SECOND QUARTER 1998
FIRST UNION CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S ANALYSIS OF OPERATIONS
Quarterly Financial Supplement
Six Months Ended June 30, 1998
FIRST UNION CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
SIX MONTHS ENDED JUNE 30, 1998
TABLE OF CONTENTS
PAGE
Financial Highlights ................................................ 1
Management's Analysis of Operations ................................. 2
Consolidated Summaries of Income, Per Share and Balance Sheet Data .. T-1
Business Segments ................................................... T-2
Internal Capital Growth and Dividend Payout Ratios .................. T-6
Selected Quarterly Data ............................................. T-7
Securities Available for Sale ....................................... T-8
Investment Securities ............................................... T-9
Loans ............................................................... T-10
Interest-Only and Residual Certificates ............................. T-11
Allowance for Loan Losses and Nonperforming Assets .................. T-12
Intangible Assets ................................................... T-13
Foreclosed Properties ............................................... T-13
Deposits ............................................................ T-14
Time Deposits in Amounts of $100,000 or More ........................ T-15
Long-Term Debt ...................................................... T-16
Changes in Stockholders' Equity ..................................... T-18
Capital Ratios ...................................................... T-19
Off-Balance Sheet Derivative Financial Instruments .................. T-20
Off-Balance Sheet Derivatives - Expected Maturities ................. T-23
Off-Balance Sheet Derivatives Activity .............................. T-23
Net Interest Income Summaries Five Quarters
Ended June 30, 1998 ............................................... T-24
Year-to-Date June 30, 1998; June 30, September 30, and
December 31, 1997 ............................................... T-26
Consolidated Balance Sheets ......................................... T-28
Consolidated Statements of Income
Five Quarters Ended June 30, 1998 ................................. T-29
Year-to-Date June 30, 1998 and 1997 ............................... T-30
Consolidated Statements of Cash Flows ............................... T-31
FINANCIAL HIGHLIGHTS
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Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
(Dollars in millions, except per share data) 1998 1997 1998 1997
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FINANCIAL HIGHLIGHTS
Net income before merger-related and restructuring
charges (Operating earnings) .................................... $ 883 719 $ 1,692 1,422
After tax merger-related and restructuring charges ................ 634 37 653 37
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Net income after merger-related and restructuring charges ......... $ 249 682 $ 1,039 1,385
==================================================================================================================================
PER SHARE DATA
Diluted earnings
Net income before merger-related and restructuring charges ...... $ 0.92 0.74 $ 1.75 1.46
Net income after merger-related and restructuring charges ....... 0.26 0.70 1.07 1.42
Basic earnings
Net income before merger-related and restructuring charges ...... 0.93 0.76 1.77 1.48
Net income after merger-related and restructuring charges ....... 0.27 0.72 1.09 1.44
Cash dividends .................................................... 0.37 0.29 0.74 0.58
Book value ........................................................ 16.72 14.82 16.72 14.82
Period-end price .................................................. $ 58.25 46.25 $ 58.25 46.25
Average shares (In thousands)
Diluted ......................................................... 962,160 964,518 969,180 972,830
Basic ........................................................... 949,750 953,612 957,430 961,612
Actual shares (In thousands) ...................................... 988,150 954,902 988,150 954,902
Dividend payout ratios (Based on operating earnings) .............. 40.22% 38.02 35.00% 38.81
==================================================================================================================================
PERFORMANCE HIGHLIGHTS
Before merger-related and restructuring charges
Return on average assets (a) .................................. 1.62% 1.47 1.59% 1.48
Return on average stockholders' equity (a) (b) ................ 23.91 20.42 22.55 20.36
Overhead efficiency ratio (excludes expenses on trust
capital securities) (c) ..................................... 56 55 56 56
Net charge-offs to
Average loans, net (a) .......................................... 0.47 0.71 0.43 0.67
Average loans, net, excluding Bankcard (a) ...................... 0.29 0.32 0.27 0.29
Nonperforming assets to loans, net and foreclosed properties ...... 0.66 0.75 0.66 0.75
Net interest margin (a) ........................................... 3.89% 4.65 4.01% 4.68
==================================================================================================================================
CASH EARNINGS (EXCLUDING OTHER
INTANGIBLE AMORTIZATION)
Before merger-related and restructuring charges
Net income .................................................... $ 951 774 $ 1,816 1,534
Earnings per share - diluted .................................. $ 0.98 0.81 $ 1.87 1.58
Return on average tangible assets (a) ......................... 1.77% 1.61 1.73% 1.63
Return on average tangible stockholders' equity (a)............ 32.59 28.31 30.25 28.39
Overhead efficiency ratio (excludes expenses on trust
capital securities) (c) ..................................... 53% 53 54% 53
==================================================================================================================================
PERIOD-END BALANCE SHEET DATA
Securities available for sale ..................................... $ 36,798 20,931
Investment securities ............................................. 2,229 3,891
Loans, net of unearned income ..................................... 137,390 136,676
Earning assets .................................................... 200,083 178,261
Total assets ...................................................... 228,996 201,642
Noninterest-bearing deposits ...................................... 33,169 30,374
Interest-bearing deposits ......................................... 105,429 104,828
Long-term debt .................................................... 13,250 10,559
Guaranteed preferred beneficial interests ......................... 1,735 1,734
Stockholders' equity .............................................. $ 16,526 14,094
==================================================================================================================================
(a) Quarterly amounts annualized.
(b) Based on net income and average stockholders' equity excluding average net
unrealized gains or losses on debt and equity securities.
(c) The overhead efficiency ratio is equal to noninterest expense divided by
net operating revenue. Net operating revenue is equal to the sum of
tax-equivalent net interest income and noninterest income, including
investment securities transactions.
1
MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Quarterly Financial
Report contain various forward-looking statements. Please refer to our 1998
Second 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. Certain amounts included in the financial tables
related to the first quarter of 1998 have been restated to conform to
classifications presented in the second quarter of 1998. Such restated amounts
do not represent material changes from those previously reported.
EARNINGS HIGHLIGHTS
First Union's operating earnings in the first half of 1998 increased 19
percent to $1.7 billion from $1.4 billion in the first half of 1997. On a
diluted per share basis, such earnings increased 20 percent to $1.75 in the
first half of 1998 from $1.46 in the first half of 1997. Operating earnings were
a record $883 million, or 92 cents, in the second quarter of 1998, compared with
$719 million, or 74 cents, in the second quarter of 1997.
Operating earnings represent earnings before merger-related and
restructuring charges. Merger-related and restructuring charges in the first six
months of 1998 of $653 million after tax were associated primarily with the
April 28, 1998, acquisition of CoreStates Financial Corp. Merger-related and
restructuring charges in the first half of 1997 were $37 million. After these
charges, earnings were $1.0 billion in the first half of 1998 compared with $1.4
billion in the first half of 1997. On a diluted per share basis, such earnings
were $1.07 in the first half of 1998 compared with $1.42 in the first half of
1997.
First Union's historical financial statements have been restated to
reflect the pooling acquisitions of CoreStates in 1998 and Signet Banking
Corporation in November 1997. Such statements were not restated for the pooling
acquisition of Wheat First Butcher Singer, Inc. or the purchase acquisitions of
Bowles Hollowell Conner & Co. and The Money Store, Inc., which are discussed
below. The Money Store acquisition closed on June 30, 1998, so earnings related
to The Money Store are not included in first half results.
These operating results represent a return on average stockholders' equity
of 22.55 percent and a return on average assets of 1.59 percent in the first
half of 1998, and 23.91 percent and 1.62 percent, respectively, in the second
quarter of 1998.
Growth in first half 1998 operating earnings was led by a 40 percent
increase in noninterest income (excluding available for sale and investment
securities transactions) from the first half of 1997, including a 60 percent
increase in Capital Management fee income and a 55 percent increase in Capital
Markets fee income. Wheat First Union made significant contributions to these
segments.
Noninterest expense, excluding merger-related and restructuring charges,
increased to $3.8 billion in the first half of 1998 from $3.4 billion in the
first half of 1997, primarily due to revenue-driven incentive pay and higher
staffing levels in Capital Markets; spending related to our Future Bank
initiative and advertising expense related to our branding campaign; and ongoing
expense related to acquired entities. The operating overhead efficiency ratio
before special charges was 56 percent, essentially flat with the first half of
1997.
In addition, credit quality continued to be strong. Nonperforming assets
declined to $909 million, or 0.66 percent of net loans and foreclosed
properties, compared with $991 million, or 0.75 percent, at December 31, 1997,
and $1 billion, or 0.75 percent, at June 30,
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1997. Annualized net charge-offs as a percentage of average net loans were 0.47
percent at June 30, 1998, 0.39 percent at March 31, 1998, and 0.71 percent at
June 30, 1997.
Outlook
We are very pleased with our progress in integrating recent acquisitions
and with the growth prospects stemming from these transactions. We believe 1998
will continue to be a very active year as we work to develop new markets and
business strategies into strong revenue growth. In addition to revenue growth,
we expect further improvements in efficiency as we begin to benefit from the
consolidation of our recent acquisitions.
Revenue growth continues to be strong, largely reflecting the investments
we have made to diversify our 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. These
investments are reflected in the strong contributions from the Capital
Management and Capital Markets business segments. Fee income from Capital
Management and Capital Markets accounted for 54 percent of noninterest income
(excluding available for sale and investment securities transactions) in the
first half of 1998.
We are also pleased with the initial results of our redesigned retail
delivery strategy, which we call the "Future Bank," that is being implemented
throughout the First Union marketplace this year;
With our previously pending acquisitions now completed, our primary
management attention is focused on developing our existing business base as we
continue to invest in new technology and fee income-generating lines of
business. The investments we have made in acquisitions, in technology and in
expanded products and services have positioned us to better serve our 16 million
customers in a diverse geographic marketplace and to reduce the impact of
adverse changes in the business cycle.
Merger and Consolidation Activity
The acquisition of CoreStates, of Philadelphia, Pennsylvania, will create
new opportunities to leverage our growing Capital Management and Capital Markets
businesses in states that generate 36 percent of the nation's gross state
product and in attractive consumer markets where the per capita income is 12
percent above the national average.
In addition, in the second quarter of 1998, we completed the purchase
accounting acquisitions of Bowles Hollowell Conner & Co., an investment banking
firm, and The Money Store, a nationally recognized consumer finance company.
On June 30, 1998, we completed the $2.2 billion acquisition of The Money
Store, which was accounted for as a purchase. In connection with this
acquisition, we recorded $1.8 billion of goodwill and an intangible asset
related to The Money Store's origination network of $304 million. This is based
on The Money Store's closing equity of $489 million and preliminary fair
value adjustments, net of tax effects, related to certain interest-only and
residual certificates related to asset-backed securities issued by The Money
Store of $186 million, long-term debt of $47 million, professional fees and
other acquisition-related expenses of $23 million, deferred taxes related to
the origination network intangible of $120 million and other miscellaneous
adjustments amounting to $103 million. The estimated periods of future benefit
related to goodwill and the network intangible is twenty-five years and fifteen
years, respectively.
We continue to evaluate acquisition opportunities that we believe would
provide access to customers and markets that complement our long-term goals.
Acquisition
3
opportunities are evaluated as a part of our ongoing capital allocation
decision-making process. Decisions to pursue acquisitions will be measured in
conjunction with financial performance guidelines adopted in 1997 and other
financial and strategic objectives. Acquisition discussions and in some cases
negotiations may take place from time to time, and future acquisitions involving
cash, debt or equity securities may be expected. The ACCOUNTING AND REGULATORY
MATTERS section provides more information about legislative, accounting and
regulatory matters that have recently been adopted or proposed.
BUSINESS SEGMENTS
Business Focus
First Union's operations are divided into four primary business segments
encompassing more than 50 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank and Capital
Markets. Additional information can be found in Table 2. Information related to
CoreStates has been restated, and it is included in the appropriate business
segments.
We have developed an internal performance reporting model to measure the
results of these four business segments and the Treasury/Nonbank segment.
Because of the complexity of the corporation and the interrelationships of these
business segments, we have used various estimates and allocation methodologies
in the preparation of the Business Segments financial information. Restatements
of various periods may occasionally occur because these estimates and
methodologies could be refined over time.
Our management structure combines this internal performance reporting with
a matrix management approach, which integrates product management with our
various distribution channels. Additionally First Union's management structure
and internal reporting methodologies produce business segment results that are
not necessarily comparable to presentations by other bank holding companies or
stand-alone entities in similar industry segments.
Our internal performance reporting model isolates the net income
contribution and measures the return on capital for each business segment by
allocating equity, funding credit and expense, and corporate expenses to each
segment. We use a risk-based methodology to allocate equity based on the credit,
market and operational risks associated with each business segment. Credit risk
allocations are intended to 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. The Treasury/Nonbank segment retains all unallocated equity. This
mismatch in book versus allocated equity may result in an unexpectedly high or
low return on equity for the Treasury/Nonbank segment for extended periods of
time. Our method of reporting does not allow for discrete reporting of the
profitability or synergies arising from our integrated approach to product
sales. For example, a commercial customer might have loans, deposits and an
interest rate swap. The loan and deposit relationship would be included in the
Commercial Bank segment and the interest rate swap would be reflected in the
risk management unit of the Capital Markets segment.
Exposure to market risk is managed centrally within the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment, our
model employs a
4
funds transfer pricing (FTP) system. The FTP system matches the duration of the
funding used by each segment to the duration of the assets and liabilities
contained in each segment. Matching the duration, or the effective term until an
instrument can be repriced, allocates interest income and/or expense to each
segment so its resulting net interest income is insulated from interest rate
risk. The majority of the interest rate risk resulting from the mismatch in
durations of assets and liabilities held by the business segments resides in the
Treasury/Nonbank segment. The Treasury/Nonbank segment also holds the
corporation's investment portfolio and off-balance sheet portfolio, which are
used to enhance corporate earnings and to manage exposure to interest rate risk.
Because most market risk is held in the Treasury/Nonbank segment, the
profitability of this segment is expected to be more volatile than for the other
business segments. General corporate expenses, with the exception of goodwill
amortization, are fully allocated to each segment in a pro rata manner based on
the direct and attributable indirect expenses for each segment. Noninterest
expense remaining in the Treasury/ Nonbank segment reflects the costs of
portfolio management activities, goodwill amortization and merger-related and
restructuring charges. In general this approach should not result in significant
volatility to business segment returns.
Consumer Bank
The Consumer Bank, our primary deposit-taking entity, provides an
attractive source of funding for secured and unsecured consumer loans, first and
second residential mortgages, installment loans, credit cards, auto loans and
leases, and student loans. The Consumer Bank's traditional deposit and lending
products are fully integrated with nontraditional financial offerings, making
our retail banking branches major distribution points for mutual funds,
insurance and small business loans. State-of-the-art technology including
centralized customer information centers, smart cards, electronic and Internet
banking capabilities support this approach.
The Consumer Bank segment generated $329 million in net income in the
second quarter of 1998 compared with $267 million in the second quarter of 1997.
Primary contributors were retail branch products. Noninterest income was $468
million in the second quarter of 1998 compared with $349 million in the second
quarter of 1997.
Noninterest expense was $757 million in the second quarter of 1998
compared with $767 million in the second quarter of 1997. Expenses in 1998
include significant 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 second quarter of 1998 were $56 billion
compared with $62 billion in the second 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 have
securitized or sold $8 billion of consumer loans since the second quarter of
1997, including adjustable rate mortgages (ARMs), home equity loans, student
loans, indirect auto loans, community reinvestment loans, credit card
receivables and other unsecured consumer credit. The managed credit card
portfolio was $5.2 billion at
5
June 30, 1998, including $1.7 billion of securitized credit cards. The credit
card sales reflect the repositioning of the portfolio in line with our Consumer
Bank's strategy of expanding relationships within our growing customer base on
the East Coast.
Loan originations in the consumer portfolio were led by mortgage loans and
direct lending through the full-service bank branches. First Union's mortgage
origination and home equity offices across the nation also are included in the
Consumer Bank through our operating subsidiaries: First Union Mortgage
Corporation (FUMC) and First Union Home Equity Bank, N.A. (FUHEB). Our home
equity lending business, combined with that of The Money Store, is the second
largest in the nation. FUMC is the nation's 11th largest mortgage servicer, with
a mortgage servicing portfolio of $65 billion at June 30, 1998. In addition,
First Union is a major participant in the "A" credit quality market for consumer
loans retained in our portfolios, as well as the sub-prime market for
securitization or sale of residential real estate loans.
Capital Management
The Capital Management Group combines our banking and investment offerings
for retail and institutional customers, and provides products and services that
primarily produce fee income. At June 30, 1998, this group had $143 billion in
assets under management. These assets include proprietary mutual funds of $64
billion, with the remaining $79 billion in assets composed of trust and
institutional accounts.
Trust and institutional assets under management in its entirety amounted
to $102 billion. This includes the $79 billion mentioned above and $23 billion
of trust and institutional customers invested in proprietary mutual funds.
The Capital Management Group produced net income of $109 million in the
second quarter of 1998 compared with $74 million in the second quarter of 1997.
Capital Management businesses and products primarily generate fee income. In the
second quarter of 1998, fee income for this segment was $445 million compared
with $276 million in the second quarter of 1997. Growth in fee income was
primarily related to retail brokerage and insurance commissions, trust and
mutual funds. Expenses in the second quarter of 1998 were $391 million compared
with $253 million in the second quarter of 1997.
Retail brokerage is the primary distribution center for Capital Management
products. This segment also includes insurance products. However, it does not
reflect sales of credit life or other insurance products sold in other areas of
the corporation.
The CAP Account is an asset management product that enables our customers
to manage their securities trading and banking activities in a single,
consolidated account. Income related to the CAP Account is therefore reflected
in several of our lines of business, including mutual funds and retail brokerage
services. CAP Account amounts in Table 2 reflect direct CAP Account fee income
only. CAP Account assets increased to $30 billion at June 30, 1998, compared
with $26 billion at year-end 1997. We are seeing an increase in investment
activity through these accounts.
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 second
quarter of 1998, the Private Client Banking Group had $3.1 billion of average
net loans compared with $2.9 billion in the second quarter of 1997, and $2.7
billion of average deposits compared with $2.2 billion in the second quarter of
1997. Private Client Banking Group amounts in Table 2 reflect only
6
the income and expense related to lending and deposit taking activities. Other
fee income is located within other business lines or segments.
We anticipate increased growth in all of the Capital Management business
lines as we introduce new products and services throughout our multistate
network and as we begin to enhance our relationships with the new customers from
our acquisitions.
Commercial Bank
The Commercial Bank provides a comprehensive array of financial solutions
primarily focused on corporate customers (annual sales of $50 million to $2
billion); commercial customers (annual sales of $10 million to $50 million); and
small-business customers (annual sales up to $10 million). Products and services
go beyond traditional commercial banking to areas such as asset-based financing,
risk management products, property and casualty insurance, leasing, treasury
services, international services, pension plans and 401(k) plans.
Specialized relationship teams throughout our region focus on sales and
service. In addition, we have an integrated approach that leverages the
capabilities of First Union's Capital Markets Group for the more complex
financing solutions.
The Commercial Bank had net income of $170 million in the second quarter
of 1998 compared with $166 million in the second quarter of 1997. Net interest
income was $481 million in the second quarter of 1998 compared with $502 million
in the second quarter of 1997. The decline was primarily related to a decrease
in outstandings and loan spreads. Noninterest income increased 8 percent from
the second quarter 1997 to $127 million in the second quarter of 1998, led by
Cash Management fee income, which increased 13 percent from the second 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
second quarter of 1998 were $324 million compared with $340 million in the
second quarter of 1997.
Average commercial loans in the second quarter of 1998 declined 4 percent
from the second 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 14 percent to $2.6 billion in the second quarter of
1998 from $2.2 billion in the second quarter of 1997. Small Business Banking
amounts in Table 2 reflect only lending activities, while our Small Business
Banking Division also generates insurance, investment and retirement services,
and commercial deposit services for customers.
First Union is the nation's third largest cash management bank based on
revenue. Cash management products stimulate the gathering of commercial deposit
balances. Deposit balances and their economic profitability are reflected in
both the Commercial Bank and the Capital Markets segments. Cash management
amounts in Table 2 reflect only the direct service charge income from cash
management products.
Capital Markets
Our Capital Markets Group provides corporate and institutional clients
one-stop shopping for a full range of investment banking products and services.
These products and services are fully integrated with our wholesale delivery
strategy, and they are a natural extension of our Commercial Bank. We have the
capability to help a company grow from its first checking account to its initial
public offering. In the Capital Markets Group, the Commercial Bank and the bank
and nonbank brokerage subsidiaries, the strategy is the same: the focus is on
providing customized solutions that are in our clients' best interests.
7
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 and utilize strong correspondent banking
relationships overseas. The primary focus of the International unit is to meet
the trade finance and foreign exchange needs of our corporate customers and to
provide commercial banking and capital markets products to financial institution
clients overseas. This unit expanded significantly with the addition of
CoreStates, which traces its roots in international finance for nearly two
centuries.
The Capital Markets Group produced net income of $182 million in the
second quarter of 1998 compared with $174 million in the second quarter of 1997.
Net interest income was $279 million in the second quarter of 1998 compared with
$254 million in the second quarter of 1997. Noninterest income increased 51
percent to $395 million in the second quarter of 1998 from $262 million in the
second quarter of 1997. The increase was led by $202 million in second quarter
1998 fee income from our investment banking segment, including $117 million in
private equity gains from merchant banking transactions, reflecting the current
market environment. Expenses in the second quarter of 1998 were $373 million
compared with $236 million in the second quarter of 1997.
Average net loans were $32 billion in the second quarter of 1998 compared
with $27 billion in the second quarter of 1997. Loan growth between the two
periods was generated primarily in the specialized industries, diversified
finance and international 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.
8
RESULTS OF OPERATIONS
INCOME STATEMENT REVIEW
Net Interest Income
Tax-equivalent net interest income was $3.8 billion in the first half of
1998 compared with $4.0 billion in the first half of 1997. The decline in
tax-equivalent net interest income reflects a changing earning asset mix,
primarily related to the divestiture of higher-yielding, unsecured consumer
loans and to the investment of excess capital in lower-yielding securities,
including purchases to leverage the CoreStates acquisition.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In the first half of 1998, $36
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 half of 1998 was $5 million.
NET INTEREST MARGIN
The net interest margin, which is the difference between the
tax-equivalent yield on earning assets and the rate paid on funds to support
those assets, was 4.01 percent in the first half of 1998 compared with 4.68
percent in the first half of 1997. 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 half of
1998. Additionally, we repurchased 40 million shares of First Union common stock
at a cost of $2.4 billion primarily related to our purchase of The Money Store,
which negatively affected the margin in the second quarter of 1998. The rest of
the decline is primarily a result of substantial increases in the balance of
securities available for sale and short-term investments in our trading
portfolio. The average rate earned on earning assets was 7.89 percent in the
first half of 1998 and 8.32 percent in the first half of 1997. The average rate
paid on interest-bearing liabilities was 4.54 percent in the first half of 1998
and 4.32 percent in the first half 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 developing products to meet the challenges of increasing
competition, changing customer demands and demographic shifts. We have pursued
strategic investments to build high-growth lines of business to increase fee
income. For example, we have significantly broadened our product lines,
particularly in the Capital Markets and Capital Management Groups, to provide
additional sources of fee income that complement our long-standing banking
products and services. These investments were reflected in a 40 percent increase
in noninterest income, excluding available for sale and investment securities
transactions, to $2.9 billion in the first half of 1998 from $2.1 billion in the
first half of 1997.
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Virtually all categories of noninterest income increased in the first half
of 1998 from a year earlier. Fee income from Capital Management and Capital
Markets activities made up more than one-half of noninterest income in the first
half of 1998. These two groups are discussed further in the BUSINESS SEGMENTS
section. Sundry income included $84 million of branch sale gains related to
discretionary branch closings.
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 $10 billion at June 30, 1998, compared
with $6 billion at December 31, 1997.
Noninterest Expense
Noninterest expense was $4.8 billion in the first half of 1998 compared
with $3.5 billion in the first half of 1997. In the first half of 1998,
noninterest expense included $983 million of merger-related and restructuring
charges compared with $59 million in the first half of 1997. In addition to
merger-related and restructuring charges, expenses in the first half of 1998
reflected revenue-driven incentive pay and higher staffing levels in Capital
Markets; spending related to our Future Bank implementation; advertising expense
related to our branding campaign; and ongoing expenses related to acquired
entities. The operating overhead efficiency ratio was 56 percent, essentially
flat with the first half of 1997.
The $983 million of 1998 pre-tax merger-related and restructuring charges
primarily related to severance and change in control obligations, fixed asset
write-downs and vacant space accruals, accelerated disposition of owned real
estate net, service contract terminations, professional fees and other
miscellaneous items, none of which individually exceeded $65 million after tax.
At June 30, 1998, $256 million of such charges had been paid and $351 million
was related to noncash charges. Most of the remaining accrual of $376 million at
June 30, 1998, is expected to be paid by the end of 1999. It is currently
estimated that an additional $165 million in after-tax merger-related and
restructuring charges related to CoreStates may be recorded by the end of 1998.
Amortization of other intangible assets predominantly represents the
amortization of goodwill and deposit base premium related to purchase accounting
acquisitions. These intangibles are amortized over periods ranging from six to
25 years. Amortization is a noncash charge to income; therefore, liquidity and
funds management activities are not affected. We had $5.2 billion in other
intangible assets at June 30, 1998, and $2.9 billion at December 31, 1997. The
increase was primarily related to The Money Store acquisition. Costs related to
environmental matters were not material.
With respect to year 2000 readiness, we are actively engaged in modifying
our own computer systems as well as working with our vendors, counterparties and
customers to ascertain their progress toward year 2000 compliance. 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 time and 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. As a result of our progress to date, we have completed
the modification on many of our critical systems. We expect to have virtually
all of the systems and application
10
modifications in place and tested by the end of 1998, allowing time in 1999 for
any system refinements that may be needed and for overall integrated systems
testing.
We are assessing, monitoring and testing the progress of our vendors and
counterparties to determine whether they will be able to successfully interact
with First Union in the year 2000. In addition we are assessing the needs of our
customers and the possible effects of their inability to become year 2000
compliant, and we are refining contingency plans for each business unit in the
event our customers are not able to become year 2000 compliant. Our formal risk
assessment of customers is incorporated into the underwriting, scheduled review
and credit grading process.
Including our 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 primarily consists of U.S. Treasury, U.S.
Government agency, municipal and mortgage-backed and asset-backed securities as
well as collateralized mortgage obligations, corporate, foreign and equity
securities. Securities available for sale transactions resulted in gains of $44
million in the first half of 1998 and $19 million in the first half of 1997.
At June 30, 1998, we had securities available for sale with a market value
of $37 billion compared with $24 billion at year-end 1997. The market value of
securities available for sale was $518 million above amortized cost at June 30,
1998. Activity in this portfolio is undertaken primarily to manage liquidity and
interest rate risk and to take advantage of market conditions that create more
economically attractive returns on these investments.
The average rate earned on securities available for sale in the first half
of 1998 was 6.64 percent compared with 6.88 percent in the first half of 1997.
The average maturity of the portfolio was 6.06 years at June 30, 1998.
Investment Securities
The investment securities portfolio primarily consists of U.S. Government
agency, corporate, municipal and mortgage-backed securities, and collateralized
mortgage obligations. Our investment securities amounted to $2.2 billion at June
30, 1998, and $3.5 billion at December 31, 1997.
The average rate earned on investment securities was 7.74 percent in the
first half of 1998 and 7.92 percent in the first half of 1997. The average
maturity of the portfolio was 5.11 years at June 30, 1998.
Loans
The loan portfolio, which represents our largest asset class, is a
significant source of interest and fee income. Elements of the loan portfolio
are subject to differing levels of credit and interest rate risk. Our lending
strategy stresses quality growth and portfolio diversification by product,
geography and industry. A common credit underwriting structure is in place
throughout the corporation.
The commercial loan portfolio includes general commercial loans, both
secured and unsecured, and commercial real estate loans. Commercial loans are
typically either working capital loans, which are used to finance the inventory,
receivables and other working capital
11
needs of commercial borrowers, or term loans, which are generally used to
finance fixed assets or acquisitions. Commercial real estate loans are typically
used to finance the construction or purchase of commercial real estate.
Our commercial lenders focus principally on middle-market companies, which
we believe reduces the risk of credit loss from any single borrower or group of
borrowers. A majority of our commercial loans are for less than $10 million.
Consistent with our longtime standard, we generally look for two repayment
sources for commercial real estate loans: cash flows from the project and other
resources of the borrower.
Consumer lending through our full-service bank branches is managed using
an automated underwriting system that combines statistical predictors of risk
and industry standards for acceptable levels of customer debt capacity and
collateral valuation. These guidelines are continually monitored for overall
effectiveness and for compliance with fair lending practices.
The loan portfolio at June 30, 1998, was composed of 55 percent in
commercial loans and 45 percent in consumer loans, which did not represent a
significant change from December 31, 1997.
Net loans at June 30, 1998, were $137 billion compared with $132 billion
at December 31, 1997. Average net loans were $132 billion in the first half of
1998 compared with $135 billion in the first half of 1997. The decrease
primarily reflects loans that were securitized, sold or transferred to assets
held for sale as part of our strategy of balance sheet management to maximize
our return on investment. Commercial loan originations in the second quarter of
1998 were led by Capital Markets and commercial lenders in Florida. Consumer
loan originations were strong in mortgages and home equity.
At June 30, 1998, unused loan commitments related to commercial and
consumer loans were $73 billion and $26 billion, respectively. Commercial and
standby letters of credit were $16 billion at June 30, 1998. At June 30, 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 8.57 percent in the first half of
1998 compared with 8.80 percent in the first half 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
federal 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 9 percent of the total portfolio
at June 30, 1998, and 12 percent at December 31, 1997. This portfolio included
commercial real estate mortgage loans of $10 billion at June 30, 1998, and $13
billion at December 31, 1997.
ASSET SECURITIZATIONS
Asset securitizations are utilized as the primary funding method for fixed
and variable rate home equity loans and as an alternative funding method for SBA
loans, student loans and certain other consumer loans. In a securitization
transaction, a pool of loans is generally sold to a trust, which simultaneously
sells interests in the underlying cash flows of the pool to third-party
investors. In its securitization transactions, First Union typically
12
receives cash proceeds, retains interest-only and residual certificates as an
investment and retains the servicing rights to the loans.
The interest-only and residual certificates retained are initially
recorded at their allocated carrying value based on relative fair value. Fair
value is determined by computing the present value of the estimated cash flows
retained, using the dates that such cash flows are expected to be released to
First Union, at a discount rate considered to be commensurate with the risks
associated with the cash flows. The amounts and timing of the cash flows are
estimated after considering various economic factors including prepayment,
delinquency, default and loss assumptions. The valuation also considers
loan-related factors such as loan type, amount, date of origination, interest
rate, term, underlying collateral value and geographic location.
First Union maintains a disciplined valuation process whereby on a monthly
basis a risk management committee reviews actual cash flows and the factors that
affect the amounts and timing of the cash flows from each of the underlying
static pools relative to the assumptions used in estimating fair value. Based on
this analysis, assumptions are validated or revised as necessary, and the
amounts and timing of cash flows are estimated and fair value is determined.
Table 8 summarizes the activity-related changes in the balance sheet amounts for
the interest-only and residual certificates, the related valuation estimates and
the related collateral data.
ASSET QUALITY
Nonperforming Assets
At June 30, 1998, nonperforming assets were $909 million, or 0.66 percent
of net loans and foreclosed properties, compared with $991 million, or 0.75
percent, at December 31, 1997.
Loans or properties of less than $5 million each made up 75 percent, or
$685 million, of nonperforming assets at June 30, 1998. Of the rest:
o Eight loans or properties between $5 million and $10 million each accounted
for $54 million; and
o Six loans or properties over $10 million each accounted for $170 million.
Forty-nine percent of nonperforming assets were collateralized primarily
by real estate at June 30, 1998 and at December 31, 1997.
Past Due Loans
Accruing loans 90 days past due were $248 million at June 30 1998,
compared with $326 million at December 31, 1997. Of the past dues at June 30,
1998, $28 million were commercial loans or commercial real estate loans and $220
million were consumer loans. At June 30, 1998, we were closely monitoring
certain loans for which borrowers were experiencing increased levels of
financial stress. None of these loans were included in nonperforming assets or
in accruing loans past due 90 days, and the aggregate amount of these loans was
not significant.
Net Charge-Offs
Net charge-offs amounted to $285 million in the first half of 1998
compared with $447 million in the first half of 1997, and in the second quarter
of 1998, $156 million compared with $238 million in the second quarter of 1997
and $129 million in the first quarter of 1998.
13
Annualized net charge-offs were 0.43 percent of average net loans in the first
half of 1998 compared with 0.67 percent in the first half of 1997.
Net charge-offs declined significantly due primarily to the restructuring
of the credit card portfolio, in which certain vintages that experienced higher
charge-off rates have been sold. 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 $285 million in the first half of 1998
compared with $433 million in the first half of 1997. The allowance for loan
losses was $1.9 billion at June 30, 1998, and $1.8 billion at December 31, 1997.
We establish reserves based on various factors, including results of
quantitative analyses of the quality of commercial loans and commercial real
estate loans. Reserves for commercial loans and commercial real estate loans are
based principally on loan grades, historical loss rates, borrowers'
creditworthiness, underlying cash flows from the project and from the borrowers,
and analysis of other 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 $499
million at June 30, 1998, compared with $485 million at December 31, 1997. A
loan is considered to be impaired when, based on current information, we believe
it is probable that we will not receive all amounts due in accordance with the
contractual terms of the loan. Included in the allowance for loan losses at June
30, 1998, was $63 million related to $267 million of impaired loans. The
remaining impaired loans were recorded at or below fair value. In the first half
of 1998 the average recorded investment in impaired loans was $417 million, and
$13 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 $13 billion
commercial real estate portfolio at June 30, 1998, was located in our East Coast
banking region.
LIQUIDITY AND FUNDING SOURCES
Liquidity planning and management are necessary to ensure we maintain the
ability to fund operations cost-effectively and to meet current and future
obligations such as loan commitments and deposit outflows. In this process we
focus on both assets and liabilities and on the manner in which they combine to
provide adequate liquidity to meet the corporation's needs.
14
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
$38 million at June 30, 1998.
Core Deposits
Core deposits are a fundamental and cost-effective source of funding. Core
deposits include savings, negotiable order of withdrawal (NOW), money market,
noninterest-bearing and other consumer time deposits. Core deposits were $130
billion at June 30, 1998, compared with $127 billion at December 31, 1997.
The portion of core deposits in higher-rate, other consumer time deposits
was 29 percent at June 30, 1998, and at December 31, 1997. Other consumer time
and other noncore deposits usually pay higher rates than savings and transaction
accounts, but they generally are not available for immediate withdrawal. They
are also less expensive to process.
Average core deposit balances were $127 billion in the first half of 1998
and $125 billion in the first half of 1997. In the first half of 1998 and in the
first half of 1997, average noninterest-bearing deposits were 24 percent and 21
percent, respectively, of average core deposits. Average balances in savings and
NOW, money market and noninterest-bearing deposits were higher when compared
with the first half of 1997, while other consumer time deposits were lower.
Deposits can be affected by numerous factors, including branch closings or
consolidations, seasonal factors and the rates being offered compared to other
investment opportunities. The NET INTEREST INCOME SUMMARIES provide additional
information about average core deposits.
Purchased Funds
Purchased funds at June 30, 1998, were $58 billion compared with $42
billion at year-end 1997, largely reflecting funding needs related to the
increased securities available for sale portfolio. Average purchased funds in
the first half of 1998 were $52 billion compared with $37 billion in the first
half 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
15
amortization. This cash was available in the first half of 1998 to increase
earning assets, to make discretionary investments and to reduce borrowings.
Long-Term Debt
Long-term debt was 80 percent of stockholders' equity at June 30, 1998,
and 77 percent at year-end 1997.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we currently have available for issuance $1.9 billion of
senior or subordinated debt securities, common stock or preferred stock. The
sale of any additional debt or equity securities will depend on future market
conditions, funding needs and other factors. In April 1998, we issued an
aggregate of $500 million of subordinated debt.
DEBT OBLIGATIONS
We have $350 million in committed back-up lines of credit, $175 million of
which expires in July 1999 and the remaining $175 million of which expires in
July 2002. These credit facilities contain covenants that require First Union to
maintain a minimum level of tangible net worth, restrict double leverage ratios
and require capital levels at subsidiary banks to meet regulatory standards.
First Union has not used these lines of credit. In the last six months of 1998,
long-term debt of $1 billion will mature. Funds for the payment of long-term
debt will come from operations or, if necessary, additional borrowings.
Guaranteed Preferred Beneficial Interests
At June 30, 1998, $1.7 billion of trust capital securities were
outstanding. Subsidiary trusts issued these capital securities and used the
proceeds to purchase junior subordinated debentures from the corporation. These
capital securities are considered tier 1 capital for regulatory purposes.
Expenses of $72 million in the first half of 1998 related to the capital
securities are included in sundry expense.
Stockholders' Equity
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Total stockholders' equity was $17 billion at June 30, 1998, and $15
billion at December 31, 1997. Common shares outstanding amounted to 988 million
at June 30, 1998, compared with 961 million at December 31, 1997. In the first
six months of 1998, we repurchased 40 million shares of our common stock in the
open market at a cost of $2.4 billion, substantially all of which was related to
The Money Store acquisition.
We paid $592 million in dividends to common stockholders in the first half
of 1998 compared with $552 million in the first half of 1997. This represented
an operating dividend payout ratio of 35 percent in the first half of 1998.
At June 30, 1998, stockholders' equity included a $334 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.
16
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 $642 million available for dividends at June 30, 1998, without
prior regulatory approval. Our subsidiaries paid $426 million in dividends to
the parent company in the first half of 1998. In addition, the consolidation of
our bank in our northern region with our North Carolina-based bank resulted in a
reduction of capital of $1 billion, which was paid to the parent company.
REGULATORY CAPITAL
Federal banking regulations require that bank holding companies and their
subsidiary banks maintain minimum levels of capital. These banking regulations
measure capital using three formulas including tier 1 capital, total capital and
leverage capital. The minimum level for the ratio of total capital to
risk-weighted assets (including certain off-balance sheet financial instruments,
such as standby letters of credit and interest rate swaps) is currently 8
percent. At least half of total capital is to be composed of common equity,
retained earnings and a limited amount of qualifying preferred stock, less
certain intangible assets (tier 1 capital). The rest may consist of a limited
amount of subordinated debt, nonqualifying preferred stock and a limited amount
of the loan loss allowance (together with tier 1 capital, total capital). At
June 30, 1998, the tier 1 and total capital ratios were 7.04 percent and 11.35
percent, respectively, compared with 8.43 percent and 13.02 percent at December
31, 1997.
In addition the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet specified criteria,
including having the highest regulatory rating. All other bank holding companies
are generally required to maintain a leverage ratio of at least 4 to 5 percent.
The leverage ratio at June 30, 1998, was 6.01 percent and at December 31,1997,
it was 7.09 percent.
The requirements also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. The Federal Reserve Board has
indicated it will continue to consider a tangible tier 1 leverage ratio
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised us of any specific minimum
leverage ratio applicable to us.
Each subsidiary bank is subject to similar capital requirements. None of
our subsidiary banks has been advised of any specific minimum capital ratios
applicable to it.
The regulatory agencies also have adopted regulations establishing capital
tiers for banks. Banks in the highest capital tier, or well capitalized, must
have a leverage ratio of 5 percent, a tier 1 capital ratio of 6 percent and a
total capital ratio of 10 percent. At June 30, 1998, our deposit-taking
subsidiary banks met the capital and leverage ratio requirements for well
capitalized banks. We expect to maintain these ratios at the required levels by
the retention of earnings and, if necessary, the issuance of additional capital.
Failure to meet
17
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 affected by interest rates. For
example our model captures rate of change differentials, such as federal funds
rates versus savings account rates; maturity effects, such as calls on
securities; and rate barrier effects, such as caps and floors on loans. It also
captures changing balance sheet levels, such as commercial and consumer loans
(both floating and fixed rate); noninterest-bearing deposits; and investment
securities. In addition our model considers leads and lags that occur in
long-term rates as short-term rates move away from current levels; the
elasticity in the repricing characteristics of savings and money market
deposits; and the effects of prepayment volatility on various fixed-rate assets
such as residential mortgages, mortgage-backed securities and consumer loans.
These and certain other effects are evaluated in developing the scenarios from
which sensitivity of earnings to changes in interest rates is determined.
We use two separate measures that each includes three standard scenarios
in analyzing interest rate sensitivity for policy measurement. Each of these
measures compares our forecasted earnings per share in both a "high rate" and
"low rate" scenario to a base-line scenario. The base-line scenario is our
estimated most likely path for future short-term interest rates over the next 24
months. The second base-line scenario holds short-term rates flat at their
current level over our forecast horizon. The "high rate" and "low rate"
scenarios assume gradual 200 basis point increases or decreases in the federal
funds
18
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 July 1998 estimate for future short-term interest rates (our "most
likely" scenario) reflects the federal funds rate remaining at its current level
of 5.50 percent through March 1999, declining to 5.30 percent by December 1999
and remaining essentially flat at 5.30 percent through June 2000. Our "flat
rate" scenario holds the federal funds rate at 5.50 percent through June 2000.
Based on the July outlook, if interest rates were to follow our "high rate"
scenario (i.e., a 200 basis point increase in short-term rates from our "flat
rate" scenario), the model indicates that earnings during the policy measurement
period would be negatively affected by 2.2 percent. Our model indicates that
earnings would benefit by 2.3 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.
Compared to our "most likely" scenario, earnings would increase by 2.8 percent
over the policy measurement period if rates fall gradually by 200 basis points
and would decrease by 1.8 percent if rates gradually rise by 200 basis points.
The primary cause for the difference in sensitivity between using the "flat
rate" scenario or "most likely" scenario as the baseline for our measurements
results from assumptions about how the level and slope of the Treasury yield
curve would be affected under the rising and falling rate scenarios.
In addition to the three standard scenarios used to analyze rate
sensitivity over the policy measurement period, we regularly analyze the
potential impact of other remote, more extreme interest rate scenarios. These
alternate "what if" scenarios may include interest rate paths both higher, lower
and more volatile than those used for policy measurement. We also perform our
analysis for time periods that reach beyond the 12-month policy period. For
example, based on our July 1998 outlook, if interest rates in calendar year 1999
were 200 basis points lower than our "most likely" scenario, earnings would
increase by 5.1 percent. If rates were 200 basis points higher than our "most
likely" scenario in 1999, those earnings would be negatively impacted by 4.0
percent.
While our interest rate sensitivity modeling assumes that management takes
no action, we regularly assess the viability of strategies to reduce
unacceptable risks to earnings and implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, management
will continue to formulate strategies aimed at protecting earnings from the
potential negative effects of changes in interest rates.
OFF-BALANCE SHEET DERIVATIVES FOR INTEREST RATE RISK MANAGEMENT
As part of our overall interest rate risk management strategy, for many
years we have used off-balance sheet derivatives as a cost- and
capital-efficient way to modify the repricing or maturity characteristics of
on-balance sheet assets and liabilities. Our off-balance sheet derivative
transactions used for interest rate sensitivity management include interest rate
swaps, futures and options with indices that relate to the pricing of specific
financial instruments of the corporation. We believe we have appropriately
controlled the risk so that derivatives used for rate sensitivity management
will not have any significant unintended effect on corporate earnings. As a
matter of policy we do not use highly
19
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 $655 million at
June 30, 1998, compared with fair value appreciation of $566 million at December
31, 1997.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Such gains and losses at June 30, 1998, are not significant.
Although off-balance sheet derivative financial instruments do not expose
the corporation to credit risk equal to the notional amount, we are exposed to
credit risk equal to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize the credit risk in these instruments by dealing only with high-quality
counterparties. Each transaction is specifically approved for applicable credit
exposure.
In addition our policy is to require that all swaps and options be
governed by an International Swaps and Derivatives Association Master Agreement.
Bilateral collateral arrangements are in place for substantially all dealer
counterparties used in our Asset/Liability Management activities. Derivative
collateral arrangements for dealer transactions and trading activities are based
on established thresholds of acceptable credit risk by counterparty. Thresholds
are determined based on the strength of the individual counterparty, and they
are bilateral. As of June 30, 1998, the total credit risk in excess of
thresholds was $376 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.
20
We use the value-at-risk methodology for measuring the market risk of the
corporation's trading positions. This statistical methodology uses recent market
volatility to estimate the maximum daily trading loss that the corporation would
expect to incur, on average, 97.5 percent of the time. The model also measures
the effect of correlation among the various trading instruments to determine how
much risk is eliminated by "offsetting" positions. The analysis captures all
financial assets and liabilities that are considered trading positions
(including loan trading activities), foreign exchange and financial and foreign
currency derivative instruments. The calculation uses historical data from the
most recent 260 business days. The total value-at-risk amount at June 30, 1998,
was $9 million. Value-at-risk amounts related to interest rate risk and currency
risk at June 30, 1998, were $9 million and $1 million, respectively.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and hedging activities. It requires that all
derivatives be included as assets or liabilities in the balance sheet and that
such instruments be carried at fair market value through adjustments to either
other comprehensive income or current earnings or both, as appropriate. The
corporation is in the process of assessing the impact of this Standard. The
Standard is effective for financial statements issued for all fiscal quarters of
fiscal years beginning after June 15, 1999.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," does not change
the recognition or measurement associated with pension or postretirement plans.
It standardizes certain disclosures, requires additional information about
changes in the benefit obligations and about changes in the fair value of plan
assets to facilitate analysis, and it eliminates certain disclosures that were
not deemed useful. This Standard is effective for financial statements issued
for periods beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," establishes standards and
disclosure requirements for the way companies report information about operating
segments both in annual and interim reports issued to stockholders. Operating
segments are components of a company about which separate financial information
is available and which are used in determining resource allocations and
assessing performance. Information such as segment earnings, certain revenue and
expense items and certain segment assets 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
21
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.
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.
22
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER SHARE AND BALANCE SHEET DATA
- ---------------------------------------------------------------------------------------------------------------------------
TWELVE
MONTHS 1998 1997
ENDED ------------------- -----------------------------
JUNE 30, SECOND FIRST FOURTH THIRD SECOND
(IN MILLIONS, EXCEPT PER SHARE DATA) 1998 QUARTER QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED SUMMARIES OF INCOME
Interest income ....................................... $ 14,627 3,727 3,602 3,635 3,663 3,621
- ---------------------------------------------------------------------------------------------------------------------------
Interest income (a) ................................... $ 14,732 3,755 3,630 3,664 3,683 3,648
Interest expense ...................................... 6,960 1,880 1,742 1,681 1,657 1,613
===========================================================================================================================
Net interest income (a) ............................... 7,772 1,875 1,888 1,983 2,026 2,035
Provision for loan losses ............................. 955 150 135 445 225 228
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 6,817 1,725 1,753 1,538 1,801 1,807
Securities available for sale transactions ............ 77 21 23 18 15 10
Investment security transactions ...................... 6 4 -- -- 2 1
Noninterest income .................................... 5,098 1,532 1,354 1,147 1,065 1,030
Merger-related and restructuring charges (b) .......... 1,208 954 29 225 -- 59
Noninterest expense ................................... 7,441 1,923 1,866 1,941 1,711 1,712
===========================================================================================================================
Income before income taxes (a) ........................ 3,349 405 1,235 537 1,172 1,077
Income taxes .......................................... 881 128 417 (68) 404 368
Tax-equivalent adjustment ............................. 105 28 28 29 20 27
===========================================================================================================================
Net income ............................................ $ 2,363 249 790 576 748 682
===========================================================================================================================
PER SHARE DATA
Basic ................................................. $ 2.49 0.27 0.82 0.61 0.79 0.72
Diluted ............................................... 2.45 0.26 0.81 0.60 0.78 0.70
Cash dividends ........................................ $ 1.38 0.37 0.37 0.32 0.32 0.29
Average shares - Basic (IN THOUSANDS) ................. -- 949,750 965,120 960,596 946,354 953,612
Average shares - Diluted (IN THOUSANDS) ............... -- 962,160 977,155 972,051 959,013 964,518
Average stockholders' equity (c)
Quarter-to-date ..................................... $ -- 14,607 15,455 14,806 14,575 14,111
Year-to-date ........................................ -- 15,029 15,455 14,365 14,010 14,077
Common stock price
High ................................................ 63 63 58 1/4 52 7/8 50 11/16 47 7/8
Low ................................................. 45 7/8 55 1/4 47 1/16 46 15/16 45 7/8 39 1/8
Period-end .......................................... $58 1/4 58 1/4 56 13/16 51 1/4 50 1/16 46 1/4
To earnings ratio (d) ............................. 23.78X 23.78 19.66 18.30 17.26 17.00
To book value ..................................... 348% 348 348 321 325 312
Book value ............................................ 16.72 16.72 16.31 15.95 15.40 14.82
BALANCE SHEET DATA
Assets ................................................ 228,996 228,996 219,944 205,735 202,766 201,642
Long-term debt ........................................ $ 13,250 13,250 12,003 11,752 11,209 10,559
===========================================================================================================================
(a) Tax-equivalent.
(b) Merger-related and restructuring charges amounted to $634 million after
tax in the second quarter of 1998, $19 million after tax in the first
quarter of 1998, $167 million after tax in the fourth quarter of 1997 and
$37 million after tax in the second quarter of 1997.
(c) Quarter-to-date and year-to-date average stockholders' equity excludes
average net unrealized gains or losses on debt and equity securities.
(d) Based on diluted earnings per share.
T-1
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- -------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 27 31 78 749 885
Provision for loan losses - 2 48 44 94
Noninterest income 121 7 93 247 468
Noninterest expense 106 21 89 541 757
Income tax expense 13 5 12 143 173
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 29 10 22 268 329
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 71.39% 42.02 24.15 40.65 40.30
Average loans, net $ 2,321 4,326 3,424 45,562 55,633
Average deposits 1,429 29 77,763 79,221
Average attributed stockholders'
equity $ 159 99 374 2,642 3,274
===============================================================================================================================
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 $ 15 (1) 41 42 16 - 113
Provision for loan losses - - 2 - - 2
Noninterest income 154 103 3 18 190 (23) 445
Noninterest expense 109 56 19 35 172 - 391
Income tax expense 21 16 8 8 11 (8) 56
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 39 30 15 17 23 (15) 109
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 76.44% 72.58 33.80 51.00 33.65 - 48.53
Average loans, net $ 100 - 3,145 1,126 - 4,371
Average deposits 2,188 - 2,689 11,172 - - 16,049
Average attributed stockholders'
equity $ 207 89 183 128 275 - 882
===============================================================================================================================
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
COMMERCIAL BANK
- -------------------------------------------------------------------------------------------------------------------------------
Income statement data
Net interest income $ 22 13 60 132 254 481
Provision for loan losses 1 - 1 22 - 24
Noninterest income - 97 - 30 127
Noninterest expense 10 74 20 90 130 324
Income tax expense 4 13 14 5 54 90
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 7 23 25 15 100 170
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 17.57% 80.24 14.63 3.66 71.71 20.99
Average loans, net $ 2,551 - 9,513 25,171 - 37,235
Average deposits - - - 24,589 24,589
Average attributed stockholders'
equity $ 170 119 673 1,746 553 3,261
===============================================================================================================================
(Continued)
T-2
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 43 9 (2) 192 37 279
Provision for loan losses 5 1 16 3 25
Noninterest income 202 46 46 57 44 395
Noninterest expense 152 35 28 130 28 373
Income tax expense 30 6 5 36 17 94
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 58 13 11 67 33 182
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 32.46% 27.21 47.36 12.20 140.93 22.02
Average loans, net $ 2,469 2,272 - 23,284 3,974 31,999
Average deposits 2,386 141 178 8,078 21 10,804
Average attributed stockholders'
equity $ 716 190 86 2,224 94 3,310
===============================================================================================================================
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 885 113 481 279 89 1,847
Provision for loan losses 94 2 24 25 5 150
Noninterest income 468 445 127 395 122 1,557
Noninterest expense 757 391 324 373 1,032 2,877
Income tax expense 173 56 90 94 (285) 128
- -------------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 329 109 170 182 (541) 249
After-tax merger-related and
restructuring charges - - 634 634
- -------------------------------------------------------------------------------------------------------------------------------
Net incomes before
merger-related and
restructuring charges $ 329 109 170 182 93 883
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 40.30% 48.53 20.99 22.02 9.14 23.91
Average loans, net $ 55,633 4,371 37,235 31,999 2,908 132,146
Average deposits 79,221 16,049 24,589 10,804 6,378 137,041
Average attributed stockholders'
equity $ 3,274 882 3,261 3,310 4,079 14,806
===============================================================================================================================
(a) Average attributed stockholders' equity excludes merger-related and
restructuring charges and average net unrealized gains or losses on debt
and equity securities. See the "Business Segments" discussion in
Management's Analysis of Operations for further information about the
methodology and assumptions used herein. The return on average attributed
stockholders' equity for the Capital Management Mutual Funds unit is net
of the Internal Management Elimination.
(Continued)
T-3
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1997
-----------------------------------------------------------------------------------------
First
First Union Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- -------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 13 30 165 826 1,034
Provision for loan losses 2 2 137 53 194
Noninterest income 75 10 75 189 349
Noninterest expense 70 17 107 573 767
Income tax expense 6 8 (1) 142 155
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 10 13 (3) 247 267
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 41.54% 63.74 (1.46) 36.32 30.71
Average loans, net $ 1,135 3,918 6,872 50,313 62,238
Average deposits 844 1 14 79,660 80,519
Average attributed stockholders'
equity $ 100 87 599 2,729 3,515
===============================================================================================================================
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 $ 15 1 36 36 4 - 92
Provision for loan losses - - - - - -
Noninterest income 136 63 3 13 71 (10) 276
Noninterest expense 104 41 19 26 63 - 253
Income tax expense 17 8 7 9 4 (4) 41
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 30 15 13 14 8 (6) 74
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 57.63% 47.56 27.37 52.86 28.29 - 42.94
Average loans, net $ 85 - 2,908 234 - 3,227
Average deposits 2,300 - 2,182 10,424 - - 14,906
Average attributed stockholders'
equity $ 202 66 187 113 101 - 669
===============================================================================================================================
Small Real
Business Cash Estate Deposit
(In millions) Banking Mgt. Banking Lending Products Total
- -------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 19 10 66 167 240 502
Provision for loan losses - - 20 - 20
Noninterest income - 86 - 32 118
Noninterest expense 10 73 20 101 136 340
Income tax expense 3 8 17 17 49 94
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 6 15 29 29 87 166
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 15.62% 49.65 16.07 6.21 66.38 19.60
Average loans, net $ 2,228 - 10,467 26,139 - 38,834
Average deposits - - - 24,139 24,139
Average attributed stockholders'
equity $ 146 116 730 1,855 524 3,371
===============================================================================================================================
(Continued)
T-4
Table 2
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 1997
-----------------------------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing
(In millions) Banking Finance Mgt. Banking & Rail Total
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 40 8 2 183 21 254
Provision for loan losses - (1) - 7 1 7
Noninterest income 49 76 27 58 52 262
Noninterest expense 56 23 15 97 45 236
Income tax expense 11 22 5 50 11 99
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 22 40 9 83 16 174
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 19.87% 134.01 71.87 19.96 52.21 27.81
Average loans, net $ 2,768 1,090 - 19,536 3,755 27,149
Average deposits 1,420 47 120 5,495 22 7,104
Average attributed stockholders'
equity $ 442 115 48 1,751 118 2,474
===============================================================================================================================
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 1,034 92 502 254 126 2,008
Provision for loan losses 194 - 20 7 7 228
Noninterest income 349 276 118 262 36 1,041
Noninterest expense 767 253 340 236 175 1,771
Income tax expense 155 41 94 99 (21) 368
- -------------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 267 74 166 174 1 682
After-tax merger-related and
restructuring charges - - 37 37
Net incomes before
merger-related and
restructuring charges $ 267 74 166 174 38 719
- -------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 30.71% 42.94 19.60 27.81 0.10 20.42
Average loans, net $ 62,238 3,227 38,834 27,149 3,830 135,278
Average deposits 80,519 14,906 24,139 7,104 6,796 133,464
Average attributed stockholders'
equity $ 3,515 669 3,371 2,474 4,088 14,117
===============================================================================================================================
(a) Average attributed stockholders' equity excludes merger-related and
restructuring charges and average net unrealized gains or losses on debt
and equity securities. See the "Business Segments" discussion in
Management's Analysis of Operations for further information about the
methodology and assumptions used herein. The return on average attributed
stockholders' equity for the Capital Management Mutual Funds unit is net
of the Internal Management Elimination.
T-5
TABLE 3
INTERNAL CAPITAL GROWTH AND DIVIDEND PAYOUT RATIOS
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 1998 1997
---------------- ----------------- ------------------------------
Second First Fourth Third Second
1998 1997 Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------------
INTERNAL CAPITAL GROWTH (a)
Assets to stockholders' equity 14.02 X 13.65 14.71 13.37 13.32 13.72 13.99
X
Return on assets 0.97 % 1.44 0.46 1.52 1.14 1.50 1.39
- ----------------------------------------------------------------------------------------------------------------------
Return on stockholders' equity (b) 13.94 % 19.84 6.83 20.74 15.44 20.36 19.37
X
Earnings retained 43.02 % 60.15 (42.31) 56.75 47.43 61.71 59.91
- -----------------------------------------------------------------------------------------------------------------------
Internal capital growth (b) 6.00 % 11.93 (2.89) 11.77 7.32 12.56 11.61
=======================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings 35.00 % 38.81 40.22 42.26 40.77 38.29 38.02
Net income 56.98 % 39.85 142.31 43.25 52.57 38.29 40.09
=======================================================================================================================
SELECTED RATIOS ON
Operating earnings
Return on assets 1.59 % 1.48 1.62 1.56 1.47 1.50 1.47
Return on stockholders' equity (b) 22.55 20.36 23.91 21.22 19.82 20.31 20.42
Net income
Return on stockholders' equity (b) 13.94 % 19.84 6.83 20.74 15.44 20.36 19.37
=======================================================================================================================
(a) Based on average balances.
(b) The determination of these ratios exclude average net unrealized gains or
losses on debt and equity securities.
T-6
Table 4
SELECTED QUARTERLY DATA
- -----------------------------------------------------------------------------
1998 1997
----------------- -----------------------
Second First Fourth Third Second
(Dollars in millions) Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
FIRST UNION MORTGAGE CORPORATION
PERMANENT LOAN ORIGINATIONS
Residential
Direct (a) $ 2,065 1,805 1,450 1,220 1,194
Wholesale 1,949 2,175 1,393 981 691
- -----------------------------------------------------------------------------
Total $ 4,014 3,980 2,843 2,201 1,885
=============================================================================
VOLUME OF RESIDENTIAL
LOANS SERVICED $ 64,591 64,218 64,231 64,322 63,625
=============================================================================
FIRST UNION CORPORATION
OTHER DATA
ATMs 3,613 3,631 3,701 3,645 3,565
Employees 72,159 69,416 65,943 66,355 67,076
=============================================================================
(a) Includes originations of affiliated banks.
T-7
Table 5
SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
----------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 230 802 3,450 280 4,762 (144) 5 4,623 8.58
U.S. Government agencies 289 5,762 15,793 4 21,848 (293) 2 21,557 5.80
CMOs 87 4,051 1,399 161 5,698 (36) 10 5,672 5.17
State, county and municipal 10 4 21 70 105 - - 105 15.34
Other 115 2,814 295 1,161 4,385 (73) 11 4,323 5.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 731 13,433 20,958 1,676 36,798 (546) 28 36,280 6.06
====================================================================================================================================
MARKET VALUE
Debt securities $ 724 13,433 20,958 787 35,902 (528) 28 35,402
Sundry securities 7 - - 889 896 (18) - 878
- -------------------------------------------------------------------------------------------------------------------------
Total $ 731 13,433 20,958 1,676 36,798 (546) 28 36,280
=========================================================================================================================
AMORTIZED COST
Debt securities $ 723 13,261 20,652 766 35,402
Sundry securities 7 - - 871 878
- ------------------------------------------------------------------------------------------
Total $ 730 13,261 20,652 1,637 36,280
==========================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.10 % 6.13 6.10 6.64 6.14
U.S. Government agencies 5.78 6.97 7.08 6.66 7.04
CMOs 6.92 6.89 6.22 7.87 6.75
State, county and municipal 7.86 7.14 7.07 6.98 7.08
Other 5.90 5.13 8.74 5.05 7.48
Consolidated 6.06 % 6.51 6.89 5.66 6.54
- ------------------------------------------------------------------------------------------
Included in "U.S. Government agencies" and "Other" at June 30, 1998, are
$2.9 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 June 30, 1998, these securities had a weighted average maturity of
3.73 years and a weighted average yield of 5.13 percent. The weighted average
U.S. equivalent yield for comparative purposes of these securities was 6.54
percent based on a weighted average funding cost differential of (1.41) 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 June 30, 1998. Average maturity in years
excludes preferred and common stocks and money market funds.
Yields related to securities exempt from both federal and state income
taxes, federal income taxes only or state income taxes only are stated on a
fully tax-equivalent basis. They are reduced by the nondeductible portion of
interest expense, assuming a federal tax rate of 35 percent; and tax rates of
7.25 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South
Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975
percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New
Jersey; and 9.5 percent in Connecticut.
There were forward commitments to purchase securities at a cost of $40
million that had a market value of $40 million at June 30, 1998. Gross gains and
losses realized on the sale of debt securities for the six months ended June 30,
1998, were $50 million and $17 million, respectively, and there was an $11
million gain related to sundry securities.
T-8
Table 6
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
----------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ - - - 1 1 - - 1 10.24
U.S. Government agencies - 884 141 1 1,026 24 (2) 1,048 4.12
CMOs 31 248 - - 279 6 - 285 1.68
State, county and municipal 59 238 214 319 830 108 - 938 7.62
Other 35 26 7 25 93 1 (1) 93 3.94
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 125 1,396 362 346 2,229 139 (3) 2,365 5.11
====================================================================================================================================
CARRYING VALUE
Debt securities $ 125 1,396 362 346 2,229 139 (3) 2,365
Sundry securities - - - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 125 1,396 362 346 2,229 139 (3) 2,365
=====================================================================================================================
MARKET VALUE
Debt securities $ 125 1,434 398 408 2,365
Sundry securities - - - - -
- --------------------------------------------------------------------------------------
Total $ 125 1,434 398 408 2,365
======================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury - % - - 5.05 5.05
U.S. Government agencies - 7.09 6.74 10.72 7.05
CMOs 7.55 7.88 - - 7.84
State, county and municipal 9.46 9.83 11.10 11.38 10.73
Other 7.42 7.40 7.08 7.75 7.48
Consolidated 8.42 % 7.70 9.33 11.10 8.54
======================================================================================
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 June 30, 1998.
Yields related to securities exempt from both federal and state income
taxes, federal income taxes only or state income taxes only are stated on a
fully tax-equivalent basis. They are reduced by the nondeductible portion of
interest expense, assuming a federal tax rate of 35 percent; and tax rates of
7.25 percent in North Carolina; 5.5 percent in Florida; 4.5 percent in South
Carolina; 6 percent in Georgia and Tennessee; 7 percent in Maryland; 9.975
percent in Washington, D.C.; 4.87 percent in Delaware; 6.5 percent in New
Jersey; and 9.5 percent in Connecticut.
There were no commitments to purchase or sell investment securities at June
30, 1998. Gross gains realized on repurchase agreement underdeliveries and calls
of investment securities for the six months ended June 30, 1998, were $4
million.
T-9
Table 7
LOANS
- --------------------------------------------------------------------------------------------
1998 1997
------------------ -----------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 50,972 49,060 46,117 45,007 44,440
Real estate - construction and other 3,033 2,957 3,037 3,156 3,284
Real estate - mortgage 9,718 10,223 13,160 13,228 13,604
Lease financing 9,155 8,413 8,610 8,307 8,182
Foreign 4,365 3,843 3,885 3,278 3,441
- --------------------------------------------------------------------------------------------
Total commercial 77,243 74,496 74,809 72,976 72,951
============================================================================================
RETAIL
Real estate - mortgage 26,221 27,997 28,998 30,131 30,721
Installment loans - Bankcard (a) 4,043 3,842 3,914 6,824 7,164
Installment loans - other 27,982 25,448 22,271 24,589 24,564
Vehicle leasing 5,692 5,490 5,331 4,971 4,834
- --------------------------------------------------------------------------------------------
Total retail 63,938 62,777 60,514 66,515 67,283
============================================================================================
Total loans 141,181 137,273 135,323 139,491 140,234
Unearned income 3,791 3,459 3,636 3,525 3,558
- --------------------------------------------------------------------------------------------
Loans, net $ 137,390 133,814 131,687 135,966 136,676
============================================================================================
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-10
Table 8
INTEREST-ONLY AND RESIDUAL CERTIFICATES
- ---------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
-----------------------------------------------------------------------------------------------
Home
Equity
Home Credit Lines of
(In millions) Equity SBA Student Auto Card Credit
- ---------------------------------------------------------------------------------------------------------------------------------
ACTIVITY
Balance, March 31, 1998 $ 171 - 19 32 49 14
Originated residual interests 2 - - 32 2
Purchased residual interests 897 185 52 - - -
Net accretion (amortization) (8) - (3) (33) (2)
Net gain (loss) (4) - 3 (2) - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 1,058 185 74 27 48 14
=================================================================================================================================
Home
Home Equity Equity
Fixed Variable Credit Lines of
Rate Rate SBA Student Auto Card Credit
- ---------------------------------------------------------------------------------------------------------------------------------
VALUATION ESTIMATES
Discount rate 11.00 % 11.00 11.00 10.10 11.60 10.34 11.00
Prepayment rate CPR-27.00 % CPR-43.00 CPR-9.50 CPR-7.00 ABS-1.40 9 Months CPR-3.95
Weighted average cumulative
net loss assumption 410 bps 520 900 11 249 383 270
Weighted average coupon rate 11.20 % 10.60 10.62 8.11 10.29 18.93 9.47
Excess annual spread 400 bps 330 368 125 350 570 247
=================================================================================================================================
Home
Home Equity Equity
Fixed Variable Credit Lines of
(Dollars in millions) Rate Rate SBA Student Auto Card Credit
- ---------------------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA
Securitized principal serviced $ 9,194 3,054 770 2,336 1,029 2,028 284
Contractual delinquency ratios
30 - 59 days 1.91 % 2.62 1.10 2.34 2.22 11.40 0.20
60 - 89 days 0.98 1.17 0.40 1.26 0.70 1.64 0.13
90 + days 2.43 2.27 2.52 2.25 0.68 2.27 0.19
Defaults
Foreclosures in process 2.24 3.88 0.81 n/a n/a n/a -
Real estate owned 0.71 % 1.03 0.36 n/a n/a n/a -
=================================================================================================================================
T-11
Table 9
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ---------------------------------------------------------------------------------------------------------------
1998 1997
--------------------- -----------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of quarter $ 1,863 1,847 2,175 2,181 2,191
Provision for loan losses 150 135 445 225 228
Allowance relating to loans acquired, transferred to
accelerated disposition or sold 13 10 (579) - -
Loan losses, net (156) (129) (194) (231) (238)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of quarter $ 1,870 1,863 1,847 2,175 2,181
===============================================================================================================
(as a % of loans, net) 1.36% 1.39 1.40 1.60 1.60
===============================================================================================================
(as a % of nonaccrual and restructured loans) 235% 210 211 247 242
===============================================================================================================
(as a % of nonperforming assets) 206% 186 186 218 213
===============================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 63 37 70 37 39
Real estate - commercial construction and mortgage 2 9 11 12 12
Real estate - residential mortgage 6 11 15 9 18
Installment loans - Bankcard 67 56 90 144 145
Installment loans - other and Vehicle leasing 52 67 64 75 75
- ---------------------------------------------------------------------------------------------------------------
Total 190 180 250 277 289
- ---------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 7 24 26 13 15
Real estate - commercial construction and mortgage - 5 7 5 7
Real estate - residential mortgage - 1 2 3 3
Installment loans - Bankcard 4 4 7 11 9
Installment loans - other and Vehicle leasing 23 17 14 14 17
- ---------------------------------------------------------------------------------------------------------------
Total 34 51 56 46 51
- ---------------------------------------------------------------------------------------------------------------
Loan losses, net $ 156 129 194 231 238
===============================================================================================================
(as % of average loans, net) (a) 0.47% 0.39 0.58 0.68 0.71
===============================================================================================================
(as % of average loans, net, excluding Bankcard) (a) 0.29% 0.24 0.35 0.30 0.32
===============================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 368 410 384 346 366
Commercial real estate loans 141 130 135 158 175
Consumer real estate loans 190 234 233 233 224
Installment loans 94 114 124 143 136
- ---------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 793 888 876 880 901
Restructured loans 1 1 2 1 2
Foreclosed properties 115 114 113 119 120
- ---------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 909 1,003 991 1,000 1,023
===============================================================================================================
(as % of loans, net and foreclosed properties) 0.66% 0.75 0.75 0.73 0.75
===============================================================================================================
Accruing loans past due 90 days $ 248 328 326 416 428
===============================================================================================================
(a) Annualized.
T-12
Table 10
INTANGIBLE ASSETS
- ---------------------------------------------------------------------------------------
1998 1997
------------------ --------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------
MORTGAGE AND OTHER SERVICING ASSETS $ 511 444 427 384 370
=======================================================================================
CREDIT CARD PREMIUM $ 19 21 24 26 29
=======================================================================================
OTHER INTANGIBLE ASSETS
Goodwill $ 4,743 2,484 2,465 2,502 2,545
Deposit base premium 421 442 473 512 546
Other 5 5 10 12 11
- ---------------------------------------------------------------------------------------
Total $ 5,169 2,931 2,948 3,026 3,102
=======================================================================================
Table 11
FORECLOSED PROPERTIES
- ---------------------------------------------------------------------------------------
1998 1997
------------------ ----------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------
Foreclosed properties $ 129 129 129 135 137
- ---------------------------------------------------------------------------------------
Allowance for foreclosed properties,
beginning of quarter 15 16 16 17 17
Provision for foreclosed properties (1) - 1 - 1
Dispositions, net - (1) (1) (1) (1)
- ---------------------------------------------------------------------------------------
Allowance for foreclosed properties,
end of quarter 14 15 16 16 17
- ---------------------------------------------------------------------------------------
Foreclosed properties, net $ 115 114 113 119 120
=======================================================================================
T-13
Table 12
DEPOSITS
- --------------------------------------------------------------------------------
1998 1997
-------------------- ---------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 33,169 32,184 31,005 29,676 30,374
Savings and NOW accounts 33,938 35,104 37,281 36,432 36,603
Money market accounts 24,520 23,875 21,240 20,383 20,227
Other consumer time 38,053 37,930 37,324 38,806 40,017
- --------------------------------------------------------------------------------
Total core deposits 129,680 129,093 126,850 125,297 127,221
Foreign 2,881 2,083 3,928 2,147 3,295
Other time 6,037 6,759 6,299 5,700 4,686
- --------------------------------------------------------------------------------
Total deposits $ 138,598 137,935 137,077 133,144 135,202
================================================================================
T-14
Table 13
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ----------------------------------------------------------------------
June 30, 1998
--------------------
Time Other
(In millions) Certificates Time
- ----------------------------------------------------------------------
MATURITY OF
3 months or less $ 6,230 -
Over 3 months through 6 months 1,987 -
Over 6 months through 12 months 2,975 -
Over 12 months 2,681 -
- ----------------------------------------------------------------------
Total $ 13,873 -
======================================================================
T-15
Table 14
LONG-TERM DEBT
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997
---------------------- ------------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES ISSUED BY THE PARENT COMPANY
7-1/2% debentures $ - - - - 16
Notes
Floating rate extendible, due June 15, 2005 10 10 10 10 10
6.60%, due June 15, 2000 249 249 249 249 249
Floating rate - - 300 300 300
6-3/4% - - 250 250 250
Subordinated notes
6.30%, due April 15, 2028 200 - - - -
7.18%, due April 15, 2011 59 59 59 59 59
8%, due August 15, 2009 149 149 149 149 149
6-3/8%, due January 15, 2009 148 148 148 148 148
6%, due October 30, 2008 198 198 198 198 198
6.4%, due April 1, 2008 297 - - - -
7-1/2%, due July 15, 2006 298 298 298 298 298
7%, due March 15, 2006 199 199 199 199 198
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 249 249 249 248 248
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 149 149 149 149 148
Fixed rate medium-term, varying rates and terms
to June 5, 2001 37 54 54 54 54
9.45%, due June 15, 1999 250 249 249 249 249
Subordinated debentures
6.55%, due October 15, 2035 249 249 249 249 249
7-1/2%, due April 15, 2035 247 247 246 246 246
6.824%/7.574%, due August 1, 2026 298 298 298 298 298
- ----------------------------------------------------------------------------------------------------------------------------
Total debentures and notes issued by the Parent Company 4,703 4,222 4,771 4,770 4,784
============================================================================================================================
(Continued)
T-16
Table 14
LONG-TERM DEBT
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997
--------------------- ---------------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
DEBENTURES AND NOTES OF SUBSIDIARIES
Debentures and notes
9-3/4%, due September 1, 2003 118 119 120 121 122
Variable rate medium-term, varying rates and terms
to November 5, 2001 1,309 1,550 1,640 1,615 1,542
Varying rates and terms to January 26, 2004 82 161 62 59 57
Floating rate - 500 500 - -
Senior notes from acquired companies, varying
rate and terms to April 15, 2004 1,059 150 150 150 150
Subordinated notes
Bank, varying rates and terms to December 15, 2036 2,367 1,611 1,205 973 875
7.95%, due December 1, 2007 100 - - - -
6-3/4%, due November 15, 2006 200 198 199 199 199
6-5/8%, due March 15, 2005 175 174 174 174 174
5-7/8%, due October 15, 2003 200 200 200 200 200
6.80%, due June 15, 2003 149 149 149 149 149
9-3/8%, due April 15, 2003 100 100 100 100 100
6-5/8%, due March 15, 2003 150 149 149 149 149
7.30%, due December 1, 2002 150 - - - -
7-7/8%, due July 15, 2002 100 100 100 100 100
9-5/8%, due February 15, 2001 150 150 150 150 150
9-5/8%, due August 15, 1999 150 150 150 150 150
9-5/8%, due June 1, 1999 100 100 100 100 100
Floating rate - 100 100 100 100
Subordinated capital notes
9-5/8%, due June 15, 1999 75 75 75 75 75
9-7/8%, due May 15, 1999 75 75 75 75 75
8-1/2% - - 149 149 149
10-1/2% collateralized mortgage obligations - - - 31 33
- -----------------------------------------------------------------------------------------------------------------------------
Total debentures and notes of subsidiaries 6,809 5,811 5,547 4,819 4,649
- -----------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Advances from the Federal Home Loan Bank 1,685 1,928 1,385 1,570 880
Mortgage notes and other debt 10 10 16 17 213
Capitalized leases 43 32 33 33 33
- ------------------------------------------------------------------------------------------------------------------------------
Total other debt 1,738 1,970 1,434 1,620 1,126
- -----------------------------------------------------------------------------------------------------------------------------
Total $ 13,250 12,003 11,752 11,209 10,559
=============================================================================================================================
T-17
Table 15
CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
Twelve
Months 1998 1997
Ended ------------------ --------------------------
June 30, Second First Fourth Third Second
(In millions) 1998 Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
Balance, beginning of period $14,094 15,806 15,269 14,823 14,094 13,843
- ---------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 2,363 249 790 576 748 682
Unrealized gain (loss) on debt and
equity securities, net 252 44 4 70 134 202
- ---------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,615 293 794 646 882 884
- ---------------------------------------------------------------------------------------------------------------
Purchase of common stock (3,077) (1,908) (531) (326) (312) (526)
Common stock issued for stock options exercised 1,111 279 340 413 79 155
Common stock issued through dividend
reinvestment plan 66 15 27 16 8 11
Common stock issued through public offering 358 - - - 358 -
Common stock issued for acquisitions 2,540 2,291 249 - - -
Cash dividends paid (1,181) (250) (342) (303) (286) (273)
- ---------------------------------------------------------------------------------------------------------------
Balance, end of period $16,526 16,526 15,806 15,269 14,823 14,094
===============================================================================================================
T-18
Table 16
CAPITAL RATIOS
- -------------------------------------------------------------------------------------
1998 1997
------------------- --------------------------
Second First Fourth Third Second
(In millions) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 12,854 14,500 13,972 12,604 11,814
Total capital 20,731 21,911 21,585 20,231 18,839
Adjusted risk-based assets 182,643 167,348 165,802 153,278 150,004
Adjusted leverage ratio assets $213,866 207,973 197,075 183,359 175,480
Ratios
Tier 1 capital 7.04% 8.66 8.43 8.22 7.88
Total capital 11.35 13.09 13.02 13.20 12.56
Leverage 6.01 6.97 7.09 6.87 6.73
STOCKHOLDERS' EQUITY TO ASSETS (a)
Quarter-end 7.22 7.19 7.42 7.31 6.99
Average 6.80% 7.48 7.51 7.29 7.15
=====================================================================================
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank 7.16% 7.49 6.97 7.13 6.75
First Union Bank of Delaware 50.55 13.75 11.83 13.72 14.16
First Union Home Equity Bank 12.27 11.41 10.95 10.23 9.68
Total capital
First Union National Bank 10.06 10.64 10.20 10.83 10.73
First Union Bank of Delaware 50.97 14.27 13.09 14.97 15.42
First Union Home Equity Bank 14.48 13.61 13.20 12.39 11.94
Leverage
First Union National Bank 6.23 5.90 6.02 5.88 5.48
First Union Bank of Delaware 23.87 6.63 6.24 8.31 11.29
First Union Home Equity Bank 10.75% 10.48 10.16 9.12 8.44
=====================================================================================
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and a minimum ratio of
total capital to risk-weighted assets of 8.00 percent. The minimum leverage
ratio of tier 1 capital to adjusted average quarterly assets is from 3.00
to 5.00 percent. The capital ratios presented herein have not been restated
to reflect the Signet pooling of interests acquisition. The amounts
presented herein have been restated for all periods presented to reflect
the CoreStates acquisition.
(b) The amounts presented herein do not include those of acquired banks.
T-19
Table 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Estimated
Average Rate -------------------
June 30, 1998 Notional ---------------- Maturity In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 16,160 6.51% 5.67% 3.76 Converts floating rate loans to fixed
Carrying amount $ 30 rate. Adds to liability sensitivity.
Unrealized gross gain 241 Similar characteristics to a fixed
Unrealized gross loss (5) income security funded with
variable rate liabilities. Includes
$2.1 billion of callable swaps
expected to mature in or before
December 1999 if swap rates are below
6.99 percent and $221 million foreign
rate swaps maturing in September 2000.
------
Total 266
------
Forward interest rate swaps 1,118 6.46 - 2.61 Converts floating rate loans to fixed
Carrying amount - rates in future periods. Effective
Unrealized gross gain 12 December 1998 with $725 million
Unrealized gross loss - of purchased put options on forward
swaps referenced under "Rate
Sensitivity Hedges" linked to this
item.
------
Total 12
------
Interest rate floors 520 6.07 5.70 0.74 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
------
Periodic caps 389 - 7.62 7.76 Paid a premium to convert capped
Carrying amount 4 adjustable rate mortgage loans to
Unrealized gross gain - floating rate.
Unrealized gross loss (4)
------
Total -
------
Purchased options on
forward swaps 130 - 7.74 5.77 Paid a premium to convert fixed rate
Carrying amount 2 assets to floating rate if the 3-year
Unrealized gross gain - swap rate is above 7.74 percent in
Unrealized gross loss (2) August 2003.
------
Total -
- ------------------------------------------ ------
Total asset rate
conversions $ 18,317 6.49% 5.73% 3.70 $ 280
========================================================================================
(Continued)
T-20
Table 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Estimated
Average Rate -------------------
June 30, 1998 Notional ---------------- Maturity In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 10,888 6.71% 5.75% 6.89 Converts $4.9 billion of fixed rate
Carrying amount $ 25 long-term debt to floating rate by
Unrealized gross gain 330 matching the terms of the swap to
Unrealized gross loss (10) the debt issue. Also converts $899
million of fixed rate CDs to variable
rate, $2.2 billion of fixed rate bank
notes to floating rate, $1.0 billion
of fixed rate capital trust securities
to variable rate, and $1.9 billion of
fixed rate deposits to floating rate.
------
Total 345
------
Interest rate floors 619 5.89 5.69 2.38 Paid a premium to convert fixed rate
Carrying amount 3 deposits to floating rate when 3
Unrealized gross gain 4 month LIBOR is below an average of
Unrealized gross loss (1) 6.49 percent. $150 million at 4.00
percent offsets a corresponding rate
floor in long-term debt.
------
Total 6
------
Interest rate collar 100 8.80/6.00 5.69 0.75 Purchased a zero-cost collar to
Carrying amount - convert fixed rate deposits to
Unrealized gross - floating gain rate when 3 month LIBOR
Unrealized gross loss - is below 6.00 percent (purchased
floor) or above 8.80 percent (sold
cap).
------
Total -
------
Purchased options on forward swaps 20 - 7.75 8.15 Paid a premium to convert floating
Carrying amount - rate debt to fixed rate if 3 year swap
Unrealized gross gain - rate is above 7.75 percent in August
Unrealized gross loss - 2003.
------
Total -
------
Forward interest rate swaps 49 6.10 - 2.54 Converts fixed rate debt to floating
Carrying amount - rate in future periods. Effective
Unrealized gross gain - in January 1999.
Unrealized gross loss -
------
Total -
- ------------------------------------------ ------
Total liability rate
conversions $ 11,676 6.66% 5.75% 6.58 $ 351
========================================================================================
(Continued)
T-21
Table 17
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Estimated
Average Rate -------------------
June 30, 1998 Notional ---------------- Maturity In Fair
(In millions) Amount Receive Pay Years (b) Value Comments
- ------------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Purchased put options on
forward swaps $ 725 -% 6.20% 2.48 Paid a premium for the right to
Carrying amount $ 2 terminate $725 million of forward
Unrealized gross gain - interest rate swaps based on
Unrealized gross loss (1) interest rates in effect in December
1998. Reduces liability sensitivity.
------
Total 1
------
Interest rate caps (LIBOR) 9,969 - 6.26 1.47 Paid a premium for the right to lock
Carrying amount 8 in 3 month LIBOR reset rates on
Unrealized gross gain - pay variable rate swaps.
Unrealized gross loss (2)
------
Total 6
------
Interest rate caps (CMT) 2,200 - 5.70 3.46 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 (11) liabilities to fixed rate.
------
Total 15
------
Short eurodollar futures 2,767 - 6.37 0.21 Locks in 3 month LIBOR reset rates
Carrying amount - on pay variable rate swaps. $2.8
Unrealized gross gain - billion effective September 1998.
Unrealized gross loss (4)
------
Total (4)
------
Long eurodollar futures 2,000 6.62 - 0.84 Converts floating rate LIBOR-based
Carrying amount - loans to fixed rate. Adds to liability
Unrealized gross gain 5 sensitivity. Similar characteristics
Unrealized gross loss - to fixed income security funded with
variable rate liabilities. $500
million effective December 1998,
March, June and September 1999.
------
Total 5
------
Purchased call options on eurodollar
futures 256 6.89 - 0.21 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 September 1998.
------
Total 1
- ------------------------------------------ ------
Total rate sensitivity
hedges $ 17,917 6.65% 6.20% 1.47 $ 24
========================================================================================
(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 June 30, 1998. Weighted average receive rates are fixed rates
set at the time the contract was transacted. Carrying amount includes
accrued interest receivable/payable and unamortized premiums paid/received.
T-22
Table 18
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- -------------------------------------------------------------------------------------------------------------
June 30, 1998 1 Year 1-2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- -------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 2,314 8,304 3,480 3,919 300 18,317
Weighted average receive rate 5.87% 6.68 6.29 6.56 6.95 6.49
Estimated fair value $ 4 125 61 55 35 280
- -------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 2,215 1,484 2,549 3,835 1,593 11,676
Weighted average receive rate 6.22% 6.76 6.62 6.67 7.35 6.66
Estimated fair value $ 8 22 73 151 97 351
- -------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 4,573 10,376 2,968 - - 17,917
Weighted average receive rate 6.66% 6.62 - - - 6.65
Estimated fair value $ (1) 8 17 - - 24
=============================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities. Pay rates are generally based on
one to six month LIBOR and reset at predetermined reset dates. Current pay
rates are not necessarily indicative of future pay rates, and therefore,
they have been excluded from the above table. Weighted average pay rates
are indicated in Table 17.
Table 19
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- --------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- --------------------------------------------------------------------------------
Balance, December 31, 1997 $ 17,714 11,422 20,880 50,016
Additions 1,913 1,083 9,976 12,972
Maturities/Amortizations (1,495) (1,759) (11,533) (14,787)
Terminations 185 930 (1,406) (291)
- --------------------------------------------------------------------------------
Balance, June 30, 1998 $ 18,317 11,676 17,917 47,910
- --------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
T-23
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- --------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 1998 FIRST QUARTER 1998
---------------------------------- --------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing bank balances $ 2,872 43 5.88% $ 2,971 41 5.65%
Federal funds sold and securities
purchased under resale agreements 11,842 151 5.18 9,728 129 5.35
Trading account assets (a) 7,655 109 5.76 5,835 90 6.20
Securities available for sale (a) 35,593 590 6.61 30,046 499 6.68
Investment securities (a)
U.S. Government and other 1,866 32 6.89 2,403 40 6.69
State, county and municipal 907 23 10.06 986 24 9.74
- -------------------------------------------------------------------- -------------------
Total investment securities 2,773 55 7.92 3,389 64 7.57
- -------------------------------------------------------------------- -------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 49,717 991 7.99 48,035 955 8.07
Real estate - construction and other 3,001 63 8.49 2,973 64 8.63
Real estate - mortgage 9,988 212 8.52 10,414 218 8.50
Lease financing 4,407 124 11.22 4,249 113 10.65
Foreign 4,123 69 6.69 4,003 66 6.68
- -------------------------------------------------------------------- -------------------
Total commercial 71,236 1,459 8.21 69,674 1,416 8.23
- -------------------------------------------------------------------- -------------------
Retail
Real estate - mortgage 26,300 495 7.54 27,555 531 7.71
Installment loans - Bankcard (c) 3,931 149 15.14 3,951 169 17.10
Installment loans - other and
Vehicle leasing 30,679 704 9.19 30,034 691 9.30
- -------------------------------------------------------------------- -------------------
Total retail 60,910 1,348 8.86 61,540 1,391 9.09
- -------------------------------------------------------------------- -------------------
Total loans 132,146 2,807 8.51 131,214 2,807 8.63
- -------------------------------------------------------------------- -------------------
Total earning assets 192,881 3,755 7.80 183,183 3,630 7.99
================== ==================
Cash and due from banks 9,282 8,976
Other assets 16,777 18,650
- -------------------------------------------------------------------- --------
Total assets $ 218,940 $210,809
==================================================================== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 34,358 226 2.64 35,336 236 2.70
Money market accounts 24,605 213 3.48 23,070 190 3.34
Other consumer time 37,927 505 5.35 37,403 489 5.30
Foreign 2,523 32 5.05 2,856 38 5.44
Other time 6,596 110 6.67 6,507 106 6.62
- -------------------------------------------------------------------- -------------------
Total interest-bearing deposits 106,009 1,086 4.11 105,172 1,059 4.08
Federal funds purchased and securities
sold under repurchase agreements 34,775 445 5.13 30,425 373 4.98
Commercial paper 2,066 27 5.33 1,939 26 5.43
Other short-term borrowings 9,273 121 5.21 7,289 99 5.48
Long-term debt 12,609 201 6.36 11,900 185 6.23
- -------------------------------------------------------------------- -------------------
Total interest-bearing liabilities 164,732 1,880 4.57 156,725 1,742 4.50
================== ==================
Noninterest-bearing deposits 31,032 29,402
Other liabilities 6,560 7,176
Guaranteed preferred beneficial interests 1,735 1,735
Stockholders' equity 14,881 15,771
- -------------------------------------------------------------------- -------------------
Total liabilities and
stockholders' equity $ 218,940 $210,809
==================================================================== ========
Interest income and rate earned $3,755 7.80% $3,630 7.99%
Interest expense and equivalent rate paid 1,880 3.91 1,742 3.85
- -------------------------------------------------------------------- -------------------
Net interest income and margin $1,875 3.89% $1,888 4.14%
==================================================================== ===================
(a) Yields related to securities and loans exempt from both federal and state
income taxes, federal income taxes only or state income taxes only are
stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of
35 percent; and tax rates of 7.25 percent in North Carolina; 5.5 percent in
Florida; 4.5 percent in South Carolina; 6 percent in Georgia and Tennessee;
7 percent in Maryland; 9.975 percent in Washington, D.C.; 4.87 percent in
Delaware; 6.5 percent in New Jersey; and 9.5 percent in Connecticut. Lease
financing amounts include related deferred income taxes.
T-24
- ------------------------------------------------------------------------------------------------------------------
FOURTH QUARTER 1997 THIRD 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 $ 3,718 55 5.75% $ 3,413 49 5.70%
Federal funds sold and securities
purchased under resale agreements 7,609 106 5.46 7,691 106 5.48
Trading account assets (a) 6,736 109 6.45 5,618 94 6.65
Securities available for sale (a) 21,590 363 6.76 21,122 366 6.87
Investment securities (a)
U.S. Government and other 2,257 43 7.07 2,418 42 7.12
State, county and municipal 1,034 27 9.46 1,069 25 9.38
- ------------------------------------------------------------------ --------------------
Total investment securities 3,291 70 7.82 3,487 67 7.81
- ------------------------------------------------------------------ --------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 44,948 891 7.86 43,430 880 8.05
Real estate - construction and other 3,124 68 8.56 3,231 74 9.19
Real estate - mortgage 13,020 288 8.80 13,518 296 8.68
Lease financing 4,380 115 10.45 4,398 113 10.19
Foreign 3,668 61 6.64 3,415 55 6.35
- ------------------------------------------------------------------ --------------------
Total commercial 69,140 1,423 8.17 67,992 1,418 8.28
- ------------------------------------------------------------------ --------------------
Retail
Real estate - mortgage 29,890 579 7.68 30,671 598 7.74
Installment loans - Bankcard (c) 6,646 273 16.28 6,997 272 15.44
Installment loans - other and
Vehicle leasing 28,443 686 9.57 29,189 713 9.69
- ------------------------------------------------------------------ --------------------
Total retail 64,979 1,538 9.39 66,857 1,583 9.40
- ------------------------------------------------------------------ --------------------
Total loans 134,119 2,961 8.76 134,849 3,001 8.83
- ------------------------------------------------------------------ --------------------
Total earning assets 177,063 3,664 8.21 176,180 3,683 8.30
================= =================
Cash and due from banks 8,880 8,499
Other assets 13,982 12,835
- ------------------------------------------------------ ---------
Total assets $199,925 $ 197,514
====================================================== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 32,023 234 2.90 33,170 229 2.74
Money market accounts 25,553 193 2.99 23,936 181 3.01
Other consumer time 37,583 496 5.23 39,407 517 5.21
Foreign 2,351 34 5.73 2,629 35 5.20
Other time 6,611 102 6.14 5,518 85 6.12
- ------------------------------------------------------------------ --------------------
Total interest-bearing deposits 104,121 1,059 4.03 104,660 1,047 3.97
Federal funds purchased and securities
sold under repurchase agreements 24,010 306 5.06 23,523 301 5.08
Commercial paper 1,931 33 6.81 2,073 28 5.47
Other short-term borrowings 6,341 96 6.00 6,951 104 5.95
Long-term debt 11,636 187 6.38 10,694 177 6.51
- ------------------------------------------------------------------ --------------------
Total interest-bearing liabilities 148,039 1,681 4.51 147,901 1,657 4.44
================= =================
Noninterest-bearing deposits 28,865 27,500
Other liabilities 6,275 5,988
Guaranteed preferred beneficial interests 1,733 1,733
Stockholders' equity 15,013 14,392
- ------------------------------------------------------------------ --------------------
Total liabilities and
stockholders' equity $199,925 $ 197,514
====================================================== =========
Interest income and rate earned $3,664 8.21% $3,683 8.30%
Interest expense and equivalent rate paid 1,681 3.77 1,657 3.73
- ------------------------------------------------------------------ --------------------
Net interest income and margin $1,983 4.44% $2,026 4.57%
================================================================== ====================
SECOND QUARTER 1997
------------------------------
Average
Interest Rates
Average Income/ Earned/
(In millions) Balances Expense Paid
ASSETS
Interest-bearing bank balances $ 2,848 41 5.65%
Federal funds sold and securities
purchased under resale agreements 7,268 101 5.55
Trading account assets (a) 4,606 78 6.80
Securities available for sale (a) 21,688 378 7.00
Investment securities (a)
U.S. Government and other 2,527 47 7.36
State, county and municipal 1,103 26 9.50
- -----------------------------------------------------------------
Total investment securities 3,630 73 8.01
- -----------------------------------------------------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 42,892 873 8.16
Real estate - construction and other 3,380 77 9.12
Real estate - mortgage 13,623 298 8.79
Lease financing 4,254 106 9.99
Foreign 3,384 54 6.46
- -----------------------------------------------------------------
Total commercial 67,533 1,408 8.36
- -----------------------------------------------------------------
Retail
Real estate - mortgage 31,604 611 7.76
Installment loans - Bankcard (c) 7,187 262 14.61
Installment loans - other and
Vehicle leasing 28,954 696 9.64
- -----------------------------------------------------------------
Total retail 67,745 1,569 9.29
- -----------------------------------------------------------------
Total loans 135,278 2,977 8.82
- -----------------------------------------------------------------
Total earning assets 175,318 3,648 8.34
=================
Cash and due from banks 8,673
Other assets 12,433
- ------------------------------------------------------
Total assets $196,424
======================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 33,769 221 2.63
Money market accounts 23,313 164 2.81
Other consumer time 40,349 521 5.18
Foreign 4,281 56 5.29
Other time 4,786 72 6.07
- -----------------------------------------------------------------
Total interest-bearing deposits 106,498 1,034 3.90
Federal funds purchased and securities
sold under repurchase agreements 23,433 295 5.04
Commercial paper 2,152 30 5.50
Other short-term borrowings 5,488 84 6.15
Long-term debt 10,543 170 6.51
- -----------------------------------------------------------------
Total interest-bearing liabilities 148,114 1,613 4.37
=================
Noninterest-bearing deposits 26,966
Other liabilities 5,568
Guaranteed preferred beneficial interests 1,733
Stockholders' equity 14,043
- -----------------------------------------------------------------
Total liabilities and
stockholders' equity $196,424
======================================================
Interest income and rate earned $3,648 8.34%
Interest expense and equivalent rate paid 1,613 3.69
- ----------------------------------------------------------------- ----
Net interest income and margin $2,035 4.65%
================================================================= -----
(b) The loan averages include loans on which the accrual of interest has been
discontinued and are stated net of unearned income.
(c) Installment loans - Bankcard include credit card, ICR, signature and First
Choice amounts.
T-25
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED 1998 SIX MONTHS ENDED 1997
--------------------------------- -------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
(In millions) Balances Expense Paid Balances Expense Paid
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing bank balances $ 2,921 84 5.77% $ 2,795 78 5.61%
Federal funds sold and securities
purchased under resale agreements 10,791 280 5.26 6,780 187 5.56
Trading account assets (a) 6,750 199 5.95 4,153 138 6.68
Securities available for sale (a) 32,835 1,089 6.64 20,324 694 6.88
Investment securities (a)
U.S. Government and other 2,134 72 6.78 2,620 94 7.22
State, county and municipal 946 47 9.90 1,124 53 9.54
- ------------------------------------------------------------------- ------------------
Total investment securities 3,080 119 7.74 3,744 147 7.92
- ------------------------------------------------------------------- ------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 48,880 1,946 8.03 42,027 1,693 8.12
Real estate - construction and other 2,987 127 8.56 3,417 151 8.89
Real estate - mortgage 10,200 430 8.51 13,856 596 8.67
Lease financing 4,328 237 10.94 4,007 195 9.83
Foreign 4,064 135 6.69 3,154 99 6.34
- ------------------------------------------------------------------- ------------------
Total commercial 70,459 2,875 8.22 66,461 2,734 8.29
- ------------------------------------------------------------------- ------------------
Retail
Real estate - mortgage 26,924 1,026 7.63 32,332 1,249 7.79
Installment loans - Bankcard (c) 3,941 318 16.12 7,165 513 14.44
Installment loans - other and
Vehicle leasing 30,358 1,395 9.25 28,592 1,374 9.69
- ------------------------------------------------------------------- ------------------
Total retail 61,223 2,739 8.98 68,089 3,136 9.29
- ------------------------------------------------------------------- ------------------
Total loans 131,682 5,614 8.57 134,550 5,870 8.80
- ------------------------------------------------------------------- ------------------
Total earning assets 188,059 7,385 7.89 172,346 7,114 8.32
=================== ==================
Cash and due from banks 9,129 8,701
Other assets 17,709 12,375
- ------------------------------------------------------- --------
Total assets $214,897 $193,422
- ------------------------------------------------------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 34,845 462 2.67 33,622 435 2.61
Money market accounts 23,842 403 3.41 23,309 320 2.76
Other consumer time 37,666 994 5.32 41,030 1,054 5.18
Foreign 2,689 70 5.26 3,703 95 5.18
Other time 6,551 216 6.65 4,678 138 5.95
- ------------------------------------------------------------------- ------------------
Total interest-bearing deposits 105,593 2,145 4.10 106,342 2,042 3.87
Federal funds purchased and securities
sold under repurchase agreements 32,612 818 5.06 21,734 540 5.01
Commercial paper 2,003 53 5.38 1,893 51 5.38
Other short-term borrowings 8,287 220 5.33 4,698 138 5.94
Long-term debt 12,256 386 6.29 10,663 343 6.50
- ------------------------------------------------------------------- ------------------
Total interest-bearing liabilities 160,751 3,622 4.54 145,330 3,114 4.32
=================== ==================
Noninterest-bearing deposits 30,222 26,784
Other liabilities 6,866 5,509
Guaranteed preferred beneficial interests 1,735 1,626
Stockholders' equity 15,323 14,173
- ------------------------------------------------------- --------
Total liabilities and
stockholders' equity $214,897 $193,422
======================================================= ========
Interest income and rate earned $7,385 7.89% $7,114 8.32%
Interest expense and equivalent rate paid 3,622 3.88 3,114 3.64
- -------------------------------------------------------------------------------- ------------------
Net interest income and margin $3,763 4.01% $4,000 4.68%
================================================================================ ==================
(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-26
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED 1997 NINE MONTHS ENDED 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 $ 3,184 182 5.68% $ 3,003 127 5.65%
Federal funds sold and securities
purchased under resale agreements 7,219 399 5.51 7,088 293 5.53
Trading account assets (a) 5,174 341 6.59 4,647 232 6.67
Securities available for sale (a) 20,844 1,423 6.83 20,600 1,060 6.88
Investment securities (a)
U.S. Government and other 2,478 179 7.22 2,545 136 7.15
State, county and municipal 1,085 105 9.67 1,104 78 9.51
- ------------------------------------------------------------------ -------------------
Total investment securities 3,563 284 7.97 3,649 214 7.86
- ------------------------------------------------------------------ -------------------
Loans (a) (b)
Commercial
Commercial, financial and agricultural 43,118 3,464 8.03 42,500 2,573 8.10
Real estate - construction and other 3,295 293 8.89 3,352 225 8.99
Real estate - mortgage 13,619 1,180 8.67 13,638 892 8.74
Lease financing 4,199 423 10.09 4,138 308 9.96
Foreign 3,349 215 6.43 3,243 154 6.34
- ------------------------------------------------------------------ -------------------
Total commercial 67,580 5,575 8.25 66,871 4,152 8.30
- ------------------------------------------------------------------ -------------------
Retail
Real estate - mortgage 31,241 2,426 7.77 31,880 1,847 7.75
Installment loans - Bankcard (c) 7,005 1,058 15.11 7,124 785 14.74
Installment loans - other and
Vehicle leasing 28,691 2,773 9.66 28,776 2,087 9.70
- ------------------------------------------------------------------ -------------------
Total retail 66,937 6,257 9.35 67,780 4,719 9.31
- ------------------------------------------------------------------ -------------------
Total loans 134,517 11,832 8.80 134,651 8,871 8.81
- ------------------------------------------------------------------ -------------------
Total earning assets 174,501 14,461 8.29 173,638 10,797 8.32
================== ======= =========
Cash and due from banks 8,695 8,633
Other assets 12,897 12,530
- ------------------------------------------------------- --------
Total assets $196,093 $194,801
- ------------------------------------------------------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 33,104 898 2.71 33,469 664 2.66
Money market accounts 24,033 694 2.89 23,521 501 2.85
Other consumer time 39,752 2,067 5.20 40,482 1,571 5.19
Foreign 3,092 164 5.29 3,341 130 5.19
Other time 5,377 325 6.05 4,962 223 6.01
- ------------------------------------------------------------------ -------------------
Total interest-bearing deposits 105,358 4,148 3.94 105,775 3,089 3.91
Federal funds purchased and securities
sold under repurchase agreements 22,759 1,147 5.04 22,336 841 5.03
Commercial paper 1,948 112 5.76 1,953 79 5.41
Other short-term borrowings 5,680 338 5.96 5,458 242 5.94
Long-term debt 10,916 707 6.47 10,673 520 6.51
- ------------------------------------------------------------------ -------------------
Total interest-bearing liabilities 146,661 6,452 4.40 146,195 4,771 4.36
----- ------ ---------------
Noninterest-bearing deposits 27,489 27,025
Other liabilities 5,823 5,672
Guaranteed preferred beneficial interests 1,680 1,662
Stockholders' equity 14,440 14,247
-------- ---------
Total liabilities and
stockholders' equity $196,093 $194,801
======================================================= ========
Interest income and rate earned $14,461 8.29% $10,797 8.32%
Interest expense and equivalent rate paid 6,452 3.70 4,771 3.67
------- ---- ------- -----
Net interest income and margin $ 8,009 4.59% $ 6,026 4.65%
=============================================== ================== =================
(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-27
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------- --------------------------------------
Second First Fourth Third Second
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 9,708 10,554 10,275 9,827 10,092
Interest-bearing bank balances 2,139 2,708 3,832 3,248 3,259
Federal funds sold and securities
purchased under resale agreements 11,753 11,656 7,781 7,037 7,784
- ---------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 23,600 24,918 21,888 20,112 21,135
- ---------------------------------------------------------------------------------------------------------------------------------
Trading account assets 9,774 6,985 5,952 8,152 5,720
Securities available for sale 36,798 34,252 23,524 21,135 20,931
Investment securities 2,229 3,227 3,526 3,681 3,891
Loans, net of unearned income 137,390 133,814 131,687 135,966 136,676
Allowance for loan losses (1,870) (1,863) (1,847) (2,175) (2,181)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, net 135,520 131,951 129,840 133,791 134,495
- ---------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 5,088 5,037 4,863 4,855 4,861
Due from customers on acceptances 1,091 1,156 1,496 1,629 1,521
Other intangible assets 5,169 2,931 2,948 3,026 3,102
Other assets 9,727 9,487 11,698 6,385 5,986
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $228,996 219,944 205,735 202,766 201,642
=================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 33,169 32,184 31,005 29,676 30,374
Interest-bearing deposits 105,429 105,751 106,072 103,468 104,828
- ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 138,598 137,935 137,077 133,144 135,202
Short-term borrowings 48,897 43,521 31,681 33,784 32,892
Bank acceptances outstanding 1,106 1,151 1,496 1,627 1,516
Other liabilities 8,884 7,793 6,725 6,445 5,645
Long-term debt 13,250 12,003 11,752 11,209 10,559
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 210,735 202,403 188,731 186,209 185,814
=================================================================================================================================
Guaranteed preferred beneficial interests in
junior subordinated deferrable interest debentures 1,735 1,735 1,735 1,734 1,734
- ---------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2 billion shares 3,294 3,243 3,203 3,197 3,183
Paid-in capital 4,089 1,439 1,582 1,484 1,194
Retained earnings 8,809 10,834 10,198 9,926 9,635
Accumulated other comprehensive income, net 334 290 286 216 82
=================================================================================================================================
Total stockholders' equity 16,526 15,806 15,269 14,823 14,094
=================================================================================================================================
Total liabilities and stockholders' equity $228,996 219,944 205,735 202,766 201,642
=================================================================================================================================
MEMORANDA
Securities available for sale-amortized cost $ 36,280 33,934 23,080 20,797 20,795
Investment securities-market value 2,365 3,315 3,670 3,829 4,026
Stockholders' equity, net of unrealized
gain on debt and equity securities $ 16,526 15,806 15,269 14,823 14,094
Shares outstanding (In thousands) 988,150 972,775 960,984 958,977 954,902
=================================================================================================================================
T-28
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------- -----------------------------------
Second First Fourth Third Second
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,794 2,792 2,946 2,992 2,966
Interest and dividends on securities available for sale 583 496 361 364 374
Interest and dividends on investment securities
Taxable income 32 40 42 41 46
Nontaxable income 16 17 18 17 17
Trading account interest 108 87 107 94 76
Other interest income 194 170 161 155 142
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 3,727 3,602 3,635 3,663 3,621
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,086 1,059 1,059 1,047 1,034
Interest on short-term borrowings 593 498 435 433 409
Interest on long-term debt 201 185 187 177 170
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,880 1,742 1,681 1,657 1,613
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,847 1,860 1,954 2,006 2,008
Provision for loan losses 150 135 445 225 228
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,697 1,725 1,509 1,781 1,780
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 66 35 100 36 75
Service charges on deposit accounts 281 283 290 283 275
Mortgage banking income 121 69 76 62 60
Capital management income 423 413 278 272 267
Securities available for sale transactions 21 23 18 15 10
Investment security transactions 4 - - 2 1
Fees for other banking services 70 70 56 64 69
Equipment lease rental income 42 46 43 48 46
Sundry income 529 438 304 300 238
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,557 1,377 1,165 1,082 1,041
- ---------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 862 822 783 711 720
Other benefits 182 162 150 156 162
- ---------------------------------------------------------------------------------------------------------------------------------
Personnel expense 1,044 984 933 867 882
Occupancy 139 137 131 138 138
Equipment 172 183 165 167 157
Advertising 49 37 36 33 37
Telecommunications 47 46 45 40 40
Travel 50 40 40 30 30
Postage, printing and supplies 63 61 59 53 53
Professional fees 40 70 97 71 67
External data processing 23 20 22 25 23
Other intangible amortization 76 75 80 78 78
Merger-related and restructuring charges 954 29 225 - 59
Sundry expense 220 213 333 209 207
- ---------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,877 1,895 2,166 1,711 1,771
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 377 1,207 508 1,152 1,050
Income taxes (benefits) (a) 128 417 (68) 404 368
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 249 790 576 748 682
=================================================================================================================================
PER SHARE DATA
Basic earnings $ 0.27 0.82 0.61 0.79 0.72
Diluted earnings 0.26 0.81 0.60 0.78 0.70
Cash dividends $ 0.37 0.37 0.32 0.32 0.29
AVERAGE SHARES (In thousands)
Basic 949,750 965,120 960,596 946,354 953,612
Diluted 962,160 977,155 972,051 959,013 964,518
=================================================================================================================================
(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-29
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
(In millions, except per share data) 1998 1997
- ------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 5,586 5,849
Interest and dividends on securities available for sale 1,079 687
Interest and dividends on investment securities
Taxable income 72 93
Nontaxable income 33 35
Trading account interest 195 135
Other interest income 364 265
- ------------------------------------------------------------------------------
Total interest income 7,329 7,064
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,145 2,042
Interest on short-term borrowings 1,091 729
Interest on long-term debt 386 343
- -------------------------------------------------------------------------------
Total interest expense 3,622 3,114
- -------------------------------------------------------------------------------
Net interest income 3,707 3,950
Provision for loan losses 285 433
- -------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,422 3,517
- -------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 101 116
Service charges on deposit accounts 564 546
Mortgage banking income 190 118
Capital management income 836 528
Securities available for sale transactions 44 19
Investment security transactions 4 1
Fees for other banking services 140 143
Equipment lease rental income 88 96
Sundry income 967 508
- -------------------------------------------------------------------------------
Total noninterest income 2,934 2,075
- -------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 1,684 1,415
Other benefits 344 335
- -------------------------------------------------------------------------------
Personnel expense 2,028 1,750
Occupancy 276 275
Equipment 355 317
Advertising 86 72
Telecommunications 93 83
Travel 90 55
Postage, printing and supplies 124 113
Professional fees 110 124
External data processing 43 47
Other intangible amortization 151 157
Merger-related and restructuring charges 983 59
Sundry expense 433 407
- -------------------------------------------------------------------------------
Total noninterest expense 4,772 3,459
- -------------------------------------------------------------------------------
Income before income taxes 1,584 2,133
Income taxes 545 748
- -------------------------------------------------------------------------------
Net income $ 1,039 1,385
- -------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 1.09 1.44
Diluted earnings 1.07 1.42
Cash dividends $ 0.74 0.58
AVERAGE SHARES (In thousands)
Basic 957,430 961,612
Diluted 969,180 972,830
- -------------------------------------------------------------------------------
T-30
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------
(IN MILLIONS) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,039 1,385
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Accretion and amortization of securities discounts and premiums, net 86 12
Provision for loan losses 285 433
Provision for foreclosed properties (1) 1
Gain on sale of mortgage servicing rights (4) -
Securities available for sale transactions (44) (19)
Investment securities transactions (4) (1)
Depreciation and amortization 497 453
Trading account assets, net (2,607) (1,103)
Mortgage loans held for resale (1,107) 127
Gain on sale of premises and equipment (6) (1)
Gain on sale of assets held for sale (5) (5)
Other assets, net 3,096 (357)
Other liabilities, net 543 140
===================================================================================================================
Net cash provided by operating activities 1,768 1,065
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 6,930 4,481
Maturities of securities available for sale 2,419 1,182
Purchases of securities available for sale (22,559) (7,287)
Calls and underdeliveries of investment securities 387 1
Maturities of investment securities 1,111 733
Purchases of investment securities (197) (443)
Origination of loans, net (2,203) (2,738)
Sales of premises and equipment 93 107
Purchases of premises and equipment (497) (330)
Other intangible assets, net (110) 15
Purchase of bank owned separate account life insurance (56) -
Cash equivalents acquired, net of purchases of banking organizations 366 6
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (14,316) (4,273)
===================================================================================================================
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits, net 1,270 (1,256)
Securities sold under repurchase agreements and other short-term borrowings, net 14,984 5,273
Issuances of guaranteed preferred beneficial interests - 945
Issuances of long-term debt 2,535 922
Payments of long-term debt (2,159) (1,178)
Sales of common stock 661 299
Purchases of common stock (2,439) (1,722)
Cash dividends paid (592) (552)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,260 2,731
===================================================================================================================
Increase (decrease) in cash and cash equivalents 1,712 (477)
Cash and cash equivalents, beginning of year 21,888 21,612
===================================================================================================================
Cash and cash equivalents, end of period $23,600 21,135
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NONCASH ITEMS
Increase in foreclosed properties and a decrease in loans $ 2 12
Issuance of common stock for acquisitions 2,540 4
Effect on stockholders' equity of an unrealized gain (loss) on debt and equity securities
included in
Securities available for sale 74 88
Other assets (deferred income taxes) $ 26 35
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T-31