the sub-prime market. FUHEB securitized and sold $914 million in sub-prime originations through our Capital Markets Group in 1997. Consumer loans in 1997 exclude $5 billion in securitized adjustable rate mortgages (ARMs), home equity loans, student loans, indirect auto loans and community reinvestment loans, as well as $3 billion in credit card receivables and Signet's loan-by-check portfolio, which were transferred to assets held for sale. Loan originations in the consumer portfolio were led by mortgage and home equity loans. The managed credit card portfolio was $7 billion at December 31, 1997. This amount includes $2 billion of securitized credit cards and $2 billion in credit card receivables that were transferred to assets held for sale. Capital Management The Capital Management Group unites our banking and investment offerings for retail and institutional customers, providing products and services that primarily produce fee income. At December 31, 1997, this group had $80 billion in assets under management, which encompassed $50 billion in total trust and institutional assets, including $12 billion in mutual funds held in trust. Including the mutual funds held in trust, the First Union-advised mutual funds amounted to $42 billion at December 31, 1997. An additional $10 billion in mutual fund assets were added in 1998 with Wheat First, which expanded our marketing power with a 6 combined sales force of more than 4,300 registered representatives in 20 states and more than 2,000 brokerage locations. The trust unit anticipates continued growth with the addition of new products and services. On the personal trust side, a Family Trust program was introduced in September 1997 to assist trust and investment management customers in providing elder care. Corporate Trust has added structured finance trust services and an investment holding company subsidiary, Delaware Financial Services Corporation. Capital Management results in 1997 reflect the December 1996 purchase accounting acquisition of Keystone Investments, Inc., the Boston, Mass.-based investment adviser to the Keystone family of mutual funds, now combined with the Evergreen Funds. Evergreen manages $42 billion in assets for more than 1 million shareholders, and offers over 70 mutual funds. Thirty-five Evergreen portfolios were rated "four" or "five" stars by the Morningstar ratings service at December 31, 1997. We are also introducing a new family of First Union-advised mutual funds designed for the institutional and corporate marketplace. Our CAP Accounts are an asset management product that enables customers to manage their securities trading and banking activities in a single, consolidated account. Income related to the CAP Account is therefore reflected in several of our lines of business, including mutual funds and retail brokerage services. The CAP Account item in Table 4 reflects direct CAP Account fee income only. At year-end 1997, CAP Account assets were $26 billion and there were 290,000 accounts. CAP customers generally hold balances split evenly between deposits and securities. Trading activity by customers through their CAP Accounts also increased in 1997. We also have introduced variations of the CAP Account designed to appeal to a broader mass of investors and to attract first-time investors, including the CAP1 Account with a lower minimum balance and a CAP for Business Account targeted primarily toward small businesses, professional associations and nonprofit groups. The Private Client Group (formerly Private Banking) provides high net worth clients with a single point of access to First Union's investments, mortgages, personal loans, trusts, financial planning, brokerage services and other services. At December 31, 1997, the Private Client Group managed $2 billion of average net loans and $2 billion of average deposits, in addition to a variety of fee-generating capital markets and investment products. Retail brokerage services are the primary distribution center for investment and insurance products. This segment does not reflect sales of credit, life or other insurance products sold in other areas of the corporation. Retail brokerage revenues were $282 million. Mutual fund sales through the brokerage unit reached $3 billion and annuity sales exceeded $1 billion. Brokerage expenses in 1997 largely reflected significant investment in reengineering our processes to implement a new operating system designed to support future growth and to provide enhanced customer service features, including cost basis investment reporting and dividend reinvestment. New brokerage products introduced in 1997 include a fee-based account that offers access to Schwab OneSource mutual funds. The expanded operating system positions retail brokerage to pursue an expanded Internet sales distribution channel in 1998. We anticipate increased growth in all of the Capital Management business lines as we introduce new products and services throughout our multistate network and with the addition of new customers from our acquisitions. Commercial Bank Our Commercial Bank's products and services go beyond traditional commercial banking to areas such as asset-based financing, risk management products, property and casualty insurance, leasing, treasury services, international services, pension plans and 401(k)s. As a result, the Commercial Bank is increasing its proportion of fee income along with the rest of the corporation as customers demand more innovative products and transaction efficiency. The Commercial Bank provides a comprehensive array of financial products to 7 corporate, middle-market, commercial and small- business customers. Specialized relationship teams throughout our region focus on sales and service. In addition, we have an integrated approach that leverages the capabilities of First Union's Capital Markets Group for the more complex financing solutions. The increase in Commercial Bank fee income was led by its Cash Management unit. Service charge volume has increased as a result of higher sales volume and improved collection policies and procedures. In addition, we have streamlined the processes in the Commercial Bank, which has increased efficiency. Revenue per relationship manager increased in 1997 to $1 million. Cash Management offers corporate customers a comprehensive selection of treasury management services, including a full range of electronic commerce, collection, disbursement and information reporting services. These products are designed and priced based on the diverse needs of companies of various sizes and industries. Combined with CoreStates, First Union is the nation's third largest cash management bank based on revenue, ranking in the Top 10 for all core cash management products, and leading the nation in corporate check clearing. The combination adds significantly to First Union's commercial cash management offerings, including Internet-based electronic commerce services, a nationwide lockbox network and expanded international cash management capabilities. Cash management products stimulate the gathering of commercial deposit balances. Deposit balances and their economic profitability are reflected in both the Commercial Bank and Capital Markets segments. Cash Management in Table 4 reflects only the direct service charge income from cash management products. Small Business Banking provides a comprehensive selection of proprietary and joint venture financial products including insurance, investment services and retirement planning services as well as loans and commercial deposit services to entrepreneurs, professionals and companies with annual sales ranging up to $10 million. Small Business Banking loan volume in 1997 was $1 billion and average net loans were $2 billion in 1997. Small Business Banking reflects only lending activities. Capital Markets In 1997 our Capital Markets Group produced strong momentum with record transaction volume and earnings, capped by the announcement of our merger with Wheat First. With this transaction, we are able to provide a crucial product to First Union's Capital Markets clients. We also have enhanced the competitive products and service offerings available to Wheat First's more than 950,000 brokerage customers. Our institutional business has a sales force of more than 100 traders covering 1,000 institutional clients, and we are a market maker in more than 300 NASDAQ stocks. We have 30 equity research analysts covering more than 300 companies with a focus on key specialized industries: communications and technology; financial services; consumer; furnishings, textiles and building; health care; and industrial. The announcement of the merger with Wheat First followed the May 1997 Federal Reserve Board approval of public equity underwriting through First Union's Section 20 subsidiary, First Union Capital Markets Corp. (FUCMC), renamed Wheat First Securities, Inc. Wheat First moved First Union far ahead in its business plan to make this service available to customers. With the addition of equity underwriting, sales and trading capabilities, our Capital Markets Group provides corporate and institutional clients one-stop shopping for a full range of investment banking products and services. These products and services are fully integrated with our wholesale delivery strategy, and they are a natural extension of our Commercial Bank. We have the capability to help a company grow from its first checking account to its initial public offering. In the Capital Markets Group, the Commercial Bank and the bank and 8 nonbank brokerage units, the strategy is the same: the focus is on providing customized solutions that are in our clients' best interests. Our primary focus has been to bring a full line of business products to middle-market customers who have been underserved by other capital markets providers. We believe this strategy, coupled with new powers, provides a rewarding platform for long-term growth. We have relationships with 42 percent of the middle-market and corporate businesses in our regional marketplace. Our relationship coverage begins in our East Coast banking markets and extends nation-wide through industry-specific specialization in such areas as health care; financial institutions; real estate; media and communications; utilities; energy; forest products; and specialty finance. In addition our International unit continues to develop strong correspondent banking relationships overseas. The primary focus of the International unit is to meet the trade finance and foreign exchange needs of our corporate customers and to provide commercial banking and capital markets products to the United States subsidiaries of foreign corporations. This unit is expected to expand significantly as a result of consummation of the merger with CoreStates, which has been involved in the international arena for a century. Capital Markets has five primary units: Investment Banking; Real Estate Finance; Risk Management; Commercial Leasing and Rail; and Traditional Banking. The Investment Banking unit provides loan syndications, high-yield debt and equity underwriting, private finance, merger and acquisition advisory services, merchant banking and asset securitizations. Loan syndications are significant contributors to earnings in the Investment Banking unit. The Loan Syndications unit, which spreads the risk of large credit facilities among several lenders, served as agent on 63 leveraged transactions amounting to $12 billion in 1997. The High-Yield unit, which underwrites below-investment grade debt and preferred stock securities, completed its first sole-managed high yield transaction in 1997 -- a $100 million offering for a communications company. This unit completed 18 high-yield bond offerings amounting to $3 billion in 1997. The Private Finance unit structures and places senior and subordinated debt, preferred and common stock, and other hybrid securities with institutional investors. This unit closed 17 transactions in 1997 with transaction volume of $309 million. The Mergers and Acquisition Advisory unit offers full advisory services to companies engaged in corporate sales and divestitures, acquisitions, fairness opinions and takeover defenses. In 1997 the M&A unit was involved in 21 closed or announced transactions with an aggregate value of nearly $3 billion. The Merchant Banking unit, or Capital Partners, was established in 1987 to make equity and subordinated debt investments in growing companies. This unit currently has committed and funded investments amounting to $625 million in 65 companies. The Asset Securitization unit undertakes the pooling and underwriting of corporate receivables and other financial assets, which are then sold in the form of securities to investors. In 1997 this unit securitized and sold to investors $6 billion of assets and securities. The Real Estate Finance unit expanded into a variety of commercial real estate finance activities in 1997. In addition to its commercial conduit operations, the Real Estate Finance unit offers credit tenant lease financings, real estate investment trust (REIT) lending, affordable housing debt and equity financings and off-balance sheet lending products for corporate real estate clients. In 1997 the Commercial Real Estate Finance unit expanded to the West, Midwest and Southwest by opening offices in Irvine, California, Chicago and Houston. The unit, which provides loan origination capabilities for mortgage loans secured by multi-family and commercial properties, originated $2 billion in loans in 1997. In November 1997 FUCMC and Lehman Bros. completed a $2 billion offering of securities backed by commercial mortgage loans, representing the industry's largest commercial mortgage loan securitization. In December 1997 the Mortgage Finance unit priced a $407 million offering of 9 securities backed by sub-prime home equity loans -- representing First Union's largest lead-managed home equity securitization. This transaction, coupled with two other securitizations earlier in the year, underscores the synergies within FUHEB in leveraging our capabilities in the home equity securities market. The Mortgage Finance unit issued new securities amounting to $1 billion in 1997. Our Risk Management unit creates customized solutions to risk management needs that allow customers to manage a wide variety of market risks, including interest rate risk, foreign exchange risk and commodity risk. The derivatives desk makes markets and trades in a large variety of derivative products and spot and forward exchange markets. The interest rate derivatives group completed more than 2,100 transactions with a notional principal value of $58 billion in 1997. The unit contributed $103 million in gross revenues in 1997. The unit expects to introduce equity derivatives for customers in the first quarter of 1998. Our Commercial Leasing and Rail unit includes First Union Rail which, with three major acquisitions in 1996, became the second largest general railcar leasing company in the United States with a fleet of more than 60,000 rail cars. First Union Rail also has developed innovative fleet management and logistics services, using the latest computer technologies to manage programs for customers and to provide insurance coverage and car accounting systems. The Traditional Banking unit includes Specialized Industries, Diversified Finance and International Finance. Specialized Industries delivers custom-tailored corporate finance advice to customers in six industry segments. Relationship managers from Diversified Finance, which includes leveraged finance and asset-based lending, also call on middle-market customers nationally. The relationship banking areas are the primary source for many of our Investment Banking products. The unit had $9 billion in average net loans in 1997. First Union will continue to expand its relationship banking efforts, including increased industry segment coverage and an expanded international presence as a result of the combination with CoreStates. Treasury/Nonbank Segment The Treasury/Nonbank segment includes First Union's Central Money Book (CMB) and certain expenses that are not allocated to the business segments, including goodwill amortization and corporate restructuring costs. The CMB is responsible for the management of our securities portfolios, our overall funding requirements and our asset and liability management functions. The Securities Available for Sale, Investment Securities, Liquidity and Funding Sources and Market Risk Management sections provide information about our securities portfolios, funding sources and asset and liability management functions. Additionally the Treasury/Nonbank segment includes amortization expense and capital not allocated to business segments related to other intangible assets (excluding deposit base premium and mortgage and other servicing assets) and charges that are unusual and infrequent, including merger-related and restructuring charges. The Treasury/Nonbank segment includes the income and expense related to the restructuring of the credit card receivables and other unsecured loans. CoreStates Discreet CoreStates segment data which would conform to First Union's segment reporting methodologies and assumptions are not available, and accordingly, the amounts related to CoreStates in the Business Segments table represent the consolidated historical results of CoreStates. Additionally, the information presented above does not include CoreStates financial data. CoreStates was composed of five primary businesses: Global and Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset Management; and Third Party Processing. Each segment was comprised of well-defined business lines with market or 10 product specific missions. These segments may or may not conform to those defined by First Union. Global and Specialized Banking includes specialized banking, secured lending, real estate, large corporate banking, Congress Financial Corporation, international banking, investment banking and cash management. Regional Banking consists of retail banking and delivery, small business lending, commercial business lending and middle market lending. Retail Credit Services include credit card, dealer services, educational lending, mortgage services, merchant credit card processing and consumer and commercial card processing. Trust and Asset Management consists of personal trust (including private banking), institutional trust, retirement plan services and investment management. Third Party Processing includes QuestPoint specialty transaction processing, earnings from CoreStates investment in Electronic Payment Services, Inc., and earnings from CoreStates Bank's Financial Institutions Division. Results of Operations INCOME STATEMENT REVIEW Net Interest Income Tax-equivalent net interest income increased 4 percent to $8.0 billion in 1997 from $7.7 billion in 1996. The increase in tax-equivalent net interest income was primarily the result of increased earning assets. Nonperforming loans reduce interest income because the contribution from these loans is eliminated or sharply reduced. In 1997, $72 million in gross interest income would have been recorded if all nonaccrual and restructured loans had been current in accordance with their original terms and if they had been outstanding throughout the period (or since origination if held for part of the period). The amount of interest income related to these assets and included in income in 1997 was $36 million. Net Interest Margin The net interest margin, which is the difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, was 4.59 percent in 1997 compared with 4.55 percent in 1996. The margin increase in 1997 was partially a result of upward repricing of credit card loans and an increase in lease financings. The average rate earned on earning assets was 8.29 percent in 1997 and 8.16 percent in 1996. The average rate paid on interest-bearing liabilities was 4.40 percent in 1997 and 4.26 percent in 1996. It should be noted that the margin is not our primary management focus or goal. Our focus is on increasing revenues. We use securities and off-balance sheet transactions to manage interest rate sensitivity. More information on these transactions is included in the Market Risk Management section. Noninterest Income We are meeting the challenges of increasing competition, changing customer demands and demographic shifts by making discretionary investments to enhance revenue growth. We have significantly broadened our product lines, particularly in the Capital Markets and Capital Management Groups, to provide additional sources of fee income that complement our long-standing banking products and services. These investments were reflected in a 24 percent increase in noninterest income, excluding investment securities transactions, to $4.3 billion in 1997 from $3.4 billion in 1996. Almost all categories of noninterest income increased in 1997 from a year earlier. On an unrestated basis, fee income from Capital Management and Capital Markets activities made 11 up one-half of noninterest income in 1997. These two groups are discussed further in the Business Segments section. Service charges on deposit accounts increased 14 percent from 1996 and mortgage banking income increased 25 percent, reflecting primarily purchase accounting acquisitions completed in 1996. Equipment leasing rental income increased 67 percent primarily reflecting the full year of railcar leasing activity. Trading Activities Our Capital Markets Group also makes a key contribution to noninterest income through trading profits. Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through profitable trading for the corporation's own account. Market making and position taking activities across a wide array of financial instruments add to our ability to optimally serve our customers. Trading profits increased 56 percent to $252 million in 1997 compared with $162 million in 1996. The increase was largely related to asset securitization activity and to increased customer transactions. Trading account assets were $6 billion at December 31, 1997, compared with $5 billion at year-end 1996. Noninterest Expense Noninterest expense was $7.3 billion in 1997 compared with $6.9 billion in 1996. Noninterest expense in 1997 included $284 million in pre-tax, merger-related and restructuring charges. Noninterest expense in 1996 included pre-tax, merger-related and restructuring charges of $421 million and the SAIF special assessment of $149 million pre-tax. The increase from 1996 also included the incremental impact of the fourth quarter 1996 purchase accounting acquisitions and expenses associated with our capital securities issues. More information on these capital securities is in the Guaranteed Preferred Beneficial Interests section. The increases in various categories of noninterest expense reflect our continued investments in fee-income generating businesses such as those managed by the Capital Management and the Capital Markets Groups, in which expenses move more in tandem with revenues, and in technology and retail branch transformation. Our overhead efficiency ratio continued to improve even while we increased our discretionary investments. This ratio was 57 percent in 1997, compared with 56 percent in 1996. These ratios exclude amounts related to the capital securities issues, merger-related and restructuring charges, and SAIF. Amortization of other intangible assets predominantly represents the amortization of goodwill and deposit base premium related to purchase accounting acquisitions. These intangibles are amortized over periods ranging from six to 25 years. Amortization is a noncash charge to income; therefore, liquidity and funds management activities are not affected. We had $2.9 billion in other intangible assets at December 31, 1997, compared with $3.2 billion at December 31, 1996. Costs related to environmental matters were not material. We are well aware of the ramifications of the change from December 31, 1999, to January 1, 2000. In February 1996 we assembled a corporate project team and engaged a leading technology firm to begin an initial assessment of the scope of the project. We determined early on that our single system platform would help minimize expenses related to the year 2000 project. Also minimizing the impact is the fact that our Emerald deposit system and essentially all of our Capital Markets systems are already year 2000 compliant. We have analyzed our computer hardware platforms and software programs and expect to have virtually all of the systems and application modifications in place and tested by the end of 1998, allowing time in 1999 for any system refinements that may be needed. Our relationship with third- party vendors, counterparties and customers also present year 2000 challenges, and we are assessing and monitoring their progress. Our process regarding vendors and counterparties includes direct access with the entity, surveys and testing procedures to assess whether such parties will be able to successfully interact with First Union in the year 2000. In addition we are assessing the needs of our customers and the possible effects of their inability 12 to become year 2000 compliant. Excluding any such expenses related to future acquisitions, First Union currently estimates total cumulative expenses for making its computer systems year 2000 compliant will be between $60 million and $65 million pretax. Income Taxes Income taxes were $1.1 billion in 1997 compared with $1.3 billion in 1996. The decrease resulted primarily from an after-tax benefit of $264 million realized in 1997 from the reorganization of certain corporate and interstate banking entities. The tax benefit had the result of reducing the corporation's effective tax rate to 29 percent from 36 percent. This benefit was principally offset by a higher provision for loan losses related to the restructuring of the unsecured consumer loan portfolio. Balance Sheet Review Earning Assets Earnings from our primary earning assets, securities and loans, are subject to two principal kinds of risks: interest rate risk and credit risk. Interest rate risk could result if rate indices related to sources and uses of funds were mismatched. Our Funds Management Committee manages interest rate risk, as well as credit risks associated with securities, under specific policy standards, which are discussed in more detail in the Market Risk Management section. In addition to certain securities, off-balance sheet transactions such as interest rate swaps have been used to maintain interest rate risk at acceptable levels in accordance with our policy standards. The loan portfolio carries the potential credit risk of past due, nonperforming or, ultimately, charged-off loans. We manage this risk primarily through credit approval standards, which are discussed in the Loans section. Average earning assets in 1997 were $175 billion, a 3 percent increase from $170 billion in 1996. Securities Available For Sale The available for sale portfolio consists of U.S. Treasury, municipal and mortgage-backed and asset-backed securities as well as collateralized mortgage obligations, corporate, foreign and equity securities. Securities available for sale transactions resulted in gains of $52 million in 1997 and $96 million in 1996. At December 31, 1997, we had securities available for sale with a market value of $24 billion compared with $19 billion at year-end 1996. The market value of securities available for sale was $444 million above amortized cost at December 31, 1997. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. The average rate earned on securities available for sale in 1997 was 6.83 percent compared with 6.62 percent in 1996. The average maturity of the portfolio was 5.72 years at December 31, 1997. Investment Securities The investment securities portfolio consists of U.S. Government agency, corporate, municipal and mortgage-backed securities, and collateralized mortgage obligations. Our investment securities amounted to $3.5 billion at December 31, 1997, and $4.2 billion at December 31, 1996. The average rate earned on investment securities was 7.97 percent in 1997 and 7.66 percent in 1996. The average maturity of the portfolio was 6.94 years at December 31, 1997. Loans The loan portfolio, which represents our largest asset class, is a significant source of interest and fee income. Elements of the loan portfolio are subject to differing levels of credit 13 and interest rate risk. Our lending strategy stresses quality growth and portfolio diversification by product, geography and industry. A common credit underwriting structure is in place throughout the corporation. The commercial loan portfolio includes general commercial loans, both secured and unsecured, and commercial real estate loans. Commercial loans are typically either working capital loans, which are used to finance the inventory, receivables and other working capital needs of commercial borrowers, or term loans, which are typically used to finance fixed assets or acquisitions. Commercial real estate loans typically are used to finance the construction or purchase of commercial real estate. Our commercial lenders focus principally on middle-market companies, which we believe reduces the risk of credit loss from any single borrower or group of borrowers. A majority of our commercial loans are for less than $10 million. Consistent with our longtime standard, we generally look for two repayment sources for commercial real estate loans: cash flows from the project and other resources of the borrower. Consumer lending through our full-service bank branches is managed using an automated underwriting system that combines statistical predictors of risk and industry standards for acceptable levels of customer debt capacity and collateral valuation. These guidelines are continually monitored for overall effectiveness and for compliance with fair lending practices. The loan portfolio at December 31, 1997, was composed of 55 percent in commercial loans and 45 percent in consumer loans compared with 50 percent and 50 percent, respectively, in 1996. Net loans at December 31, 1997, were $132 billion compared with $135 billion at December 31, 1996. Average net loans were $135 billion in 1997 and $129 billion in 1996. First Union transferred to assets held for sale $3 billion in loans in 1997 as part of its strategy of balance sheet management to maximize its return on investment. The increase in average loans was primarily attributable to the fourth quarter 1996 purchase accounting acquisitions and growth in both our consumer and Capital Markets portfolios. At December 31, 1997, unused loan commitments related to commercial and consumer loans were $58 billion and $30 billion, respectively. Commercial and standby letters of credit were $9 billion at December 31, 1997. At December 31, 1997, loan participations sold to other lenders amounted to $4 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.80 percent in 1997 compared with 8.70 percent in 1996. Factors contributing to the increase in the rate on loans included a reduction in lower-yielding mortgage loans, the upward repricing of credit card loans and growth in high-yielding leveraged leases. The 1997 reduction in mortgage loans resulted from the sale of $1 billion of ARMs and from the natural runoff of our mortgage portfolio. The improvement in the yield on credit cards reflected the repricing of loans originated with lower introductory rates and the targeted repricing of certain accounts to improve overall profitability. The reduction in installment loans-other was primarily attributable to the securitization of student loans, indirect auto loans and community reinvestment loans. The Asset Quality section provides information about geographic exposure in the loan portfolio. Commercial Real Estate Loans Commercial real estate loans amounted to 12 percent of the total portfolio at December 31, 1997, and 13 percent at December 31, 1996. This portfolio included commercial real estate mortgage loans of $13 billion at December 31, 1997, compared with $14 billion at December 31, 1996. 14 ASSET QUALITY Nonperforming Assets At December 31, 1997, nonperforming assets were $991 million, or 0.75 percent of net loans and foreclosed properties, compared with $1.05 billion, or 0.78 percent, at December 31, 1996. Loans or properties of less than $5 million each made up 75 percent, or $740 million, of nonperforming assets at December 31, 1997. Of the rest: o Eleven loans or properties between $5 million and $10 million each accounted for $80 million; and o Seven loans or properties over $10 million each accounted for $171 million. Forty-nine percent of nonperforming assets were collateralized primarily by real estate at December 31, 1997, and 56 percent at year-end 1996. Past Due Loans Accruing loans 90 days past due were $326 million at December 31, 1997, compared with $474 million at December 31, 1996. Of the past dues, $44 million were commercial and commercial real estate loans and $282 million were consumer loans. At December 31, 1997, we were closely monitoring certain loans for which borrowers were experiencing increased levels of financial stress. None of these loans were included in nonperforming assets or in accruing loans past due 90 days, and the aggregate amount of these loans was not significant. Net Charge-Offs Net charge-offs amounted to $872 million in 1997 compared with $824 million in 1996. Net charge-offs were 0.65 percent of average net loans in 1997 compared with 0.64 percent in 1996. Excluding net charge-offs related to the credit card portfolio, net charge-offs were 0.31 percent compared with 0.35 percent in 1996. At December 31, 1997, the owned credit card portfolio represented 3 percent of the loan portfolio. We do not believe that the higher levels of net charge-offs in the credit card portfolio are indicative of any significant deterioration in the credit quality of the total loan portfolio. The higher credit card-related net charge-offs were concentrated in certain vintages that were transferred to assets held for sale. We are carefully monitoring trends in both the commercial and consumer loan portfolios for signs of credit weakness. Additionally we have evaluated our credit policies in light of changing economic trends, and we have taken appropriate steps where necessary. All of these steps have been taken with the goals of minimizing future credit losses and deterioration and of allowing for maximum profitability. Provision and Allowance for Loan Losses The loan loss provision was $1.1 billion in 1997 compared with $678 million in 1996. We increased the loan loss provision to facilitate the restructuring of the unsecured consumer loan portfolio, which resulted in the sale of $3 billion of credit card receivables and other unsecured loans. The allowance for loan losses was $1.8 billion at December 31, 1997, and $2.2 billion at December 31, 1996. The decrease was commensurate with the reduction in the credit card portfolio. We establish reserves based on various factors, including results of quantitative analyses of the quality of commercial loans and commercial real estate loans. Reserves for commercial and commercial real estate loans are based principally on loan grades, historical loss rates, borrowers' creditworthiness, underlying cash flows from the project and from the borrowers, and analysis of other less quantifiable factors that might influence the portfolio. We analyze all loans in excess of $1 million that are being monitored as potential credit problems to determine whether supplemental, specific reserves are necessary. Reserves for consumer loans are based principally on delinquencies and historical and projected loss rates. 15 At December 31, 1997, impaired loans, which are included in nonaccrual loans, amounted to $485 million compared with $553 million at December 31, 1996. A loan is considered to be impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of a loan agreement. Included in the allowance for loan losses at December 31, 1997, was $89 million related to $384 million of impaired loans. The remaining impaired loans were recorded at or below fair value. In 1997 the average recorded investment in impaired loans was $479 million, and $37 million of interest income was recognized on loans while they were impaired. This income was recognized using a cash-basis method of accounting. Geographic Exposure The loan portfolio in the East Coast region of the United States is spread primarily across 106 metropolitan areas with diverse economies. Atlanta, Georgia; Charlotte, North Carolina; Miami and Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C., are our largest markets. Substantially all of the $16 billion commercial real estate portfolio at December 31, 1997, was located in our East Coast banking region. Liquidity and Funding Sources Liquidity planning and management are necessary to ensure we maintain the ability to fund operations cost-effectively and to meet current and future obligations such as loan commitments and deposit outflows. In this process we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the corporation's needs. Funding sources primarily include customer-based core deposits but also include purchased funds and cash flows from operations. First Union is one of the nation's largest core deposit-funded banking institutions. Our large consumer deposit base, which is spread across the economically strong South Atlantic region and high per-capita income Middle Atlantic region, creates considerable funding diversity and stability. Asset liquidity is maintained through maturity management and through our ability to liquidate assets, primarily securities held for sale. Another significant source of asset liquidity is the ability to securitize assets such as credit card receivables and auto, home equity, student and mortgage loans. Other off-balance sheet sources of liquidity exist as well, including a mortgage servicing portfolio for which the estimated fair value exceeded book value by $44 million at December 31, 1997. Core Deposits Core deposits are a fundamental and cost-effective source of funding. Core deposits include savings, negotiable order of withdrawal (NOW), money market, noninterest-bearing and other consumer time deposits. Core deposits were $127 billion at December 31, 1997, compared with $129 billion at December 31, 1996. The decline largely reflected runoff that is typical following acquisitions, in addition to customers' movement into investment products. The portion of core deposits in higher-rate, other consumer time deposits was 29 percent at December 31, 1997, and 33 percent at year-end 1996. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they generally are not available for immediate withdrawal, and they are less expensive to process. Average core deposit balances were $124 billion in 1997 and in 1996. In 1997 and 1996, average noninterest- bearing deposits were 22 percent and 21 percent, respectively, of average core deposits. Average balances in money market and noninterest-bearing deposits were higher when compared with 1996, while savings and now and other consumer time deposits were lower. Deposits can be affected by branch closings or consolidations, seasonal factors and the rates being offered compared to other investment 16 opportunities. The Net Interest Income Summaries provide additional information about average core deposits. Purchased Funds Purchased funds at December 31, 1997, were $42 billion compared with $35 billion at year-end 1996, largely reflecting funding needs related to the increased securities available for sale portfolio and the decrease in core deposits. Average purchased funds in 1997 were $39 billion compared with $36 billion in 1996. Purchased funds are acquired primarily through (i) our large branch network, consisting principally of $100,000 and over certificates of deposit, public funds and treasury deposits, and (ii) national market sources, consisting of relatively short-term funding sources such as federal funds, securities sold under repurchase agreements, eurodollar time deposits, short-term bank notes and commercial paper, and longer-term funding sources such as term bank notes, Federal Home Loan Bank borrowings and corporate notes. Cash Flows Cash flows from operations are a significant source of liquidity. Net cash provided from operations primarily results from net income adjusted for the following noncash accounting items: the provisions for loan losses and foreclosed properties; depreciation and amortization; and deferred income taxes or benefits. This cash was available in 1997 to increase earning assets, to make discretionary investments and to reduce borrowings. Long-Term Debt Long-term debt was 77 percent of total stockholders' equity at December 31, 1997, compared with 74 percent at year-end 1996. Under a shelf registration statement filed with the Securities and Exchange Commission, we have available for issuance $1.9 billion of senior or subordinated debt securities, common stock or preferred stock at April 30, 1998. The sale of any additional debt or equity securities will depend on future market conditions, funding needs and other factors. Debt Obligations We have a $350 million, committed back-up line of credit that expires in December 1998. This credit facility contains financial covenants that require First Union to maintain a minimum level of tangible net worth, restrict double leverage ratios and require capital levels at subsidiary banks to meet regulatory standards. First Union has not used this line of credit. In 1998, $3 billion of long-term debt will mature. Funds for the payment of long-term debt will come from operations or, if necessary, additional borrowings. Guaranteed Preferred Beneficial Interests In 1997 we issued $945 million of trust capital securities. As a result, $1.7 billion of capital securities were outstanding as of December 31, 1997. Subsidiary trusts issued these capital securities, and proceeds were received by issuing junior subordinated debentures to the trusts. These capital securities are considered tier 1 capital for regulatory purposes. Expenses of $116 million in 1997 related to capital securities are included in sundry expense. Stockholders' Equity The management of capital in a regulated banking environment requires a balance between maximizing leverage and return on equity to stockholders while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. We have historically generated attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios. 17 Total stockholders' equity was $15 billion at December 31, 1997, and December 31, 1996. Common shares outstanding amounted to 961 million at December 31, 1997, compared with 989 million at December 31, 1996. In 1997 we repurchased 52 million shares of our common stock at a cost of $2.4 billion compared with 51 million shares at a cost of $1.6 billion in 1996. In addition in 1997 we issued 7.5 million shares and received $358 million in proceeds, which were used for general corporate purposes. We paid $1.1 billion in dividends to common stockholders in 1997 compared with $1 billion in 1996. At December 31, 1997, stockholders' equity included a $286 million unrealized after-tax gain related to debt and equity securities. The Securities Available for Sale section provides additional information about debt and equity securities. Subsidiary Dividends Our banking subsidiaries are the largest source of parent company dividends. Capital requirements established by regulators limit dividends that these and certain other of our subsidiaries can pay. Banking regulators generally limit a bank's dividends in two principal ways: first, dividends cannot exceed the bank's undivided profits, less statutory bad debt in excess of a bank's allowance for loan losses; and second, in any year dividends cannot exceed a bank's net profits for that year, plus its retained earnings from the preceding two years, less any required transfers to surplus. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well capitalized level, our subsidiaries had $458 million available for dividends at December 31, 1997, without prior regulatory approval. Our subsidiaries paid $2 billion in dividends to the parent company in 1997. In addition the consolidation of our banks in our southern region and Connecticut into First Union National Bank, based in Charlotte, North Carolina, resulted in a reduction of capital of $835 million, which was paid to the parent company. Regulatory Capital Federal banking regulations require that bank holding companies and their subsidiary banks maintain minimum levels of capital. These banking regulations measure capital using three formulas including tier 1 capital, total capital and leverage capital. The minimum level for the ratio of total capital to risk-weighted assets (including certain off-balance sheet financial instruments, such as standby letters of credit and interest rate swaps) is currently 8 percent. At least half of total capital is to be composed of common equity, retained earnings and a limited amount of qualifying preferred stock, less certain intangible assets (tier 1 capital). The rest may consist of a limited amount of subordinated debt, nonqualifying preferred stock and a limited amount of the loan loss allowance (together with tier 1 capital, total capital). At December 31, 1997, the tier 1 and total capital ratios were 8.43 percent and 13.02 percent, respectively, compared with 7.91 percent and 12.58 percent at December 31, 1996. Amounts prior to 1997 are not restated for the Signet acquisition. In addition the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets equal to 3 percent for bank holding companies that meet specified criteria, including having the highest regulatory rating. All other bank holding companies are generally required to maintain a leverage ratio of at least 4 to 5 percent. The leverage ratio at December 31, 1997, was 7.09 percent and at December 31, 1996, it was 6.74 percent. The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board has indicated it will continue to consider a tangible tier 1 leverage ratio 18 (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. Each subsidiary bank is subject to similar capital requirements. None of our subsidiary banks has been advised of any specific minimum capital ratios applicable to it. The regulatory agencies also have adopted regulations establishing capital tiers for banks. Banks in the highest capital tier, or well capitalized, must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a total capital ratio of 10 percent. At December 31, 1997, our deposit-taking subsidiary banks met the capital and leverage ratio requirements for well capitalized banks. We expect to maintain these ratios at the required levels by the retention of earnings and, if necessary, the issuance of additional capital. Failure to meet certain capital ratio or leverage ratio requirements could subject a bank to a variety of enforcement remedies, including termination of deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking banks. The Accounting and Regulatory Matters section provides more information about proposed changes in risk-based capital standards. The Merger and Consolidation Activity and the Accounting and Regulatory Matters sections provide additional information about the consolidation of our regional banks. MARKET RISK MANAGEMENT Interest Rate Risk Methodology Managing interest rate risk is fundamental to banking. The inherent maturity and repricing characteristics of our day-to-day lending and deposit activities create a naturally asset-sensitive structure. By using a combination of on- and off-balance sheet financial instruments, we manage the sensitivity of earnings to changes in interest rates within our established policy guidelines. The Credit/Market Risk Committee of the corporation's board of directors reviews overall interest rate risk management activity. The Funds Management Committee of the corporation oversees the interest rate risk management process and approves policy guidelines. Balance sheet management and finance personnel monitor the day-to-day exposure to changes in interest rates in response to loan and deposit flows. They make adjustments within established policy guidelines. In 1997 we modified our methodology for measuring exposure to interest rate risk for policy measurement. This change in methodology is intended to ensure we include a sufficiently broad range of rate scenarios and pattern of rate movements that we believe to be reasonably possible. The fundamental difference between our previous and our new methodologies is in the absolute amount of change in interest rates we incorporate in our alternative scenarios and the rapidity with which these rate changes occur. Previously we measured the impact that 100 basis point rate changes over a three-month period had on earnings per share over the subsequent 12 months. Our new methodology uses 200 basis point changes over a 12-month period. We retained our 5 percent policy limit described below because our change in methodology was intended to focus on the pattern of rate change rather than on the average amount of change in rates between the two methodologies. We believe our earnings simulation model is a more relevant depiction of interest rate risk than traditional gap tables because it captures multiple effects excluded in less sophisticated presentations, and it includes significant variables that we identify as being affected by interest rates. For example our model captures rate of change differentials, such as federal funds rates versus savings account rates; maturity effects, such as calls on securities; and rate barrier effects, such as caps and floors on loans. It also captures changing balance sheet levels, such as commercial and consumer loans (both floating and fixed rate); noninterest-bearing deposits and investment securities. In addition our model considers leads and lags 19 that occur in long-term rates as short-term rates move away from current levels; the elasticity in the repricing characteristics of savings and money market deposits; and the effects of prepayment volatility on various fixed-rate assets such as residential mortgages, mortgage-backed securities and consumer loans. These and certain other effects are evaluated in developing the scenarios from which sensitivity of earnings to changes in interest rates is determined. We use two separate measures that each include three standard scenarios in analyzing interest rate sensitivity for policy measurement. Each of these measures compares our forecasted earnings per share in both a "high rate" and "low rate" scenario to a base-line scenario. The base-line scenario is our estimated most likely path for future short-term interest rates over the next 24 months. The second base-line scenario holds short-term rates flat at their current level over our forecast horizon. The "high rate" and "low rate" scenarios assume gradual 200 basis point increases or decreases in the federal funds rate from the beginning point of each base-line scenario over the most current 12-month period. Our policy limit for the maximum negative impact on earnings per share resulting from "high rate" or "low rate" scenarios is 5 percent. The policy limit applies to both the "most likely rate" scenario and the "flat rate" scenario. The policy measurement period is 12 months in length, beginning with the first month of the forecast. Earnings Sensitivity Our January 1998 estimate for future short-term interest rates (our "most likely" scenario) includes an average federal funds rate declining gradually from 5.50 percent in January 1998 to 5.38 percent by December 1998, then declining to 5.25 percent by December 1999. Our "flat rate" scenario holds the federal funds rate at 5.50 percent over this same horizon. Based on the January outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200 basis point increase in short- term rates from our "flat rate" scenario), the model indicates that earnings during the policy measurement period would be negatively affected by 1.0 percent. Our model indicates that earnings would benefit by 0.8 percent in our "low rate" scenario (i.e., a 200 basis point decline in short-term rates from our "flat rate" scenario). Our model indicates that a 200 basis point rise in rates from our "most likely" scenario is less detrimental than the same rise from our "flat rate" scenario. Over the next year, earnings would increase by 0.4 percent if rates fall gradually by 200 basis points, and would decrease by 0.8 percent if rates gradually rise 200 basis points, compared to our "most likely" scenario. In 1999, earnings would fall below those earned in our "most likely" scenario by 0.1 percent if rates were 200 basis points lower than our "most likely" scenario. If rates were 200 basis points higher than our "most likely" scenario in 1999, then earnings would be negatively affected by 2.5 percent. In addition to the three standard scenarios used to analyze rate sensitivity over the policy measurement period, we regularly analyze the potential impact of other remote, more extreme interest rate scenarios and time periods. These alternate "what if" scenarios may include interest rate paths both higher, lower and more volatile than those used for policy measurement and extend to periods beyond the policy measurement period. While our interest rate sensitivity modeling assumes that management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, management will continue to formulate strategies to protect earnings from the potential negative effects of changes in interest rates. Off-Balance Sheet Derivatives For Interest Rate Risk Management As part of our overall interest rate risk management strategy, for many years we have used off-balance sheet derivatives as a cost- and capital-efficient way to modify the repricing or maturity characteristics of on-balance sheet assets and liabilities. Our off-balance sheet 20 derivative transactions used for interest rate sensitivity management include interest rate swaps, futures and options with indices that relate to the pricing of specific financial instruments of the corporation. We believe we have appropriately controlled the risk so that derivatives used for rate sensitivity management will not have any significant unintended effect on corporate earnings. As a matter of policy we do not use highly leveraged derivative instruments for interest rate risk management. The impact of derivative products on our earnings and rate sensitivity is fully incorporated in the earnings simulation model in the same manner as on-balance sheet instruments. Our overall goal is to manage our rate sensitivity such that earnings are not adversely affected materially whether rates go up or down. As a result of interest rate fluctuations, off-balance sheet transactions (and securities) will from time to time develop unrealized appreciation or depreciation in market value when compared with their cost. The impact on net interest income attributable to these off-balance sheet transactions, all of which are linked to specific financial instruments as part of our overall interest rate risk management strategy, will generally be offset by net interest income from on-balance sheet assets and liabilities. The important consideration is not the shifting of unrealized appreciation or depreciation between and among on- and off-balance sheet instruments, but the prudent management of interest rate sensitivity so that corporate earnings are not unduly at risk as interest rates move up or down. Despite significant year-to-year fluctuations in the market value of both on- and off-balance sheet positions and related fluctuations in net interest income contribution from these positions, tax-equivalent net interest income continued to increase. This is the outcome we strive to achieve in using portfolio securities and off-balance sheet products to balance the income effects of core loans and deposits from changing interest rate environments. The fair value appreciation of off- balance sheet derivative financial instruments used to manage our interest rate sensitivity was $566 million at December 31, 1997, compared with fair value appreciation of $325 million at December 31, 1996. The carrying amount of financial instruments used for interest rate risk management includes amounts for deferred gains and losses related to terminated positions. Deferred gains and losses were each $14 million at December 31, 1997. Net gains of $3 million will increase net interest income in 1998. Net losses of $3 million in the aggregate will reduce net interest income in subsequent years. Although off-balance sheet derivative financial instruments do not expose the corporation to credit risk equal to the notional amount, we are exposed to credit risk equal to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize the credit risk in these instruments by dealing only with high-quality counterparties. Each transaction is specifically approved for applicable credit exposure. In addition our policy is to require that all swaps and options be governed by an International Swaps and Derivatives Association Master Agreement. Bilateral collateral arrangements are in place for substantially all dealer counterparties used in our Asset/Liability Management activities. Derivative collateral arrangements for dealer transactions and trading activities are based on established thresholds of acceptable credit risk by counterparty. Thresholds are determined based on the strength of the individual counterparty, and they are bilateral. As of December 31, 1997, the total credit risk in excess of thresholds was $301 million. This amount does not include credit risk related to CoreStates dealer transactions and trading activities.The fair value of collateral held approximated the total credit risk in excess of thresholds. For nondealer transactions the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. Trading Risk Management Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through profitable trading for the corporation's own account. We trade a variety of debt securities and foreign exchange, as 21 well as financial and foreign currency derivatives, in order to provide customized solutions for the risk management challenges faced by our customers. We maintain diversified trading positions in both the fixed income and foreign exchange markets. Risk is controlled through the imposition of value-at-risk limits and an active, independent monitoring process. We use the value-at-risk methodology for measuring the market risk of the corporation's trading positions. This statistical methodology uses recent market volatility to estimate the maximum daily trading loss that the corporation would expect to incur, on average, 97.5 percent of the time. The model also measures the effect of correlation among the various trading instruments to determine how much risk is eliminated by "offsetting" positions. The analysis captures all financial assets and liabilities that are considered trading positions (including loan trading activities), foreign exchange and financial and foreign currency derivative instruments. The calculation uses historical data from either the most recent 180 or 260 business days, depending on the activity. Value-at-risk amounts related to interest rate risk and currency risk at December 31, 1997, were $11 million and $2 million, respectively. ACCOUNTING AND REGULATORY MATTERS Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about change in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. This Standard is effective for financial statements issued for periods beginning after December 31, 1997. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards and disclosure requirements for the way companies report information about operating segments both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and assessing performance. Information such as segment earnings, certain revenue and expense items and certain segment assets are required to be presented, and such amounts are required to be reconciled to the company's financial statements. Certain information related to this Standard is included in the Business Segments section. The corporation will assess the current methodologies and reporting for compliance with the Standard. This Standard is effective for financial statements issued for periods beginning after December 15, 1997. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and the presentation of comprehensive income, which is defined as the change in equity transactions with nonowners. It includes net income and other comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. Generally, other comprehensive income includes transactions not typically recorded as a component of net income such as foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain debt and equity securities. This Standard requires that such items be presented with equal prominence on a comparative basis in the appropriate financial statements for fiscal years beginning after December 15, 1997, including interim periods. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), among other provisions, imposes liability on a bank insured by the FDIC for certain obligations to the FDIC incurred in connection with other insured banks under common control with such bank. The Federal Deposit Insurance Corporation Improvement Act, among other things, requires a revision of risk-based capital standards. The new standards are required to 22 incorporate interest rate risk, concentration of credit risk and the risks of nontraditional activities and to reflect the actual performance and expected risk of loss of multifamily mortgages. The Risk-Based Capital section provides information on risk assessment classifications. Legislation has been enacted providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) authorized interstate acquisitions of banks and bank holding companies without geographic limitation beginning September 27, 1995. Beginning June 1, 1997, a bank was allowed to merge with a bank in another state as long as neither of the states opt out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provided that a state may enact laws permitting interstate merger transactions before June 1, 1997. Certain states in which First Union conducts banking operations have enacted such legislation. Information about First Union's consolidation under this legislation is in the Merger and Consolidation Activity section. Various other legislative and accounting proposals concerning the banking industry are pending in Congress and with the Financial Accounting Standards Board, respectively. Given the uncertainty of the proposal process, we cannot assess the impact of any such proposals on our financial condition or results of operations. EARNINGS AND BALANCE SHEET ANALYSIS (1996 compared with 1995) First Union's operating earnings in 1996, before special charges, were $2.6 billion, or basic earnings per common share of $2.70. Diluted operating earnings per common share were $2.68 in 1996. The special charges were after-tax merger-related and restructuring charges of $272 million and an after-tax SAIF special assessment of $96 million. Operating earnings in 1995 were $2.3 billion, or basic earnings per share of $2.38 before restructuring charges of $163 million after-tax, or 17 cents per share, taken in the fourth quarter of 1995. Diluted operating earnings per common share were $2.33 in 1995. After the special charges, net income applicable to common stockholders was $2.3 billion, or basic earnings per share of $2.33, in 1996 compared with $2.2 billion, or $2.21 per share, in 1995. Diluted earnings per common share were $2.30 in 1996 and $2.17 in 1995. The restructuring charges were related in part to the January 1, 1996, First Fidelity pooling of interests acquisition. The SAIF special assessment resulted from 1996 legislation to recapitalize the SAIF. Tax-equivalent net interest income increased 4 percent to $7.7 billion in 1996 from $7.4 billion in 1995. The increase was primarily the result of assets acquired in purchase accounting acquisitions, an increase in the securities available for sale portfolio and the repricing of variable rate assets. Nonperforming loans reduce interest income because the contribution from these loans is eliminated or sharply reduced. In 1996, $77 million in gross interest income would have been recorded if all nonaccrual and restructured loans had been current in accordance with their original terms and had been outstanding throughout the period, or since origination if held for part of the period. The amount of interest income related to these assets and included in income in 1996 was $22 million. The net interest margin was 4.55 percent in 1996 compared with 4.76 percent in 1995. The margin decline was primarily related to the securitization of credit card receivables; the addition of lower spread investment securities in the early months of 1996; the addition of acquired banks and thrifts with lower margins; the reduction in the prime rate from 1995; and the purchase of lower-spread assets related to Capital Markets activities. The average rate 23 earned on earning assets was 8.16 percent in 1996 and 8.42 percent in 1995. The average rate paid on interest-bearing liabilities was 4.26 percent in 1996 and 4.36 percent in 1995. Noninterest income, excluding investment securities transactions, increased to $3.4 billion in 1996 from $3.0 billion in 1995. Virtually all categories of noninterest income increased in 1996. Securities available for sale transactions resulted in gains of $96 million in 1996 and $76 million in 1995. Trading profits were $162 million in 1996 compared with $122 million in 1995. Trading account assets were $4.6 billion at year-end 1996 compared with $2.5 billion at year-end 1995. The increase was the result of general market conditions and expanded trading volume. Noninterest expense increased in 1996 to $6.9 billion from $6.5 billion in 1995. The 1996 results include $421 million in pre-tax, merger-related and restructuring charges and a $149 million pre-tax SAIF special assessment. The 1995 results include pre-tax restructuring charges of $233 million. In addition to the special charges, the increase in noninterest expense was primarily related to purchase accounting acquisitions that resulted in higher personnel costs, an increase in equipment expense and an increase in external data processing expense. At December 31, 1996, we had $3.2 billion in other intangible assets compared with $2.8 billion at December 31, 1995. Costs related to environmental matters were not material. Income taxes were $1.3 billion in 1996 compared with $1.2 billion in 1995. The increase resulted primarily from increased income before income taxes. Average earning assets in 1996 were $170 billion, a 9 percent increase from $156 billion in 1995. At December 31, 1996, we had securities available for sale with a market value of $19 billion compared with $23 billion at year-end 1995. The market value of securities available for sale was $48 million above amortized cost at December 31, 1996. The average rate earned on securities available for sale in 1996 was 6.62 percent compared with 6.45 percent in 1995. The average maturity of the portfolio was 4.84 years at December 31, 1996. Our investment securities amounted to $4.2 billion at December 31, 1996, compared with $6.2 billion at year-end 1995. This decline resulted from scheduled maturities, prepayments and issuer calls. The average rate earned on investment securities was 7.66 percent in 1996 and 7.11 percent in 1995. The increase in yield was primarily related to the year-end 1995 transfer of lower-yielding securities to the available for sale portfolio. The average maturity of the portfolio was 5.14 years at December 31, 1996. Net loans at December 31, 1996, were $135 billion compared with $128 billion at year-end 1995. Average net loans in 1996 increased 6 percent to $129 billion from $121 billion in 1995. Demand for credit slowed in 1996, and branch sales campaigns focused more heavily on investment products rather than on lending products. Commercial loans increased slightly in 1996, primarily due to additional lease financings. The loan portfolio at December 31, 1996, was composed of 50 percent in commercial loans and 50 percent in consumer loans, which did not represent a significant change from year-end 1995. At December 31, 1996, unused loan commitments related to commercial and consumer loans were $72 billion. Commercial and standby letters of credit were $8 billion. At December 31, 1996, loan participations sold to other lenders amounted to $3 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.70 percent in 1996 and 8.95 percent in 1995. Factors affecting loan rates in 1996 compared with 1995 included a general decrease in market rates used to price loans. For example the prime rate decreased to an average of 8.27 percent in 1996 from 8.44 percent in 1995. Other factors included the 1995 credit card securitization, as well as a larger portfolio of fixed and adjustable rate mortgages as a result of bank and thrift acquisitions. These factors were offset somewhat by the upward repricing of adjustable rate mortgages and credit card portfolio introductory rates. 24 Commercial real estate loans amounted to 13 percent of the total portfolio at December 31, 1996, compared with 14 percent at December 31, 1995. This portfolio included commercial real estate mortgage loans of $14 billion at December 31, 1996, and $15 million at December 31, 1995. At December 31, 1996, nonperforming assets were $1 billion, or 0.78 percent of net loans and foreclosed properties, compared with $1.1 billion, or 0.90 percent, at December 31, 1995. Fifty-six percent of nonperforming assets were collateralized primarily by real estate at December 31, 1996, compared with 43 percent at year-end 1995. Accruing loans 90 days past due were $474 million and $445 million, respectively, at December 31, 1996 and December 31, 1995. Net charge-offs as a percentage of average net loans were 0.64 percent in 1996 compared with 0.45 percent in 1995. Net charge-offs, excluding credit cards, were 0.35 percent in 1996 compared with 0.27 percent in 1995. The loan loss provision was $678 million in 1996 compared with $403 million in 1995. The allowance for loan losses was $2.2 billion at December 31, 1996, compared with $2.3 billion at year-end 1995. In 1996 we reallocated the acquired First Fidelity allowance for loan losses based on First Union's policies and procedures. The ratio of the allowance for loan losses to nonaccrual and restructured loans was 241 percent at December 31, 1996, and 252 percent at December 31, 1995. The ratio of the allowance to net loans was 1.64 percent at December 31, 1996, compared with 1.80 percent at December 31, 1995. At December 31, 1996, impaired loans, which are included in nonaccrual loans, amounted to $553 million. Included in the allowance for loan losses was $51 million related to $312 million of impaired loans. The remaining impaired loans are recorded at or below fair value. In 1996 the average recorded investment in impaired loans was $675 million, and $28 million of interest income was recognized on loans while they were impaired. All of this income was recognized using a cash-basis method of accounting. Core deposits were $129 billion at December 31, 1996, compared with $126 billion at December 31, 1995. Average core deposit balances were $124 billion in 1996, an increase of $4 billion from 1995 that was primarily related to acquisitions. In 1996 and 1995, average noninterest-bearing deposits were 21 percent of average core deposits. Average balances in money market, other consumer time and noninterest-bearing deposits were higher when compared with 1995, while savings and NOW deposits were lower. Purchased funds at December 31, 1996, were $35 billion, compared with $33 billion at year-end 1995. Average purchased funds in 1996 were $36 billion, an increase of 30 percent from $28 billion in 1995. The increase was used primarily to fund loans and to purchase available for sale portfolio securities earlier in the year. Long-term debt was 74 percent of total stockholders' equity at December 31, 1996 and 70 percent at December 31, 1995. In 1996 we added $1 billion of subordinated notes and debentures with rates ranging from 6.824 percent to 7.80 percent and maturities of 10 years to 30 years. Proceeds from these debt issues were used for general corporate purposes. At December 31, 1996, total stockholders' equity was $15 billion, compared with $14 billion at December 31, 1995, and 989 million common shares were outstanding compared with 981 million shares at December 31, 1995. We repurchased 51 million shares of common stock at a cost of $1.6 billion. This compares with repurchases of 69 million shares at a cost of $1.6 billion in 1995. In 1996 First Union redeemed the outstanding shares of its Series D and Series F preferred stock at a cost of $109 million. In 1996 First Union also redeemed its Series B convertible preferred stock, substantially all of which converted into 6 million shares of common stock. We paid $1 billion in dividends to preferred and common stockholders in 1996. Preferred dividends were $9 million in 1996 compared with $26 million in 1995. At December 31, 1996, stockholders' equity was increased by a $29 million unrealized after-tax gain related to debt and equity securities. 25 At December 31, 1996, the tier 1 and total capital ratios were 7.91 percent and 12.58 percent, respectively, compared with 7.40 percent and 11.81 percent at December 31, 1995. The leverage ratio at December 31, 1996, was 6.74 percent compared with 6.16 percent at December 31, 1995. These ratios have not been restated for the Signet acquisition. 26
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 - ------------------------------------------------------------------------------------------------------------- SUMMARIES OF INCOME Interest income $ 14,362 13,758 13,028 10,245 9,507 - ------------------------------------------------------------------------------------------------------------- Interest income (a) $ 14,461 13,876 13,177 10,405 9,691 Interest expense 6,452 6,151 5,732 3,739 3,376 - ------------------------------------------------------------------------------------------------------------- Net interest income (a) 8,009 7,725 7,445 6,666 6,315 Provision for loan losses 1,103 678 403 458 559 - ------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (a) 6,906 7,047 7,042 6,208 5,756 Securities available for sale transactions 52 96 76 24 76 Investment security transactions 3 4 6 4 7 Noninterest income 4,267 3,435 2,976 2,336 2,332 Merger-related and restructuring charges (b) 284 421 233 107 17 SAIF special assessment (c) - 149 - - - Noninterest expense 7,052 6,360 6,309 5,558 5,405 - ------------------------------------------------------------------------------------------------------------- Income before income taxes (a) 3,892 3,652 3,558 2,907 2,749 Income taxes 1,084 1,261 1,213 938 826 Tax-equivalent adjustment 99 118 149 160 184 - ------------------------------------------------------------------------------------------------------------- Net income 2,709 2,273 2,196 1,809 1,739 Dividends on preferred stock - 9 26 46 46 - ------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before redemption premium 2,709 2,264 2,170 1,763 1,693 Redemption premium on preferred stock - - - 41 - - ------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after redemption premium $ 2,709 2,264 2,170 1,722 1,693 - ------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic earnings $ 2.84 2.33 2.21 1.86 1.85 Diluted earnings 2.80 2.30 2.17 1.83 1.81 Cash dividends $ 1.22 1.10 0.98 0.86 0.75 Average common shares (In thousands) Basic 955,241 973,712 979,852 927,941 913,621 Diluted 966,792 982,755 1,001,145 946,969 940,167 Average common stockholders' equity (d) $ 14,365 13,788 12,977 11,453 10,190 Common stock price High 52 7/8 38 1/2 29 3/8 23 3/4 25 3/4 Low 36 5/8 25 3/4 20 5/8 19 5/8 18 7/8 Period-end $ 51 1/4 37 27 3/4 20 5/8 20 5/8 To earnings 18.30 X 16.09 12.79 11.27 11.40 To book value 321 % 249 199 164 172 Book value $ 15.95 14.85 13.91 12.58 11.99 BALANCE SHEET DATA Assets 205,735 197,341 188,855 159,577 148,759 Long-term debt $ 11,752 10,815 9,586 6,405 5,685 - -------------------------------------------------------------------------------------------------------------
(a) Tax-equivalent. (b) After tax merger-related and restructuring charges amounted to $204 million in 1997, $272 million in 1996, $163 in 1995, $70 million in 1994 and $11 million in 1993. (c) The SAIF special assessment amounted to $96 million after tax in 1996. (d) Average common stockholders' equity excludes average net unrealized gains or losses on debt and equity securities. T-1
Table 2 NONINTEREST INCOME - --------------------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------- Trading account profits $ 252 162 122 75 104 Service charges on deposit accounts 1,119 979 921 820 809 Mortgage banking income 256 205 196 100 181 Capital management income 1,078 782 631 483 451 Securities available for sale transactions 52 96 76 24 76 Investment security transactions 3 4 6 4 7 Fees for other banking services 263 280 226 157 125 Equipment lease rental income 187 112 32 22 20 Sundry income 1,112 915 848 679 642 - --------------------------------------------------------------------------------------------------------- Total noninterest income $ 4,322 3,535 3,058 2,364 2,415 - ---------------------------------------------------------------------------------------------------------
Table 3 NONINTEREST EXPENSE - ----------------------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------------------------ (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Salaries $ 2,909 2,649 2,514 2,173 2,057 Other benefits 641 628 597 548 506 - ------------------------------------------------------------------------------------------------------------------ Personnel expense 3,550 3,277 3,111 2,721 2,563 Occupancy 544 546 553 515 501 Equipment 649 569 471 388 349 Advertising 141 100 127 107 86 Telecommunications 168 158 142 115 109 Travel 125 114 96 76 67 Postage, printing and supplies 225 236 220 180 182 FDIC assessment 29 45 169 254 261 Professional fees 292 257 342 290 216 External data processing 94 146 101 72 90 Other intangible amortization 315 290 280 192 158 Merger-related and restructuring charges 284 421 233 107 17 SAIF special assessment - 149 - - - Sundry expense 920 622 697 648 823 - ------------------------------------------------------------------------------------------------------------------ Total noninterest expense $ 7,336 6,930 6,542 5,665 5,422 - ------------------------------------------------------------------------------------------------------------------ Overhead efficiency ratio (a) 59 % 62 62 63 62 Overhead efficiency ratio, adjusted (b) 57 % 56 60 62 62 - ------------------------------------------------------------------------------------------------------------------
(a) The overhead efficiency ratio is equal to noninterest expense divided by net operating revenue. Net operating revenue is equal to the sum of tax-equivalent net interest income and noninterest income. (b) These ratios are the result of reducing noninterest expense by merger-related and restructuring charges and the 1996 SAIF special assessment. Additionally, net operating revenue and noninterest expense are reduced by trust capital securities expense included in sundry expense. T-2
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
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 CoreStates Total - ---------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED (b) Income statement data Net interest income $ 3,083 263 1,505 435 457 2,167 7,910 Provision for loan losses 522 3 60 1 254 263 1,103 Noninterest income 1,238 920 338 793 107 926 4,322 Noninterest expense 2,452 887 1,013 679 558 1,747 7,336 Income tax expense 493 107 282 200 (268) 270 1,084 - ---------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after merger-related and restructuring charges $ 854 186 488 348 20 813 2,709 After-tax merger-related and restructuring charges - - - - 194 10 204 - --------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before merger-related and restructuring charges $ 854 186 488 348 214 823 2,913 - ---------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 30.78 % 33.25 19.87 24.99 5.52 24.68 20.24 Average loans, net $ 52,510 2,149 27,949 14,887 2,934 34,088 134,517 Average deposits 60,423 13,258 18,608 3,820 3,771 32,967 132,847 Average attributed common equity $ 2,774 558 2,459 1,392 3,875 3,335 14,393 - ----------------------------------------------------------------------------------------------------------------------------
(a) Average attributed common equity excludes merger-related and restructuring charges and average net unrealized gains or losses on debt and equity securities. See the "Business Segments" discussion in Management's Analysis of Operations for further information about the methodology and assumptions used herein. (b) Discreet CoreStates segment data which would conform to the Corporation's segment reporting methodologies and assumptions are not available, and accordingly, the amounts related to CoreStates represent the consolidated historical results of CoreStates. T-4
Table 5 INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS - ---------------------------------------------------------------------------------------------------- Years Ended December 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- INTERNAL CAPITAL GROWTH (a) Assets to stockholders' equity 13.58 X 13.61 13.22 12.63 13.31 X Return on assets 1.38 % 1.20 1.26 1.20 1.22 - ---------------------------------------------------------------------------------------------------- Return on total stockholders' equity (b) 18.86 % 16.36 16.65 15.14 16.23 X Earnings retained 57.88 % 54.24 60.43 58.59 64.45 - ---------------------------------------------------------------------------------------------------- Internal capital growth (b) 10.91 % 8.87 10.06 8.87 10.46 - ---------------------------------------------------------------------------------------------------- DIVIDEND PAYOUT RATIOS ON Operating earnings Common shares 39.18 % 39.18 36.13 38.30 33.59 Preferred and common shares 39.18 39.38 36.84 39.84 35.32 Net income Common shares 42.12 45.55 38.84 39.85 33.81 Preferred and common shares 42.12 % 45.76 39.57 41.41 35.55 - ---------------------------------------------------------------------------------------------------- SELECTED RATIOS ON Operating earnings Return on assets 1.49 % 1.39 1.36 1.25 1.22 Return on common stockholders' equity (b) (c) 20.24 18.76 17.98 15.65 16.73 Net income Return on common stockholders' equity (b) (c) 18.86 % 16.42 16.72 15.04 16.62 - ----------------------------------------------------------------------------------------------------
(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
Table 6 SELECTED QUARTERLY DATA - -------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------------------------------------------ (In millions, except per share data) Fourth Third Second First Fourth Third Second First - -------------------------------------------------------------------------------------------------------------------- Interest income $ 3,635 3,663 3,621 3,443 3,484 3,457 3,452 3,365 Interest expense 1,681 1,657 1,613 1,501 1,574 1,534 1,538 1,505 - -------------------------------------------------------------------------------------------------------------------- Net interest income 1,954 2,006 2,008 1,942 1,910 1,923 1,914 1,860 Provision for loan losses 445 225 228 205 190 164 204 120 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,509 1,781 1,780 1,737 1,720 1,759 1,710 1,740 Securities available for sale transactions 18 15 10 9 20 33 21 22 Investment security transactions - 2 1 - 1 - 2 1 Noninterest income 1,147 1,065 1,030 1,025 976 873 817 769 Merger-related and restructuring charges (a) 225 - 59 - 10 12 104 295 SAIF special assessment (b) - - - - - 149 - - Noninterest expense 1,941 1,711 1,712 1,688 1,646 1,605 1,580 1,529 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) 508 1,152 1,050 1,083 1,061 899 866 708 Income taxes (benefits) (68) 404 368 380 373 316 315 257 - -------------------------------------------------------------------------------------------------------------------- Net income 576 748 682 703 688 583 551 451 Dividends on preferred stock - - - - 1 1 3 4 - -------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 576 748 682 703 687 582 548 447 - -------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic earnings $ 0.61 0.79 0.72 0.72 0.71 0.60 0.56 0.46 Diluted earnings 0.60 0.78 0.70 0.72 0.70 0.60 0.55 0.45 Cash dividends 0.32 0.32 0.29 0.29 0.29 0.29 0.26 0.26 Common stock price High 52 7/8 50 11/16 47 7/8 47 3/4 38 1/2 33 7/8 32 1/4 31 3/8 Low 46 15/16 45 7/8 39 1/8 36 5/8 33 1/2 30 1/2 28 3/4 25 3/4 Period-end $ 51 1/4 50 1/16 46 1/4 40 1/2 37 33 3/8 30 3/8 30 1/8 - -------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS (c) Return on assets (d) 1.14 % 1.50 1.39 1.50 1.51 1.23 1.16 0.98 Return on common stockholders' equity (e) 15.44 20.36 19.37 19.91 20.70 16.87 15.85 13.14 Stockholders' equity to assets 7.51 % 7.29 7.15 7.51 7.31 7.27 7.27 7.54 - -------------------------------------------------------------------------------------------------------------------- SELECTED RATIOS (f) Return on assets (d) 1.47 % 1.50 1.47 1.50 1.52 1.45 1.30 1.39 Return on common stockholders' equity (e) 19.82 % 20.31 20.42 19.91 20.39 19.50 17.49 18.57 - -------------------------------------------------------------------------------------------------------------------- CORPORATION AS REPORTED Net interest income $ 1,416 1,463 1,460 1,404 1,372 1,383 1,381 1,329 Net income 362 547 483 504 494 386 470 274 Net income applicable to common stockholders 362 547 483 504 493 385 467 270 Basic earnings per share 0.57 0.88 0.78 0.80 0.80 0.63 0.75 0.43 Diluted earnings per share $ 0.56 0.87 0.77 0.79 0.79 0.62 0.74 0.43 - --------------------------------------------------------------------------------------------------------------------
(a) Merger-related restructuring charges amounted to $204 million after tax in 1997 and $272 million after tax in 1996. (b) The SAIF special assessment amounted to $96 million after tax in 1996. (c) Based on average balances and after merger-related and restructuring charges and SAIF special assessment. (d) Based on net income. (e) Based on net income applicable to common stockholders, excluding average net unrealized gains or losses on debt and equity securities. (f) Based on average balances and before merger-related and restructuring charges and SAIF special assessment. T-6
Table 7 SELECTED FIVE-YEAR DATA - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------- (Dollars in millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- FIRST UNION MORTGAGE CORPORATION PERMANENT LOAN ORIGINATIONS Residential Direct (a) $ 4,827 5,707 3,836 3,842 6,277 Wholesale 3,845 399 428 933 2,431 - ---------------------------------------------------------------------------------------------------------------- Total $ 8,672 6,106 4,264 4,775 8,708 - ---------------------------------------------------------------------------------------------------------------- VOLUME OF RESIDENTIAL LOANS SERVICED $ 64,363 61,909 57,504 33,881 32,786 - ---------------------------------------------------------------------------------------------------------------- FIRST UNION CORPORATION OTHER DATA ATMs 3,701 3,458 3,165 2,039 1,986 Employees 65,943 67,793 68,978 54,479 56,430 Common stockholders 120,437 103,538 89,257 54,236 58,670 - ----------------------------------------------------------------------------------------------------------------
(a) Includes originations of affiliated banks. T-7
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 $ 718 1,106 1,420 178 3,422 (120) - 3,302 6.05 U.S. Government agencies 170 5,749 7,722 46 13,687 (234) 4 13,457 5.41 CMOs 333 1,806 176 224 2,539 (25) 7 2,521 4.68 State, county and municipal 13 30 22 71 136 (1) - 135 12.75 Other 114 2,250 237 1,139 3,740 (87) 12 3,665 6.83 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080 5.72 - ------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 1,348 10,875 9,577 751 22,551 (414) 21 22,158 Sundry securities - 66 - 907 973 (53) 2 922 - ------------------------------------------------------------------------------------------------------------------- Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080 - ------------------------------------------------------------------------------------------------------------------- AMORTIZED COST Debt securities $ 1,334 10,743 9,341 740 22,158 Sundry securities - 66 - 856 922 - ----------------------------------------------------------------------------------- Total $ 1,334 10,809 9,341 1,596 23,080 - ----------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD U.S. Treasury 6.06 % 6.30 7.01 7.07 6.57 U.S. Government agencies 5.96 7.11 7.05 7.57 7.07 CMOs 7.49 6.62 5.68 5.77 6.59 State, county and municipal 8.09 6.93 6.64 6.90 6.98 Other 6.90 5.69 6.91 6.44 6.03 Consolidated 6.48 % 6.66 7.02 6.47 6.78 - -----------------------------------------------------------------------------------
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 $ 595 2,677 53 22 3,347 (16) 15 3,346 2.25 U.S. Government agencies 100 2,669 8,970 31 11,770 (45) 60 11,785 5.74 CMOs 199 1,256 1 8 1,464 (9) 9 1,464 3.12 State, county and municipal 29 35 25 31 120 (1) - 119 7.10 Other 122 1,128 115 1,133 2,498 (77) 16 2,437 4.68 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151 4.84 - ------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 1,045 7,748 9,164 225 18,182 (97) 100 18,185 Sundry securities - 17 - 1,000 1,017 (51) - 966 - -------------------------------------------------------------------------- ---------------------------------------- Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151 - ------------------------------------------------------------------------------------------------------------------- AMORTIZED COST Debt securities $ 1,042 7,716 9,192 235 18,185 Sundry securities - 16 - 950 966 - ----------------------------------------------------------------------------------- Total $ 1,042 7,732 9,192 1,185 19,151 - ----------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD U.S. Treasury 6.10 % 6.05 7.24 6.46 6.08 U.S. Government agencies 5.83 6.82 6.98 7.77 6.93 CMOs 6.32 6.99 6.03 6.03 6.90 State, county and municipal 7.68 7.41 7.72 7.14 7.47 Other 7.36 6.15 7.83 5.76 6.11 Consolidated 6.31 % 6.49 6.99 5.86 6.68 - -----------------------------------------------------------------------------------
T-8 Included in "U.S. Government agencies" and "Other" at December 31, 1997, are $2.7 billion of securities that are denominated in currencies other than the U.S. dollar. The currency exchange rates were hedged utilizing both on-and off-balance sheet instruments to minimize the exposure to currency revaluation risks. At December 31, 1997, these securities had a weighted average maturity of 3.75 years and a weighted average yield of 5.31 percent. The weighted average U.S. equivalent yield for comparative purposes of these securities was 6.57 percent based on a weighted average funding cost differential of (1.26) percent. The amounts included in this paragraph are not restated for the CoreStates acquisition. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The aging of mortgage-backed securities is based on their weighted average maturities at December 31, 1997. Average maturity in years excludes preferred and common stocks and money market funds. Yields related to securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.5 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5 percent in Connecticut. There were forward commitments to purchase securities at a cost of $6.4 billion that had a market value of $6.4 billion at December 31, 1997. Gross gains and losses realized on the sale of debt securities in 1997 were $54 million and $43 million, respectively, and gross gains and losses on sundry securities were $52 million and $11 million, respectively. Gross gains and losses realized on the sale of debt securities in 1996 were $163 million and $130 million, respectively, and gross gains on sundry securities $63 million. T-9
Table 9 INVESTMENT SECURITIES - ------------------------------------------------------------------------------------------------------------------------------- December 31, 1997 ------------------------------------------------------------------------------------------------- Gross Unrealized Average 1 Year 1-5 5-10 After 10 ------------------ Market Maturity (In millions) or Less Years Years Years Total Gains Losses Value in Years - ------------------------------------------------------------------------------------------------------------------------------- CARRYING VALUE U.S. Treasury $ 14 3 1 - 18 - - 18 0.86 U.S. Government agencies 171 861 323 24 1,379 28 (2) 1,405 3.89 CMOs 31 380 42 67 520 9 - 529 4.77 State, county and municipal 105 282 302 327 1,016 120 - 1,136 8.60 Other 16 56 79 442 593 2 (13) 582 20.70 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 337 1,582 747 860 3,526 159 (15) 3,670 6.94 - ------------------------------------------------------------------------------------------------------------------------------- CARRYING VALUE Debt securities $ 337 1,582 747 544 3,210 159 (2) 3,367 Sundry securities - - - 316 316 - (13) 303 - ------------------------------------------------------------------------------------------------------------------- Total $ 337 1,582 747 860 3,526 159 (15) 3,670 - ------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 338 1,623 791 615 3,367 Sundry securities - - - 303 303 - --------------------------------------------------------------------------------- Total $ 338 1,623 791 918 3,670 - --------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD U.S. Treasury 5.96 % 5.62 6.10 - 5.91 U.S. Government agencies 6.03 7.29 6.92 5.35 7.02 CMOs 7.82 7.88 6.34 2.66 7.08 State, county and municipal 9.77 10.90 13.14 12.20 11.87 Other 3.75 4.74 7.18 9.72 8.74 Consolidated 7.25 % 7.98 9.43 9.99 8.71 - ---------------------------------------------------------------------------------
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. Treasury $ 12 23 - 1 36 1 - 37 2.36 U.S. Government agencies 108 988 319 5 1,420 25 (4) 1,441 4.13 CMOs 221 715 1 8 945 8 (1) 952 2.51 State, county and municipal 160 388 215 408 1,171 113 (1) 1,283 7.16 Other 41 159 50 368 618 5 (8) 615 8.68 - ------------------------------------------------------------------------------------------------------------------------------- Total $ 542 2,273 585 790 4,190 152 (14) 4,328 5.14 - ------------------------------------------------------------------------------------------------------------------------------- CARRYING VALUE Debt securities $ 542 2,273 585 468 3,868 152 (2) 4,018 Sundry securities - - - 322 322 - (12) 310 - ------------------------------------------------------------------------------------------------------------------- Total $ 542 2,273 585 790 4,190 152 (14) 4,328 - ------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 547 2,318 608 545 4,018 Sundry securities - - - 310 310 - --------------------------------------------------------------------------------- Total $ 547 2,318 608 855 4,328 - --------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD U.S. Treasury 5.80 % 6.31 - 6.34 6.14 U.S. Government agencies 5.81 7.60 7.18 6.34 7.36 CMOs 6.47 6.98 6.03 6.03 6.85 State, county and municipal 7.50 8.81 9.76 11.31 9.68 Other 5.83 6.41 7.12 6.64 6.56 Consolidated 6.58 % 7.51 8.12 9.05 7.77 - ----------------------------------------------------------------------------
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
Table 10 LOANS - ---------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 46,117 41,489 40,959 35,220 31,871 Real estate - construction and other 3,037 3,474 3,350 2,651 2,791 Real estate - mortgage 13,160 14,300 15,071 14,533 14,448 Lease financing 8,610 6,348 4,556 2,278 1,769 Foreign 3,885 2,842 1,675 1,121 968 - ---------------------------------------------------------------------------------------------------- Total commercial 74,809 68,453 65,611 55,803 51,847 - ---------------------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 28,998 33,181 32,782 26,615 23,862 Installment loans - Bankcard (a) 3,914 7,295 5,358 5,837 3,425 Installment loans - other 22,271 23,855 22,493 18,153 17,171 Vehicle leasing 5,331 4,529 3,615 2,799 1,905 - ---------------------------------------------------------------------------------------------------- Total retail 60,514 68,860 64,248 53,404 46,363 - ---------------------------------------------------------------------------------------------------- Total loans 135,323 137,313 129,859 109,207 98,210 - ---------------------------------------------------------------------------------------------------- UNEARNED INCOME Loans 661 542 513 456 372 Lease financing 2,975 2,124 1,441 786 463 - ---------------------------------------------------------------------------------------------------- Total unearned income 3,636 2,666 1,954 1,242 835 - ---------------------------------------------------------------------------------------------------- Loans, net $ 131,687 134,647 127,905 107,965 97,375 - ----------------------------------------------------------------------------------------------------
(a) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts. T-11
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 $ 11,285 37 1,405 2,417 15,144 1-5 years 4,447 252 3,473 199 8,371 After 5 years 1,642 199 1,788 - 3,629 - ---------------------------------------------------------------------------------------------------------------- Total 17,374 488 6,666 2,616 27,144 - ---------------------------------------------------------------------------------------------------------------- ADJUSTABLE RATE 1 year or less 14,045 905 1,350 1,148 17,448 1-5 years 11,934 1,339 3,196 119 16,588 After 5 years 2,764 305 1,948 2 5,019 - ---------------------------------------------------------------------------------------------------------------- Total 28,743 2,549 6,494 1,269 39,055 - ---------------------------------------------------------------------------------------------------------------- Total $ 46,117 3,037 13,160 3,885 66,199 ================================================================================================================
T-12
Table 12 ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS - ------------------------------------------------------------------------------------------------------------ Years Ended December 31, ----------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES Balance, beginning of year $ 2,212 2,308 2,259 2,259 2,171 Provision for loan losses 1,103 678 403 458 559 Allowance relating to loans acquired, transferred to accelerated disposition or sold (596) 50 193 82 197 Loan losses, net (872) (824) (547) (540) (668) - ------------------------------------------------------------------------------------------------------------ Balance, end of year $ 1,847 2,212 2,308 2,259 2,259 - ------------------------------------------------------------------------------------------------------------ as % of loans, net 1.40 % 1.64 1.80 2.09 2.32 - ------------------------------------------------------------------------------------------------------------ as % of nonaccrual and restructured loans 211 % 241 252 228 142 - ------------------------------------------------------------------------------------------------------------ as % of nonperforming assets 186 % 211 201 170 111 - ------------------------------------------------------------------------------------------------------------ LOAN LOSSES Commercial, financial and agricultural $ 172 221 187 276 357 Real estate - construction and other 49 98 64 123 127 Real estate - mortgage 54 60 97 123 174 Installment loans - Bankcard 511 405 255 110 95 Installment loans - Bankcard special adjustment (a) - 34 - - - Installment loans - other and Vehicle leasing 288 258 163 125 137 - ------------------------------------------------------------------------------------------------------------ Total 1,074 1,076 766 757 890 - ------------------------------------------------------------------------------------------------------------ LOAN RECOVERIES Commercial, financial and agricultural 74 120 103 101 111 Real estate - construction and other 23 33 24 20 17 Real estate - mortgage 9 12 22 23 24 Installment loans - Bankcard 35 40 23 18 16 Installment loans - other and Vehicle leasing 61 47 47 55 54 - ------------------------------------------------------------------------------------------------------------ Total 202 252 219 217 222 - ------------------------------------------------------------------------------------------------------------ Loan losses, net $ 872 824 547 540 668 - ------------------------------------------------------------------------------------------------------------ as % of average loans, net 0.65 % 0.64 0.45 0.53 0.72 - ------------------------------------------------------------------------------------------------------------ as % of average loans, net, excluding Bankcard 0.31 % 0.35 0.27 0.46 0.66 - ------------------------------------------------------------------------------------------------------------ NONPERFORMING ASSETS Nonaccrual loans Commercial loans $ 384 324 514 569 797 Commercial real estate loans 135 218 - - - Consumer real estate loans 233 240 - - - Installment loans 124 123 131 - - Real estate loans - - 260 397 686 - ------------------------------------------------------------------------------------------------------------ Total nonaccrual loans 876 905 905 966 1,483 Restructured loans 2 14 11 27 106 Foreclosed properties 113 128 232 335 448 - ------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 991 1,047 1,148 1,328 2,037 - ------------------------------------------------------------------------------------------------------------ as % of loans, net and foreclosed properties 0.75 % 0.78 0.90 1.23 2.08 - ------------------------------------------------------------------------------------------------------------ Accruing loans past due 90 days $ 326 474 445 350 294 - ------------------------------------------------------------------------------------------------------------
(a) Installment loans - Bankcard special adjustment includes a 1996 one-time charge-off related to an anticipated regulatory change that would reduce the period delinquent loans could be held before charge-off. Any loans classified by regulatory examiners as loss, doubtful, substandard or special mention that have not been disclosed herein or under the "Loans" or "Asset Quality" narrative discussions in Management's Analysis of Operations do not (i) represent or result from trends or uncertainties that management expects will materially affect future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. T-13
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 $ 480 35 % $ 543 30 % $ 645 32 % $ 689 32 % $ 657 32 % Real estate - Construction and other 44 2 90 3 102 3 106 2 243 3 Mortgage 149 31 284 34 405 36 403 39 466 40 Installment loans - Bankcard 225 3 442 5 322 4 238 5 142 3 Other and Vehicle leasing 227 20 309 21 334 20 251 19 275 19 Lease financing 46 6 73 5 37 4 39 2 26 2 Foreign 49 3 39 2 60 1 44 1 18 1 Unallocated 627 - 432 - 403 - 489 - 432 - - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 1,847 100 % $ 2,212 100 % $ 2,308 100 % $ 2,259 100 % $ 2,259 100 % - ----------------------------------------------------------------------------------------------------------------------------------
(a) The allocation of the allowance for loan losses to the respective classifications is not necessarily indicative of future losses or future allocations. See the "Loans" and the "Provision and Allowance for Loan Losses" discussions in Management's Analysis of Operations and the "Allowance for Loan Losses" discussion in Note 1 of Notes to Supplemental Consolidated Financial Statements.
Table 14 INTANGIBLE ASSETS - -------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- MORTGAGE AND OTHER SERVICING ASSETS $ 427 284 209 135 95 - -------------------------------------------------------------------------------------------------------------------------- CREDIT CARD PREMIUM $ 24 35 46 62 82 - -------------------------------------------------------------------------------------------------------------------------- OTHER INTANGIBLE ASSETS Goodwill $ 2,465 2,650 2,202 1,665 1,110 Deposit base premium 473 551 622 627 404 Other 10 15 19 29 40 - -------------------------------------------------------------------------------------------------------------------------- Total $ 2,948 3,216 2,843 2,321 1,554 ==========================================================================================================================
T-14
Table 15 FORECLOSED PROPERTIES - ------------------------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Foreclosed properties $ 129 145 257 377 511 - ------------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, beginning of year 17 25 42 63 109 Provision for foreclosed properties 2 (1) (3) 14 46 Transfer from allowance for segregated assets - 1 - 2 5 Dispositions, net (3) (8) (14) (37) (97) - ------------------------------------------------------------------------------------------------------------- Allowance for foreclosed properties, end of year 16 17 25 42 63 - ------------------------------------------------------------------------------------------------------------- Foreclosed properties, net $ 113 128 232 335 448 - -------------------------------------------------------------------------------------------------------------
T-15
Table 16 DEPOSITS - --------------------------------------------------------------------------------------------- Years Ended December 31, ---------------------------------------------------- (In millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------- CORE DEPOSITS Noninterest-bearing $ 31,005 29,713 27,706 24,542 24,976 Savings and NOW accounts 37,281 35,892 36,654 33,634 31,903 Money market accounts 21,240 21,193 18,719 19,284 20,455 Other consumer time 37,324 42,457 42,857 36,671 33,545 - --------------------------------------------------------------------------------------------- Total core deposits 126,850 129,255 125,936 114,131 110,879 Foreign 3,928 3,307 4,720 5,916 2,254 Other time 6,299 3,867 3,456 2,592 2,616 - --------------------------------------------------------------------------------------------- Total deposits $ 137,077 136,429 134,112 122,639 115,749 - ---------------------------------------------------------------------------------------------
T-16 Table 17 TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE - ------------------------------------------------------------------------ December 31, 1997 -------------------- Time Other (In millions) Certificates Time - ------------------------------------------------------------------------ MATURITY OF 3 months or less $ 3,783 - Over 3 months through 6 months 2,307 - Over 6 months through 12 months 2,016 - Over 12 months 2,728 - - ------------------------------------------------------------------------ Total $ 10,834 - - ------------------------------------------------------------------------ T-17
Table 18 CAPITAL RATIOS - ---------------------------------------------------------------------------------------------------- Years Ended December 31, ------------------------------------------------------ (In millions) 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- CONSOLIDATED CAPITAL RATIOS (a) Qualifying capital Tier 1 capital $ 13,972 11,358 10,085 7,854 6,216 Total capital 21,585 18,058 16,089 12,190 9,722 Adjusted risk-based assets 165,802 143,549 136,261 94,410 67,702 Adjusted leverage ratio assets $ 197,075 168,455 163,668 116,642 93,654 Ratios Tier 1 capital 8.43 % 7.91 7.40 8.32 9.18 Total capital 13.02 12.58 11.81 12.91 14.36 Leverage 7.09 6.74 6.16 6.73 6.64 STOCKHOLDERS' EQUITY TO ASSETS (a) Year-end 7.42 7.41 7.30 7.52 7.83 Average 7.36 % 7.35 7.56 7.92 7.51 - ---------------------------------------------------------------------------------------------------- BANK CAPITAL RATIOS (b) Tier 1 capital First Union National Bank (North Carolina) 6.97 % 6.43 6.46 7.32 8.24 First Union National Bank (New Jersey) 10.70 8.98 9.16 - - First Union Bank of Delaware 11.83 13.61 25.45 - - First Union Home Equity Bank 10.95 8.40 7.50 7.60 - Total capital First Union National Bank (North Carolina) 10.20 10.20 10.15 10.69 11.35 First Union National Bank (New Jersey) 13.99 12.22 10.95 - - First Union Bank of Delaware 13.09 14.87 26.74 - - First Union Home Equity Bank 13.20 10.77 10.09 12.10 - Leverage First Union National Bank (North Carolina) 6.02 5.95 5.72 6.10 5.52 First Union National Bank (New Jersey) 7.06 7.06 7.43 - - First Union Bank of Delaware 6.24 10.60 17.20 - - First Union Home Equity Bank 10.16 % 7.84 6.48 7.22 - - ----------------------------------------------------------------------------------------------------
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 to 5.00 percent. The 1992-1996 capital ratios presented herein have not been restated to reflect the Signet pooling of interests acquisition. The amounts presented herein have been restated for all periods presented to reflect the CoreStates acquisition. (b) By the end of 1997, all First Union bank affiliates were merged into First Union National Bank (North Carolina), except those included herein. Accordingly, historical information related to such affiliates is not presented, and historical ratios for First Union National Bank (North Carolina) are not restated. On February 26, 1998, First Union National Bank (New Jersey) and First Union National Bank (North Carolina) were combined. The combined banks will operate as First Union National Bank. The amounts presented herein do not include those of acquired banks. T-18 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 Comments - --------------------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Interest rate swaps $ 16,287 6.50 % 5.94 % 3.59 Converts floating rate loans to fixed Carrying amount $ 13 rate. Adds to liability sensitivity. Unrealized gross gain 190 Similar characteristics to a fixed Unrealized gross loss (14) income security funded with variable rate liabilities. Includes $1.4 billion of callable swaps expected to mature in December 1999 if swap rates are below 6.99 percent. ------- Total 189 ------- Forward interest rate swaps 725 6.20 - 2.97 - Converts floating rate loans to fixed Carrying amount rates in future periods. Effective Unrealized gross gain 1 December 1998 with put options on Unrealized gross loss - forward swaps referenced under "Rate Sensitivity Hedges" linked to this item. -------- Total 1 -------- Interest rate floors 579 6.06 5.90 1.60 Paid a premium to convert floating Carrying amount 3 rate loans to fixed rate when 3 Unrealized gross gain 2 month LIBOR is below an average Unrealized gross loss (1) of 6.06 percent. -------- Total 4 -------- Portfolio swaps 100 8.19 6.08 6.30 - Converts 3 month floating rate Carrying amount treasury bill-based portfolio assets Unrealized gross gain 11 to 1 month floating rate LIBOR Unrealized gross loss - assets. -------- Total 11 -------- Mortgage swap 9 6.05 8.09 4.30 - Offsets interest rate risk in a portion Carrying amount of the fixed rate long-term mortgage Unrealized gross gain - portfolio. Unrealized gross loss - -------- Total - -------- Interest rate caps 14 8.50 7.65 0.90 - Offsets corresponding rate caps in Carrying amount commercial loans. Unrealized gross gain - Unrealized gross loss - -------- Total - - ---------------------------------------- -------- Total asset rate conversions $ 17,714 6.48 % 5.94 % 3.52 $ 205 - -----------------------------------------------------------------------------------------
(Continued) T-19 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 Comments - ------------------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Interest rate swaps $ 10,627 6.77 % 6.24 % 7.09 Converts $6.0 billion of fixed rate Carrying amount $ 19 long-term debt to floating rate by Unrealized gross gain 309 matching the terms of the swap to Unrealized gross loss (19) the debt issue. Also converts $1.1 billion of fixed rate CDs to variable rate, $950 million of fixed rate bank notes to floating rate, $1 billion of capital trust securities to variable rate, and $1.5 billion of deposits to variable rate. ----- Total 309 ----- Forward interest rate swaps 459 6.83 - 3.30 - Converts fixed rate deposit liabilities Carrying amount to floating rate in future periods. Unrealized gross gain 6 Unrealized gross loss - ----- Total 6 ----- Interest rate floors 336 4.65 - 2.67 $250 million and $86 million offset Carrying amount 1 corresponding rate purchased floors Unrealized gross gain - in long-term debt and 2 year floating Unrealized gross loss (1) rate retail deposits, respectively. ----- Total - - ------------------------------------------ ----- Total liability rate conversions $ 11,422 6.71 % 6.24 % 6.81 $ 315 - ----------------------------------------------------------------------------------------
(Continued) T-20 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 Comments - ------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Put options on forward swaps $ 725 - % 6.20 % 0.95 Paid a premium for the right to Carrying amount $ 5 terminate $725 million of forward Unrealized gross gain - interest rate swaps based on Unrealized gross loss - interest rates in effect in December 1998. Reduces liability sensitivity. ------ Total 5 ------ Call options on forward swaps 200 - - 6.70 Paid a premium for the right to Carrying amount 3 extend interest rate swaps hedging Unrealized gross gain 1 $50 million of deposits and other Unrealized gross loss - borrowings if LIBOR rates rise above a certain level, and to execute interest rate swaps to convert $150 million of long-term fixed rate debt into floating rate. ------ Total 4 ------ Interest rate caps (LIBOR) 158 5.88 7.03 1.86 Paid a premium for the right to lock Carrying amount 1 in 3 month LIBOR reset rates on Unrealized gross gain - pay variable rate swaps. Unrealized gross loss (1) ------ Total - ------ Periodic caps 408 - 7.84 8.37 Paid a premium for the right to lock Carrying amount 5 in 1 year LIBOR reset rates for the Unrealized gross gain - purpose of converting floating rate Unrealized gross loss - liabilities to fixed rate. ====== Total 5 ------ Interest rate caps (CMT) 2,200 - 5.70 3.96 Paid a premium for the right to lock Carrying amount 27 in 1 year Treasury rates for the Unrealized gross gain - purpose of converting floating rate Unrealized gross loss (1) liabilities to fixed rate. ------ Total 26 ------ Interest rate floors 625 7.13 - 1.40 Paid a premium for the right to Carrying amount 2 receive a fixed rate if LIBOR is Unrealized gross gain 6 below 7.13 percent. Adds to Unrealized gross loss - liability sensitivity when rates are below 7.13 percent. ====== Total 8 ------ Interest rate caps 200 - 6.13 0.70 Received a premium for the Carrying amount - obligation to pay a fixed rate when Unrealized gross gain - rates are above 6.13 percent. Adds Unrealized gross loss - to liability sensitivity when rates are above 6.13 percent. ------ Total - ------ Forward rate locks 50 5.69 - 0.50 Offsets interest rate risk and Carrying amount - corresponding price risk associated Unrealized gross gain - with the anticipated sale of 10- and Unrealized gross loss - 15-year fixed rate home equity loans. ------ Total - ------
(Continued) T-21 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 Comments - ------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES (continued) Short eurodollar futures 12,922 - 6.11 0.40 Locks in 3 month LIBOR reset rates Carrying amount - on pay variable rate swaps. $4.8 Unrealized gross gain - billion effective March and June Unrealized gross loss (10) 1998 and $2.8 billion effective September 1998. $621 million converts 1 month floating rate loans to 1 month fixed rate loans. -------- Total (10) -------- Long eurodollar futures 2,468 6.47 - 1.13 Converts floating rate LIBOR-based Carrying amount - loans to fixed rate. Adds to liability Unrealized gross gain 4 sensitivity. Similar characteristics to Unrealized gross loss - fixed income security funded with variable rate liabilities. $500 million effective December 1998, March, June and September 1999. $468 million converts 1 month floating rate loans to 3 month fixed rate loans. -------- Total 4 -------- Call Options on eurodollar futures 768 6.79 - 0.46 Paid a premium for the right to buy Carrying amount - Eurodollar futures that convert Unrealized gross gain 2 floating rate LIBOR-based loans to Unrealized gross loss - fixed rate. Interest rate risk limited to premium paid. $256 million effective March 1998, June 1998 and September 1998. -------- Total 2 -------- Short Deutschemark futures 56 - 3.94 0.21 Locks in 3 month Deutschemark Carrying amount - funding levels in March 1998 for a Unrealized gross gain - portion of the German bonds in the Unrealized gross loss - foreign bond portfolio. -------- Total - -------- CMT Floor 100 6.42 5.84 3.34 First Union Mortgage Corporation Carrying amount 1 paid a premium for a CMT floor in Unrealized gross gain 1 order to offset the decline in value Unrealized gross loss - of mortgage servicing in a falling rate environment. -------- Total 2 - ------------------------------------------- -------- Total rate sensitivity hedges $ 20,880 6.66 % 6.10 % 1.14 $ 46 - -------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (b) Estimated maturity approximates average life except for eurodollar futures, average life of .25 years. London Interbank Offered Rates (LIBOR) - The average of interbank offered rates on dollar deposits in the London market, based on quotations at five major banks. Weighted average pay rates are generally based on one to six month LIBOR. Pay rates reset at predetermined reset dates over the life of the contract. Rates shown are the pay rates in effect as of December 31, 1997. Weighted average receive rates are fixed rates set at the time the contract was transacted. Carrying amount includes accrued interest receivable/payable and unamortized premiums paid/received. T-22 Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated -------------------------------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years (b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Interest rate swaps $ 24,088 6.27 % 5.56 % 2.18 Converts floating rate loans to fixed Carrying amount $ 11 rate. Adds to liability sensitivity. Unrealized gross gain 183 Similar characteristics to a fixed Unrealized gross loss (41) income security funded with variable rate liabilities. Includes $4.8 billion of indexed amortizing swaps, with $1.3 billion maturing within 1 year and $3.5 billion within 4 years. -------- Total 153 -------- Forward interest rate swaps 57 7.83 - 1.21 Converts floating rate loans to fixed Carrying amount - rates in future periods. Effective Unrealized gross gain 1 March 1997 with put options on Unrealized gross loss - forward swaps referenced under "Rate Sensitivity Hedges" linked to this item. -------- Total 1 -------- Interest rate floors 558 5.98 5.51 1.98 Paid a premium to convert floating Carrying amount 4 rate loans to fixed rate when 3 Unrealized gross gain - month LIBOR is below 5.98 Unrealized gross loss - percent (approximately). -------- Total 4 -------- Mortgage swap 139 6.24 8.09 5.10 Offsets interest rate risk in a portion Carrying amount - of the fixed rate long-term mortgage Unrealized gross gain 1 portfolio. Unrealized gross loss - -------- Total 1 -------- Interest rate caps 20 8.25 7.33 1.90 Offsets corresponding rate caps in Carrying amount - commercial loans. Unrealized gross gain - Unrealized gross loss - -------- Total - - ------------------------------------------ -------- Total asset rate conversions $ 24,862 6.27 % 5.57 % 2.18 $ 159 - -------------------------------------------------------------------------------------------
(Continued) T-23
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ------------------------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated ---------------------------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years (b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Interest rate swaps $ 12,322 6.58 % 5.73 % 4.67 Converts $4.8 billion of fixed rate Carrying amount $ 31 long-term debt to floating rate by Unrealized gross gain 178 matching the terms of the swap Unrealized gross loss (81) to the debt issue. Rate sensitivity remains unchanged due to the direct linkage of the swap to the debt issue. Also converts $3.4 billion of fixed rate CDs to variable rate, $1.2 billion of fixed rate bank notes to floating rate and $2.9 billion of deposits to variable rate. -------- Total 128 -------- Forward interest rate swaps 482 6.73 - 4.10 Converts fixed rate deposit liabilities Carrying amount - to floating rate in future periods. Unrealized gross gain 2 Unrealized gross loss (1) -------- Total 1 -------- Interest rate floors 357 4.69 - 3.33 $250 million and $107 million offset Carrying amount 2 corresponding rate purchased floors Unrealized gross gain - in long-term debt and 2 year floating Unrealized gross loss (1) rate retail deposits, respectively. -------- Total 1 - ------------------------------------------ -------- Total liability rate conversions $ 13,161 6.53 % 5.73 % 4.61 $ 130 - ------------------------------------------------------------------------------------------- ASSET HEDGES Forward sale of Treasury notes$ 662 - % 5.74 % 0.03 Sold U.S. Treasury notes forward to Carrying amount $ - hedge the market value of similar Unrealized gross gain 5 U.S. Treasury notes in the available Unrealized gross loss - for sale portfolio. -------- Total 5 - ------------------------------------------ -------- Total asset hedges $ 662 - % 5.74 % 0.03 $ 5 - -------------------------------------------------------------------------------------------
(Continued) T-24
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ------------------------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated ---------------------------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years (b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Put options on eurodollar futures $ 12,678 - % 6.37 % 0.31 Paid a premium for the right to lock Carrying amount $ 6 in the 3 month LIBOR reset rates on Unrealized gross gain - pay variable rate swaps. $7.6 billion Unrealized gross loss (5) effective March 1997; $5.1 billion effective June 1997. -------- Total 1 -------- Call options on forward swaps 250 - - 7.70 Paid a premium for the right to Carrying amount 3 extend interest rate swaps hedging Unrealized gross gain 3 $100 million of deposits and other Unrealized gross loss - borrowings if LIBOR rates rise above a certain level, and to execute interest rate swaps to convert $150 million of long-term fixed rate debt into floating rate. -------- Total 6 -------- Interest rate caps (LIBOR) 168 5.54 7.03 2.70 Paid a premium for the right to lock Carrying amount 1 in 3 month LIBOR reset rates on Unrealized gross gain - pay variable rate swaps. Unrealized gross loss - -------- Total 1 -------- Periodic caps 483 - 7.77 9.39 Paid a premium for the right to lock Carrying amount 6 in 1 year LIBOR reset rates for the Unrealized gross gain 2 purpose of converting floating rate Unrealized gross loss - liabilities to fixed rate. -------- Total 8 -------- Interest rate floors 725 7.04 - 2.20 Paid a premium for the right to Carrying amount 2 receive a fixed rate if LIBOR is Unrealized gross gain 12 below 7.04 percent. Adds to Unrealized gross loss - liability sensitivity when rates are below 7.04 percent. -------- Total 14 -------- Interest rate caps 200 - 6.18 1.70 Received a premium for the Carrying amount - obligation to pay a fixed rate when Unrealized gross gain - rates are above 6.18 percent. Adds Unrealized gross loss - to liability sensitivity when rates are above 6.18 percent. -------- Total - -------- Forward rate locks 165 5.52 - 0.10 Offsets interest rate risk and Carrying amount - corresponding price risk associated Unrealized gross gain 2 with the anticipated sale of 10- and Unrealized gross loss - 15-year fixed rate home equity loans. -------- Total 2 --------
(continued) T-25
Table 19 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - ------------------------------------------------------------------------------------------------------------------------------- Weighted Average Rate Estimated -------------------------------------------------- Maturity December 31, 1996 Notional In Fair (In millions) Amount Receive Pay Years(b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES (continued) Short eurodollar futures 16,955 - 5.82 0.21 Locks in 3 month LIBOR reset rates Carrying amount - on pay variable rate swaps. $15.0 Unrealized gross gain - billion effective March 1997; $89 Unrealized gross loss (11) million effective June 1997. $1.9 billion converts 1 month floating rate loans to 1 month fixed rate loans. -------- Total (11) -------- Long eurodollar futures 17,108 6.19 - 1.13 Converts floating rate LIBOR-based Carrying amount - loans to fixed rate. Adds to liability Unrealized gross gain 10 sensitivity. Similar characteristics to Unrealized gross loss (2) fixed income security funded with variable rate liabilities. $4.6 billion effective September 1997; $2.0 billion effective December 1997, March, June and September 1998; $500 million effective December 1998, March, June and September 1999. $2.5 billion converts 1 month floating rate loans to 3 month fixed rate loans. -------- Total 8 -------- CMT floor 100 6.42 6.37 4.34 First Union Mortgage Corporation Carrying amount 1 paid a premium for a CMT floor in Unrealized gross gain 1 order to offset the decline in value of Unrealized gross loss - mortgage servicing in a falling rate environment. -------- Total 2 - ------------------------------------------ -------- Total rate sensitivity hedges $ 48,832 6.24 % 5.95 % 0.74 $ 31 - -------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (b) Estimated maturity approximates duration except for forward bullets, average duration of 1.0 years; and long eurodollar futures, average duration of .25 years. London Interbank Offered Rates (LIBOR) - The average of interbank offered rates on dollar deposits in the London market, based on quotations at five major banks. Weighted average pay rates are generally based on one to six month LIBOR. Pay rates related to forward interest rate swaps are set on the future effective date. Pay rates reset at predetermined reset dates over the life of the contract. Rates shown are the rates in effect as of December 31, 1996. Weighted average receive rates were set at the time the contract was transacted. Carrying amount includes accrued interest receivable/payable, unamortized premiums paid/received and any related margin accounts. T-26
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 $ 1,747 1,561 11,167 3,237 2 17,714 Weighted average receive rate 5.90 % 6.49 6.58 6.53 6.80 6.48 Estimated fair value $ (8) 14 170 29 - 205 - ---------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 2,643 927 2,462 3,502 1,888 11,422 Weighted average receive rate 5.98 % 7.06 6.87 6.79 7.29 6.71 Estimated fair value $ (9) 18 77 125 104 315 - ---------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 15,022 2,185 3,137 436 100 20,880 Weighted average receive rate 6.59 % 6.65 6.30 7.94 7.72 6.66 Estimated fair value $ (7) 9 32 12 - 46 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- December 31, 1996 1 Year 1 -2 2 -5 5 -10 After 10 (In millions) or Less Years Years Years Years Total - ---------------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Notional amount $ 11,509 2,064 10,874 415 - 24,862 Weighted average receive rate 6.15 % 5.64 6.54 5.88 - 6.27 Estimated fair value $ 39 (9) 145 (16) - 159 - ---------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 2,984 2,175 2,984 4,158 860 13,161 Weighted average receive rate 6.27 % 5.99 6.58 6.88 6.48 6.53 Estimated fair value $ 16 8 54 56 (4) 130 - ---------------------------------------------------------------------------------------------------------------------- ASSET HEDGES Notional amount $ 662 - - - - 662 Weighted average receive rate - % - - - - - Estimated fair value $ 5 - - - - 5 - ---------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 39,118 6,805 2,303 506 100 48,832 Weighted average receive rate 5.87 % 6.55 6.51 8.03 7.70 6.24 Estimated fair value $ (5) 7 13 15 1 31 - ----------------------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. Pay rates are generally based on one to six month LIBOR and reset at predetermined reset dates. Current pay rates are not necessarily indicative of future pay rates, and therefore, they have been excluded from the above table. Weighted average pay rates are indicated in Table 19. T-27
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 $ 21,644 11,368 1,016 34,564 68,592 Additions 11,555 8,305 662 89,766 110,288 Maturities/Amortizations (5,786) (4,678) (697) (48,647) (59,808) Terminations (2,551) (1,834) (319) (26,851) (31,555) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 24,862 13,161 662 48,832 87,517 Additions 4,905 2,435 - 41,765 49,105 Maturities/Amortizations (11,553) (3,147) (662) (55,730) (71,092) Terminations (500) (1,027) - (13,987) (15,514) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 17,714 11,422 - 20,880 50,016 - -------------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities.
Table 22 INTEREST DIFFERENTIAL - -------------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 --------------------------------------------------------------- Interest Variance Interest Variance Income/ Attributable to (b) Income/ Attributable to (b) Expense -------------------- Expense -------------------- (In millions) Variance Rate Volume Variance Rate Volume - -------------------------------------------------------------------------------------------------------------- EARNING ASSETS Interest-bearing bank balances $ 52 1 51 (20) (11) (9) Federal funds sold and securities purchased under resale agreements 22 15 7 198 (12) 210 Trading account assets (a) 21 (3) 24 162 (9) 171 Securities available for sale (a) (26) 44 (70) 501 32 469 Investment securities (a) U.S. Government and other (62) 10 (72) (447) 22 (469) State, county and municipal (27) - (27) (70) (3) (67) - -------------------------------------------------------------------------------------------------------------- Total investment securities (89) 10 (99) (517) 19 (536) - -------------------------------------------------------------------------------------------------------------- Loans (a) 605 134 471 375 (320) 695 - -------------------------------------------------------------------------------------------------------------- Total earning assets $ 585 201 384 699 (301) 1,000 - -------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Deposits 117 100 17 15 (63) 78 Short-term borrowings 132 56 76 309 (169) 478 Long-term debt 52 18 34 95 (39) 134 - -------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 301 174 127 419 (271) 690 - -------------------------------------------------------------------------------------------------------------- Net interest income $ 284 27 257 280 (30) 310 - --------------------------------------------------------------------------------------------------------------
(a) Income related to securities and loans exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense assuming a federal tax rate of 35 percent; and state tax rates of 7.5 percent in 1997, and 7.75 percent in 1996 in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in Connecticut. (b) Changes attributable to rate/volume are allocated to both rate and volume on an equal basis. T-28
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 $ 3,184 182 5.68 % $ 2,298 130 5.67 % Federal funds sold and securities purchased under resale agreements 7,219 399 5.51 7,104 377 5.32 Trading account assets (a) (d) 5,174 341 6.59 4,811 320 6.64 Securities available for sale (a) (d) 20,844 1,423 6.83 21,869 1,449 6.62 Investment securities (a) (d) U.S. Government and other 2,478 179 7.22 3,497 241 6.89 State, county and municipal 1,085 105 9.67 1,370 132 9.64 - ---------------------------------------------------------------- -------------------- Total investment securities 3,563 284 7.97 4,867 373 7.66 - ---------------------------------------------------------------- -------------------- Loans (a) (b) (d) Commercial Commercial, financial and agricultural 43,118 3,464 8.03 40,089 3,285 8.20 Real estate - construction and other 3,295 293 8.89 3,562 302 8.48 Real estate - mortgage 13,619 1,180 8.67 14,230 1,283 9.02 Lease financing 4,199 423 10.09 3,124 264 8.44 Foreign 3,349 215 6.43 2,144 136 6.33 - ---------------------------------------------------------------- -------------------- Total commercial 67,580 5,575 8.25 63,149 5,270 8.35 - ---------------------------------------------------------------- -------------------- Retail Real estate - mortgage 31,241 2,426 7.77 32,856 2,514 7.65 Installment loans - Bankcard (c) 7,005 1,058 15.11 6,478 922 14.24 Installment loans - other and Vehicle leasing 28,691 2,773 9.66 26,637 2,521 9.47 - ---------------------------------------------------------------- -------------------- Total retail 66,937 6,257 9.35 65,971 5,957 9.03 - ---------------------------------------------------------------- -------------------- Total loans 134,517 11,832 8.80 129,120 11,227 8.70 - ---------------------------------------------------------------- -------------------- Total earning assets 174,501 14,461 8.29 170,069 13,876 8.16 -------------------- ------------------- Cash and due from banks 8,695 8,620 Other assets 12,897 10,596 ---------- --------- - -------------------------------------------- Total assets $ 196,093 $ 189,285 - ------------------------------------------------------ --------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Savings and NOW accounts 33,104 898 2.71 33,360 828 2.48 Money market accounts 24,033 694 2.89 22,179 622 2.80 Other consumer time 39,752 2,067 5.20 42,226 2,198 5.21 Foreign 3,092 164 5.29 3,307 167 5.07 Other time 5,377 325 6.05 3,853 216 5.60 - ---------------------------------------------------------------- -------------------- Total interest-bearing deposits 105,358 4,148 3.94 104,925 4,031 3.84 Federal funds purchased and securities sold under repurchase agreements 22,759 1,147 5.04 22,815 1,133 4.97 Commercial paper 1,948 112 5.76 1,865 98 5.27 Other short-term borrowings 5,680 338 5.96 4,228 234 5.53 Long-term debt 10,916 707 6.47 10,386 655 6.30 - ---------------------------------------------------------------- -------------------- Total interest-bearing liabilities 146,661 6,452 4.40 144,219 6,151 4.26 -------------------- ------------------- Noninterest-bearing deposits 27,489 26,351 Other liabilities 5,823 4,753 Guaranteed preferred beneficial interests 1,680 57 Stockholders' equity 14,440 13,905 - ------------------------------------------------------ --------- Total liabilities and stockholders' equity $ 196,093 $ 189,285 - ------------------------------------------------------ --------- Interest income and rate earned $ 14,461 8.29 % $ 13,876 8.16 % Interest expense and equivalent rate paid 6,452 3.70 6,151 3.61 - ------------------------------------------------------------------------------ -------------------- Net interest income and margin $ 8,009 4.59 % $ 7,725 4.55 % - ------------------------------------------------------------------------------ -------------------
(a) Yields related to securities and loans exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and state tax rates of 7.5 percent in 1997, 7.75 percent in 1995 and 1996, 7.8275 percent in 1994, and 7.905 percent in 1993 in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in 1995 through 1997, and 10.25 percent in 1993 and 1994 in Washington, D.C.; 4.87 percent in 1996 and 1997 in Delaware; 6.5 percent in 1996 and 1997 in New Jersey; and 10.5 percent in 1997, and 10.75 percent in 1996 in Connecticut. Lease financing amounts include related deferred income taxes. T-29
---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- $ 2,439 150 6.15 % $ 2,896 136 4.70 % $ 3,431 135 3.96 % 3,231 179 5.55 1,680 69 4.14 1,381 44 3.18 2,294 158 6.90 1,294 77 5.97 1,225 59 4.79 14,690 948 6.45 14,708 816 5.55 9,296 547 5.88 10,470 688 6.58 11,451 670 5.85 17,430 1,020 5.85 2,050 202 9.83 2,464 245 9.97 2,502 251 10.03 -------------------- -------------------- -------------------- 12,520 890 7.11 13,915 915 6.58 19,932 1,271 6.38 -------------------- -------------------- -------------------- 38,493 3,265 8.48 32,173 2,585 8.03 29,036 2,252 7.75 3,077 315 10.24 2,606 225 8.64 3,286 225 6.83 15,246 1,483 9.73 14,554 1,252 8.60 13,587 1,156 8.51 2,453 209 8.52 1,326 120 9.06 1,171 127 10.85 1,453 102 7.05 1,145 62 5.39 936 46 4.94 -------------------- -------------------- -------------------- 60,722 5,374 8.85 51,804 4,244 8.19 48,016 3,806 7.93 -------------------- -------------------- -------------------- 29,426 2,190 7.44 25,411 1,802 7.09 21,112 1,570 7.44 6,366 902 14.17 4,321 562 13.00 3,292 433 13.14 24,731 2,386 9.65 19,299 1,784 9.25 19,739 1,826 9.25 -------------------- -------------------- -------------------- 60,523 5,478 9.05 49,031 4,148 8.46 44,143 3,829 8.67 -------------------- -------------------- -------------------- 121,245 10,852 8.95 100,835 8,392 8.32 92,159 7,635 8.28 -------------------- -------------------- -------------------- 156,419 13,177 8.42 135,328 10,405 7.69 127,424 9,691 7.60 ------------------ ------------------ ------------------- 8,306 7,844 8,049 9,257 7,072 7,574 --------- --------- --------- $ 173,982 $ 150,244 $ 143,047 --------- --------- --------- 33,781 824 2.44 30,835 604 1.96 27,470 553 2.01 20,654 633 3.06 21,006 496 2.36 20,936 462 2.21 40,766 2,112 5.18 33,209 1,384 4.17 34,963 1,459 4.17 4,284 237 5.53 2,800 121 4.30 1,516 46 3.05 3,437 210 6.11 2,543 121 4.77 2,830 119 4.21 -------------------- -------------------- -------------------- 102,922 4,016 3.90 90,393 2,726 3.02 87,715 2,639 3.01 14,599 831 5.69 10,960 470 4.28 10,158 354 3.48 2,104 123 5.83 1,607 67 4.19 1,090 32 2.92 3,376 202 6.00 2,050 109 5.30 1,290 53 4.12 8,334 560 6.72 6,049 367 6.07 5,492 298 5.43 -------------------- -------------------- -------------------- 131,335 5,732 4.36 111,059 3,739 3.37 105,745 3,376 3.19 ------------------ ------------------ ------------------- 24,822 23,322 22,403 4,669 3,964 4,151 - - - 13,156 11,899 10,748 --------- --------- --------- $ 173,982 $ 150,244 $ 143,047 --------- --------- --------- $ 13,177 8.42 % $ 10,405 7.69 % $ 9,691 7.60 % 5,732 3.66 3,739 2.76 3,376 2.65 ------------------ ------------------ ------------------- $ 7,445 4.76 % $ 6,666 4.93 % $ 6,315 4.95 % ------------------ ------------------ -------------------
b) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. (c) Installment loans -Bankcard include credit card, ICR, signature and First Choice amounts for all years. (d) Tax-equivalent adjustments included in trading account assets, securities available for sale, investment securities, commercial, financial and agricultural loans, commercial real estate--mortgage loans, and lease financing are (in millions) $5, $11, $38, $32, $8 and $5, respectively, in 1997; and $10, $14, $48, $35, $8 and $3, respectively, in 1996. T-30 FIRST UNION CORPORATION AND SUBSIDIARIES MANAGEMENT'S STATEMENT OF RESPONSIBILITY - -------------------------------------------------------------------------------- Management of First Union Corporation and its subsidiaries (the "Corporation") is committed to the highest standards of quality customer service and the enhancement of stockholder value. Management expects the Corporation's employees to respect its customers and to assign the highest priority to customer needs. The accompanying supplemental consolidated financial statements were prepared in conformity with generally accepted accounting principles and include, as necessary, best estimates and judgments by management. Other financial information contained in this supplemental annual report is presented on a basis consistent with the supplemental consolidated financial statements unless otherwise indicated. To ensure the integrity, objectivity and fairness of the information in these supplemental consolidated financial statements, management of the Corporation has established and maintains internal control supplemented by a program of internal audits. The internal control is designed to provide reasonable assurance that assets are safeguarded and transactions are executed, recorded and reported in accordance with management's intentions and authorizations and to comply with applicable laws and regulations. To enhance the reliability of internal control, management recruits and trains highly qualified personnel, and maintains sound risk management practices. The supplemental consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors, in accordance with generally accepted auditing standards. KPMG Peat Marwick LLP reviews the results of its audit with both management and the Audit Committee of the Board of Directors of the Corporation. The Audit Committee, composed entirely of outside directors, meets periodically with management, internal auditors and KPMG Peat Marwick LLP to determine that each is fulfilling its responsibilities and to support actions to identify, measure and control risks and augment internal controls. Edward E. Crutchfield Chairman and Chief Executive Officer Robert T. Atwood Executive Vice President and Chief Financial Officer May 15, 1998 C-1 FIRST UNION CORPORATION AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- Board of Directors and Stockholders First Union Corporation We have audited the supplemental consolidated balance sheets of First Union Corporation and subsidiaries as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These supplemental consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of First Union Corporation and CoreStates Financial Corp on April 28, 1998, which has been accounted for as a pooling of interests as described in Note 2 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the consummation date. These financial statements do not extend through the date of consummation. However, they will become the historical consolidated statements of First Union Corporation and subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Union Corporation and subsidiaries at December 31, 1997 and 1996, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. KPMG Peat Marwick LLP Charlotte, North Carolina May 15, 1998 C-2
FIRST UNION CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------ December 31, -------------------- (In millions, except per share data) 1997 1996 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 10,275 10,538 Interest-bearing bank balances 3,832 2,762 Federal funds sold and securities purchased under resale agreements 7,781 8,312 - ------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 21,888 21,612 - ------------------------------------------------------------------------------------------------------------------ Trading account assets 5,952 4,602 Securities available for sale (amortized cost $23,080 in 1997; $19,151 in 1996) 23,524 19,199 Investment securities (market value $3,670 in 1997; $4,328 in 1996) 3,526 4,190 Loans, net of unearned income ($3,636 in 1997; $2,666 in 1996) 131,687 134,647 Allowance for loan losses (1,847) (2,212) - ------------------------------------------------------------------------------------------------------------------ Loans, net 129,840 132,435 - ------------------------------------------------------------------------------------------------------------------ Premises and equipment 4,863 4,883 Due from customers on acceptances 1,496 1,502 Other intangible assets 2,948 3,216 Other assets 11,698 5,702 - ------------------------------------------------------------------------------------------------------------------ Total assets $ 205,735 197,341 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 31,005 29,713 Interest-bearing deposits 106,072 106,716 - ------------------------------------------------------------------------------------------------------------------ Total deposits 137,077 136,429 Short-term borrowings 31,681 27,620 Bank acceptances outstanding 1,496 1,493 Other liabilities 6,725 5,567 Long-term debt 11,752 10,815 - ------------------------------------------------------------------------------------------------------------------ Total liabilities 188,731 181,924 - ------------------------------------------------------------------------------------------------------------------ Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures 1,735 789 - ------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred stock - - Common stock, $3.33-1/3 par value; authorized 2 billion shares, outstanding 961 million shares in 1997; 989 million shares in 1996 3,203 3,295 Paid-in capital 1,582 1,855 Retained earnings 10,198 9,449 Unrealized gain on debt and equity securities, net 286 29 - ------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 15,269 14,628 - ------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 205,735 197,341 - ------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Supplemental Consolidated Financial Statements. C-3
FIRST UNION CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, --------------------------------------- (In millions, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 11,787 11,181 10,799 Interest and dividends on securities available for sale 1,412 1,435 935 Interest and dividends on investment securities Taxable income 176 238 670 Nontaxable income 70 87 142 Trading account interest 336 310 153 Other interest income 581 507 329 - ------------------------------------------------------------------------------------------------------------------------- Total interest income 14,362 13,758 13,028 - ------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 4,148 4,031 4,016 Interest on short-term borrowings 1,597 1,465 1,156 Interest on long-term debt 707 655 560 - ------------------------------------------------------------------------------------------------------------------------- Total interest expense 6,452 6,151 5,732 - ------------------------------------------------------------------------------------------------------------------------- Net interest income 7,910 7,607 7,296 Provision for loan losses 1,103 678 403 - ------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 6,807 6,929 6,893 - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trading account profits 252 162 122 Service charges on deposit accounts 1,119 979 921 Mortgage banking income 256 205 196 Capital management income 1,078 782 631 Securities available for sale transactions 52 96 76 Investment security transactions 3 4 6 Fees for other banking services 263 280 226 Equipment lease rental income 187 112 32 Sundry income 1,112 915 848 - ------------------------------------------------------------------------------------------------------------------------- Total noninterest income 4,322 3,535 3,058 - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,909 2,649 2,514 Other benefits 641 628 597 - ------------------------------------------------------------------------------------------------------------------------- Personnel expense 3,550 3,277 3,111 Occupancy 544 546 553 Equipment 649 569 471 Advertising 141 100 127 Telecommunications 168 158 142 Travel 125 114 96 Postage, printing and supplies 225 236 220 FDIC assessment 29 45 169 Professional fees 292 257 342 External data processing 94 146 101 Other intangible amortization 315 290 280 Merger-related and restructuring charges 284 421 233 SAIF special assessment - 149 - Sundry expense 920 622 697 - ------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 7,336 6,930 6,542 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,793 3,534 3,409 Income taxes 1,084 1,261 1,213 - ------------------------------------------------------------------------------------------------------------------------- Net income 2,709 2,273 2,196 Dividends on preferred stock - 9 26 - ------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 2,709 2,264 2,170 - ------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic earnings $ 2.84 2.33 2.21 Diluted earnings 2.80 2.30 2.17 Cash dividends $ 1.22 1.10 0.98 AVERAGE COMMON SHARES (In thousands) Basic 955,241 973,712 979,852 Diluted 966,792 982,755 1,001,145 - -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Supplemental Consolidated Financial Statements. C-4
FIRST UNION CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------- Unrealized Gain (Loss) on (Shares in thousands, Preferred Stock Common Stock Debt and ------------------ ---------------- Paid-in Retained Equity dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994, as originally reported 5,213 $ 230 285,361 $ 951 2,361 5,022 (290) 8,274 Common stock issued in 1997 two-for-one stock split - - 285,361 951 (951) - - - Common stock issued for pooled bank acquired April 28, 1998 - - 370,656 1,236 153 2,331 11 3,731 - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994, as restated 5,213 230 941,378 3,138 1,563 7,353 (279) 12,005 Stockholders' equity of pooled bank not restated prior to 1995 - - 64,501 215 277 641 (22) 1,111 Net income - - - - - 2,196 - 2,196 Purchase of common stock primarily for purchase accounting acquisitions - - (68,816) (230) (1,157) (167) - (1,554) Common stock issued for stock options exercised - - 20,414 68 332 (51) - 349 Common stock issued through dividend reinvestment plan - - 3,044 9 55 1 - 65 Common stock issued for purchase accounting acquisitions - - 25,090 84 527 - - 611 Converted preferred stock (1,574) (40) 3,316 12 53 (25) - - Pre-merger transactions of pooled bank (251) (7) (7,812) (26) (171) (436) - (640) Cash dividends paid by First Union Corporation 8.90% per Series 1990 preferred share - - - - - (7) - (7) $0.98 per common share - - - - - (336) - (336) Acquired companies Preferred shares - - - - - (19) - (19) Common shares - - - - - (507) - (507) Unrealized gain on debt and equity securities - - - - - - 508 508 - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,388 183 981,115 3,270 1,479 8,643 207 13,782 Net income - - - - - 2,273 - 2,273 Redemption of preferred stock (433) (109) - - - - - (109) Purchase of common stock primarily for purchase accounting acquisitions - - (50,648) (167) (1,184) (233) - (1,584) Common stock issued for stock options exercised - - 17,659 58 356 - - 414 Common stock issued through dividend reinvestment plan - - 2,250 8 54 - - 62 Common stock issued for purchase accounting acquisitions - - 31,994 106 1,096 (194) - 1,008 Converted preferred stock (2,955) (74) 6,224 20 54 - - - Cash dividends paid by First Union Corporation Preferred shares - - - - - (9) - (9) $1.10 per common share - - - - - (611) - (611) Acquired companies Common shares - - - - - (420) - (420) Unrealized loss on debt and equity securities - - - - - - (178) (178) - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 - - 988,594 3,295 1,855 9,449 29 14,628 - -----------------------------------------------------------------------------------------------------------------------
C-5 - ----------------------------------------------------------------------------------------------------------------------- Unrealized Gain (Loss) on (Shares in thousands, Preferred Stock Common Stock Debt and ------------------ ---------------- Paid-in Retained Equity dollars in millions) Shares Amount Shares Amount Capital Earnings Securities Total - ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 - - 988,594 3,295 1,855 9,449 29 14,628 Net income - - - - - 2,709 - 2,709 Purchase of common stock - - (51,675) (172) (1,369) (819) - (2,360) Common stock issued for stock options exercised - - 14,923 50 709 - - 759 Common stock issued through dividend reinvestment plan - - 1,525 5 51 - - 56 Common stock issued through public offering - - 7,500 25 333 - - 358 Common stock issued for purchase accounting acquisitions - - 117 - 3 - - 3 Cash dividends paid by First Union Corporation $1.22 per common share - - - - - (711) - (711) Acquired companies Common shares - - - - - (430) - (430) Unrealized gain on debt and equity securities - - - - - - 257 257 - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 - $ - 960,984 $ 3,203 1,582 10,198 286 15,269 - -------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Supplemental Consolidated Financial Statements. C-6
FIRST UNION CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, -------------------------------- (In millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 2,709 2,273 2,196 Adjustments to reconcile net income to net cash provided (used) by operating activities Accretion and amortization of securities discounts and premiums, net 40 37 (34) Provision for loan losses 1,103 678 403 Provision for foreclosed properties 2 (1) (3) Gain on sale of mortgage servicing rights (1) (49) (3) Securities available for sale transactions (52) (96) (76) Investment security transactions (3) (4) (5) Depreciation and amortization 922 779 705 Deferred income taxes 553 554 425 Trading account assets, net (1,350) (2,067) (476) Mortgage loans held for resale (964) (9) (304) (Gain) loss on sales of premises and equipment 5 (3) 11 Gain on sale of segregated assets (7) (12) (18) Other assets, net (648) 1,215 (343) Other liabilities, net 933 (47) 668 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,242 3,248 3,146 - ----------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 9,243 21,453 9,490 Maturities of securities available for sale 2,278 4,162 2,455 Purchases of securities available for sale (15,374) (20,121) (10,678) Calls and underdeliveries of investment securities 4 10 33 Maturities of investment securities 1,500 2,328 4,816 Purchases of investment securities (840) (663) (4,355) Origination of loans, net (1,114) (3,102) (7,872) Sales of premises and equipment 160 60 47 Purchases of premises and equipment (648) (1,148) (792) Other intangible assets, net (44) (18) (72) Purchase of bank-owned separate account life insurance (2,011) - - Cash equivalents acquired, net of purchases of banking organizations 6 (484) 2,527 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (6,840) 2,477 (4,401) - ----------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in cash realized from Purchases (sales) of deposits, net 620 (2,789) (4,045) Securities sold under repurchase agreements and other short-term borrowings, net 4,061 1,380 7,199 Issuance of guaranteed preferred beneficial interests 945 789 - Issuances of long-term debt 2,731 2,863 3,928 Increase in long-term debt due to a spin-off of an acquired company - - 1,388 Payments of long-term debt (1,797) (1,922) (1,310) Sales of common stock 815 402 374 Purchases of preferred stock - - (7) Redemption of preferred stock - (109) - Purchases of common stock (2,360) (1,584) (1,554) Cash dividends paid (1,141) (1,040) (869) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 3,874 (2,010) 5,104 - ----------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 276 3,715 3,849 Cash and cash equivalents, beginning of year 21,612 17,897 14,048 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 21,888 21,612 17,897 - ----------------------------------------------------------------------------------------------------------------------------- CASH PAID FOR Interest $ 7,250 6,187 5,602 Income taxes 502 574 756 NONCASH ITEMS Increase in securities available for sale - 592 7,602 Increase (decrease) in investment securities - 303 (6,923) Increase in other assets - - 15 Increase in assets available for sale and a decrease in loans 3,200 - - Increase in foreclosed properties and a decrease in loans 17 59 72 Conversion of preferred stock to common stock - 74 40 Issuance of common stock for purchase accounting acquisitions 3 1,008 611 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Securities available for sale 397 (295) 701 Other assets (deferred income taxes) $ 140 (117) 193 - -----------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Supplemental Consolidated Financial Statements. C-7 FIRST UNION CORPORATION AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL First Union Corporation (the "Parent Company") is a bank holding company whose principal wholly owned subsidiaries are national banking associations using the name First Union National Bank; Wheat First Securities, Inc., an investment banking firm; First Union Mortgage Corporation, a mortgage banking firm; First Union Brokerage Services, Inc., a securities brokerage firm; and certain business trusts as more fully described in Note 11. The accounting and reporting policies of First Union Corporation and subsidiaries (the "Corporation") are in accordance with generally accepted accounting principles and conform to general practices within the banking, investment banking and mortgage banking industries. The consolidated financial statements include accounts of the Parent Company and all its subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The Corporation is a diversified financial services company with principal operations in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C. Its foreign banking operations are immaterial. Management of the Corporation has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and due from banks, interest-bearing bank balances and federal funds sold and securities purchased under resale agreements. Generally, both cash and cash equivalents are considered to have maturities of three months or less, and accordingly, the carrying amount of such instruments is deemed to be a reasonable estimate of fair value. SECURITIES The classification of securities is determined at the date of commitment or purchase. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis. Trading account assets, primarily debt securities, and trading derivatives, which include interest rate futures, options, caps, floors and forward contracts, are recorded at market value. Included in noninterest income are realized and unrealized gains and losses resulting from such market value adjustments and from recording the results of sales of trading account securities. Securities available for sale, primarily debt securities, are recorded at market value with a corresponding adjustment net of tax recorded as a component of stockholders' equity. Securities available for sale are used as a part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rates, changes in prepayment risk and other factors. Investment securities, primarily debt securities, are stated at cost, net of the amortization of premium and the accretion of discount. The Corporation intends and has the ability to hold such securities until maturity. The market value of securities, including securities sold not owned, is generally based on quoted market prices or dealer quotes. If a quoted market price is not available, market value is estimated using quoted market prices for similar securities. INTEREST RATE SWAPS, FLOORS AND CAPS The Corporation uses interest rate swaps, floors and caps for interest rate risk management, in connection with providing risk management services to customers and for trading for its own account. Interest rate swaps, floors and caps used to achieve interest rate risk management objectives are designated as hedges of specific assets and liabilities. The net interest payable or receivable on swaps, floors and caps is accrued and recognized as an adjustment to interest income or interest expense of the related asset or liability. Premiums paid for purchased floors and caps are amortized over the term of the floors and caps as a yield adjustment of the related asset or liability. Floors and caps are written only to adjust the amount or term of purchased floors and caps to more effectively reduce interest rate risk, and a net written position is not created. Premiums received on floors and caps offset the premium paid on the floors and caps they adjust. On the early termination of swaps, floors and caps, the net proceeds received or paid, including premiums, are deferred and included in other assets or liabilities, and they are amortized over the shorter of the remaining contract life or the maturity of the related asset or liability. C-8 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis for financial purposes and on straight-line and accelerated bases for tax purposes, using estimated lives generally as follows: buildings, 10 to 50 years; furniture and equipment, 3 to 10 years; and leasehold improvements and capitalized leases, over the lives of the respective leases. INTANGIBLE ASSETS Generally, goodwill is amortized on a straight-line basis over periods ranging from 15 to 25 years. The Corporation's unamortized goodwill is periodically reviewed to ensure that there are no conditions which exist indicating that the recorded amount of goodwill is not recoverable from future undiscounted cash flows. The review process includes an evaluation of the earnings history of each subsidiary, its contribution to the Corporation, capital levels and other factors. If events or changes in circumstances indicate further evaluation is warranted, the undiscounted net cash flows of the operations to which goodwill relates are estimated. If the estimated undiscounted net cash flows are less than the carrying amount of goodwill, a loss is recognized to reduce goodwill's carrying value to fair value, and when appropriate, the amortization period is also reduced. Unamortized goodwill associated with disposed assets is charged to current earnings. Credit card premiums are amortized principally over the estimated period of benefit not to exceed 10 years using the sum-of-the-years' digits method. Deposit base premiums are amortized principally over a 10-year period using accelerated methods. Annually, the fair value of the unamortized balance of such premiums is estimated on a discounted cash flow basis, and if such value is less than such balance, the difference is charged to noninterest expense. FORECLOSED PROPERTIES Foreclosed properties are included in other assets, and they represent other real estate that has been acquired through loan or in-substance foreclosures or deeds received in lieu of loan payments. Generally, such properties are appraised annually, and they are recorded at the lower of cost or fair value less estimated selling costs. When appropriate, adjustments to cost are charged or credited to the allowance for foreclosed properties. TRANSFERS AND SERVICING OF FINANCIAL ASSETS The Corporation records the securitization or transfer of assets as sales when the assets securitized or transferred have been isolated from the Corporation and the transferee obtains the unconditional right to pledge or exchange the assets, or the transferee is a qualifying special purpose entity. Transfers not meeting these criteria are generally treated as secured borrowings. Gains or losses on the securitization or transfer of assets determined to be sales are based on the fair value of the assets obtained and liabilities assumed less the carrying value of the assets sold. Any servicing assets or other interests retained remain on the balance sheet at their allocated carrying value based on relative fair value. Servicing assets purchased are initially recorded at fair value. Gains or losses resulting from the securitization or transfer of assets are recorded in noninterest income. Retained residual interests subject to prepayment risk are recorded as trading account assets or as securities available for sale. Servicing assets and liabilities are included in other assets and other liabilities, and they are amortized to noninterest income in proportion to net servicing income. Servicing assets are evaluated for impairment based on the fair value of those assets. Fair values are estimated based on market prices for similar servicing assets and on the discounted estimated future net cash flows based on market consensus loan prepayment estimates, historical prepayment rates, interest rates, and other economic factors. For purposes of impairment evaluation, the servicing assets are stratified based on predominant risk characteristics of the underlying loans, including loan type (conventional or government), amortization type (fixed or adjustable), note rate, and in certain instances, period of origination. To the extent the carrying value of the servicing asset exceeds fair value by individual stratum, a valuation allowance is established. Servicing assets amounted to $427 million and $284 million at December 31, 1997 and 1996, respectively. PENSION AND SAVINGS PLANS Substantially all employees with one year of service are eligible for participation in a non-contributory, defined benefit pension plan and a matching savings plan. Pension cost is determined annually by an actuarial valuation, which includes service costs for the current year and amortization of amounts related to prior years. The Corporation's funding policy is to contribute to the pension plan the amount required to fund the benefits expected to be earned for the current year and to amortize amounts related to prior years using the projected unit credit valuation method. The difference between the pension cost included in current income and the funded amount is included in other assets or other liabilities, as appropriate. Actuarial assumptions are evaluated annually. C-11 - -------------------------------------------------------------------------------- The matching savings plan permits eligible employees to make basic contributions to the plan of up to six percent of base compensation and supplemental contributions of up to nine percent of base compensation. Annually, on approval of the Board of Directors, employee basic contributions may be matched up to six percent of the employee's base compensation. INCOME TAXES The operating results of the Parent Company and its eligible subsidiaries are included in a consolidated federal income tax return. Each subsidiary pays its allocation of federal income taxes to the Parent Company or receives payment from the Parent Company to the extent tax benefits are realized. Where state income tax laws do not permit consolidated income tax returns, applicable state income tax returns are filed. INCOME PER COMMON SHARE Basic earnings per share is computed by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing such net income by the sum of such weighted average number of shares and the potentially dilutive shares, including restricted stock awards, that could occur through the issuance of common stock options or convertible securities. C-12 - -------------------------------------------------------------------------------- NOTE 2: ACQUISITIONS The supplemental consolidated financial statements give retroactive effect to the pooling of interests acquisition of CoreStates Financial Corp ("CoreStates") as more fully described below. As a result, the supplemental consolidated balance sheets as of December 31, 1997 and 1996, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, are presented as if the combining companies had been consolidated for all periods presented. As required by generally accepted accounting principles, the supplemental consolidated financial statements will become the historical consolidated financial statements upon issuance of the consolidated financial statements for the period that includes the date of acquisition. The supplemental consolidated statements of changes in stockholders' equity reflect the accounts of the Corporation as if the additional common stock had been issued for all periods presented. The supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of the Corporation included in the Corporation's 1997 annual report on Form 10-K. On November 28, 1997, the Corporation acquired Signet Banking Corporation ("Signet"), a bank holding company based in Virginia. The merger was accounted for as a pooling of interests, and accordingly, all historical financial information for the Corporation has been restated to include Signet historical information for all periods presented herein. At September 30, 1997, Signet had assets of $11 billion, net loans of $7 billion, deposits of $8 billion and net income applicable to common stockholders of $73 million. As a result of the merger, each of the 61 million net outstanding shares of Signet common stock was converted into 1.10 shares of the Corporation's common stock and common stock equivalents, except that cash was paid for fractional share interests. Additionally, merger-related and restructuring charges associated with the Signet merger of $269 million ($194 million after tax) are included as a component of noninterest expense in 1997. The remaining unpaid balance of the initial accrual of $269 million is $169 million at December 31, 1997. The remaining restructuring charges will be paid primarily in 1998, and they include $17 million of noncash charges. At December 31, 1997, the Corporation had two pending acquisitions, both of which were consummated in January 1998. The first relates to the purchase accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which at December 31, 1997, had assets of $415 million, for 1.6 million shares of the Corporation's common stock, substantially all of which were repurchased in the open market at a cost of $79 million. The second relates to the pooling of interests accounting acquisition of Wheat First Butcher Singer, Inc. ("Wheat First"), which at December 31, 1997 had assets of $1 billion and stockholders' equity of $171 million for 10.3 million shares of the Corporation's common stock. Financial information related to Wheat First is not considered material to the historical results of the Corporation, and accordingly, the Corporation's financial statements will not be restated. On April 28, 1998, the Corporation acquired CoreStates, a multi-bank holding company based in Pennsylvania. The merger was accounted for as a pooling of interests. On such date, each of the 204 million shares of CoreStates' common stock was exchanged for 1.62 shares of the Corporation's common stock. In 1998, the Corporation currently estimates after-tax, merger-related and restructuring expenses of $795 million related to the CoreStates acquisition. At December 31, 1997, CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and net income applicable to common stockholders of $813 million. Certain pro forma financial information related to the Corporation and CoreStates and which does not include information related to Covenant or Wheat First follows. C-13
- ----------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------- CORPORATION AS REPORTED Net interest income $ 5,743 5,465 5,129 Net income 1,896 1,624 1,541 Net income applicable to common stockholders 1,896 1,615 1,515 Basic earning per share 3.03 2.61 2.44 Diluted earning per share $ 2.99 2.58 2.38 - -----------------------------------------------------------------------------------------------------------------
On January 1, 1996, the Corporation acquired First Fidelity Bancorporation ("First Fidelity"), a multi-bank holding company based in New Jersey. The merger was accounted for as a pooling of interests, and accordingly, all historical financial information for the Corporation has been restated to include First Fidelity historical information for all periods presented herein. At December 31, 1995, First Fidelity had assets of $35 billion, net loans of $25 billion, deposits of $28 billion and net income applicable to common stockholders of $398 million. As a result of the merger, each of the 79 million net outstanding shares of First Fidelity common stock was converted into 1.35 shares of the Corporation's common stock and common stock equivalents, except that cash was paid for fractional share interests. In addition, the 3 million net outstanding shares of First Fidelity Series B Convertible Preferred Stock were converted into a like number of shares of the Corporation's Series B Convertible Class A Preferred Stock (the "Series B Stock") having substantially identical terms as the First Fidelity Series B, the 350,000 outstanding shares of First Fidelity Series D Adjustable Rate Cumulative Preferred Stock were converted into a like number of shares of the Corporation's Series D Adjustable Rate Cumulative Class A Preferred Stock (the "Series D Stock") having substantially identical terms as the First Fidelity Series D, and the 3 million net outstanding First Fidelity Depository Receipts (each representing a 1/40th interest in a share of First Fidelity Series F 10.64% Preferred Stock (74,130 net outstanding shares) were converted into a like number of the Corporation's Depository Receipts (each representing a 1/40th interest in the Corporation's Series F 10.64% Class A Preferred Stock (the "Series F Stock") having substantially identical terms as the First Fidelity Series F. See Note 12 for information related to the redemption of the Series B Stock, the Series D Stock and the Series F Stock. Additionally, merger-related and restructuring expenses associated with the First Fidelity merger of $281 million ($181 million after tax) and $94 million ($73 million after tax) are included as a component of noninterest expense in 1996 and 1995, respectively. The remaining unpaid balance of the initial accrual of $375 million was $29 million at December 31, 1996, and it was paid in 1997. In 1996, various banking subsidiaries of the Parent Company also acquired twelve financial institutions and certain other assets which in the aggregate amounted to the addition of $7.8 billion in assets, $4.8 billion in net loans and $5.1 billion in deposits. The purchase method of accounting, which requires (i) no restatement of the Corporation's historical financial statements, and (ii) the inclusion of the acquired company's financial information on a fair value basis only from the date of consummation, was used in these transactions. With respect to these transactions, the Parent Company issued 32 million shares of its common stock in exchange for the common stock of certain of the acquired financial institutions, and it paid cash for the other financial institutions and assets, which in the aggregate amounted to $1.1 billion. These transactions resulted in an increase to stockholders' equity of $1.0 billion, and the increase was reduced by the Parent Company's purchase in the open market of 24 million shares of its common stock for $764 million in 1996. These transactions also resulted in an increase in goodwill of $595 million, which will be amortized on a straight-line basis over 25 years, and in deposit base premium of $70 million, which will be amortized on an accelerated basis over 10 years. C-14
- ------------------------------------------------------------------------------------------------------------------------------------ NOTE 3: SECURITIES AVAILABLE FOR SALE December 31, 1997 ----------------------------------------------------------------------------------------- Gross Unrealized 1 Year 1-5 5-10 After 10 ------------------ Amortized (In millions) or Less Years Years Years Total Gains Losses Cost - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 718 1,106 1,420 178 3,422 (120) - 3,302 U.S. Government agencies 170 5,749 7,722 46 13,687 (234) 4 13,457 Collateralized mortgage obligations 333 1,806 176 224 2,539 (25) 7 2,521 State, county and municipal 13 30 22 71 136 (1) - 135 Other 114 2,250 237 1,139 3,740 (87) 12 3,665 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080 - ----------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 1,348 10,875 9,577 751 22,551 (414) 21 22,158 Sundry securities - 66 - 907 973 (53) 2 922 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 1,348 10,941 9,577 1,658 23,524 (467) 23 23,080 - ----------------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST Debt securities $ 1,334 10,743 9,341 740 22,158 Sundry securities - 66 - 856 922 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 1,334 10,809 9,341 1,596 23,080 - --------------------------------------------------------------------------------------------------- December 31, 1996 ----------------------------------------------------------------------------------------- Gross Unrealized 1 Year 1-5 5-10 After 10 ------------------- Amortized (In millions) or Less Years Years Years Total Gains Losses Cost - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 595 2,677 53 22 3,347 (16) 15 3,346 U.S. Government agencies 100 2,669 8,970 31 11,770 (45) 60 11,785 Collateralized mortgage obligations 199 1,256 1 8 1,464 (9) 9 1,464 State, county and municipal 29 35 25 31 120 (1) - 119 Other 122 1,128 115 1,133 2,498 (77) 16 2,437 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151 - ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 1,045 7,748 9,164 225 18,182 (97) 100 18,185 Sundry securities - 17 - 1,000 1,017 (51) - 966 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,045 7,765 9,164 1,225 19,199 (148) 100 19,151 - ------------------------------------------------------------------------------------------------------------------------------------ AMORTIZED COST Debt securities $ 1,042 7,716 9,192 235 18,185 Sundry securities - 16 - 950 966 - --------------------------------------------------------------------------------------------------- Total $ 1,042 7,732 9,192 1,185 19,151 - ---------------------------------------------------------------------------------------------------
C-15 - -------------------------------------------------------------------------------- Securities available for sale with an aggregate amortized cost of $6.9 billion at December 31, 1997, are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements. Included in "U.S. Government agencies" and "Other" at December 31, 1997, are $2.7 billion of securities that are denominated in currencies other than the U.S. dollar. The currency exchange rates were hedged utilizing both on- and off-balance sheet instruments to minimize the exposure to currency revaluation risks. At December 31, 1997, these securities had a weighted average maturity of 3.75 years and a weighted average yield of 5.31 percent. The weighted average U.S. equivalent yield for comparative purposes of these securities was 6.57 percent based on a weighted average funding cost differential of (1.26) percent. The amounts included in this paragraph are not restated for the CoreStates acquisition. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Generally, the aging of mortgage-backed securities included in U.S. Government agencies and collateralized mortgage obligations is based on their weighted average maturities at December 31, 1997 and 1996. At December 31, 1997 and 1996, collateralized mortgage obligations had a weighted average yield based on amortized cost of 6.59 percent and 6.90 percent, respectively. At December 31, 1997 and 1996, there were forward commitments to purchase securities at a cost of $6.4 billion and $127 million, respectively, that at December 31, 1997 and 1996, had a market value of $6.4 billion and $127 million, respectively. Gross gains and losses realized on the sale of debt securities in 1997 were $54 million and $43 million, respectively, and on sundry securities such gains and losses were $52 million and $11 million, respectively. Gross gains and losses realized on the sale of debt securities in 1996 were $163 million and $130 million, respectively, and on sundry securities such gains were $63 million. Gross gains and losses realized on the sale of debt securities in 1995 were $83 million and $46 million, respectively, and on sundry securities such gains were $39 million. At December 31, 1997, stockholders' equity includes an after-tax amount of $286 million, which is based on net unrealized appreciation in the securities available for sale portfolio of $444 million. At December 31, 1996, stockholders' equity includes an after-tax amount of $29 million, which is based on net unrealized appreciation in the securities available for sale portfolio of $48 million. C-16
- ------------------------------------------------------------------------------------------------------------------------------------ NOTE 4: INVESTMENT SECURITIES December 31, 1997 ----------------------------------------------------------------------------------- Gross Unrealized 1 Year 1-5 5-10 After 10 ----------------- Market (In millions) or Less Years Years Years Total Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE U.S. Treasury $ 14 3 1 - 18 - - 18 U.S. Government agencies 171 861 323 24 1,379 28 (2) 1,405 Collateralized mortgage obligations 31 380 42 67 520 9 - 529 State, county and municipal 105 282 302 327 1,016 120 - 1,136 Other 16 56 79 442 593 2 (13) 582 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 337 1,582 747 860 3,526 159 (15) 3,670 - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE Debt securities $ 337 1,582 747 544 3,210 159 (2) 3,367 Sundry securities - - - 316 316 - (13) 303 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 337 1,582 747 860 3,526 159 (15) 3,670 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE Debt securities $ 338 1,623 791 615 3,367 Sundry securities - - - 303 303 - --------------------------------------------------------------------------------------------------- Total $ 338 1,623 791 918 3,670 - --------------------------------------------------------------------------------------------------- December 31, 1996 ----------------------------------------------------------------------------------------- Gross Unrealized 1 Year 1-5 5-10 After 10 ----------------- Market (In millions) or Less Years Years Years Total Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE U.S. Treasury $ 12 23 - 1 36 1 - 37 U.S. Government agencies 108 988 319 5 1,420 25 (4) 1,441 Collateralized mortgage obligations 221 715 1 8 945 8 (1) 952 State, county and municipal 160 388 215 408 1,171 113 (1) 1,283 Other 41 159 50 368 618 5 (8) 615 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 542 2,273 585 790 4,190 152 (14) 4,328 - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE Debt securities $ 542 2,273 585 468 3,868 152 (2) 4,018 Sundry securities - - - 322 322 - (12) 310 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 542 2,273 585 790 4,190 152 (14) 4,328 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE Debt securities $ 547 2,318 608 545 4,018 Sundry securities - - - 310 310 - --------------------------------------------------------------------------------------------------- Total $ 547 2,318 608 855 4,328 - ---------------------------------------------------------------------------------------------------
C-17 - -------------------------------------------------------------------------------- Investment securities with an aggregate carrying value of $1.6 billion at December 31, 1997, are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements. Expected maturities differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Generally, the aging of mortgage-backed securities included in U.S. Government agencies and collateralized mortgage obligations is based on their weighted average maturities at December 31, 1997 and 1996. At December 31, 1997 and 1996, collateralized mortgage obligations had a weighted average yield of 7.08 percent and 6.85 percent, respectively. There were no commitments to purchase or sell investment securities at December 31, 1997 and 1996. Gross gains realized on calls of sundry securities in 1997 were $3 million. Gross gains and losses realized on repurchase agreement underdeliveries and calls of investment securities in 1996 were $5 million and $1 million, respectively. Gross gains and losses realized on repurchase agreement underdeliveries and calls of investment securities in 1995 were $6 million and $1 million, respectively. C-18
- ------------------------------------------------------------------------------------------------------------------------- NOTE 5: LOANS Years Ended December 31, ------------------------ (In millions) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 46,117 41,489 Real estate - construction and other 3,037 3,474 Real estate - mortgage 13,160 14,300 Lease financing 8,610 6,348 Foreign 3,885 2,842 - ------------------------------------------------------------------------------------------------------------------------- Total commercial 74,809 68,453 - ------------------------------------------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 28,998 33,181 Installment loans - Bankcard 3,914 7,295 Installment loans - other 22,271 23,855 Vehicle leasing 5,331 4,529 - ------------------------------------------------------------------------------------------------------------------------- Total retail 60,514 68,860 - ------------------------------------------------------------------------------------------------------------------------- Total loans $ 135,323 137,313 - -------------------------------------------------------------------------------------------------------------------------
Directors and executive officers of the Parent Company and their related interests were indebted to the Corporation in the aggregate amounts of $2.4 billion and $1.3 billion at December 31, 1997 and 1996, respectively. From January 1, 1997, through December 31, 1997, directors and executive officers of the Parent Company and their related interests borrowed $1.5 billion and repaid $376 million. In the opinion of management, these loans do not involve more than the normal risk of collectibility, nor do they present other unfavorable features. At December 31, 1997 and 1996, nonaccrual and restructured loans amounted to $878 million and $919 million, respectively. Interest related to nonaccrual and restructured loans for the years ended December 31, 1997, 1996 and 1995, amounted to $72 million, $77 million and $100 million, respectively. Interest collected on such loans and included in the results of operations for each of the years in the three-year period then ended amounted to $36 million, $22 million and $32 million, respectively. Included in other assets at December 31, 1997, are $4.0 billion of credit card receivables and other unsecured installment loans with a carrying value of $3.6 billion that are being held for accelerated disposition. At December 31, 1997 and 1996, impaired loans, which are included in nonaccrual loans, amounted to $485 million and $553 million, respectively. Included in the allowance for loan losses is $89 million related to $384 million of impaired loans at December 31, 1997, and $51 million related to $312 million of impaired loans at December 31, 1996. The rest of the impaired loans are recorded at or below fair value. For the years ended December 31, 1997 and 1996, the average recorded investment in impaired loans was $479 million and $675 million, respectively; and $37 million and $28 million, respectively, of interest income was recognized on loans while they were impaired. All this income was recognized on loans using a cash-basis method of accounting. Loan fair values are disclosed in Note 17. C-19
- ------------------------------------------------------------------------------------------------------------ NOTE 6: ALLOWANCE FOR LOAN LOSSES Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Balance, beginning of year $ 2,212 2,308 2,259 Provision for loan losses 1,103 678 403 Allowance of loans acquired, transferred to accelerated disposition or sold (596) 50 193 - ------------------------------------------------------------------------------------------------------------ 2,719 3,036 2,855 - ------------------------------------------------------------------------------------------------------------ Loan losses 1,074 1,076 766 Loan recoveries 202 252 219 - ------------------------------------------------------------------------------------------------------------ Loan losses, net 872 824 547 - ------------------------------------------------------------------------------------------------------------ Balance, end of year $ 1,847 2,212 2,308 - ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- NOTE 7: PREMISES AND EQUIPMENT Years Ended December 31, -------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Land $ 548 555 561 Buildings 2,827 2,731 2,591 Equipment 4,241 4,147 2,671 Capitalized leases 56 62 41 - ------------------------------------------------------------------------------------------------------------------------- 7,672 7,495 5,864 Accumulated depreciation and amortization (2,809) (2,612) (2,455) - ------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net $ 4,863 4,883 3,409 - ------------------------------------------------------------------------------------------------------------------------- Net premises and equipment pledged as security for mortgage notes $ 26 62 63 - ------------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 532 456 392 - -------------------------------------------------------------------------------------------------------------------------
C-20
- ------------------------------------------------------------------------------------------------------------------ NOTE 8: FORECLOSED PROPERTIES Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Foreclosed properties $ 129 145 257 - ------------------------------------------------------------------------------------------------------------------ Allowance for foreclosed properties, beginning of year 17 25 42 Provision for foreclosed properties 2 (1) (3) Transfer from allowance for segregated assets - 1 - Dispositions, net (3) (8) (14) - ------------------------------------------------------------------------------------------------------------------ Allowance for foreclosed properties, end of year 16 17 25 - ------------------------------------------------------------------------------------------------------------------ Foreclosed properties, net $ 113 128 232 - ------------------------------------------------------------------------------------------------------------------
C-21 - -------------------------------------------------------------------------------- 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 $ 20,344 18,539 12,954 21,070 22,258 13,325 Federal funds purchased 3,418 3,211 5,294 3,865 5,625 5,801 Fixed and variable rate bank notes 1,114 1,155 2,631 2,076 2,485 2,632 Interest-bearing demand deposits issued to the U. S. Treasury 649 805 623 793 1,183 1,408 Commercial paper 1,737 1,696 2,418 2,467 2,123 2,584 Other 4,419 2,214 1,161 4,765 3,319 3,315 - ------------------------------------------------------------------------------------------ Total $ 31,681 27,620 25,081 - ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997, 1996 and 1995, the combined weighted average interest rates related to federal funds purchased and securities sold under repurchase agreements were 6.14 percent, 6.06 percent and 5.46 percent, respectively. Maturities related to such instruments in each of the years in the three-year period then ended were not greater than 350 days. At December 31, 1997, 1996 and 1995, the weighted average interest rates for fixed and variable rate bank notes were 5.71 percent, 5.53 percent and 5.70 percent, respectively. Weighted average maturities related to such notes in each of the years in the three-year period then ended were 153 days, 109 days and 90 days, respectively. At December 31, 1997, 1996 and 1995, the weighted average interest rates for commercial paper were 5.59 percent, 5.49 percent and 5.49 percent, respectively. Weighted average maturities related to such commercial paper in each of the years in the three-year period then ended were 4 days, 21 days and 21 days, respectively. Included in "Other" are Federal Home Loan Bank borrowings and securities sold short of $286 million and $3.5 billion, respectively, at December 31, 1997; $211 million and $1.9 billion, respectively, at December 31, 1996; and $380 million and $444 million, respectively, at December 31, 1995. Substantially all short-term borrowings are due within 90 days, and accordingly, the carrying amount of such borrowings is deemed to be a reasonable estimate of fair value. C-22
- ------------------------------------------------------------------------------------------------------------------------------- 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-23
- ----------------------------------------------------------------------------------------------------------------------------------- 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 Variable rate medium-term, varying rates and terms to November 5, 2001 1,640 1,638 1,507 1,505 Varying rates and terms to November 1, 2002 62 63 71 71 Floating rate, due October 29, 2002 (par value $500) 500 497 - - 6-5/8%, due June 15, 2000 (par value $150) (b) (d) 150 152 150 150 Subordinated notes Bank, varying rates and terms to December 15, 2036 1,205 1,219 1,397 1,409 6-3/4%, due November 15, 2006 (par value $200) (b) 199 202 198 193 6-5/8%, due March 15, 2005 (par value $175) (b) 174 177 174 170 5-7/8%, due October 15, 2003 (par value $200) (b) 200 195 200 189 6.80%, due June 15, 2003 (par value $150) (b) 149 153 149 154 9-3/8%, due April 15, 2003 (par value $100) (b) 100 113 100 113 6-5/8%, due March 15, 2003 (par value $150) (b) 149 149 149 149 7-7/8%, due July 15, 2002 (par value $100) (b) (d) 100 106 100 105 9-5/8%, due February 15, 2001 (par value $150) (b) 150 164 150 166 9-5/8%, due August 15, 1999 (par value $150) (b) 150 156 149 161 9-5/8%, due June 1, 1999 (par value $100) (b) (d) 100 105 100 107 Floating rate, due April 15, 1998 (c) (d) 100 100 100 100 Floating rate - - 50 50 Floating rate - - 25 25 Subordinated capital notes 9-5/8%, due June 15, 1999 (par value $75) (b) (d) 75 79 74 80 9-7/8%, due May 15, 1999 (par value $75) (b) (d) 75 79 75 82 8-1/2%, due April 1, 1998 (par value $150) (b) 149 150 149 153 10-1/2% collateralized mortgage obligations - - 37 41 - ----------------------------------------------------------------------------------------------------------------------------------- Total debentures and notes of subsidiaries 5,547 5,637 5,262 5,332 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER DEBT Advances from the Federal Home Loan Bank 1,385 1,385 933 933 Mortgage notes and other debt of subsidiaries, varying rates and terms 16 16 51 52 Capitalized leases, rates generally ranging from 7-1/2% to 15.20% 33 33 36 36 - ----------------------------------------------------------------------------------------------------------------------------------- Total other debt 1,434 1,434 1,020 1,021 - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 11,752 12,065 10,815 10,958 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Redeemable in whole or in part at the option of the Parent Company. (b) Not redeemable prior to maturity. (c) Redeemable at the option of the Parent Company. (d) Assumed by the Parent Company. The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. The interest rate on the floating rate extendible notes is 6.0875 percent to March 16, 1998. The interest rate on the floating rate notes due February 24, 1998, is 5.1875 percent. The 7.18 percent subordinated notes are redeemable in whole and not in part at the option of the Parent Company on April 15, 2000 and on each October 15 and April 15 thereafter. The 8 percent subordinated notes due August 15, 2009, are redeemable in whole and not in part at the option of the Parent Company on August 15, 2004. The 8.77 percent subordinated notes are redeemable in whole or in part at the option of the Parent Company on November 15, 1999. The interest rate on the floating rate subordinated notes is 5.93359 percent to January 22, 1998. Fixed rate medium-term senior and subordinated notes can be issued periodically. Interest rates, maturities, redemption and other terms are determined at the date of issuance. At December 31, 1997, the Parent Company had issued medium-term subordinated notes with fixed rates of interest ranging from 9.49 percent to 9.93 percent. C-24 - -------------------------------------------------------------------------------- Holders of the 6.55 percent subordinated debentures and the 7-1/2 percent subordinated debentures may elect to redeem a part or all of such debentures on October 15, 2005, and April 15, 2005, respectively. Otherwise such debentures are not redeemable prior to maturity. Holders of the 6.824 percent/7.754 percent subordinated debentures may elect to redeem a part or all of such debentures on August 1, 2006, or August 1, 2016. Otherwise such debentures are not redeemable prior to maturity. The 9-3/4 percent senior notes were issued by an acquired subsidiary prior to the acquisition, and in accordance with a covenant defeasance related thereto, the subsidiary has announced that it will redeem all such notes on September 2, 1998, the earliest date the notes can be redeemed, at a redemption price equal to 103.375 percent of the principal amount then outstanding plus any accrued and unpaid interest to such date. The subsidiary has deposited with the trustee sufficient cash and securities to effect the redemption of the notes on such date. The interest rate on the floating rate notes due October 29, 2009, is 5.731 percent to January 29, 1998. At December 31, 1997, bank notes of $200 million had floating rates of interest ranging from 5.69 percent to 6.14 percent, and $1.0 billion of the notes had fixed rates of interest ranging from 5.65 percent to 7.80 percent. The interest rate on the floating rate subordinated notes is 5.875 percent to April 15, 1998. In April 1998, $1.9 billion of senior or subordinated debt securities or equity securities remained available for issuance under a shelf registration statement filed with the Securities and Exchange Commission. The weighted average rate paid for long-term debt in 1997, 1996 and 1995 was 6.47 percent, 6.30 percent and 6.72 percent, respectively. Interest rate swap agreements entered into at the time of issuance of certain long-term debt reduced related interest expense. Long-term debt maturing in each of the five years subsequent to December 31, 1997, is as follows (in millions): 1998, $2,830; 1999, $1,691; 2000, $772; 2001, $494; and 2002, $1,116. C-25 - -------------------------------------------------------------------------------- NOTE 11: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES First Union Institutional Capital I, a statutory business trust (the "Trust") created by the Parent Company had outstanding at December 31, 1997 and 1996, $495 million (par value $500 million) of 8.04% Capital Securities which will mature on December 1, 2026 (the "Capital Securities"). The principal assets of the Trust are $515 million of the Parent Company's 8.04% Junior Subordinated Deferrable Interest Debentures, which will mature on December 1, 2026 (the "Subordinated Debentures"). Additionally, the Trust has issued $15 million of common securities (the "Common Securities") to the Parent Company. The estimated fair value of each of the Capital Securities and the related Subordinated Debentures at December 31, 1997 and 1996, was $536 million and $500 million, respectively. The Capital Securities, the Subordinated Debentures and the Common Securities are redeemable in whole or in part on or after December 1, 2006, or at any time in whole but not in part from the date of issuance on the occurrence of certain events. On January 6, 1997, and January 16, 1997, First Union Institutional Capital II and First Union Capital I, respectively, both statutory business trusts (the "Trusts") created by the Parent Company, issued $250 million of 7.85% Capital Securities and $250 million of 7.935% Capital Securities, Series A, respectively, (together the "Securities") which will mature on January 1, 2027, and January 15, 2027, respectively. The principal combined assets of the Trusts are $515 million of the Parent Company's subordinated debentures with like maturities and like interest rates to the Securities. Additionally, the Trusts have issued $15 million in the aggregate of common securities to the Parent Company. The 7.85% Capital Securities and the 7.935% Capital Securities, Series A, both had $248 million outstanding at December 31, 1997 and estimated fair values of $263 million and $265 million, respectively. The related subordinated debentures had a combined estimated fair value of $528 million. The Securities, the assets of the Trusts and the common securities issued by the Trusts are redeemable in whole or in part on or after January 1, 2007, and January 15, 2007, respectively, or at any time in whole but not in part from the date of issuance on the occurrence of certain events. The Capital Securities and the Securities may be included in tier 1 capital for regulatory capital adequacy determination purposes. Distributions to the holders of the Capital Securities and the Securities are included in sundry expense. The obligations of the Parent Company with respect to the issuance of the Capital Securities and the Securities constitute a full and unconditional guarantee by the Parent Company of the Trusts' obligations with respect to the Capital Securities or Securities. Subject to certain exceptions and limitations, the Parent Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related Capital Securities or Securities. - -------------------------------------------------------------------------------- Additionally, an acquired bank subsidiary (the "Acquired Bank") issued through a statutory business trust, trust capital securities (the "Acquired Bank Capital Securities") and the Acquired Bank issued related junior subordinated deferrable interest rate debentures, all with terms substantially the same as the Capital Securities and Subordinated Debentures issued by the Parent Company. At December 31, 1997 and 1996, the Acquired Bank had outstanding $299 million and $294 million, respectively, of 8% Acquired Bank Capital Securities (par value $300 million), which will mature on December 15, 2026. At December 31, 1997, the Acquired Bank had outstanding $147 million (par value $150 million) and $298 million (par value $300 million) of Libor-indexed floating rate Acquired Bank Capital Securities, which will mature on January 15, 2027, and February 15, 2027, respectively. The aggregate estimated fair value of the Acquired Bank Capital Securities at December 31, 1997 and 1996, was $737 million and $296 million, respectively. C-26
- ------------------------------------------------------------------------------------------------------------------------------- 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-27
- ------------------------------------------------------------------------------------------------------------------------------------ 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 Options granted $5.06-$31.79 9,378 2,647 (3,566) (251) 8,208 22.84 5,809 - -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK SPLIT All common stock and per share data has been restated to reflect a two-for one stock split that was paid on July 31, 1997. OPTION AND OTHER PLANS Under the terms of the 1984, 1988, 1992 and 1996 Master Stock Plans (the "Plans"), stock options may be periodically granted to key personnel at a price not less than the fair market value of the shares at the date of grant. The exercise periods for options granted under the Plans are (i) determined at the date of grant, (ii) not exercisable for one year following the date of grant, and (iii) for periods no longer than ten years. Restricted stock may also be granted under the Plans. The stock is subject to certain restrictions over a specified period (generally, five years), during which time the holder is entitled to full voting rights and dividend privileges. Compensation cost recognized for restricted stock during 1997 and 1996 was $43 million and $23 million, respectively. Employees, based on their eligibility and compensation, were granted options to purchase shares of common stock under the 1996 Employee Stock Purchase Plan (the "Plan") at a price equal to 85 percent of the fair market value of the shares as of the Plan date. From the Plan date, and generally for approximately a two-year period thereafter, employees have the option to purchase all or a portion of the optioned shares. The Plan provides that at the end of such two-year period (the "Final Purchase Date"), the option price will be the lesser of 85 percent of the fair market value as of the Plan date or 85 percent of the fair market value as of the Final Purchase Date. Under the terms of the Dividend Reinvestment Plan, a participating stockholder's cash dividends and optional cash payments are used to purchase Parent Company common stock. Under the terms of the Parent Company's merger agreements with certain acquired companies, all options with respect to their common stock were converted into options to purchase Parent Company common stock. In accordance with a Shareholder Protection Rights Agreement dated December 18, 1990, as amended, the Parent Company issued a dividend of one right for each share of Parent Company common stock outstanding as of such date. These continue to attach to all common stock issued after December 18, 1990. The rights will become exercisable if any person or group commences a tender or exchange offer that would result in (i) their becoming the beneficial owner of 15 percent or more of the Parent Company's common stock, or (ii) any person being determined by the Federal Reserve Board to control the Corporation within the meaning of the Bank Holding Company Act of 1956, as amended. C-28 - -------------------------------------------------------------------------------- The rights will also become exercisable if a person or group acquires beneficial ownership of 15 percent or more of the Parent Company's common stock. Each right (other than rights owned by such person or group) will entitle its holder to purchase, for an exercise price of $105.00, a number of shares of the Parent Company's common stock (or at the option of the Board of Directors, shares of junior participating class A preferred stock) having a market value of twice the exercise price. If any person or group acquires beneficial ownership of between 15 percent and 50 percent of the Parent Company's common stock, the Board of Directors may, at its option, exchange for each outstanding right (other than rights owned by such person or group) either two shares of common stock or two one-hundredths of a share of junior participating class A preferred stock having economic and voting terms similar to two shares of common stock. The rights are subject to adjustment if certain events occur, and they will expire on December 28, 2000, if not redeemed or terminated sooner. On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended ("FAS 123"), which requires either the (i) fair value of employee stock-based compensation plans be recorded as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans, or (ii) impact of such fair value on net income and earnings per share be disclosed on a pro forma basis in a footnote to financial statements for awards granted after December 15, 1994, if the accounting for such awards continues to be in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). The Corporation has elected to continue such accounting under the provisions of APB 25. As determined in accordance with FAS 123, certain pro forma information which is based on the estimated fair value of the Corporation's outstanding stock options for each of the three years ended December 31, 1997, 1996 and 1995, is as follows: pro forma net income, $2.669 billion, $2.194 billion and $2.156 billion, respectively; pro forma basic earnings per common share, $2.79, $2.25 and $2.20, respectively; and pro forma diluted earnings per common share, $2.76, $2.23 and $2.15, respectively. The Black-Scholes option pricing model methodology was used in preparing such pro forma information. Option pricing models require the use of highly subjective assumptions, including expected stock price volatility, which when changed can materially affect fair value estimates. Accordingly, the model does not necessarily provide a reliable single measure of the fair value of the Corporation's stock options. CAPITAL RATIOS Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4 percent and a minimum ratio of total capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3 percent to 5 percent. At December 31, 1997, the Corporation's tier 1 capital ratio, total capital ratio and leverage ratio were 8.43 percent, 13.02 percent and 7.09 percent, respectively. At December 31, 1996, such ratios were 7.91 percent, 12.58 percent and 6.74 percent, respectively. The Corporation does not anticipate or foresee any conditions that would reduce such ratios to levels at or below minimum or that would cause its deposit-taking banking affiliates to be less than well capitalized. Additional information related to the consolidated capital ratios of the Corporation for each of the years in the two-year period ended December 31, 1997, can be found in "Management's Analysis of Operations" - "Stockholders' Equity; Regulatory Capital" on page 18 and in Table 18 on page T-18, which are incorporated herein by reference. EARNINGS PER COMMON SHARE The reconciliation between basic and diluted earings per common share is below.
Years Ended December 31, ------------------------------------------------ (Dollars in millions, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Basic Net income $ 2,709 2,273 2,196 Preferred stock dividends - (9) (26) - ------------------------------------------------------------------------------------------------------------------------ Net income applicable to common stockholders $ 2,709 2,264 2,170 - ------------------------------------------------------------------------------------------------------------------------ Basic earnings per common share $ 2.84 2.33 2.21 - ------------------------------------------------------------------------------------------------------------------------ Average common shares (In thousands) 955,241 973,712 979,852 - ------------------------------------------------------------------------------------------------------------------------ Diluted Net income applicable to common stockholders $ 2,709 2,264 1,270 Dividends on convertible preferred stock - - 9 - ------------------------------------------------------------------------------------------------------------------------ Net income applicable to common stockholders $ 2,709 2,264 2,179 - ------------------------------------------------------------------------------------------------------------------------ Diluted earnings per common share $ 2.80 2.30 2.17 - ------------------------------------------------------------------------------------------------------------------------ Average common shares (In thousands) 955,241 973,712 979,852 Options 11,551 9,043 12,461 Convertible preferred stock - - 8,832 - ------------------------------------------------------------------------------------------------------------------------ Average common shares - diluted (In thousands) 966,792 982,755 1,001,145 - ------------------------------------------------------------------------------------------------------------------------
C-29 - -------------------------------------------------------------------------------- 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 $ 2,909 2,649 2,514 Pension cost 58 81 42 Savings plan 87 80 78 Other benefits 496 467 477 - ----------------------------------------------------------------------------------------------------------- Total $ 3,550 3,277 3,111 - -----------------------------------------------------------------------------------------------------------
Pension expense for nonqualified plans was $19 million, $13 million and $12 million for the years ended December 31, 1997, 1996 and 1995, respectively. The accumulated benefit obligation for nonqualified plans was $121 million, $101 million and $62 million for the years ended December 31, 1997, 1996 and 1995, respectively, including vested benefits of $120 million, $100 million and $61 million, respectively. Such plans have no assets. The assumed rates used in actuarial computations were the same as those used in the qualified pension plan computations. The Corporation has tax-qualified defined benefit pension plans (together, the "Plan") covering substantially all of its employees with one year of service. The benefits are based on years of service and the employee's highest five-year average compensation. Contributions are made each year to a trust in an amount that is determined by an actuary to meet the minimum requirements of ERISA and to fall at or below the maximum amount that can be deducted on the Corporation's tax return. At December 31, 1997, Plan assets include U.S. Government and Government agency securities, equity securities and other investments. Also included are two million shares of the Parent Company's common stock. All Plan assets are held by First Union National Bank (the "Bank") in a Bank-administered trust fund. The Plan's funded status for each of the years in the three-year period ended December 31, 1997, is presented below.
Years Ended December 31, ------------------------------------ (In millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Accumulated benefit obligation including vested benefits of $1,598, 1997; $1,414, 1996; and $1,290, 1995 $ 1,686 1,495 1,387 - ---------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation for service rendered to date (2,059) (1,852) (1,757) Plan assets at fair value 2,447 2,117 1,884 - ---------------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 388 265 127 Prior service cost 48 69 54 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 71 89 129 Unrecognized net transition asset (174) (113) (3) - ---------------------------------------------------------------------------------------------------------------------------------- Prepaid pension cost, net $ 333 310 307 - ---------------------------------------------------------------------------------------------------------------------------------- ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS Discount rate at beginning of year 7.50-7.75 % 7.00-7.50 8.00-8.75 Discount rate at end of year 7.25 7.50-7.75 7.00-7.50 Weighted average rate of increase in future compensation levels 4.25-5.00 4.50-5.00 4.50-6.00 Long-term average rate of return 8.50-9.00 % 8.50 7.50-9.75 - ----------------------------------------------------------------------------------------------------------------------------------
C-30 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 $ 84 93 67 Interest cost on projected benefit obligation 138 128 115 Actual (return) on Plan assets (398) (232) (316) Net amortization and deferral 215 80 164 - ------------------------------------------------------------------------------------------------------------------------- Net pension cost $ 39 69 30 - -------------------------------------------------------------------------------------------------------------------------
The Corporation and its subsidiaries provide certain health care and life insurance benefits for retired employees. Substantially all the Corporation's employees may become eligible for these benefits if they reach retirement age while working for the Corporation. Life insurance benefits are provided through an insurance company. Medical and other benefits are provided through a tax-exempt trust formed by the Corporation. The Corporation recognizes the cost of providing these benefits by expensing annual insurance premiums, trust funding allocations and administrative expenses. The amount expensed for group insurance for active employees in 1997, 1996 and 1995 was $157 million, $157 million and $152 million, respectively. The status of postretirement benefits other than pensions and certain amounts recognized in the Corporation's consolidated financial statements for each of the years in the three-year period ended December 31, 1997, are presented below.
Years Ended December 31, ------------------------------------------- (In millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF POSTRETIREMENT BENEFITS OBLIGATION Retirees $ 235 256 351 Fully eligible active employees 9 6 9 Other active participants 106 81 87 - ---------------------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation $ 350 343 447 - ---------------------------------------------------------------------------------------------------------------------------------- Plan assets at fair value 66 58 53 Projected benefit obligation in excess of plan assets $ 284 285 394 Unrecognized prior service cost 32 45 10 Unrecognized net gain (loss) from past experience different from that assumed and effects of changes in assumptions 104 92 5 Unrecognized net transition obligation (60) (66) (84) - ---------------------------------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 360 356 325 - ---------------------------------------------------------------------------------------------------------------------------------- ASSUMED RATES USED IN ACTUARIAL COMPUTATIONS Weighted average discount rate 7.25 % 7.50-7.75 7.00-7.50 Rate of increase in future compensation levels, depending on age 4.25-5.00 4.50-5.00 4.00-9.00 Health care cost trend rate Prior to age 65 5.50-6.00 5.50-11.67 5.00- grading 12.25 to 5.50 After age 65 5.00-8.75 10.67-11.50 5.00- grading grading to 5.50 % to 5.50 11.25 - ---------------------------------------------------------------------------------------------------------------------------------- EFFECT OF ONE PERCENT INCREASE IN HEALTH CARE COST TREND RATE Service costs $ - - - Interest costs 1 2 2 Accumulated postretirement benefit obligation $ 15 17 29 - ---------------------------------------------------------------------------------------------------------------------------------- POSTRETIREMENT COSTS Service cost-benefits earned during the period $ 8 8 7 Interest cost on projected benefit obligation 26 28 31 Actual (return) on Plan assets (2) (3) (2) Amortization of transition obligation (3) 0 2 - ---------------------------------------------------------------------------------------------------------------------------------- Net cost $ 29 33 38 - ----------------------------------------------------------------------------------------------------------------------------------
C-31 - -------------------------------------------------------------------------------- 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 $ 480 622 720 State 39 73 60 - ------------------------------------------------------------------------------------------------------------------------- Total 519 695 780 Foreign 12 12 8 - ------------------------------------------------------------------------------------------------------------------------- Total 531 707 788 - ------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX EXPENSE Federal 526 544 373 State 27 10 52 - ------------------------------------------------------------------------------------------------------------------------- Total 553 554 425 - ------------------------------------------------------------------------------------------------------------------------- Total $ 1,084 1,261 1,213 - -------------------------------------------------------------------------------------------------------------------------
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 $ 3,793 $ 3,534 $ 3,409 -------- -------- ----------- Tax at federal income tax rate $ 1,327 35.0 % $ 1,237 35.0 % $ 1,193 35.0 % Reasons for difference in federal income tax rate and effective tax rate Tax-exempt interest, net of cost to carry (53) (1.4) (62) (1.7) (80) (2.3) Non-taxable distributions from corporate reorganizations (264) (7.0) - - - - State income taxes, net of federal tax benefit 43 1.1 54 1.5 73 2.1 Goodwill amortization 50 1.3 40 1.1 37 1.1 Change in the beginning-of-the-year deferred tax assets valuation allowance (11) (0.3) (12) (0.3) 3 0.1 Other items, net (8) (0.2) 4 0.1 (13) (0.4) - ---------------------------------------------------------------------------------------------------------------------------- Total $ 1,084 28.5 % $ 1,261 35.7 % $ 1,213 35.6 % - ----------------------------------------------------------------------------------------------------------------------------
C-32 - -------------------------------------------------------------------------------- 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 $ 303 131 100 Unrealized gain on debt and equity securities 154 15 100 Intangible assets 115 99 84 Leasing activities 2,082 1,527 994 Loan products 46 25 8 Prepaid pension assets 128 105 91 Loan loss reserve recapture 30 49 72 Other 126 148 128 - --------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 2,984 2,099 1,577 - --------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAX ASSETS Provision for loan losses, net (857) (803) (823) Accrued expenses, deductible when paid (524) (413) (406) Foreclosed properties (7) (9) (16) Sale and leaseback transactions (15) (10) (17) Deferred income (18) (25) (22) Purchase accounting adjustments (primarily loans and securities) (79) (144) (63) Net operating loss carryforwards (71) (55) (38) First American segregated assets - (4) (20) Other (162) (132) (102) - --------------------------------------------------------------------------------------------------------------------------------- Total deferred income tax assets (1,733) (1,595) (1,507) - --------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets valuation allowance 24 35 43 - --------------------------------------------------------------------------------------------------------------------------------- Net deferred income tax liabilities $ 1,275 539 113 - ---------------------------------------------------------------------------------------------------------------------------------
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 $139 million, $(85) million and $258 million, respectively, have been recorded directly to stockholders' equity. Purchase acquisitions also increased (decreased) the net deferred tax liability by $44 million, $(43) million and $1 million in 1997, 1996 and 1995, respectively. The realization of deferred tax assets may be based on the utilization of carrybacks to prior taxable periods, the anticipation of future taxable income in certain periods and the utilization of tax planning strategies. Management has determined that it is more likely than not that the deferred tax assets can be supported by carrybacks to federal taxable income in excess of $2.4 billion in the two-year federal carryback period and by expected future taxable income that will far exceed amounts necessary to fully realize remaining deferred tax assets resulting from net operating loss carryforwards and from the scheduling of temporary differences. The valuation allowance primarily relates to certain state temporary differences and to federal and state net operating loss carryforwards. To the extent that the valuation allowance attributable to purchase acquisitions in the amount of $22 million is subsequently recognized, such income tax benefit will reduce goodwill. C-33 - -------------------------------------------------------------------------------- At December 31, 1997, the Corporation has net operating loss carryforwards of $40 million which are available to offset future federal taxable income through 2007, subject to annual limitations. The Corporation also has net operating loss carryforwards of approximately $1.7 billion, which are available to offset future state taxable income through 2012. Income tax expense related to securities available for sale transactions was $11 million, $14 million, and $14 million in 1997, 1996 and 1995, respectively. Income tax expense related to investment security transactions was $1 million, $1 million, and $2 million in 1997, 1996 and 1995, respectively. The Internal Revenue Service (the "IRS") is examining the Corporation's federal income tax returns for the years 1991 through 1996, and the IRS is examining federal income tax returns for certain acquired subsidiaries for periods prior to acquisition. In 1995, the IRS examination of the Corporation's federal income tax returns for the years through 1990 was settled with no material impact to the Corporation's financial position or results of operations. In 1996 and 1995, tax liabilities for certain acquired subsidiaries for periods prior to their acquisition by the Corporation were settled with the IRS with no significant impact on the Corporation's financial position or results of operations. C-34 - -------------------------------------------------------------------------------- NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to conduct lending activities. These financial instruments include commitments to extend credit; standby and commercial letters of credit; forward and futures contracts; interest rate swaps; options, interest rate caps, floors, collars and swaptions; foreign currency and exchange rate swap commitments; commodity swaps; and commitments to purchase and sell securities. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the consolidated financial statements. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and commercial letters of credit is represented by the contract amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward and futures contracts, interest rate swaps, options, interest rate caps, floors, collars and swaptions, the contract or notional amounts do not represent the exposure to credit loss. The Corporation controls the credit risk of its forward and futures contracts, interest rate swap agreements, foreign currency and exchange rate swaps, and securities transactions through collateral arrangements, credit approvals, limits and monitoring procedures. Our policy requires all swaps and options to be governed by an International Swaps and Derivatives Association Master Agreement. Bilateral collateral agreements are in place for substantially all dealer counterparties. Collateral for dealer transactions is delivered by either party when the credit risk associated with a particular transaction, or group of transactions to the extent netting exists, exceeds defined thresholds of credit risk. Thresholds are determined based on the strength of the individual counterparty, and they are bilateral. As of December 31, 1997, the total credit risk in excess of thresholds was $301 million. This amount does not include credit risk related to CoreStates dealer transactions and trading activities. The fair value of collateral held approximated the total credit risk in excess of the thresholds. For non-dealer transactions, the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. The carrying amount of financial instruments used for interest rate risk management includes amounts for deferred gains and losses. Deferred gains and losses were each $14 million at December 31, 1997. Net gains of $3 million will increase net interest income in 1998. Net losses of $3 million in the aggregate will reduce net interest income in subsequent years. Additional information related to derivative financial instruments and financial instruments held or issued for the purposes of trading activity or other than for trading can be found below and in Tables 19 through Table 21 on pages T-19 through T-28, which are incorporated herein by reference. Off-balance sheet derivative and other financial instruments and their related fair values as of December 31, 1997 and 1996, are presented below. C-35
- ---------------------------------------------------------------------------------------------------------------------------------- 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 $ - 180 87,707 - 130 71,813 Standby and commercial letters of credit - 26 9,275 - 20 8,069 FINANCIAL INSTRUMENTS WHOSE CONTRACT OR NOTIONAL AMOUNTS EXCEED THE AMOUNT OF CREDIT RISK Forward and futures contracts Trading and dealer activities 81 79 28,727 62 62 20,839 Interest rate risk management Asset rate conversions - 1 725 - 1 57 Liability rate conversions - 6 459 - 482 - Asset hedges - - - - 5 662 Rate sensitivity hedges - (6) 15,440 - (1) 34,228 Interest rate swap agreements Trading and dealer activities (204) (225) 45,950 (45) (44) 24,818 Interest rate risk management Asset rate conversions 13 189 16,287 11 153 24,088 Liability rate conversions 19 309 10,627 32 129 12,322 Purchased options, interest rate caps, floors, collars and swaptions Trading and dealer activities 250 254 12,424 68 72 10,819 Interest rate risk management Asset rate conversions 3 15 702 4 5 717 Liability rate conversions 1 - 336 2 1 357 Rate sensitivity hedges 44 52 5,384 19 32 14,604 Written options, interest rate caps, floors, collars and swaptions Trading and dealer activities (136) (99) 15,064 (56) (52) 10,579 Foreign currency and exchange rate swap commitments Trading and dealer activities 44 48 7,462 2 1 5,915 Foreign currency risk management - - 56 - - - Commodity swaps Trading and dealer activities - - 24 3 3 67 Commitments to purchase trading securities (1) (1) 439 (2) (2) 616 Commitments to sell trading securities $ (1) (3) 1,248 1 1 605 - ----------------------------------------------------------------------------------------------------------------------------------
C-36 - -------------------------------------------------------------------------------- Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and they may require payment of a fee. Since many of the commitments are expected to expire without being drawn on, the total commitment amounts do not necessarily represent future cash requirements. Standby and commercial letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Except for short-term guarantees of $6.2 billion, guarantees extend for more than one year, and they expire in varying amounts primarily through 2019. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation holds various assets as collateral supporting those commitments for which collateral is deemed necessary. Forward and futures contracts are contracts for delayed deliveries of securities or money market instruments in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. The Corporation enters into a variety of interest rate contracts, including options, interest rate caps, floors, collars and swaptions written, and interest rate swap agreements, in its trading activities and in managing its interest rate exposure. Interest rate caps, floors, collars and swaptions written by the Corporation enable customers to transfer, modify or reduce their interest rate risk. Interest rate options are contracts that allow the holder of the option to purchase or sell a financial instrument at a specified price and within a specified period of time from the seller or writer of the option. As a writer of options, the Corporation receives a premium at the outset and bears the risk of an unfavorable change in the price of the financial instrument underlying the option. Interest rate swap transactions generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts but also the interest rate risk associated with unmatched positions. Notional principal amounts often are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. The Corporation also acts as an intermediary in arranging interest rate swap transactions for customers. Generally, futures contracts are exchange traded, and all other off-balance sheet instruments are transacted in the over-the-counter markets. In the normal course of business, the Corporation has entered into certain transactions that have recourse options. These recourse options, if acted on, would not have a material impact on the Corporation's financial position. Substantially all time drafts accepted by December 31, 1997, met the requirements for discount with Federal Reserve Banks. Average daily Federal Reserve Bank balance requirements for the year ended December 31, 1997, amounted to $472 million. Minimum operating lease payments due in each of the five years subsequent to December 31, 1997, are as follows (in millions): 1998, $153; 1999, $136; 2000, $122; 2001, $108; 2002, $101; and subsequent years, $661. Rental expense for all operating leases for the three years ended December 31, 1997, was $316 million, 1997; $314 million, 1996; and $287 million, 1995. The Parent Company and certain of its subsidiaries have been named as defendants in various legal actions arising from their normal business activities in which damages in various amounts are claimed. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, based on the opinions of counsel, any such liability will not have a material impact on the Corporation's consolidated financial position. C-37 - -------------------------------------------------------------------------------- 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 $ 21,888 21,888 21,612 21,612 Trading account assets 5,952 5,952 4,602 4,602 Securities available for sale 23,524 23,524 19,199 19,199 Investment securities 3,526 3,670 4,190 4,328 Loans Commercial, financial and agricultural 45,563 45,825 40,988 41,112 Real estate - construction and other 3,032 3,081 3,470 3,543 Real estate - commercial mortgage 13,143 13,361 14,287 14,567 Lease financing 5,786 5,786 4,398 4,399 Foreign 3,875 3,874 2,834 2,831 Real estate - mortgage 28,980 29,420 33,171 33,555 Installment loans - Bankcard 3,914 3,981 7,295 7,397 Installment loans - other and Vehicle leasing 27,394 27,477 28,204 28,219 - ---------------------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 131,687 132,805 134,647 135,623 Allowance for loan losses (1,847) - (2,212) - - ---------------------------------------------------------------------------------------------------------------------------- Loans, net 129,840 132,805 132,435 135,623 - ---------------------------------------------------------------------------------------------------------------------------- Other assets $ 9,313 9,313 3,578 3,586 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 31,005 31,005 29,713 29,713 Interest-bearing deposits Savings and NOW accounts 37,281 37,281 35,892 35,892 Money market accounts 21,240 21,240 21,193 21,193 Other consumer time 37,324 37,867 42,457 43,123 Foreign 3,928 3,928 3,307 3,307 Other time 6,299 6,398 3,867 3,883 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits 137,077 137,719 136,429 137,111 Short-term borrowings 31,681 31,681 27,620 27,620 Other liabilities 3,690 3,690 2,779 2,779 Long-term debt 11,752 12,065 10,815 10,958 Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures $ 1,735 1,801 789 796 - ----------------------------------------------------------------------------------------------------------------------------
C-38 - -------------------------------------------------------------------------------- Estimated fair values for the commercial loan portfolio were based on weighted average discount rates ranging from 6.57 percent to 8.68 percent and 6.18 percent to 8.95 percent at December 31, 1997 and 1996, respectively, and for the retail portfolio from 7.24 percent to 14.71 percent and 8.33 percent to 14.14 percent, respectively. The fair value of noninterest-bearing deposits, savings and NOW accounts, and money market accounts is the amount payable on demand at December 31, 1997 and 1996. The fair value of fixed-maturity certificates of deposit is estimated based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by deposit liabilities compared to the cost of borrowing funds in the market. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Corporation has a substantial trust department, which includes mutual fund activities, that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, brokerage network, deferred tax assets, premises and equipment, and goodwill. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates, and they have not been considered in any of the estimates. The fair value of off-balance sheet derivative financial instruments has not been considered in determining on-balance sheet fair value estimates. C-39 - -------------------------------------------------------------------------------- NOTE 18: FIRST UNION CORPORATION (PARENT COMPANY) The Parent Company's principal assets are its investments in its subsidiaries, interest-bearing balances with bank subsidiaries, securities purchased under resale agreements, securities available for sale and loans to subsidiaries. The significant sources of income of the Parent Company are dividends from its subsidiaries, interest and fees charged on loans made to its subsidiaries, interest on eurodollars purchased from bank subsidiaries and interest on securities available for sale. Additionally, a significant amount of sundry income includes fees the Parent Company charges to its subsidiaries for providing various services. In addition, the Parent Company serves as the primary source of funding for the mortgage banking and other activities of its nonbank subsidiaries, including Wheat First Securities, Inc. Lines of credit in the aggregate amount of $350 million are available to the Parent Company at an annual facility fee of 8.00 basis points to 18.75 basis points and a utilization fee of 6.25 basis points. The facility fee is based on the daily average commitment amount, and the utilization fee is based on the daily average principal amount outstanding. Generally, interest rates will be determined when credit line usage occurs, and they will vary based on the type of loan extended to the Parent Company. The lines of credit expire in December 1998. Certain regulatory and other requirements restrict the (i) lending of funds by the bank subsidiaries to the Parent Company and to the Parent Company's nonbank subsidiaries, and (ii) amount of dividends that can be paid to the Parent Company by the bank subsidiaries and certain of the Parent Company's other subsidiaries. On December 31, 1997, the Parent Company was indebted to subsidiary banks in the amount of $375 million that, under the terms of revolving credit agreements, was collateralized by certain interest-bearing balances, securities available for sale, loans, premises and equipment and was payable on demand. On such date, a subsidiary bank had loans outstanding to Parent Company nonbank subsidiaries in the amount of $139 million that, under the terms of a revolving credit agreement, were collateralized by securities available for sale and certain loans and were payable on demand. The Parent Company has guaranteed certain borrowings of its subsidiaries that at December 31, 1997, amounted to $3.3 billion. Industry regulators limit dividends that can be paid by the Corporation's subsidiaries. National banks are limited in their ability to pay dividends in two principal ways. First, dividends cannot exceed the bank's undivided profits, less statutory bad debt in excess of the bank's allowance for loan losses; and second, in any year, dividends may not exceed a bank's net profits for that year, plus its retained earnings from the preceding two years, less any required transfers to surplus. The Parent Company's subsidiaries, including its bank subsidiaries, had available retained earnings of $458 million at December 31, 1997, for the payment of dividends to the Parent Company without such regulatory or other restrictions. Subsidiary net assets of $10.7 billion were restricted from being transferred to the Parent Company at December 31, 1997, under such regulatory or other restrictions. Dividends from subsidiaries includes $835 million in equity transfers to the Parent Company related to internal bank consolidations in 1997. At both December 31, 1997 and 1996, the estimated fair value of the Parent Company's loans was $2.8 billion. See Note 11 for information related to the Parent Company's junior subordinated deferrable interest debentures. The Parent Company's condensed balance sheets as of December 31, 1997 and 1996, and the related condensed statements of income and cash flows for the three-year period ended December 31, 1997, are presented below. The condensed financial statements of the Parent Company as of December 31, 1996, and for the two-year period then ended reflect the November 28, 1997, merger of Signet's parent company into the Parent Company on a net basis within the investment in wholly owned subsidiaries and equity in undistributed net income of subsidiaries line classifications, as appropriate. Information with respect to CoreStates has been appropriately classified within the condensed financial statements of the Parent Company on a gross basis. C-40
- -------------------------------------------------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS December 31, ------------------------ (In millions) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing balances with bank subsidiary $ 4,215 2,161 Securities purchased under resale agreements 381 306 - -------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 4,596 2,467 - -------------------------------------------------------------------------------------------------------------------------- Securities available for sale (amortized cost $452 in 1997; $354 in 1996) 453 363 Investment securities 28 - Loans, net of unearned income ($1 in 1997 and $1 in 1996) 154 108 Allowance for loan losses - (1) - -------------------------------------------------------------------------------------------------------------------------- Loans, net 154 107 - -------------------------------------------------------------------------------------------------------------------------- Loans due from subsidiaries Banks 1,912 1,786 Bank holding companies 174 311 Other subsidiaries 531 552 Investments in wholly owned subsidiaries Arising from investments in equity in undistributed net income of subsidiaries Banks 12,346 9,557 Bank holding companies 2,357 5,288 Other subsidiaries 1,274 1,071 - -------------------------------------------------------------------------------------------------------------------------- 15,977 15,916 Arising from purchase acquisitions 101 93 - -------------------------------------------------------------------------------------------------------------------------- Total investments in wholly owned subsidiaries 16,078 16,009 - -------------------------------------------------------------------------------------------------------------------------- Other assets 628 497 - -------------------------------------------------------------------------------------------------------------------------- Total $ 24,554 22,092 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits 1 - Commercial paper 871 1,021 Other short-term borrowings with affiliates 1,114 651 Other liabilities 901 418 Long-term debt 5,377 4,864 Junior subordinated deferrable interest debentures 1,021 510 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 9,285 7,464 Stockholders' equity 15,269 14,628 - -------------------------------------------------------------------------------------------------------------------------- Total $ 24,554 22,092 - --------------------------------------------------------------------------------------------------------------------------
C-41
- ----------------------------------------------------------------------------------------------------------------------- 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 29 22 15 Interest and dividends on investment securities 3 - - Other interest income from subsidiaries 172 73 84 - ----------------------------------------------------------------------------------------------------------------------- Total interest income 381 253 233 - ----------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on short-term borrowings 95 74 91 Interest on long-term debt 434 301 256 - ----------------------------------------------------------------------------------------------------------------------- Total interest expense 529 375 347 - ----------------------------------------------------------------------------------------------------------------------- Net interest income (148) (122) (114) Provision for loan losses (1) - - - ----------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (147) (122) (114) - ----------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Dividends from subsidiaries Banks 2,226 1,268 881 Bank holding companies 452 1,693 275 Other subsidiaries 116 42 102 Securities available for sale transactions 6 - 26 Investment security transactions 3 - - Sundry income 723 529 503 - ----------------------------------------------------------------------------------------------------------------------- Total noninterest income 3,526 3,532 1,787 - ----------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE 650 561 498 - ----------------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) and equity in undistributed net income of subsidiaries 2,729 2,849 1,175 Income taxes (benefits) 13 (33) (26) - ----------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 2,716 2,882 1,201 Equity in undistributed net income of subsidiaries (7) (609) 995 - ----------------------------------------------------------------------------------------------------------------------- Net income 2,709 2,273 2,196 Dividends on preferred stock - 9 26 - ----------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders $ 2,709 2,264 2,170 - -----------------------------------------------------------------------------------------------------------------------
C-42
- ------------------------------------------------------------------------------------------------------------------------------ CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------------------- (In millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 2,709 2,148 2,085 Adjustments to reconcile net income to net cash provided (used) by operating activities Equity in undistributed net income of subsidiaries 7 734 (884) Accretion and revaluation losses on securities available for sale 2 1 (4) Provision for loan losses (1) - - Securities available for sale transactions (6) - (26) Investment security transactions (3) - - Depreciation and amortization 13 10 6 Deferred income taxes (benefits) (46) 5 - Other assets, net (79) 131 (262) Other liabilities, net 828 42 33 - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 3,424 3,071 948 - ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 161 104 99 Purchases of securities available for sale (335) (171) (125) Sales of investment securities 153 718 118 Purchases of investment securities (96) (707) (258) Advances to subsidiaries, net 402 (316) (599) Investments in subsidiaries 196 (581) 553 Longer-term loans originated or acquired (382) (244) (101) Principal repaid on longer-term loans 336 212 97 Purchases of premises and equipment, net (18) (26) (7) - ------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities 417 (1,011) (223) - ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase (decrease) in cash realized from Deposits 1 - - Commercial paper (150) 79 546 Other short-term borrowings, net 104 190 86 Issuance of junior subordinated deferrable interest debentures 511 510 - Issuances of long-term debt 525 852 1,442 Payments of long-term debt (17) (364) (273) Sales of common stock 815 367 348 Purchases of preferred stock - - (7) Redemption of preferred stock - (109) - Purchases of common stock (2,360) (1,584) (1,554) Cash dividends paid (1,141) (1,040) (869) - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (1,712) (1,099) (281) - ------------------------------------------------------------------------------------------------------------------------------ Increase in cash and cash equivalents 2,129 961 444 Cash and cash equivalents, beginning of year 2,467 1,506 1,062 - ------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 4,596 2,467 1,506 - ------------------------------------------------------------------------------------------------------------------------------ CASH PAID FOR Interest $ 464 346 329 Income taxes 200 225 381 NONCASH ITEMS Increase in investments in subsidiaries as a result of acquisitions of institutions for common stock 3 1,008 611 Assumption of long-term debt of liquidated affiliate - - 74 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Parent Company Securities available for sale (8) (60) 27 Other liabilities 4 3 24 Parent Company subsidiaries Securities available for sale 429 (126) 501 Other assets $ 133 (92) 136 - ------------------------------------------------------------------------------------------------------------------------------
C-43 EX-99 9 EXHIBIT(99)(B) FIRST UNION CORPORATION AND SUBSIDIARIES Management's Analysis of Operations Supplemental Quarterly Financial Report Three Months Ended March 31, 1998 Restated to reflect the pooling of interests accounting acquisition of CoreStates Financial Corp on April 28, 1998 FIRST UNION CORPORATION AND SUBSIDIARIES SUPPLEMENTAL QUARTERLY FINANCIAL REPORT THREE MONTHS ENDED MARCH 31, 1998 TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------- PAGE - -------------------------------------------------------------------------------------------- Financial Highlights 1 Management's Analysis of Operations 2 Consolidated Summaries of Income, Per Share and Balance Sheet Data T-1 Business Segments T-2 Internal Capital Growth and Dividend Payout Ratios T-6 Selected Quarterly Data T-7 Securities Available for Sale T-8 Investment Securities T-9 Loans T-10 Allowance for Loan Losses and Nonperforming Assets T-11 Intangible Assets T-12 Foreclosed Properties T-13 Deposits T-14 Time Deposits in Amounts of $100,000 or More T-15 Long-Term Debt T-16 Changes in Stockholders' Equity T-17 Capital Ratios T-18 Off-Balance Sheet Derivative Financial Instruments T-19 Off-Balance Sheet Derivatives - Expected Maturities T-23 Off-Balance Sheet Derivatives Activity T-23 Net Interest Income Summaries T-24 Consolidated Balance Sheets T-26 Consolidated Statements of Income T-27 Consolidated Statements of Cash Flows T-28
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, -------------------------- (Dollars in millions, except per share data) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ FINANCIAL HIGHLIGHTS Net income after merger-related and restructuring charges $ 790 703 After tax merger-related and restructuring charges 19 -- - ------------------------------------------------------------------------------------------------------------------ Net income before merger-related and restructuring charges $ 809 703 ================================================================================================================== PER SHARE DATA (a) Basic earnings Net income after merger-related and restructuring charges $ 0.82 0.72 Net income before merger-related and restructuring charges 0.84 0.72 Diluted earnings Net income after merger-related and restructuring charges 0.81 0.72 Net income before merger-related and restructuring charges 0.83 0.72 Cash dividends 0.37 0.29 Book value 16.31 14.41 Period-end price $56.8125 40.50 Average shares (In thousands) Basic 965,120 969,669 Diluted 977,155 981,174 Actual shares (In thousands) 972,775 964,186 Dividend payout ratios (based on operating earnings) 42.26% 39.62 ================================================================================================================== PERFORMANCE HIGHLIGHTS Before merger-related and restructuring charges Return on average assets (a) (b) 1.56% 1.50 Return on average stockholders' equity (a) (c) 21.22 19.91 Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 57 56 Net charge-offs to Average loans, net (a) 0.39 0.62 Average loans, net, excluding Bankcard (a) 0.24 0.27 Nonperforming assets to loans, net and foreclosed properties 0.75 0.79 Net interest margin (a) 4.18% 4.71 ================================================================================================================== CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION) Before merger-related and restructuring charges Net income $ 865 760 Earnings per share - basic $ 0.90 0.78 Return on average tangible assets (a) 1.69% 1.65 Return on average tangible stockholders' equity (a) (c) 28.03 27.74 Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 54% 53 ================================================================================================================== PERIOD-END BALANCE SHEET DATA Securities available for sale $ 34,388 19,059 Investment securities 3,172 4,024 Loans, net of unearned income 133,092 134,839 Earning assets 191,962 171,442 Total assets 220,066 193,507 Noninterest-bearing deposits 30,530 28,935 Interest-bearing deposits 107,604 104,434 Long-term debt 12,010 10,767 Guaranteed preferred beneficial interests 1,741 1,734 Stockholders' equity $ 15,806 13,843 ==================================================================================================================
(a) Quarterly amounts annualized. (b) Based on net income. (c) Based on net income and average stockholders' equity excluding average net unrealized gains or losses on debt and equity securities. (d) The overhead efficiency ratio is equal to noninterest expense divided by net operating revenue. Net operating revenue is equal to the sum of tax-equivalent net interest income and noninterest income, including investment securities transactions. MANAGEMENT'S ANALYSIS OF OPERATIONS The following discussion and other portions of this Supplemental Quarterly Financial Report contain various forward-looking statements. Please refer to our 1998 First Quarter Report on Form 10-Q for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements. The following review is a discussion of the performance and financial condition of First Union Corporation and CoreStates Financial Corp on a combined basis. All CoreStates historical financial data have been restated for the pooling of interests acquisition of CoreStates, which was consummated on April 28, 1998. EARNINGS HIGHLIGHTS First Union's operating earnings in the first quarter of 1998 increased 15 percent to $809 million from $703 million in the first quarter of 1997. Diluted operating earnings per share were 83 cents in the first quarter of 1998, up 15 percent from 72 cents per share in the first quarter of 1997. First quarter 1998 operating earnings represent a return on average common equity of 21.22 percent and a return on average assets of 1.56 percent compared with 19.88 percent and 1.50 percent, respectively, in the year ago period. Operating earnings represent earnings before merger-related and restructuring charges. Merger-related and restructuring charges of $19 million after tax were associated with the January 31, 1998, acquisition of Wheat First Butcher Singer, Inc. After these charges, earnings were $790 million, or 81 cents per diluted share. First Union's historical financial statements were not restated for the Wheat First pooling of interests acquisition, which was deemed to be immaterial. Growth in first quarter 1998 operating earnings was led by a 32 percent increase in noninterest income (excluding investment securities transactions) compared to the first quarter of 1997, including, on an unrestated basis, a 68 percent increase in Capital Management fee income and a 59 percent increase in Capital Markets fee income. The combined Wheat First Union fee income contribution to these segments was $142 million. Noninterest expense, excluding merger-related and restructuring charges, increased 11 percent from the first quarter of 1997, including $115 million of Wheat First operating expenses. Merger-related and restructuring charges related to Wheat First Union amounted to $29 million in the first quarter of 1998. On a core operating basis, expenses were essentially flat with the fourth quarter of 1997. In addition nonperforming assets declined to $1.0 billion, or 0.75 percent of net loans and foreclosed properties, from $1.1 billion, or 0.79 percent, in the first quarter of 1997. Annualized net charge-offs as a percentage of average net loans improved to 0.39 percent in the first quarter of 1998 compared with 0.62 percent in the first quarter of 1997. Outlook We believe 1998 will be a very active year as we work to turn new markets and business strategies into strong revenue stories. As a result of our investments for the future: 2 o We continue to see strong growth in fee income from our Capital Management and Capital Markets business segments, with Wheat First Union contributing significantly to business opportunities; o We are very encouraged by initial results as we introduce our redesigned retail delivery strategy, which we call the "Future Bank," throughout the First Union marketplace this year; o The pending acquisition of The Money Store Inc., a consumer finance company, and the April 30, 1998, acquisition of Bowles Hollowell Conner & Co., an investment banking firm, will broaden our geographic reach and product capability; and o We completed the systems integration of Signet Banking Corporation less than four months after we acquired this Virginia-based banking company. We are working very hard to integrate CoreStates' systems, to provide training and to introduce new products into this franchise, which we acquired April 28, 1998. Our goal is to refocus our new employees on customer sales and service, rather than on consolidation issues, as rapidly as possible. First Union continues to diversify its business mix in order to meet client demands and to decrease the corporation's reliance on interest income, which can be affected by volatility in economic conditions and movements in interest rates. First Union's goal is to increase noninterest income in proportion to total revenue to 40 to 45 percent by the year 2000. The percentage of noninterest income to total revenue was 42 percent in the first quarter of 1998 compared with 34 percent in the first quarter of 1997. We continue to invest in high-growth business lines such as the investment banking, brokerage services and asset management businesses in our Capital Markets and Capital Management Groups. These nontraditional businesses contribute a greater percentage of fee income to our earnings stream and complement our loan and deposit activities. We also are applying nontraditional approaches to our more mature lines of business, primarily by streamlining processes, by adding electronic and remote banking alternatives and by implementing our Future Bank retail delivery model. The goals are to improve customer service, to increase sales and to generate efficiencies. We expect strong sales momentum in light of demographic trends, a robust economy and our market expansion. Our primary management attention is focused on leveraging our existing business base as we invest in new technology and fee income-generating lines of business. The significant investments we have made in acquisitions, in technology and in expanded products and services have positioned us to better serve our 16 million customers in a diverse geographic marketplace and to reduce the impact of adverse changes in the business cycle. Merger and Consolidation Activity The acquisition of CoreStates, of Philadelphia, Pennsylvania, was completed on April 28, 1998. We believe this acquisition will create new opportunities to leverage our growing Capital Management and Capital Markets businesses in states that generate 36 percent of the nation's gross state product and in attractive consumer markets where the per capita income is 12 percent above the national average. Approximately 331 million shares of First Union common stock have been issued in this pooling of interests accounting transaction. At March 31, 1998, CoreStates had assets of $48 billion, net loans of $35 billion, deposits of $35 billion, stockholders' equity of $3 billion and net income of $203 million for the quarter ended March 31, 1998. 3 In 1998, First Union currently estimates after-tax, merger-related and restructuring expenses of $795 million related to the CoreStates merger. More information is available in our Current Reports on Form 8-K, dated November 18, 1997, November 28, 1997, and December 2, 1997, in our registration statement on Form S-4 (No. 333-44015), filed with the Securities and Exchange Commission on January 9, 1998, and in our 1997 Supplemental Annual Report on Form 8-K. In addition, in the first quarter of 1998, we announced two purchase accounting acquisitions: The Money Store, which we expect to complete in the second or third quarter of 1998, subject to approval by The Money Store's shareholders and applicable regulators and other conditions of closing, and Bowles Hollowell Conner & Co., which we completed on April 30, 1998. The Money Store transaction provides that First Union pay $34 per share in First Union common stock for each share of The Money Store's common stock, with a total indicated purchase price of approximately $2.1 billion. In connection with The Money Store acquisition, we have repurchased in the open market 37 million of the outstanding shares of First Union common stock at a cost of $2 billion, which equals the number of such shares currently expected to be issued in the merger. In The Money Store acquisition, we estimate we will take a merger-related and restructuring expense of approximately $20 million. In connection with the Bowles Hollowell transaction, we issued approximately 1.2 million shares of First Union common stock. Bowles Hollowell had assets of $18 million at January 31, 1998. In addition, the acquisition of Covenant Bancorp, Inc., a bank holding company based in Haddonfield, New Jersey, was consummated on January 15, 1998. Covenant had assets of $415 million, net loans of $254 million, deposits of $294 million and stockholders' equity of $31 million at December 31, 1997. First Union issued 1.6 million shares in this purchase accounting transaction, substantially all of which we repurchased in 1997 in the open market at a cost of $79 million. The acquisition of Wheat First, based in Richmond, Virginia, was consummated on January 31, 1998. We expect this partnership will enhance the equity securities business of First Union's Capital Markets Group, as well as create one of the nation's largest brokerage networks. The merger was accounted for as a pooling of interests. However, financial information related to Wheat First is not considered material to the historical results of First Union, and such historical results will not be restated as a result of this acquisition. First Union issued 10.3 million shares of its common stock in the Wheat First acquisition. Wheat First had assets of $1 billion and stockholders' equity of $171 million at December 31, 1997. We continue to evaluate acquisition opportunities that will provide access to customers and markets that we believe complement our long-term goals. Acquisition opportunities are evaluated as a part of our ongoing capital allocation decision-making process. Decisions to pursue acquisitions will be measured in conjunction with financial performance guidelines adopted in 1997 and other financial and strategic objectives. Acquisition discussions and in some cases negotiations may take place from time to time, and future acquisitions involving cash, debt or equity securities may be expected. The Accounting and Regulatory Matters section provides more information about legislative, accounting and regulatory matters that have recently been adopted or proposed. 4 BUSINESS SEGMENTS Business Focus First Union's operations are divided into four primary business segments encompassing more than 40 distinct product and service units. These segments include the Consumer Bank, Capital Management, the Commercial Bank and Capital Markets. Additional information can be found in Table 2. Information related to CoreStates is separately discussed below and in Table 2. We have developed an internal performance reporting model to measure the results of these four business segments and the Treasury/Nonbank segment. Because of the complexity of the corporation and the interrelationships of these business segments, we have used various estimates and allocation methodologies in the preparation of the Business Segments financial information. Restatements of various periods may occasionally occur because these estimates and methodologies could be refined over time. Our management structure combines this internal performance reporting with a matrix management approach, which integrates product management with our various distribution channels. Additionally First Union's management structure and internal reporting methodologies will produce business segment results that are not necessarily comparable to presentations by other bank holding companies or stand-alone entities in similar industry segments. Our internal performance reporting model isolates the net income contribution and measures the return on capital for each business segment by allocating equity, funding credit and expense and corporate expenses to each segment. We use a risk-based methodology to allocate equity based on the credit, market and operational risks associated with each business segment. Credit risk allocations provide sufficient equity to cover unexpected losses for each asset portfolio. Operational capital is allocated based on the level of noninterest expense for each segment. In addition capital is allocated to segments with deposit products to reflect the risk of unanticipated disintermediation. Through this process, the aggregate amount of equity allocated to all business segments may differ from the corporation's book equity. All unallocated equity is retained by the Treasury/Nonbank segment. This mismatch in book versus allocated equity may result in an unexpectedly high or low return on equity for the Treasury/Nonbank segment for extended periods of time. Our method of reporting does not allow for discrete reporting of the profitability or synergies arising from our integrated approach to product sales. For example, a commercial customer might have loans, deposits and an interest rate swap. The loan and deposit relationship would be included in the commercial segment and the interest rate swap would be reflected in the risk management unit of the Capital Markets segment. Exposure to market risk is managed centrally within the Treasury/Nonbank segment. In order to remove interest rate risk from each business segment, our model employs a funds transfer pricing (FTP) system. The FTP system matches the duration of the funding used by each segment to the duration of the assets and liabilities contained in each segment. Matching the duration, or the effective term until an instrument can be repriced, allocates interest income and/or expense to each segment so its resulting net interest income is insulated from interest rate risk. The majority of the interest rate risk resulting from the mismatch in durations of assets and liabilities held by the business segments resides in the Treasury/Nonbank segment. The Treasury/Nonbank segment also holds the corporation's investment portfolio and off-balance sheet portfolio, which are used to 5 enhance corporate earnings and to manage exposure to interest rate risk. Because most market risk is held in the Treasury/Nonbank segment, the profitability of this segment is expected to be more volatile than for the other business segments. General corporate expenses, with the exception of goodwill amortization, are allocated to each segment in a pro rata manner based on the direct and attributable indirect expenses for each segment. Residual corporate expense remaining in the Treasury/Nonbank segment reflects the costs of portfolio management activities, goodwill amortization and merger-related restructuring charges. In general this approach should not result in significant volatility to business segment returns. Consumer Bank The Consumer Bank, our primary deposit-taking entity, provides an attractive source of funding for secured and unsecured consumer loans, first and second residential mortgages, installment loans, credit cards, auto loans and leases, and student loans. The Consumer Bank's traditional deposit and lending products are fully integrated with nontraditional financial offerings, making our retail banking branches major distribution points for mutual funds, insurance and small business loans. This approach is supported by state-of-the-art technology including centralized customer information centers, smart cards, electronic and Internet banking capabilities. The Consumer Bank segment generated $197 million in net income in the first quarter of 1998 compared with $226 million in the first quarter of 1997. Primary contributors were credit cards and deposits. The decline reflected lower securitization gains along with increases in operating expense related to the increase in mortgage volume, including an acceleration in the amortization of mortgage servicing rights. Noninterest income was $320 million compared with $330 million in the first quarter of 1997. Noninterest expense was $624 million compared with $588 million in the first quarter of 1997. Expense growth largely reflected training and other costs related to the implementation of our Future Bank delivery strategy, as well as expenses related to the increased mortgage volume and accelerated mortgage servicing rights amortization. Our new Future Bank retail delivery model is being implemented throughout 1998 in our full-service branch network in 12 states and Washington, D.C. The Future Bank model increases service options and access for our customers, improves sales capacity for employees and ultimately is expected to reduce costs. Average Consumer Bank loans in the first quarter of 1998 were $49 billion compared with $54 billion in the first quarter of 1997. While consumer loan originations were strong, the decrease in the consumer loan portfolio reflects our strategy to actively manage our balance sheet by selling or securitizing loans to maximize return on capital. As part of this strategy we securitized or sold $5 billion of consumer loans in 1997, including adjustable rate mortgages (ARMs), home equity loans, student loans, indirect auto loans, community reinvestment loans, credit card receivables and other unsecured consumer credit. The managed credit card portfolio was $4 billion at March 31, 1998, including $2 billion of securitized credit cards. The credit card sales reflect the repositioning of the portfolio in line with our Consumer Bank's strategy of expanding relationships within our growing customer base on the East Coast. Loan originations in the consumer portfolio were led by mortgage loans, direct lending through the full-service bank branches, and home equity loans. First Union's mortgage origination and home equity offices across the nation also are included in the Consumer 6 Bank through our operating subsidiaries: First Union Mortgage Corporation (FUMC) and First Union Home Equity Bank, N.A. (FUHEB). Our equity lending business, when combined with that of The Money Store, is expected to be the second largest in the nation. FUMC was the nation's 12th largest mortgage servicer, with a mortgage servicing portfolio of $61 billion at March 31, 1998. In addition, FUHEB is a major participant in both the "A" credit quality market for our portfolio, as well as in the sub-prime market for securitization or sale. Capital Management The Capital Management Group unites our banking and investment offerings for retail and institutional customers, providing products and services that primarily produce fee income. At March 31, 1998, this group had $98 billion in assets under management, which encompassed $53 billion in total trust and institutional assets, including $15 billion in proprietary mutual funds. Including the proprietary mutual funds for trust customers, the First Union-advised mutual funds amounted to $60 billion at March 31, 1998. Including CoreStates, we had $63 billion in mutual fund assets under management at March 31, 1998. The Capital Management Group produced net income of $76 million in the first quarter of 1998 compared with $44 million in the first quarter of 1997. Capital Management businesses and products primarily generate fee income. In the first quarter of 1998, fee income for this segment was $373 million compared with $222 million in the first quarter of 1997. Growth in fee income was primarily related to retail brokerage and insurance commissions and mutual funds, with Wheat First Union contributing $117 million to fee income. Expenses in the first quarter of 1998 were $346 million compared with $216 million in the first quarter of 1997. Retail brokerage and insurance services are the primary distribution center for investment and insurance products. This segment does not reflect sales of credit, life or other insurance products sold in other areas of the corporation. Retail brokerage and insurance income included in noninterest income was $180 million in the first quarter of 1998 compared with $64 million in the first quarter of 1997. The CAP Account is an asset management product that enables our customers to manage their securities trading and banking activities in a single, consolidated account. Income related to the CAP Account is therefore reflected in several of our lines of business, including mutual funds and retail brokerage services. The CAP Account item in Table 2 reflects direct CAP Account fee income only. CAP Account assets increased to $28 billion at the end of the first quarter of 1998 compared with $26 billion at year-end 1997. We are seeing an increase in investment activity through these accounts. The investment proportion in the CAP Accounts has risen from 33 percent in the first quarter of 1997 to 43 percent in the first quarter of 1998. Trades in CAP Accounts increased 43 percent compared with the first quarter of 1997. The Private Client Banking Group provides high net worth clients with a single point of access to First Union's investments, mortgages, personal loans, trusts, financial planning, brokerage services and other services. In the first quarter of 1998, the Private Client Banking Group managed $2.1 billion of average net loans compared with $1.8 billion in the first quarter of 1997, and $1.8 billion of average deposits compared with $1.6 billion in the first quarter of 1997. The Private Client Banking Group line in Table 2 reflects only the 7 income and expense related to lending and deposit taking activities. Both capital management and capital market fee income is located within other business lines. We anticipate increased growth in all of the Capital Management business lines as we introduce new products and services throughout our multistate network and with the addition of new customers from our acquisitions. Commercial Bank The Commercial Bank provides a comprehensive array of financial solutions primarily focused on corporate (annual sales of $50 million to $2 billion); commercial (annual sales of $10 million to $50 million); and small-business (annual sales up to $10 million) customers. Products and services go beyond traditional commercial banking to areas such as asset-based financing, risk management products, property and casualty insurance, leasing, treasury services, international services, pension plans and 401(k)s. Specialized relationship teams throughout our region focus on sales and service. In addition, we have an integrated approach that leverages the capabilities of First Union's Capital Markets Group for the more complex financing solutions. The Commercial Bank had net income of $123 million in the first quarter of 1998 compared with $132 million in the first quarter of 1997. Net interest income was $352 million compared with $382 million in the first quarter of 1997. The decline was primarily related to a decrease in outstandings and loan spreads. Noninterest income increased 8 percent from the first quarter of 1997 to $91 million in the first quarter of 1998, led by Cash Management fee income, which increased 25 percent from the first quarter of 1997. In addition, service charge volume has increased as a result of higher sales volume and improved collection policies and procedures. Expenses in the first quarter of 1998 were $246 million compared with $248 million in the first quarter of 1997. Average commercial loans in the first quarter of 1998 declined 7 percent from the first quarter of 1997, primarily reflecting run-off in all commercial lending areas due to selective new loan originations and renewals. Average small business loans increased 25 percent to $1.9 billion in the first quarter of 1998 from $1.5 billion in the first quarter of 1997. Small Business Banking in Table 2 reflects only lending activities, while our Small Business Banking Division also generates insurance, investment and retirement services, and commercial deposit services for customers. First Union is the nation's third largest cash management bank based on revenue. Cash management products stimulate the gathering of commercial deposit balances. Deposit balances and their economic profitability are reflected in both the Commercial Bank and the Capital Markets segments. Cash Management in Table 2 reflects only the direct service charge income from cash management products. Capital Markets Our Capital Markets Group provides corporate and institutional clients one-stop shopping for a full range of investment banking products and services. These products and services are fully integrated with our wholesale delivery strategy, and they are a natural extension of our Commercial Bank. We have the capability to help a company grow from its first checking account to its initial public offering. In the Capital Markets Group, the Commercial Bank and the bank and nonbank brokerage units, the strategy is the same: the focus is on providing customized solutions that are in our clients' best interests. 8 Within Capital Markets, our primary focus has been to bring a full line of business products to middle-market customers. We believe this strategy provides a rewarding platform for long-term growth. Our relationship coverage begins in our East Coast banking markets and extends nationwide through industry-specific specialization in such areas as health care; financial institutions; real estate; media and communications; utilities; energy; forest products; and specialty finance. In addition, our International unit continues to develop strong correspondent banking relationships overseas. The primary focus of the International unit is to meet the trade finance and foreign exchange needs of our corporate customers and to provide commercial banking and capital markets products to financial institution clients overseas. This unit expanded significantly with the addition of CoreStates, which has been involved in the international arena for nearly two centuries. The Capital Markets Group produced net income of $108 million in the first quarter of 1998 compared with $70 million in the first quarter of 1997. Net interest income was $123 million compared with $96 million in the first quarter of 1997. Noninterest income increased 56 percent to $250 million in the first quarter of 1998 from $159 million in the first quarter of 1997. The increase was led by $141 million in fee income from our investment banking segment, including $25 million from Wheat First Union. Expenses in the first quarter of 1998 were $203 million compared with $146 million in the first quarter of 1997. Average net loans were $17 billion in the first quarter of 1998 compared with $13 billion in the first quarter of 1997. Loan growth between the two periods was generated primarily in the commercial real estate, diversified finance and commercial leasing units. First Union's Capital Markets Group will continue to expand its relationship banking efforts, including increased industry segment coverage and an expanded international presence with CoreStates. Treasury/Nonbank Segment The Treasury/Nonbank segment includes First Union's Central Money Book (CMB) and certain expenses that are not allocated to the business segments, including goodwill amortization and corporate restructuring costs. The CMB is responsible for the management of our securities portfolios, our overall funding requirements and our asset and liability management functions. The Securities Available for Sale, Investment Securities, Liquidity and Funding Sources and Market Risk Management sections provide information about our securities portfolios, funding sources and asset and liability management functions. Additionally, the Treasury/Nonbank segment includes amortization expense and capital not allocated to business segments related to other intangible assets (excluding deposit base premium and mortgage and other servicing assets) and charges that are unusual and infrequent, including merger-related and restructuring charges. The Treasury/Nonbank segment includes the income and expense related to the restructuring of the credit card receivables and other unsecured loans. CoreStates Discreet CoreStates segment data which would conform to First Union's segment reporting methodologies and assumptions are not available, and accordingly, the amounts related to CoreStates in the Business Segments table represent the consolidated historical results of CoreStates. Additionally, the information presented above does not include CoreStates financial data. CoreStates was composed of five primary businesses: Global and Specialized Banking; Regional Banking; Retail Credit Services; Trust and Asset Management; and Third 9 Party Processing. Each segment was comprised of well-defined business lines with market or product specific missions. These segments may or may not conform to those defined by First Union. Global and Specialized Banking includes specialized banking, secured lending, real estate, large corporate banking, Congress Financial Corporation, international banking, investment banking and cash management. Regional Banking consists of retail banking and delivery, small business lending, commercial business lending and middle market lending. Retail Credit Services include credit card, dealer services, educational lending, mortgage services, merchant credit card processing and consumer and commercial card processing. Trust and Asset Management consists of personal trust (including private banking), institutional trust, retirement plan services and investment management. Third Party Processing includes QuestPoint specialty transaction processing, earnings from CoreStates investment in Electronic Payment Services, Inc., and earnings from CoreStates Bank's Financial Institutions Division. RESULTS OF OPERATIONS INCOME STATEMENT REVIEW Net Interest Income Tax-equivalent net interest income was $1.89 billion in the first quarter of 1998 compared with $1.97 billion in the first quarter of 1997. The decline in tax-equivalent net interest income reflects a changing earning asset mix, primarily related to the divestiture of higher-yielding, unsecured consumer loans and to the investment of excess capital in lower-yielding securities, including purchases to leverage the CoreStates acquisition. Nonperforming loans reduce interest income because the contribution from these loans is eliminated or sharply reduced. In the first quarter of 1998, $15 million in gross interest income would have been recorded if all nonaccrual and restructured loans had been current in accordance with their original terms and if they had been outstanding throughout the period (or since origination if held for part of the period). The amount of interest income related to these assets and included in income in the first quarter of 1998 was $3 million. Net Interest Margin The net interest margin, which is the difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, was 4.18 percent in the first quarter of 1998 compared with 4.70 percent in the first quarter of 1997, a reduction of 52 basis points. Significant changes in our asset mix played the greatest role in narrowing the net interest margin. The restructuring of our unsecured consumer loan portfolio and the subsequent reinvestment in lower yielding investment securities reduced the margin in the first quarter of 1998. Additionally, we purchased securities to rebalance our interest rate sensitivity position in advance of our merger with CoreStates which added to the decline. The rest of the decline is a result of substantial increases in the balance of short-term investments and trading assets, as well as a modest decline in the spread between loan yields and retail deposit costs. We expect our margin to increase following the consummation of the CoreStates merger. The average rate earned on earning assets was 10 8.04 percent in the first quarter of 1998 and 8.30 percent in the first quarter of 1997. The average rate paid on interest-bearing liabilities was 4.48 percent in the first quarter of 1998 and 4.27 percent in the first quarter of 1997. It should be noted that the margin is not our primary management focus or goal. We use securities and off-balance sheet transactions to manage interest rate sensitivity. More information on these transactions is included in the Market Risk Management section. Noninterest Income We are meeting the challenges of increasing competition, changing customer demands and demographic shifts by investing in high-growth lines of business to enhance revenue growth. We have significantly broadened our product lines, particularly in the Capital Markets and Capital Management Groups, to provide additional sources of fee income that complement our long-standing banking products and services. These investments were reflected in a 31 percent increase in noninterest income, excluding investment securities transactions, to $1.3 billion in the first quarter of 1998 from $1.0 billion in the first quarter of 1997. The combined Wheat First Union fee income contribution to both segments was $142 million. Virtually all categories of noninterest income increased in the first quarter of 1998 from a year earlier. On an unrestated basis, fee income from Capital Management and Capital Markets activities made up more than half of noninterest income in the first quarter of 1998. These two groups are discussed further in the Business Segments section. Sundry income included $55 million of branch sale gains related to discretionary branch closings. During 1998, we expect to realize additional branch sale gains associated with the CoreStates acquisition. Trading Activities Our Capital Markets Group also makes a key contribution to noninterest income through trading profits. Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through profitable trading for the corporation's own account. Market making and position taking activities across a wide array of financial instruments add to our ability to optimally serve our customers. Trading account assets were $7 billion at March 31, 1998, compared with $6 billion at December 31, 1997. Noninterest Expense Noninterest expense was $1.9 billion in the first quarter of 1998 compared with $1.7 billion in the first quarter of 1997. Noninterest expense in the first quarter of 1998 included $29 million in merger-related and restructuring charges related to Wheat First Union, as well as $115 million of Wheat First operating expenses. The increases in various categories of noninterest expense reflect our continued investments in fee-income generating businesses such as those managed by the Capital Management and the Capital Markets Groups, in which expenses move more in tandem with revenues, and in technology and retail branch transformation. Amortization of other intangible assets predominantly represents the amortization of goodwill and deposit base premium related to purchase accounting acquisitions. These intangibles are amortized over periods ranging from six to 25 years. Amortization is a noncash charge to income; therefore, liquidity and funds management activities are not 11 affected. We had $2.9 billion in other intangible assets at March 31, 1998, and at December 31, 1997. Costs related to environmental matters were not material. We are actively engaged in assessing our own computer systems as well as those of third-party vendors, counterparties and customers for year 2000 readiness. Our single system platform, as well as the fact that our Emerald deposit system and essentially all of our Capital Markets systems are already year 2000 compliant, has minimized the expense related to ensuring that all computer software and hardware is able to recognize the date change from December 31, 1999, to January 1, 2000. We have analyzed our computer hardware platforms and software programs, and we expect to have virtually all of the systems and application modifications in place and tested by the end of 1998, allowing time in 1999 for any system refinements that may be needed and overall integrated systems testing. We are assessing, monitoring and testing the progress of our third-party vendors and counterparties to determine whether they will be able to successfully interact with First Union in the year 2000. In addition we are assessing the needs of our customers and the possible effects of their inability to become year 2000 compliant. Our formal risk assessment of customers is incorporated into the underwriting, scheduled review and credit grading process. Including closed and pending acquisitions, First Union currently estimates that aggregate expenses for making its computer systems year 2000 compliant will be between $60 million and $65 million pretax. BALANCE SHEET REVIEW Securities Available For Sale The available for sale portfolio consists of U.S. Treasury, municipal and mortgage-backed and asset-backed securities as well as collateralized mortgage obligations, corporate, foreign and equity securities. Securities available for sale transactions resulted in gains of $23 million in the first quarter of 1998 and $9 million in the first quarter of 1997. At March 31, 1998, we had securities available for sale with a market value of $34 billion compared with $24 billion at year-end 1997. The market value of securities available for sale was $454 million above amortized cost at March 31, 1998. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. The average rate earned on securities available for sale in the first quarter of 1998 was 6.70 percent compared with 6.75 percent in the first quarter of 1997. The average maturity of the portfolio was 5.93 years at March 31, 1998. Investment Securities The investment securities portfolio consists of U.S. Government agency, corporate, municipal and mortgage-backed securities, and collateralized mortgage obligations. Our investment securities amounted to $3.2 billion at March 31, 1998, and $3.5 billion at December 31, 1997. The average rate earned on investment securities was 8.13 percent in the first quarter of 1998 and 7.83 percent in the first quarter of 1997. The average maturity of the portfolio was 7.75 years at March 31, 1998. 12 Loans The loan portfolio, which represents our largest asset class, is a significant source of interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Our lending strategy stresses quality growth and portfolio diversification by product, geography and industry. A common credit underwriting structure is in place throughout the corporation. The commercial loan portfolio includes general commercial loans, both secured and unsecured, and commercial real estate loans. Commercial loans are typically either working capital loans, which are used to finance the inventory, receivables and other working capital needs of commercial borrowers, or term loans, which are generally used to finance fixed assets or acquisitions. Commercial real estate loans are typically used to finance the construction or purchase of commercial real estate. Our commercial lenders focus principally on middle-market companies, which we believe reduces the risk of credit loss from any single borrower or group of borrowers. A majority of our commercial loans are for less than $10 million. Consistent with our longtime standard, we generally look for two repayment sources for commercial real estate loans: cash flows from the project and other resources of the borrower. Consumer lending through our full-service bank branches is managed using an automated underwriting system that combines statistical predictors of risk and industry standards for acceptable levels of customer debt capacity and collateral valuation. These guidelines are continually monitored for overall effectiveness and for compliance with fair lending practices. The loan portfolio at March 31, 1998, was composed of 55 percent in commercial loans and 45 percent in consumer loans, which did not represent a significant change from December 31, 1997. Net loans at March 31, 1998, were $133 billion compared with $132 billion at December 31, 1997. Average net loans were $131 billion in the first quarter of 1998 and $134 billion in the first quarter of 1997. The decrease reflects $7 billion in loans that were securitized, sold or transferred to assets held for sale as part of our strategy of balance sheet management to maximize its return on investment. Commercial loan originations in the first quarter of 1998 were led by Capital Markets and commercial lenders in Georgia and the Carolinas. Consumer loan originations were strong in mortgages, home equity and direct lending. At March 31, 1998, unused loan commitments related to commercial and consumer loans were $65 billion and $29 billion, respectively. Commercial and standby letters of credit were $10 billion at March 31, 1998. At March 31, 1998, loan participations sold to other lenders amounted to $4 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.66 percent in the first quarter of 1998 compared with 8.77 percent in the first quarter of 1997. The primary factor contributing to the decline was the restructuring of our unsecured consumer loan portfolio. This restructuring, in conjunction with a general downward trend in Treasury rates over this period, was only partially offset by an increase in the Fed funds and the prime rates, and growth in high yielding leveraged leases. The Asset Quality section provides information about geographic exposure in the loan portfolio. 13 Commercial Real Estate Loans Commercial real estate loans amounted to 12 percent of the total portfolio at March 31, 1998, and at December 31, 1997. This portfolio included commercial real estate mortgage loans of $13 billion at March 31, 1998 and December 31, 1997. ASSET QUALITY Nonperforming Assets At March 31, 1998, nonperforming assets were $1.0 billion, or 0.75 percent of net loans and foreclosed properties, compared with $991 million, or 0.75 percent, at December 31, 1997. Loans or properties of less than $5 million each made up 74 percent, or $746 million, of nonperforming assets at March 31, 1998. Of the rest: o Twelve loans or properties between $5 million and $10 million each accounted for $81 million; and o Eight loans or properties over $10 million each accounted for $175 million. Forty-eight percent of nonperforming assets were collateralized primarily by real estate at March 31, 1998 compared with 49 percent at December 31, 1997. Past Due Loans Accruing loans 90 days past due were $328 million at March 31, 1998, compared with $326 million at December 31, 1997. Of the past dues at March 31, 1998, $63 million were commercial and commercial real estate loans and $265 million were consumer loans. At March 31, 1998, we were closely monitoring certain loans for which borrowers were experiencing increased levels of financial stress. None of these loans were included in nonperforming assets or in accruing loans past due 90 days, and the aggregate amount of these loans was not significant. Net Charge-Offs Net charge-offs amounted to $129 million in the first quarter of 1998 and $194 million in the fourth quarter of 1997. Annualized net charge-offs were 0.39 percent of average net loans in the first quarter of 1998 compared with 0.58 percent in the fourth quarter of 1997. Excluding net charge-offs related to the credit card portfolio, net charge-offs were 0.24 percent compared with 0.35 percent in the fourth quarter of 1997. At March 31, 1998, the owned credit card portfolio represented less than 3 percent of the loan portfolio. Net charge-offs declined significantly due to the restructuring of the credit card portfolio, in which certain vintages that experienced higher charge-off rates have been sold. Our card solicitation marketing efforts are now focused on customers and prospects within our marketplace and nationally with whom it is our goal to build long-term, multi-product relationships. We continue to carefully monitor trends in both the commercial and consumer loan portfolios for signs of credit weakness. Additionally, we have evaluated our credit policies in light of changing economic trends, and we have taken steps we believe are appropriate where necessary. All of these steps have been taken with the goals of minimizing future credit losses and deterioration and of allowing for maximum profitability. Provision and Allowance for Loan Losses The loan loss provision was $135 million in the first quarter of 1998 compared with $445 million in the fourth quarter of 1997. The loan loss provision was increased in the 14 fourth quarter of 1997 to facilitate the restructuring of the unsecured consumer loan portfolio, which resulted in the sale of $3 billion of credit card receivables and other unsecured loans. The allowance for loan losses was $1.9 billion at March 31, 1998, compared with 1.8 billion at December 31, 1997. We establish reserves based on various factors, including results of quantitative analyses of the quality of commercial loans and commercial real estate loans. Reserves for commercial and commercial real estate loans are based principally on loan grades, historical loss rates, borrowers' creditworthiness, underlying cash flows from the project and from the borrowers, and analysis of other less quantifiable factors that might influence the portfolio. We analyze all loans in excess of $1 million that are being monitored as potential credit problems to determine whether supplemental, specific reserves are necessary. Reserves for consumer loans are based principally on delinquencies and historical and projected loss rates. Impaired loans, which are included in nonaccrual loans, amounted to $509 million at March 31, 1998, compared with $485 million at December 31, 1997. A loan is considered to be impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of a loan agreement. Included in the allowance for loan losses at March 31, 1998, was $82 million related to $363 million of impaired loans. The remaining impaired loans were recorded at or below fair value. In the first quarter of 1998 the average recorded investment in impaired loans was $499 million, and $6 million of interest income was recognized on loans while they were impaired. This income was recognized using a cash-basis method of accounting. Geographic Exposure The loan portfolio in the East Coast region of the United States is spread primarily across 106 metropolitan areas with diverse economies. Our largest markets are: Atlanta, Georgia; Charlotte, North Carolina; Miami and Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia, Pennsylvania; and Washington, D.C. Substantially all of the $16 billion commercial real estate portfolio at March 31, 1998, was located in our East Coast banking region. LIQUIDITY AND FUNDING SOURCES Liquidity planning and management are necessary to ensure we maintain the ability to fund operations cost-effectively and to meet current and future obligations such as loan commitments and deposit outflows. In this process we focus on both assets and liabilities and on the manner in which they combine to provide adequate liquidity to meet the corporation's needs. Funding sources primarily include customer-based core deposits but also include purchased funds and cash flows from operations. First Union is one of the nation's largest core deposit-funded banking institutions. Our large consumer deposit base, which is spread across the economically strong South Atlantic region and high per-capita income Middle Atlantic region, creates considerable funding diversity and stability. Asset liquidity is maintained through maturity management and through our ability to liquidate assets, primarily securities held for sale. Another significant source of asset liquidity is the ability to securitize assets such as credit card receivables and auto, home equity, student and mortgage loans. Other off-balance sheet sources of liquidity exist as well, including a mortgage servicing portfolio for which the estimated fair value exceeded book value by $29 million at March 31, 1998. 15 Core Deposits Core deposits are a fundamental and cost-effective source of funding. Core deposits include savings, negotiable order of withdrawal (NOW), money market, noninterest-bearing and other consumer time deposits. Core deposits were $129 billion at March 31, 1998, compared with $127 billion at December 31, 1997. The portion of core deposits in higher-rate, other consumer time deposits was 30 percent at March 31, 1998 and December 31, 1997. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they generally are not available for immediate withdrawal. They are also less expensive to process. Average core deposit balances were $125 billion in the first quarter of 1998 and $124 billion in the fourth quarter of 1997. In the first quarter of 1998 and in the fourth quarter of 1997, average noninterest-bearing deposits were 22 and 23 percent, respectively, of average core deposits. Average balances in savings and NOW and money market deposits were higher when compared with the fourth quarter of 1997, while other consumer time and noninterest-bearing deposits were lower. Deposits can be affected by branch closings or consolidations, seasonal factors and the rates being offered compared to other investment opportunities. The Net Interest Income Summaries provide additional information about average core deposits. Purchased Funds Purchased funds at March 31, 1998, were $53 billion compared with $42 billion at year-end 1997, largely reflecting funding needs related to the increased securities available for sale portfolio. Average purchased funds in the first quarter of 1998 were $49 billion compared with $41 billion in the fourth quarter of 1997. Purchased funds are acquired primarily through (i) our large branch network, consisting principally of $100,000 and over certificates of deposit, public funds and treasury deposits, and (ii) national market sources, consisting of relatively short-term funding sources such as federal funds, securities sold under repurchase agreements, eurodollar time deposits, short-term bank notes and commercial paper, and longer-term funding sources such as term bank notes, Federal Home Loan Bank borrowings and corporate notes. Cash Flows Cash flows from operations are a significant source of liquidity. Net cash provided from operations primarily results from net income adjusted for the following noncash accounting items: the provisions for loan losses and foreclosed properties; and depreciation and amortization. This cash was available in the first quarter of 1998 to increase earning assets, to make discretionary investments and to reduce borrowings. Long-Term Debt Long-term debt was 76 percent of total stockholders' equity at March 31, 1998, and 77 percent at year-end 1997. Under a shelf registration statement filed with the Securities and Exchange Commission, we currently have available for issuance $1.9 billion of senior or subordinated debt securities, common stock or preferred stock. The sale of any additional debt or equity securities will depend on future market conditions, funding needs and other factors. In April 1998, we issued an aggregate of $500 million of subordinated debt. 16 Debt Obligations We have a $350 million, committed back-up line of credit that expires in December 1998. This credit facility contains financial covenants that require First Union to maintain a minimum level of tangible net worth, restrict double leverage ratios and require capital levels at subsidiary banks to meet regulatory standards. First Union has not used this line of credit. In 1998, $2 billion of long-term debt will mature. Funds for the payment of long-term debt will come from operations or, if necessary, additional borrowings. Guaranteed Preferred Beneficial Interests At March 31, 1998, $1.7 billion of trust capital securities were outstanding. Subsidiary trusts issued these capital securities, and received the proceeds by issuing junior subordinated debentures to the trusts. These capital securities are considered tier 1 capital for regulatory purposes. Expenses of $29 million in the first quarter of 1998 related to the capital securities are included in sundry expense. Stockholders' Equity The management of capital in a regulated banking environment requires a balance between maximizing leverage and return on equity to stockholders while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. We have historically generated attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios. Total stockholders' equity was $16 billion at March 31, 1998, and $15 billion at December 31, 1997. Common shares outstanding amounted to 973 million at March 31, 1998, compared with 961 million at December 31, 1997. From January 1, 1998, through May 21, 1998, we repurchased 37 million shares of our common stock in the open market in connection with The Money Store acquisition at a cost of $2 billion. We paid $341 million in dividends to common stockholders in the first quarter of 1998 compared with $279 million in the first quarter of 1997. At March 31, 1998, stockholders' equity included a $290 million unrealized after-tax gain related to debt and equity securities. The Securities Available for Sale section provides additional information about debt and equity securities. Subsidiary Dividends Our banking subsidiaries are the largest source of parent company dividends. Capital requirements established by regulators limit dividends that these and certain other of our subsidiaries can pay. Banking regulators generally limit a bank's dividends in two principal ways: first, dividends cannot exceed the bank's undivided profits, less statutory bad debt in excess of a bank's allowance for loan losses; and second, in any year dividends cannot exceed a bank's net profits for that year, plus its retained earnings from the preceding two years, less any required transfers to surplus. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well capitalized level, our subsidiaries had $809 million available for dividends at March 31, 1998, without prior regulatory approval. Our subsidiaries paid $368 million in dividends to the parent company in the first quarter of 1998. Regulatory Capital Federal banking regulations require that bank holding companies and their subsidiary banks maintain minimum levels of capital. These banking regulations measure capital using 17 three formulas including tier 1 capital, total capital and leverage capital. The minimum level for the ratio of total capital to risk-weighted assets (including certain off-balance sheet financial instruments, such as standby letters of credit and interest rate swaps) is currently 8 percent. At least half of total capital is to be composed of common equity, retained earnings and a limited amount of qualifying preferred stock, less certain intangible assets (tier 1 capital). The rest may consist of a limited amount of subordinated debt, nonqualifying preferred stock and a limited amount of the loan loss allowance (together with tier 1 capital, total capital). At March 31, 1998, the tier 1 and total capital ratios were 8.66 percent and 13.09 percent, respectively, compared with 8.43 percent and 13.02 percent at December 31, 1997. In addition the Federal Reserve Board has established minimum leverage ratio requirements for bank holding companies. These requirements provide for a minimum leverage ratio of tier 1 capital to adjusted average quarterly assets equal to 3 percent for bank holding companies that meet specified criteria, including having the highest regulatory rating. All other bank holding companies are generally required to maintain a leverage ratio of at least 4 to 5 percent. The leverage ratio at March 31, 1998, was 6.97 percent and at December 31,1997, it was 7.09 percent. The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board has indicated it will continue to consider a tangible tier 1 leverage ratio (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. Each subsidiary bank is subject to similar capital requirements. None of our subsidiary banks has been advised of any specific minimum capital ratios applicable to it. The regulatory agencies also have adopted regulations establishing capital tiers for banks. Banks in the highest capital tier, or well capitalized, must have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a total capital ratio of 10 percent. At March 31, 1998, our deposit-taking subsidiary banks met the capital and leverage ratio requirements for well capitalized banks. We expect to maintain these ratios at the required levels by the retention of earnings and, if necessary, the issuance of additional capital. Failure to meet certain capital ratio or leverage ratio requirements could subject a bank to a variety of enforcement remedies, including termination of deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking banks. The Accounting and Regulatory Matters section provides more information about proposed changes in risk-based capital standards. MARKET RISK MANAGEMENT Interest Rate Risk Methodology Managing interest rate risk is fundamental to banking. The inherent maturity and repricing characteristics of our day-to-day lending and deposit activities create a naturally asset-sensitive structure. By using a combination of on- and off-balance sheet financial instruments, we manage the sensitivity of earnings to changes in interest rates within our established policy guidelines. 18 The Credit/Market Risk Committee of the corporation's board of directors reviews overall interest rate risk management activity. The Funds Management Committee of the corporation oversees the interest rate risk management process and approves policy guidelines. Balance sheet management and finance personnel monitor the day-to-day exposure to changes in interest rates in response to loan and deposit flows. They make adjustments within established policy guidelines. Our methodology for measuring exposure to interest rate risk for policy measurement is intended to ensure we include a sufficiently broad range of rate scenarios and pattern of rate movements that we believe to be reasonably possible. Our methodology measures the impact that 200 basis point rate changes would have on earnings per share over the subsequent 12 months. We believe our earnings simulation model is a more relevant depiction of interest rate risk than traditional gap tables because it captures multiple effects excluded in less sophisticated presentations, and it includes significant variables that we identify as being affected by interest rates. For example our model captures rate of change differentials, such as federal funds rates versus savings account rates; maturity effects, such as calls on securities; and rate barrier effects, such as caps and floors on loans. It also captures changing balance sheet levels, such as commercial and consumer loans (both floating and fixed rate); noninterest-bearing deposits and investment securities. In addition our model considers leads and lags that occur in long-term rates as short-term rates move away from current levels; the elasticity in the repricing characteristics of savings and money market deposits; and the effects of prepayment volatility on various fixed-rate assets such as residential mortgages, mortgage-backed securities and consumer loans. These and certain other effects are evaluated in developing the scenarios from which sensitivity of earnings to changes in interest rates is determined. We use two separate measures that each include three standard scenarios in analyzing interest rate sensitivity for policy measurement. Each of these measures compares our forecasted earnings per share in both a "high rate" and "low rate" scenario to a base-line scenario. The base-line scenario is our estimated most likely path for future short-term interest rates over the next 24 months. The second base-line scenario holds short-term rates flat at their current level over our forecast horizon. The "high rate" and "low rate" scenarios assume gradual 200 basis point increases or decreases in the federal funds rate from the beginning point of each base-line scenario over the most current 12-month period. Our policy limit for the maximum negative impact on earnings per share resulting from "high rate" or "low rate" scenarios is 5 percent. The policy limit applies to both the "most likely rate" scenario and the "flat rate" scenario. The policy measurement period is 12 months in length, beginning with the first month of the forecast. Earnings Sensitivity Our April 1998 estimate for future short-term interest rates (our "most likely" scenario) includes a flat federal funds rate of 5.50 percent from April 1998 through March 2000. Our "flat rate" scenario also holds the federal funds rate at 5.50 percent over this same horizon. Based on the April outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200 basis point increase in short-term rates from our "flat rate" scenario), the model indicates that earnings during the policy measurement period would be negatively affected by 2.1 percent. Our model indicates that earnings would benefit by 1.4 percent in our "low rate" scenario (i.e., a 200 basis point decline in short-term rates from our "flat rate" 19 scenario). Our model indicates that a 200 basis point rise in rates from our "most likely" scenario is less detrimental than the same rise from our "flat rate" scenario. Over the next year, earnings would increase by 1.5 percent if rates fall gradually by 200 basis points, and would decrease by 1.4 percent if rates gradually rise 200 basis points, compared to our "most likely" scenario. The difference in the sensitivity measurements between our flat and best guess methodologies results from using different assumptions regarding the level or scope of the Treasury yield curve. In 1999, earnings would increase above those earned in our "most likely" scenario by 4.8 percent if rates were 200 basis points lower than our "most likely" scenario. If rates were 200 basis points higher than our "most likely" scenario in 1999, then earnings would be negatively affected by 4.9 percent. The CoreStates and The Money Store acquisitions are incorporated into these estimates. In addition to the three standard scenarios used to analyze rate sensitivity over the policy measurement period, we regularly analyze the potential impact of other remote, more extreme interest rate scenarios and time periods. These alternate "what if" scenarios may include interest rate paths both higher, lower and more volatile than those used for policy measurement and extend to periods beyond the policy measurement period. While our interest rate sensitivity modeling assumes that management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, management will continue to formulate strategies to protect earnings from the potential negative effects of changes in interest rates. Off-Balance Sheet Derivatives For Interest Rate Risk Management As part of our overall interest rate risk management strategy, for many years we have used off-balance sheet derivatives as a cost- and capital-efficient way to modify the repricing or maturity characteristics of on-balance sheet assets and liabilities. Our off-balance sheet derivative transactions used for interest rate sensitivity management include interest rate swaps, futures and options with indices that relate to the pricing of specific financial instruments of the corporation. We believe we have appropriately controlled the risk so that derivatives used for rate sensitivity management will not have any significant unintended effect on corporate earnings. As a matter of policy we do not use highly leveraged derivative instruments for interest rate risk management. The impact of derivative products on our earnings and rate sensitivity is fully incorporated in the earnings simulation model in the same manner as on-balance sheet instruments. Our overall goal is to manage our rate sensitivity such that earnings are not adversely affected materially whether rates go up or down. As a result of interest rate fluctuations, off-balance sheet transactions (and securities) will from time to time develop unrealized appreciation or depreciation in market value when compared with their cost. The impact on net interest income attributable to these off-balance sheet transactions, all of which are linked to specific financial instruments as part of our overall interest rate risk management strategy, will generally be offset by net interest income from on-balance sheet assets and liabilities. The important consideration is not the shifting of unrealized appreciation or depreciation between and among on- and off-balance sheet instruments, but the prudent management of interest rate sensitivity so that corporate earnings are not unduly at risk as interest rates move up or down. 20 The fair value appreciation of off-balance sheet derivative financial instruments used to manage our interest rate sensitivity was $622 million at March 31, 1998, compared with fair value appreciation of $566 million at December 31, 1997. The carrying amount of financial instruments used for interest rate risk management includes amounts for deferred gains and losses related to terminated positions. Such gains and losses at March 31, 1998, are not significant. Although off-balance sheet derivative financial instruments do not expose the corporation to credit risk equal to the notional amount, we are exposed to credit risk equal to the extent of the fair value gain in an off-balance sheet derivative financial instrument if the counterparty fails to perform. We minimize the credit risk in these instruments by dealing only with high-quality counterparties. Each transaction is specifically approved for applicable credit exposure. In addition our policy is to require that all swaps and options be governed by an International Swaps and Derivatives Association Master Agreement. Bilateral collateral arrangements are in place for substantially all dealer counterparties used in our Asset/Liability Management activities. Derivative collateral arrangements for dealer transactions and trading activities are based on established thresholds of acceptable credit risk by counterparty. Thresholds are determined based on the strength of the individual counterparty, and they are bilateral. As of March 31, 1998, the total credit risk in excess of thresholds was $313 million. This amount does not include credit risk related to CoreStates dealer transactions and trading activities. The fair value of collateral held approximated the total credit risk in excess of thresholds. For nondealer transactions the need for collateral is evaluated on an individual transaction basis, and it is primarily dependent on the financial strength of the counterparty. Trading Risk Management Trading activities are undertaken primarily to satisfy the investment and risk management needs of our customers and secondarily to enhance our earnings through profitable trading for the corporation's own account. We trade a variety of debt securities and foreign exchange, as well as financial and foreign currency derivatives, in order to provide customized solutions for the risk management challenges faced by our customers. We maintain diversified trading positions in both the fixed income and foreign exchange markets. Risk is controlled through the imposition of value-at-risk limits and an active, independent monitoring process. We use the value-at-risk methodology for measuring the market risk of the corporation's trading positions. This statistical methodology uses recent market volatility to estimate the maximum daily trading loss that the corporation would expect to incur, on average, 97.5 percent of the time. The model also measures the effect of correlation among the various trading instruments to determine how much risk is eliminated by "offsetting" positions. The analysis captures all financial assets and liabilities that are considered trading positions (including loan trading activities), foreign exchange and financial and foreign currency derivative instruments. The calculation uses historical data from either the most recent 180 or 260 business days, depending on the activity. The total value-at-risk amount at March 31, 1998, was $15 million. Value-at-risk amounts related to interest rate risk and currency risk at March 31, 1998, were $13 million and $3 million, respectively. Risk management correlation assumptions resulted in the elimination of $1 million of the value-at-risk of components. 21 ACCOUNTING AND REGULATORY MATTERS Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," does not change the recognition or measurement associated with pension or postretirement plans. It standardizes certain disclosures, requires additional information about changes in the benefit obligations and about changes in the fair value of plan assets to facilitate analysis, and it eliminates certain disclosures that were not deemed useful. This Standard is effective for financial statements issued for periods beginning after December 31, 1997. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards and disclosure requirements for the way companies report information about operating segments both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and assessing performance. Information such as segment earnings, certain revenue and expense items and certain segment assets are required to be presented, and such amounts are required to be reconciled to the company's financial statements. Certain information related to this Standard is included in the Business Segments section and in the Business Segments table. The corporation will assess the current methodologies and reporting for compliance with the Standard. This Standard is effective for financial statements issued for periods beginning after December 15, 1997. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and the presentation of comprehensive income, which is defined as the change in equity transactions with nonowners. It includes net income and other comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. Generally, other comprehensive income includes transactions not typically recorded as a component of net income such as foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain debt and equity securities. This Standard requires that such items be presented with equal prominence on a comparative basis in the appropriate financial statements for periods beginning after December 15, 1997, including interim periods. The Changes in Stockholders' Equity table provides information related to this Standard. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), among other provisions, imposes liability on a bank insured by the FDIC for certain obligations to the FDIC incurred in connection with other insured banks under common control with such bank. The Federal Deposit Insurance Corporation Improvement Act, among other things, requires a revision of risk-based capital standards. The new standards are required to incorporate interest rate risk, concentration of credit risk and the risks of nontraditional activities and to reflect the actual performance and expected risk of loss of multifamily mortgages. The Risk-Based Capital section provides information on risk assessment classifications. 22 Legislation has been enacted providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver. Various other legislative and accounting proposals concerning the banking industry are pending in Congress and with the Financial Accounting Standards Board, respectively. Given the uncertainty of the proposal process, we cannot assess the impact of any such proposals on our financial condition or results of operations. 23
Table 1 CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA - -------------------------------------------------------------------------------------------------------------------------- Twelve Months 1998 1997 Ended ---------------------------------------------------- Mar. 31, First Fourth Third Second First (In millions, except per share data) 1998 Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED SUMMARIES OF INCOME Interest income $ 14,521 3,602 3,635 3,663 3,621 3,443 ========================================================================================================================== Interest income (a) $ 14,625 3,630 3,664 3,683 3,648 3,466 Interest expense 6,693 1,742 1,681 1,657 1,613 1,501 - -------------------------------------------------------------------------------------------------------------------------- Net interest income (a) 7,932 1,888 1,983 2,026 2,035 1,965 Provision for loan losses 1,033 135 445 225 228 205 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (a) 6,899 1,753 1,538 1,801 1,807 1,760 Securities available for sale transactions 66 23 18 15 10 9 Investment security transactions 3 -- -- 2 1 -- Noninterest income 4,596 1,354 1,147 1,065 1,030 1,025 Merger-related and restructuring charges (b) 313 29 225 -- 59 -- Noninterest expense 7,230 1,866 1,941 1,711 1,712 1,688 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes (a) 4,021 1,235 537 1,172 1,077 1,106 Income taxes 1,121 417 (68) 404 368 380 Tax-equivalent adjustment 104 28 29 20 27 23 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 2,796 790 576 748 682 703 ========================================================================================================================== PER SHARE DATA Basic $ 2.94 0.82 0.61 0.79 0.72 0.72 Diluted 2.89 0.81 0.60 0.78 0.70 0.72 Cash dividends $ 1.30 0.37 0.32 0.32 0.29 0.29 Average shares - Basic (In thousands) -- 965,120 960,596 946,354 953,612 969,669 Average shares - Diluted (In thousands) -- 977,155 972,051 959,013 964,518 981,174 Average stockholders' equity (c) Quarter-to-date $ -- 15,456 14,806 14,575 14,111 14,326 Year-to-date -- 15,456 14,365 14,010 14,077 14,326 Common stock price High 58 1/4 58 1/4 52 7/8 50 11/16 47 7/8 47 3/4 Low 39 1/8 47 1/16 46 15/16 45 7/8 39 1/8 36 5/8 Period-end $56 13/16 56 13/16 51 1/4 50 1/16 46 1/4 40 1/2 To earnings ratio (d) 19.66X 19.66 18.30 17.26 17.00 15.76 To book value 348% 348 321 325 312 281 Book value $ 16.31 16.31 15.95 15.40 14.82 14.41 BALANCE SHEET DATA Assets 220,066 220,066 205,735 202,766 201,642 193,507 Long-term debt $ 12,010 12,010 11,752 11,209 10,559 10,767 ==========================================================================================================================
(a) Tax-equivalent. (b) Merger-related and restructuring charges amounted to $19 million after tax in the first quarter of 1998, $167 million after tax in the fourth quarter of 1997 and $37 million after tax in the second quarter of 1997. (c) Quarter-to-date and year-to-date average stockholders' equity excludes average net unrealized gains or losses on debt and equity securities. (d) Based on diluted earnings per share. T-1 Table 2 BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, 1998 --------------------------------------------------------------------------------- First First Union Retail Union Home Card Branch (In millions) Mortgage Equity Products Products Total - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER BANK Income statement data Net interest income $ 21 31 60 571 683 Provision for loan losses 1 2 37 35 75 Noninterest income 75 9 88 148 320 Noninterest expense 93 23 69 439 624 Income tax expense -- 5 15 87 107 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 2 10 27 158 197 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 4.60% 41.21 42.42 31.32 31.18 Average loans, net $1,800 4,107 2,282 40,853 49,042 Average deposits 1,046 -- 11 59,775 60,832 Average attributed stockholders' equity $ 157 99 259 2,051 2,566 ====================================================================================================================================
Retail Private Brokerage & Internal Mutual Client CAP Insurance Mgt. (In millions) Trust Funds Banking Account Services Elimination Total - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL MANAGEMENT Income statement data Net interest income $ 8 1 26 39 14 -- 88 Provision for loan losses -- -- -- -- -- -- -- Noninterest income 98 93 2 17 180 (17) 373 Noninterest expense 79 63 16 28 160 -- 346 Income tax expense 9 10 4 10 12 (6) 39 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 18 21 8 18 22 (11) 76 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 49.97% 77.41 20.71 63.49 35.04 -- 39.38 Average loans, net $ 27 -- 2,067 -- 744 -- 2,838 Average deposits 1,257 -- 1,825 10,901 -- -- 13,983 Average attributed stockholders' equity $ 146 101 142 116 256 -- 761 ====================================================================================================================================
Small Real Business Cash Estate Deposit (In millions) Banking Mgt. Banking Lending Products Total - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL BANK Income statement data Net interest income $ 16 12 46 89 189 352 Provision for loan losses 1 -- 1 6 -- 8 Noninterest income -- 65 -- -- 26 91 Noninterest expense 7 50 20 62 107 246 Income tax expense 3 9 9 6 39 66 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 5 18 16 15 69 123 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 18.60% 88.03 12.88 5.00 65.08 21.34 Average loans, net $1,882 -- 7,465 17,464 -- 26,811 Average deposits -- -- -- -- 19,148 19,148 Average attributed stockholders' equity $ 122 81 512 1,205 434 2,354 ==================================================================================================================================== (continued)
T-2 Table 2 BUSINESS SEGMENTS
==================================================================================================================================== Three Months Ended March 31, 1998 --------------------------------------------------------------------------------- Real Commercial Investment Estate Risk Traditional Leasing (In millions) Banking Finance Mgt. Banking & Rail Total - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL MARKETS Income statement data Net interest income $ 22 11 1 64 25 123 Provision for loan losses -- -- -- 5 -- 5 Noninterest income 141 16 22 24 47 250 Noninterest expense 85 31 15 34 38 203 Income tax expense 27 (2) 3 17 12 57 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 51 (2) 5 32 22 108 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 34.92% (13.04) 32.37 13.95 83.22 24.17 Average loans, net $2,449 966 -- 9,965 3,323 16,703 Average deposits 1,409 484 109 3,176 21 5,199 Average attributed stockholders' equity $ 599 102 62 923 110 1,796 ====================================================================================================================================
Consumer Capital Commercial Capital Treasury/ (In millions) Bank Mgt. Bank Markets Nonbank CoreStates Total - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED (b) Income statement data Net interest income $ 683 88 352 123 100 514 1,860 Provision for loan losses 75 -- 8 5 2 45 135 Noninterest income 320 373 91 250 115 228 1,377 Noninterest expense 624 346 246 203 89 387 1,895 Income tax expense 107 39 66 57 41 107 417 Net income after merger-related and restructuring charges $ 197 76 123 108 83 203 790 After-tax merger-related and restructuring charges -- -- -- -- 19 -- 19 - ------------------------------------------------------------------------------------------------------------------------------------ Net income before merger-related and restructuring charges $ 197 76 123 108 102 203 809 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 31.18% 39.38 21.34 24.17 8.83 24.95 21.22 Average loans, net $49,042 2,838 26,811 16,703 632 35,008 131,034 Average deposits 60,832 13,983 19,148 5,199 1,725 33,629 134,516 Average attributed stockholders' equity $ 2,566 761 2,354 1,796 4,684 3,298 15,459 ==================================================================================================================================== (continued)
(a) Average attributed stockholders' equity excludes merger-related and restructuring charges and average net unrealized gains or losses on debt and equity securities. See the "Business Segments" discussion in Management's Analysis of Operations for further information about the methodology and assumptions used herein. (b) Discreet CoreStates segment data which would conform to the Corporation's segment reporting methodologies and assumptions are not available, and accordingly, the amounts related to CoreStates represent the consolidated historical results of CoreStates. T-3 Table 2 BUSINESS SEGMENTS
==================================================================================================================================== Three Months Ended March 31, 1997 --------------------------------------------------------------------------------- First First Union Retail Union Home Card Branch (In millions) Mortgage Equity Products Products Total - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER BANK Income statement data Net interest income $ 12 28 118 592 750 Provision for loan losses 1 2 100 34 137 Noninterest income 81 4 54 191 330 Noninterest expense 70 18 72 428 588 Income tax expense 8 4 -- 117 129 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 14 8 -- 204 226 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 55.59% 35.71 (0.18) 38.97 32.99 Average loans, net $1,144 3,738 5,247 43,911 54,040 Average deposits 636 1 15 60,375 61,027 Average attributed stockholders' equity $ 103 85 458 2,115 2,761 ====================================================================================================================================
Retail Private Brokerage & Internal Mutual Client CAP Insurance Mgt. (In millions) Trust Funds Banking Account Services Elimination Total - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL MANAGEMENT Income statement data Net interest income $ 9 1 22 29 3 -- 64 Provision for loan losses -- -- -- -- -- -- -- Noninterest income 88 63 1 13 64 (7) 222 Noninterest expense 71 47 14 25 59 -- 216 Income tax expense 10 6 4 6 3 (3) 26 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 16 11 5 11 5 (4) 44 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 49.99% 59.36 22.71 40.92 22.48 -- 35.21 Average loans, net $ 14 -- 1,774 -- 206 -- 1,994 Average deposits 1,420 -- 1,569 9,896 -- -- 12,885 Average attributed stockholders' equity $ 135 75 112 108 95 -- 525 ====================================================================================================================================
Small Real Business Cash Estate Deposit (In millions) Banking Mgt. Banking Lending Products Total - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL BANK Income statement data Net interest income $ 13 9 53 116 191 382 Provision for loan losses -- -- 3 6 -- 9 Noninterest income -- 52 -- -- 32 84 Noninterest expense 6 47 18 69 108 248 Income tax expense 3 5 13 14 42 77 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 4 9 19 27 73 132 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 17.90% 46.18 13.60 7.93 70.39 20.94 Average loans, net $1,510 -- 8,430 18,757 -- 28,697 Average deposits -- -- -- -- 19,091 19,091 Average attributed stockholders' equity $ 99 76 594 1,389 421 2,579 ==================================================================================================================================== (continued)
T-4 Table 2 BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, 1997 --------------------------------------------------------------------------------- Real Commercial Investment Estate Risk Traditional Leasing (In millions) Banking Finance Mgt. Banking & Rail Total - ------------------------------------------------------------------------------------------------------------------------------------ CAPITAL MARKETS Income statement data Net interest income $ 17 2 3 61 13 96 Provision for loan losses -- -- -- (2) -- (2) Noninterest income 56 12 17 17 57 159 Noninterest expense 42 13 14 30 47 146 Income tax expense 11 -- 2 19 9 41 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 20 1 4 31 14 70 - ----------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed stockholders' equity (a) 26.76% 6.75 31.74 20.15 48.65 24.73 Average loans, net $ 2,230 393 -- 7,712 2,928 13,263 Average deposits 714 75 123 2,624 21 3,557 Average attributed stockholders' equity $ 296 55 44 644 123 1,162 ====================================================================================================================================
Consumer Capital Commercial Capital Treasury/ (In millions) Bank Mgt. Bank Markets Nonbank CoreStates Total - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED (b) Income statement data Net interest income $ 750 64 382 96 112 538 1,942 Provision for loan losses 137 -- 9 (2) 18 43 205 Noninterest income 330 222 84 159 22 217 1,034 Noninterest expense 588 216 248 146 85 405 1,688 Income tax expense 129 26 77 41 (1) 108 380 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 226 44 132 70 32 199 703 - ------------------------------------------------------------------------------------------------------------------------------------ Performance and other data Return on average attributed stockholders' equity (a) 32.99% 35.21 20.94 24.73 3.55 22.02 19.88 Average loans, net $54,040 1,994 28,697 13,263 3,018 32,803 133,815 Average deposits 61,027 12,885 19,091 3,557 3,869 32,356 132,785 Average attributed stockholders' equity $ 2,761 525 2,579 1,162 3,651 3,648 14,326 ====================================================================================================================================
(a) Average attributed stockholders' equity excludes merger-related and restructuring charges and average net unrealized gains or losses on debt and equity securities. See the "Business Segments" discussion in Management's Analysis of Operations for further information about the methodology and assumptions used herein. (b) Discreet CoreStates segment data which would conform to the Corporation's segment reporting methodologies and assumptions are not available, and accordingly, the amounts related to CoreStates represent the consolidated historical results of CoreStates. T-5 TABLE 3 INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS - -------------------------------------------------------------------------------- 1998 1997 --------- ---------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- INTERNAL CAPITAL GROWTH (a) Assets to stockholders' equity 13.35X 13.32 13.72 13.99 13.31 X Return on assets 1.52% 1.14 1.50 1.39 1.50 - -------------------------------------------------------------------------------- Return on stockholders' equity (b) 20.74% 15.44 20.36 19.37 19.91 X Earnings retained 56.75% 47.43 61.71 59.91 60.38 - -------------------------------------------------------------------------------- Internal capital growth (b) 11.77% 7.32 12.56 11.61 12.02 ================================================================================ DIVIDEND PAYOUT RATIOS ON Operating earnings 42.26% 40.77 38.29 38.02 39.62 Net income 43.25% 52.57 38.29 40.09 39.62 ================================================================================ SELECTED RATIOS ON Operating earnings Return on assets 1.56% 1.47 1.50 1.47 1.50 Return on stockholders' equity (b) 21.22 19.82 20.31 20.42 19.91 Net income Return on stockholders' equity (b) 20.74% 15.44 20.36 19.37 19.91 (a) Based on average balances and net income. (b) The determination of these ratios exclude average net unrealized gains or losses on debt and equity securities. T-6 Table 4 SELECTED QUARTERLY DATA - ------------------------------------------------------------------------------- 1998 1997 -------- ---------------------------------- First Fourth Third Second First (Dollars in millions) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------- FIRST UNION MORTGAGE CORPORATION PERMANENT LOAN ORIGINATIONS Residential Direct (a) $ 1,812 1,448 1,218 1,194 967 Wholesale 2,175 1,393 981 691 780 =============================================================================== Total $ 3,987 2,841 2,199 1,885 1,747 =============================================================================== VOLUME OF RESIDENTIAL LOANS SERVICED $ 64,344 64,363 64,471 63,772 63,133 =============================================================================== FIRST UNION CORPORATION OTHER DATA ATMs 3,631 3,701 3,645 3,565 3,471 Employees 69,416 65,943 66,355 67,076 67,883 =============================================================================== (a) Includes originations of affiliated banks. T-7 Table 5 SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------- March 31, 1998 ------------------------------------------------------------------------------- Gross Unrealized Average 1 Year 1-5 5-10 After 10 ---------------- Amortized Maturity (In millions) or Less Years Years Years Total Gains Losses Cost in Years - ------------------------------------------------------------------------------------------------------- MARKET VALUE U.S. Treasury $ 610 1,033 3,409 195 5,247 (104) 19 5,162 $ 7.56 U.S. Government agencies 719 6,678 11,649 50 19,096 (256) 4 18,844 5.66 CMOs 180 4,098 880 173 5,331 (29) 21 5,323 5.25 State, county and municipal 11 26 23 69 129 -- -- 129 12.57 Other 79 2,365 876 1,265 4,585 (125) 16 4,476 5.56 - ------------------------------------------------------------------------------------------------------- Total $ 1,599 14,200 16,837 1,752 34,388 (514) 60 33,934 $ 5.93 ======================================================================================================= MARKET VALUE Debt securities $ 1,598 14,200 16,837 779 33,414 (438) 52 33,028 Sundry securities 1 -- -- 973 974 (76) 8 906 - ----------------------------------------------------------------------------------------- Total $ 1,599 14,200 16,837 1,752 34,388 (514) 60 33,934 ========================================================================================= AMORTIZED COST Debt securities $ 1,592 14,017 16,648 771 33,028 Sundry securities 1 -- -- 905 906 - ----------------------------------------------------------------- Total $ 1,593 14,017 16,648 1,676 33,934 ================================================================= WEIGHTED AVERAGE YIELD U.S. Treasury 5.69% 6.21 6.10 6.68 6.13 U.S. Government agencies 6.44 7.02 7.04 7.30 7.01 CMOs 7.31 6.96 6.11 5.81 6.79 State, county and municipal 8.24 6.35 6.62 6.89 6.85 Other 6.30 5.53 5.36 6.30 5.72 Consolidated 6.36% 6.69 6.71 6.35 6.67 =================================================================
Included in "U.S. Government agencies" and "Other" at March 31, 1998, are $2.8 billion of securities that are denominated in currencies other than the U.S. dollar. The currency exchange rates were hedged utilizing both on- and off-balance sheet instruments to minimize the exposure to currency revaluation risks. At March 31, 1998, these securities had a weighted average maturity of 4.08 years and a weighted average yield of 5.15 percent. The weighted average U.S. equivalent yield for comparative purposes of these securities was 6.65 percent based on a weighted average funding cost differential of (1.50) percent. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The aging of mortgage-backed securities is based on their weighted average maturities at March 31, 1998. Average maturity in years excludes preferred and common stocks and money market funds. Yields related to securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.25 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 9.5 percent in Connecticut. There were forward commitments to purchase securities at a cost of $311 million that had a market value of $311 million at March 31, 1998. Gross gains and losses realized on the sale of debt securities for the three months ended March 31, 1998 were $27 million and $7 million, respectively. There were no gains or losses on sundry securities. T-8 Table 6 INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------- March 31, 1998 ------------------------------------------------------------------------------- Gross Unrealized Average 1 Year 1-5 5-10 After 10 ---------------- Market Maturity (In millions) or Less Years Years Years Total Gains Losses Value in Years - ------------------------------------------------------------------------------------------------------- CARRYING VALUE U.S. Treasury $ 42 3 1 -- 46 -- -- 46 0.37 U.S. Government agencies 66 830 300 23 1,219 28 (1) 1,246 3.99 CMOs 36 327 33 41 437 7 -- 444 3.72 State, county and municipal 91 292 272 316 971 117 -- 1,088 7.42 Other 20 48 25 406 499 2 (10) 491 21.80 - ---------------------------------------------------------------------------------------------------- Total $ 255 1,500 631 786 3,172 154 (11) 3,315 7.75 ==================================================================================================== CARRYING VALUE Debt securities $ 250 1,500 631 499 2,880 154 (2) 3,032 Sundry securities 5 -- -- 287 292 -- (9) 283 - --------------------------------------------------------------------------------------- Total $ 255 1,500 631 786 3,172 154 (11) 3,315 ======================================================================================= MARKET VALUE Debt securities $ 251 1,546 670 565 3,032 Sundry securities 5 -- -- 278 283 - ----------------------------------------------------------------- Total $ 256 1,546 670 843 3,315 ================================================================= WEIGHTED AVERAGE YIELD U.S. Treasury 4.08% 6.42 6.00 -- 4.29 U.S. Government agencies 6.00 7.31 6.83 8.25 7.14 CMOs 7.70 7.47 5.70 6.35 7.25 State, county and municipal 9.61 9.63 10.35 11.82 10.54 Other 7.05 6.89 6.25 6.38 6.45 Consolidated 7.29% 7.78 8.27 8.62 8.05 =================================================================
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The aging of mortgage-backed securities is based on their weighted average maturities at March 31, 1998. Yields related to securities exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.25 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 9.5 percent in Connecticut. There were no commitments to purchase or sell investment securities at March 31, 1998. There were no gains or losses realized on investment securities for the three months ended March 31, 1998. T-9 Table 7 LOANS
- -------------------------------------------------------------------------------------- 1998 1997 -------- ----------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 46,266 46,117 45,007 44,440 43,013 Real estate - construction and other 2,957 3,037 3,156 3,284 3,421 Real estate - mortgage 12,994 13,160 13,228 13,604 13,882 Lease financing 8,407 8,610 8,307 8,182 6,976 Foreign 4,050 3,885 3,278 3,441 2,999 - -------------------------------------------------------------------------------------- Total commercial 74,674 74,809 72,976 72,951 70,291 - -------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 29,612 28,998 30,131 30,721 31,507 Installment loans - Bankcard (a) 3,639 3,914 6,824 7,164 7,129 Installment loans - other 23,179 22,271 24,589 24,564 24,157 Vehicle leasing 5,490 5,331 4,971 4,834 4,691 - -------------------------------------------------------------------------------------- Total retail 61,920 60,514 66,515 67,283 67,484 - -------------------------------------------------------------------------------------- Total loans 136,594 135,323 139,491 140,234 137,775 Unearned income 3,502 3,636 3,525 3,558 2,936 - -------------------------------------------------------------------------------------- Loans, net $ 133,092 131,687 135,966 136,676 134,839 ======================================================================================
(a) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts. T-10 Table 8 ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------- 1998 1997 -------- ---------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES Balance, beginning of quarter $1,847 2,175 2,181 2,191 2,212 Provision for loan losses 135 445 225 228 205 Allowance relating to loans acquired, transferred to accelerated disposition or sold 9 (579) -- -- (17) Loan losses, net (129) (194) (231) (238) (209) - ------------------------------------------------------------------------------------------- Balance, end of quarter $1,862 1,847 2,175 2,181 2,191 =========================================================================================== (as a % of loans, net) 1.40% 1.40 1.60 1.60 1.60 =========================================================================================== (as a % of nonaccrual and restructured loans) 210% 211 247 242 232 =========================================================================================== (as a % of nonperforming assets) 186% 186 218 213 203 =========================================================================================== LOAN LOSSES Commercial, financial and agricultural $ 37 70 37 39 26 Real estate - commercial construction and mortgage 9 11 12 12 15 Real estate - residential mortgage 11 15 9 18 11 Installment loans - Bankcard 56 90 144 145 132 Installment loans - other and Vehicle leasing 67 64 75 75 75 - ------------------------------------------------------------------------------------------- Total 180 250 277 289 259 - ------------------------------------------------------------------------------------------- LOAN RECOVERIES Commercial, financial and agricultural 24 26 13 15 20 Real estate - commercial construction and mortgage 5 7 5 7 4 Real estate - residential mortgage 1 2 3 3 2 Installment loans - Bankcard 4 7 11 9 8 Installment loans - other and Vehicle leasing 17 14 14 17 16 - ------------------------------------------------------------------------------------------- Total 51 56 46 51 50 - ------------------------------------------------------------------------------------------- Loan losses, net $ 129 194 231 238 209 =========================================================================================== (as % of average loans, net) (a) 0.39% 0.58 0.68 0.71 0.62 =========================================================================================== (as % of average loans, net, excluding Bankcard) (a) 0.24% 0.35 0.30 0.32 0.27 =========================================================================================== NONPERFORMING ASSETS Nonaccrual loans Commercial loans $ 410 384 346 366 341 Commercial real estate loans 130 135 158 175 204 Consumer real estate loans 234 233 233 224 259 Installment loans 114 124 143 136 131 - ------------------------------------------------------------------------------------------- Total nonaccrual loans 888 876 880 901 935 Restructured loans 1 2 1 2 11 Foreclosed properties 114 113 119 120 132 - ------------------------------------------------------------------------------------------- Total nonperforming assets $1,003 991 1,000 1,023 1,078 =========================================================================================== (as % of loans, net and foreclosed properties) 0.75% 0.75 0.73 0.75 0.79 =========================================================================================== Accruing loans past due 90 days $ 328 326 416 428 431 ===========================================================================================
(a) Annualized. T-11 Table 9 INTANGIBLE ASSETS
- --------------------------------------------------------------------------------------------- 1998 1997 -------- ----------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- MORTGAGE AND OTHER SERVICING ASSETS $ 443 427 384 370 325 ============================================================================================= CREDIT CARD PREMIUM $ 21 24 26 29 32 ============================================================================================= OTHER INTANGIBLE ASSETS Goodwill $ 2,479 2,465 2,502 2,545 2,591 Deposit base premium 443 473 512 546 579 Other 8 10 12 11 13 - --------------------------------------------------------------------------------------------- Total $ 2,930 2,948 3,026 3,102 3,183 =============================================================================================
T-12 Table 10 FORECLOSED PROPERTIES
- --------------------------------------------------------------------------------------------- 1998 1997 -------- ---------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- Foreclosed properties $ 129 129 135 137 149 - --------------------------------------------------------------------------------------------- Allowance for foreclosed properties, beginning of quarter 16 16 17 17 17 Provision for foreclosed properties -- 1 -- 1 -- Dispositions, net (1) (1) (1) (1) -- - --------------------------------------------------------------------------------------------- Allowance for foreclosed properties, end of quarter 15 16 16 17 17 - --------------------------------------------------------------------------------------------- Foreclosed properties, net $ 114 113 119 120 132 =============================================================================================
T-13
Table 11 DEPOSITS - -------------------------------------------------------------------------------------------------------------------- 1998 1997 ------------- --------------------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------- CORE DEPOSITS Noninterest-bearing $ 30,530 31,005 29,676 30,374 28,935 Savings and NOW accounts 37,256 37,281 36,432 36,603 36,594 Money market accounts 22,864 21,240 20,383 20,227 20,489 Other consumer time 38,023 37,324 38,806 40,017 41,006 - -------------------------------------------------------------------------------------------------------------------- Total core deposits 128,673 126,850 125,297 127,221 127,024 Foreign 2,723 3,928 2,147 3,295 2,174 Other time 6,738 6,299 5,700 4,686 4,171 - -------------------------------------------------------------------------------------------------------------------- Total deposits $ 138,134 137,077 133,144 135,202 133,369 =====================================================================================================================
T-14 Table 12 TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE - --------------------------------------------------------------------------- March 31, 1998 ------------------------ Time Other (In millions) Certificates Time - --------------------------------------------------------------------------- MATURITY OF 3 months or less $ 4,180 -- Over 3 months through 6 months 2,018 -- Over 6 months through 12 months 2,540 -- Over 12 months 2,935 -- - --------------------------------------------------------------------------- Total $11,673 -- =========================================================================== T-15 Table 13 LONG-TERM DEBT
- --------------------------------------------------------------------------------------------------------------------------- 1998 1997 ----------- ------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------------- DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY 7-1/2% debentures $ -- -- -- 16 16 Notes Floating rate extendible, due June 15, 2005 10 10 10 10 10 6.60%, due June 15, 2000 249 249 249 249 -- Floating rate -- 300 300 300 300 6-3/4% -- 250 250 250 250 Subordinated notes 7.18%, due April 15, 2011 59 59 59 59 59 8%, due August 15, 2009 149 149 149 149 149 6-3/8%, due January 15, 2009 148 148 148 148 148 6%, due October 30, 2008 198 198 198 198 198 7-1/2%, due July 15, 2006 298 298 298 298 297 7%, due March 15, 2006 199 199 199 198 198 6-7/8%, due September 15, 2005 249 249 249 249 249 7.05%, due August 1, 2005 248 248 248 248 248 6-5/8%, due July 15, 2005 249 249 248 248 248 8.77%, due November 15, 2004 149 149 149 149 149 Floating rate, due July 22, 2003 149 149 149 149 149 7-1/4%, due February 15, 2003 149 149 149 149 149 8%, due November 15, 2002 224 224 224 224 224 8-1/8%, due June 24, 2002 249 249 249 249 249 9.45%, due August 15, 2001 149 149 149 148 148 Fixed rate medium-term, varying rates and terms to June 5, 2001 54 54 54 54 54 9.45%, due June 15, 1999 249 249 249 249 249 Subordinated debentures 6.55%, due October 15, 2035 249 249 249 249 249 7-1/2%, due April 15, 2035 247 246 246 246 246 6.824%/7.574%, due August 1, 2026 298 298 298 298 298 - --------------------------------------------------------------------------------------------------------------------------- Total debentures and notes issued by the Parent Company 4,222 4,771 4,770 4,784 4,534 - --------------------------------------------------------------------------------------------------------------------------- DEBENTURES AND NOTES OF SUBSIDIARIES Debentures and notes 9-3/4%, due September 1, 2003 119 120 121 122 156 Variable rate medium-term, varying rates and terms to November 5, 2001 1,550 1,640 1,615 1,542 1,517 Varying rates and terms to January 26, 2004 161 62 59 57 69 Floating rate, due October 29, 2002 500 500 -- -- -- 6-5/8%, due June 15, 2000 150 150 150 150 150 Subordinated notes Bank, varying rates and terms to December 15, 2036 1,611 1,205 973 875 1,372 6-3/4%, due November 15, 2006 198 199 199 199 199 6-5/8%, due March 15, 2005 174 174 174 174 174 5-7/8%, due October 15, 2003 200 200 200 200 200 6.80%, due June 15, 2003 149 149 149 149 149 9-3/8%, due April 15, 2003 100 100 100 100 100 6-5/8%, due March 15, 2003 149 149 149 149 149 7-7/8%, due July 15, 2002 100 100 100 100 100 9-5/8%, due February 15, 2001 150 150 150 150 150 9-5/8%, due August 15, 1999 150 150 150 150 149 9-5/8%, due June 1, 1999 100 100 100 100 100 Floating rate, due April 15, 1998 100 100 100 100 100 Floating rate -- -- -- -- 50 Subordinated capital notes 9-5/8%, due June 15, 1999 75 75 75 75 74 9-7/8%, due May 15, 1999 75 75 75 75 75 8-1/2% -- 149 149 149 149 10-1/2% collateralized mortgage obligations -- -- 31 33 35 - --------------------------------------------------------------------------------------------------------------------------- Total debentures and notes of subsidiaries 5,811 5,547 4,819 4,649 5,217 - --------------------------------------------------------------------------------------------------------------------------- OTHER DEBT Advances from the Federal Home Loan Bank 1,935 1,385 1,570 880 933 Mortgage notes and other debt 10 16 17 213 49 Capitalized leases 32 33 33 33 34 - --------------------------------------------------------------------------------------------------------------------------- Total other debt 1,977 1,434 1,620 1,126 1,016 - --------------------------------------------------------------------------------------------------------------------------- Total $12,010 11,752 11,209 10,559 10,767 ===========================================================================================================================
T-16 Table 14 CHANGES IN STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
Twelve Months 1998 1997 Ended ------- ------------------------------------------- Mar. 31, First Fourth Third Second First (In millions) 1998 Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $ 13,843 15,269 14,823 14,094 13,843 14,628 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income Net income 2,796 790 576 748 682 703 Unrealized gain (loss) on debt and equity securities, net 410 4 70 134 202 (149) - ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income 3,206 794 646 882 884 554 - ------------------------------------------------------------------------------------------------------------------------------------ Purchase of common stock (1,695) (531) (326) (312) (526) (1,196) Common stock issued for stock options exercised 986 339 413 79 155 112 Common stock issued through dividend reinvestment plan 62 27 16 8 11 21 Common stock issued through public offering 358 -- -- 358 -- -- Common stock issued for acquisitions 249 249 -- -- -- 3 Cash dividends paid (1,203) (341) (303) (286) (273) (279) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $ 15,806 15,806 15,269 14,823 14,094 13,843 - ------------------------------------------------------------------------------------------------------------------------------------
T-17 Table 15 CAPITAL RATIOS - --------------------------------------------------------------------------------
1998 1997 ---------- ------------------------------------------------------------ First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED CAPITAL RATIOS (a) Qualifying capital Tier 1 capital $ 14,500 13,972 12,604 11,814 11,694 Total capital 21,911 21,585 20,231 18,839 18,523 Adjusted risk-based assets 167,348 165,802 153,278 150,004 147,012 Adjusted leverage ratio assets $ 207,973 197,075 183,359 175,480 170,259 Ratios Tier 1 capital 8.66% 8.43 8.22 7.88 7.95 Total capital 13.09 13.02 13.20 12.56 12.60 Leverage 6.97 7.09 6.87 6.73 6.87 STOCKHOLDERS' EQUITY TO ASSETS (a) Quarter-end 7.18 7.42 7.31 6.99 7.15 Average 7.49% 7.51 7.29 7.15 7.51 - ----------------------------------------------------------------------------------------------------------------------------------- BANK CAPITAL RATIOS (b) Tier 1 capital First Union National Bank 7.49% 6.97 7.13 6.75 6.51 First Union Bank of Delaware 13.75 11.83 13.72 14.16 13.86 First Union Home Equity Bank 11.41 10.95 10.23 9.68 8.27 Total capital First Union National Bank 10.64 10.20 10.83 10.73 10.11 First Union Bank of Delaware 14.27 13.09 14.97 15.42 15.11 First Union Home Equity Bank 13.61 13.20 12.39 11.94 10.87 Leverage First Union National Bank 5.90 6.02 5.88 5.48 6.15 First Union Bank of Delaware 6.63 6.24 8.31 11.29 11.43 First Union Home Equity Bank 10.48% 10.16 9.12 8.44 7.42 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 to 5.00 percent. The capital ratios presented herein have not been restated to reflect the Signet pooling of interests acquisition. The amounts presented herein have been restated for all periods presented to reflect the Signet pooling of interests acquisition. The amounts presented herein have been restated for all periods presented to reflect the CoreStates acquisition. (b) The amounts presented herein do not include those of acquired banks. T-18 Table 16 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - --------------------------------------------------------------------------------
Weighted Average Rate Estimated ------------------------- ------------------ Maturity March 31, 1998 Notional In Fair (In millions) Amount Receive Pay Years(b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------------ ASSET RATE CONVERSIONS Interest rate swaps $ 17,705 6.54% 5.70% 3.98 Converts floating rate loans to fixed Carrying amount $ 60 rate. Adds to liability sensitivity. Unrealized gross gain 198 Similar characteristics to a fixed Unrealized gross loss (10) income security funded with variable rate liabilities. Includes $3.0 billion of callable swaps expected to mature in or before December 1999 if swap rates are below 7.04 percent. ------- Total 248 ------- Forward interest rate swaps 725 6.20 -- 2.73 Converts floating rate loans to fixed Carrying amount -- rates in future periods. Effective Unrealized gross gain 2 December 1998 with put options on Unrealized gross loss -- forward swaps referenced under "Rate Sensitivity Hedges" linked to this item ------- Total 2 ------- Interest rate floors 578 6.06 5.72 1.29 Paid a premium to convert floating rate Carrying amount 2 loans to fixed rate when 3 month LIBOR Unrealized gross gain 1 is below an average of 6.06 percent. Unrealized gross loss -- ------- Total 3 ------- Portfolio swaps 100 8.19 5.78 6.00 Converts 3 month floating rate treasury Carrying amount -- bill-based portfolio assets to 1 month Unrealized gross gain 12 floating rate LIBOR assets. Unrealized gross loss -- ------- Total 12 ------- Mortgage swap 9 5.70 8.09 5.40 Offsets interest rate risk in a portion Carrying amount -- of the fixed rate long-term mortgage Unrealized gross gain -- portfolio. Unrealized gross loss -- ------- Total -- ------- Interest rate caps 12 8.50 6.99 0.60 Offsets corresponding rate caps in Carrying amount -- commercial loans. Unrealized gross gain -- Unrealized gross loss -- ------- Total -- - ------------------------------------------ ------- Total asset rate conversions $ 19,129 6.52% 5.70% 3.86 $ 265 - --------------------------------------------------------------------------------
(Continued) T-19 Table 16 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - --------------------------------------------------------------------------------
Weighted Average Rate Estimated -------------------------- ------------------ Maturity March 31, 1998 Notional In Fair (In millions) Amount Receive Pay Years(b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITY RATE CONVERSIONS Interest rate swaps $ 10,428 6.73% 6.08% 7.03 Converts $5.4 billion of fixed rate Carrying amount $ 24 long-term debt to floating rate by Unrealized gross gain 306 matching the terms of the swap to the Unrealized gross loss (16) debt issue. Also converts $1.2 billion of fixed rate CDs to variable rate, $1.5 billion of fixed rate bank notes to floating rate, $1.0 billion of fixed rate capital trust securities to variable rate, and $1.3 billion of deposits to variable rate. ------- Total 314 ------- Forward interest rate swaps 494 6.75 -- 2.80 Converts fixed rate deposit liabilities Carrying amount -- to floating rate in future periods. Unrealized gross gain 6 Unrealized gross loss -- ------- Total 6 ------- Interest rate floors 295 4.57 -- 2.73 $250 million and $45 million offset Carrying amount 1 corresponding rate purchased floors Unrealized gross gain -- in long-term debt and 2 year floating Unrealized gross loss (1) rate retail deposits, respectively. ------- Total -- - ------------------------------------------ ------- Total liability rate conversions $ 11,217 6.67% 6.08% 6.73 $ 320 - --------------------------------------------------------------------------------
(Continued) T-20 Table 16 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - --------------------------------------------------------------------------------
Weighted Average Rate Estimated ------------------------- ------------------ Maturity March 31, 1998 Notional In Fair (In millions) Amount Receive Pay Years(b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------------ RATE SENSITIVITY HEDGES Put options on forward swaps $ 725 --% 6.20% 0.71 Paid a premium for the right to Carrying amount $ 3 terminate $725 million of forward Unrealized gross gain -- interest rate swaps based on Unrealized gross loss -- interest rates in effect in December 1998. Reduces liability sensitivity. ------- Total 3 ------- Call options on forward swaps 200 -- -- 6.40 Paid a premium for the right to extend Carrying amount 3 interest rate swaps hedging $50 Unrealized gross gain 1 million of deposits and other Unrealized gross loss -- borrowings if LIBOR rates rise above a certain level, and to execute interest rate swaps to convert $150 million of long-term fixed rate debt into floating rate. ------- Total 4 ------- Interest rate caps (LIBOR) 148 5.68 7.03 1.73 Paid a premium for the right to lock Carrying amount 1 in 3 month LIBOR reset rates on Unrealized gross gain -- pay variable rate swaps. Unrealized gross loss (1) ------- Total -- ------- Periodic caps 383 -- 7.85 8.16 Paid a premium for the right to lock Carrying amount 5 in 1 year LIBOR reset rates for the Unrealized gross gain -- purpose of converting floating rate Unrealized gross loss -- liabilities to fixed rate. ------- Total 5 ------- Interest rate caps (CMT) 2,200 -- 5.70 3.71 Paid a premium for the right to lock Carrying amount 26 in 1 year Treasury rates for the Unrealized gross gain -- purpose of converting floating rate Unrealized gross loss (4) liabilities to fixed rate. ------- Total 22 ------- Interest rate floors 525 6.94 -- 1.30 Paid a premium for the right to Carrying amount 2 receive a fixed rate if LIBOR is Unrealized gross gain 5 below 6.94 percent. Adds to Unrealized gross loss liability sensitivity when rates are -- below 6.94 percent. ------- Total 7 ------- Interest rate caps 100 -- 6.00 1.00 Received a premium for the Carrying amount -- obligation to pay a fixed rate when Unrealized gross gain -- rates are above 6.00 percent. Adds Unrealized gross loss -- to liability sensitivity when rates are above 6.00 percent. ------- Total -- -------
(Continued) T-21 Table 16 OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a) - --------------------------------------------------------------------------------
Weighted Average Rate Estimated ------------------------- ------------------ Maturity March 31, 1998 Notional In Fair (In millions) Amount Receive Pay Years(b) Value Comments - ------------------------------------------------------------------------------------------------------------------------------------ RATE SENSITIVITY HEDGES (continued) Forward rate locks 185 -- -- 0.30 Offsets interest rate risk and Carrying amount -- corresponding price risk associated Unrealized gross gain -- with the anticipated sale of 10- and Unrealized gross loss -- 15-year fixed rate home equity loans. ------- Total -- ------- Short eurodollar futures 7,594 -- 6.20 0.31 Locks in 3 month LIBOR reset rates Carrying amount -- on pay variable rate swaps. $4.8 Unrealized gross gain -- billion effective June 1998 and $2.8 Unrealized gross loss (9) billion effective September 1998. ------- Total (9) ------- Long eurodollar futures 2,170 6.56 -- 1.03 Converts floating rate LIBOR-based Carrying amount -- loans to fixed rate. Adds to liability Unrealized gross gain 4 sensitivity. Similar characteristics to Unrealized gross loss -- fixed income security funded with variable rate liabilities. $500 million effective December 1998, March, June and September 1999. $170 million converts 1 month floating rate loans to 3 month fixed rate loans. ------- Total 4 ------- Call options on eurodollar futures 512 6.84 -- 0.34 Paid a premium for the right to buy Carrying amount -- Eurodollar futures that convert Unrealized gross gain 1 floating rate LIBOR-based loans to Unrealized gross loss -- fixed rate. Interest rate risk limited to premium paid. $256 million effective June 1998 and September 1998. ------- Total 1 - ------------------------------------------ ------- Total rate sensitivity hedges $ 14,742 6.62% 6.16% 1.28 $ 37 - --------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. (b) Estimated maturity approximates average life except for eurodollar futures, average life of .25 years. London Interbank Offered Rates (LIBOR) - The average of interbank offered rates on dollar deposits in the London market, based on quotations at five major banks. Weighted average pay rates are generally based on one to six month LIBOR. Pay rates reset at predetermined reset dates over the life of the contract. Rates shown are the pay rates in effect as of March 31, 1998. Weighted average receive rates are fixed rates set at the time the contract was transacted. Carrying amount includes accrued interest receivable/payable and unamortized premiums paid/received. T-22 Table 17 OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- ------------------------------------------------------------------------------------------------------------- March 31, 1998 1 Year 1 - 2 2 - 5 5 - 10 After 10 (In millions) or Less Years Years Years Years Total - ------------------------------------------------------------------------------------------------------------- ASSET RATE CONVERSIONS Notional amount $ 2,374 1,024 11,088 4,641 2 19,129 Weighted average receive rate 5.89% 6.87 6.57 6.70 6.80 6.52 Estimated fair value $ 10 13 206 36 -- 265 - ------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 2,723 901 2,353 3,352 1,888 11,217 Weighted average receive rate 5.79% 7.39 6.88 6.76 7.29 6.67 Estimated fair value $ (8) 22 77 128 101 320 - ------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 10,566 1,400 2,270 466 40 14,742 Weighted average receive rate 6.50% 6.39 5.71 8.30 7.77 6.62 Estimated fair value $ (2) 6 22 11 -- 37 - -------------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. Pay rates are generally based on one to six month LIBOR and reset at predetermined reset dates. Current pay rates are not necessarily indicative of future pay rates, and therefore, they have been excluded from the above table. Weighted average pay rates are indicated in Table 16. Table 18 OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- ----------------------------------------------------------------------------------------- Asset Liability Rate Rate Rate Sensitivity (In millions) Conversions Conversions Hedges Total - ----------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 17,713 11,422 20,781 49,916 Additions 1,753 549 135 2,437 Maturities/Amortizations (337) (754) (6,074) (7,165) Terminations -- -- (100) (100) - ----------------------------------------------------------------------------------------- Balance, March 31, 1998 $ 19,129 11,217 14,742 45,088 - -----------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. T-23 FIRST UNION CORPORATION NET INTEREST INCOME SUMMARIES
- ------------------------------------------------------------------------------------------------------------------------------------ FIRST QUARTER 1998 FOURTH QUARTER 1997 --------------------------------- ---------------------------------- Average Average Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ (In millions) Balances Expense Paid Balances Expense Paid - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-bearing bank balances $ 2,915 41 5.73% $ 3,718 55 5.75% Federal funds sold and securities purchased under resale agreements 9,704 128 5.35 7,609 106 5.46 Trading account assets (a) 5,878 96 6.66 6,736 109 6.45 Securities available for sale (a) 30,523 504 6.70 21,590 363 6.76 Investment securities (a) U.S. Government and other 2,051 38 7.43 2,257 43 7.07 State, county and municipal 990 23 9.56 1,034 27 9.46 - ----------------------------------------------------------------------------------- --------------------- Total investment securities 3,041 61 8.13 3,291 70 7.82 - ----------------------------------------------------------------------------------- --------------------- Loans Commercial Commercial, financial and agricultural 45,552 897 7.99 44,948 891 7.86 Real estate - construction and other 2,973 63 8.63 3,124 68 8.56 Real estate - mortgage 12,898 266 8.35 13,020 288 8.80 Lease financing 4,249 114 10.83 4,380 115 10.45 Foreign 4,003 66 6.68 3,668 61 6.64 - ----------------------------------------------------------------------------------- --------------------- Total commercial 69,675 1,406 8.18 69,140 1,423 8.17 - ----------------------------------------------------------------------------------- --------------------- Retail Real estate - mortgage 29,618 571 7.82 29,890 579 7.68 Installment loans - Bankcard (c) 3,726 159 17.34 6,646 273 16.28 Installment loans - other and Vehicle leasing 28,015 664 9.61 28,443 686 9.57 - ----------------------------------------------------------------------------------- --------------------- Total retail 61,359 1,394 9.21 64,979 1,538 9.39 - ----------------------------------------------------------------------------------- --------------------- Total loans 131,034 2,800 8.66 134,119 2,961 8.76 - ----------------------------------------------------------------------------------- --------------------- Total earning assets 183,095 3,630 8.04 177,063 3,664 8.21 ---------------- --------------- Cash and due from banks 8,936 8,880 Other assets 18,470 13,982 - ---------------------------------------------------------------------- --------- Total assets $210,501 $199,925 - ---------------------------------------------------------------------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Savings and NOW accounts 33,428 233 2.83 32,023 234 2.90 Money market accounts 26,225 192 2.96 25,553 193 2.99 Other consumer time 37,425 488 5.29 37,583 496 5.23 Foreign 2,914 38 5.35 2,351 34 5.73 Other time 6,556 106 6.54 6,611 102 6.14 - ----------------------------------------------------------------------------------- --------------------- Total interest-bearing deposits 106,548 1,057 4.03 104,121 1,059 4.03 Federal funds purchased and securities sold under repurchase agreements 29,818 370 5.03 24,010 306 5.06 Commercial paper 1,939 26 5.43 1,931 33 6.81 Other short-term borrowings 7,567 104 5.56 6,341 96 6.00 Long-term debt 11,914 185 6.31 11,636 187 6.38 - ----------------------------------------------------------------------------------- --------------------- Total interest-bearing liabilities 157,786 1,742 4.48 148,039 1,681 4.51 ---------------- --------------- Noninterest-bearing deposits 27,968 28,865 Other liabilities 7,242 6,275 Guaranteed preferred beneficial interests 1,734 1,733 Stockholders' equity 15,771 15,013 - ---------------------------------------------------------------------- --------- Total liabilities and stockholders' equity $210,501 $199,925 - ---------------------------------------------------------------------- --------- Interest income and rate earned $ 3,630 8.04% $ 3,664 8.21% Interest expense and equivalent rate paid 1,742 3.86 1,681 3.77 - ---------------------------------------------------------------------------------------------- ---------------------------------- Net interest income and margin $ 1,888 4.18% $ 1,983 4.44% - ---------------------------------------------------------------------------------------------- ----------------------------------
(a) Yields related to securities and loans exempt from both federal and state income taxes, federal income taxes only or state income taxes only are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent; and tax rates of 7.25 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New Jersey; and 9.5 percent in Connecticut. Lease financing amounts include related deferred income taxes. T-24
- ----------------------------------------------------------------------------------------------------------------------- THIRD QUARTER 1997 SECOND QUARTER 1997 FIRST QUARTER 1997 - -------------------------------------- ------------------------------------ ----------------------------------- Average Average Average Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balances Expense Paid Balances Expense Paid Balances Expense Paid - ----------------------------------------------------------------------------------------------------------------------- $ 3,413 49 5.70% $ 2,848 41 5.65% $ 2,741 37 5.57% 7,691 106 5.48 7,268 101 5.55 6,288 86 5.57 5,618 94 6.65 4,606 78 6.80 3,696 60 6.52 21,122 366 6.87 21,688 378 7.00 18,952 316 6.75 2,418 42 7.12 2,527 47 7.36 2,713 47 7.07 1,069 25 9.38 1,103 26 9.50 1,135 27 9.64 - ---------------------- ---------------------- --------------------- 3,487 67 7.81 3,630 73 8.01 3,848 74 7.83 - ---------------------- ---------------------- --------------------- 43,430 880 8.05 42,892 873 8.16 41,154 820 8.08 3,231 74 9.19 3,380 77 9.12 3,448 74 8.68 13,518 296 8.68 13,623 298 8.79 14,003 298 8.62 4,398 113 10.19 4,254 106 9.99 3,789 89 9.57 3,415 55 6.35 3,384 54 6.46 2,921 45 6.20 - ---------------------- ---------------------- --------------------- 67,992 1,418 8.28 67,533 1,408 8.36 65,315 1,326 8.23 - ---------------------- ---------------------- --------------------- 30,671 598 7.74 31,604 611 7.76 33,109 638 7.82 6,997 272 15.44 7,187 262 14.61 7,191 251 14.16 29,189 713 9.69 28,954 696 9.64 28,200 678 9.75 - ---------------------- ---------------------- --------------------- 66,857 1,583 9.40 67,745 1,569 9.29 68,500 1,567 9.28 - ---------------------- ---------------------- --------------------- 134,849 3,001 8.83 135,278 2,977 8.82 133,815 2,893 8.77 - ---------------------- ---------------------- --------------------- 176,180 3,683 8.30 175,318 3,648 8.34 169,340 3,466 8.30 ----------------------- ---------------------- ---------------------- 8,499 8,673 8,729 12,835 12,433 12,318 - ---------- -------- -------- $ 197,514 $ 196,424 $190,387 - ---------- --------- -------- 33,170 229 2.74 33,769 221 2.63 33,474 214 2.60 23,936 181 3.01 23,313 164 2.81 23,306 156 2.72 39,407 517 5.21 40,349 521 5.18 41,717 533 5.18 2,629 35 5.20 4,281 56 5.29 3,119 39 5.03 5,518 85 6.12 4,786 72 6.07 4,569 66 5.82 - ---------------------- ---------------------- --------------------- 104,660 1,047 3.97 106,498 1,034 3.90 106,185 1,008 3.85 23,523 301 5.08 23,433 295 5.04 20,015 245 4.97 2,073 28 5.47 2,152 30 5.50 1,633 21 5.23 6,951 104 5.95 5,488 84 6.15 3,899 54 5.63 10,694 177 6.51 10,543 170 6.51 10,783 173 6.50 - ---------------------- ---------------------- --------------------- 147,901 1,657 4.44 148,114 1,613 4.37 142,515 1,501 4.27 ----------------------- ---------------------- ---------------------- 27,500 26,966 26,600 5,988 5,568 5,451 1,733 1,733 1,517 14,392 14,043 14,304 - ---------- --------- --------- $ 197,514 $ 196,424 $ 190,387 - ---------- --------- --------- $ 3,683 8.30% $ 3,648 8.34% $ 3,466 8.30% 1,657 3.73 1,613 3.69 1,501 3.60 ----------------------- ---------------------- ---------------------- $ 2,026 4.57% $ 2,035 4.65% $ 1,965 4.70% ----------------------- ---------------------- ----------------------
(b) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned income. (c) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts. T-25 FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 --------- --------------------------------------------------- First Fourth Third Second First (In millions, except per share data) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 10,528 10,275 9,827 10,092 9,205 Interest-bearing bank balances 2,646 3,832 3,248 3,259 2,590 Federal funds sold and securities purchased under resale agreements 11,656 7,781 7,037 7,784 6,535 - ------------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 24,830 21,888 20,112 21,135 18,330 - ------------------------------------------------------------------------------------------------------------------------------------ Trading account assets 7,008 5,952 8,152 5,720 4,395 Securities available for sale 34,388 23,524 21,135 20,931 19,059 Investment securities 3,172 3,526 3,681 3,891 4,024 Loans, net of unearned income 133,092 131,687 135,966 136,676 134,839 Allowance for loan losses (1,862) (1,847) (2,175) (2,181) (2,191) - ------------------------------------------------------------------------------------------------------------------------------------ Loans, net 131,230 129,840 133,791 134,495 132,648 - ------------------------------------------------------------------------------------------------------------------------------------ Premises and equipment 5,007 4,863 4,855 4,861 4,936 Due from customers on acceptances 945 1,496 1,629 1,521 1,354 Other intangible assets 2,930 2,948 3,026 3,102 3,183 Other assets 10,556 11,698 6,385 5,986 5,578 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 220,066 205,735 202,766 201,642 193,507 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 30,530 31,005 29,676 30,374 28,935 Interest-bearing deposits 107,604 106,072 103,468 104,828 104,434 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 138,134 137,077 133,144 135,202 133,369 Short-term borrowings 43,524 31,681 33,784 32,892 27,349 Bank acceptances outstanding 940 1,496 1,627 1,516 1,353 Other liabilities 7,911 6,725 6,445 5,645 5,092 Long-term debt 12,010 11,752 11,209 10,559 10,767 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 202,519 188,731 186,209 185,814 177,930 - ------------------------------------------------------------------------------------------------------------------------------------ Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures 1,741 1,735 1,734 1,734 1,734 - ------------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred stock -- -- -- -- -- Common stock, $3.33-1/3 par value; authorized 2,000,000,000 shares 3,243 3,203 3,197 3,183 3,214 Paid-in capital 1,439 1,582 1,484 1,194 1,186 Retained earnings 10,834 10,198 9,926 9,635 9,563 Accumulated other comprehensive income (loss), net 290 286 216 82 (120) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 15,806 15,269 14,823 14,094 13,843 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 220,066 205,735 202,766 201,642 193,507 - ------------------------------------------------------------------------------------------------------------------------------------ MEMORANDA Securities available for sale-amortized cost $ 33,934 23,080 20,797 20,795 19,241 Investment securities-market value 3,315 3,670 3,829 4,026 4,138 Stockholders' equity, net of unrealized gain (loss) on debt and equity securities $ 15,806 15,269 14,823 14,094 13,843 Shares outstanding (In thousands) 972,775 960,984 958,977 954,902 964,186 - ------------------------------------------------------------------------------------------------------------------------------------
T-26 FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------- 1998 1997 -------- ---------------------------------------------- First Fourth Third Second First (In millions, except per share data) Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 2,787 2,946 2,992 2,966 2,883 Interest and dividends on securities available for sale 501 361 364 374 313 Interest and dividends on investment securities Taxable income 38 42 41 46 47 Nontaxable income 16 18 17 17 18 Trading account interest 91 107 94 76 59 Other interest income 169 161 155 142 123 - -------------------------------------------------------------------------------------------------------------------- Total interest income 3,602 3,635 3,663 3,621 3,443 - -------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 1,057 1,059 1,047 1,034 1,008 Interest on short-term borrowings 500 435 433 409 320 Interest on long-term debt 185 187 177 170 173 - -------------------------------------------------------------------------------------------------------------------- Total interest expense 1,742 1,681 1,657 1,613 1,501 - -------------------------------------------------------------------------------------------------------------------- Net interest income 1,860 1,954 2,006 2,008 1,942 Provision for loan losses 135 445 225 228 205 - -------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,725 1,509 1,781 1,780 1,737 - -------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trading account profits 35 100 36 75 41 Service charges on deposit accounts 283 290 283 275 271 Mortgage banking income 69 76 62 60 58 Capital management income 413 278 272 267 261 Securities available for sale transactions 23 18 15 10 9 Investment security transactions -- -- 2 1 -- Fees for other banking services 70 56 64 69 74 Equipment lease rental income 46 43 48 46 50 Sundry income 438 304 300 238 270 - -------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,377 1,165 1,082 1,041 1,034 - -------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 822 783 711 720 695 Other benefits 162 150 156 162 173 - -------------------------------------------------------------------------------------------------------------------- Personnel expense 984 933 867 882 868 Occupancy 137 131 138 138 137 Equipment 183 165 167 157 160 Advertising 37 36 33 37 35 Telecommunications 46 45 40 40 43 Travel 40 40 30 30 25 Postage, printing and supplies 61 59 53 53 60 FDIC assessment 6 8 7 7 7 Professional fees 70 97 71 67 57 External data processing 20 22 25 23 24 Other intangible amortization 75 80 78 78 79 Merger-related and restructuring charges 29 225 -- 59 -- Sundry expense 207 325 202 200 193 - -------------------------------------------------------------------------------------------------------------------- Total noninterest expense 1,895 2,166 1,711 1,771 1,688 - -------------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) 1,207 508 1,152 1,050 1,083 Income taxes (benefits) (a) 417 (68) 404 368 380 - -------------------------------------------------------------------------------------------------------------------- Net income $ 790 576 748 682 703 - -------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Basic earnings $ 0.82 0.61 0.79 0.72 0.72 Diluted earnings 0.81 0.60 0.78 0.70 0.72 Cash dividends $ 0.37 0.32 0.32 0.29 0.29 AVERAGE SHARES (In thousands) Basic 965,120 960,596 946,354 953,612 969,669 Diluted 977,155 972,051 959,013 964,518 981,174 - --------------------------------------------------------------------------------------------------------------------
(a) Certain corporate and interstate banking entities were reorganized, which resulted in a reduction in the effective federal income tax rate in the fourth quarter of 1997. This benefit was principally offset by a higher provision for loan losses related to the restructuring of the unsecured consumer loan portfolio. T-27 FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, ------------------------- (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 790 703 Adjustments to reconcile net income to net cash provided (used) by operating activities Accretion and amortization of securities discounts and premiums, net 39 7 Provision for loan losses 135 205 Gain on sale of mortgage servicing rights (2) -- Securities available for sale transactions (23) (9) Depreciation and amortization 247 219 Trading account assets, net (1,003) 215 Mortgage loans held for resale (912) 140 Gain on sale of premises and equipment (5) -- Gain on sale of assets held for sale (1) (2) Other assets, net 3,201 240 Other liabilities, net 179 (529) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,645 1,189 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 3,438 3,045 Maturities of securities available for sale 528 727 Purchases of securities available for sale (14,791) (3,858) Calls and underdeliveries of investment securities -- 1 Maturities of investment securities 496 364 Purchases of investment securities (151) (204) Origination of loans, net (1,337) (585) Sales of premises and equipment 52 24 Purchases of premises and equipment (305) (201) Other intangible assets, net (11) (8) Purchase of bank owned separate account life insurance (31) -- Cash equivalents acquired, net of purchases of banking organizations 80 -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (12,032) (695) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase (decrease) in cash realized from Deposits, net 810 (3,060) Securities sold under repurchase agreements and other short-term borrowings, net 11,729 (270) Issuances of guaranteed preferred beneficial interests -- 945 Issuances of long-term debt 1,647 26 Payments of long-term debt (1,351) (75) Sales of common stock 366 133 Purchases of common stock (531) (1,196) Cash dividends paid (341) (279) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 12,329 (3,776) - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 2,942 (3,282) Cash and cash equivalents, beginning of year 21,888 21,612 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 24,830 18,330 - ------------------------------------------------------------------------------------------------------------------------------------ NONCASH ITEMS Increase in foreclosed properties and a decrease in loans $ 2 9 Issuance of common stock for acquisitions 249 3 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Securities available for sale (18) (192) Other assets (deferred income taxes) $ 22 43 - ------------------------------------------------------------------------------------------------------------------------------------
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