-----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, R+iKQuZelxFI94JUX1QaEvGaD6TXt/r15atDnJKtUBkt3Uxs9FQAnLb+9b7c8NuJ tUnWfiwDze+XtiqXjBasGQ== 0000950168-98-001630.txt : 19980515 0000950168-98-001630.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950168-98-001630 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST UNION CORP CENTRAL INDEX KEY: 0000036995 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 560898180 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10000 FILM NUMBER: 98621376 BUSINESS ADDRESS: STREET 1: ONE FIRST UNION CTR CITY: CHARLOTTE STATE: NC ZIP: 28288-0630 BUSINESS PHONE: 7043746565 MAIL ADDRESS: STREET 1: ONE FIRST UNION CENTER STREET 2: 301 S TRYON ST CITY: CHARLOTTE STATE: NC ZIP: 28288-0137 FORMER COMPANY: FORMER CONFORMED NAME: CAMERON FINANCIAL CORP DATE OF NAME CHANGE: 19750522 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION NATIONAL BANCORP INC DATE OF NAME CHANGE: 19721115 10-Q 1 FIRST UNION 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-10000 First Union Corporation (Exact name of registrant as specified in its charter)
North Carolina 56-0898180 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
First Union Corporation One First Union Center Charlotte, North Carolina 28288-0013 (Address of principal executive offices) (Zip Code) (704) 374-6565 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 629,237,671 shares of Common Stock, par value $3.33 1/3 per share, were outstanding as of April 27, 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Union Corporation (the "Corporation" or "FUNC") may from time to time make written or oral "forward-looking statements", including statements contained in the Corporation's filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its reports to stockholders and in other communications by the Corporation, which are made in good faith by the Corporation pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to the Corporation's beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Corporation's control). The words "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. The following factors, among others, could cause the Corporation's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Corporation conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Corporation and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Corporation's products and services; the success of the Corporation in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Corporation at managing the risks involved in the foregoing. The Corporation cautions that the foregoing list of important factors is not exclusive. The Corporation incorporates by reference those factors included in the Corporation's Current Reports on Form 8-K dated July 21, 1997, August 20, 1997, November 18, 1997, November 28, 1997, and December 2, 1997. The Corporation does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Corporation. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. The following unaudited consolidated financial statements of the Corporation within Item 1 include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation of such consolidated financial statements for the periods indicated. 1 FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS The Consolidated Balance Sheets of the Corporation and subsidiaries at March 31, 1998, March 31, 1997, and December 31, 1997, respectively, set forth on page T-22 of the Corporation's First Quarter Financial Supplement for the three months ended March 31, 1998 (the "Financial Supplement"), are incorporated herein by reference. The Consolidated Statements of Income of the Corporation and subsidiaries for the three months ended March 31, 1998 and 1997, set forth on page T-23 of the Financial Supplement, are incorporated herein by reference. The Consolidated Statements of Cash Flows of the Corporation and subsidiaries for the three months ended March 31, 1998 and 1997, set forth on page T-24 of the Financial Supplement, are incorporated herein by reference. A copy of the Financial Supplement is being filed as Exhibit (19) to this Report. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information related to the Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deferrable Interest Debentures can be found in Exhibit 13(b) of the Corporation's 1997 Annual Report on Form 10-K in Notes to Consolidated Financial Statements in Note 11 on page C-23, and is incorporated herein by reference. 2 Part II. OTHER INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis of Financial Condition and Results of Operations appears on pages 2 through 22, P-1 through P-4 and T-1 through T-24 of the Financial Supplement and is incorporated herein by reference. A copy of the Financial Supplement is being filed as Exhibit (19) to this Report. Item 4. Submission of Matters to a Vote of Security Holders. At a Special Meeting of the Stockholders of the Corporation held on February 27, 1998, the following proposals were approved by the holders of the Corporation's common stock voting as indicated: 1. Proposal to approve the Agreement and Plan of Mergers, dated as of November 18, 1997, by and between CoreStates Financial Corp ("CFC") and the Corporation pursuant to which, among other things, (i) CFC will merge with and into the Corporation, and (ii) each outstanding share of CFC common stock will be converted into 1.62 shares of the Corporation's common stock, all as more fully described in the Joint Proxy Statement/ Prospectus, dated January 9, 1998: FOR AGAINST ABSTAIN 457,042,091 10,299,597 3,933,778 2. Proposal to approve an amendment to the Corporation's Articles of Incorporation to increase the number of shares of the Corporation's common stock that the Corporation is authorized to issue from 750,000,000 to 2,000,000,000: FOR AGAINST ABSTAIN 446,347,497 19,723,867 5,204,102 At the Annual Meeting of the Stockholders of the Corporation held on April 21, 1998, the following proposals were approved by the holders of the Corporation's common stock voting as indicated: 1. Proposal to elect the following individuals as directors of the Corporation:
FOR WITHHELD Class III directors: Edward E. Barr ....... 532,265,084 1,729,859 G. Alex Bernhardt .... 532,046,752 1,948,191 W. Waldo Bradley ..... 532,334,003 1,660,940 Norwood H. Davis, Jr. 532,175,536 1,819,407 John R. Georgius ..... 532,297,276 1,697,667 Frank M. Henry ....... 532,289,360 1,705,583 Lanty L. Smith ....... 532,216,052 1,778,891 Class I director: Malcolm S. McDonald .. 532,285,299 1,709,644 Class II director: B.F. Dolan ........... 532,253,198 1,741,745
2. Proposal to approve the Corporation's 1998 Stock Incentive Plan: FOR AGAINST ABSTAIN 345,073,801 125,718,654 6,480,673 3. Proposal to approve the Corporation's 1998 Employee Stock Purchase Plan: FOR AGAINST ABSTAIN 449,089,414 13,638,170 5,088,741 4. Proposal to approve the Corporation's 1999 Employee Stock Plan: FOR AGAINST ABSTAIN 437,793,468 33,424,941 5,932,699 5. Proposal to ratify the appointment of KPMG Peat Marwick LLP as auditors for the Corporation: FOR AGAINST ABSTAIN 529,726,395 1,126,039 3,142,509 3 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits.
Exhibit No. Description - ---------------- ---------------------------------------------------------------------------- (4) Instruments defining the rights of security holders, including indentures.* (12) Computations of Consolidated Ratios of Earnings to Fixed Charges. (19) The Corporation's First Quarter 1998 Financial Supplement. (27) (a) The Corporation's Financial Data Schedule.** (27) (b) The Corporation's Financial Data Schedules.**
- --------- * The Corporation agrees to furnish to the Commission upon request, copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries. ** Filing by Electronic Data Gathering, Analysis and Retrieval System only. (b) Reports on Form 8-K. During the quarter ended March 31, 1998, a Current Report on Form 8-K, dated January 22, 1998, was filed with the Commission by the Corporation. 4 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 14, 1998 By /s/ James H. Hatch ------------------------------------ James H. Hatch Senior Vice President and Corporate Controller (Principal Accounting Officer) EXHIBIT INDEX
Exhibit No. Description - ---------------- --------------------------------------------------------------- (4) Instruments defining the rights of security holders, including indentures.* (12) Computations of Consolidated Ratios of Earnings to Fixed Charges. (19) The Corporation's First Quarter 1998 Financial Supplement. (27) (a) The Corporation's Financial Data Schedule.** (27) (b) The Corporation's Financial Data Schedules.**
- --------- * The Corporation agrees to furnish to the Commission upon request, copies of the instruments, including indentures, defining the rights of the holders of the long-term debt of the Corporation and its consolidated subsidiaries. ** Filing by Electronic Data Gathering, Analysis and Retrieval System only. EX-12 2 EXHIBIT (12)
Exhibit (12) FIRST UNION CORPORATION AND SUBSIDIARIES COMPUTATIONS OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended Years Ended December 31, ------------------------------------------------------------ Mar. 31, (In millions) 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 897 2,710 2,499 2,389 2,088 1,795 Fixed charges, excluding capitalized interest 621 2,068 1,880 1,426 816 608 - ------------------------------------------------------------------------------------------------------------------------------- Earnings (A) $ 1,518 4,778 4,379 3,815 2,904 2,403 - ------------------------------------------------------------------------------------------------------------------------------- Interest, excluding interest on deposits $ 587 1,926 1,805 1,349 747 538 Distributions on guaranteed preferred beneficial interests 16 66 - - - - One-third of rents 18 76 74 76 69 70 Capitalized interest - - 5 4 1 - - ------------------------------------------------------------------------------------------------------------------------------- Fixed charges (B) $ 621 2,068 1,884 1,429 817 608 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, excluding interest on deposits (A)/(B) 2.44 X 2.31 2.32 2.67 3.55 3.95 - ------------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Pretax income from continuing operations $ 897 2,710 2,499 2,389 2,088 1,795 Fixed charges, excluding capitalized interest 1,443 5,332 5,070 4,502 2,862 2,552 - ------------------------------------------------------------------------------------------------------------------------------- Earnings (C) $ 2,340 8,042 7,569 6,891 4,950 4,347 - ------------------------------------------------------------------------------------------------------------------------------- Interest, including interest on deposits $ 1,409 5,190 4,995 4,425 2,793 2,482 Distributions on guaranteed preferred beneficial interests 16 66 - - - - One-third of rents 18 76 74 76 69 70 Capitalized interest - - 5 4 1 - - ------------------------------------------------------------------------------------------------------------------------------- Fixed charges (D) $ 1,443 5,332 5,074 4,505 2,863 2,552 - ------------------------------------------------------------------------------------------------------------------------------- Consolidated ratios of earnings to fixed charges, including interest on deposits (C)/(D) 1.62 X 1.51 1.49 1.53 1.73 1.70 - -------------------------------------------------------------------------------------------------------------------------------
EX-19 3 EXHIBIT 19 FIRST QUARTER 1998 FIRST UNION CORPORATION AND SUBSIDIARIES Management's Analysis of Operations Quarterly Financial Supplement Three Months Ended March 31, 1998 FIRST UNION CORPORATION AND SUBSIDIARIES FIRST QUARTER FINANCIAL SUPPLEMENT THREE MONTHS ENDED MARCH 31, 1998 TABLE OF CONTENTS
- ------------------------------------------------------------------------------------------------------------------- PAGE - ------------------------------------------------------------------------------------------------------------------- Financial Highlights 1 Management's Analysis of Operations 2 Pro Forma Financial Information P-1 Consolidated Summaries of Income, Per Share and Balance Sheet Data T-1 Business Segments T-2 Internal Capital Growth and Dividend Payout Ratios T-6 Selected Quarterly Data T-6 Securities Available for Sale T-7 Investment Securities T-8 Loans T-9 Allowance for Loan Losses and Nonperforming Assets T-10 Intangible Assets T-11 Foreclosed Properties T-11 Deposits T-12 Time Deposits in Amounts of $100,000 or More T-12 Long-Term Debt T-13 Changes in Stockholders' Equity T-14 Capital Ratios T-15 Off-Balance Sheet Derivative Financial Instruments T-16 Off-Balance Sheet Derivatives - Expected Maturities T-18 Off-Balance Sheet Derivatives Activity T-19 Net Interest Income Summaries T-20 Consolidated Balance Sheets T-22 Consolidated Statements of Income T-23 Consolidated Statements of Cash Flows T-24
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 $ 587 504 After tax merger-related and restructuring charges 19 - - -------------------------------------------------------------------------------------------------------------------------- Net income before merger-related and restructuring charges $ 606 504 - -------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (a) Basic earnings Net income after merger-related and restructuring charges $ 0.91 0.80 Net income before merger-related and restructuring charges 0.94 0.80 Diluted earnings Net income after merger-related and restructuring charges 0.90 0.79 Net income before merger-related and restructuring charges 0.93 0.79 Cash dividends 0.37 0.29 Book value 19.16 16.62 Period-end price $ 56.8125 40.50 Average shares (In thousands) Basic 642,343 627,402 Diluted 651,355 635,852 Actual shares (In thousands) 644,493 625,914 Dividend payout ratios (based on operating earnings) 39.74% 35.43 - -------------------------------------------------------------------------------------------------------------------------- PERFORMANCE HIGHLIGHTS Before merger-related and restructuring charges Return on average assets (a) (b) 1.50% 1.40 Return on average stockholders' equity (a) (c) 20.21 19.15 Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 59 57 Net charge-offs to Average loans, net (a) 0.36 0.63 Average loans, net, excluding Bankcard (a) 0.22 0.25 Nonperforming assets to loans, net and foreclosed properties 0.74 0.80 Net interest margin (a) 3.88% 4.44 - -------------------------------------------------------------------------------------------------------------------------- CASH EARNINGS (EXCLUDING OTHER INTANGIBLE AMORTIZATION) Before merger-related and restructuring charges Net income $ 659 558 Earnings per share - basic $ 1.03 0.89 Return on average tangible assets (a) 1.66% 1.58 Return on average tangible stockholders' equity (a) (c) 28.15 29.09 Overhead efficiency ratio (excludes expenses on trust capital securities) (d) 56 % 54 - -------------------------------------------------------------------------------------------------------------------------- PERIOD-END BALANCE SHEET DATA Securities available for sale $ 32,111 16,839 Investment securities 2,072 2,408 Loans, net of unearned income 98,092 101,747 Earning assets 150,002 131,526 Total assets 171,966 148,442 Noninterest-bearing deposits 22,425 19,978 Interest-bearing deposits 80,901 80,320 Long-term debt 8,252 8,004 Guaranteed preferred beneficial interests 991 990 Stockholders' equity $ 12,349 10,400 - --------------------------------------------------------------------------------------------------------------------------
(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 Financial Supplement 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. EARNINGS HIGHLIGHTS First Union's operating earnings in the first quarter of 1998 increased 20 percent to $606 million from $504 million in the first quarter of 1997. Diluted operating earnings per share were 93 cents in the first quarter of 1998, up 18 percent from 79 cents per share in the first quarter of 1997. First quarter 1998 operating earnings represent a return on average common equity of 20.21 percent and a return on average assets of 1.50 percent compared with 19.15 percent and 1.40 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 $587 million, or 90 cents per diluted share. First quarter 1997 results have been restated to reflect the pooling of interests acquisition of Signet Banking Corporation in November 1997. The information presented herein has not been restated to reflect the acquisition of CoreStates Financial Corp on April 28, 1998. In future periods, historical financial information will be restated to reflect the CoreStates acquisition. 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 39 percent increase in noninterest income (excluding investment securities transactions), including 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 15 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, credit quality continued to improve, with nonperforming assets declining to $729 million, or 0.74 percent of net loans and foreclosed properties, from $819 million, or 0.80 percent, in the first quarter of 1997. Annualized net charge-offs as a percentage of average net loans improved to 0.36 percent in the first quarter of 1998 compared with 0.63 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 (bullet) 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; (bullet) 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; (bullet) 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 (bullet) 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 Financial Corp 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. In fact, the percentage of noninterest income to total revenue was 45 percent in the first quarter of 1998 compared with 36 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 the CoreStates merger. More information is available in our Current Reports on Form 8-K, which we filed with the Securities and Exchange Commission (SEC) dated November 18, 1997, November 28, 1997, and December 2, 1997, in our registration statement on Form S-4 (No. 333-44015), filed with the SEC on January 9, 1998, and in our 1997 Annual Report on Form 10-K. Additionally, pro forma financial information related to CoreStates is presented elsewhere in this report. 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 for First Union to 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 34 million of the outstanding shares of First Union common stock at a cost of $2 billion. First Union expects to repurchase an additional 3 million shares of its common stock which will then equal the number of such shares expected to be issued in the merger, currently estimated to be approximately 37 million shares. 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 financial statements will not be restated. 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. 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 enhance corporate earnings and to manage exposure to interest rate risk. Because most 5 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 CoreStates and 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. On a pro forma basis with CoreStates, we would have 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. When combined with CoreStates, First Union will be 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 8 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. 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. 9 RESULTS OF OPERATIONS INCOME STATEMENT REVIEW NET INTEREST INCOME Tax-equivalent net interest income was $1.37 billion in the first quarter of 1998 compared with $1.42 billion in the first quarter of 1997. The modest 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, $13 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 not significant. NET INTEREST MARGIN The net interest margin, which is the difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, was 3.88 percent in the first quarter of 1998 compared with 4.44 percent in the first quarter of 1997, a reduction of 56 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 7.92 percent in the first quarter of 1998 and 8.25 percent in the first quarter of 1997. The average rate paid on interest-bearing liabilities was 4.57 percent in the first quarter of 1998 and 4.38 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 10 investments were reflected in a 39 percent increase in noninterest income, excluding investment securities transactions, to $1.1 billion in the first quarter of 1998 from $813 million 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. 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 $5 billion at December 31, 1997. NONINTEREST EXPENSE Noninterest expense was $1.5 billion in the first quarter of 1998 compared with $1.3 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 affected. We had $2.7 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 11 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 $20 million in the first quarter of 1998 and $4 million in the first quarter of 1997. At March 31, 1998, we had securities available for sale with a market value of $32 billion compared with $21 billion at year-end 1997. The market value of securities available for sale was $391 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 6.68 percent compared with 6.84 percent in the first quarter of 1997. The average maturity of the portfolio was 5.95 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 $2.1 billion at March 31, 1998, and $2.2 billion at December 31, 1997. The average rate earned on investment securities was 8.74 percent in the first quarter of 1998 and 8.62 percent in the first quarter of 1997. The average maturity of the portfolio was 5.31 years at March 31, 1998. LOANS The loan portfolio, which represents our largest asset class, is a significant source of interest and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Our lending strategy stresses quality growth and portfolio diversification by product, geography and industry. A common credit underwriting structure is in place throughout the corporation. The commercial loan portfolio includes general commercial loans, both secured and unsecured, and commercial real estate loans. Commercial loans are typically either working capital loans, which are used to finance the inventory, receivables and other working capital needs of commercial borrowers, or term loans, which are generally used to finance fixed assets or acquisitions. Commercial real estate loans are typically used to finance the construction or purchase of commercial real estate. Our commercial lenders focus principally on middle-market companies, which we believe reduces the risk of credit loss from any single borrower or group of borrowers. A 12 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 47 percent in commercial loans and 53 percent in consumer loans compared with 48 percent and 52 percent, respectively, at December 31, 1997. Net loans at March 31, 1998, were $98 billion compared with $97 billion at December 31, 1997. Average net loans were $96 billion in the first quarter of 1998 and $101 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 $47 billion and $24 billion, respectively. Commercial and standby letters of credit were $6 billion at March 31, 1998. At March 31, 1998, loan participations sold to other lenders amounted to $2 billion. They were recorded as a reduction of gross loans. The average rate earned on loans was 8.63 percent in the first quarter of 1998 compared with 8.71 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. COMMERCIAL REAL ESTATE LOANS Commercial real estate loans amounted to 11 percent of the total portfolio at March 31, 1998, and at December 31, 1997. This portfolio included commercial real estate mortgage loans of $8 billion at March 31, 1998, compared with $9 billion at December 31, 1997. ASSET QUALITY NONPERFORMING ASSETS At March 31, 1998, nonperforming assets were $729 million, or 0.74 percent of net loans and foreclosed properties, compared with $723 million, or 0.75 percent, at December 31, 1997. Loans or properties of less than $5 million each made up 81 percent, or $594 million, of nonperforming assets at March 31, 1998. Of the rest: (bullet) Seven loans or properties between $5 million and $10 million each accounted for $54 million; and (bullet) Three loans or properties over $10 million each accounted for $81 million. 13 Fifty percent of nonperforming assets were collateralized primarily by real estate at March 31, 1998 and at December 31, 1997. PAST DUE LOANS Accruing loans 90 days past due were $229 million at March 31, 1998, compared with $232 million at December 31, 1997. Of the past dues at March 31, 1998, $23 million were commercial and commercial real estate loans and $206 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 $87 million in the first quarter of 1998 and $131 million in the fourth quarter of 1997. Annualized net charge-offs were 0.36 percent of average net loans in the first quarter of 1998 compared with 0.53 percent in the fourth quarter of 1997. Excluding net charge-offs related to the credit card portfolio, net charge-offs were 0.22 percent compared with 0.33 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 $90 million in the first quarter of 1998 compared with $325 million in the fourth quarter of 1997. The loan loss provision was increased in the 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 $1.2 billion at March 31, 1998, and 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 $315 million at March 31, 1998, compared with $301 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 $30 million related to $213 million of 14 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 $310 million, and $3 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 $11 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. 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 $98 billion at March 31, 1998, compared with $97 billion at December 31, 1997. The portion of core deposits in higher-rate, other consumer time deposits was 31 percent at March 31, 1998, and 30 percent at year-end 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 $96 billion in the first quarter of 1998 and $94 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 percent and 21 percent, respectively, of average core deposits. Average balances in savings and NOW, other consumer time and noninterest-bearing deposits were higher when compared with the fourth quarter of 1997, while money market deposits were lower. Deposits can be affected by branch closings or 15 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 $45 billion compared with $34 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 $42 billion compared with $33 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 67 percent of total stockholders' equity at March 31, 1998, and at year-end 1997. Under a shelf registration statement filed with the Securities and Exchange Commission, we currently have available for issuance $1.9 billion of senior or subordinated debt securities, common stock or preferred stock. The sale of any additional debt or equity securities will depend on future market conditions, funding needs and other factors. In April 1998, we issued an aggregate of $500 million of subordinated debt. DEBT OBLIGATIONS We have 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, $1.5 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, $991 million of trust capital securities were outstanding. A subsidiary trust of the corporation issued these capital securities, and the corporation received the proceeds by issuing junior subordinated debentures to the trust. These capital securities are considered tier 1 capital for regulatory purposes. Expenses of $16 million in the first quarter of 1998 related to the capital securities are included in sundry expense. 16 STOCKHOLDERS' EQUITY The management of capital in a regulated banking environment requires a balance between maximizing leverage and return on equity to stockholders while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. We have historically generated attractive returns on equity to stockholders while maintaining sufficient regulatory capital ratios. Total stockholders' equity was $12 billion at March 31, 1998, and at December 31, 1997. Common shares outstanding amounted to 644 million at March 31, 1998, compared with 636 million at December 31, 1997. From January 1, 1998, through May 12, 1998, we repurchased 34 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 $241 million in dividends to common stockholders in the first quarter of 1998 compared with $179 million in the first quarter of 1997. At March 31, 1998, stockholders' equity included a $249 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 $737 million available for dividends at March 31, 1998, without prior regulatory approval. Our subsidiaries paid $205 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 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 8.61 percent and 13.44 percent, respectively, compared with 8.41 percent and 13.40 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 17 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 6.52 percent and at December 31,1997, it was 6.81 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. 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 18 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" 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 19 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. The fair value appreciation of off-balance sheet derivative financial instruments used to manage our interest rate sensitivity was $467 million at March 31, 1998, compared with fair value appreciation of $412 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 20 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. 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 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
FIRST UNION CORPORATION CORESTATES FINANCIAL CORP PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ The following unaudited pro forma combined condensed balance sheet and condensed statements of income present combined financial information for First Union Corporation (the "Corporation") and CoreStates Financial Corp ("CoreStates") assuming the Corporation and CoreStates had been combined for each period presented on a pooling of interests accounting basis (the "Merger"). March 31, 1998 ----------------------------------------------------------------------------- Pro Forma Pro Forma (In millions) Corporation CoreStates Adjustments Combined - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 7,077 3,451 - 10,528 Interest-bearing bank balances 217 2,429 - 2,646 Federal funds sold and securities purchased under resale agreements 10,828 828 - 11,656 - ---------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 18,122 6,708 - 24,830 - ---------------------------------------------------------------------------------------------------------------------------------- Trading account assets 6,682 326 - 7,008 Securities available for sale 32,111 2,277 - 34,388 Investment securities 2,072 1,100 - 3,172 Loans, net of unearned income 98,092 35,000 - 133,092 Allowance for loan losses (1,224) (638) - (1,862) - ---------------------------------------------------------------------------------------------------------------------------------- Loans, net 96,868 34,362 - 131,230 - ---------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 4,398 609 - 5,007 Due from customers on acceptances 575 370 - 945 Other intangible assets 2,665 265 - 2,930 Other assets 8,473 2,083 - 10,556 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 171,966 48,100 - 220,066 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 22,425 8,105 - 30,530 Interest-bearing deposits 80,901 26,703 - 107,604 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits 103,326 34,808 - 138,134 Short-term borrowings 40,301 3,223 - 43,524 Bank acceptances outstanding 575 365 - 940 Other liabilities 6,172 1,739 - 7,911 Long-term debt 8,252 3,758 - 12,010 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 158,626 43,893 - 202,519 - ---------------------------------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in junior subordinated deferrable interest debentures 991 750 - 1,741 - ---------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock - - - - Common stock 2,148 224 871 3,243 Paid-in capital 1,203 1,300 (1,064) 1,439 Retained earnings 8,749 3,063 (978) 10,834 Unrealized gain on debt and equity securities, net 249 41 - 290 Treasury stock - (1,121) 1,121 - Unallocated shares held by ESOP - (50) 50 - - ---------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 12,349 3,457 - 15,806 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 171,966 48,100 - 220,066 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Pro Forma Financial Information. P-1
FIRST UNION CORPORATION CORESTATES FINANCIAL CORP PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, Years Ended December 31, --------------------- ------------------------------------------------------ (In millions, except per share data) 1998 1997 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 3,602 3,442 14,362 13,758 13,028 10,245 9,507 Interest expense 1,756 1,512 6,452 6,151 5,732 3,739 3,376 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 1,846 1,930 7,910 7,607 7,296 6,506 6,131 Provision for loan losses 135 205 1,103 678 403 458 559 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,711 1,725 6,807 6,929 6,893 6,048 5,572 Securities available for sale transactions 23 9 52 96 76 24 76 Investment security transactions - - 3 4 6 4 7 Noninterest income 1,354 1,023 4,267 3,435 2,976 2,336 2,332 Merger-related and restructuring charges 29 - 284 421 233 107 - SAIF special assessment - - - 149 - - - Noninterest expense 1,852 1,675 7,052 6,360 6,309 5,558 5,430 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,207 1,082 3,793 3,534 3,409 2,747 2,557 Income taxes 417 380 1,084 1,261 1,213 938 818 - ----------------------------------------------------------------------------------------------------------------------------------- Net income 790 702 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 790 702 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 $ 790 702 2,709 2,264 2,170 1,722 1,693 - ----------------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Basic earnings $ 0.82 0.72 2.84 2.33 2.21 1.86 1.85 Diluted earnings $ 0.81 0.72 2.80 2.30 2.17 1.83 1.81 AVERAGE COMMON SHARES (In thousands) Basic 965,120 969,669 955,241 973,712 979,852 927,941 913,621 Diluted 977,155 981,174 966,792 982,755 1,001,145 946,969 940,167 - ----------------------------------------------------------------------------------------------------------------------------------- CORPORATION HISTORICAL PER COMMON SHARE DATA Basic earnings $ 0.91 0.80 3.03 2.61 2.44 2.30 2.15 Diluted earnings $ 0.90 0.79 2.99 2.58 2.38 2.25 2.09 AVERAGE COMMON SHARES (In thousands) Basic 642,343 627,402 625,649 619,237 619,777 561,442 543,321 Diluted 651,355 635,852 633,772 625,224 637,186 577,709 565,239 - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Pro Forma Financial Information. P-2 FIRST UNION CORPORATION CORESTATES FINANCIAL CORP NOTES TO PRO FORMA FINANCIAL INFORMATION (Unaudited) - -------------------------------------------------------------------------------- (1) The unaudited pro forma information presented herein is not necessarily indicative of the results of operations or the combined financial position that would have resulted had the Merger been consummated at the beginning of the applicable periods indicated, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. Pro forma financial information with respect to the Merger assumes the Merger was consummated as of the beginning of each period presented. Average common and total stockholders' equity excludes net unrealized gains or losses on debt and equity securities. (2) The Merger was consummated on April 28, 1998, and it was accounted for on a pooling of interests accounting basis. Accordingly, the related pro forma adjustments herein reflect, where applicable, an exchange ratio of 1.62 shares of the Corporation's common stock for each of the 202,643,000 shares of CoreStates common stock which were outstanding at March 31, 1998. As a result, information was adjusted for the Merger by the (i) addition of 328,282,000 shares of the Corporation's common stock amounting to $1.1 billion (excluding the shares of the Corporation's common stock issued in exchange for 1.7 million shares of CoreStates common stock that CoreStates issued in April 1998 in order to qualify the Merger as a pooling of interests); (ii) elimination of 202,643,000 shares of outstanding CoreStates common stock amounting to $224 million; (iii) elimination of the cost of CoreStates treasury stock of $1.1 billion; (iv) elimination of the cost of unallocated shares held by the CoreStates ESOP of $50 million; and (v) recordation of the remaining amount of $1.1 billion as a reduction of paid-in capital at March 31, 1998. As of March 31, 1998, the Corporation and CoreStates had 48,222,000 and 15,294,000 shares of common stock reserved for issuance primarily for stock option plans, respectively, (excluding, as to the Corporation, shares reserved for issuance in connection with the Merger, or upon exercise of the rights attached to the Corporation's common stock), which are not included in the unaudited pro forma financial information presented herein. For the three months ended March 31, 1998, CoreStates had net income applicable to common stockholders of $203 million. In 1993, CoreStates changed its method of accounting for postemployment benefits, and in 1993 CoreStates reported additional expense as a cumulative effect of a change in accounting principle, net of tax of $16 million. Such amount has been reclassified to noninterest expense and income taxes in the pro forma financial information presented herein. (3) On November 28, 1997, the Corporation acquired Signet Banking Corporation ("Signet"), which was accounted for as a pooling of interests. The financial information presented herein includes Signet as of and for the three years ended December 31, 1997, and the three months ended March 31, 1998 and 1997. (4) Except for the three months ended March 31, 1998, the pro forma financial information presented herein does not include financial information related to the Corporation's (i) January 15, 1998, purchase accounting acquisition of Covenant Bancorp, Inc. ("Covenant"), which had assets of $415 million, net loans of $254 million, deposits of $294 million and stockholders' equity of $31 million at December 31, 1997; and (ii) January 31, 1998, pooling of interests acquisition of Wheat First Butcher Singer, Inc. ("Wheat First"), which had assets of $1.1 billion and stockholders' equity of $171 million at December 31, 1997. P-3 - -------------------------------------------------------------------------------- The Corporation issued 1.6 million shares of its common stock to stockholders of Covenant, substantially all of which were repurchased in 1997 in the open market at a cost of $79 million, and 10.3 million shares of its common stock to stockholders of Wheat First. Financial information related to Wheat First is not considered material to the historical results of the Corporation, and accordingly, such financial information has not been combined with the historical results of the Corporation for periods ended on or prior to December 31, 1997. (5) The pro forma financial information also does not include financial information related to the Corporation's (i) pending purchase accounting acquisition of The Money Store Inc. ("TMSI"), which had assets of $3 billion, net receivables of $1 billion and stockholders' equity of $698 million, and (ii) April 30, 1998 purchase accounting acquisition of Bowles, Hollowell Connor & Co., which had assets of $18 million. The TMSI transaction requires the Corporation to pay $34 per share in the Corporation's common stock for each share of TMSI common stock. The total purchase price is approximately $2 billion. The Corporation expects to repurchase outstanding shares of common stock equal to the number of such shares to be issued, currently estimated to be approximately 37 million shares. From January 1 through May 12, 1998, the Corporation repurchased approximately 34 million shares of its common stock at a cost of $2 billion. None of the foregoing is included in the pro forma financial information presented herein. (6) Earnings per share data has been computed based on the combined historical net income applicable to common stockholders of the Corporation and CoreStates using the combined (i) historical weighted average shares outstanding with respect to basic earnings per share, and (ii) sum of the historical weighted average shares outstanding and common stock equivalents related to employee stock options including restricted stock awards with respect to diluted earnings per share, adjusted to equivalent shares of the Corporation's common stock with respect to CoreStates, as of the earliest applicable period presented, as appropriate. (7) Certain insignificant reclassifications have been included herein to conform to financial statement presentations. Transactions conducted in the ordinary course of business between the Corporation and CoreStates are immaterial, and accordingly, they have not been eliminated. (8) The unaudited pro forma financial information does not include any material merger-related expenses or any material expenses related to the Merger. The Corporation currently estimates after-tax merger-related and restructuring expenses of approximately $795 million related to the Merger, or $0.81 per share of the Corporation's common stock, expected to be recorded in the second quarter of 1998. In addition, the Corporation expects to incur an estimated $75 million in pre-tax merger-related and restructuring charges in the 12-month period following the Merger. (9) The Corporation expects to realize significant revenue enhancements and cost savings from the Merger. The pro forma financial information, which does not reflect any revenue enhancements, direct costs or potential savings from the consolidation of operations of the Corporation and CoreStates, is not indicative of the results of future operations. No assurance can be given with respect to the ultimate level of such revenue enhancements or cost savings. As indicated by the foregoing unaudited pro forma financial information and based solely on the foregoing assumptions, consummation of the Merger would have diluted each of the Corporation's historical basic and diluted earnings per common share amounts for the year ended December 31, 1997 and the three months ended March 31, 1998 by 6 percent and 10 percent, respectively. P-4
Table 1 CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA - ----------------------------------------------------------------------------------------------------------------------------------- Twelve 1998 1997 Months ----------- --------------------------------------------------- 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 $ 11,063 2,755 2,746 2,791 2,771 2,625 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income (a) $ 11,141 2,775 2,767 2,809 2,790 2,643 Interest expense 5,378 1,409 1,330 1,328 1,311 1,221 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income (a) 5,763 1,366 1,437 1,481 1,479 1,422 Provision for loan losses 768 90 325 175 178 162 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses (a) 4,995 1,276 1,112 1,306 1,301 1,260 Securities available for sale transactions 47 20 12 10 5 4 Investment security transactions 3 - - 2 1 - Noninterest income 3,678 1,129 905 835 809 813 Merger-related and restructuring charges (b) 298 29 210 - 59 - Noninterest expense 5,516 1,479 1,450 1,292 1,295 1,283 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes (a) 2,909 917 369 861 762 794 Income taxes 852 310 (14) 296 260 272 Tax-equivalent adjustment 78 20 21 18 19 18 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,979 587 362 547 483 504 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Basic $ 3.14 0.91 0.57 0.88 0.78 0.80 Diluted 3.10 0.90 0.56 0.87 0.77 0.79 Cash dividends $ 1.30 0.37 0.32 0.32 0.29 0.29 Average shares - Basic (In thousands) - 642,343 631,004 622,650 621,541 627,402 Average shares - Diluted (In thousands) - 651,355 639,031 630,552 629,654 635,852 Average stockholders' equity (c) Quarter-to-date $ - 12,158 11,666 11,060 10,705 10,678 Year-to-date - 12,158 11,030 10,816 10,691 10,678 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) 18.33X 18.33 17.14 15.55 15.57 13.78 To book value 297 % 297 271 272 266 244 Book value $ 19.16 19.16 18.91 18.43 17.40 16.62 BALANCE SHEET DATA Assets 171,966 171,966 157,274 155,175 154,795 148,442 Long-term debt $ 8,252 8,252 8,042 8,169 7,608 8,004 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Tax-equivalent (b) Merger-related and restructuring charges amounted to $19 million after tax in the first quarter of 1998, $157 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 applicable to common stockholders $ 2 10 27 158 197 - --------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 18 21 8 18 22 (11) 76 - --------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 5 18 16 15 69 123 - --------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 51 (2) 5 32 22 108 - ----------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common equity $ 599 102 62 923 110 1,796 - ----------------------------------------------------------------------------------------------------------------------------- Consumer Capital Commercial Capital Treasury/ (In millions) Bank Mgt. Bank Markets Nonbank Total - ----------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Income statement data Net interest income $ 683 88 352 123 100 1,346 Provision for loan losses 75 - 8 5 2 90 Noninterest income 320 373 91 250 115 1,149 Noninterest expense 624 346 246 203 89 1,508 Income tax expense 107 39 66 57 41 310 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after merger-related and restructuring charges $ 197 76 123 108 83 587 After-tax merger-related and restructuring charges - - - - 19 19 - ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before merger-related and restructuring charges $ 197 76 123 108 102 606 - ----------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 31.18 % 39.38 21.34 24.17 8.83 20.21 Average loans, net $ 49,042 2,838 26,811 16,703 632 96,026 Average deposits 60,832 13,983 19,148 5,199 1,725 100,887 Average attributed common equity $ 2,566 761 2,354 1,796 4,684 12,161 - -----------------------------------------------------------------------------------------------------------------------------
(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. (Continued) 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 applicable to common stockholders $ 14 8 - 204 226 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 16 11 5 11 5 (4) 44 - ----------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 4 9 19 27 73 132 - ----------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common 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 applicable to common stockholders $ 20 1 4 31 14 70 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common 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 common equity $ 296 55 44 644 123 1,162 - ---------------------------------------------------------------------------------------------------------------------------------- Consumer Capital Commercial Capital Treasury/ (In millions) Bank Mgt. Bank Markets Nonbank Total - ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Income statement data Net interest income $ 750 64 382 96 112 1,404 Provision for loan losses 137 - 9 (2) 18 162 Noninterest income 330 222 84 159 22 817 Noninterest expense 588 216 248 146 85 1,283 Income tax expense 129 26 77 41 (1) 272 - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders after merger-related and restructuring charges $ 226 44 132 70 32 504 After-tax merger-related and restructuring charges - - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stockholders before merger-related and restructuring charges $ 226 44 132 70 32 504 - ---------------------------------------------------------------------------------------------------------------------------------- Performance and other data Return on average attributed common equity (a) 32.99 % 35.21 20.94 24.73 3.55 19.15 Average loans, net $ 54,040 1,994 28,697 13,263 3,018 101,012 Average deposits 61,027 12,885 19,091 3,557 3,869 100,429 Average attributed common equity $ 2,761 525 2,579 1,162 3,651 10,678 - ----------------------------------------------------------------------------------------------------------------------------------
(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. (Continued) 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 13.18 X 12.88 13.54 14.22 13.76 X Return on assets 1.45 % 0.94 1.43 1.28 1.40 - --------------------------------------------------------------------------------------------------------------------- Return on stockholders' equity (b) 19.60 % 12.29 19.63 18.09 19.15 X Earnings retained 59.01 % 43.68 64.97 63.67 64.57 - --------------------------------------------------------------------------------------------------------------------- Internal capital growth (b) 11.56 % 5.37 12.75 11.52 12.37 - --------------------------------------------------------------------------------------------------------------------- DIVIDEND PAYOUT RATIOS ON Operating earnings 39.74 % 39.26 35.03 33.74 35.43 Net income 40.99 % 56.32 35.03 36.33 35.43 - ---------------------------------------------------------------------------------------------------------------------
(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. 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) $ 1,575 1,274 1,054 1,055 857 Wholesale 2,175 1,393 981 691 780 - --------------------------------------------------------------------------------------------------------- Total $ 3,750 2,667 2,035 1,746 1,637 - --------------------------------------------------------------------------------------------------------- VOLUME OF RESIDENTIAL LOANS SERVICED $ 60,739 60,738 60,825 60,101 59,375 - --------------------------------------------------------------------------------------------------------- FIRST UNION CORPORATION OTHER DATA ATMs 2,693 2,768 2,741 2,727 2,690 Employees 50,899 47,096 47,393 47,943 48,582 - ------------------------------------------------------------------------------------------------------------
(a) Includes originations of affiliated banks. T-6 Table 5 SECURITIES AVAILABLE FOR SALE
- ----------------------------------------------------------------------------------------------------------------------------------- March 31, 1998 -------------------------------------------------------------------------------------------- Average 1 Year 1-5 5-10 After 10 Gross Unrealized Amortized Maturity ----------------- (In millions) or Less Years Years Years Total Gains Losses Cost in Years - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE U.S. Treasury $ 170 709 3,408 195 4,482 (100) 19 4,401 8.74 U.S. Government agencies 361 6,475 11,631 4 18,471 (254) 3 18,220 5.76 CMOs 180 4,088 829 - 5,097 (28) 20 5,089 4.81 State, county and municipal 5 2 20 62 89 - - 89 16.45 Other 65 2,256 715 936 3,972 (66) 15 3,921 4.70 - ------------------------------------------------------------------------------------------------------------------------- Total $ 781 13,530 16,603 1,197 32,111 (448) 57 31,720 5.95 - ------------------------------------------------------------------------------------------------------------------------------------ MARKET VALUE Debt securities $ 781 13,530 16,603 459 31,373 (431) 50 30,992 Sundry securities - - - 738 738 (17) 7 728 - ------------------------------------------------------------------------------------------------------------------------- Total $ 781 13,530 16,603 1,197 32,111 (448) 57 31,720 - ------------------------------------------------------------------------------------------------------------------------- AMORTIZED COST Debt securities $ 777 13,351 16,414 450 30,992 Sundry securities - - - 728 728 - ---------------------------------------------------------------------------------------- Total $ 777 13,351 16,414 1,178 31,720 - ---------------------------------------------------------------------------------------- WEIGHTED AVERAGE YIELD U.S. Treasury 5.57 % 6.13 6.10 6.68 6.11 U.S. Government agencies 7.11 7.05 7.04 6.57 7.04 CMOs 7.31 6.96 6.13 - 6.83 State, county and municipal 11.19 7.19 6.02 6.48 6.65 Other 6.10 5.49 5.21 6.18 5.61 Consolidated 6.76 % 6.72 6.72 6.27 6.70 - ----------------------------------------------------------------------------------------
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-7 Table 6 INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------- March 31, 1998 ------------------------------------------------------------------------------------- Average 1 Year 1-5 5-10 After 10 Gross Unrealized Market Maturity ----------------- (In millions) or Less Years Years Years Total Gains Losses Value in Years - ------------------------------------------------------------------------------------------------------------------------------------ CARRYING VALUE U.S. Government agencies $ - 697 292 - 989 25 (1) 1,013 4.13 CMOs 36 293 - - 329 7 - 336 2.04 State, county and municipal 55 187 169 295 706 109 - 815 8.23 Other - 18 2 28 48 2 - 50 9.09 - -------------------------------------------------------------------------------------------------------------------------- Total $ 91 1,195 463 323 2,072 143 (1) 2,214 5.31 - --------------------------------------------------------------------------------------------------------------------------------- CARRYING VALUE Debt securities $ 91 1,195 463 323 2,072 143 (1) 2,214 Sundry securities - - - - - - - - - ------------------------------------------------------------------------------------------------------------------------- Total $ 91 1,195 463 323 2,072 143 (1) 2,214 - -------------------------------------------------------------------------------------------------------------------------- MARKET VALUE Debt securities $ 92 1,235 500 387 2,214 Sundry securities - - - - - - ------------------------------------------------------------------------------------------ Total $ 92 1,235 500 387 2,214 - ------------------------------------------------------------------------------------------ WEIGHTED AVERAGE YIELD U.S. Government agencies - % 7.41 6.80 - 7.23 CMOs 7.70 7.67 - - 7.67 State, county and municipal 11.17 10.91 11.92 11.90 11.59 Other - 7.68 7.27 9.87 8.94 Consolidated 9.79 % 8.03 8.67 11.73 8.83 - -----------------------------------------------------------------------------------------
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-8 Table 7 LOANS
- -------------------------------------------------------------------------------------------------------------- 1998 1997 ---------- ----------------------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 27,910 28,111 27,244 27,414 26,683 Real estate - construction and other 2,288 2,386 2,530 2,699 2,837 Real estate - mortgage 8,411 8,576 8,916 9,179 9,460 Lease financing 7,843 8,056 7,871 7,775 6,587 Foreign 1,520 1,431 1,308 1,395 1,091 - -------------------------------------------------------------------------------------------------------------- Total commercial 47,972 48,560 47,869 48,462 46,658 - -------------------------------------------------------------------------------------------------------------- RETAIL Real estate - mortgage 26,114 25,382 26,086 26,636 27,356 Installment loans - Bankcard (a) 2,514 2,708 5,137 5,494 5,453 Installment loans - other 20,282 19,297 21,660 21,671 21,309 Vehicle leasing 4,457 4,312 4,005 3,858 3,704 - -------------------------------------------------------------------------------------------------------------- Total retail 53,367 51,699 56,888 57,659 57,822 - -------------------------------------------------------------------------------------------------------------- Total loans 101,339 100,259 104,757 106,121 104,480 Unearned income 3,247 3,386 3,305 3,338 2,733 - -------------------------------------------------------------------------------------------------------------- Loans, net $ 98,092 96,873 101,452 102,783 101,747 - --------------------------------------------------------------------------------------------------------------
(a) Installment loans - Bankcard include credit card, ICR, signature and First Choice amounts. T-9 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 $ 1,212 1,496 1,490 1,487 1,502 Provision for loan losses 90 325 175 178 162 Allowance relating to loans acquired, transferred to accelerated disposition or sold 9 (478) - - (17) Loan losses, net (87) (131) (169) (175) (160) - -------------------------------------------------------------------------------------------------------------------------------- Balance, end of quarter $ 1,224 1,212 1,496 1,490 1,487 - -------------------------------------------------------------------------------------------------------------------------------- (as a % of loans, net) 1.25 % 1.25 1.47 1.45 1.46 - -------------------------------------------------------------------------------------------------------------------------------- (as a % of nonaccrual and restructured loans) 195 % 195 235 233 209 - -------------------------------------------------------------------------------------------------------------------------------- (as a % of nonperforming assets) 168 % 168 203 201 182 - -------------------------------------------------------------------------------------------------------------------------------- LOAN LOSSES Commercial, financial and agricultural $ 16 45 15 13 10 Real estate - commercial construction and mortgage 4 8 8 6 10 Real estate - residential mortgage 7 10 6 13 7 Installment loans - Bankcard 39 60 113 116 107 Installment loans - other and Vehicle leasing 42 41 56 55 54 - -------------------------------------------------------------------------------------------------------------------------------- Total 108 164 198 203 188 - -------------------------------------------------------------------------------------------------------------------------------- LOAN RECOVERIES Commercial, financial and agricultural 6 16 8 6 12 Real estate - commercial construction and mortgage 2 3 2 4 1 Real estate - residential mortgage - - 1 - - Installment loans - Bankcard 3 5 9 7 6 Installment loans - other and Vehicle leasing 10 9 9 11 9 - -------------------------------------------------------------------------------------------------------------------------------- Total 21 33 29 28 28 - -------------------------------------------------------------------------------------------------------------------------------- Loan losses, net $ 87 131 169 175 160 - -------------------------------------------------------------------------------------------------------------------------------- (as % of average loans, net) (a) 0.36 % 0.53 0.67 0.69 0.63 - -------------------------------------------------------------------------------------------------------------------------------- (as % of average loans, net, excluding Bankcard) (a) 0.22 % 0.33 0.27 0.28 0.25 - -------------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS Nonaccrual loans Commercial loans $ 246 236 215 219 231 Commercial real estate loans 80 76 88 101 125 Consumer real estate loans 186 186 188 181 214 Installment loans 114 124 143 136 131 - -------------------------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 626 622 634 637 701 Restructured loans 1 2 1 2 11 Foreclosed properties 102 99 103 102 107 - -------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 729 723 738 741 819 - -------------------------------------------------------------------------------------------------------------------------------- (as % of loans, net and foreclosed properties) 0.74 % 0.75 0.73 0.72 0.80 - -------------------------------------------------------------------------------------------------------------------------------- Accruing loans past due 90 days $ 229 232 306 318 332 - --------------------------------------------------------------------------------------------------------------------------------
(a) Annualized. T-10 Table 9 INTANGIBLE ASSETS
- ---------------------------------------------------------------------------------------------------------- 1998 1997 ----------- ---------------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------------------- MORTGAGE AND OTHER SERVICING ASSETS $ 436 421 380 367 322 - ----------------------------------------------------------------------------------------------------------- CREDIT CARD PREMIUM $ 21 24 26 29 32 - ----------------------------------------------------------------------------------------------------------- OTHER INTANGIBLE ASSETS Goodwill $ 2,267 2,247 2,278 2,314 2,354 Deposit base premium 393 421 457 488 519 Other 5 6 8 7 9 - ----------------------------------------------------------------------------------------------------------- Total $ 2,665 2,674 2,743 2,809 2,882 - -----------------------------------------------------------------------------------------------------------
Table 10 FORECLOSED PROPERTIES
- ----------------------------------------------------------------------------------------------------------------------------- 1998 1997 ----------- -------------------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------ Foreclosed properties $ 117 115 119 119 124 - ----------------------------------------------------------------------------------------------------------------------------- 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 $ 102 99 103 102 107 - -----------------------------------------------------------------------------------------------------------------------------
T-11 Table 11 DEPOSITS
- ---------------------------------------------------------------------------------------------------------- 1998 1997 ------------ ---------------------------------------------------- First Fourth Third Second First (In millions) Quarter Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------- CORE DEPOSITS Noninterest-bearing $ 22,425 21,753 20,734 20,962 19,978 Savings and NOW accounts 30,015 30,118 29,274 29,311 29,421 Money market accounts 15,672 15,494 14,848 14,387 14,496 Other consumer time 30,109 29,231 30,575 31,432 32,312 - ---------------------------------------------------------------------------------------------------------- Total core deposits 98,221 96,596 95,431 96,092 96,207 Foreign 1,209 2,483 750 1,708 906 Other time 3,896 3,810 3,222 3,189 3,185 - ---------------------------------------------------------------------------------------------------------- Total deposits $ 103,326 102,889 99,403 100,989 100,298 - ----------------------------------------------------------------------------------------------------------
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 $ 3,300 - Over 3 months through 6 months 1,217 - Over 6 months through 12 months 1,514 - Over 12 months 2,185 - - ----------------------------------------------------------------------------- Total $ 8,216 - - -----------------------------------------------------------------------------
T-12 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 Varying rates and terms to January 26, 2004 161 59 56 52 64 Subordinated notes Bank, varying rates and terms to December 15, 2036 1,134 975 973 875 1,372 6.80%, due June 15, 2003 149 149 149 149 149 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 2,063 1,952 1,979 1,880 2,473 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DEBT Advances from the Federal Home Loan Bank 1,935 1,285 1,385 880 930 Mortgage notes and other debt 10 11 12 41 43 Capitalized leases 22 23 23 23 24 - ------------------------------------------------------------------------------------------------------------------------------------ Total other debt 1,967 1,319 1,420 944 997 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 8,252 8,042 8,169 7,608 8,004 - ------------------------------------------------------------------------------------------------------------------------------------
T-13 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 $ 10,400 12,032 11,710 10,916 10,400 10,932 - ---------------------------------------------------------------------------------------------------------------------------------- Comprehensive income Net income 1,979 587 362 547 483 504 Unrealized gain (loss) on debt and equity securities, net 387 (5) 73 126 193 (140) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 2,366 582 435 673 676 364 - ---------------------------------------------------------------------------------------------------------------------------------- Purchase of common stock (594) (406) - (83) (105) (836) Common stock issued for stock options exercised 357 121 80 38 118 103 Common stock issued through dividend reinvestment plan 24 12 10 - 2 13 Common stock issued through public offerings 358 - - 358 - - Common stock issued for acquisitions 249 249 - - - 3 Cash dividends paid (811) (241) (203) (192) (175) (179) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 12,349 12,349 12,032 11,710 10,916 10,400 - ----------------------------------------------------------------------------------------------------------------------------------
T-14 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 $ 10,522 10,215 8,986 8,135 7,752 Total capital 16,433 16,279 15,073 13,614 13,027 Adjusted risk-based assets 122,249 121,503 109,851 107,726 106,451 Adjusted leverage ratio assets $ 161,401 149,921 137,516 130,666 126,465 Ratios Tier 1 capital 8.61 % 8.41 8.18 7.55 7.28 Total capital 13.44 13.40 13.72 12.64 12.24 Leverage 6.52 6.81 6.53 6.23 6.13 STOCKHOLDERS' EQUITY TO ASSETS Quarter-end 7.18 7.65 7.55 7.05 7.01 Average 7.59 % 7.77 7.38 7.03 7.27 - ---------------------------------------------------------------------------------------------------------------------------------- BANK CAPITAL RATIOS 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. T-15 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 $ 13,000 6.52% 5.63% 4.15 Converts floating rate loans to fixed Carrying amount $ 50 rate. Adds to liability sensitivity. Unrealized gross gain 129 Similar characteristics to a fixed Unrealized gross loss (5) income security funded with variable rate liabilities. Includes $2.9 billion of callable swaps expected to mature in or before December 1999 if swap rates are below 7.04 percent. ------- Total 174 ------- Forward interest rate swaps 725 6.20 - 2.72 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 500 6.07 5.63 0.87 Paid a premium to convert floating Carrying amount 2 rate loans to fixed rate when 3 Unrealized gross gain - month LIBOR is below an average Unrealized gross loss - of 6.07 percent. ------- Total 2 - --------------------------------------------- ------- Total asset rate conversions $ 14,225 6.49% 5.63% 3.96 $ 178 - ----------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Interest rate swaps $ 6,772 7.01% 5.81% 9.36 Converts $4.0 billion of fixed rate Carrying amount $ 16 long-term debt to floating rate by Unrealized gross gain 258 matching the terms of the swap Unrealized gross loss (6) to the debt issue. Also converts $562 million of fixed rate CDs to variable rate, $1.2 billion of fixed rate bank notes to floating rate and $1.0 billion of fixed rate trust capital securities to variable rate. ------- Total 268 ------- Interest rate floors 250 4.43 - 3.20 $250 million floor offsets a Carrying amount 1 corresponding rate purchased floor Unrealized gross gain - in long-term debt. Unrealized gross loss (1) ------- Total - - --------------------------------------------- ------- Total liability rate conversions $ 7,022 6.92% 5.81% 9.14 $ 268 - -----------------------------------------------------------------------------------------
(Continued) T-16 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 ---- 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 - ---- 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 ---- Short eurodollar futures 7,534 - 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 2,000 6.62 - 1.09 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 1999, June 1999 and September 1999. ---- 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 $ 13,119 6.61 % 6.11% 1.04 $ 21 - -----------------------------------------------------------------------------------------
(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-17 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 $ 1,596 10 8,422 4,197 - 14,225 Weighted average receive rate 5.54% 5.63 6.59 6.65 - 6.49 Estimated fair value $ 10 - 145 23 - 178 - --------------------------------------------------------------------------------------------------------------------- LIABILITY RATE CONVERSIONS Notional amount $ 865 374 1,045 3,150 1,588 7,022 Weighted average receive rate 5.61% 7.88 7.34 6.81 7.35 6.92 Estimated fair value $ (1) 12 50 126 81 268 - --------------------------------------------------------------------------------------------------------------------- RATE SENSITIVITY HEDGES Notional amount $ 9,826 1,050 2,243 - - 13,119 Weighted average receive rate 6.63% 6.61 5.68 - - 6.61 Estimated fair value $ (3) 2 22 - - 21 - ---------------------------------------------------------------------------------------------------------------------
(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. T-18
Table 18 OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a) - ------------------------------------------------------------------------------------------------------- Asset Liability Rate Rate Rate Sensitivity (In millions) Conversions Conversions Hedges Total - ------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ 12,880 7,133 18,308 38,321 Additions 1,600 525 - 2,125 Maturities/Amortizations (255) (636) (5,089) (5,980) Terminations - - (100) (100) - ------------------------------------------------------------------------------------------------------ Balance, March 31, 1998 $ 14,225 7,022 13,119 34,366 - ------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to interest rate risk management activities. T-19
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 $ 242 3 4.52 % $ 382 5 5.30 % Federal funds sold and securities purchased under resale agreements 9,108 119 5.33 7,527 104 5.44 Trading account assets (a) 5,512 83 6.13 6,383 101 6.30 Securities available for sale (a) 28,152 469 6.68 19,192 331 6.90 Investment securities (a) U.S. Government and other 1,399 27 7.63 1,473 28 7.46 State, county and municipal 711 19 10.90 731 20 10.97 - --------------------------------------------------------------------- ---------------------- Total investment securities 2,110 46 8.74 2,204 48 8.63 - --------------------------------------------------------------------- ---------------------- Loans Commercial Commercial, financial and agricultural 27,830 527 7.68 27,094 508 7.44 Real estate - construction and other 2,313 48 8.37 2,486 50 7.95 Real estate - mortgage 8,503 175 8.35 8,726 188 8.55 Lease financing 3,782 105 11.09 3,988 108 10.80 Foreign 1,448 23 6.44 1,299 22 6.62 - --------------------------------------------------------------------- ---------------------- Total commercial 43,876 878 8.10 43,593 876 7.98 - --------------------------------------------------------------------- ---------------------- Retail Real estate - mortgage 25,686 499 7.77 25,719 507 7.89 Installment loans - Bankcard (c) 2,493 116 18.63 4,982 213 17.17 Installment loans - other and Vehicle leasing 23,971 562 9.49 24,380 582 9.48 - --------------------------------------------------------------------- ---------------------- Total retail 52,150 1,177 9.08 55,081 1,302 9.43 - --------------------------------------------------------------------- ---------------------- Total loans 96,026 2,055 8.63 98,674 2,178 8.79 - --------------------------------------------------------------------- ---------------------- Total earning assets 141,150 2,775 7.92 134,362 2,767 8.20 ------------------- ------------------- Cash and due from banks 6,111 5,978 Other assets 16,709 12,134 - --------------------------------------------------------- ---------- Total assets $ 163,970 $ 152,474 - --------------------------------------------------------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Savings and NOW accounts 30,188 225 3.02 28,585 222 3.09 Money market accounts 15,282 123 3.27 16,073 125 3.09 Other consumer time 29,493 386 5.31 29,482 391 5.27 Foreign 1,515 20 5.41 1,002 17 6.48 Other time 3,829 68 7.17 3,995 66 6.47 - --------------------------------------------------------------------- ---------------------- Total interest-bearing deposits 80,307 822 4.15 79,137 821 4.11 Federal funds purchased and securities sold under repurchase agreements 28,946 360 5.04 22,270 282 5.03 Commercial paper 1,071 14 5.27 864 18 8.17 Other short-term borrowings 6,296 85 5.49 5,094 77 6.03 Long-term debt 8,230 128 6.23 8,173 132 6.49 - --------------------------------------------------------------------- ---------------------- Total interest-bearing liabilities 124,850 1,409 4.57 115,538 1,330 4.57 ------------------- ------------------- Noninterest-bearing deposits 20,580 20,264 Other liabilities 5,111 3,842 Guaranteed preferred beneficial interests 991 990 Stockholders' equity 12,438 11,840 - --------------------------------------------------------- ---------- Total liabilities and $ 152,474 ---------- stockholders' equity $ 163,970 - --------------------------------------------------------- Interest income and rate earned $ 2,775 7.92 % $ 2,767 8.20 % Interest expense and equivalent rate paid 1,409 4.04 1,330 3.93 - --------------------------------------------------------------------------------- ---------------------------------- Net interest income and margin $ 1,366 3.88 % $ 1,437 4.27 % - --------------------------------------------------------------------------------- ----------------------------------
(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-20
------------------------------------------------------------------------------------------------------------------------------ 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 -------------------------------------------------------------------------------------------------------------------------------- $ 489 6 4.74 % $ 377 5 5.66 % $ 284 3 4.41 % 7,573 104 5.46 7,096 99 5.54 6,110 83 5.59 5,301 88 6.55 4,289 72 6.72 3,557 57 6.49 18,636 328 6.98 19,275 341 7.09 16,525 278 6.84 1,533 28 7.36 1,531 29 7.61 1,646 31 7.47 742 21 10.89 766 21 11.21 787 21 11.03 ----------------------- ----------------------- ----------------------- 2,275 49 8.51 2,297 50 8.81 2,433 52 8.62 ----------------------- ----------------------- ----------------------- 26,582 510 7.61 26,661 513 7.72 25,702 485 7.66 2,625 58 8.80 2,795 60 8.65 2,879 61 8.53 9,117 202 8.78 9,289 203 8.77 9,630 200 8.41 4,043 106 10.42 3,919 100 10.19 3,419 83 9.83 1,296 20 6.27 1,290 19 6.14 1,024 16 6.16 ----------------------- ----------------------- ----------------------- 43,663 896 8.14 43,954 895 8.17 42,654 845 8.03 ----------------------- ----------------------- ----------------------- 26,373 519 7.80 27,279 534 7.85 28,601 555 7.87 5,321 213 15.87 5,510 202 14.68 5,514 192 14.09 25,096 606 9.59 24,860 592 9.55 24,243 578 9.67 ----------------------- ----------------------- ----------------------- 56,790 1,338 9.35 57,649 1,328 9.24 58,358 1,325 9.21 ----------------------- ----------------------- ----------------------- 100,453 2,234 8.82 101,603 2,223 8.78 101,012 2,170 8.71 ----------------------- ----------------------- ----------------------- 134,727 2,809 8.27 134,937 2,790 8.29 129,921 2,643 8.25 -------------------- --------------------- -------------------- 5,740 5,835 5,933 10,895 10,528 10,430 ----------- ----------- ----------- $ 151,362 $ 151,300 $ 146,284 ----------- ----------- ----------- 29,357 219 2.96 29,507 210 2.85 28,840 199 2.80 14,794 119 3.20 14,257 107 3.00 14,696 106 2.93 30,991 409 5.23 31,721 410 5.19 32,920 421 5.18 1,263 17 5.48 3,068 41 5.39 1,821 24 5.27 3,328 54 6.46 3,422 53 6.27 3,684 54 5.94 ----------------------- ----------------------- ----------------------- 79,733 818 4.07 81,975 821 4.02 81,961 804 3.98 22,011 281 5.06 21,958 275 5.00 18,801 229 4.96 1,089 14 5.36 1,280 18 5.40 905 11 5.05 5,616 85 6.00 4,630 71 6.21 3,296 47 5.73 7,854 130 6.51 7,707 126 6.59 8,032 130 6.54 ----------------------- ----------------------- ----------------------- 116,303 1,328 4.53 117,550 1,311 4.47 112,995 1,221 4.38 -------------------- --------------------- -------------------- 19,197 18,808 18,468 3,696 3,313 3,274 990 990 913 11,176 10,639 10,634 ----------- ----------- ----------- $ 151,362 $ 151,300 $ 146,284 ----------- ------------ ----------- $ 2,809 8.27 % $ 2,790 8.29 % $ 2,643 8.25 % 1,328 3.91 1,311 3.90 1,221 3.81 ----------------------- --------------------- -------------------- $ 1,481 4.36 % $ 1,479 4.39 % $ 1,422 4.44 % ----------------------- --------------------- --------------------
(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-21
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 $ 7,077 6,445 6,661 6,971 6,540 Interest-bearing bank balances 217 710 204 492 353 Federal funds sold and securities purchased under resale agreements 10,828 7,740 6,898 7,450 5,985 - --------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 18,122 14,895 13,763 14,913 12,878 - --------------------------------------------------------------------------------------------------------------------------- Trading account assets 6,682 5,457 7,825 5,418 4,194 Securities available for sale 32,111 21,415 18,924 18,817 16,839 Investment securities 2,072 2,175 2,268 2,285 2,408 Loans, net of unearned income 98,092 96,873 101,452 102,783 101,747 Allowance for loan losses (1,224) (1,212) (1,496) (1,490) (1,487) - --------------------------------------------------------------------------------------------------------------------------- Loans, net 96,868 95,661 99,956 101,293 100,260 - --------------------------------------------------------------------------------------------------------------------------- Premises and equipment 4,398 4,233 4,228 4,230 4,310 Due from customers on acceptances 575 854 838 730 635 Other intangible assets 2,665 2,674 2,743 2,809 2,882 Other assets 8,473 9,910 4,630 4,300 4,036 - --------------------------------------------------------------------------------------------------------------------------- Total assets $ 171,966 157,274 155,175 154,795 148,442 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 22,425 21,753 20,734 20,962 19,978 Interest-bearing deposits 80,901 81,136 78,669 80,027 80,320 - --------------------------------------------------------------------------------------------------------------------------- Total deposits 103,326 102,889 99,403 100,989 100,298 Short-term borrowings 40,301 27,357 29,545 29,544 24,500 Bank acceptances outstanding 575 855 838 730 635 Other liabilities 6,172 5,108 4,520 4,018 3,615 Long-term debt 8,252 8,042 8,169 7,608 8,004 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities 158,626 144,251 142,475 142,889 137,052 - --------------------------------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in Corporation's junior subordinated deferrable interest debentures 991 991 990 990 990 - --------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock - - - - - Common stock, $3.33-1/3 par value; authorized 2,000,000,000 shares 2,148 2,121 2,118 2,091 2,086 Paid-in capital 1,203 1,384 1,296 1,010 1,000 Retained earnings 8,749 8,273 8,115 7,760 7,452 Accumulated other comprehensive (loss), net 249 254 181 55 (138) - --------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 12,349 12,032 11,710 10,916 10,400 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 171,966 157,274 155,175 154,795 148,442 - --------------------------------------------------------------------------------------------------------------------------- MEMORANDA Securities available for sale-amortized cost $ 31,720 21,020 18,639 18,723 17,049 Investment securities-market value 2,214 2,322 2,412 2,417 2,522 Stockholders' equity, net of unrealized gain (loss) on debt and equity securities $ 12,349 12,032 11,710 10,916 10,400 Shares outstanding (In thousands) 644,493 636,394 635,335 627,398 625,914 - ---------------------------------------------------------------------------------------------------------------------------
T-22
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 $ 2,045 2,167 2,226 2,216 2,162 Interest and dividends on securities available for sale 465 329 325 337 276 Interest and dividends on investment securities Taxable income 27 27 28 29 30 Nontaxable income 14 14 14 14 15 Trading account interest 82 100 88 71 56 Other interest income 122 109 110 104 86 - --------------------------------------------------------------------------------------------------------------------------------- Total interest income 2,755 2,746 2,791 2,771 2,625 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 822 821 818 821 804 Interest on short-term borrowings 459 377 380 364 287 Interest on long-term debt 128 132 130 126 130 - --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,409 1,330 1,328 1,311 1,221 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income 1,346 1,416 1,463 1,460 1,404 Provision for loan losses 90 325 175 178 162 - --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,256 1,091 1,288 1,282 1,242 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trading account profits 33 86 24 61 33 Service charges on deposit accounts 214 222 214 208 210 Mortgage banking income 66 74 59 58 56 Capital management income 362 226 223 219 214 Securities available for sale transactions 20 12 10 5 4 Investment security transactions - - 2 1 - Fees for other banking services 41 27 37 41 46 Equipment lease rental income 46 43 48 46 50 Sundry income 367 227 230 176 204 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest income 1,149 917 847 815 817 - --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 653 597 543 554 527 Other benefits 138 116 118 124 137 - --------------------------------------------------------------------------------------------------------------------------------- Personnel expense 791 713 661 678 664 Occupancy 101 99 102 100 100 Equipment 150 132 137 126 129 Advertising 30 22 25 29 27 Telecommunications 35 32 30 29 30 Travel 36 35 27 26 22 Postage, printing and supplies 49 45 40 40 45 FDIC assessment 5 6 6 6 5 Professional fees 32 54 29 27 24 External data processing 20 22 25 23 24 Other intangible amortization 66 71 69 68 69 Merger-related and restructuring charges 29 210 - 59 - Sundry expense 164 219 141 143 144 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 1,508 1,660 1,292 1,354 1,283 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes (benefits) 897 348 843 743 776 Income taxes (benefits) (a) 310 (14) 296 260 272 - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 587 362 547 483 504 - --------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA Basic earnings $ 0.91 0.57 0.88 0.78 0.80 Diluted earnings 0.90 0.56 0.87 0.77 0.79 Cash dividends $ 0.37 0.32 0.32 0.29 0.29 AVERAGE SHARES (In thousands) Basic 642,343 631,004 622,650 621,541 627,402 Diluted 651,355 639,031 630,552 629,654 635,852 - -----------------------------------------------------------------------------------------------------------------------------------
(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-23
FIRST UNION CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------------------------------------------------ Three Months Ended March 31, ------------------------ (In millions) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 587 504 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 90 162 Gain on sale of mortgage servicing rights (2) - Securities available for sale transactions (20) (4) Investment security transactions - - Depreciation and amortization 216 192 Trading account assets, net (1,173) 294 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 2,354 96 Other liabilities, net 297 (313) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 1,470 1,076 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities available for sale 3,226 3,019 Maturities of securities available for sale 324 463 Purchases of securities available for sale (14,241) (3,732) Calls and underdeliveries of investment securities - 1 Maturities of investment securities 145 109 Purchases of investment securities (40) (20) Origination of loans, net (141) 282 Sales of premises and equipment 31 18 Purchases of premises and equipment (241) (178) Other intangible assets, net (9) (7) 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 (10,897) (45) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase (decrease) in cash realized from Deposits, net 189 (2,404) Securities sold under repurchase agreements and other short-term borrowings, net 12,829 (486) Issuances of guaranteed preferred beneficial interests - 495 Issuances of long-term debt 1,400 - Payments of long-term debt (1,250) (56) Sales of common stock 133 116 Purchases of common stock (406) (836) Cash dividends paid (241) (179) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 12,654 (3,350) - ------------------------------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents 3,227 (2,319) Cash and cash equivalents, beginning of year 14,895 15,197 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 18,122 12,878 - ------------------------------------------------------------------------------------------------------------------------ NONCASH ITEMS Increase in foreclosed properties and a decrease in loans $ 1 6 Issuance of common stock for purchase accounting acquisitions 249 4 Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities included in Securities available for sale (4) (205) Other assets (deferred income taxes) $ 1 (65) - ------------------------------------------------------------------------------------------------------------------------
T-24 EX-27 4 EXHIBIT (27) (A)
9 3-MOS DEC-31-1998 MAR-31-1998 7,077 217 10,828 6,682 32,111 2,072 2,214 101,339 (1,224) 171,966 103,326 40,301 6,172 8,252 0 0 2,148 10,201 171,966 2,045 506 122 2,755 822 1,409 1,346 90 20 1,508 897 897 0 0 587 0.91 0.90 3.88 626 229 1 0 1,212 108 21 1,224 666 6 552
EX-27 5 EXHIBIT (27) (B)
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 6,540 6,971 6,661 353 492 204 5,985 7,450 6,898 4,194 5,418 7,825 16,839 18,817 18,924 2,408 2,285 2,268 2,522 2,417 2,412 104,480 106,121 104,757 (1,487) (1,490) (1,496) 148,442 154,795 155,175 100,298 100,989 99,403 24,500 29,544 29,545 3,615 4,018 4,520 8,004 7,608 8,169 0 0 0 0 0 0 2,086 2,091 2,118 8,314 8,825 9,592 148,442 154,795 155,175 2,162 4,378 6,604 321 701 1,068 86 190 300 2,625 5,396 8,187 804 1,625 2,443 1,221 2,532 3,860 1,404 2,864 4,327 162 340 515 4 10 22 1,283 2,637 3,929 776 1,519 2,362 776 1,519 2,362 0 0 0 0 0 0 504 987 1,534 0.80 1.58 2.46 0.79 1.56 2.43 4.44 4.42 4.40 701 637 634 332 318 306 11 2 1 0 0 0 1,502 1,502 1,502 188 391 589 28 56 85 1,487 1,490 1,496 1,043 1,027 1,068 5 3 5 439 460 423
-----END PRIVACY-ENHANCED MESSAGE-----