FIRST
UNION
1998 Annual Report
Your Guide to the Financial World
About the cover...
The image on the cover is from First Union's first national advertising
campaign, "Your Guide to the Financial World," which ends with the message,
"Come to the Mountain that is First Union. Or, if you prefer, the Mountain will
come to you."
Dividend Growth
Current dividend annualized
(In dollars)
First Union has announced four dividend increases in the past 18 months.
Including its predecessor Union National Bank, First Union has paid a dividend
every year since 1910 and has increased the dividend at least annually for 21
consecutive years.
(A line chart appears here. See the table below for plot points.)
78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 Current
.145 .155 .165 .18 .20 .225 .245 .29 .325 .385 .43 .50 .54 .56 .64 .75 .86 .98 1.10 1.22 1.58 1.88
Contents
At A Glance..................i
Letter To Our Stockholders...1
Index to Special Topics......6
Management's Analysis
of Operations................7
Glossary....................28
Financial Tables...........T-1
Management's Statement
of Responsibility..........C-1
Independent Auditors'
Report.....................C-2
Audited Financial
Statements.................C-3
Financial Highlights
Percent
Years Ended December 31, Increase
- -------------------------------------------------------------------------------------------
(Dollars in millions, except per share data) 1998 1997 (Decrease)
- -------------------------------------------------------------------------------------------
Financial Highlights
Net income before merger-related and
restructuring charges (Operating earnings) $ 3,696 2,913 27%
After-tax merger-related and restructuring charges 805 204 --
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Net income after merger-related and
restructuring charges $ 2,891 2,709 7%
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Per Share Data
Diluted earnings
Net income before merger-related and
restructuring charges $ 3.77 3.01 25%
Net income after merger-related and
restructuring charges 2.95 2.80 5
Basic earnings
Net income before merger-related and
restructuring charges 3.81 3.05 25
Net income after merger-related and
restructuring charges 2.98 2.84 5
Cash dividends 1.58 1.22 30
Book value 17.48 15.95 10
Year-end price $60.8125 51.2500 19
Dividend payout ratio (Based on operating earnings) 41.24% 39.18 --
Average shares (In thousands)
Diluted 980,112 966,792 1
Basic 969,131 955,241 1
Actual shares (In thousands) 982,223 960,984 2%
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Performance Highlights
Before merger-related and restructuring charges
Return on average assets 1.66% 1.49 --
Return on average stockholders' equity 22.81 20.24 --
Overhead efficiency ratio 57.09 56.78 --
Net charge-offs as a percentage of
Average loans, net 0.48 0.65 --
Average loans, net, excluding Bankcard 0.32 0.31 --
Nonperforming assets to loans, net,
and foreclosed properties 0.62 0.75 --
Net interest margin 3.81% 4.53 --
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Cash Earnings (Excluding Other Intangible Amortization)
Before merger-related and restructuring charges
Net income $ 3,982 3,156 26%
Diluted earnings per share $ 4.06 3.26 25
Return on average tangible assets 1.82% 1.64 --
Return on average tangible stockholders' equity 32.83 27.97 --
Overhead efficiency ratio 54.60% 54.20 --%
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Year-End Balance Sheet Items
Securities available for sale $ 37,434 23,524 59%
Investment securities 2,025 3,526 (43)
Loans, net of unearned income 135,383 131,687 3
Earning assets 202,046 176,302 15
Total assets 237,363 205,735 15
Noninterest-bearing deposits 35,614 31,005 15
Interest-bearing deposits 106,853 106,072 1
Long-term debt 22,949 13,487 70
Stockholders' equity $ 17,173 15,269 12%
First Union Across The Nation
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Legend
o Bank Branches
[ ] First Union Capital Markets Group
(triangle) First Union Home Equity Bank, N.A.
* First Union Mortgage Corporation
(diamond) The Money Store
Banking Units
Florida
Branches: 666
ATMs: 735
Market Share: 16.91%
Ranking: No. 2
Pennsylvania
Branches: 378
ATMs: 565
Market Share: 15.88%
Ranking: No. 1
New Jersey
Branches: 375
ATMs: 613
Market Share: 13.90%
Ranking: No. 2
North Carolina
Branches: 235
ATMs: 341
Market Share: 13.98%
Ranking: No. 3
Virginia
Branches: 188
ATMs: 279
Market Share: 13.17%
Ranking: No. 3
Georgia
Branches: 135
ATMs: 359
Market Share: 9.35%
Ranking: No. 4
Connecticut
Branches: 96
ATMs: 114
Market Share: 6.84%
Ranking: No. 4
Maryland
Branches: 87
ATMs: 120
Market Share: 7.88%
Ranking: No. 5
South Carolina
Branches: 59
ATMs: 82
Market Share: 6.84%
Ranking: No. 4
New York
Branches: 55
ATMs: 72
Market Share: 2.00%
Ranking: No. 13
Tennessee
Branches: 46
ATMs: 61
Market Share: 2.75%
Ranking: No. 7
Washington, D.C.
Branches: 29
ATMs: 61
Market Share: 17.00%
Ranking: No. 3
Delaware
Branches: 22
ATMs: 58
Market Share: 1.85%
Ranking: No. 8
Source: SNL Securities;
market share data represent
deposits at June 30, 1998.
(A map of the United States appears here, depicting all of First Union's
branches.)
At A Glance
(Photo of a skyscraper with clouds in the background appears here.)
First Union Corporation, founded in 1908 as Union National Bank in Charlotte,
North Carolina, has grown from the nation's 50th largest banking company in 1984
with $7.3 billion in assets to the sixth largest in the nation, with $237
billion in assets. In addition to $135 billion in loans and $142 billion in
deposits, First Union had $621 billion in assets under care and $153 billion in
assets under management at year-end 1998.
First Union has the nation's third largest branch network in a
marketplace that covers more than a third of the population of the United
States. Beginning in 1985, First Union embarked on a growth strategy that
provided geographic diversification as we entered Florida, South Carolina,
Georgia and Tennessee. Eight years later, we entered the Middle Atlantic region
with Virginia, Maryland and Washington, D.C. In 1996 we added New Jersey, New
York, Pennsylvania, Connecticut and Delaware to our marketplace. This expansion
has given First Union the largest domestic deposit share from Connecticut to
Florida and a commanding share of the nation's middle-market commercial
relationships.
In 1994 we began expanding the definition of a "bank" by diversifying
into higher growth businesses such as mutual funds and other investment products
for individual customers, and capital markets products and services for
corporate customers. We provide an integrated approach that offers everything
from commercial loans and cash management to loan syndications, asset
securitizations, merger and acquisition advisory services, and debt and equity
underwritings.
We serve nearly 10 million households, which translates into 16 million
customers, who may access their account information and purchase financial
products at any of our 2,400 retail offices; 3,500 automated teller machines
(the nation's fifth largest ATM network); through the Internet at
www.firstunion.com; through First Union Direct at 1-800-413-7898; or they may
manage their investments through our 4,300 licensed representatives -- the
nation's ninth largest brokerage affiliation.
At A Glance i
Corporate Overview
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Key Year-End Data
Assets
$237 billion
Loans
$135 billion
Deposits
$142 billion
Stockholders' Equity
$17 billion
Customer Relationships
16 million
Asset Ranking
Sixth largest in nation
Corporate Headquarters
Charlotte, North Carolina
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Metropolitan Market Share
First Union ranks number 1, 2 or 3 in deposit share in 18 East Coast
metropolitan areas.
(A map appears here depicting the following cities:)
Scranton, PA Middlesex County, NJ
Allentown, PA New Haven, CT
Philadelphia, PA Newark, NJ
Roanoke, VA Monmouth County, NJ
Johnson City, TN Washington, D.C.
Tampa, FL Charlotte, NC
Sarasota, FL Jacksonville, FL
Miami, FL Orlando, FL
West Palm Beach, FL
Fort Lauderdale, FL
Per Capita Income by Metropolitan Area
Eight of the ten metro areas with highest per capita income are in First Union's
marketplace.
Per Capita % of U.S
Personal Income Average
- --------------------------------------------------------------------------------
San Francisco, CA $ 39,746 163%
New Haven - Bridgeport - Stamford -
Danbury - Waterbury, CT 38,962 159
West Palm Beach - Boca Raton, FL 38,081 156
San Jose, CA 35,395 145
Bergen - Passaic, NJ 35,371 145
Naples, FL 34,830 143
Middlesex - Somerset - Hunterdon, NJ 34,366 141
Trenton, NJ 34,292 140
Newark, NJ 33,952 139
Nassau-Suffolk, NY $ 33,837 138%
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Greatest Concentration of Companies
(With Annual Sales $20mm-$250mm+)
First Union's regions account for 33 percent of the nation's middle-market
companies.*
(A line graph appears here. See the table below for plot points.)
South Atlantic 19%
Middle Atlantic 14%
East North Central 17%
Pacific 15%
West South Central 11%
West North Central 7%
Mountain 6%
East South Central 6%
New England 5%
*First Union is primarily located in the South Atlantic region (DE, FL, GA, MD,
DC, NC, SC, VA) and Middle Atlantic region (NJ, NY, PA), as well as Connecticut
and Tennessee, which are in other regions as defined by the U.S. Statistical
Abstract.
Source: Dun & Bradstreet 1998.
ii At A Glance
Business Segments -- Introduction
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Execution is Key
We believe that First Union is unique in successfully combining the
cultures of traditional banking and investment banking. But such teamwork does
not just happen. We have created an organizational structure that encourages the
entire team to work in our customers' best interests. We work hard to select the
right people who are comfortable in our relationship-oriented culture, which
rewards doing what is right for the customer and the company. We also devote a
significant amount of senior management attention to making this work. And we
provide many hours of training on product knowledge to enhance our marketing
culture.
We believe we have the talent, products and resources to focus the right
skills on solutions for customers. The investments of the past five years
have put us in position to maximize the potential of our organization both in
terms of profitability and in terms of leveraging our relationships for the
long term.
Today, First Union is essentially divided into two parts -- wholesale
operations that serve business customers, corporate clients and institutions,
and retail operations devoted to individual customers. Increasingly, we deliver
the "bank" right to the customers' doorsteps, telephones or personal computers.
And we go beyond traditional banking products to help customers meet their
financial goals throughout the various needs and stages of their lives.
Business Segment Contributions to Profitability
Net Income*
(Percent)
(A pie chart appears here. See the table below for plot points.)
Commercial Bank 19%
Capital Markets 20%
Consumer Bank 34%
Capital Management 12%
Treasury/Nonbank** 15%
* Before special charges.
**Includes securities gains.
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Strategic Priorities
[ ] Meet our financial performance objectives over the long term and create
unparalleled stockholder value;
[ ] Build fee-based lines of business that complement our traditional banking
businesses; and
[ ] Provide the best access to the best products in each customer's best
interests.
Business Segments Contents
Wholesale Strategy..........iv
Commercial Bank..............v
Capital Markets.............vi
Retail Strategy............vii
Consumer Bank.............viii
Capital Management..........ix
At A Glance iii
Business Segments -- Wholesale Strategy
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Maximizing Our Potential
On the wholesale side, First Union has staked out a competitive edge by
focusing primarily on the mid-sized commercial market we have served for so
long. We have developed a full range of products, from traditional loans and
cash management services, to asset-based financing, to alternative financing
solutions in the global financial markets. Our international operations focus on
trade finance, payment and processing services for the world's financial
institutions, United States importers and exporters, and subsidiaries of foreign
corporations in the United States. Our wholesale approach builds on a foundation
of long-term relationships.
We benefit from operating in a region that encompasses more than a
third of the nation's businesses and population. Our East Coast market,
stretching from Connecticut to Florida, generates 36 percent of the nation's
Gross Domestic Product. Per capita income in this region is 109 percent of the
national average. We have relationships with a third of the middle-market
companies in this market, and the potential for growth remains strong as we
supply a full range of products and services to business customers in the
under-served middle market, our longtime strength and focus.
We bring the full force of seasoned professionals to serve our
middle-market customers. The long-term relationships we have developed are the
linchpin between our capital markets product specialists and our commercial bank
relationship managers. In addition we reach a national client base through
targeted specialized industries.
Our approach has moved beyond a transaction orientation of selling
products, one at a time. We focus on providing tailor-made solutions in the
customers' best interests, whether they are a small business owner, a
middle-market firm or a large corporate entity. Our goals are to anticipate
customers' needs at each stage of the corporate life cycle and to support those
customers with technology, products, execution and expertise.
We operate in a flexible, entrepreneurial manner. In other words, we
provide customers with a totally seamless experience, no matter which part of
the company has established the relationship. We strive to provide individually
tailored solutions that meet the customer's financial objectives.
Commercial Bank
Cash Management
Deposits
Small Business Loans
Real Estate Loans
C&I Loans and Leases
International Trade Services
Real Estate Conduit Loans
And More...
Capital Markets
Loan Syndications
Private Placements
Asset Securitizations
Leveraged Financings
Commercial Real Estate
Asset-Based Lending
Merchant Banking
Risk Management
M&A Advisory Services
High Yield Debt
Equity Underwriting
And More...
iv At A Glance
Business Segments -- Commercial Bank
- --------------------------------------------------------------------------------
Key 1998 Statistics
[ ] Top 3 middle-market lender
[ ] Top 5 small business lender
[ ] Top 3 cash management bank based on revenue
[ ] Top 5 ranking in all major cash management products
Products and Services
Investments in new products and services, training and technology have
turned our Commercial Bank into a more streamlined, cost-efficient and nimble
organization, poised to maximize its potential both for our customers and our
company.
Our commercial products and services go beyond traditional lending to
areas such as risk management, asset-based lending, property and casualty
insurance, leasing, global cash management and international services. As our
clients have grown, we have expanded our capabilities in partnership with the
Capital Markets Group to meet the demand for investment banking and advisory
services, and to provide more complex financing alternatives. In addition, the
Commercial Bank also has developed close links with the Capital Management Group
to provide commercial clients with corporate trust, pension plans, 401(k) plans
and other retirement and business advisory services.
Relationship Approach
Our relationship managers in our state branch network are committed to
serving the full financial needs of commercial clients. Specialized relationship
teams focus on sales and service. This support allows relationship managers to
spend more time finding new opportunities and bringing fresh ideas to help
customers expand their businesses. We have relationships with a third of the
commercial businesses in our marketplace.
Our Small Business Banking Division (SBBD) is focused primarily on
meeting the loan origination and servicing needs of companies with annual sales
up to $10 million and loan requests for $25,000 to $1 million. Referrals from
our retail financial centers and from our commercial bankers are directed to our
small business lenders in Charlotte, North Carolina; Tampa, Florida; and
Philadelphia, Pennsylvania. These locations are staffed by experienced lenders
who are committed to providing responses to customers within 24 hours. SBBD also
has introduced new channels such as an interactive website and centralized
telephone sales to cross-sell First Union's small business products and
services. First Union had over $10 billion in small business loans in 1998,
including $2.6 billion through the SBBD and the rest through other origination
channels.
In a technology-driven business, our Global Cash Management Division is
committed to new product development, offering corporate customers a complete
selection of innovative domestic and international treasury management services
including electronic commerce, a full range of Internet- and PC-based services
and nationwide lockbox processing. This Division supports the relationship sales
effort of the Commercial Bank through sales consultants who are located
throughout our marketplace and through a sales team dedicated to Capital Markets
clients. Representing significant cross-sell potential, 63 percent of cash
management customers use multiple services.
Strategy
The Commercial Bank is focused on targeted programs to increase
efficiency, product penetration and customer retention. First Union is one of
the few banking organizations that provides commercial customers with
single-view access to their accounts throughout the entire First Union market
area. First Union is leveraging its return on capital by securitizing and
selling certain commercial loans rather than retaining them on the balance
sheet. While this reduces balance sheet loan growth, it also frees capital for
investment in higher return alternatives and enables us to avoid stretching for
loan growth when margins are thin.
Highlights
[ ] Revenue per relationship manager has increased from $587,000 in 1995 to $2.2
million in 1998.
[ ] Cash management revenue increased 10 percent from 1997, surpassing the
industry average.
Selected Financial Data
(Dollars in millions)
1998 1997
- ------------------------------------------------------
Net Interest Income $ 1,965 2,020
Fee Income 520 481
Noninterest Expense 1,256 1,314
Net Income $ 701 675
ROE 20.31% 19.24
At A Glance v
Business Segments -- Capital Markets
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Key 1998 Statistics
[ ] 2nd largest middle-market, lead-bank relationships in the First Union
marketplace
[ ] No. 1 in merger and acquisition advisory services
to middle market
[ ] No. 5 in leveraged loan syndications ("agent-only")
[ ] No. 6 in loan syndications ("agent-only")
[ ] No. 11 in lead-managed asset securitizations
[ ] No. 8 in traditional private placements
[ ] No. 4 in international trade services volume
[ ] No. 10 in municipal bond underwriting
Products and Services
Our Capital Markets Group is a fully integrated investment banking and
commercial banking firm that originates and distributes a full range of quality
financial products and services to meet the individualized needs of corporate
clients and institutional investors.
Our investment bankers, industry specialists and capital market
professionals team with commercial bank relationship managers to meet customers'
objectives seamlessly. In addition to our geographic coverage on the East Coast,
we reach a national client base with an in-depth focus on more than a dozen
specialized industries. We provide full execution including corporate finance,
equity research, merger and acquisition advisory services, and debt and equity
financing in health care, communications and technology, insurance, utilities,
textiles and home furnishings, retail, specialty finance, oil and gas, financial
institutions, real estate and other industry specializations.
We have built product and execution capabilities to match the evolution
of our clients in every phase of the corporate life cycle, from raising capital
to day-to-day operations; from corporate liquidity to asset management; and from
risk management to restructuring and expansion. As companies grow, their needs
become more complex. A relationship that begins with cash management and bank
loans will evolve into more sophisticated financing solutions ranging from
syndicated loans to equity needs and merger and acquisition advice.
Relationship Approach
We have developed Capital Markets expertise as a natural extension of our
commercial bank offerings, and our commercial bank relationships have been key
to our success. The focus is on building long-term relationships rather than on
one-time transactions. This approach is supported by an incentive compensation
program and a cultural imperative that rewards teamwork in meeting clients'
needs.
Strategy
Our Capital Markets Group is committed to serving the full financial
needs of middle-market corporate clients. We recruit and work to retain top
industry professionals who share First Union's client focus. Our goals are to
continue to grow and to strengthen product capabilities based on client demand.
We intend to distinguish ourselves as the leading full-service financial company
in combining the best of banking and the best of the securities business, and in
serving customers' needs in a consistent manner.
Highlights
Four 1998 acquisitions expanded our product line and added scale for our
products and services:
[ ] We immediately began leveraging the equity underwriting capabilities of
Wheat First Union with First Union's large corporate client base, and we
provided debt financing to Wheat First Union clients.
[ ] With Bowles Hollowell Conner, merger and acquisition opportunities were
immediately identified for First Union clients, and Capital Markets
financings were completed for Bowles Hollowell Conner clients. We gained
significant new relationships through access to Bowles' private equity
group client base.
[ ] We provided a full range of products to the former CoreStates customer base,
leveraging CoreStates' expertise in global trade finance with First Union's
broader geographic coverage and Capital Markets capabilities.
[ ] We dramatically expanded our nationwide origination network and added
increased geographical diversification through the June 1998 acquisition of
The Money Store.
Selected Financial Data
(Dollars in millions)
1998 1997
- -------------------------------------------------------
Net Interest Income $ 1,224 1,051
Fee Income 1,134 740
Noninterest Expense 1,162 931
Net Income $ 732 655
ROE 18.76% 23.59
vi At A Glance
Business Segments -- Retail Strategy
- --------------------------------------------------------------------------------
Redefining Retail Through Future Bank
With 10 million retail customer households, First Union is the leading
retail bank from Connecticut to Key West, Florida. This region, which boasts 35
million households and eight of the nation's highest per capita income metro
areas, offers an attractive marketplace for our retail products and services.
Our June 1998 acquisition of The Money Store establishes our position as the top
home equity lender, and it allows us to meet the needs of a broader range of
customers nationwide.
With the implementation of our new retail Future Bank, First Union has
taken an important step toward achieving our retail vision of being the world's
most innovative financial services company. Traditional banking, with its
emphasis on "order taking" and transaction volume, has been replaced by a new
kind of retail service: fast, easy and convenient financial solutions
delivered when, where and how our customers prefer.
First Union is focused on gaining customers for life by offering a mix of
superior products with innovative delivery. Through our Consumer Bank and
Capital Management Group, we meet customers' lifetime financial needs with a
full array of retail offerings from traditional checking and loan products to
wealth management products and services including mutual funds, annuities,
brokerage and personal trust.
A cornerstone of our retail strategy is the use of advanced technology to
enhance revenue growth and to improve customer service. The long-term
competitive advantage created by our single-systems operating platform has paved
the way for the development of cost-efficient delivery channels such as
telephone banking, enhanced ATMs, card products and online banking as well as
the rapid introduction of new products across all channels.
First Union's technology edge is also helping to position our traditional
branch network as a strong sales platform. The majority of administrative
functions have been centralized at state-of-the-art call centers and other
support units, allowing our sales force more time to focus on serving customers.
With a unique blend of products, delivery and integrated technology,
First Union provides seamless access to a lifetime of financial solutions for
our customers. Through Future Bank, the embodiment of our customer-focused
retail strategy, we have created a solid foundation for building lasting,
mutually beneficial customer relationships.
Consumer Bank
Consumer Deposits
Student Loans
Auto Finance
Card Products
Residential Mortgages
Home Equity
Other Retail Loans
Mortgage Servicing
And More...
Capital Management
Personal Trust
Brokerage Services
CAP Accounts
Mutual Funds
Insurance
IRAs
401(k)
Private Client Banking
Corporate Trust
Institutional Services
Retail Money Manager
Institutional Money Manager
And More...
At A Glance vii
Business Segments -- Consumer Bank
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Key 1998 Statistics
[ ] No. 1 deposit share on the East Coast
[ ] Nation's 3rd largest branch network
[ ] Nation's 5th largest automated teller network
[ ] Nation's top home equity lender
[ ] Nation's 6th largest student loan originator
[ ] Nation's 11th largest mortgage servicer
[ ] Nation's 6th largest debit and ATM card issuer
Products, Services and Channels
The implementation of Future Bank has allowed us to accelerate the
momentum of our Consumer Bank by expanding our reach beyond that of brick and
mortar. First Union's Consumer Bank is focused on providing innovative, expert
and personalized solutions that take into account our customers' desire for
convenience and control. To help meet our customers' lifetime financial needs,
our Consumer Bank offers a robust product and service array, including deposit
and savings accounts; first and second residential mortgages; installment loans;
credit cards; auto loans and leases; and student loans.
A hallmark of our Future Bank is the ability to let customers do business
with us when, where and how they prefer. As a result, we offer our superior
products and services through one of the nation's most comprehensive and
flexible delivery networks that includes:
[ ] 2,400 full-service financial centers located in Connecticut, Delaware,
Florida, Georgia, Maryland, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia and Washington, D.C.;
[ ] 285 locations nationwide to support real estate secured lending;
[ ] An external sales force of nearly 200 professionals dedicated to bringing
new business to First Union and to deepening relationships with existing
customers;
[ ] More than 200 specialty branches targeting high concentrations of customers
in convenient locations such as retirement communities;
[ ] Direct access, 24 hours a day, seven days a week, through First Union
Direct, our telephone banking system. Calls are handled through
state-of-the-art customer information centers that use advanced technology
to provide seamless customer service; and
[ ] Additional technology-based delivery channels, including the personal
computer, automated teller machine (ATM), and debit, chip and credit card
products.
Strategy
The Consumer Bank is helping to build lifetime customer relationships by
providing a full range of superior products, flexible delivery and quality
service across all channels. Industry observers have remarked that First Union's
approach is unusual because the focus is on meeting customer needs rather than
making the customer accept what the bank has to offer.
Highlights
First Union Direct enables customers to conduct via telephone virtually
any type of business transaction --from service to sales -- that would normally
be performed at a branch. In 1998 First Union Direct handled more than 110
million calls, a 25 percent increase over 1997, and generated 12 percent of
total corporate product sales. A multilingual call center was opened in
September 1998.
The popularity of First Union's online banking system continues to grow,
with enrollment nearly tripling from 1997 to 1998. In September 1998, First
Union became the country's first financial services provider to offer customers
online bill presentment and payment.
Mortgage loan production more than doubled the 1997 level, with a record
$18 billion in 1998.
The 1998 addition of The Money Store establishes our position as the
nation's top home equity lender and the nation's sixth largest student loan
originator, and it allows us to help more customers realize their financial
dreams. To ensure that all of our customers receive the highest levels of
service, First Union's fair lending programs and procedures extend across all
channels, including The Money Store.
Selected Financial Data
(Dollars in millions)
1998 1997
- -------------------------------------------------------
Net Interest Income $ 3,842 4,154
Fee Income 2,102 1,535
Noninterest Expense 3,528 3,355
Net Income $ 1,247 997
ROE 33.12% 28.52
viii At A Glance
Business Segments -- Capital Management
- --------------------------------------------------------------------------------
Key 1998 Statistics
[ ] $153 billion in assets under management
[ ] $69 billion in First Union-advised mutual funds; the nation's 18th
largest mutual fund family
[ ] 26 First Union-advised mutual funds rated "4" or "5" star by Morningstar
rating service
[ ] Nation's 9th largest brokerage
[ ] $38 billion in CAP account assets; 430,000
accounts; the nation's 6th largest asset management account
[ ] $14 billion in IRA customer assets; 2nd largest bank-based IRA provider
[ ] $1.6 billion in annuity sales in 1998; the top bank in annuity sales for
three consecutive years
Products, Services and Channels
First Union's Capital Management Group provides the critical link between
traditional banking and investing for our retail and institutional investors.
With $153 billion in assets under management, we have built a leading asset
management and distribution business that provides a one-stop marketplace for
our customers' insurance, mutual funds, brokerage, retirement, and trust and
estate planning needs. Most banks have traditionally offered checking, savings
and credit services. What distinguishes First Union is our ability to complement
these conventional offerings with sophisticated investment products and services
that help our customers meet their lifetime financial needs.
To reach a wide range of customers, we have created a multi-channel
distribution system, including both bank-based and traditional brokerage. The
January 1998 addition of the brokerage firm Wheat First Securities increased our
sales force to more than 4,300 registered representatives in 23 states and
Washington, D.C. First Union leads the industry in licensing Series 6
representatives in nearly all of our 2,400 financial centers, making our branch
network another powerful distribution point for Capital Management products and
services.
We have developed the products, distribution channels and expertise to
help customers manage their assets at all stages of their lives. For those who
are just beginning to focus on their accumulation plans, we offer systematic
investment plans (SIPs) requiring low minimum balances; self-directed as well as
bank-managed IRAs; and other services. For customers who have accumulated
substantial assets, we provide trust services; private client services; tax
strategies; teams of sophisticated asset managers; and other specialized
services.
Recognizing the corporate life cycles of our institutional customers, we
also offer a complete range of services including employee benefit plans and
institutional custody, corporate trust, and institutional debt management, all
of which are bolstered by the strength of First Union's well-developed wholesale
operations.
Strategy
The Capital Management Group is capitalizing on a unique product and
distribution combination that allows us to meet customers' lifetime financial
needs across a wide range of channels. By generating most of its revenue through
fee income, our Capital Management Group helps diversify First Union's earnings
stream to build stockholder value. In 1998 Capital Management fees reached $1.8
billion, or 29 percent of the total fee income produced by the corporation.
Highlights
Our popular CAP account, which fully integrates traditional banking and
brokerage services, has grown to more than $38 billion in assets and a customer
base of over 430,000. In December 1998, we expanded the CAP product line to
reach our Wheat First Union clients, offering customers full access to their
accounts from any of First Union's ATMs and financial centers.
The First Union-advised Evergreen and Mentor funds comprise one of the
fastest-growing mutual fund families in the nation. With more than $69 billion
in assets and more than 2.2 million stockholders, we are the 18th largest fund
manager in the United States.
For the past three years, First Union has led the banking industry in
annuity sales, with a record $1.6 billion in sales in 1998. As part of our
ongoing strategy to meet our customers' lifetime financial needs, we have
developed a line of life insurance products, including term, universal, whole
life and disability insurance. Long-term care and variable life insurance
products were introduced in early 1999.
Selected Financial Data
(Dollars in millions)
1998 1997
- -------------------------------------------------------
Net Interest Income $ 455 361
Fee Income 1,791 1,125
Noninterest Expense 1,503 956
Net Income $ 455 326
ROE 45.81% 45.97
At A Glance ix
Community Focus
- --------------------------------------------------------------------------------
(Graphic of city appears here)
Leading The Way
First Union In The Community
Innovation, Unwavering Focus, Leadership
The same elements that have lifted First Union to record financial
performance are also producing outstanding returns of a different sort:
dividends to the community. We are leveraging First Union's strength as a leader
in the financial services industry to enhance the communities we serve.
In 1998 First Union directed more than $10 billion to community
development activities, making us a national leader in promoting affordable
housing and neighborhood revitalization. In addition First Union contributed
more than $66 million to education, the arts, health and human needs and civic
projects throughout our marketplace.
But our commitment to the community cannot be measured in dollars alone.
It is also reflected in the efforts of thousands of First Union employees
who give generously of themselves -- both in and out of work -- to lead the way
to stronger communities.
[ ] First Union received an "outstanding" rating in 1998 for its 1997
performance on meeting community credit needs -- the highest rating given by
the United States Office of the Comptroller of the Currency (OCC). From
financing daycare centers to bringing grocery stores back into local
neighborhoods, we originated close to $500 million in community development
loans in 1998.
[ ] To help families realize the dream of home ownership, First Union originated
$1.9 billion in affordable home mortgages in 1998. Our creative mortgage
products, which offer discounted interest rates and low down payment
requirements, helped more than 20,500 families move into their own homes.
[ ] First Union is an industry leader in the financing of affordable rental
housing. Since 1994 our Affordable Housing Group has committed $1.8 billion
in equity and loans to projects that qualify for federal Low-Income Housing
Tax Credits.
[ ] First Union is a leading financial resource for small business. With the
additions of The Money Store and CoreStates, we became the nation's top
Small Business Administration (SBA) lender in 1998, providing more than $465
million in SBA loans.
x At A Glance
- --------------------------------------------------------------------------------
[ ] As part of our community commitment, we provide financial education tools
that focus on basic budgeting, money management, savings and investing.
First Union provided more than $1 million to our nonprofit community
partners in 1998 for homeownership and credit counseling.
[ ] First Union is marking ten years of promoting excellence in education
through Education First. Created in 1989, this program emphasizes employee
volunteerism and parental involvement in all areas of education, with a
special focus on enhancing early childhood literacy.
[ ] During the 1997-98 school year, more than 21,000 First Union employees
dedicated over 753,000 hours serving as volunteers in education. More than
40 percent of these hours were donated during the business day, thanks to
First Union's long-standing Time Away From Work policy, which offers
employees up to four hours of paid time off each month to volunteer in
schools or to participate in community education programs.
[ ] Last year, First Union partnered with the Children's Literacy Initiative in
Philadelphia and the Charlotte-Mecklenburg Schools in North Carolina to
promote early childhood literacy. Through the Reading First program, First
Union employee volunteers read aloud each week to pre-kindergarten children,
and First Union donates quality books to their classrooms. During the
1998-99 school year, this program was expanded throughout the First Union
franchise.
[ ] First Union ranks first among companies across the nation in employee
support for the March of Dimes WalkAmerica. In 1998 more than 4,400
employees participated in marches across the country, raising over $1
million for their efforts.
1998 Community Development
(A pie chart appears here. See the table below for plot points.)
Affordable Housing 46%
Small Business/Small Farm 35%
Consumer Credit 14%
Community Development Loans 5%
1998 Charitable Contributions*
(A pie chart appears here. See the table below for plot points.)
Education 27%
Civic and Community Improvement 25%
Arts and Culture 18%
United Way 15%
Health and Human Services 15%
* The First Union Foundation is a private, non-operating foundation that
distributes First Union's charitable contributions. All funds contributed to
the Foundation are disbursed in the forms of grants to eligible 501(c)(3)
tax-exempt organizations throughout our twelve-state region and Washington,
D.C. Grants are made to organizations in the categories of education; civic
and community improvement; arts and culture; United Way; and health and human
services.
- --------------------------------------------------------------------------------
Ambassadors Council
Established in 1996, the Ambassadors Council is made up of community leaders
appointed by First Union who advise us on enhancing development efforts in our
communities. Current members include:
Janaka Casper
Executive Director,
VMH, Inc.
Christiansburg, Virginia
The Rev. Luis Antonio Cortes Jr.
President,
Nueva Esperanza
Community Development Corporation
Philadelphia, Pennsylvania
Catherine Dodd
Executive Director,
Woodbine Community Organization
Nashville, Tennessee
Hattie B. Dorsey
President and Chief Executive Officer,
Atlanta Neighborhood
Development Partnership, Inc.
Atlanta, Georgia
Arthur L. Fleming
Executive Director,
Community Financing Consortium, Inc.
West Palm Beach, Florida
Charles E. Gardner
Director of Community Service,
City of Greenville
Greenville, South Carolina
W. Retta Gilliam
Executive Director,
East of the River
Community Development Corporation
Washington, D.C.
Caroline E.W. Glackin
Executive Director,
First State Community Loan Fund
Wilmington, Delaware
Robert E. King
President,
Yearwood Center
Stamford, Connecticut
Abdul Rasheed
President and Chief Executive Officer,
North Carolina Community Development Initiatives, Inc.
Raleigh, North Carolina
Andrea Thomas-Reynolds
Executive Director,
Ogontz Avenue Revitalization Corporation
Philadelphia, Pennsylvania
Keith J. Richardson
Loan Officer,
North Philadelphia Financing Partnership
Philadelphia, Pennsylvania
Elizabeth Scott
Community Development Consultant,
Synergees, Inc.
Essex, Maryland
The Rev. William D. Watley, Ph.D.
Pastor,
Saint James AME Church
Newark, New Jersey
At A Glance xi
Board of Directors
- --------------------------------------------------------------------------------
Edward E. Barr
Chairman,
Sun Chemical Corporation
Fort Lee, New Jersey
G. Alex Bernhardt Sr.
Chairman and
Chief Executive Officer,
Bernhardt Furniture Company
Lenoir, North Carolina
W. Waldo Bradley
Chairman,
Bradley Plywood Corporation
Savannah, Georgia
Robert J. Brown
Chairman, President and
Chief Executive Officer,
B&C Associates, Inc.
High Point, North Carolina
Edward E. Crutchfield
Chairman and
Chief Executive Officer,
First Union Corporation
Charlotte, North Carolina
A. Dano Davis
Chairman and
Principal Executive Officer,
Winn Dixie Stores, Inc.
Jacksonville, Florida
Norwood H. Davis Jr.
Chairman and
Chief Executive Officer,
Trigon Healthcare, Inc.
Richmond, Virginia
R. Stuart Dickson
Chairman of
Executive Committee,
Ruddick Corporation
Charlotte, North Carolina
B.F. Dolan
Investor
Charlotte, North Carolina
Roddey Dowd Sr.
Chairman of
Executive Committee,
Charlotte Pipe and
Foundry Company
Charlotte, North Carolina
John R. Georgius
President and
Chief Operating Officer,
First Union Corporation
Charlotte, North Carolina
Arthur M. Goldberg
President and
Chief Executive Officer,
Park Place Entertainment Corporation
Chatham, New Jersey
William H. Goodwin Jr.
Chairman,
CCA Industries Inc.
Richmond, Virginia
Frank M. Henry
Chairman,
Frank Martz Coach Company
Wilkes-Barre, Pennsylvania
Ernest E. Jones
President and
Chief Executive Officer,
Private Industry Council
Philadelphia, Pennsylvania
Terrence A. Larsen
Retired Vice Chairman,
First Union Corporation
Philadelphia, Pennsylvania
Herbert Lotman
Chairman and
Chief Executive Officer,
Keystone Foods Corporation
Bala Cynwyd, Pennsylvania
Radford D. Lovett
Chairman,
Commodores Point
Terminal Corporation
Jacksonville, Florida
Mackey J. McDonald
Chairman, President and
Chief Executive Officer,
VF Corporation
Greensboro, North Carolina
Malcolm S. McDonald
Retired Chairman and
Chief Executive Officer
of First Union-Virginia
Richmond, Virginia
Patricia A. McFate
Senior Scientist,
Science Applications
International Corporation
McLean, Virginia
Joseph Neubauer
Chairman and
Chief Executive Officer,
ARAMARK Corporation
Philadelphia, Pennsylvania
Randolph N. Reynolds
Vice Chairman,
Reynolds Metals Company
Richmond, Virginia
James M. Seabrook
Chairman and
Chief Executive Officer,
Seabrook Brothers & Sons, Inc.
Seabrook, New Jersey
Ruth G. Shaw
Executive Vice President and
Chief Administrative Officer,
Duke Energy Corporation
Charlotte, North Carolina
Charles M. Shelton Sr.
General Partner,
The Shelton Companies
Charlotte, North Carolina
Lanty L. Smith
Chairman,
Precision Fabrics Group, Inc.
Greensboro, North Carolina
and Chairman,
The Greenwood Group, Inc.
Raleigh, North Carolina
Raymond W. Smith*
Chairman,
Rothschild North America, Inc.
New York, New York
Executive Officers
Edward E. Crutchfield
Chairman and
Chief Executive Officer
John R. Georgius
President and
Chief Operating Officer
Charles L. Coltman
Vice Chairman
G. Kennedy Thompson
Vice Chairman
B.J. Walker
Vice Chairman
Robert T. Atwood
Executive Vice President
and Chief Financial Officer
Marion A. Cowell Jr.
Executive Vice President,
Secretary and General Counsel
* Retired on January 1, 1999.
- --------------------------------------------------------------------------------
Committees of the Corporate Board of Directors
Executive Committee
B.F. Dolan, Chairman
Edward E. Crutchfield
R. Stuart Dickson
Arthur M. Goldberg
William H. Goodwin Jr.
Radford D. Lovett
Joseph Neubauer
Charles M. Shelton Sr.
Lanty L. Smith
Raymond W. Smith*
Robert T. Atwood (staff)
Human Resources Committee
R. Stuart Dickson, Chairman
W. Waldo Bradley
Robert J. Brown
B.F. Dolan
Frank M. Henry
Herbert Lotman
Radford D. Lovett
Don R. Johnson (staff)
Nominating Committee
B.F. Dolan, Chairman
R. Stuart Dickson, Vice Chairman
G. Alex Bernhardt Sr.
Edward E. Crutchfield
William H. Goodwin Jr.
Radford D. Lovett
Mackey J. McDonald
Charles M. Shelton Sr.
Credit/Market Risk Committee
Lanty L. Smith, Chairman
Ruth G. Shaw, Vice Chairman
A. Dano Davis
Roddey Dowd Sr.
Arthur M. Goldberg
Raymond W. Smith*
Malcolm T. Murray Jr. (staff)
Louis A. Schmitt Jr.**(staff)
Financial Services Committee
William H. Goodwin Jr., Chairman
Charles M. Shelton Sr., Vice Chairman
G. Alex Bernhardt Sr.
Malcolm S. McDonald
Randolph N. Reynolds
James M. Seabrook
Robert T. Atwood (staff)
G. Kennedy Thompson (staff)
Audit Committee
Joseph Neubauer, Chairman
Mackey J. McDonald, Vice Chairman
Edward E. Barr
Norwood H. Davis Jr.
Ernest E. Jones
Patricia A. McFate
James H. Hatch (staff)
Peter J. Schild (staff)
** Retired on December 31, 1998.
xii At A Glance
First Union Headquarters and Principal Subsidiaries
- --------------------------------------------------------------------------------
Headquarters
First Union National Bank
One First Union Center
Charlotte, North Carolina
28288
704-374-6161
Regional
Headquarters
First Union-Atlantic
(Includes the states of
Delaware, New Jersey,
New York and Pennsylvania)
190 River Road
Summit, New Jersey 07901
973-565-3200
1339 Chestnut Street
Widener Building, 13th Floor
Philadelphia, Pennsylvania 19107
215-985-6000
First Union-Connecticut
300 Main Street
Stamford, Connecticut 06904
203-348-6211
First Union-Florida
225 Water Street
Jacksonville, Florida 32202
904-361-2265
First Union-Georgia
999 Peachtree Street
Suite 1200
Atlanta, Georgia 30309
404-827-7100
First Union-
North Carolina
One First Union Center
Charlotte, North Carolina 28288
704-374-6161
First Union-
South Carolina
Insignia Financial Plaza
One Insignia Place
Greenville, South Carolina 29601
864-255-8000
First Union-Tennessee
150 Fourth Avenue North
Nashville, Tennessee 37219
615-251-9200
First Union-Virginia, Maryland
and Washington, D.C.
7 North Eighth Street
P.O. Box 25970
Richmond, Virginia 23260
804-771-7729
Principal Subsidiaries
Congress Financial Corporation
Asset-based lending.
1133 Avenue of the Americas
New York, New York 10036
212-545-4437
First Union
Bank of Delaware
Full-service commercial bank.
One Rodney Square
Tenth and King Streets
Wilmington, Delaware
19801
302-888-7500
First Union
Brokerage Services, Inc.
Securities brokerage firm.
One First Union Center
Charlotte, North Carolina 28288
704-374-6927
First Union
Capital Markets Corp.
Provides a wide range of
investment banking, brokerage
and securities products and
services through its principal
divisions: Bowles Hollowell
Conner, Wheat First Securities
and Wheat First Union.
One First Union Center
Charlotte, North Carolina 28288
704-715-1958
Bowles Hollowell Conner
101 South Tryon Street
Charlotte, North Carolina
28280
704-348-1000
Wheat First Securities
Riverfront Plaza
West Tower
901 East Byrd Street
Richmond, Virginia 23219
804-782-3758
Wheat First Union
Riverfront Plaza
West Tower
901 East Byrd Street
Richmond, Virginia 23219
804-649-2311
First Union
Capital Partners, Inc.
Investment and merchant
banking.
One First Union Center
Charlotte, North Carolina 28288
704-374-4656
First Union
Commercial Corporation
Provides equipment lease
financing.
One First Union Center
Charlotte, North Carolina 28288
704-374-4900
First Union
Direct Bank, N.A.
Card products, including credit
and debit cards, remote and
electronic delivery channels.
699 Broad Street
Augusta, Georgia 30903
800-413-7898
First Union
Home Equity Bank, N.A.
Offers home equity loans.
1000 Louis Rose Place
Charlotte, North Carolina 28262
704-593-9300
First Union
Mortgage Corporation
Offers a variety of mortgage
banking and insurance services.
Two First Union Center
Charlotte, North Carolina 28288
704-374-6161
First Union
Rail Corporation
Railcar leasing.
6250 River Road
Suite 5000
Rosemont, Illinois 60018
847-318-7575
The Money Store, Inc.
Provides home equity, student
and small business loans.
707 Third Street
West Sacramento, California 95605
916-617-2000
- --------------------------------------------------------------------------------
Foreign Branches
Hong Kong, China
(Restricted License Branch)
London, England
Nassau, Bahamas
Seoul, South Korea
Taipei, Taiwan
Representative Offices
Bangkok, Thailand
Beijing, China
Bogota, Colombia
Buenos Aires, Argentina
Cairo, Egypt
Dubai, United Arab Emirates
Hamburg, Germany
Hong Kong, China
Istanbul, Turkey
Jakarta, Indonesia
Johannesburg, South Africa
Kuala Lumpur, Malaysia
London, England
Madrid, Spain
Manila, Philippines
Mexico City, Mexico
Milan, Italy
Mumbai, India
Panama City, Panama
Paris, France
Santiago, Chile
Sao Paulo, Brazil
Seoul, South Korea
Shanghai, China
Singapore
Sydney, Australia
Taipei, Taiwan
Tokyo, Japan
At A Glance xiii
Stockholder Information
- --------------------------------------------------------------------------------
Financial Information
Analysts, stockholders and other investors seeking financial information about
First Union should contact Alice Lehman, managing director of Corporate
Relations, at 704-374-2137. News media and others seeking general information
should contact R. Jeep Bryant, senior vice president, Corporate Relations, at
704-374-2138.
Print. Printed financial materials including our 1998 Annual Report on Form 10-K
may be obtained from Investor Relations by calling 704-383-5401.
Internet. First Union's annual report and quarterly financial releases, as well
as other company news releases, can be accessed through our website on the
Internet at www.firstunion.com.
Fax-On-Demand. Call 1-800-283-6214 for the latest news announcements through
FAX-On-Demand.
Stockholder Assistance
General information, including information about our dividend reinvestment
program and direct deposit of dividends, may be obtained by calling Investor
Relations at 704-374-6782.
If you have questions concerning your stockholder account, please call our
transfer agent, First Union National Bank, at 1-800-347-1246. This is the place
to call if you require a change of address, records or information about lost
certificates, dividend checks or dividend reinvestment.
Customer Inquiries
Mail. If you need to contact our Corporate Headquarters, write First Union
Corporation, One First Union Center, 301 South College Street, Suite 4000,
Charlotte, North Carolina 28288, or call 704-374-4880.
Internet. Our Internet address is www.firstunion.com and our electronic mail
address is comments@firstunion.com.
Phone. Customers nationwide who wish to open a checking or savings account;
transfer funds; apply for a mortgage, home equity or auto loan or lease; request
credit cards; pay bills; and conduct other banking transactions may call
toll-free at 1-800-413-7898.
Annual Meeting
The annual meeting of stockholders will be at 9:30 a.m. on Tuesday, April 20,
1999, in the 12th floor auditorium of Two First Union Center, Charlotte, North
Carolina.
Duplicate Copies
The Annual Report to Stockholders is an important disclosure document that
securities laws require us to provide. However, we are looking for ways to
reduce the expense associated with mailing financial reports. If you receive
duplicate copies of the same report, it may be that you have more than one
stockholder account whose registration is identical or two or more differently
registered accounts receiving information at the same address. We can eliminate
duplicate mailings only if we receive written authorization from each registered
stockholder named on the account to mail only one report per address. Please
send written authorization signed by each stockholder listed on the stockholder
account to First Union National Bank Shareholder Services, 1525 West W.T. Harris
Boulevard 3C3, Charlotte, North Carolina 28288-1153. Please include name,
address, phone number, Social Security number or account number.
Equal Opportunity Employer
First Union Corporation is an equal opportunity employer. All matters regarding
recruiting, hiring, training, compensation, benefits, promotions, transfers and
all other personnel policies will continue to be free from discriminatory
practices.
Securities and Debt Ratings
First Union Corporation's senior long-term debt is rated A by Standard & Poor's;
A1 by Moody's; and AA- by Thomson BankWatch, Duff & Phelps and Fitch IBCA.
Subordinated debt is rated A- by S&P; A2 by Moody's; and A+ by Thomson BankWatch
and Duff & Phelps. Commercial paper is rated A-1 by S&P; P-1 by Moody's; TBW-1
by Thomson BankWatch; and D-1 by Duff & Phelps.
First Union National Bank ratings for long-term letters of credit and
certificates of deposit are A+ by S&P; Aa3 by Moody's; AA- by Duff & Phelps and
by Fitch IBCA. Short-term letters of credit and certificates of deposit are
rated A-1, P-1, TBW-1, D-1+ and F-1+ by S&P, Moody's, Thomson BankWatch, Duff &
Phelps, and Fitch IBCA, respectively.
xiv At A Glance
Letter To Our Stockholders
(A photo of the world appears here)
- --------------------------------------------------------------------------------
Dear Stockholders,
Our record financial results in 1998 clearly demonstrate the value of
developing diversified sources of revenue and earnings. Let me simply lay out
the numbers, based on operating earnings:
[ ] 25 percent growth in earnings per share-- third in earnings per share
growth among the nation's 20 largest banking companies.
[ ] 22.81 percent return on average common equity -- third among the Top 20.
[ ] 45 percent growth in fee income -- leading the Top 20.
[ ] 57 percent overhead efficiency ratio -- eighth among the Top 20.
In addition, in 1998 First Union continued to reward stockholders with
the 21st year of increased dividends. In fact we raised the dividend four times
in the previous 18 months. Our 47 percent increase from year-end 1997
represented the second best dividend growth among the Top 20. First Union,
including its predecessor Union National Bank, has paid a dividend every year
since 1910.
Additionally we also have enhanced stockholder value by implementing a 50
million share buyback program announced in November 1998.
First Union achieved Top 10 performance on all of our key performance
goals in 1998, and we are committed to meeting our financial performance
guidelines over the long term.
================================================================================
Record $3.7 Billion In Operating Earnings
First Union's operating earnings were a record $3.7 billion in 1998, a 27
percent increase from $2.9 billion in 1997. On a per share basis, operating
earnings increased 25 percent to $3.77 in 1998 from $3.01 in 1997, representing
a return on average stockholders' equity of 22.81 percent and a return on
average assets of 1.66 percent. At December 31, 1998, First Union had assets of
$237 billion and stockholders' equity of $17 billion.
Operating earnings represent earnings before merger-related and
restructuring charges, which in 1998 were primarily associated with the April
28, 1998, acquisition of CoreStates Financial Corp. After these charges,
earnings per share were $2.95 in 1998 compared with $2.80 in 1997.
================================================================================
Earnings Diversity
The earnings and revenue diversity we enjoy today is the result of a
strategic process begun five years ago to build a prototype financial services
company for the future. Five years ago, we were good at gathering deposits and
making plain vanilla loans. But the handwriting was on the wall. Individual
customers were telling us they wanted mutual funds and other investment options.
Commercial clients wanted alternatives to traditional financing vehicles,
Maximizing the Potential 1
- -------------------------------------------------
In 1998 First Union continued to reward
stockholders with the 21st year of increased
dividends. In fact, we raised the dividend four
times in the 18 months prior to year-end 1998.
- -------------------------------------------------
such as loan syndication capability, and nonbank competitors were taking our
most profitable customers.
We moved very quickly to redefine First Union as a full-service financial
company focused on producing diversified and stable earnings. Today I believe we
have an entrepreneurial organization that, while larger, moves with great
teamwork, flexibility and speed to serve the varied and evolving needs of our
customers.
Reengineered Commercial Bank
We have relationships with a third of the middle-market companies in our
East Coast marketplace, and we saw there was high potential for deepening
relationships with additional products and services.
We needed to maximize the potential of our commercial bank by making it
as efficient as possible and by taking capital markets financing solutions to
our middle-market customer base -- customers who may not have previously been
able to access the capital markets.
We established a relationship approach to ensure that customers receive
what they need, from traditional loans or products to capital markets expertise.
In doing so, we have become significantly more productive and efficient in our
commercial bank. We have increased revenue per relationship manager nearly
fourfold since 1995.
Customer service also has been enhanced. Turnaround time on commercial
loan requests could take as long as three weeks in the past. We have eliminated
redundant procedures, resulting in a turnaround for loan requests of not more
than three days -- and usually within 24 hours.
Expertise for the Middle Market
At the same time we were redesigning our commercial bank, we began
countering Wall Street's encroachment by building our own Capital Markets
businesses. Only a handful of what we now call Capital Markets businesses
(International, Capital Partners and certain Specialized Industries) were up and
running in 1994 when we formed our Capital Markets Group. We now offer a full
complement of capital markets products and services, from loan syndications and
private placements to debt and equity underwritings and merger and acquisition
advisory services. This diversity served us well during the unprecedented
turbulence in the financial markets in mid-1998, as we continued to apply the
resources and expertise we have gained to serve our clients' needs. Our broad
diversification in products, customers and geography blunted the impact of
market turbulence.
From a standing start in 1994, our Capital Markets businesses (based on
internal management reports) have increased almost tenfold in incremental fee
income and almost sevenfold in incremental total revenue.
That's a brief summary of our efforts on what is called the "wholesale
side" of our company. About the same time, we also began rethinking our retail
strategies.
We Invented Future Bank
The retail side was also under pressure from demographic changes, new
competitors and changes in customer behavior. The products and expertise we
have developed over the past five years have given us a competitive edge. But
the world continues to change. The growth of the Internet and telephone banking
pushed us to rethink our branch delivery strategies as well. In response, we
developed the new retail "Future Bank," designed essentially to do three things:
[ ] Provide more product and delivery options to our
customers;
[ ] Increase the sales capacity in our retail financial
centers; and
[ ] Increase efficiency by encouraging (but not requiring) customers to use
alternative delivery channels such as ATMs, the Internet and the telephone.
Chart appears below:
Revenue Growth & Expense Control
(Percent)
First Union Average Top 10 Most Effecient Banks
Efficiency Ratio* 57 54
Revenue Growth** 14 10
* Excluding special charges.
** Excluding securities transactions
Chart appears below:
Market Shares of Business Credit
(Percent)
Plot points appear below:
83 86 89 92 95 98
Nonbanks 53 56 59 61 60 59
Commercial 47 44 41 39 40 59
Chart appears below:
Compound Annual Growth
Originally Reported Operating Earnings Per Basic Common Share
(Percent)
83-98 88-98 93-98
15 Years 10 Years 5 Years
Percent 10 11 10
Chart appears below:
Market Shares of Household Assets
(Percent)
Plot points appear below:
Bank Deposits Mutual and Money Market Funds
83 46 6
86 42 9
89 37 10
92 30 11
95 25 14
98 22 19
2 Maximizing the Potential
We have centralized 80 percent of administrative tasks in our
state-of-the-art call centers and other support units. The result has been a
fourfold increase in the time that branch employees have to concentrate on sales
and value-added customer service.
Our Future Bank pulls together all of First Union's advantages:
[ ] It leverages our single automation systems to create a single view of the
complete customer relationship;
[ ] It provides an efficient platform for distribution of new products, such
as mutual funds, insurance and our asset management product called the CAP
Account; and
[ ] It enables us to efficiently provide any delivery channel a customer
chooses today, whether it is a telephone, computer, remote device or
branch.
The Future Bank is designed to move us farther along the path from being
order takers to solution makers.
Experienced at Managing Wealth
Also five years ago, we launched a massive effort to defend against the
inroads of nonbanks on our individual customers. We could no longer afford to
operate as a passive deposit gatherer. We could no longer merely watch as
customers walked across the street to buy mutual funds and other investment
products. Just like on the wholesale side, today's retail customers are more
knowledgeable about their financial options, and they require higher returns on
their hard-earned dollars.
Building on our long experience in managing wealth in our traditional
trust business, we expanded into mutual funds, insurance and other retail
investment products and services to provide a world of investment advice at the
retail level. We led the industry in licensing bank branch employees to provide
these investment products and services. Today, our broad product and service
array enables us to meet the individual lifetime financial needs of each
customer.
As a result, we have seen steady growth in assets under management to
$153 billion, including $69 billion of First Union-advised mutual funds. These
assets are managed in our Capital Management Group, which had fee income of $1.8
billion in 1998. Let me point out that, like the Capital Markets businesses we
have built, this largely is income we would not have earned if we had not
invested to build our brokerage services and other fee-generating Capital
Management businesses.
Business Model: Flexibility
Our new products and delivery strategies are designed to maintain our
strength in the 21st century. The
================================================================================
Emerging As A New Financial Force
First Union has invested in key growth businesses over the past five years
to retain competitive strength and to meet customer needs. Today, in addition to
being the nation's sixth largest banking company, we also are:
[ ] The ninth largest brokerage business based on number of registered
representatives;
[ ] The 18th largest mutual fund manager (second largest among banks), with
$69 billion in managed mutual fund assets;
[ ] The 28th largest insurance annuity provider;
[ ] Ranked 6th in loan syndications; and
[ ] The leading merger and acquisition adviser to middle-market companies.
================================================================================
success of these strategies stems from a business model that has enabled
us to operate with flexibility, speed and efficiency even as we have grown
rapidly.
A key element of our operating model is a single-
systems automation platform. This platform allows us to introduce products
simultaneously systemwide, ensuring consistent delivery across channels. It also
enables us to consolidate acquisitions rapidly (for example, we converted
CoreStates in seven months).
In addition, our organizational structure is designed to give our people
the products and tools they need to succeed, including critical management
information at their desktop. We also have developed compensation plans that
reward teamwork in the customers' and the corporation's best interests. And we
devote a significant amount of senior management attention to instilling the
message that petty turf battles are not the way to get ahead at First Union.
Perhaps the best sign that our approach is effective is the steady
increase in cross-sales and referrals between Capital Markets and the Commercial
Bank. In 1998 nearly 40 percent of Capital Markets revenue came through
Commercial Bank referrals to our Capital Markets product specialists. Since we
acquired Wheat First Union in January 1998, our traditional client base has
contributed 46 percent of Wheat's transaction volume. First Union commercial
bankers have referred 75 merger and acquisition advisory opportunities to Bowles
Hollowell Conner since they were acquired in April 1998. In turn Bowles has
referred 37
Maximizing the Potential 3
- --------------------------------------------------------------------------------
The earnings and revenue diversity we enjoy today is the result of a strategic
process begun five years ago to build a prototype financial services company for
the future.
- --------------------------------------------------------------------------------
transactions to other areas of the Capital Markets Group. These synergies
are developing all over our diversified company. For example, we leveraged the
capabilities of both our Capital Markets Group and Capital Management Group to
originate, structure, underwrite and distribute a new First Union product,
collateralized loan obligations, to investors around the globe.
Prepared for Year 2000
Our integrated platform has also afforded us a major advantage in dealing
with the Year 2000 computer problem that has been widely reported. Because the
cost of building a single-systems platform is long behind us, we estimate our
Year 2000 expense will be in the range of $60 million to $65 million -- far
below the cost estimates we have seen for many of our competitors. (Additional
information related to our preparations for the Year 2000 is discussed in the
Management's Analysis of Operations section of this report.)
Business Model: Credit Quality
Another key aspect of our business model is a long-term focus on credit
quality. Our record speaks for itself in that over the past decade, our average
net charge-offs rank among the four lowest of the Top 20 banking companies.
Our commitment to credit quality was particularly clear in this year's
turbulent marketplace. First Union's exposure to emerging markets at December
31, 1998, was limited to bank-to-bank and trade finance, with an average
maturity of 100 days, and it amounted to less than 1.5 percent of total assets.
We have no exposure to hedge funds.
Industry Convergence
As the financial services industry continues to converge, we believe
First Union has several key competitive advantages. As you may infer from this
letter, First Union is an entirely different company from even five years ago as
a result of our strategic initiatives. We are not alone in that belief. Fortune
magazine, in its year-end 1998 issue, said that "First Union is way ahead of its
peers in creating the kind of integrated banking giant that Wall Street has been
talking about for years."
The financial services industry continues to consolidate in a quest for
improved efficiency, revenue opportunities and productivity. For years, you have
been reading in this space my prediction that ultimately we would see four to
six national financial services companies of $300 billion to $600 billion in
size. In 1998 this "end game" came into sight, and it seemed hardly a week went
by without the announcement of another megamerger.
Amid this macroeconomic trend, our goal is not size for the sake of size.
Our goal is to be in the forefront of our industry in reputation, capability,
performance and profitability.
Modernizing the Factory
While we are achieving excellent results because of the key initiatives I
have discussed, we are not standing still. As 1999 begins, we are in the early
stages of a new initiative we call "Modernizing the Factory," which is designed
to ensure that our internal operation, our "factory," is organized in ways that
make it easy and efficient for customers to do business with us and for First
Union to deliver the absolute best service at the smartest cost.
We also have launched our first national advertising campaign, "Your
Guide to the Financial World." Perhaps you have seen the television ads. They
depict the "Financial World" as a foreboding and uncertain place, filled with
potential pitfalls. We offer First Union as a guide to help customers find their
way to their financial goals. Behind this advertising notion is First Union's
long history of navigating uncertain waters for the benefit of stockholders and
customers, through the turbulent markets of 1998 and amid the rapidly
consolidating financial services industry of the past 13 years since the advent
of interstate banking.
Total Return on
Common Stock
Compound Annual
Growth Ratio*
(Dollars)
(A bar graph appears here with the following plot points.)
3 Year 34% 5 Year 28% 10 Year 23%
95 1,000 1,000 1,000
98 2,385 3,487 8,098
* Assuming dividends reinvested.
Total Return
During the 1990s
(Percent)
(A bar graph appears here with the following plot points.)
90 93 94 96 98
FTU Return -20% 160% 185% 322% 734%
Standard & Poor's
Major Regional Bank -10% 80% 84% 190% 482%
Standard & Poor's 500 Index -70% 39% 48% 130% 340%
Stock Price
Performance
Since year-end 1997
(Dollars)
(A bar graph appears here with the following plot points.)
12/97 3/98 6/98 12/98
51 1/4 56 13/16 58 1/4 60 13/16
Stock Price
Performance
5-year trend
(Dollars)
93 94 95 96 97 98
20 5/8 20 11/16 27 13/16 37 51 1/4 60 13/16
4 Maximizing the Potential
(Photo of Edward E. Crutchfield) (Photo of John R. Georgius)
Edward E. Crutchfield John R. Georgius
Chairman and President and
Chief Executive Officer Chief Operating Officer
Outlook
Nineteen ninety-nine will be a challenging year for the financial
services industry, including First Union. Accordingly, in late January 1999, we
announced a modified goal for 1999 operating earnings per share growth on a
percentage basis in the mid- to high-single digits. At that level, the return on
equity would be approximately 22 percent.
For 1999, we continue to be in the building phase of what we envision as
a prototype financial services institution to more efficiently serve our
customers. As such we will continue to invest in initiatives such as Future
Bank, Capital Management and Capital Markets, which are essential to our
long-term strategic growth. To ensure sustained operating leverage, we are
streamlining operations and we anticipate a reduction in our workforce.
Ultimately we believe we will better serve our customers, our stockholders and
our employees as a whole, going forward. More information about our 1999 outlook
is in the Management's Analysis of Operations section.
The Intangible: Our People
Let me end this letter by saying a heartfelt "thank you" to our employees
for their accomplishments in 1998 and for the hard work yet to come in 1999 and
the years ahead.
We want First Union to be regarded as a company where the most talented
people want to work; where customers want to do business; and where stockholders
want to invest their money. We believe the only way to achieve that goal is to
work just as hard at keeping the humanity in our day-to-day dealings with each
other as we do at seeking to increase our profitability. As one example, we
pride ourselves on the comprehensive training programs we provide employees at
our First University. In 1998 First University provided more than 45 hours of
training per employee in programs ranging from personal development to product
sales.
I have the good fortune to be associated with thousands of fellow
employees who feel the same way -- that work, as the writer Studs Terkel once
said, is about daily meaning as well as daily bread. In the At A Glance section,
you may read more about First Union's commitment to the communities we serve.
But let me share with you a few sources of pride that give me confidence we are
heading in the right direction:
[ ] Three national magazines, Money, Working Mother and SmartMoney, ranked
First Union as one of the best employers in the country based on employee
benefits and family friendly programs.
[ ] The Florida Commission on Human Relations recognized First Union for its
leadership and dedication to promoting equality and fairness in lending.
[ ] Our Legal Division received the National Public Service Award from the
American Bar Association for encouraging staff lawyers to donate a minimum
of 40 hours of pro bono work in 1998 and 50 hours thereafter to needy
clients.
[ ] Hundreds of employees helped build Habitat for Humanity homes. Our Capital
Markets Affordable Housing Group has built three Habitat for Humanity
homes in the past three years, with another planned in 1999, and
contributed $173,000 as well.
[ ] During the 1997 President's Summit for America's Future, First Union
challenged employees to volunteer 1.2 million hours to schools and
education by the year 2000. That goal was surpassed by May 1998 when
employees had already completed 1.5 million volunteer hours. The goal for
2000 has been raised to 2.4 million hours.
In fact, wherever you find First Union, you will find the leaders in
United Way, Salvation Army, Red Cross, chambers of commerce, the arts and other
organizations that work for the betterment of the community at large.
This commitment does not come about because of a corporate mandate.
Rather, it is the heartfelt outpouring of employees who work just as hard for
the quality of life in their communities as they do in their jobs. We will work
just as hard to maintain these values as we do to achieve the high performance
to which we aspire.
Let me also not fail to express sincere appreciation for the support of
our longtime stockholders, the guidance of our directors and the confidence of
our customers. Thank you, again, for your interest in First Union.
Sincerely,
/s/ Edward E. Crutchfield
Edward E. Crutchfield
Chairman and Chief Executive Officer
February 12, 1999
Maximizing the Potential 5
Financial Reports
===================================================
Contents
Management's Analysis of Operations..............7
Financial Tables...............................T-1
Six-Year Net Interest Income Summary..........T-26
Management's Statement
of Responsibility..............................C-1
Independent Auditors' Report...................C-2
Consolidated Balance Sheets....................C-3
Consolidated Statements of Income..............C-4
Consolidated Statements
of Changes in Stockholders'Equity..............C-5
Consolidated Statements of Cash Flows..........C-7
Notes to Consolidated Financial Statements.....C-8
===================================================
Index to Special Topics
General Information
Annual Meeting...............................................................xiv
Description of Business........................................................i
Employees....................................................................T-1
Market Share....................At A Glance, First Union Across the Nation, 2, 3
Year 2000...................................................................4,24
Capital Resources
Regulatory Capital............................................20, 21, T-19, C-21
Stockholders' Equity.....................Financial Highlights, 21, T-1, C-3, C-5
Common Stock
Book Value..........................................Financial Highlights, 8, T-1
Dividends..............................Inside Front Cover, Financial Highlights,
1, 8, 21, T-1, T-8, C-4, C-5, C-7
Market Price...................................Financial Highlights, 4, T-1, T-8
Shares, Number Outstanding.............................Financial Highlights, 21,
T-1, C-3, C-4, C-5
Stockholders, Number of......................................................T-1
Liquidity
Debt Ratings.................................................................xiv
Loans
Average Balances............................10, 12, 16, T-3, T-4, T-5, T-6, T-26
Commercial Real Estate........................................................17
Consumer Loan Portfolio...................................................10, 16
Geographic Concentrations.....................................................19
Industry Concentrations...................................................17, 18
Loan Loss Allowance........................18, T-16, T-17, C-3, C-10, C-16, C-32
Loan Loss Provision...............18, T-1, T-8, T-16, C-4, C-7, C-16, C-36, C-37
Mix at Year-End...........................................................15, 16
Net Charge-Offs...................Financial Highlights, 4, 8, 16, 18, T-16, C-16
Nonperforming Assets...................Financial Highlights, 7, 16, 17, 18, T-16
Project Type..................................................................17
Profitability
Earnings Performance...............Financial Highlights, At A Glance, 1, 7, T-1,
T-3, T-4, T-5, T-6, T-7, C-4, C-28, C-36
Income Per Share....................Financial Highlights, 1, 2, 7, T-1, T-8, C-4
Net Interest Income.....................At AGlance, 7, 10, 11, 12, 13, T-1, T-3,
T-4, T-5, T-6, T-8, T-26, C-4, C-36
Net Interest Margin...............................Financial Highlights, 13, T-26
Noninterest Expense.............................7, 10, 11, 12, 14, T-1, T-2, T-3
T-4, T-5, T-6, C-4, C-36
Noninterest, or Fee, Income..........At AGlance, 1, 7, 10, 11, 12, 13, T-1, T-2,
T-3, T-4, T-5, T-6, T-8, C-4, C-36
Results of Operations............................Financial Highlights, 1, 7, 13,
T-1, T-3, T-4, T-5, T-6, C-4, C-36
Return on Average Assets....................Financial Highlights, 1, 7, T-7, T-8
Return on Average
Stockholders' Equity..........................Financial Highlights, At A Glance,
1, 7, T-1, T-3, T-4, T-5, T-6, T-7, T-8
Risk Management
Asset Quality....................................Financial Highlights, 4, 7, 17,
18, T-15, T-16, T-17, C-16
Derivative Transactions....................23, T-20, T-22, T-24, T-25, C-9, C-29
Market Risk Management..................................................22, C-29
Securities
Available For Sale...........Financial Highlights, 15, T-1, T-2, T-8, T-9, T-25,
T-26, C-3, C-4, C-7, C-14, C-32, C-35, C-37
Investment...Financial Highlights, 15, 16, T-1, T-2, T-8, T-11, T-25, T-26, C-3,
C-4, C-7, C-32, C-35, C-37
Trading Activities............1, 2, 14, 23, T-2, T-26, C-3, C-4, C-7, C-32, C-35
6
MANAGEMENT'S ANALYSIS OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and other portions of this Annual Report contain
various forward-looking statements. Please refer to our 1998 Annual Report on
Form 10-K for a discussion of various factors that could cause our actual
results to differ materially from those expressed in such forward-looking
statements.
Earnings Highlights
First Union's operating earnings in 1998 were a record $3.7 billion, an
increase of 27 percent from $2.9 billion in 1997. On a per share basis,
operating earnings increased 25 percent to $3.77 in 1998 from $3.01 in 1997.
These results represented a return on average stockholders' equity of 22.81
percent and a return on average assets of 1.66 percent.
Operating earnings represent earnings before merger-related and
restructuring charges (or special charges) of $805 million after tax in 1998 and
$204 million after tax in 1997. These special charges in 1998 were primarily
associated with the April 28, 1998, pooling of interests acquisition of
CoreStates Financial Corp. After these special charges, earnings per share were
$2.95 in 1998 and $2.80 in 1997.
In the fourth quarter of 1998, operating earnings increased 34 percent to
$993 million compared with $743 million in the fourth quarter of 1997. On a per
share basis, operating earnings in the fourth quarter of 1998 increased 30
percent to $1.00 from $0.77 in the fourth quarter of 1997, representing a return
on average stockholders' equity of 22.59 percent and a return on average assets
of 1.70 percent. After special charges, earnings per share were $0.87 compared
with $0.60 in the fourth quarter of 1997.
Growth in 1998 operating earnings compared with 1997 was led by a 45
percent increase in fee income, which represents noninterest income excluding
securities gains. Securities gains of $357 million pretax in 1998 are discussed
in the Outlook and Securities Available for Sale sections. Key contributions to
the growth in fee income came from our Capital Markets Group and our Capital
Management Group. Capital Management fee income increased 59 percent in 1998,
primarily related to the addition of Wheat First Union in January 1998 and to
strong growth in retail brokerage and insurance services volume, mutual fund
fees and trust fees. Capital Markets fee income increased 53 percent, led by
growth in Investment Banking. Mortgage banking income of $412 million in 1998
reflected strong originations (including refinancings) as residential mortgage
rates fell. Fee income in 1998 also reflected a $375 million increase in gains
on securitization of certain consumer products, excluding securitization gains
included in mortgage banking income. Because of the unfavorable market
conditions late in the year, we did not securitize subprime home equity loans,
and accordingly, no fourth quarter gains were recorded. Also contributing to the
increase in fee income was $254 million in branch sale gains as we continue to
rationalize our retail delivery network.
Noninterest expense, excluding special charges, increased to $8.0 billion
in 1998 from $6.9 billion in 1997, due to the June 30, 1998, purchase accounting
acquisition of The Money Store; higher personnel costs, primarily the result of
incentives associated with revenue growth in the Capital Markets Group and the
Capital Management Group; spending related to our Future Bank initiative; and
advertising expense related to our corporate branding campaign. The operating
overhead efficiency ratio before special charges was 57.09 percent in 1998
compared with 56.78 percent in 1997. In addition, the tax benefits resulting
from decisions related to corporate reorganizations over the past several years
reduced the overall effective federal tax rate for 1998.
The Income Tax section provides more information about income taxes.
Nonperforming assets declined to $844 million, or 0.62 percent of net
loans and foreclosed properties, compared with $991 million, or 0.75 percent, at
December
Operating Earnings
Per Diluted
Common Share*
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
1.81 1.89 2.33 2.68 3.01 3.77
* Excluding special charges.
Operating Earnings*
(Dollars in billions)
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
1.8 1.9 2.4 2.6 2.9 3.7
* Excluding special charges.
Return on
Average Assets*
(Percent)
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
1.22 1.25 1.36 1.39 1.49 1.66
* Excluding special charges.
Return on Average
Common Equity*
(Percent)
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
16.73 15.65 17.98 18.76 20.24 22.81
* Excluding special charges.
Management's Analysis of Operations 7
31, 1997. Net charge-offs were 0.48 percent of average net loans in 1998
compared with 0.65 percent in 1997. Excluding charge-offs related to the credit
card portfolio, net charge-offs were 0.32 percent in 1998 compared with 0.31
percent in 1997.
In addition, we announced a dividend increase on December 15, 1998,
payable March 15, 1999, to 47 cents per share, or $1.88 on an annualized basis.
Outlook
Our record 1998 performance underscored the benefits of First Union's
strategic investments over the past several years to create a financial services
company with diversified sources of revenue and earnings. A growing proportion
of our revenue is generated by fee-producing businesses. These businesses
complement traditional lending and investing activities. In 1998, 46 percent of
our net tax-equivalent revenue came from fee income, excluding securities
transactions, compared with 35 percent in 1997.
The Capital Markets Group and the Capital Management Group produced
almost one-half of the total fee income in 1998. We are encouraged by the
increasing cross-sales opportunities developing among our lines of business, and
we continue to invest significantly in these high-growth areas.
These two businesses have developed products and services for delivery to
the middle-market client base we have served for so long. This focus enabled us
to continue serving clients and to limit the impact of the turbulence in the
global financial markets in 1998. For example, while many of the global
financial markets essentially closed down in the third quarter of 1998, we
capitalized on our product diversity to meet corporate customer demand for
traditional lending products. As the markets for high yield debt, equity
underwriting and commercial mortgage securitizations rebounded in the fourth
quarter of 1998, we were able to again provide customers with these alternative
financing vehicles. In addition, our international strategy is to support the
trade finance needs of our domestic customers and correspondent financial
institutions around the world, rather than lend to sovereign nations or foreign
companies. Because of this strategy, we have limited credit exposure to emerging
markets. Our exposure at December 31, 1998, had an average maturity of 100 days
and amounted to 1.5 percent of total assets.
We completed the CoreStates conversion in November 1998. Customer sales
and retention strategies are well under way, as well as efforts to realize
expense efficiencies. As such, we are encouraged with our prospects for revenue
growth and for expense reductions in 1999 stemming from this and other recently
consolidated acquisitions.
In 1998 we completed the implementation of our new Future Bank retail
delivery channel throughout our 12-state region and Washington, D.C.,
marketplace. Our initial results, as discussed in At A Glance, reinforce our
belief that this strategic initiative will be beneficial to us and to our
customers. To capitalize on this momentum, we anticipate continued investment in
staffing and training in 1999 related to our Future Bank initiative and in First
Union Direct, our telephone sales and servicing channel.
Our primary management attention is focused on developing our existing
business base as we continue to invest in new technology and revenue-generating
lines of business. Our investments in technology, in expanded products and
services, in acquisitions and in new talent and expertise have positioned us to
better serve our 16 million customers in a diverse geographic marketplace in the
years ahead.
We believe, however, that 1999 has the potential to be a challenging year
for the financial services industry, including First Union, as a result of
continued uncertainty in the global markets. We are committed to meeting our
financial performance guidelines in the long term. However, numerous factors,
most significantly higher investment spending (including the Future Bank and
First Union Direct mentioned above) and a change in the business strategy for
funding subprime home equity loans (discussed in the Asset Securitization
section), led us to announce in late January 1999 a modified goal for 1999
operating earnings per share growth on a percentage basis in the mid- to
high-single digits. Our previously stated earnings growth financial performance
guideline was 12 to 14 percent. Achieving the modified goal would result in a
return on equity of approximately 22 percent. We believe we are taking solid
steps to enhance profitability in 2000 and beyond. This involves a review of our
current cost structure, including a reduction in our workforce, and a concurrent
program to streamline operations.
The Impact of Year 2000 section provides information about First Union's
initiatives related to Year 2000 readiness and to expenses associated with these
initiatives.
Asset Growth
(Dollars in billions)
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
149 160 189 197 206 237
Book Value
Per Share
(Dollars)
(A bar graph appears here with the following plot points.)
93 94 95 96 97 98
11.99 12.58 13.91 14.85 15.95 17.48
8 Management's Analysis of Operations
- --------------------------------------------------------------------------------
We have pursued strategic investments to build high growth lines of business to
increase the proportion of fee income in our earnings mix.
- --------------------------------------------------------------------------------
Merger and Consolidation Activity
In 1998, in addition to CoreStates and The Money Store, we completed the
pooling of interests acquisition of Wheat First Butcher Singer, Inc., a
Richmond, Virginia-based broker/dealer, as well as the purchase accounting
acquisitions of Bowles Hollowell Conner & Co., a Charlotte, North Carolina-based
investment banking firm, and Covenant Bancorp, Inc., a Haddonfield, New
Jersey-based bank holding company. The corporation's financial statements have
been restated to reflect the April 28, 1998, acquisition of CoreStates but not
the other acquisitions.
With the June 30, 1998, acquisition of The Money Store, we recorded $1.9
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 fair value adjustments, net of tax effects, related
to certain interest-only and residual certificates of $207 million resulting
from asset securitizations by The Money Store, 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 $158 million. The estimated periods
of future benefit related to goodwill and the network intangible are 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 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 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 five business segments
encompassing more than 50 distinct product and service units. These segments
include the Consumer Bank, Capital Management, the Commercial Bank, Capital
Markets and Treasury/Nonbank. Additional information can be found in Table 4.
We have developed an internal performance reporting model to measure the
results of operations of these five business segments. Because of the complexity
of the corporation, we have used various estimates and allocation methodologies
in the preparation of the Business Segments financial information. 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. First Union's management structure and internal
reporting methodologies produce business segment results that are not
necessarily comparable to presentations by other bank holding companies or
stand-alone entities in similar industry segments.
Our internal performance reporting model isolates the net income
contribution and measures the return on capital for each business segment by
allocating equity, funding credit and expense, and corporate expenses to each
segment. We use a risk-based methodology to allocate equity based on the credit,
market and operational risks associated with each business segment. Credit risk
allocations are intended to provide sufficient equity to cover the unexpected
losses for each asset portfolio. Provisions for loan losses in excess of each
business segment's net charge-offs are included in the Treasury/Nonbank segment.
Operational capital is allocated based on the normal volatility in revenue
associated with each segment. In addition, capital is allocated to segments with
deposit products to reflect the risk of unanticipated disintermediation.
Through this process, the aggregate amount of equity allocated to all
business segments may differ from the corporation's consolidated equity. The
Treasury/Nonbank segment retains all unallocated equity. This mismatch in
consolidated versus allocated equity may result in an unexpectedly high or low
return on equity in the Treasury/Nonbank segment for extended periods of time.
Our method of reporting does not allow for discrete reporting of the
profitability or synergies arising from our integrated approach to product
sales. For example, a commercial customer might have loans, deposits and an
interest rate swap. The loan and deposit relationship would be included in the
Commercial Bank segment and the interest rate swap would be reflected in the
risk management unit of the Capital Markets segment. Our methodology does
transfer expenses from one segment to another based on which segment recognizes
the related income stream.
Exposure to market risk is managed centrally within the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment, our
model employs a funds transfer pricing (FTP) system. The FTP system matches the
duration of the funding used by each segment
Management's Analysis of Operations 9
- --------------------------------------------------------------------------------
to the duration of the assets and liabilities contained in each segment.
Matching the duration, or the effective term until an instrument can be
repriced, allocates interest income and/or expense to each segment so its
resulting net interest income is insulated from interest rate risk. Most of the
interest rate risk resulting from the mismatch in durations of assets and
liabilities held by the business segments resides in the Treasury/Nonbank
segment. The Treasury/Nonbank segment also holds the corporation's investment
portfolio and off-balance sheet portfolio, which are used to enhance corporate
earnings and to manage exposure to interest rate risk. Because most market risk
is held in the Treasury/Nonbank segment, the profitability of this segment can
be more volatile than the other business segments.
General corporate expenses, with the exception of goodwill amortization
and certain other corporate charges, are fully allocated to each segment in a
pro rata manner based on the direct and attributable indirect expenses for each
segment. Noninterest expense remaining in the Treasury/Nonbank segment reflects
the costs of portfolio management activities, goodwill amortization, and other
special charges including merger-related and restructuring charges.
(Two pie charts appear below with the following plot points:)
CONSUMER BANK
Contributions to Group Profitability
Net Income (Percent)
Retail Branch Products 75%
Card Products 14%
First Union Mortgage 7%
Home Equity and
The Money Store 4%
CAPITAL MANAGEMENT
Contributions to Group Profitability
Net Income (Percent)
Trust & Mutual Funds 50%
Retail Brokerage
& Insurance Services 20%
CAP Account 18%
Private Client Banking 12%
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 products, making our
retail banking branches major distribution points for mutual funds, insurance
and small business loans. State-of-the-art technology including centralized
customer information centers, smart cards, electronic and Internet banking
capabilities support this approach.
The Consumer Bank generated $1.2 billion in net income in 1998 compared
with $1.0 billion in 1997. Net interest income was $3.8 billion in 1998 compared
with $4.2 billion in 1997. Fee income was $2.1 billion in 1998 compared with
$1.5 billion in 1997. The Money Store, record production in residential first
mortgage loans (including refinancings) and home equity loans contributed to the
increase in Consumer Bank net income. Residential first mortgage production
volume increased 102 percent to $18 billion in 1998. Home equity volume,
including The Money Store, increased 20 percent to $17 billion from 1997.
Noninterest expense was $3.5 billion in 1998 compared with $3.4 billion
in 1997. Expenses in 1998 included the addition of The Money Store to our
expense base, costs related to the implementation of our Future Bank retail
delivery strategy, and expenses related to the increased mortgage volume.
Average Consumer Bank loans in 1998 were $58 billion compared with $62
billion in 1997. The decrease in the consumer loan portfolio reflects the sale
or securitization of certain loans. As part of our strategy in 1998, we
securitized or sold $11 billion of consumer loans, including residential
mortgages and adjustable rate mortgages (ARMs), home equity loans, student
loans, community reinvestment loans, credit card receivables and other unsecured
consumer credit. The total managed portfolio of consumer loans at December 31,
1998, consisted of $32 billion in home equity loans, $22 billion in residential
mortgages, $11 billion in auto lending, $5 billion in card products; $5 billion
in student loans; and $4 billion in other consumer lending products. By selling
certain credit card relationships, we have repositioned the credit card
portfolio in line with our Consumer Bank's strategy of expanding relationships
within our growing customer base on the East Coast.
First Union's mortgage origination and home equity offices across the
nation also are included in the Consumer Bank through our operating
subsidiaries, First Union Mortgage Corporation (FUMC), First Union Home Equity
10 Management's Analysis of Operations
- --------------------------------------------------------------------------------
Bank (FUHEB) and The Money Store (TMS.) Our home equity lending business is the
largest in the nation based on 1998 originations. In addition, we are the
nation's largest Small Business Administration originator. We had over $10
billion in small business loans in 1998. FUMC is the nation's 11th largest
mortgage servicer, with a mortgage servicing portfolio of $62 billion at
December 31, 1998.
Capital Management
The Capital Management Group encompasses the nation's ninth largest
securities brokerage, 18th largest mutual fund manager and 28th largest
insurance annuity provider. The Capital Management Group is the link between
traditional banking and investing for retail and institutional customers. These
products and services are distributed through three key channels: First Union
Brokerage Services, the Wheat First Union retail brokerage division of First
Union Capital Markets Corp. and our retail full-service financial centers
throughout our 12-state and Washington, D.C., marketplace. At December 31, 1998,
the Capital Management Group had $153 billion in assets under management and
$621 billion in assets under care. Assets under management include proprietary
mutual funds of $69 billion, with the remaining $84 billion in assets related to
trust and institutional accounts.
The Capital Management Group produced net income of $455 million in 1998
compared with $326 million in 1997. Net interest income amounted to $455 million
in 1998 compared with $361 million in 1997, with loan growth of 47 percent,
primarily from the Private Client Banking Group and Wheat First Union. Fee
income in 1998 increased 59 percent to $1.8 billion, primarily related to the
addition of Wheat First Union and to strong growth in retail brokerage, mutual
funds and trust. Noninterest expense in 1998 was $1.5 billion compared with $956
million in 1997, primarily due to the addition of Wheat First Union.
Retail Brokerage Services also includes insurance products, with strong
growth in 1998 in annuity sales to $1.6 billion. Capital Management does not
include 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 the Capital Management Group's lines of business, including Mutual
Funds and Retail Brokerage Services. CAP Account amounts in Table 4 reflect CAP
Account annual fees and the spread attributed to the on-balance sheet deposits.
CAP Account assets increased to $38 billion at December 31, 1998, compared with
$26 billion at year-end
(A pie chart appears below with the following plot points:)
COMMERCIAL BANK
Contributions to Group Profitability
Net Income (Percent)
Cash Management
& Deposit Services 68%
Lending 15%
Real Estate Banking 13%
Small Business Banking 4%
1997. We are seeing increased investment activity through this product, and as
an example, the number of brokerage trades increased 69 percent from 1997 to
1998.
The Private Client Banking Group provides high net worth retail clients
with a single point of access to First Union's investments, mortgages, personal
loans, trusts, financial planning, brokerage services and other products and
services. In 1998 the Private Client Banking Group had $3.5 billion of average
net loans compared with $2.9 billion in 1997, and $2.7 billion of average
deposits in 1998 compared with $2.2 billion in 1997. Private Client Banking
Group amounts in Table 4 reflect only the income and expense related to their
lending and deposit-taking activities.
We anticipate increased growth in all of the Capital Management business
lines as we introduce products and services throughout our multistate network
and as we enhance relationships with new and existing customers.
Commercial Bank
The Commercial Bank provides a comprehensive array of financial solutions
primarily focused on corporate customers (annual sales of $50 million to $2
billion and above); commercial customers (annual sales of $10 million to $50
million); and small-business customers (annual sales up to $10 million). We have
an integrated relationship approach that leverages the capabilities of the
Capital Markets Group to provide complex financing solutions, risk management
products and international services, and the capabilities of the Capital
Management Group to provide property and casualty insurance, pension plans and
401(k) plans.
The Commercial Bank had net income of $701 million in 1998 compared with
$675 million in 1997. Net interest income of $2.0 billion in 1998 was
essentially flat compared with 1997. Fee income increased 8 percent to $520
million in 1998, led by increased cash management volume. Noninterest expense
declined 4 percent to $1.3 billion in 1998.
Management's Analysis of Operations 11
- --------------------------------------------------------------------------------
Average commercial loans in 1998 declined 5 percent from 1997, due to
reduced loan originations and renewals, as well as to the transfer of corporate
customer relationships to the Capital Markets Group. Average small business
loans increased 15 percent to $2.6 billion in 1998. In Table 4 the Commercial
Bank includes the lending activities of our Small Business Banking Division and
excludes insurance, investment and retirement services, and commercial deposit
services for small business customers. We are the nation's fourth largest small
business lender.
First Union is the nation's third largest provider of cash management
products and services. Cash management products stimulate growth in commercial
deposit balances. Deposit balances and their economic profitability are
reflected in both the Commercial Bank and Capital Markets.
Capital Markets
Our Capital Markets Group provides corporate and institutional clients
with a complete selection of investment banking products and services. These
products and services are fully integrated with our wholesale delivery strategy,
and they are a natural extension of our Commercial Bank. Our large banking
franchise provides a strong platform for the delivery of Capital Markets
products and services to meet customer needs.
Our relationship coverage begins in our East Coast banking markets, and
it extends nationwide through specialized industry expertise in such areas as
communications and technology; health care; insurance; utilities; textiles and
home furnishings; retail and specialty finance; oil and gas; financial
institutions; real estate; and other specializations. In addition, our
International unit continues to develop and utilize strong correspondent banking
relationships overseas. The primary focus of the International unit is to meet
the trade finance and foreign exchange needs of our domestic customers and
correspondent financial institutions
(A pie chart appears below with the following plot points:)
CAPITAL MARKETS
Contributions to Group Profitability
Net Income (Percent)
Traditional Banking 57%
Commercial
Leasing & Rail 18%
Investment Banking
& Real Estate Finance 18%
Risk Management 7%
around the world, and to provide commercial banking and capital markets products
to financial institutions and corporate clients overseas.
Capital Markets has five business units: (1) Investment Banking, which
includes loan syndications, investment grade and high yield debt, equity
underwriting, merger and acquisition advisory services, and Capital Partners,
our merchant banking unit; (2) Real Estate Finance, primarily commercial real
estate finance, structured product servicing and affordable housing; (3) Risk
Management, primarily fixed-income and equity derivatives and foreign exchange;
(4) Traditional Banking, which encompasses Specialized Industries and
International; and (5) Commercial Leasing, which includes operating, finance and
leveraged leasing, and Rail, the nation's second largest general purpose railcar
leasing operation. Capital Markets results also include the impact of the Wheat
First Butcher and Bowles Hollowell acquisitions.
These growing businesses enabled Capital Markets to produce net income of
$732 million in 1998 compared with $655 million in 1997. Net interest income
increased 16 percent to $1.2 billion in 1998, with average loans up 21 percent.
Fee income increased 53 percent to $1.1 billion in 1998. Trading profits
declined from $237 million in 1997 to $121 million in 1998, reflecting a net $90
million mark-to-market writedown of commercial mortgages warehoused for
securitization and the associated hedges. This reflects a writedown of $159
million in connection with the third quarter 1998 flight to quality, which was
partially offset by a $69 million recovery in commercial real estate
securitizations. In addition, we experienced good growth in Traditional Banking
as clients sought debt financing when turmoil in the global financial markets
closed certain financing alternatives. Also contributing to fee income was
strong growth in Capital Partners, international products and services, loan
syndications, and fixed income sales and trading. Noninterest expense was $1.2
billion in 1998 compared with $931 million in 1997.
Average net loans were $33 billion in 1998 compared with $27 billion in
1997. Loan growth between the two periods was generated primarily in the
Specialized Industries unit, and it was related to new relationships and to the
alignment of customers from the Commercial Bank.
First Union's Capital Markets Group will continue
to expand its relationship banking efforts, including increased industry segment
coverage and an expanded international presence.
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
12 Management's Analysis of Operations
goodwill amortization and certain other corporate charges. The CMB is
responsible for the management of our securities portfolios, our overall funding
requirements and our asset and liability management functions. The Securities
Available for Sale, Investment Securities, Liquidity and Funding Sources and
Market Risk Management sections provide information about our securities
portfolios, funding sources and asset and liability management functions.
In 1997 the Treasury/Nonbank segment also included the income and expense
related to the restructuring of credit card receivables and other unsecured
loans.
Results of Operations
Income Statement Review
Net Interest Income
Tax-equivalent net interest income was $7.4 billion in 1998 compared with
$7.9 billion in 1997. The decline reflects a changing earning asset mix,
primarily related to the sale and securitization of certain higher-yielding
consumer loans and to the investment of excess capital in lower-yielding
securities.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In 1998, $67 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 1998 was $19 million.
Net Interest Margin
The net interest margin, which is the difference between the
tax-equivalent yield on earning assets and the rate paid on funds to support
those assets, was 3.81 percent in 1998 compared with 4.53 percent in 1997. The
primary factors contributing to the reduction in the net interest margin were
the restructuring of our unsecured consumer loan portfolio; a $9 billion
increase in short-term investments and trading activities; a $14 billion
increase in our securities available for sale portfolio associated with our
consumer loan restructuring and with our acquisition of CoreStates; and an
increase in deposit costs related to customer migration to market-priced
accounts. Changes in the composition of our earning asset mix and a lower
interest rate environment resulted in a decrease in the average rate on earning
assets from 8.29 percent in 1997 to 7.77 percent in 1998. Our average rate paid
on liabilities increased from 3.76 percent to 3.96 percent over this same period
due to the increased
(Two bar charts appear below with the following plot points:)
Net Interest Income Noninterest Income
(Tax-equivalent) (Dollars in billions)
(Dollars in billions)
93 94 95 96 97 98 93 94 95 96 97 98
-- -- -- -- -- -- -- -- -- -- -- --
6.3 6.7 7.4 7.7 7.9 7.4 2.4 2.4 3.1 3.5 4.3 6.6
Components of Noninterest Income
(In millions)
1998 1997
- ---------------------------------------------------
Trading account profits $ 123 252
Service charges on
deposit accounts 1,146 1,119
Mortgage banking income 412 256
Capital management income 1,720 1,078
Securities transactions 357 55
Fees for other banking services 260 263
Equipment lease rental income 176 187
Sundry income $ 2,361 1,112
reliance on higher rate purchased funds, offsetting the lower interest rate
environment. It should be noted that we focus on net income and economic
contribution when evaluating corporate strategies and that we place less
importance on the net interest margin impact of such decisions.
We use securities and off-balance sheet transactions to manage interest
rate sensitivity. More information on these transactions is included in the
Market Risk Management section.
Noninterest, or Fee, 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 Group and the Capital Management Group, to
provide additional sources of fee income that complement our long-standing
banking products and services. These investments were reflected in a
Management's Analysis of Operations 13
- -------------------------------------------------------------------------------
Even with sustained investment spending for the future, our operating overhead
efficiency ratio has been maintained at 57 percent.
- -------------------------------------------------------------------------------
45 percent increase in noninterest, or fee, income, excluding securities
transactions, to $6.2 billion in 1998 from $4.3 billion in 1997.
Fee income from Capital Management and Capital Markets activities
amounted to almost one-half of fee income in 1998. These activities are
discussed further in the Business Segments section.
Sundry income was $2.4 billion in 1998 and $1.1 billion in 1997. Included
in sundry income are securitization income, gains from the sale of branches,
transactions in equity method investments, and other miscellaneous items.
Securitization gains included in sundry income amounted to $529 million in 1998
compared with $154 million in 1997. The increase was primarily attributable to
the securitization of credit cards and mortgage-related products including
subprime home equity loans from The Money Store. In 1998 we realized a $254
million gain on the sale of branches, largely in connection with rationalizing
the branch network, compared with branch gains of $27 million in 1997.
Transactions in equity method investments include a $96 million gain recognized
as a result of a secondary offering of securities by an investee and the
subsequent sale of additional shares. We also recognized a previously deferred
gain of $60 million in connection with an equity method investment. Also
included in sundry income was a $57 million gain on the sale of our merchant
card business.
Trading Activities
Capital Markets also makes a key contribution to fee 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
profits were
(Two bar charts appear below with the following plot points:)
Year-End Earning
Assets
(Dollars in billions)
93 94 95 96 97 98
-- -- -- -- -- --
Loans, net 97 108 128 135 132 136
Investment Securities 14 14 6 4 3 2
Securities Available for Sale 16 13 23 19 23 37
Other 5 7 10 16 18 27
Operating
Overhead
Efficiency Ratio
(Percent)
93 94 95 96 97 98
- -- -- -- -- -- --
62 62 60 56 57 57
$123 million in 1998 compared with $252 million in 1997. The decline was the
result of a global flight to quality in the third quarter of 1998 that had a
negative impact on some segments of our trading activities. As U.S. Treasuries
became the asset of choice for investors, the widening of spreads to treasuries
negatively affected our hedging related to some trading accounts. This resulted
in a trading account net loss of $55 million in the third quarter of 1998.
However, the market rebound late in the year resulted in fourth quarter 1998
trading account profits of $77 million. Trading account assets were $9.8 billion
at December 31, 1998, compared with $6.0 billion at December 31, 1997.
Noninterest Expense
Noninterest expense was $9.2 billion in 1998 compared with $7.2 billion
in 1997. Noninterest expense included $1.2 billion of merger-related and
restructuring charges compared with $284 million in 1997. In addition to
merger-related and restructuring charges, expenses in 1998 reflected the
purchase accounting acquisition of The Money Store; higher personnel costs,
primarily incentives associated with revenue growth in the Capital Markets Group
and the Capital Management Group; spending related to our Future Bank
implementation; and advertising expense related to our branding campaign. The
operating overhead efficiency ratio before special charges was 57.09 percent in
1998 compared with 56.78 percent in 1997.
The $1.2 billion of 1998 pre-tax merger-related and restructuring charges
was associated primarily with the acquisition and the integration of CoreStates.
This amount consisted of $798 million of restructuring charges and $414 million
of other merger-related charges. Included in merger-related expenses is a $185
million gain from regulatory-mandated branch sales. Substantially all of the
unpaid restructuring charges of $398 million at year-end 1998 will be paid in
1999. These integration activities will result in operational efficiencies as
processes and systems are consolidated, redundant activities are eliminated and
other changes to effect the acquisition are completed.
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 $5.0 billion in other
intangible assets at December 31, 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.
The Impact of Year 2000 section provides information about our Year 2000
readiness and associated expenses.
14 Management's Analysis of Operations
Income Taxes
Income taxes were $1.1 billion in 1998 and in 1997. As a result of
several years of effective tax planning, we realized an after-tax benefit of
$270 million in the fourth quarter of 1998 and $264 million in the fourth
quarter of 1997. The effective tax rate declined to 27 percent in 1998 from 29
percent in 1997, but it is currently anticipated that the effective tax rate
will return to 35 percent in 1999.
Balance Sheet Review
Earning Assets
Earnings from our primary earning assets, securities and loans, are
subject to two principal kinds of risk: interest rate risk and credit risk.
Interest rate risk results if durations and rate indices related to sources and
uses of funds are mismatched. Our Funds Management Committee manages interest
rate risk, as well as credit risk associated with securities, under specific
policy standards, which are discussed in more detail in the Market Risk
Management section.
In addition to certain securities, off-balance sheet transactions such as
interest rate swaps, caps and floors are used to maintain interest rate risk at
acceptable levels in accordance with our policy standards. The loan portfolio
carries the potential credit risk of past due, nonperforming or, ultimately,
charged-off loans. We manage this risk primarily through credit approval
standards, which are discussed in the Loans section. Average earning assets in
1998 were $194 billion, an 11 percent increase from $175 billion in 1997. Of the
$19 billion increase in earning assets from 1997, $14 billion was related to an
increase in securities available for sale.
Securities Available for Sale
The securities available for sale portfolio consists
primarily 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. At December 31, 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 $636 million above amortized cost at December 31, 1998.
Securities available for sale transactions resulted
in gains of $353 million in 1998 and $52 million in 1997. Activity in this
portfolio is undertaken primarily to manage liquidity and interest rate risk and
to take advantage of market conditions that create more economically attractive
returns on these investments. In 1998 we took advantage of market conditions to
reposition a portion of our securities portfolio. Primarily, we sold securities
where investor
(Three pie charts appear below with the following plot points:)
Year-End Loans
(Percent)
Commercial, Financial
and Agricultureal 39%
Installment Loans - Other 21%
Real Estate - Mortgage 16%
Lease Financing 7%
Commercial Real
Estate - Mortgage 6%
Other 5%
Vehicle Leasing 4%
Installment Loans -
Bankcard 2%
Year-End Securities Available for Sale
(Percent)
U.S. Government
Agencies 67%
Asset-Backed 19%
U.S. Treasury 7%
Other 7%
Year-End Investment Securities
(Percent)
U.S. Government 52%
Municipals 37%
Collateralized
Mortgage Obligations 8%
Other 3%
demand for a safe haven had driven prices up and reinvested the proceeds in
higher-yielding securities. As a result of our reinvestment strategies, we
believe we will be able to replace a majority of the future income we would have
received on the securities sold, in addition to realizing the gain.
The average rate earned on securities available for
sale in 1998 was 6.60 percent and 6.83 percent in 1997. The average maturity of
the portfolio was 6.40 years at December 31, 1998.
Management's Analysis of Operations 15
Investment Securities
The investment securities portfolio consists primarily of U.S. Government
agency, corporate, municipal and mortgage-backed securities, and collateralized
mortgage obligations. Our investment securities amounted to $2.0 billion at
December 31, 1998, and $3.5 billion at December 31, 1997.
The average rate earned on investment securities was 8.04 percent in 1998
and 7.97 percent in 1997. The average maturity of the portfolio was 5.08 years
at December 31, 1998.
(Two pie charts appear below with the following plot points:)
Year-End Managed Consumer Loans
(Percent)
Home Equity Loans 41%
Residential Mortgages 27%
Auto Lending 14%
Card Products 7%
Student Loans 6%
Other Consumer
Lending Products 5%
Year-End Commercial Loans
(Percent)
Commercial, Financial
and Agricultural 68%
Lease Financing 12%
Real Estate - Mortgage 11%
Foreign 6%
Real Estate -
Construction and Other 3%
(Two bar charts appear below with the following plot points:)
Nonperforming
Assets
(Dollars in billions)
93 94 95 96 97 98
- -- -- -- -- -- --
2.0 1.3 1.1 1.0 .99 .84
Net Charge-Offs
(Percent)
93 94 95 96 97 98
Net Charge-Offs .72 .53 .45 .64 .65 .48
Excluding Bankcard .66 .46 .27 .35 .31 .32
Loans
The loan portfolio, which represents our largest asset, is a significant
source of interest income and fee income. Elements of the loan portfolio are
subject to differing levels of credit and interest rate risk. Our lending
strategy stresses quality growth and portfolio diversification by product,
geography and industry. A common credit underwriting structure is in place
throughout the corporation.
The commercial loan portfolio includes general commercial loans, both
secured and unsecured, and commercial real estate loans. Commercial loans are
typically either working capital loans, which are used to finance the inventory,
receivables and other working capital needs of commercial borrowers, or term
loans, which are generally used to finance fixed assets or acquisitions.
Commercial real estate loans are typically used to finance the construction or
purchase of commercial real estate.
Our commercial lenders focus principally on
middle-market companies, which we believe reduces the risk of credit loss from
any single borrower or group of borrowers. Consistent with our longtime
standard, we generally look for two repayment sources for commercial real estate
loans: cash flows from the project and other resources of the borrower.
Consumer lending through our full-service bank branches is managed using
an automated underwriting system that combines statistical predictors of risk
and industry standards for acceptable levels of customer debt capacity and
collateral valuation. These guidelines are continually monitored for overall
effectiveness and for compliance with fair lending practices.
The loan portfolio at December 31, 1998, was composed of 57 percent in
commercial loans and 43 percent in consumer loans. The composition of our loan
portfolio has changed as a result of the sale and the securitization of certain
assets such as residential real estate and credit card loans when this strategy
produces a better return than would be realized by holding these assets.
Net loans at December 31, 1998, were $135 billion compared with $132
billion at December 31, 1997. Average net loans were $133 billion in 1998
compared with $135 billion in 1997. Commercial loan originations in 1998 were
led by Capital Markets lending. Consumer loan originations were strong in
mortgages (including refinancings) and home equity. Origination volume was
offset by the securitization and the sale of loans as part of our balance sheet
management strategy to maximize our return on investment.
At December 31, 1998, unused loan commitments related to commercial and
consumer loans were $96 billion
16 Management's Analysis of Operations
and $35 billion, respectively. Commercial and standby letters of credit were $11
billion at December 31, 1998. At December 31, 1998, loan participations sold to
other lenders amounted to $4 billion. They were recorded as a reduction of gross
loans.
The average rate earned on loans was 8.45 percent
in 1998 compared with 8.80 percent in 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 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 8 percent of the total portfolio
at December 31, 1998, compared with 12 percent at December 31, 1997. This
portfolio included commercial real estate mortgage loans of $9 billion at
December 31, 1998, and $13 billion at December 31, 1997. The decline reflects
amortization, payoffs resulting from customers obtaining term financing and
reclassifications within the former CoreStates portfolio.
Asset Securitizations
Asset securitizations have been utilized as a funding method for fixed
and variable rate home equity loans and as an alternative funding method for SBA
loans, student loans and certain other loans. In a securitization transaction, a
pool of loans is generally transferred to a trust, which simultaneously issues
interests in the underlying cash flows of the pool to third-party investors. In
its securitization transactions, First Union typically receives cash proceeds,
retains interest-only and residual certificates as an investment and retains
the servicing rights to the loans.
In 1998 securitization was the primary funding
strategy for certain types of home equity loans. In these transactions, which
were accounted for as sales, the loans were securitized and sold, and gains were
recognized in current income. In early 1999, we reevaluated our business
strategy for subprime home equity loan products and decided that we will utilize
other strategies that do not result in gain recognition. Accordingly, we
estimate that 1999 income per share may be reduced by eight to twelve cents.
Table 11 summarizes the activity in the balance sheet amounts for the
interest-only and residual certificates, the related valuation estimates and the
related collateral data.
Year-End Commercial Loans
Industry Classification In Millions
- ---------------------------------------------------
Manufacturing $ 10,664
Retail trade 3,764
Wholesale trade 4,009
Services 9,101
Financial services 8,524
Insurance 851
Real estate-related 2,880
Communication 2,212
Transportation 2,713
Public utilities 1,333
Agriculture 783
Construction 1,136
Mining 1,091
Individuals 3,695
Public administration 1,952
Other 13,788
- ---------------------------------------------------
Total $ 68,496
- ---------------------------------------------------
Year-End Commercial Real Estate Loans
Number
Project Type In Millions of Loans
- ---------------------------------------------------
Apartments $ 1,556 1,203
CONDOMINIUMS 242 165
Land-improved 619 868
Land-unimproved 278 391
Lodging 203 143
Office building 1,589 2,106
Industrial 1,152 1,908
Retail 1,525 1,415
Single family 616 2,299
Other 3,413 4,454
- ---------------------------------------------------
Total $ 11,193 14,952
- ---------------------------------------------------
Asset Quality
Nonperforming Assets
At December 31, 1998, nonperforming assets were $844 million, or 0.62
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 79 percent, or
$664 million, of nonperforming assets at December 31, 1998. Of the rest, five
loans or properties each between $5 million and $10 million accounted for $31
million; and eight loans or properties each over $10 million accounted for $149
million.
Management's Analysis of Operations 17
- -------------------------------------------------------------------------------
Our loan portfolio is primarily middle market and broadly diversified by
product, geography and concentration. Commercial real estate amounts to less
than 15 percent of the total portfolio.
- -------------------------------------------------------------------------------
Forty-two percent of nonperforming assets were
collateralized primarily by real estate at December 31, 1998, and 49 percent at
December 31, 1997.
Past Due Loans
Accruing loans 90 days past due were $385 million
at December 31, 1998, compared with $326 million at December 31, 1997. Of the
past dues at December 31, 1998, $109 million were commercial loans or commercial
real estate loans and $276 million were consumer loans.
Net Charge-Offs
Net charge-offs amounted to $638 million in 1998 compared with $872
million in 1997. Net charge-offs were 0.48 percent of average net loans in 1998
compared with 0.65 percent in 1997.
Year-End Nonperforming Assets
Excluding Commercial Loans
Industry Classification In Millions
- ----------------------------------------------------
Apartments $ 5
Condominiums 1
Industrial 14
Land-improved 4
Land-unimproved 4
Office buildings 7
Retail 4
Single family 277
Other 166
- ----------------------------------------------------
TOTAL $ 482
- ----------------------------------------------------
Year-End Nonaccrual Commercial Loans
Industry Classification In Millions
- ----------------------------------------------------
Manufacturing $ 31
Retail trade 24
Wholesale trade 11
Services 130
Financial services 48
Real estate-related 18
Transportation 2
Public utilities 1
Agriculture 22
Construction 6
Individuals 45
Public administration 1
Other 23
- ----------------------------------------------------
Total $ 362
- ----------------------------------------------------
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 were sold. Excluding credit card-related charge-offs, our net
charge-offs were 0.32 percent of average net loans in 1998 compared with 0.31
percent in 1997. Current card solicitations focus on customers and prospects
within our marketplace and nationally on those with potential for building
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 where
necessary we have taken steps we believe are appropriate.
Provision and Allowance for Loan Losses
The loan loss provision was $691 million in 1998 compared with $1.1
billion in 1997. The allowance for loan losses was $1.8 billion at December 31,
1998, and at December 31, 1997.
The allowance as a percentage of loans declined in 1998, reflecting
continued strength in credit quality as evidenced by lower net loan losses,
primarily lower consumer charge-offs and nonperforming loan levels. Despite this
continued strength, the provision for loan losses exceeded charge-offs in
response to several factors, including the third quarter disruption in the
capital markets and the changing mix of our loan portfolio. Specifically, our
retained commercial loan portfolio continues to grow more rapidly than our
consumer loan portfolio, reflecting the growth of Capital Markets lending.
Further, we believe commercial loan growth has the potential for slightly higher
and more volatile loss severity, and accordingly, we have increased the
allocation of allowance to the commercial loan portfolio.
The allowance for loan losses is the amount considered adequate to cover
probable credit losses inherent in the loan portfolio. Our methodology for
determining the allowance for loan losses establishes both an allocated and
unallocated component. The allocated portion of the allowance represents the
allowance needed for specific loans and specific portfolios. The allocated
portion of the allowance for commercial loans is based principally on current
loan grades, historical loan loss rates, borrowers' creditworthiness, as well as
analyses of other factors that might affect the portfolio. We analyze all loans
in excess of $1 million that are being monitored as potential credit problems to
determine whether supplemental, specific reserves are necessary given borrowers'
collateral values and cash flows. The allocated portion of the allowance for
consumer loans is based principally on delinquencies and historical and
18 Management's Analysis of Operations
projected loss rates. The unallocated portion of our allowance for loan losses
represents the results of other analyses, which are intended to ensure the
allowance is adequate for other probable losses inherent in our portfolio. These
analyses include consideration of changes in credit risk resulting from the
changing underwriting criteria, including acquired loan portfolios, changes in
the types and mix of loans originated, industry concentrations and evaluations,
allowance levels relative to selected, overall credit criteria and other
loss-predictive economic indicators.
Impaired loans, which are included in nonaccrual loans, amounted to $424
million at December 31, 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 collect all amounts due in accordance with the
contractual terms of the loan. Included in the allowance for loan losses at
December 31, 1998, was $80 million related to $397 million of impaired loans.
The remaining impaired loans were recorded at or below fair value. In 1998 the
average recorded investment in impaired loans was $428 million, and $29 million
of interest income was recognized on loans while they were impaired. This income
was recognized using a cash-basis method of accounting.
Additionally, a long-standing strategy that focuses on our middle-market
client base has enabled us to limit our credit exposures to areas of recent
public concern, such as emerging markets, and we have no exposure to hedge
funds.
Geographic Exposure
The loan portfolio in the East Coast region of the United States is
spread primarily across 106 metropolitan areas with diverse economies. Our
largest markets are: Atlanta, Georgia; Charlotte, North Carolina; Miami and
Jacksonville, Florida; Newark, New Jersey; New York, New York; Philadelphia,
Pennsylvania; and Washington, D.C. Substantially all of the $11 billion
commercial real estate portfolio at December 31, 1998, was located in our East
Coast banking region.
Liquidity and Funding Sources
Liquidity planning and management are necessary to ensure we maintain the
ability to fund operations cost-effectively and to meet current and future
obligations such as loan commitments and deposit outflows. In this process we
focus on both assets and liabilities and on the manner in which they combine to
provide adequate liquidity to meet the corporation's needs.
Funding sources primarily include customer-based core deposits but also
include purchased funds and cash
(Two bar charts appear below with the following plot points:)
Core Deposits
(Dollars in billions)
93 94 95 96 97 98
- -- -- -- -- -- --
111 114 126 129 127 133
Comparison of
Funding Sources
(Percent)
Long-Term Debt
7% 7% 11%
Short-Term
Borrowings
16% 17% 20%
Deposits
77% 76% 69%
flows from operations. First Union is one of the nation's largest core
deposit-funded banking institutions. Our large deposit base, which is spread
across the economically strong South Atlantic region and high per-capita income
Middle Atlantic region, creates considerable funding diversity and stability.
Asset liquidity is maintained through maturity
management and through our ability to liquidate assets,
primarily securities available for sale. Another significant source of asset
liquidity is the ability to securitize assets such as credit card receivables
and auto, home equity, student and mortgage loans. Other off-balance sheet
sources of liquidity exist as well.
Core Deposits
Core deposits are a fundamental and cost-effective source of funding.
Core deposits include savings, negotiable order of withdrawal (NOW), money
market, noninterest-bearing and other consumer time deposits. Core deposits were
$133 billion at December 31, 1998, compared with $127 billion at December 31,
1997.
The portion of core deposits in higher-rate, other
consumer time deposits was 27 percent at December 31, 1998, and 29 percent 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 1998 and $124 billion
in 1997. In 1998 and 1997, average noninterest-bearing deposits were 24 percent
and 22 percent of average core deposits, respectively. Average balances in
savings and NOW, money market and noninterest-bearing deposits were higher when
compared with 1997, while other consumer time deposits were lower. Deposits can
be affected by numerous
Management's Analysis of Operations 19
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We have historically generated attractive returns on equity to stockholders
while maintaining sufficient regulatory capital ratios. Our operating dividend
payout ratio was 41 percent in 1998.
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factors, including branch closings or consolidations, seasonal factors and the
rates being offered compared to other investment opportunities. The Net Interest
Income Summaries section provides additional information about average core
deposits.
Purchased Funds
Purchased funds at December 31, 1998, were $51
billion compared with $42 billion at year-end 1997, with the increase largely
reflecting the effects of loan growth, branch sales, the acquisition of The
Money Store, and the stock buyback program announced in November 1998. Our
decision to hold certain assets on the balance sheet during the financial market
turmoil in the third and fourth quarters of 1998 also contributed to the
increase in purchased funds. Certain of these assets are currently scheduled for
securitization in 1999. Average purchased funds in 1998 were $56 billion
compared with $39 billion in 1997. Purchased funds are acquired primarily
through our large branch network by issuing principally $100,000 and over
certificates of deposit, public funds and treasury deposits, and through
national market sources, consisting of relatively short-term funding sources
such as federal funds, securities sold under repurchase agreements, eurodollar
time deposits, short-term bank notes and commercial paper, and longer-term
funding sources such as term bank notes, Federal Home Loan Bank borrowings and
corporate notes.
Cash Flows
Cash flows from operations are a significant source of liquidity. Net
cash provided from operations results primarily from net income adjusted for the
following noncash accounting items: the provision for loan losses; depreciation
and amortization; and deferred income taxes or benefits. This cash was available
in 1998 to increase earning assets, to make discretionary investments and to
reduce borrowings.
(Two bar charts appear below with the following plot points:)
Regulatory Capital
to Assets
(Percent)
Tier 1 Total Capital
------ -------------
1998 Regulatory Minimum 6.00 10.00
First Union 6.94 11.12
Dividend Payout
Ratio*
(Common Shares)
(Percent)
93 94 95 96 97 98
-- -- -- -- -- --
33.59 38.30 36.13 39.18 39.18 41.24
*Based on operating earnings
Long-Term Debt
Long-term debt amounted to $23 billion at December 31, 1998, and $13
billion at year-end 1997. The level of long-term debt was increased to take
advantage of favorable market conditions and to provide a funding alternative to
purchased funds.
At December 31, 1998 and 1997, long-term debt included $1.7 billion of
trust capital securities. Subsidiary trusts issued these capital securities and
used the proceeds to purchase junior subordinated debentures from the
corporation. These capital securities are considered tier 1 capital for
regulatory purposes.
Under a shelf registration statement filed with the Securities and
Exchange Commission, we currently have $1.9 billion of senior or subordinated
debt securities, common stock or preferred stock available for issuance. The
sale of any additional debt or equity securities will depend on future market
conditions, funding needs and other factors. In 1998 the parent company issued
an aggregate of $500 million of subordinated debt.
Our principal banking subsidiary, First Union National Bank, has
available a global note program for the issuance of up to $20 billion of senior
and subordinated notes. Under the program, $5 billion of the notes had been
issued at December 31, 1998. The sale of any additional notes will depend on
future market conditions, funding needs and
other factors.
In 1999 long-term debt of $9 billion will mature. Funds for the payment
of long-term debt will come from operations or, if necessary, additional
borrowings.
Credit Lines
We have $350 million in committed back-up lines of credit, $175 million
of which expires in July 1999 and the remaining $175 million of which expires in
July 2002. These credit facilities contain covenants that require First Union to
maintain a minimum level of tangible net worth, restrict double leverage ratios
and require capital levels at subsidiary banks to meet regulatory standards.
First Union has not used these lines of credit.
Stockholders' Equity
The management of capital in a regulated banking environment requires a
balance between maximizing leverage and return on equity to stockholders while
maintaining sufficient capital levels and related ratios to satisfy regulatory
requirements. We have historically generated attractive returns on equity to
stockholders while maintaining sufficient regulatory capital ratios.
Stockholders' equity was $17 billion at December 31, 1998, and $15
billion at December 31, 1997. Common
20 Management's Analysis of Operations
shares outstanding amounted to 982 million at December 31, 1998, compared with
961 million at December 31, 1997. In the first half of 1998, we repurchased 50
million shares of our common stock in the open market at a cost of $3.1 billion,
all of which were repurchased in connection with purchase accounting
acquisitions (38 million shares related to The Money Store). Additionally in
November 1998, we announced a 50 million share buyback program, and by year-end
1998, we had repurchased 10 million shares at a cost of $618 million. As of
February 12, 1999, we had repurchased a total of 35 million shares in connection
with the buyback program at an aggregate cost of $1.9 billion.
We paid $1.5 billion in dividends to common stockholders in 1998 compared
with $1.1 billion in 1997. This represented an operating dividend payout ratio
of 41.24 percent in 1998.
At December 31, 1998, stockholders' equity included a $407 million net
unrealized after-tax gain related to debt and equity securities. The Securities
Available for Sale section provides additional information about debt and equity
securities.
Subsidiary Dividends
Our banking subsidiaries are the largest source of parent company
dividends. Capital requirements established by regulators limit dividends that
these and certain other of our subsidiaries can pay. Banking regulators
generally limit a bank's dividends in two principal ways: first, dividends
cannot exceed the bank's undivided profits, less statutory bad debt in excess of
a bank's allowance for loan losses; and second, in any year dividends cannot
exceed a bank's net profits for that year, plus its retained earnings from the
preceding two years, less any required transfers to surplus. Under these and
other limitations, which include an internal requirement to maintain all
deposit-taking banks at the well-capitalized level, our subsidiaries had $1.3
billion available for dividends at December 31, 1998, without prior regulatory
approval. Our subsidiaries paid $251 million in dividends to the parent company
in 1998. In addition, the consolidation of our principal bank in our northern
region with our North Carolina-based bank resulted in a reduction of its capital
of $1.5 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,
is currently 8 percent. At least half of total capital must be composed of
common equity, retained earnings and a limited amount of qualifying preferred
stock, less certain intangible assets (tier 1 capital). The remainder of total
capital may consist of a limited amount of subordinated debt, nonqualifying
preferred stock and a limited amount of the allowance for loan losses. At
December 31, 1998, the tier 1 and total capital ratios were 6.94 percent and
11.12 percent, respectively, compared with 8.43 percent and 13.02 percent at
December 31, 1997. The decline in these ratios was primarily the result of
reducing tier 1 capital by goodwill associated with The Money Store and the cost
of common stock repurchases.
In addition the Federal Reserve Board has established minimum leverage
ratio requirements for bank holding companies. These requirements provide for a
minimum leverage ratio of tier 1 capital to adjusted average quarterly assets
equal to 3 percent for bank holding companies that meet specified criteria,
including having the highest regulatory rating. All other bank holding companies
are generally required to maintain a leverage ratio of at least 4 to 5 percent.
The leverage ratio at December 31, 1998, was 6.02 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 December 31, 1998, our deposit-taking
subsidiary banks met the capital and leverage ratio requirements for well
capitalized banks. We expect to maintain these ratios at the required levels by
the retention of earnings and, if necessary, the issuance of additional capital.
Failure to meet certain capital ratio or leverage ratio requirements could
subject a bank to a variety of enforcement remedies, including termination of
deposit insurance by the FDIC. First Union Home Equity Bank, N.A., First Union
Trust Company, N.A., and First Union Direct Bank, N.A., are not deposit-taking
banks.
Management's Analysis of Operations 21
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We manage the sensitivity of earnings to changes in interest rates to remain
within our established policy guidelines.
- -------------------------------------------------------------------------------
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.
Our earnings simulation model reflects a number of variables that we
identify as being affected by interest rates. For example our model captures
rate of change differentials, such as federal funds rates versus savings account
rates; maturity effects, such as calls on securities; and rate barrier effects,
such as caps and floors on loans. It also captures changing balance sheet
levels, such as commercial and consumer loans (both floating and fixed rate),
noninterest-bearing deposits and investment securities. In addition, our model
considers leads and lags that occur in long-term rates as short-term rates move
away from current levels; the elasticity in the repricing
Interest Rate Sensitivity Assumption
Fed Funds Rate
- ------------------------------------
Policy Period
- ---------------------
Jan 99 Dec 99 Dec 00
- ------ ------ ------
4.75% 6.36% 6.46%
Base Line + 200
4.36% 4.46%
Base Line
2.36% 2.46%
Base Line - 200
characteristics of savings and money market deposits; and the effects of
prepayment volatility on various fixed-rate assets such as residential
mortgages, mortgage-backed securities and consumer loans. These and certain
other effects are evaluated in developing the scenarios from which sensitivity
of earnings to changes in interest rates is determined.
We use two separate measures that each include three standard scenarios
in analyzing interest rate sensitivity for policy measurement. Each of these
measures compares our forecasted earnings per share in both a "high rate" and
"low rate" scenario to a base-line scenario. One base-line scenario is our
estimated most likely path for future short-term interest rates over the next 24
months. The second base-line scenario holds short-term rates flat at their
current level over our forecast horizon. The "high rate" and "low rate"
scenarios assume gradual 200 basis point increases or decreases in the federal
funds rate from the beginning point of each base-line scenario over the most
current 12-month period. Our policy limit for the maximum negative impact on
earnings per share resulting from "high rate" or "low rate" scenarios is 5
percent. The policy limit applies to both the "most likely rate" scenario and
the "flat rate" scenario. The policy measurement period is 12 months in length,
beginning with the first month of the forecast.
Earnings Sensitivity
Our January 1999 estimate for future short-term interest rates (our "most
likely rate" scenario) projects the federal funds rate declining from its
current rate of 4.75 percent to 4.36 percent by December 1999 and then
increasing to 4.46 percent by December 2000. Our flat rate scenario holds the
federal funds rate constant at 4.75 percent through December 2000.
Based on the January 1999 outlook, if interest rates were to follow our
"high rate" scenario (i.e., a 200 basis point increase in short-term rates from
our "flat rate" scenario), the model indicates that earnings during the policy
measurement period would be negatively affected by 4.1 percent. Our model
indicates that earnings would benefit by 3.3 percent in our "low rate" scenario
(i.e., a 200 basis point decline in short-term rates from our "flat rate"
scenario).
Compared to our "most likely rate" scenario, earnings would increase 3.8
percent over the policy measurement period if rates fall gradually by 200 basis
points, and they would decrease by 3.9 percent if rates gradually rise by 200
basis points.
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,
22 Management's Analysis of Operations
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 January 1999 outlook, if interest rates in calendar year
2000 were 200 basis points lower than our "most likely rate" scenario, earnings
would increase by 6.2 percent. If rates were 200 basis points higher than our
"most likely rate" scenario in 2000, those earnings would be negatively affected
by 5.9 percent.
While our interest rate sensitivity modeling assumes that management
takes no action, we regularly assess the viability of strategies to reduce
unacceptable risks to earnings, and we implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, management
will continue to formulate strategies aimed at protecting earnings from the
potential negative effects of changes in interest rates.
Off-Balance Sheet Derivatives
for Interest Rate Risk Management
As part of our overall interest rate risk management strategy, we use
off-balance sheet derivatives as a cost- and capital-efficient way to modify the
repricing or maturity characteristics of on-balance sheet assets and
liabilities. Our off-balance sheet derivative transactions used for interest
rate risk management include various interest rate swap, futures and option
structures with indices that relate to the pricing of specific financial
instruments of the corporation. We believe we have appropriately controlled the
risk so that derivatives used for interest rate risk management will not have
any significant unintended effect on corporate earnings. As a matter of practice
we do not use highly leveraged derivative instruments for interest rate risk
management. The impact of derivative products on our earnings and rate
sensitivity is fully incorporated in the earnings simulation model in the same
manner as on-balance sheet instruments.
As a result of interest rate fluctuations, off-balance sheet transactions
will from time to time develop unrealized appreciation or depreciation in market
value when compared with their cost. The impact on net interest income
attributable to these off-balance sheet transactions, all of which are linked to
specific assets and liabilities as part of our overall interest rate risk
management strategy, will generally offset net interest income from on-balance
sheet assets and liabilities. The important consideration is not the shifting of
unrealized appreciation or depreciation between and among on- and off-balance
sheet instruments, but the prudent management of interest rate sensitivity so
that corporate earnings are not unduly at risk as interest rates move up or
down.
The net fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $1.1 billion at
December 31, 1998, compared with fair value appreciation of $566 million at
December 31, 1997.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Such gains and losses at December 31, 1998, were not significant.
Although off-balance sheet derivative financial instruments do not expose
the corporation to credit risk equal to the notional amount, we are exposed to
credit risk equal to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize the credit risk in these instruments by dealing only with high-quality
counterparties. Each transaction is specifically approved for applicable credit
exposure.
In addition our policy is generally to require that swaps and options be
governed by an International Swaps and Derivatives Association Master Agreement.
Bilateral collateral arrangements are in place for substantially all dealer
counterparties used in our market risk management activities. Derivative
collateral arrangements for dealer transactions and trading activities are based
on established thresholds of acceptable credit risk by counterparty. Thresholds
are determined based on the financial strength of the individual counterparty,
and they are bilateral. As of December 31, 1998, the total mark-to-market
related credit risk for derivative transactions in excess of counterparty
thresholds was $594 million. The fair value of collateral held approximated the
total mark-to-market related credit risk in excess of counterparty thresholds as
of such date. For nondealer transactions the need for collateral is evaluated on
an individual transaction basis, and it is primarily dependent on the financial
strength of the counterparty.
Trading Risk Management
Trading activities are undertaken primarily to satisfy the investment and
risk management needs of our customers and secondarily to enhance our earnings
through profitable trading for the corporation's own account. We trade a variety
of debt securities and foreign exchange, as well as financial and foreign
currency derivatives, in order to provide customized solutions for the risk
management challenges faced by our customers. We maintain diversified trading
positions in both the fixed income and foreign exchange markets. Risk is
controlled through the imposition of value-at-risk limits and an active,
independent monitoring process.
We use the value-at-risk (VAR) methodology for measuring the market risk
of the corporation's trading positions. This statistical methodology uses recent
market volatility to estimate the maximum daily trading loss that the
corporation would expect to incur, on average, 97.5 percent
Management's Analysis of Operations 23
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As of December 31, 1998, we had completed the analysis and remediation and
partition testing phases on 90 percent of the major business applications,
except for certain acquired applications.
- -------------------------------------------------------------------------------
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 VAR analysis is supplemented by stress testing on a daily basis.
The analysis captures all financial assets and liabilities that are considered
trading positions (including loan trading activities), foreign exchange and
financial and foreign currency derivative instruments. The calculation uses
historical data from the most recent 252 business days. The total VAR amount at
December 31, 1998, was $19 million, substantially all of which related to
interest rate risk.
Impact of Year 2000
In February 1996, First Union initiated a Year 2000 project to address
the issues associated with its computer systems and business functions through
the turn of the century. The project is under the overall direction of the chief
information officer, and it consists of a project team representing all areas
within First Union. The progress of the work related to Year 2000 compliance is
reported to a Year 2000 steering committee on a monthly basis and to the Audit
Committee of the Board of Directors on a bimonthly basis.
We have assessed the Year 2000 risk of information technology systems,
non-information technology systems and business relationships as: Mission
Critical - those areas where lack of compliance could cause major operational
risk to First Union; High Risk - those areas where lack of compliance could
affect First Union, but would not cause the failure of core operations; Medium
Risk - those areas where lack of compliance would not have a major impact to our
customers; or Low Risk - those areas that do not affect customers and that could
be delayed or otherwise processed on an exception basis.
The Planning and Assessment phase, which includes the identification of
potential points of failure requiring focused Year 2000 efforts, was
substantially completed in 1998.
Information Technology Systems
Information technology systems include proprietary and vendor-supported
business applications. The most significant phases of the Year 2000 project
related to information technology systems are analysis and remediation,
partition testing, and certification. Analysis and remediation includes the
modification of program code to address date-related issues. Partition testing
includes limited integrated testing to validate remediation. In this phase each
application is tested for Year 2000 compliance in an isolated and fully
functional environment to verify that the application executes correctly with
Year 2000 changes included. We consider information technology systems to be
Year 2000 compliant when these phases of the Year 2000 project have been
completed, which is consistent with bank regulatory guidelines.
As of December 31, 1998, we had completed the analysis and remediation
and partition testing phases on approximately 90 percent of the major business
applications, excluding those applications from entities acquired in 1998, and
which First Union will retain. Of the remaining 10 percent, the major business
applications rated Mission Critical and High Risk are scheduled for completion
by March 31, 1999, with the exception of one vendor application that is
scheduled for completion by July 31, 1999, based on the application vendor's
Year 2000 compliance plan. The rest of the major business applications are
scheduled for completion by June 30, 1999.
Of the major business applications from entities we acquired in 1998, the
analysis and remediation and partition testing phases were complete as of
December 31, 1998, for 40 percent of major business applications rated Mission
Critical and High Risk, and 25 percent for those rated Medium and Low Risk. The
rest are expected to be substantially complete by March 31, 1999, with the
exception of two vendor applications that are scheduled for completion by July
31, 1999, based on the application vendor's Year 2000 compliance plan. We had
originally anticipated completing the testing in 1998; however, systems
conversion activity has delayed the completion of this phase.
With respect to personal computers, we have identified which versions of
software and which models of hardware the manufacturers have identified as Year
2000 compliant, and we continually reassess manufacturers' representations. As
of December 31, 1998, approximately 60 percent of the personal computer hardware
had been certified as Year 2000 compliant, with the remainder expected to be
substantially complete by April 30, 1999, including the additional equipment
from acquired entities. We had originally anticipated completing this
certification in 1998; however, the integration of acquisitions, and the
resulting increase in personal computers, delayed this effort.
The goal of the certification phase is to obtain reasonable assurance
that the corporation-wide production environment is capable of the integrated
processing of future dates and that they have not been adversely affected by
Year 2000 remediation and testing efforts. First Union's certification phase
addresses all frequencies of processing and all major computing platforms. Every
effort has been made to emulate a production environment, including
applications, system software, hardware and critical internal and external
interfaces. Certification also includes user acceptance testing and testing with
customers and other key counterparties.
24 Management's Analysis of Operations
The certification phase has commenced, and we expect to be approximately
50 percent complete by March 31, 1999, with all aspects expected to be complete
by September 30, 1999. During the fourth quarter of 1999, a final system test
will take place and a strict change control process will be implemented to
ensure that information technology systems remain Year 2000 compliant.
Non-Information Technology Systems
First Union's Year 2000 project encompasses embedded technology in
non-information technology areas, including facilities and related building
services, such as utilities, security systems, general business equipment and
non-computer office equipment. Approximately 50 facilities and the related
building services have been identified as Mission Critical or High Risk. Testing
of these Mission Critical and High Risk facilities and the related building
services was approximately 25 percent complete by December 31, 1998. We expect
that testing of these facilities and related business services will be complete
and they will be Year 2000 compliant by June 30, 1999. We had originally
anticipated completing this testing by March 31, 1999; however, acquisition
integration has delayed this effort.
Business Relationships
We have requested warranties from our vendors certifying that their
products will be Year 2000 compliant. Vendors who were not compliant by
September 30, 1998, who have not responded to our requests or who have not
adequately demonstrated they can make their products Year 2000 compliant are
being separately identified and monitored.
First Union is evaluating the Year 2000 readiness of its borrowers and
the resulting effect on the credit quality of its loan portfolio. We have
developed a Year 2000 credit risk policy, which requires that a risk assessment
be performed on all new and existing borrowers, subject to certain criteria. As
of September 30, 1998, all borrowers covered by the policy had been assigned a
Year 2000 risk rating.
Business Continuity Planning
Another significant aspect of the Year 2000 project is business
continuity planning, which is a process to ensure that First Union can continue
operations in the event that information technology systems, non-information
technology systems or business relationships are not Year 2000 compliant. As of
December 31, 1998, all critical areas of the corporation were actively engaged
in the business continuity planning program. We had originally anticipated that
all of the plans would be completed by December 31, 1998; however, we have
adjusted the timing of our process based on current regulatory guidance. We
anticipate completion of all the plans by March 31, 1999, and critical business
continuity plans will be validated as defined by current regulatory guidance by
June 30, 1999. Business continuity planning includes consideration of the most
reasonably likely worst case scenario that we could encounter.
Cost
First Union currently estimates the cost for the Year 2000 project will
amount to $60 million to $65 million pretax. This amount includes only the costs
associated with the core Year 2000 project office team, incremental personnel
and contractors hired specifically to participate in the Year 2000 project and
direct expenses incurred on the project. The cost associated with the
redeployment of personnel to the Year 2000 project is expected to be
significantly less than the incremental cost. In 1998, $21 million was incurred
on the Year 2000 project, and as of December 31, 1998, $26 million had been
incurred since project inception.
Accounting and Regulatory Matters
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
with the subsequent accounting for securities retained after the securitization
of other types of assets. Under this Standard, retained interests resulting from
the securitization of mortgage loans held for sale are to be classified either
in securities available for sale or in trading account assets based on intent.
Under current accounting, these retained interests are classified in trading
account assets. The corporation adopted this Standard on the January 1, 1999,
effective date of the Standard.
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 recognized as assets or liabilities in the balance sheet and that
such instruments be measured at fair value through adjustments to either other
comprehensive income or current earnings or both, depending on the purpose for
which the derivative is held. This Standard significantly changes the accounting
for hedge-related derivatives. For the corporation, the Standard is effective
January 1, 2000. The corporation is in the process of assessing the impact of
this Standard.
Legislation has been enacted providing that deposits and certain claims
for administrative expenses and employee compensation against an insured
depository institution
Management's Analysis of Operations 25
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.
Earnings and Balance Sheet Analysis
(1997 compared with 1996)
First Union's operating earnings, which represent earnings before special
charges, were $2.9 billion, or $3.01 per common share in 1997 compared with $2.6
billion, or $2.68 per share in 1996.
Special charges excluded from operating earnings were after-tax
merger-related and restructuring costs of $204 million, or 21 cents per share,
in 1997 primarily related to the November 28, 1997, pooling of interests
acquisition of Richmond, Virginia-based Signet Banking Corporation, and $272
million, or 28 cents per share, in 1996 primarily related to 1996 acquisitions.
Operating earnings in 1996 also excluded a special charge related to an
after-tax SAIF special assessment of $96 million, or 10 cents per common share.
After the special charges, basic earnings in 1997 were $2.7 billion, or $2.84
per common share compared with $2.3 billion, or $2.33 per common share in 1996.
Diluted earnings per common share were $2.80 in 1997 and $2.30 in 1996.
Tax-equivalent net interest income increased 2 percent to $7.9 billion in
1997 from $7.7 billion in 1996. The increase in tax-equivalent net interest
income was primarily the result of increased earning assets.
Nonperforming loans reduce interest income because the contribution from
these loans is eliminated or sharply reduced. In 1997, $72 million in gross
interest income would have been recorded if all nonaccrual and restructured
loans had been current in accordance with their original terms and if they had
been outstanding throughout the period or since origination if held for part of
the period. The amount of interest related to these assets and included in
income in 1997 was $36 million.
The net interest margin was 4.53 percent in 1997 compared with 4.55
percent in 1996. The average rate earned on earning assets was 8.29 percent in
1997 and 8.16 percent in 1996. The average rate paid on interest-bearing
liabilities was 4.43 percent in 1997 and 4.26 percent in 1996.
Noninterest, or fee, income excluding securities transactions, increased
to $4.3 billion in 1997 from $3.4 billion in 1996. Almost all categories of
noninterest income increased in 1997 from a year earlier. Trading account
profits increased 56 percent to $252 million in 1997 compared with $162 million
in 1996. Trading account assets were $6 billion at December 31, 1997, compared
with $5 billion at year-end 1996.
Noninterest expense was $7.2 billion in 1997 compared with $6.9 billion
in 1996. Noninterest expense in 1997 included $284 million in pre-tax,
merger-related and restructuring charges. Noninterest expense in 1996 included
pre-tax, merger-related and restructuring charges of $421 million and the SAIF
special assessment of $149 million pre-tax. The increases in various categories
of noninterest expense reflected our continued investments in fee-income
generating businesses such as those managed by the Capital Management Group and
the Capital Markets Group, in which expenses move more in tandem with revenues,
and in technology and retail branch transformation.
Income taxes were $1.1 billion in 1997 compared with $1.3 billion in
1996. The decrease resulted primarily from an after-tax benefit of $264 million
realized in 1997 from the reorganization of certain corporate and interstate
banking entities.
Average earning assets in 1997 were $175 billion, a 3 percent increase
from $170 billion in 1996.
At December 31, 1997, we had securities available for sale with a market
value of $24 billion compared with $19 billion at year-end 1996. The market
value of securities available for sale was $444 million above amortized cost at
December 31, 1997. The average rate earned on securities available for sale in
1997 was 6.83 percent compared with 6.62 percent in 1996. The average maturity
of the portfolio was 5.72 years at December 31, 1997.
Our investment securities amounted to $3.5 billion at December 31, 1997,
and $4.2 billion at December 31, 1996. The average rate earned on investment
securities was 7.97 percent in 1997 and 7.66 percent in 1996. The average
maturity of the portfolio was 6.94 years at December 31, 1997.
Net loans at December 31, 1997, were $132 billion compared with $135
billion at December 31, 1996. Average net loans were $135 billion in 1997 and
$129 billion in 1996. First Union transferred to assets held for sale $3 billion
in loans in 1997 as part of balance sheet management to maximize its return on
investment. The increase in average loans was primarily attributable to fourth
quarter 1996 purchase accounting acquisitions and to growth in both our consumer
and Capital Markets portfolios. A reduction in mortgage loans in 1997 resulted
from the sale of $1 billion of ARMs and from the natural runoff of our mortgage
portfolio. A reduction in installment loans-other was primarily attributable to
the securitization of student loans, indirect auto loans and community
reinvestment loans.
26 Management's Analysis of Operations
The loan portfolio at December 31, 1997, was composed of 55 percent in
commercial loans and 45 percent in consumer loans compared with 50 percent and
50 percent, respectively, in 1996. At December 31, 1997, unused loan commitments
related to commercial and consumer loans were $58 billion and $30 billion,
respectively. Commercial and standby letters of credit were $9 billion at
December 31, 1997. At December 31, 1997, loan participations sold to other
lenders amounted to $4 billion. They were recorded as a reduction of gross
loans.
The average rate earned on loans was 8.80 percent in 1997 compared with
8.70 percent in 1996. Factors contributing to the increase included a reduction
in lower-yielding mortgage loans, the upward repricing of credit card loans and
the growth in high-yielding leveraged leases. An improvement in the yield on
credit cards reflected the repricing of loans originated with lower introductory
rates and the targeted repricing of certain accounts to improve overall
profitability.
Commercial real estate loans amounted to 12 percent of the total
portfolio at December 31, 1997, and 13 percent at December 31, 1996. This
portfolio included commercial real estate mortgage loans of $13 billion at
December 31, 1997, compared with $14 billion at December 31, 1996.
At December 31, 1997, nonperforming assets were $991 million, or 0.75
percent of net loans and foreclosed properties, compared with $1.0 billion, or
0.78 percent, at December 31, 1996. Forty-nine percent of nonperforming assets
were collateralized primarily by real estate at December 31, 1997, and 56
percent at year-end 1996.
Accruing loans 90 days past due were $326 million at December 31, 1997,
compared with $474 million at December 31, 1996. Of the past dues, $44 million
were commercial and commercial real estate loans and $282 million were consumer
loans. Net charge-offs were 0.65 percent of average net loans in 1997 compared
with 0.64 percent in 1996. Excluding net charge-offs related to the credit card
portfolio, net charge-offs were 0.31 percent in 1997 compared with 0.35 percent
in 1996. The loan loss provision was $1.1 billion in 1997 compared with $678
million in 1996. The allowance for loan losses was $1.8 billion at December 31,
1997, and $2.2 billion at December 31, 1996.
At December 31, 1997, impaired loans, which are included in nonaccrual
loans, amounted to $485 million compared with $553 million at December 31, 1996.
Included in the allowance for loan losses at December 31, 1997, was $89 million
related to $384 million of impaired loans. The remaining impaired loans were
recorded at or below fair value. In 1997 the average recorded investment in
impaired loans was $479 million, and $37 million of interest income was
recognized on loans while they were impaired. This income was recognized using a
cash-basis method of accounting.
Core deposits were $127 billion at December 31, 1997, compared with $129
billion at December 31, 1996. The decline largely reflected runoff that is
typical following acquisitions, in addition to customers' movement into
investment products. Average core deposit balances were $124 billion in 1997 and
in 1996. In 1997 and 1996, average noninterest-bearing deposits were 22 percent
and 21 percent, respectively, of average core deposits. Average balances in
money market and noninterest-bearing deposits were higher when compared with
1996, while savings and NOW and other consumer time deposits were lower.
Purchased funds at December 31, 1997, were $42 billion compared with $35 billion
at year-end 1996, largely reflecting funding needs related to the increased
securities available for sale portfolio and the decrease in core deposits.
Average purchased funds in 1997 were $39 billion compared with $36 billion in
1996.
Long-term debt was $13 billion at December 31, 1997, and $12 billion at
year-end 1996. Total stockholders' equity was $15 billion at December 31, 1997,
and December 31, 1996. Common shares outstanding amounted to 961 million at
December 31, 1997, compared with 989 million at December 31, 1996. In 1997 we
repurchased 52 million shares of our common stock at a cost of $2.4 billion
compared with 51 million shares at a cost of $1.6 billion in 1996. In addition,
in 1997 we issued 7.5 million shares and received $358 million in proceeds,
which were used for general corporate purposes. We paid $1.1 billion in
dividends to common stockholders in 1997 compared with $1.0 billion in 1996. At
December 31, 1997, stockholders' equity included a $286 million unrealized
after-tax gain related to debt and equity securities.
At December 31, 1997, the tier 1 and total capital ratios were 8.43
percent and 13.02 percent, respectively, compared with 7.91 percent and 12.58
percent at December 31, 1996. Amounts prior to 1997 were not restated for the
Signet acquisition.
The fair value appreciation of off-balance sheet derivative financial
instruments used to manage our interest rate sensitivity was $566 million at
December 31, 1997, compared with fair value appreciation of $325 million at
December 31, 1996.
Management's Analysis of Operations 27
Glossary of Terms
Asset Securitization
A funding method whereby a pool of accumulated loans is sold, generally to a
trust, which simultaneously sells interests in the underlying cash flows of the
pool to third-party investors. While the loans are sold, the seller often
retains the servicing rights to the loans, generating an ongoing income stream
over the life of the loans.
Asset Sensitivity
A situation in which a company's asset, liability and off-balance sheet
financial instrument mix results in diminished net interest income in a
declining interest rate environment.
Collateralized Mortgage Obligation (CMO)
A mortgage-backed bond that is divided into separate maturity classes called
tranches. The cash flows for each tranche are paid out in a specific order to
investors based on the prepayment characteristics of the underlying mortgages.
Debit Cards
A method of payment that is tied to a customer's checking account. When used to
make a purchase, the bank-issued debit card (which looks like a credit card)
acts as a "plastic check," and money is deducted directly from the customer's
checking account.
Derivatives
A term used to include a broad base of financial instruments that are, for the
most part, "derived" from underlying securities traded in the cash markets.
Examples include interest rate swaps, swaptions, options and futures contracts.
Earnings Per
Common Share -- Basic Net income, adjusted for preferred stock dividends,
divided by the average common shares outstanding.
Earnings Per
Common Share -- Diluted
Net income, adjusted for preferred dividends, divided by the sum of average
common shares outstanding and common stock equivalents including restricted
stock awards related to employee stock options and convertible securities.
Futures Contract
An agreement to buy or sell a specific amount of a commodity or financial
instrument at a particular price on a stipulated future date.
Interest Rate Swap
A contractual arrangement between two parties in which each agrees to exchange
interest rate payments for a specified period of time. These payments are
calculated on a "notional amount," and no exchange of principal occurs. Interest
rate swaps are commonly used to manage the asset or liability sensitivity of a
balance sheet by converting fixed rate assets or liabilities to floating rates,
or vice versa.
Internet
A global network of computers providing access to information worldwide.
Liability Sensitivity
A situation in which a company's asset, liability and off- balance sheet
financial instrument mix results in diminished net interest income in a rising
interest rate environment.
Managed Loan Portfolio
Owned and securitized loan receivables.
Mark-To-Market
A method of accounting for a corporation's assets or liabilities by recording
them at their current market values, rather than at their historical costs.
Mortgage Banking Income
Noninterest income related to mortgage banking activity.
Mortgage Servicing
Portfolio
Mortgage loans owned by investors for which a company manages payment
processing, remittance and escrow accounts.
Net Charge-Offs
The amount of loans written off as uncollectible, net of the recovery of loans
previously written off as uncollectible.
Net Interest Margin
The difference between the tax-equivalent yield on earning assets and the rate
paid on funds to support those assets, divided by average earning assets.
Net Operating Revenue
The sum of tax-equivalent net interest income and noninterest income.
Noninterest Expense
All expenses other than interest.
Noninterest, or Fee, Income
All income other than interest and dividend income.
Nonperforming Assets
Assets on which income is not being accrued for financial reporting purposes;
restructured loans on which interest rates or terms of repayment have been
materially revised; and other real estate that has been acquired through loan
foreclosures, in-substance foreclosures or deeds received in lieu of loan
payments.
Notional Amount
The principal amount of a financial instrument on which a derivative
transaction is based. In an interest rate swap, for example, the "notional
amount" is used to calculate the interest rate cash flows to be exchanged. No
exchange of principal occurs.
Operating Leverage
An indication of a company's ability to accelerate revenue for a given level of
expense.
Option
An agreement that allows, but does not require, a holder to buy (or sell) a
financial instrument at a predetermined price for a specified time.
Overhead Efficiency Ratio
Noninterest expense divided by net operating revenue.
Pooling Of Interests
An accounting method that may restate historical financial information of the
surviving company in a merger as if the two entities were always one, depending
on the material significance of the acquired company to the surviving company.
Purchase Accounting
An accounting method that adds the fair market value of assets and liabilities
of the company acquired to those of the acquiror at the time of acquisition.
Historical financial information of the acquiror is not restated.
Return On Assets (ROA)
Net income as a percentage of average assets.
Return On Common Equity (ROE)
Net income applicable to common stockholders as a percentage of average common
stockholders' equity, excluding unrealized gains and losses on certain
securities.
Security Gains Or Losses
A gain or loss resulting from the sale of a security at a price above or below
the security's carrying value.
Smart Cards
A plastic card containing microchips that store data. Although many kinds of
information can be embedded on a smart card (which works like a credit card),
most issuers are primarily interested in storing cash value.
Stockholders' Equity
A balance sheet amount that represents the total investment in the corporation
by holders of preferred and common stock.
Swaptions
Options on interest rate swaps.
28 Glossary of Terms
Table 1
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE,
BALANCE SHEET AND OTHER DATA
Years Ended December 31,
------------------------
(In millions, except per share and other data) 1998 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 14,988 14,362 13,758 13,028 10,245 9,507
- -------------------------------------------------------------------------------------------------------------
Interest income (a) $ 15,105 14,461 13,876 13,177 10,405 9,691
Interest expense 7,711 6,568 6,151 5,732 3,739 3,376
- -------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,394 7,893 7,725 7,445 6,666 6,315
Provision for loan losses 691 1,103 678 403 458 559
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses (a) 6,703 6,790 7,047 7,042 6,208 5,756
Securities transactions (b) 357 55 100 82 28 83
Other noninterest income 6,198 4,267 3,435 2,976 2,336 2,332
Merger-related and restructuring charges (c) 1,212 284 421 233 107 17
Other noninterest expense (d) 7,964 6,936 6,509 6,309 5,558 5,405
- -------------------------------------------------------------------------------------------------------------
Income before income taxes (a) 4,082 3,892 3,652 3,558 2,907 2,749
Income taxes 1,074 1,084 1,261 1,213 938 826
Tax-equivalent adjustment 117 99 118 149 160 184
- -------------------------------------------------------------------------------------------------------------
Net income 2,891 2,709 2,273 2,196 1,809 1,739
Dividends on preferred stock - - 9 26 46 46
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders before redemption premium 2,891 2,709 2,264 2,170 1,763 1,693
Redemption premium on preferred stock - - - - 41 -
- -------------------------------------------------------------------------------------------------------------
Net income applicable to common
stockholders after redemption premium $ 2,891 2,709 2,264 2,170 1,722 1,693
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic $ 2.98 2.84 2.33 2.21 1.86 1.85
Diluted 2.95 2.80 2.30 2.17 1.83 1.81
Cash dividends $ 1.58 1.22 1.10 0.98 0.86 0.75
Average shares - Basic (In thousands) 969,131 955,241 973,712 979,852 927,941 913,621
Average shares - Diluted (In thousands) 980,112 966,792 982,755 1,001,145 946,969 940,167
Average common stockholders' equity (e) $ 15,800 14,365 13,788 12,977 11,453 10,190
Book value 17.48 15.95 14.85 13.91 12.58 11.99
Common stock price
High 65 11/16 52 7/8 38 1/2 29 3/8 23 3/4 25 3/4
Low 44 11/16 36 5/8 25 3/4 20 5/8 19 5/8 18 7/8
Period-end $ 60 13/16 51 1/4 37 27 3/4 20 5/8 20 5/8
To earnings ratio (f) 20.61 X 18.30 16.09 12.79 11.27 11.40
To book value 348 % 321 249 199 164 172
BALANCE SHEET DATA
Assets $ 237,363 205,735 197,341 188,855 159,577 148,759
Long-term debt $ 22,949 13,487 11,604 9,586 6,405 5,685
OTHER DATA
ATMs 3,690 3,701 3,458 3,165 2,039 1,986
Employees 71,486 65,943 67,793 68,978 54,479 56,430
Common stockholders 146,775 120,437 103,538 89,257 54,236 58,670
- -------------------------------------------------------------------------------------------------------------
(a) Tax-equivalent.
(b) Securities transactions include investment securities gains of $4 million in
1998; $3 million in 1997; $4 million in 1996; $6 million in 1995; $4 million in
1994; and $7 million in 1993.
(c) After-tax merger-related and restructuring charges amounted to $805 million
in 1998; $204 million in 1997; $272 million in 1996; $163 million in 1995; $70
million in 1994; and $11 million in 1993.
(d) The SAIF special assessment amounted to $149 million ($96 million after tax)
in 1996.
(e) Excludes average net unrealized gains or losses on debt and equity
securities.
(f) Based on diluted earnings per share.
Financial Tables T-1
Table 2
NONINTEREST INCOME (a)
Years Ended December 31,
------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Trading account profits $ 123 252 162 122 75 104
Service charges on deposit accounts 1,146 1,119 979 921 820 809
Mortgage banking income 412 256 205 196 100 181
Capital management income 1,720 1,078 782 631 483 451
Securities transactions 357 55 100 82 28 83
Fees for other banking services 260 263 280 226 157 125
Equipment lease rental income 176 187 112 32 22 20
Sundry income 2,361 1,112 915 848 679 642
- ------------------------------------------------------------------------------------------------------------
Total noninterest income $ 6,555 4,322 3,535 3,058 2,364 2,415
- ------------------------------------------------------------------------------------------------------------
(a) See Table 4 for further information related to noninterest income on a
business segment basis.
Table 3
NONINTEREST EXPENSE (a)
Years Ended December 31,
------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Salaries $ 3,567 2,909 2,649 2,514 2,173 2,057
Other benefits 683 641 628 597 548 506
- ------------------------------------------------------------------------------------------------------------
Personnel expense 4,250 3,550 3,277 3,111 2,721 2,563
Occupancy 561 544 546 553 515 501
Equipment 723 649 569 471 388 349
Advertising 223 141 100 127 107 86
Communications and supplies 480 393 394 362 295 291
Professional and consulting fees 311 386 403 443 362 306
Other intangible amortization 348 315 290 280 192 158
Merger-related and restructuring charges 1,212 284 421 233 107 17
Travel 202 125 114 96 76 67
FDIC assessment 28 29 45 169 254 261
Sundry expense (b) 838 804 771 697 648 823
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense $ 9,176 7,220 6,930 6,542 5,665 5,422
- ------------------------------------------------------------------------------------------------------------
Overhead efficiency ratio (c) 66 % 59 62 62 63 62
Overhead efficiency ratio, adjusted (d) 57 % 57 56 60 62 62
- ------------------------------------------------------------------------------------------------------------
(a) See Table 4 for further information related to noninterest expense on a
business segment basis.
(b) In 1996, a SAIF special assessment of $149 million was included in sundry
expense.
(c) The overhead efficiency ratio is equal to noninterest expense divided by the
sum of tax-equivalent net interest income and noninterest income.
(d) These ratios are the result of reducing noninterest expense by
merger-related and restructuring charges and the 1996 SAIF special assessment.
T-2 Financial Tables
Table 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
----------------------------------------------------------------------------------------
Home
Equity &
First The Retail
Union Money Card Branch
(In millions) Mortgage Store Products Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 103 273 352 3,114 3,842
Provision for loan losses 2 9 211 176 398
Noninterest income 433 199 520 950 2,102
Noninterest expense 397 392 371 2,368 3,528
Income tax expense 52 27 111 581 771
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 85 44 179 939 1,247
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 52.06 % 7.86 38.73 36.42 33.12
Average loans, net $ 2,203 5,762 3,461 46,514 57,940
Average deposits 1,339 - 21 76,400 77,760
Average attributed stockholders'
equity $ 162 562 462 2,577 3,763
- ------------------------------------------------------------------------------------------------------------------------------------
Retail
Private Brokerage &
Mutual Client CAP Insurance
(In millions) Trust Funds Banking Account Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 60 (1) 166 168 64 (2) 455
Provision for loan losses - - 4 - - - 4
Noninterest income 612 412 12 77 763 (85) 1,791
Noninterest expense 415 210 86 113 679 - 1,503
Income tax expense 98 77 34 51 57 (33) 284
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 159 124 54 81 91 (54) 455
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 66.82 % 59.92 22.39 72.26 31.94 - 45.81
Average loans, net $ 113 - 3,523 - 1,177 - 4,813
Average deposits 2,316 - 2,712 11,663 - - 16,691
Average attributed stockholders'
equity $ 238 146 243 113 286 (28) 998
- ------------------------------------------------------------------------------------------------------------------------------------
Small Real Cash Mgt. &
Business Estate Deposit
(In millions) Banking Lending Banking Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 91 549 232 1,093 1,965
Provision for loan losses 4 68 19 - 91
Noninterest income - - 520 520
Noninterest expense 39 311 63 843 1,256
Income tax expense 19 65 58 295 437
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 29 105 92 475 701
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 14.92 % 5.99 12.44 61.95 20.31
Average loans, net $ 2,603 24,728 9,432 - 36,763
Average deposits - - - 25,682 25,682
Average attributed stockholders'
equity $ 201 1,747 748 768 3,464
- ------------------------------------------------------------------------------------------------------------------------------------
(Continued)
Financial Tables T-3
Table 4
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
---------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing &
(In millions) Banking Finance Mgt. Banking Rail Total
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 123 76 (2) 867 160 1,224
Provision for loan losses -- 1 -- 124 6 131
Trading account profit (loss) 62 (104) 163 -- -- 121
Noninterest income 540 95 9 307 183 1,134
Noninterest expense 445 141 89 370 117 1,162
Income tax expense 107 (28) 31 260 84 454
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 173 (47) 50 420 136 732
- --------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 21.55 %(12.95) 52.53 16.81 86.47 18.76
Average loans, net $3,024 1,871 -- 24,261 3,930 33,086
Average deposits 2,019 656 246 7,972 16 10,909
Average attributed stockholders'
equity $ 803 353 95 2,500 157 3,908
- --------------------------------------------------------------------------------------------------------------------------
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 3,842 455 1,965 1,224 (209) 7,277
Provision for loan losses 398 4 91 131 67 691
Trading account profits -- -- -- 121 2 123
Noninterest income 2,102 1,791 520 1,134 885 6,432
Noninterest expense 3,528 1,503 1,256 1,162 1,727 9,176
Income tax expense 771 284 437 454 (872) 1,074
- --------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 1,247 455 701 732 (244) 2,891
After-tax merger-related and
restructuring charges -- -- -- -- 805 805
- --------------------------------------------------------------------------------------------------------------------------
Net incomes before
merger-related and
restructuring charges $ 1,247 455 701 732 561 3,696
- --------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 33.12 % 45.81 20.31 18.76 14.01 22.81
Average loans, net $57,940 4,813 36,763 33,086 633 133,235
Average deposits 77,760 16,691 25,682 10,909 5,288 136,330
Average attributed stockholders'
equity $ 3,763 998 3,464 3,908 4,004 16,137
- --------------------------------------------------------------------------------------------------------------------------
(Continued)
T-4 Financial Tables
Table 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
--------------------------------------------------------------------------------------
First Retail
Union Home Card Branch
(In millions) Mortgage Equity Products Products Total
- ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER BANK
Income statement data
Net interest income $ 58 125 626 3,345 4,154
Provision for loan losses 6 9 491 213 719
Noninterest income 324 44 345 822 1,535
Noninterest expense 357 75 376 2,547 3,355
Income tax expense 7 33 40 538 618
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 12 52 64 869 997
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 13.31 % 48.37 9.93 32.77 28.52
Average loans, net $ 1,281 982 6,410 53,101 61,774
Average deposits 880 - 16 79,523 80,419
Average attributed stockholders'
equity $ 89 111 650 2,650 3,500
- ------------------------------------------------------------------------------------------------------------------------------------
Retail
Private Brokerage &
Mutual Client CAP Insurance
(In millions) Trust Funds Banking Account Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT
Income statement data
Net interest income $ 60 4 146 137 15 (1) 361
Provision for loan losses - - 4 - - - 4
Noninterest income 556 266 9 56 283 (45) 1,125
Noninterest expense 384 161 79 77 255 - 956
Income tax expense 89 42 27 44 16 (18) 200
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 143 67 45 72 27 (28) 326
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 65.22 % 46.26 21.89 72.72 25.77 - 45.97
Average loans, net $ 94 - 2,933 - 250 - 3,277
Average deposits 2,233 - 2,220 10,282 - - 14,735
Average attributed stockholders'
equity $ 220 98 200 98 102 (15) 703
- ------------------------------------------------------------------------------------------------------------------------------------
Small Real Cash Mgt. &
Business Estate Deposit
(In millions) Banking Lending Banking Services Total
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANK
Income statement data
Net interest income $ 80 649 265 1,026 2,020
Provision for loan losses 3 75 14 - 92
Noninterest income - - - 481 481
Noninterest expense 42 343 67 862 1,314
Income tax expense 13 89 71 247 420
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 22 142 113 398 675
- ------------------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 13.19 % 7.64 14.78 56.25 19.24
Average loans, net $ 2,262 26,117 10,276 - 38,655
Average deposits - - - 24,266 24,266
Average attributed stockholders'
equity $ 164 1,877 773 708 3,522
- ------------------------------------------------------------------------------------------------------------------------------------
(Continued)
Financial Tables T-5
Table 4
BUSINESS SEGMENTS
Year Ended December 31, 1997
--------------------------------------------------------------------
Real Commercial
Investment Estate Risk Traditional Leasing &
(In millions) Banking Finance Mgt. Banking Rail Total
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS
Income statement data
Net interest income $ 109 60 10 785 87 1,051
Provision for loan losses 2 1 - 27 3 33
Trading account profits 43 76 118 - - 237
Noninterest income 219 122 5 192 202 740
Noninterest expense 245 124 63 342 157 931
Income tax expense 48 51 27 233 50 409
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 76 82 43 375 79 655
- -------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 16.09 % 30.82 56.43 20.55 57.31 23.59
Average loans, net $2,202 1,522 - 19,854 3,724 27,302
Average deposits 880 274 111 5,871 22 7,158
Average attributed stockholders'
equity $ 477 267 76 1,829 140 2,789
- -------------------------------------------------------------------------------------------------------------------------
Consumer Capital Commercial Capital Treasury/
(In millions) Bank Mgt. Bank Markets Nonbank Total
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 4,154 361 2,020 1,051 208 7,794
Provision for loan losses 719 4 92 33 255 1,103
Trading account profits - - - 237 15 252
Noninterest income 1,535 1,125 481 740 189 4,070
Noninterest expense 3,355 956 1,314 931 664 7,220
Income tax expense 618 200 420 409 (563) 1,084
- -------------------------------------------------------------------------------------------------------------------------
Net income after
merger-related and
restructuring charges $ 997 326 675 655 56 2,709
After-tax merger-related and
restructuring charges - - - - 204 204
- -------------------------------------------------------------------------------------------------------------------------
Net incomes before
merger-related and
restructuring charges $ 997 326 675 655 260 2,913
- -------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity (a) 28.52 % 45.97 19.24 23.59 6.62 20.24
Average loans, net $61,774 3,277 38,655 27,302 3,509 134,517
Average deposits 80,419 14,735 24,266 7,158 6,269 132,847
Average attributed stockholders'
equity $ 3,500 703 3,522 2,789 3,926 14,440
- -------------------------------------------------------------------------------------------------------------------------
(a) Average attributed stockholders' equity excludes merger-related and
restructuring charges and average net unrealized gains or losses on debt and
equity securities. See the "Business Segments" discussion in Management's
Analysis of Operations for further information about the methodology and
assumptions used herein. The return on average attributed stockholders' equity
for the Capital Management Mutual Funds unit is net of the amount included in
Other.
T-6 Financial Tables
Table 5
SELECTED PERFORMANCE, DIVIDEND PAYOUT AND OTHER RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 13.79 X 13.58 13.61 13.22 12.63 13.31
Return on assets 1.30 % 1.38 1.20 1.26 1.20 1.22
Return on total stockholders' equity (b) 18.30 18.86 16.36 16.65 15.14 16.23
Internal capital growth (b) 8.65 % 10.91 8.87 10.06 8.87 10.46
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 41.24 % 39.18 39.18 36.13 38.30 33.59
Preferred and common shares 41.24 39.18 39.38 36.84 39.84 35.32
Net income
Common shares 52.72 42.12 45.55 38.84 39.85 33.81
Preferred and common shares 52.72 % 42.12 45.76 39.57 41.41 35.55
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER RATIOS ON
Operating earnings
Return on assets 1.66 % 1.49 1.39 1.36 1.25 1.22
Return on common
stockholders' equity (b) (c) 22.81 20.24 18.76 17.98 15.65 16.73
Net income
Return on common
stockholders' equity (b) (c) 18.30 % 18.86 16.42 16.72 15.04 16.62
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Based on average balances and net income.
(b) Excludes average net unrealized gains or losses on debt and equity
securities.
(c) Based on average balances and net income applicable to common
stockholders.
Financial Tables T-7
Table 6
SELECTED QUARTERLY DATA
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- -------------------------------------------
(In millions, except per
share data) Fourth Third Second First Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $3,768 3,891 3,727 3,602 3,635 3,663 3,621 3,443
Interest expense 1,970 2,048 1,922 1,771 1,710 1,686 1,643 1,529
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,798 1,843 1,805 1,831 1,925 1,977 1,978 1,914
Provision for loan losses 167 239 150 135 445 225 228 205
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,631 1,604 1,655 1,696 1,480 1,752 1,750 1,709
Securities transactions 98 211 25 23 18 17 11 9
Noninterest income 1,679 1,633 1,532 1,354 1,147 1,065 1,030 1,025
Merger-related and
restructuring charges (a) 205 24 954 29 225 -- 59 --
Noninterest expense 2,317 1,929 1,881 1,837 1,912 1,682 1,682 1,660
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes (benefit) 886 1,495 377 1,207 508 1,152 1,050 1,083
Income taxes (benefit) 29 500 128 417 (68) 404 368 380
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 857 995 249 790 576 748 682 703
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic earnings $ 0.87 1.02 0.27 0.82 0.61 0.79 0.72 0.72
Diluted earnings 0.87 1.01 0.26 0.81 0.60 0.78 0.70 0.72
Cash dividends 0.42 0.42 0.37 0.37 0.32 0.32 0.29 0.29
Common stock price
High 63 15/16 65 11/16 63 58 1/4 52 7/8 50 11/16 47 7/8 47 3/4
Low 44 11/16 47 9/16 55 1/4 47 1/16 46 15/16 45 7/8 39 1/8 36 5/8
Period-end $ 60 13/16 51 3/16 58 1/4 56 13/16 51 1/4 50 1/16 46 1/4 40 1/2
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS (b)
Return on assets 1.47 % 1.72 0.46 1.52 1.14 % 1.50 1.39 1.50
Return on stockholders'
equity (c) 20.32 24.10 6.83 20.74 15.44 20.36 19.37 19.91
Stockholders' equity to assets 7.42 % 7.32 6.80 7.48 7.51 % 7.29 7.15 7.51
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED RATIOS (d)
Return on assets 1.70 % 1.75 1.62 1.56 1.47 % 1.50 1.47 1.50
Return on stockholders'
equity (c) 22.59 % 23.50 23.91 21.22 19.82 % 20.31 20.42 19.91
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATION AS
ORIGINALLY REPORTED
Net interest income $ -- -- -- 1,330 1,400 1,447 1,443 1,387
Net income -- -- -- 587 362 547 483 504
Basic earnings per share -- -- -- 0.91 0.57 0.88 0.78 0.80
Diluted earnings per share $ -- -- -- 0.90 0.56 0.87 0.77 0.79
- ------------------------------------------------------------------------------------------------------------------------------------
(a) After-tax merger-related restructuring charges amounted to $805 million in
1998 and $204 million in 1997.
(b) Based on average balances and net income.
(c) Excludes average net unrealized gains or losses on debt and equity
securities.
(d) Based on average balances and net income excluding after-tax merger-related
and restructuring charges.
T-8 Financial Tables
Table 7
SECURITIES AVAILABLE FOR SALE
December 31, 1998
--------------------------------------------------------------------------------------------------
Average
1 Year 1-5 5-10 After 10 Gross Unrealized Amortized Maturity
--------------------- in Years
(In millions) or Less Years Years Years Total Gains Losses Cost
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 66 1 2,477 238 2,782 201 -- 2,581 10.14
U.S. Government agencies 225 6,203 18,483 -- 24,911 212 18 24,717 5.89
Asset-backed 315 2,545 4,311 49 7,220 95 46 7,171 6.42
State, county and municipal 4 2 19 56 81 1 -- 80 15.92
Sundry 92 547 266 1,535 2,440 216 25 2,249 8.00
- ----------------------------------------------------------------------------------------------------------------------
Total $ 702 9,298 25,556 1,878 37,434 725 89 36,798 6.40
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 702 9,298 25,556 604 36,160 520 87 35,727
Equity securities -- -- -- 1,274 1,274 205 2 1,071
- ----------------------------------------------------------------------------------------------------------------------
Total $ 702 9,298 25,556 1,878 37,434 725 89 36,798
- ----------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $ 690 9,209 25,216 612 35,727
Equity securities - - - 1,071 1,071
- --------------------------------------------------------------------------------------
Total $ 690 9,209 25,216 1,683 36,798
- --------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.70 % 4.96 6.05 6.05 6.07
U.S. Government agencies 5.82 6.71 6.48 - 6.53
Asset-backed 8.77 7.52 6.64 7.85 7.05
State, county and municipal 9.29 7.15 7.23 7.28 7.38
Sundry 4.34 7.10 6.39 5.34 5.85
Consolidated 7.03 % 6.95 6.46 5.58 6.56
- --------------------------------------------------------------------------------------
December 31, 1997
-----------------------------------------------------------------------------------------------
1 Year 1-5 5-10 After 10 Gross Unrealized Amortized Average
-------------------- Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 718 1,106 1,420 178 3,422 120 -- 3,302 6.06
U.S. Government agencies 170 5,749 7,722 46 13,687 234 4 13,457 5.41
Asset-backed 333 1,806 176 224 2,539 25 7 2,521 4.68
State, county and municipal 13 30 22 71 136 1 -- 135 12.75
Sundry 114 2,250 237 1,139 3,740 87 12 3,665 6.83
- ------------------------------------------------------------------------------------------------------------------------
Total $1,348 10,941 9,577 1,658 23,524 467 23 23,080 5.72
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $1,348 10,875 9,577 751 22,551 414 21 22,158
Equity securities -- 66 -- 907 973 53 2 922
- ------------------------------------------------------------------------------------------------------------------------
Total $1,348 10,941 9,577 1,658 23,524 467 23 23,080
- ------------------------------------------------------------------------------------------------------------------------
AMORTIZED COST
Debt securities $1,334 10,743 9,341 740 22,158
Equity securities -- 66 -- 856 922
- ---------------------------------------------------------------------------------------
Total $1,334 10,809 9,341 1,596 23,080
- ---------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.06 % 6.30 7.01 7.07 6.57
U.S. Government agencies 5.96 7.11 7.05 7.57 7.07
Asset-backed 7.49 6.62 5.68 5.77 6.59
State, county and municipal 8.09 6.93 6.64 6.90 6.98
Sundry 6.90 5.69 6.91 6.44 6.03
Consolidated 6.48 % 6.66 7.02 6.47 6.78
- ---------------------------------------------------------------------------------------
Financial Tables T-9
Securities available for sale with an aggregate amortized cost of $2.7
billion at December 31, 1998, are pledged to secure U.S. Government and other
public deposits and for other purposes as required by various statutes or
agreements.
Included in "U.S. Government agencies" and "Sundry" at December 31, 1998,
are $199 million of securities denominated in currencies other than the U.S.
dollar. At December 31, 1998, these securities had a weighted average maturity
of 3.49 years and a weighted average yield of 5.54 percent. For comparative
purposes, the weighted average U.S. dollar equivalent yield of these securities
was 5.99 percent based on a weighted average funding cost differential of (.45)
percent.
Expected maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Average maturity excludes equity securities and money
market funds.
Yields related to securities exempt from federal and state income taxes
are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates.
At December 31, 1998 and 1997, there were forward commitments to purchase
securities at a cost which approximates market value of $4.0 billion and $6.4
billion, respectively.
Gross gains and losses realized on the sale of debt securities in 1998
were $399 million and $62 million, respectively, and gross gains and losses
realized on equity securities were $18 million and $2 million, respectively.
Gross gains and losses realized on the sale of debt securities in 1997 were $54
million and $43 million, respectively, and gross gains and losses realized on
equity securities were $52 million and $11 million, respectively. Gross gains
and losses realized on the sale of debt securities in 1996 were $163 million and
$130 million, respectively, and gross gains realized on equity securities were
$63 million.
T-10 Financial Tables
Table 8
INVESTMENT SECURITIES
December 31, 1998
-----------------------------------------------------------------------------------------
Average
1 Year 1-5 5-10 After 10 Gross Unrealized Market Maturity
--------------------
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 5 7 -- -- 12 -- -- 12 1.23
U.S. Government agencies -- 891 151 3 1,045 25 1 1,069 4.08
CMOs 100 65 -- -- 165 3 -- 168 0.98
State, county and municipal 102 165 235 245 747 110 -- 857 7.65
Sundry 24 27 2 3 56 -- -- 56 2.13
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 231 1,155 388 251 2,025 138 1 2,162 5.08
- ------------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 234 1,190 434 304 2,162
- ---------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 4.78 % 4.70 - - 4.73
U.S. Government agencies - 6.95 6.51 8.43 6.89
CMOs 8.71 7.21 - - 8.12
State, county and municipal 9.97 9.95 11.41 11.96 11.07
Sundry 7.12 7.32 7.26 5.14 7.13
Consolidated 9.02 % 7.39 9.48 11.84 8.53
- ---------------------------------------------------------------------------------------------
December 31, 1997
-----------------------------------------------------------------------------------------
Average
1 Year 1-5 5-10 After 10 Gross Unrealized Market Maturity
-------------------
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- ------------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 14 3 1 - 18 - - 18 0.86
U.S. Government agencies 171 861 323 24 1,379 28 2 1,405 3.89
CMOs 31 380 42 67 520 9 - 529 4.77
State, county and municipal 105 282 302 327 1,016 120 - 1,136 8.60
Sundry 16 56 79 442 593 2 13 582 20.70
- ---------------------------------------------------------------------------------------------------------------------
Total $ 337 1,582 747 860 3,526 159 15 3,670 6.94
----------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 338 1,623 791 615 3,367
Sundry - - - 303 303
- ----------------------------------------------------------------------------------------------------
Total $ 338 1,623 791 918 3,670
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.96 % 5.62 6.10 - 5.91
U.S. Government agencies 6.03 7.29 6.92 5.35 7.02
CMOs 7.82 7.88 6.34 2.66 7.08
State, county and municipal 9.77 10.90 13.14 12.20 11.87
Sundry 3.75 4.74 7.18 9.72 8.74
Consolidated 7.25 % 7.98 9.43 9.99 8.71
- ----------------------------------------------------------------------------------------------------
Financial Tables T-11
Investment securities with an aggregate amortized cost of $1.2 billion at
December 31, 1998, are pledged to secure U.S. Government and other public
deposits and for other purposes as required by various statutes or agreements.
Expected maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Yields related to securities exempt from federal and state income taxes
are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates.
There were no commitments to purchase or sell investment securities at
December 31, 1998 and 1997.
In 1998, gross gains realized on repurchase agreement underdeliveries and
calls of investment securities were $4 million. Gross gains realized on calls of
investment securities in 1997 were $3 million. In 1996, gross gains and losses
realized on repurchase agreement underdeliveries and calls of investment
securities were $5 million and $1 million, respectively.
T-12 Financial Tables
Table 9
LOANS
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 53,961 46,117 41,489 40,959 35,220 31,871
Real estate - construction and other 2,628 3,037 3,474 3,350 2,651 2,791
Real estate - mortgage 8,565 13,160 14,300 15,071 14,533 14,448
Lease financing 9,730 8,610 6,348 4,556 2,278 1,769
Foreign 4,805 3,885 2,842 1,675 1,121 968
- ------------------------------------------------------------------------------------------------------------------------------------
Total commercial 79,689 74,809 68,453 65,611 55,803 51,847
- ------------------------------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 21,729 28,998 33,181 32,782 26,615 23,862
Installment loans - Bankcard (a) 2,779 3,914 7,295 5,358 5,837 3,425
Installment loans - other 29,050 22,271 23,855 22,493 18,153 17,171
Vehicle leasing 6,162 5,331 4,529 3,615 2,799 1,905
- ------------------------------------------------------------------------------------------------------------------------------------
Total retail 59,720 60,514 68,860 64,248 53,404 46,363
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 139,409 135,323 137,313 129,859 109,207 98,210
Unearned income 4,026 3,636 2,666 1,954 1,242 835
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net $135,383 131,687 134,647 127,905 107,965 97,375
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Installment loans - Bankcard include credit card, ICR, signature and First
Choice.
Financial Tables T-13
Table 10
CERTAIN COMMERCIAL LOAN MATURITIES AND SENSITIVITY
TO CHANGES IN INTEREST RATES
December 31, 1998
------------------------------------------------------------------------------
Real
Commercial, Estate-
Financial Construction Real
and and Estate-
(In millions) Agricultural Other Mortgage Foreign Total
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED RATE
1 year or less $ 2,802 2 33 809 3,646
1-5 years 4,721 145 1,824 1,018 7,708
After 5 years 2,467 197 1,394 - 4,058
- ------------------------------------------------------------------------------------------------------------------------------------
-------
Total 9,990 344 3,251 1,827 15,412
- ------------------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE
1 year or less 21,340 90 61 372 21,863
1-5 years 18,815 1,817 3,119 2,577 26,328
After 5 years 3,816 377 2,134 29 6,356
- ------------------------------------------------------------------------------------------------------------------------------------
Total 43,971 2,284 5,314 2,978 54,547
- ------------------------------------------------------------------------------------------------------------------------------------
Total $53,961 2,628 8,565 4,805 69,959
- ------------------------------------------------------------------------------------------------------------------------------------
T-14 Financial Tables
Table 11
INTEREST-ONLY AND RESIDUAL CERTIFICATES
December 31, 1998
--------------------------------------------------------------------------------------
Home
Equity
Home Credit Lines of
(In millions) Equity (a) SBA Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
ACTIVITY
Balance, December 31, 1997 $ 172 - 20 46 38 14
Originated residual interests 245 - 10 - 254 6
Purchased residual interests 823 188 82 - - -
Net accretion (amortization) (65) (13) 4 (26) (143) (8)
Net gain (loss) (39) - 3 (4) 10 -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 1,136 175 119 16 159 12
- ------------------------------------------------------------------------------------------------------------------------------------
Home
Home Equity Equity
----------------------------- Lines of
Fixed Variable Credit
Rate Rate SBA Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
VALUATION ESTIMATES
Discount rate 11.00 % 11.00 11.00 9.50 11.00 10.05 11.00
Prepayment rate CPR-26.00 % CPR-37.00 CPR-12.80 CPR-5.00 ABS-1.50 9 Months CPR-3.95
Weighted average life 34.2 months 24.4 months 50.3 months 70.7 months 14.5 months 9 Months 54 Months
Weighted average cumulative
net loss assumption 405 bps 438 371 20 244 349 270
Weighted average coupon rate 11.23 % 10.51 10.36 8.11 10.32 18.47 9.47
Excess annual spread 394 bps 351 292 179 311 641 247
- ------------------------------------------------------------------------------------------------------------------------------------
Home
Home Equity Equity
------------------------
Fixed Variable Credit Lines of
(Dollars in millions) Rate Rate SBA Student Auto Card Credit
- ------------------------------------------------------------------------------------------------------------------------------------
COLLATERAL DATA
Securitized principal serviced $ 9,372 3,268 666 2,724 776 3,708 226
Contractual delinquency ratios
30 - 59 days 2.51 % 2.76 1.23 3.62 2.47 10.25 0.37
60 - 89 days 1.00 0.98 0.41 1.47 0.84 0.70 0.07
90 - 179 days 1.18 0.80 1.29 2.13 0.71 1.02 0.17
180 - 359 days 0.98 0.83 1.17 0.85 0.10 - 0.14
Defaults
Foreclosures in process (b) 3.49 6.47 1.70 n/a n/a n/a -
Real estate owned 0.90 % 1.51 0.27 n/a n/a n/a 0.03
- ------------------------------------------------------------------------------------------------------------------------------------
(a) The December 31, 1998, Home Equity balance includes servicer advances of
$150 million, for which the corporation is the servicer.
(b) Foreclosures in process includes loans that are delinquent 360 days or more.
n/a - Data is not available or not meaningful.
Financial Tables T-15
Table 12
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year $ 1,847 2,212 2,308 2,259 2,259 2,171
Provision for loan losses 691 1,103 678 403 458 559
Allowance relating to loans acquired, transferred
to accelerated disposition or sold (74) (596) 50 193 82 197
Loan losses, net (638) (872) (824) (547) (540) (668)
- ----------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,826 1,847 2,212 2,308 2,259 2,259
- ----------------------------------------------------------------------------------------------------------------------
as % of loans, net 1.35 % 1.40 1.64 1.80 2.09 2.32
- ----------------------------------------------------------------------------------------------------------------------
as % of nonaccrual and restructured loans 246 % 211 241 252 228 142
- ----------------------------------------------------------------------------------------------------------------------
as % of nonperforming assets 217 % 186 211 201 170 111
- ----------------------------------------------------------------------------------------------------------------------
LOAN LOSSES
Commercial, financial and agricultural $ 281 172 221 187 276 357
Real estate - construction and other 15 49 98 64 123 127
Real estate - residential mortgage 27 54 60 97 123 174
Installment loans - Bankcard (a) 241 511 439 255 110 95
Installment loans - other and vehicle leasing 235 288 258 163 125 137
- ----------------------------------------------------------------------------------------------------------------------
Total 799 1,074 1,076 766 757 890
- ----------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 65 74 120 103 101 111
Real estate - construction and other 11 23 33 24 20 17
Real estate - residential mortgage 1 9 12 22 23 24
Installment loans - Bankcard 16 35 40 23 18 16
Installment loans - other and vehicle leasing 68 61 47 47 55 54
- ----------------------------------------------------------------------------------------------------------------------
Total 161 202 252 219 217 222
- ----------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 638 872 824 547 540 668
- ----------------------------------------------------------------------------------------------------------------------
as % of average loans, net (a) 0.48 % 0.65 0.64 0.45 0.53 0.72
- ----------------------------------------------------------------------------------------------------------------------
as % of average loans, net, excluding Bankcard (a) 0.32 % 0.31 0.35 0.27 0.46 0.66
- ----------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonaccrual loans
Commercial loans $ 362 384 324 514 569 797
Commercial real estate loans 67 135 218 - - -
Consumer real estate loans 184 233 240 - - -
Installment loans 128 124 123 131 - -
Real estate loans - - - 260 397 686
- ----------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 741 876 905 905 966 1,483
Restructured loans 1 2 14 11 27 106
Foreclosed properties 102 113 128 232 335 448
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 844 991 1,047 1,148 1,328 2,037
- ----------------------------------------------------------------------------------------------------------------------
as % of loans, net, and foreclosed properties 0.62 % 0.75 0.78 0.90 1.23 2.08
- ----------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90 days $ 385 326 474 445 350 294
- ----------------------------------------------------------------------------------------------------------------------
(a) Installment loans - Bankcard includes a 1996 one-time charge-off of $34
million related to an anticipated regulatory change that would reduce the period
delinquent loans could be held before charge-off. This amount is not included in
charge-off ratios.
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed herein or under the "Loans" or
"Asset Quality" discussions in Management's Analysis of Operations do not (i)
represent or result from trends or uncertainties that management expects will
materially affect future operating results, liquidity or capital resources, or
(ii) represent material credits about which management is aware of any
information that causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
T-16 Financial Tables
Table 13
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (a)
December 31,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -----------------
Loans Loans Loans Loans Loans
% to % to % to % to % to
Total Total Total Total Total
(In millions) Amt. Loans Amt. Loans Amt. Loans Amt. Loans Amt. Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural $ 724 39% $ 480 35 % $ 543 30 % $ 645 32 % $ 689 32 %
Real estate -
Construction and
other 34 2 44 2 90 3 102 3 106 2
Mortgage 103 22 149 31 284 34 405 36 403 39
Installment loans -
Bankcard 145 2 225 3 442 5 322 4 238 5
Other and vehicle
leasing 207 25 227 20 309 21 334 20 251 19
Lease financing 5 7 46 6 73 5 37 4 39 2
Foreign 12 3 49 3 39 2 60 1 44 1
Unallocated 596 - 627 - 432 - 403 - 489 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total $1,826 100% $1,847 100 % $2,212 100 % $2,308 100 % $2,259 100 %
- ------------------------------------------------------------------------------------------------------------------------------------
(a) See the "Loans" and the "Provision and Allowance for Loan Losses"
discussions in Management's Analysis of Operations and the "Allowance for Loan
Losses" discussion in Note 1of Notes to Consolidated Financial Statements.
Financial Tables T-17
Table 14
INTANGIBLE ASSETS
December 31,
----------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS
Goodwill $4,376 2,465 2,650 2,202 1,665 1,110
Deposit base premium 360 473 551 622 627 404
Other 300 10 15 19 29 40
- ------------------------------------------------------------------------------------------------------------------------------------
Total $5,036 2,948 3,216 2,843 2,321 1,554
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE AND OTHER
SERVICING ASSETS $ 637 427 284 209 135 95
- ------------------------------------------------------------------------------------------------------------------------------------
CREDIT CARD PREMIUM $ 14 24 35 46 62 82
- ------------------------------------------------------------------------------------------------------------------------------------
Table 15
DEPOSITS
December 31,
------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 35,614 31,005 29,713 27,706 24,542 24,976
Savings and NOW accounts 38,649 37,281 35,892 36,654 33,634 31,903
Money market accounts 22,762 21,240 21,193 18,719 19,284 20,455
Other consumer time 35,809 37,324 42,457 42,857 36,671 33,545
- ------------------------------------------------------------------------------------------------------------------------------------
Total core deposits 132,834 126,850 129,255 125,936 114,131 110,879
Foreign 3,487 3,928 3,307 4,720 5,916 2,254
Other time 6,146 6,299 3,867 3,456 2,592 2,616
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $142,467 137,077 136,429 134,112 122,639 115,749
- ------------------------------------------------------------------------------------------------------------------------------------
Table 16
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE (a)
- -------------------------------------------------------------------------------------------------------------------------------
December 31,1998
----------------------------
(In millions) Time Certificates
- -------------------------------------------------------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 4,555
Over 3 months through 6 months 2,387
Over 6 months through 12 months 2,593
Over 12 months 2,199
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 11,734
- --------------------------------------------------------------------------------------------------------------------------------
(a) There were no other time deposits in amounts of $100,000 or more at December
31, 1998.
T-18 Financial Tables
Table 17
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------
(In millions) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 13,603 13,972 11,358 10,085 7,854 6,216
Total capital 21,794 21,585 18,058 16,089 12,190 9,722
Adjusted risk-weighted assets 96,033 165,802 143,549 136,261 94,410 67,702
Adjusted leverage ratio assets $ 25,830 197,075 168,455 163,668 116,642 93,654
Ratios
Tier 1 capital 6.94 % 8.43 7.91 7.40 8.32 9.18
Total capital 11.12 13.02 12.58 11.81 12.91 14.36
Leverage 6.02 7.09 6.74 6.16 6.73 6.64
STOCKHOLDERS' EQUITY TO ASSETS (a)
Year-end 7.23 7.42 7.41 7.30 7.52 7.83
Average 7.25 % 7.36 7.35 7.56 7.92 7.51
- -----------------------------------------------------------------------------------------------------------------------
BANK CAPITAL RATIOS (b)
Tier 1 capital
First Union National Bank 7.48 % 6.97 6.43 6.46 7.32 8.24
First Union Bank of Delaware 11.44 11.83 13.61 25.45 - -
First Union Home Equity Bank 11.91 10.95 8.40 7.50 7.60 -
Total capital
First Union National Bank 10.38 10.20 10.20 10.15 10.69 11.35
First Union Bank of Delaware 12.82 13.09 14.87 26.74 - -
First Union Home Equity Bank 13.82 13.20 10.77 10.09 12.10 -
Leverage
First Union National Bank 6.69 6.02 5.95 5.72 6.10 5.52
First Union Bank of Delaware 6.96 6.24 10.60 17.20 - -
First Union Home Equity Bank 10.86 % 10.16 7.84 6.48 7.22 -
- -------------------------------------------------------------------------------------------------------------------------
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and a minimum ratio of total
capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of
tier 1 capital to adjusted average quarterly assets is from 3.00 to 5.00
percent. The 1993-1996 capital ratios presented herein are not restated to
reflect the Signet pooling of interests acquisition.
(b) By the end of 1998, all First Union bank affiliates were merged into First
Union National Bank , except those included herein. Accordingly, historical
information related to such affiliates is not presented, and historical ratios
for First Union National Bank are not restated.
Financial Tables T-19
Table 18
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
Maturity
December 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- ---------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 18,351 6.50 % 5.31 % 2.75 Converts floating rate loans to fixed
Carrying amount $ 41 rate. Adds to liability sensitivity.
Unrealized gross gain 397
Unrealized gross loss (14)
---------
Total 424
---------
Interest rate collars 6,100 - - 9.56 Converts floating rate loans to fixed
Carrying amount 124 rate when LIBOR is below 6.00
Unrealized gross gain 16 percent (purchased floor) or above
Unrealized gross loss (6) 7.03 percent (sold cap).
---------
Total 134
---------
Interest rate floors 994 - - 0.61 Converts floating rate loans to fixed
Carrying amount 6 rate when LIBOR is below 6.27
Unrealized gross gain 2 percent.
Unrealized gross loss -
---------
Total 8
---------
Other derivatives 463 - - 6.68 Includes interest rate caps and
Carrying amount 5 purchased options on forward
Unrealized gross gain - swaps that convert fixed rate assets
Unrealized gross loss (5) to floating rate with a weighted
average strike rate of 7.87 percent.
---------
Total -
- ------------------------------------------ ---------
Total asset rate
conversions $ 25,908 - - 4.34 $ 566
- ----------------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 8,898 6.65 % 5.41 % 5.21 Converts $6.0 billion of fixed rate
Carrying amount $ 27 long-term debt, $2.1 billion of
Unrealized gross gain 504 fixed rate bank notes and $800
Unrealized gross loss (32) million of fixed rate CDs to
variable rate.
---------
Total 499
---------
Other derivatives 170 - - 4.57 Includes primarily interest rate
Carrying amount 1 floors that offset corresponding
Unrealized gross gain - floors in floating rate long-term
Unrealized gross loss - debt.
---------
Total 1
- ------------------------------------------ ---------
Total liability rate
conversions $ 9,068 - - 5.20 $ 500
- ----------------------------------------------------------------------------------------------
(Continued)
T-20 Financial Tables
Table 18
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
Maturity
December 31, 1998 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- ------------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Basis swaps $ 785 5.56 % 4.94 % 8.06 Converts LIBOR reset rates on pay
Carrying amount $ - variable swaps under asset rate
Unrealized gross gain - conversions to commercial paper
Unrealized gross loss - rates.
--------
Total -
--------
Interest rate caps 12,169 - - 1.32 $10.0 billion locks in reset rates on
Carrying amount 34 pay variable swaps under asset rate
Unrealized gross gain - conversions when LIBOR is above
Unrealized gross loss (29) 6.26 percent. $2.1 billion locks in
1-year CMT rates at 5.70 percent
to cap pay variable swaps under
liability rate conversions.
--------
Total 5
--------
Long eurodollar futures 1,500 6.63 - 0.46 Converts floating rate LIBOR-
Carrying amount - based loans to fixed rate. Adds to
Unrealized gross gain 6 liability sensitivity. $500 million
Unrealized gross loss - effective March, June and
September 1999.
--------
Total 6
- ------------------------------------------ --------
Total rate sensitivity
hedges $ 14,454 - - 1.60 $ 11
- ----------------------------------------------------------------------------------------------
Financial Tables T-21
Table 18
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- ------------------------------------------------------------------------------------------------------------------------------------
ASSET RATE
CONVERSIONS
Interest rate swaps $ 17,121 6.50 % 5.94 % 3.58
Carrying amount $ 13 Converts floating rate loans to
Unrealized gross gain 202 fixed rate. Adds to liability
Unrealized gross loss (14) sensitivity.
----------
Total 201
----------
Other derivatives 593 - - 1.58 Includes primarily interest rate
Carrying amount 3 floors that convert floating rate
Unrealized gross gain 2 loans to fixed rate when LIBOR is
Unrealized gross loss (1) below 6.06 percent.
----------
Total 4
- ------------------------------------------ ----------
Total asset rate
conversions $ 17,714 - - 3.52 $ 205
- ------------------------------------------------------------------------------------------------
LIABILITY RATE
CONVERSIONS
Interest rate swaps $ 11,086 6.77 % 6.24 % 6.93 Converts $7.0 billion of fixed rate
Carrying amount $ 19 long-term debt, $2.0 billion of
Unrealized gross gain 315 deposits, $1.1 billion of fixed
Unrealized gross loss (19) rate CDs and $1.0 billion of fixed
rate bank notes to floating rate.
----------
Total 315
----------
Interest rate floors 336 - - 2.67 Offsets corresponding floors in
Carrying amount 1 floating rate liabilities. The
Unrealized gross gain - weighted average strike rate is
Unrealized gross loss (1) 4.65 percent.
----------
Total -
- ------------------------------------------ ----------
Total liability rate
conversions $ 11,422 - - 6.81 $ 315
- ------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES
Put options on forward swaps $ 725 - % -% 0.95 Right to terminate $725 million of
Carrying amount $ 5 forward interest rate swaps based
Unrealized gross gain - on interest rates in effect in
Unrealized gross loss - December 1998.
----------
Total 5
----------
Call options on forward swaps 200 - - 6.70 Includes primarily call options
Carrying amount 3 that provide the right to execute
Unrealized gross gain 1 interest rate swaps to convert
Unrealized gross loss - long-term fixed rate debt to
floating rate.
----------
Total 4
----------
Interest rate caps 2,967 - - 4.24 $2.6 billion locks in floating rate
Carrying amount 32 liabilities at a strike rate of
Unrealized gross gain - 6.04 percent. $158 million locks in
Unrealized gross loss (1) reset rates on pay variable swaps
when LIBOR is above 7.03 perent.
----------
- ---------------------------------
Total 31
- --------------------------------- ----------
(Continued)
T-22 Financial Tables
Table 18
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted
Average Rate (b) Estimated
---------------------- --------------------
Maturity
December 31, 1997 Notional In Fair
(In millions) Amount Receive Pay Years (c) Value (d) Comments
- ------------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY
HEDGES (continued)
Interest rate floors 625 - - 1.40 Right to recieve a fixed rate if
Carrying amount 2 LIBOR is below 7.13 percent.
Unrealized gross gain 6
Unrealized gross loss -
--------
Total 8
--------
Short futures 12,977 - 6.10 0.40 $12.9 billion of eurodollar futures
Carrying amount - locks in LIBOR reset rates on pay
Unrealized gross gain - variable rate swaps. $56 million of
Unrealized gross loss (10) Deutschemark futures locks in 3-
month Deutschemark funding
levels in March 1998.
--------
Total (10)
--------
Long eurodollar futures 2,468 6.47 - 1.13 Converts floating rate LIBOR-based
Carrying amount - loans to fixed rate.
Unrealized gross gain 4
Unrealized gross loss -
--------
--------
Total 4
--------
Call options on eurodollar
futures 768 - - 0.46 Right to buy eurodollar futures
Carrying amount - which convert floating rate LIBOR-
Unrealized gross gain 2 based loans to fixed rate.
Unrealized gross loss -
--------
--------
Total 2
--------
Other derivatives 150 - - 2.39 Primarily includes a CMT floor that
Carrying amount 1 offsets the decline in value of
Unrealized gross gain 1 mortgage servicing assets in a
Unrealized gross loss - falling rate environment.
--------
Total 2
- ------------------------------------------ --------
Total rate sensitivity
hedges $ 20,880 - - 1.14 $ 46
- ----------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Weighted average receive rates are fixed rates set at the time the contract
was transacted. Weighted average pay rates are generally based on one-to-six
month LIBOR, and they are pay rates in effect as of December 31, 1998 and 1997.
(c) Estimated maturity approximates average life.
(d) Carrying amount includes accrued interest receivable or payable and
unamortized premiums paid or received.
Financial Tables T-23
Table 19
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 4,569 9,779 3,664 7,496 400 25,908
Weighted average receive rate (b) 6.77 % 6.58 6.27 6.32 6.65 6.50
Estimated fair value $ 57 218 99 142 50 566
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 1,587 493 1,954 4,879 155 9,068
Weighted average receive rate (b) 6.37 % 6.33 6.57 6.74 6.31 6.61
Estimated fair value $ 41 5 95 349 10 500
- ---------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 11,426 - 2,243 785 - 14,454
Weighted average receive rate (b) 6.63 % - - 5.56 - 6.27
Estimated fair value $ 7 - 4 - - 11
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount $ 1,747 1,561 11,167 3,237 2 17,714
Weighted average receive rate (b) 5.90 % 6.49 6.58 6.53 6.80 6.48
Estimated fair value $ (8) 14 170 29 - 205
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount $ 2,643 927 2,462 3,502 1,888 11,422
Weighted average receive rate (b) 5.98 % 7.06 6.87 6.79 7.29 6.71
Estimated fair value $ (9) 18 77 125 104 315
- ---------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount $ 15,022 2,185 3,137 436 100 20,880
Weighted average receive rate (b) 6.59 % 6.65 6.30 7.94 7.72 6.66
Estimated fair value $ (7) 9 32 12 - 46
- ---------------------------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Weighted average receive rates include the impact of interest rate options.
T-24 Financial Tables
Table 20
OFF-BALANCE SHEET DERIVATIVES ACTIVITY (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Liability Rate
Rate Rate Sensitivity
(In millions) Conversions Conversions Hedges Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 24,862 13,161 48,832 86,855
Additions 4,905 2,435 41,765 49,105
Maturities/Amortizations (11,553) (3,147) (55,730) (70,430)
Terminations/Redesignations (500) (1,027) (13,987) (15,514)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 17,714 11,422 20,880 50,016
Additions 11,422 1,361 10,775 23,558
Maturities/Amortizations (3,413) (2,348) (15,794) (21,555)
Terminations/Redesignations 185 (1,367) (1,407) (2,589)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 25,908 9,068 14,454 49,430
- -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
Table 21
INTEREST DIFFERENTIAL
- ------------------------------------------------------------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------- ---------------------------------
Interest Interest
Income/ Variance Income/ Variance
Expense Attributable to (b) Expense Attributable to (b)
---------------------- ----------------------
(In millions) Variance Rate Volume Variance Rate Volume
- ------------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest-bearing bank balances $ (48) 1 (49) 52 1 51
Federal funds sold and securities
purchased under resale agreements 227 (46) 273 22 15 7
Trading account assets (a) 214 (9) 223 21 (3) 24
Securities available for sale (a) 899 (63) 962 (26) 44 (70)
Investment securities (a)
U.S. Government and other (58) (5) (53) (62) 10 (72)
State, county and municipal (17) 5 (22) (27) - (27)
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities (75) - (75) (89) 10 (99)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans (a) (573) (462) (111) 605 134 471
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 644 (579) 1,223 585 201 384
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Deposits 168 153 15 117 100 17
Short-term borrowings 776 (45) 821 132 56 76
Long-term debt 199 (36) 235 168 30 138
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,143 72 1,071 417 186 231
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ (499) (651) 152 168 15 153
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Yields related to securities and loans exempt from federal and state income
taxes are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates. Lease financing amounts include related
deferred income taxes.
(b) Changes attributable to rate/volume are allocated to both rate and volume on
an equal basis.
Financial Tables T-25
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1998 YEAR 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 $ 2,331 134 5.76 % $ 3,184 182 5.68 %
Federal funds sold and securities
purchased under resale agreements 12,381 626 5.06 7,219 399 5.51
Trading account assets (a) (d) 8,598 555 6.46 5,174 341 6.59
Securities available for sale (a) (d) 35,177 2,322 6.60 20,844 1,423 6.83
Investment securities (a) (d)
U.S. Government and other 1,727 121 6.99 2,478 179 7.22
State, county and municipal 867 88 10.12 1,085 105 9.67
- --------------------------------------------------------------------------- --------------------
Total investment securities 2,594 209 8.04 3,563 284 7.97
- --------------------------------------------------------------------------- --------------------
Loans (a) (b) (d)
Commercial
Commercial, financial and agricultural 50,080 3,926 7.84 43,118 3,464 8.03
Real estate - construction and other 2,912 245 8.42 3,295 293 8.89
Real estate - mortgage 9,663 821 8.50 13,619 1,180 8.67
Lease financing 4,454 502 11.28 4,199 423 10.09
Foreign 4,297 287 6.68 3,349 215 6.43
- --------------------------------------------------------------------------- --------------------
Total commercial 71,406 5,781 8.10 67,580 5,575 8.25
- --------------------------------------------------------------------------- --------------------
Retail
Real estate - mortgage 26,114 1,968 7.54 31,241 2,426 7.77
Installment loans - Bankcard (c) 3,634 566 15.56 7,005 1,058 15.11
Installment loans - other and
vehicle leasing 32,081 2,944 9.18 28,691 2,773 9.66
- --------------------------------------------------------------------------- --------------------
Total retail 61,829 5,478 8.86 66,937 6,257 9.35
- --------------------------------------------------------------------------- --------------------
Total loans 133,235 11,259 8.45 134,517 11,832 8.80
- --------------------------------------------------------------------------- --------------------
Total earning assets 194,316 15,105 7.77 174,501 14,461 8.29
--------------------------- ------------------------
Cash and due from banks 9,132 8,695
Other assets 19,024 12,897
- ------------------------------------------------------------- ---------
Total assets $ 222,472 $ 196,093
- ------------------------------------------------------------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 34,917 937 2.68 33,104 898 2.71
Money market accounts 24,130 837 3.47 24,033 694 2.89
Other consumer time 37,291 1,987 5.33 39,752 2,067 5.20
Foreign 3,041 156 5.14 3,092 164 5.29
Other time 6,342 399 6.29 5,377 325 6.05
- --------------------------------------------------------------------------- --------------------
Total interest-bearing deposits 105,721 4,316 4.08 105,358 4,148 3.94
Federal funds purchased and securities
sold under repurchase agreements 33,121 1,676 5.06 22,759 1,147 5.04
Commercial paper 1,954 102 5.23 1,948 112 5.76
Other short-term borrowings 11,109 595 5.36 5,680 338 5.96
Long-term debt 16,268 1,022 6.28 12,596 823 6.53
- --------------------------------------------------------------------------- --------------------
Total interest-bearing liabilities 168,173 7,711 4.59 148,341 6,568 4.43
--------------------------- ------------------------
Noninterest-bearing deposits 30,609 27,489
Other liabilities 7,553 5,823
Stockholders' equity 16,137 14,440
- ------------------------------------------------------------- ---------
Total liabilities and
stockholders' equity $ 222,472 $ 196,093
- ------------------------------------------------------------- ---------
Interest income and rate earned $ 15,105 7.77 % 14,461 8.29 %
Interest expense and equivalent rate paid 7,711 3.96 6,568 3.76
- ------------------------------------------------------------------------------------------ ------------------------
Net interest income and margin $ 7,394 3.81 % 7,893 4.53 %
- ------------------------------------------------------------------------------------------ ------------------------
(a) Yields related to securities and loans exempt from federal and state income
taxes are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates. Lease financing amounts include related
deferred income taxes. (b) The loan averages are stated net of unearned income,
and the averages include loans on which the accrual of interest has been
discontinued .
T-26 Financial Tables
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1996 YEAR ENDED 1995 YEAR ENDED 1994
- --------------------------------------- ------------------------------------------ ---------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid Balances Expense Paid
- -----------------------------------------------------------------------------------------------------------------------------------
2,298 130 5.67 % $ 2,439 150 6.15 % $ 2,896 136 4.70 %
7,104 377 5.32 3,231 179 5.55 1,680 69 4.14
4,811 320 6.64 2,294 158 6.90 1,294 77 5.97
21,869 1,449 6.62 14,690 948 6.45 14,708 816 5.55
3,497 241 6.89 10,470 688 6.58 11,451 670 5.85
1,370 132 9.64 2,050 202 9.83 2,464 245 9.97
- -------------------------- ---------------------------- ------------------------
4,867 373 7.66 12,520 890 7.11 13,915 915 6.58
- -------------------------- ---------------------------- ------------------------
40,089 3,285 8.20 38,493 3,265 8.48 32,173 2,585 8.03
3,562 302 8.48 3,077 315 10.24 2,606 225 8.64
14,230 1,283 9.02 15,246 1,483 9.73 14,554 1,252 8.60
3,124 264 8.44 2,453 209 8.52 1,326 120 9.06
2,144 136 6.33 1,453 102 7.05 1,145 62 5.39
- -------------------------- ---------------------------- ------------------------
63,149 5,270 8.35 60,722 5,374 8.85 51,804 4,244 8.19
- -------------------------- ---------------------------- ------------------------
32,856 2,514 7.65 29,426 2,190 7.44 25,411 1,802 7.09
6,478 922 14.24 6,366 902 14.17 4,321 562 13.00
26,637 2,521 9.47 24,731 2,386 9.65 19,299 1,784 9.25
- -------------------------- ---------------------------- ------------------------
65,971 5,957 9.03 60,523 5,478 9.05 49,031 4,148 8.46
- -------------------------- ---------------------------- ------------------------
129,120 11,227 8.70 121,245 10,852 8.95 100,835 8,392 8.32
- -------------------------- ---------------------------- ------------------------
170,069 13,876 8.16 156,419 13,177 8.42 135,328 10,405 7.69
------------------------- -------------------------- ------------------------
8,620 8,306 7,844
10,596 9,257 7,072
- -------------- ------------- ----------
189,285 $ 173,982 $ 150,244
- -------------- ------------- ----------
33,360 828 2.48 33,781 824 2.44 30,835 604 1.96
22,179 622 2.80 20,654 633 3.06 21,006 496 2.36
42,226 2,198 5.21 40,766 2,112 5.18 33,209 1,384 4.17
3,307 167 5.07 4,284 237 5.53 2,800 121 4.30
3,853 216 5.60 3,437 210 6.11 2,543 121 4.77
- -------------------------- ---------------------------- ------------------------
104,925 4,031 3.84 102,922 4,016 3.90 90,393 2,726 3.02
22,815 1,133 4.97 14,599 831 5.69 10,960 470 4.28
1,865 98 5.27 2,104 123 5.83 1,607 67 4.19
4,228 234 5.53 3,376 202 6.00 2,050 109 5.30
10,443 655 6.27 8,334 560 6.72 6,049 367 6.07
- -------------------------- ---------------------------- ------------------------
144,276 6,151 4.26 131,335 5,732 4.36 111,059 3,739 3.37
------------------------- -------------------------- ------------------------
26,351 24,822 23,322
4,753 4,669 3,964
13,905 13,156 11,899
- -------------- ------------- ----------
189,285 $ 173,982 $ 150,244
- -------------- ------------- ----------
$ 13,876 8.16 % $ 13,177 8.42 % $ 10,405 7.69 %
6,151 3.61 5,732 3.66 3,739 2.76
------------------------- -------------------------- ------------------------
$ 7,725 4.55 % $ 7,445 4.76 % $ 6,666 4.93 %
------------------------- -------------------------- ------------------------
(c) Installment loans - Bankcard include credit card, ICR, signature and First
Choice. (d) Tax-equivalent adjustments included in trading account assets,
securities available for sale, investment securities, commercial, financial and
agricultural loans, commercial real estate - mortgage loans, and lease financing
are (in millions): $9, $18, $27, $49, $0 and $14, respectively, in 1998; $5,
$11, $38, $32, $8 and $5, respectively, in 1997; and $10, $14, $48, $35, $8 and
$3, respectively, in 1996.
Financial Tables T-27
FIRST UNION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Management of First Union Corporation and its subsidiaries (the
"Corporation") is committed to the highest standards of quality customer service
and the enhancement of stockholder value. Management expects the Corporation's
employees to respect its customers and to assign the highest priority to
customer needs.
The accompanying consolidated financial statements were prepared in
conformity with generally accepted accounting principles and include, as
necessary, best estimates and judgments by management. Other financial
information contained in this annual report is presented on a basis consistent
with the consolidated financial statements unless otherwise indicated.
To ensure the integrity, objectivity and fairness of the information in
these consolidated financial statements, management of the Corporation has
established and maintains internal controls supplemented by a program of
internal audits. The internal control is designed to provide reasonable
assurance that assets are safeguarded and transactions are executed, recorded
and reported in accordance with management's intentions and authorizations and
to comply with applicable laws and regulations. To enhance the reliability of
internal control, management recruits and trains highly qualified personnel, and
maintains sound risk management practices.
The consolidated financial statements have been audited by KPMG LLP,
independent auditors, in accordance with generally accepted auditing standards.
KPMG LLP reviews the results of its audit with both management and the Audit
Committee of the Board of Directors of the Corporation. The Audit Committee,
composed entirely of outside directors, meets periodically with management,
internal auditors and KPMG LLP to determine that each is fulfilling its
responsibilities and to support actions to identify, measure and control risks
and augment internal controls.
/s/ Edward E. Crutchfield
- -------------------------
Edward E. Crutchfield
Chairman and
Chief Executive Officer
/s/ Robert T. Atwood
- --------------------
Robert T. Atwood
Executive Vice President and
Chief Financial Officer
January 14, 1999
C-1 Statement of Responsibility
FIRST UNION CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
First Union Corporation
We have audited the consolidated balance sheets of First Union Corporation
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First Union
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- ------------------------
KPMG LLP
Charlotte, North Carolina
January 14, 1999
Independent Auditors' Report C-2
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
(In millions, except per share data) 1998 1997
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11,192 10,275
Interest-bearing bank balances 2,916 3,832
Federal funds sold and securities purchased under resale agreements 14,529 7,781
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 28,637 21,888
- ------------------------------------------------------------------------------------------------------------
Trading account assets 9,759 5,952
Securities available for sale (amortized cost $36,798 in 1998; $23,080 in 1997) 37,434 23,524
Investment securities (market value $2,162 in 1998; $3,670 in 1997) 2,025 3,526
Loans, net of unearned income ($4,026 in 1998; $3,636 in 1997) 135,383 131,687
Allowance for loan losses (1,826) (1,847)
- ------------------------------------------------------------------------------------------------------------
Loans, net 133,557 129,840
- ------------------------------------------------------------------------------------------------------------
Premises and equipment 5,067 4,863
Due from customers on acceptances 1,268 1,496
Other intangible assets 5,036 2,948
Other assets 14,580 11,698
Total assets $ 237,363 205,735
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 35,614 31,005
Interest-bearing deposits 106,853 106,072
- ------------------------------------------------------------------------------------------------------------
Total deposits 142,467 137,077
Short-term borrowings 41,438 31,681
Bank acceptances outstanding 1,281 1,496
Other liabilities 12,055 6,725
Long-term debt 22,949 13,487
- ------------------------------------------------------------------------------------------------------------
Total liabilities 220,190 190,466
- ------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, Class A, 40 million shares, no par value; 10 million shares,
no par value; none issued -- --
Common stock, $3.33-1/3 par value; authorized 2 billion shares, outstanding
982 million shares in 1998; 961 million shares in 1997 3,274 3,203
Paid-in capital 4,305 1,582
Retained earnings 9,187 10,198
Accumulated other comprehensive income, net 407 286
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,173 15,269
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 237,363 205,735
- ------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
C-3 Audited Financial Statements
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
(In millions, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 11,196 11,787 11,181
Interest and dividends on securities available for sale 2,304 1,412 1,435
Interest and dividends on investment securities
Taxable income 120 176 238
Nontaxable income 62 70 87
Trading account interest 546 336 310
Other interest income 760 581 507
- --------------------------------------------------------------------------------------------------------------
Total interest income 14,988 14,362 13,758
- --------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,316 4,148 4,031
Interest on short-term borrowings 2,373 1,597 1,465
Interest on long-term debt 1,022 823 655
- --------------------------------------------------------------------------------------------------------------
Total interest expense 7,711 6,568 6,151
- --------------------------------------------------------------------------------------------------------------
Net interest income 7,277 7,794 7,607
Provision for loan losses 691 1,103 678
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,586 6,691 6,929
- --------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trading account profits 123 252 162
Service charges on deposit accounts 1,146 1,119 979
Mortgage banking income 412 256 205
Capital management income 1,720 1,078 782
Securities transactions 357 55 100
Fees for other banking services 260 263 280
Equipment lease rental income 176 187 112
Sundry income 2,361 1,112 915
- --------------------------------------------------------------------------------------------------------------
Total noninterest income 6,555 4,322 3,535
- --------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 3,567 2,909 2,649
Other benefits 683 641 628
- --------------------------------------------------------------------------------------------------------------
Personnel expense 4,250 3,550 3,277
Occupancy 561 544 546
Equipment 723 649 569
Advertising 223 141 100
Communications and supplies 480 393 394
Professional and consulting fees 311 386 403
Other intangible amortization 348 315 290
Merger-related and restructuring charges 1,212 284 421
Sundry expense 1,068 958 930
- --------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,176 7,220 6,930
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 3,965 3,793 3,534
Income taxes 1,074 1,084 1,261
- --------------------------------------------------------------------------------------------------------------
Net income 2,891 2,709 2,273
Dividends on preferred stock 9
- --------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,891 2,709 2,264
- --------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings $ 2.98 2.84 2.33
Diluted earnings 2.95 2.80 2.30
Cash dividends $ 1.58 1.22 1.10
AVERAGE COMMON SHARES (In thousands)
Basic 969,131 955,241 973,712
Diluted 980,112 966,792 982,755
- --------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Audited Financial Statements C-4
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
(Shares in thousands, Preferred Stock Common Stock Paid-in Retained Comprehensive
----------------------- ----------------------
dollars in millions) Shares Amount Shares Amount Capital Earnings Income, Net Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,388 $ 183 981,115 $ 3,270 1,479 8,643 207 13,782
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income -- -- -- -- -- 2,273 -- 2,273
Net unrealized loss on debt and
equity securities -- -- -- -- -- -- (178) (178)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- -- -- -- 2,273 (178) 2,095
Redemption of preferred
stock (433) (109) -- -- -- -- -- (109)
Purchase of common stock
primarily for purchase
accounting acquisitions -- -- (50,648) (167) (1,184) (233) -- (1,584)
Common stock issued for
stock options exercised -- -- 17,659 58 356 -- -- 414
Common stock issued
through dividend
reinvestment plan -- -- 2,250 8 54 -- -- 62
Common stock issued for
purchase accounting
acquisitions -- -- 31,994 106 1,096 (194) -- 1,008
Converted preferred stock (2,955) (74) 6,224 20 54 -- -- --
Cash dividends paid by
First Union Corporation
Preferred shares -- -- -- -- -- (9) -- (9)
$1.10 per common share -- -- -- -- -- (611) -- (611)
Acquired companies
Common shares -- -- -- -- -- (420) -- (420)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- -- 988,594 3,295 1,855 9,449 29 14,628
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income -- -- -- -- -- 2,709 -- 2,709
Net unrealized gain on debt and
equity securities -- -- -- -- -- -- 257 257
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- -- -- -- 2,709 257 2,966
Purchase of common stock -- -- (51,675) (172) (1,369) (819) -- (2,360)
Common stock issued for
stock options exercised -- -- 14,923 50 709 -- -- 759
Common stock issued
through dividend
reinvestment plan -- -- 1,525 5 51 -- -- 56
Common stock issued
through public offering -- -- 7,500 25 333 -- -- 358
Common stock issued for
purchase accounting
acquisitions -- -- 117 -- 3 -- -- 3
Cash dividends paid by
First Union Corporation
$1.22 per common share -- -- -- -- -- (711) -- (711)
Acquired companies
Common shares -- -- -- -- -- (430) -- (430)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- -- 960,984 3,203 1,582 10,198 286 15,269
- ------------------------------------------------------------------------------------------------------------------------------------
C-5 Audited Financial Statements
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
(Shares in thousands, Preferred Stock Common Stock Paid-in Retained Comprehensive
-------------------------------------------
dollars in millions) Shares Amount Shares Amount Capital Earnings Income, Net Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - -- 960,984 3,203 1,582 10,198 286 15,269
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income - -- -- -- -- 2,891 -- 2,891
Net unrealized gain on debt and
equity securities, net of
reclassification adjustment - -- -- -- -- -- 121 121
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income - -- -- -- -- 2,891 121 3,012
Purchase of common stock - -- (49,738) (165) (384) (2,507) -- (3,056)
Common stock issued for
stock options exercised - -- 19,271 64 787 -- -- 851
Common stock issued
through dividend
reinvestment plan - -- 1,476 4 77 -- -- 81
Common stock issued for
acquisitions - -- 50,230 168 2,243 129 -- 2,540
Cash dividends paid by
First Union Corporation
$1.58 per common share - -- -- -- -- (1,423) -- (1,423)
Acquired companies
Common shares - -- -- -- -- (101) -- (101)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 - $ -- 982,223 $ 3,274 4,305 9,187 407 17,173
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Audited Financial Statements C-6
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,891 2,709 2,273
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 249 40 37
Provision for loan losses 691 1,103 678
Securitization gains (529) (154) -
Gain on sale of mortgage servicing rights (22) (1) (49)
Securities available for sale transactions (353) (52) (96)
Investment security transactions (4) (3) (4)
Depreciation and amortization 1,058 922 779
Deferred income taxes 624 553 554
Trading account assets, net (380) (1,350) (2,067)
Mortgage loans held for resale (1,464) (964) (9)
(Gain) loss on sales of premises and equipment (11) 5 (3)
Gain on sale of segregated assets (7) (12)
Other assets, net (1,428) (646) 1,214
Other liabilities, net 3,090 933 (47)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,412 3,088 3,248
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 28,698 9,243 21,453
Maturities of securities available for sale 5,201 2,278 4,162
Purchases of securities available for sale (47,477) (15,374) (20,121)
Calls and underdeliveries of investment securities 387 4 10
Maturities of investment securities 1,480 1,500 2,328
Purchases of investment securities (366) (840) (663)
Origination of loans, net (2,106) (960) (3,102)
Sales of premises and equipment 475 160 60
Purchases of premises and equipment (1,139) (648) (1,148)
Other intangible assets, net (179) (44) (18)
Purchase of bank-owned separate account life insurance (359) (2,011) -
Cash equivalents acquired, net of purchases of banking organizations 366 6 (484)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (15,019) (6,686) 2,477
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net 5,139 620 (2,789)
Securities sold under repurchase agreements and other short-term borrowings, net 7,525 4,061 1,380
Issuances of long-term debt 11,493 3,676 3,652
Payments of long-term debt (3,153) (1,797) (1,922)
Sales of common stock 932 815 402
Redemption of preferred stock (109)
Purchases of common stock (3,056) (2,360) (1,584)
Cash dividends paid (1,524) (1,141) (1,040)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 17,356 3,874 (2,010)
- -------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 6,749 276 3,715
Cash and cash equivalents, beginning of year 21,888 21,612 17,897
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 28,637 21,888 21,612
- -------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 7,566 7,250 6,187
Income taxes 152 502 574
NONCASH ITEMS
Increase in securities available for sale - - 592
Increase (decrease) in investment securities 303
Increase in trading account assets and a decrease in loans 2,212 - -
Increase in assets available for sale and a decrease in loans 133 3,200 -
Increase in foreclosed properties and a decrease in loans 3 17 59
Conversion of preferred stock to common stock - - 74
Issuance of common stock for purchase accounting acquisitions $ 2,540 3 1,008
- -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
C-7 Audited Financial Statements
FIRST UNION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
First Union Corporation (the "Parent Company") is a bank holding company
whose principal wholly owned subsidiaries are First Union National Bank, a
national banking association; First Union Home Equity Bank, N.A., a national
banking association; First Union Capital Markets Corp., an investment banking
firm; First Union Mortgage Corporation, a mortgage banking firm; and First Union
Brokerage Services, Inc., a securities brokerage firm.
The accounting and reporting policies of First Union Corporation and
subsidiaries (the "Corporation") are in accordance with generally accepted
accounting principles, and they conform to general practices within the
applicable industries. The consolidated financial statements include accounts of
the Parent Company and all its subsidiaries. In consolidation, all significant
intercompany accounts and transactions are eliminated. Certain amounts for 1997
and 1996 were reclassified to conform with the presentation for 1998. These
reclassifications have no effect on stockholders' equity or net income as
previously reported.
The Corporation is a diversified financial services company with principal
operations in Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and
Washington, D.C. Its foreign banking operations are immaterial.
Management of the Corporation has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks,
interest-bearing bank balances and federal funds sold and securities purchased
under resale agreements. Generally, both cash and cash equivalents have
maturities of three months or less, and accordingly, the carrying amount of such
instruments is deemed to be a reasonable estimate of fair value.
SECURITIES PURCHASED AND SOLD AGREEMENTS
Securities purchased under resale agreements and securities sold under
repurchase agreements are generally accounted for as collateralized financing
transactions. They are recorded at the amount at which the securities were
acquired or sold plus accrued interest. It is the Corporation's policy to take
possession of securities purchased under resale agreements, which are primarily
U. S. Government and Government agency securities. The market value of these
securities is monitored, and additional securities are obtained when deemed
appropriate. The Corporation also monitors its exposure with respect to
securities sold under repurchase agreements, and a request for the return of
excess securities held by the lender is made when deemed appropriate.
SECURITIES
The classification of securities is determined at the date of commitment
or purchase. Gains or losses on the sale of securities are recognized on a
specific identification, trade date basis.
Trading account assets, primarily debt securities; trading derivatives,
which include interest rate futures, options, caps, floors and forward
contracts; and securities sold not owned are recorded at fair value. Realized
and unrealized gains and losses resulting from such fair value adjustments and
from recording the results of sales of trading account assets are included in
trading account profits.
Securities available for sale, primarily debt securities, are recorded at
market value with a corresponding adjustment net of tax recorded as a component
of other comprehensive income. Securities available for sale are used as a part
of the Corporation's interest rate risk management strategy, and they may be
sold in response to changes in interest rates, changes in prepayment risk and
other factors.
Investment securities, primarily debt securities, are stated at cost, net
of the amortization of premium and the accretion of discount. The Corporation
has the intent and the ability to hold such securities until maturity.
The market value of securities is generally based on quoted market prices
or dealer quotes. If a quoted market price is not available, market value is
estimated using quoted market prices for similar securities.
Audited Financial Statements C-8
DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Swaps, Floors and Caps
The Corporation uses interest rate swaps, floors and caps for interest
rate risk management, in connection with providing risk management services to
customers and for trading for its own account. Interest rate swaps, floors and
caps used to achieve interest rate risk management objectives are designated as
hedges of specific assets and liabilities. The fair value of the swaps, floors
and caps are not recognized in the consolidated financial statements. These
hedges are designed to be effective hedges, and if determined to be ineffective,
they are transferred to trading account assets. The net interest payable or
receivable on swaps, floors and caps is accrued and recognized as an adjustment
to interest income or interest expense of the related asset or liability. Under
certain circumstances, floors and caps are written to adjust the amount or term
of purchased floors and caps to more effectively reduce interest rate risk;
however, to qualify for hedge accounting, the resulting instrument must be a net
purchased option. Net premiums paid on floors and caps are amortized over the
term of the floors and caps as a yield adjustment of the related asset or
liability.
On the early termination of swaps, floors and caps, the net proceeds
received or paid, including premiums, are deferred and included in other assets
or liabilities, and they are amortized over the shorter of the remaining
contract life or the maturity of the related asset or liability. On disposition
or settlement of a hedged asset or a liability, hedge accounting for the related
derivatives is discontinued and any deferred amount is recognized in earnings.
Interest rate swaps, floors and caps entered into for trading purposes or
sold to customers are recorded at fair value, and realized and unrealized gains
and losses are recorded in trading account profits. The fair value of these
financial instruments represents the estimated amount the Corporation would
receive or pay to terminate the contracts or agreements, and it is determined
using a valuation model that considers current market yields, quoted prices and
other relevant data.
Interest Rate Futures, Forward and Option Contracts
The Corporation uses interest rate futures, forward and option contracts
for interest rate risk management and in connection with hedging interest rate
products sold to customers.
Interest rate futures and option contracts are used to hedge interest rate
risk arising from specific assets or liabilities. They are expected to reduce
overall interest rate risk, and they have been and are expected to be highly
correlated with the interest rate risk of the hedged items. Gains and losses on
interest rate futures are deferred and included in the carrying value of the
related asset or liability, and they are amortized over the estimated life of
the asset or liability as a yield adjustment. Premiums paid for option contracts
are included in other assets, and they are amortized over the option term as a
yield adjustment of the related asset or liability. On the early termination of
futures contracts, the deferred amounts are amortized over the remaining
maturity of the related asset or liability. On disposition or settlement of the
asset or liability being hedged, hedge accounting is discontinued and any
deferred amount is recognized in earnings. Interest rate futures and forwards
that do not reduce overall interest rate risk or that are not highly correlated
are transferred to trading account assets.
Interest rate futures, forward and option contracts used to hedge risk
management products sold to customers are recorded at fair value, and the
realized and unrealized gains and losses are recorded in trading account
profits. The fair value of these financial instruments is based on dealer or
exchange quotes.
LOANS
Commercial, financial and agricultural loans include industrial revenue
bonds, highly leveraged transaction loans and certain other loans that are made
primarily on the strength of the borrower's general credit standing and ability
to generate repayment cash flows from income sources even though such bonds and
loans may be secured by real estate or other assets. Commercial real estate
construction and mortgage loans represent interim and permanent financing of
commercial properties that are secured by real estate. Retail real estate
mortgage loans represent 1-4 family first mortgage loans. Bankcard installment
loans include credit card, instant cash reserve, signature and First Choice
unsecured revolving lines of credit. Retail installment loans include all other
consumer loans, including home equity and second mortgage loans.
Loans held for sale or securitization are valued at the lower of cost or
market value as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis. Gains or
losses resulting from sales of loans are recognized when the proceeds are
received from investors.
C-9 Audited Financial Statements
In many lending transactions, collateral is required to provide an
additional measure of security. Generally, the cash flow or earning power of the
borrower represents the primary source of repayment, and collateral liquidation
is a secondary source of repayment. The Corporation determines the need for
collateral on a case-by-case or product-by-product basis. Factors considered
include the current and prospective creditworthiness of the customer, terms of
the instrument and economic conditions.
Unearned income is generally accreted to interest income using the
constant yield method. Interest income is recorded on an accrual basis.
A loan is considered to be impaired when based on current information, it
is probable the Corporation will not receive all amounts due in accordance with
the contractual terms of a loan agreement. Discounted cash flows using stated
loan rates or the estimated collateral fair value are used in determining the
fair value of impaired loans.
When the ultimate collectibility of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent any interest has been foregone, and
then they are recorded as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after January 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest in accordance with
the terms of the restructured loan agreement.
The accrual of interest is generally discontinued on all loans, except
consumer loans, that become 90 days past due as to principal or interest unless
collection of both principal and interest is assured by way of
collateralization, guarantees or other security. Generally, loans past due 180
days or more are placed on nonaccrual status regardless of security. Consumer
loans and bankcard products that become approximately 120 days and 180 days past
due, respectively, are generally charged to the allowance for loan losses. When
borrowers demonstrate over an extended period the ability to repay a loan in
accordance with the contractual terms of a loan the Corporation has classified
as nonaccrual, such loan is returned to accrual status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is the amount considered adequate to cover
probable credit losses inherent in the loan portfolio. The Corporation's
methodology for determining the allowance for loan losses establishes both an
allocated and unallocated component. The allocated portion of the allowance
represents the allowance needed for specific loans and specific portfolios. The
allocated portion of the allowance for commercial loans is based principally on
current loan grades, historical loan loss rates, borrowers' creditworthiness, as
well as analyses of other factors that affect the portfolio. The Corporation
analyzes all loans in excess of $1 million that are being monitored as potential
credit problems to determine whether, given borrowers' collateral values and
cash flows, supplemental, specific reserves are necessary. The allocated portion
of the allowance for consumer loans is based principally on delinquencies and
historical and projected loss rates. The unallocated portion of the
Corporation's allowance for loan losses represents the results of other
analyses, which are intended to ensure the allowance is adequate for other
probable losses inherent in Corporation's portfolio. These analyses include
consideration of changes in credit risk resulting from the changing underwriting
criteria, including acquired loan portfolios, changes in the types and mix of
loans originated, industry concentrations and evaluations, allowance levels
relative to selected, overall credit criteria and other loss predictive economic
indicators.
Management believes the allowance for loans losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's bank subsidiaries'
allowances for loans losses. These agencies may require such subsidiaries to
recognize changes to the allowance based on their judgments about information
available to them at the time of their examination.
EQUITY METHOD INVESTMENTS
The Corporation recognizes gain or loss on transactions where a subsidiary
or an equity method investee issues common stock. Recognition of a gain is
subject to a determination that the gain is realizable and that there are no
plans to reacquire the shares.
Audited Financial Statements C-10
INTANGIBLE ASSETS
Generally, goodwill is amortized on a straight-line basis over periods
ranging from 15 to 25 years. The Corporation's unamortized goodwill is
periodically reviewed to ensure that there are no conditions that exist
indicating that the recorded amount of goodwill is not recoverable from future
undiscounted cash flows. The review process includes an evaluation of the
earnings history of each subsidiary, its contribution to the Corporation,
capital levels and other factors. If events or changes in circumstances indicate
further evaluation is warranted, the undiscounted net cash flows of the
operations to which goodwill relates are estimated. If the estimated
undiscounted net cash flows are less than the carrying amount of goodwill, a
loss is recognized to reduce the carrying value of goodwill to fair value, and
when appropriate, the amortization period is also reduced. Unamortized goodwill
associated with disposed assets is charged to current earnings. Credit card
premiums are amortized principally over the estimated period of benefit not to
exceed 10 years using the sum-of-the-years' digits method. Deposit base premiums
are amortized principally over a 10-year period using accelerated methods. When
deposits are sold, any related unamortized deposit base intangible is included
in the determination of the gain on the sale of the deposits. If any events or
circumstances indicate that the unamortized balance of all or a portion of the
deposit base intangible is impaired, an analysis is performed, and if the fair
value is less than the recorded balance, the difference is charged to
noninterest expense.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
The Corporation records the securitization or transfer of assets as sales
when the assets securitized or transferred have been isolated from the
Corporation, the transferee obtains the unconditional right to pledge or
exchange the assets, the Corporation is not entitled to and/or obligated to
repurchase the assets and the transferee is a qualifying special purpose entity.
Transfers not meeting these criteria are generally treated as secured
borrowings. Gains or losses on the securitization or transfer of assets
determined to be sales are based on the fair value of the assets obtained and
liabilities assumed less the carrying value of the assets sold. Any servicing
assets, interest-only certificates, residual certificates or other interests
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 the Corporation, 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 as applicable. Gains or losses
resulting from the securitization or transfer of assets are recorded in
noninterest income. Retained residual interests subject to prepayment risk are
recorded as trading account assets or as securities available for sale.
Servicing assets and liabilities are included in other assets and other
liabilities, and they are amortized to noninterest income in proportion to net
servicing income.
Servicing assets, interest-only certificates, residual certificates and
other interests retained are periodically evaluated for impairment based on the
fair value of those assets. Fair values of servicing assets are estimated based
on market prices for similar assets and on the discounted estimated future net
cash flows based on market consensus loan prepayment estimates, historical
prepayment rates, interest rates and other economic factors. For purposes of
impairment evaluation, the servicing assets are stratified based on predominant
risk characteristics of the underlying loans, including loan type (conventional
or government), amortization type (fixed or adjustable), note rate, and in
certain instances, period of origination. To the extent the carrying value of
the servicing asset exceeds fair value by individual stratum, a valuation
allowance is established. Servicing assets amounted to $637 million and $427
million at December 31, 1998 and 1997, respectively.
Fair values of interest-only certificates, residual certificates and other
interests retained are based on a review of actual cash flows and on 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 at the
time the instrument was initially recorded. Based on this analysis, assumptions
are validated or revised as deemed necessary, the amounts and the timing of cash
flows are estimated and fair value is determined.
C-11 Audited Financial Statements
NOTE 2: ACQUISITIONS
In January 1998, the Corporation acquired Covenant Bancorp, Inc.
("Covenant"), which at December 31, 1997, had assets of $415 million, for 1.6
million shares of the Corporation's common stock, substantially all of which
were repurchased in the open market at a cost of $79 million. The Covenant
acquisition was accounted for as a purchase. Also in January 1998, the
Corporation acquired Wheat First Butcher Singer, Inc. ("Wheat First "), which at
December 31, 1997, had assets of $1 billion and stockholders' equity of $171
million, for 10.3 million shares of the Corporation's common stock. The Wheat
First acquisition was accounted for as a pooling of interests. Financial
information related to Wheat First is not considered material to the historical
results of the Corporation, and accordingly, the Corporation's financial
statements were not restated.
On April 28, 1998, the Corporation acquired CoreStates Financial Corp
("CoreStates"), a multi-bank holding company based in Pennsylvania. The merger
was accounted for as a pooling of interests, and accordingly, all historical
financial information for the Corporation has been restated to include
CoreStates historical financial information as if the combining companies had
been consolidated for all periods presented herein. On such date, each of the
204 million shares of CoreStates' common stock was exchanged for 1.62 shares of
the Corporation's common stock and common stock equivalents. The consolidated
statements of changes in stockholders' equity reflect the accounts of the
Corporation as if the additional common stock had been issued for all periods
presented. At December 31, 1997, CoreStates had assets of $48 billion, net loans
of $35 billion, deposits of $34 billion, stockholders' equity of $3 billion and
net income applicable to common stockholders of $813 million.
On June 30, 1998, the Corporation acquired The Money Store Inc. ("TMSI"),
a consumer finance company, which at December 31, 1997, had assets of $3.1
billion, for 38 million shares of the Corporation's common stock, substantially
all of which were repurchased in the open market at a cost of $2 billion. With
respect to this purchase accounting acquisition, the Corporation recorded $1.9
billion of goodwill and an intangible asset related to TMSI's origination
network of $304 million. This was based on TMSI's closing equity of $489 million
and fair value adjustments, net of tax effects, related to certain interest-only
and residual certificates related to asset-backed securities issued by TMSI of
$207 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 $158 million. The estimated periods of future benefit
related to goodwill and to the network intangible are twenty-five years and
fifteen years, respectively.
Certain pro forma financial information related to the Corporation and
CoreStates, and which does not include information related to Covenant, Wheat
First or TMSI, is presented below.
Years Ended
December 31,
------------
(In millions, except per share data) 1997 1996
- ------------------------------------------------------------------------------------------------------------
(Unaudited)
Interest income $ 14,362 13,758
Interest expense 6,452 6,151
Provision for loan losses 1,103 678
Noninterest income 4,322 3,535
Noninterest expense 7,336 6,930
Income taxes 1,084 1,261
- ------------------------------------------------------------------------------------------------------------
Net income 2,709 2,273
Dividends on preferred stock - 9
- ------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,709 2,264
- ------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.84 2.33
Diluted earnings per share $ 2.80 2.30
- ------------------------------------------------------------------------------------------------------------
CORPORATION AS ORIGINALLY REPORTED
Net interest income $ 5,677 5,465
Net income 1,896 1,624
Net income applicable to common stockholders 1,896 1,615
Basic earnings per share 3.03 2.61
Diluted earnings per share $ 2.99 2.58
- ------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-12
On November 28, 1997, the Corporation acquired Signet Banking Corporation
("Signet"), a bank holding company based in Virginia. The merger was accounted
for as a pooling of interests, and accordingly, all historical financial
information for the Corporation has been restated to include Signet historical
information as if the combining companies had been consolidated for all periods
presented herein. At September 30, 1997, Signet had assets of $11 billion, net
loans of $7 billion, deposits of $8 billion and net income applicable to common
stockholders of $73 million. As a result of the merger, each of the 61 million
net outstanding shares of Signet common stock was converted into 1.10 shares of
the Corporation's common stock and common stock equivalents.
On January 1, 1996, the Corporation acquired First Fidelity Bancorporation
("First Fidelity"), a multi-bank holding company based in New Jersey. The merger
was accounted for as a pooling of interests, and accordingly, all historical
financial information for the Corporation has been restated to include First
Fidelity historical information for all periods presented herein. At December
31, 1995, First Fidelity had assets of $35 billion, net loans of $25 billion,
deposits of $28 billion and net income applicable to common stockholders of $398
million.
As a result of the merger, each of the 79 million net outstanding shares
of First Fidelity common stock was converted into 1.35 shares of the
Corporation's common stock and common stock equivalents. In addition, each of
the First Fidelity Series B Convertible Preferred Stock (3 million shares), the
First Fidelity Series D Adjustable Rate Cumulative Preferred Stock (350,000
shares) and the First Fidelity Depository Receipts (3 million shares, each
representing a 1/40th interest in a share of First Fidelity Series F 10.64%
Preferred Stock, or 74,130 net outstanding shares) were converted into like
securities of the Corporation, all of which were either converted into common
stock of the Corporation or redeemed by the end of 1996.
In 1996, the Corporation also acquired twelve financial institutions and
certain other assets which in the aggregate amounted to the addition of $7.8
billion in assets, $4.8 billion in net loans and $5.1 billion in deposits. The
purchase method of accounting was used in these transactions. With respect to
these transactions, the Corporation issued 32 million shares of its common stock
in exchange for the common stock of certain of the acquired financial
institutions, and it paid cash for the other financial institutions and assets,
which in the aggregate amounted to $1.1 billion. These transactions resulted in
an increase to stockholders' equity of $1.0 billion, and the increase was
reduced by the Corporation's purchase in the open market of 24 million shares of
its common stock for $764 million in 1996. These transactions also resulted in
goodwill of $595 million, which is being amortized on a straight-line basis over
25 years, and in deposit base premium of $70 million, which is being amortized
on an accelerated basis over 10 years.
Merger-related and restructuring charges for each of the years in the
three-year period ended December 31, 1998, substantially all of which in 1998
relate to the CoreStates merger; in 1997, to the Signet merger; and in 1996, to
the First Fidelity merger, are presented below.
Years Ended December 31,
----------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
MERGER-RELATED CHARGES
Merger-related charges $ 599 17 18
Less gain on regulatory-mandated branch sales (185) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 414 17 18
- ------------------------------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES
Employee termination benefits 280 121 37
Occupancy 242 25 21
Asset write-offs 110 56 101
Contract cancellations 108 20 41
Other 58 30 63
- ------------------------------------------------------------------------------------------------------------------------------------
Total 798 252 263
- ------------------------------------------------------------------------------------------------------------------------------------
Merger-related and restructuring charges of acquired companies -- 15 140
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,212 284 421
- ------------------------------------------------------------------------------------------------------------------------------------
After-tax merger-related and restructuring charges $ 805 204 272
- ------------------------------------------------------------------------------------------------------------------------------------
C-13 Audited Financial Statements
Merger-related charges are those charges which are directly related to the
mergers but which do not qualify for recognition until they are incurred. Gains
from the sale of branches which were regulatory-mandated divestitures are
credited to the merger-related charges when realized. Merger-related charges
consist principally of transaction costs such as investment banker fees;
expenses related to combining operations and instituting efficiencies such as
systems conversions and integration costs; and in 1998, they include a $100
million charitable contribution that was required under the terms of the
CoreStates merger agreement. Merger-related charges also include other items
similar to those classified as restructuring charges but which did not qualify
for accrual at the time the mergers were consummated.
Restructuring charges were recorded at the date of consummation of the
mergers at which time the Corporation had formulated, documented and approved a
plan to terminate employees and to exit certain activities in connection with
combining operations and eliminating duplicate activities.
Employee termination benefits include severance payments and related
benefits and outplacement services for employees terminated in connection with
the mergers (3,400 employees with respect to the CoreStates merger). Subsequent
to recording the restructuring charge in 1998 in connection with the CoreStates
merger, $30 million of the employee termination benefits accrual was reversed by
a credit to the restructuring charge based on revisions to earlier estimates.
Occupancy includes write-downs to market value of owned premises which were held
for disposition as a result of the mergers. Occupancy also includes the
cancellation payments or the present value of the remaining lease obligations
for leased premises, or portions thereof, that were vacated as a result of the
mergers. Asset write-offs consist primarily of computer hardware and software
and other equipment that were no longer used as a result of the mergers.
Contract cancellation costs represent the cost to buyout the remaining term or
the present value of the remaining payments on contracts that provided no future
benefit to the Corporation as a result of the mergers. Other restructuring
charges include certain miscellaneous charges that qualified for accrual at the
time the mergers were consummated.
A reconciliation of the unpaid restructuring charges for each of the years
in the three-year period ended December 31, 1998, is presented below.
Years Ended December 31,
------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 199 33 -
Accrued restructuring charges 798 252 263
Cash payments (239) (82) (115)
Noncash write-downs (360) (4) (115)
- -------------------------------------------------------------------------------------------------------------
Balance, end of year $ 398 199 33
- -------------------------------------------------------------------------------------------------------------
Substantially all of the balances of the restructuring charges at December
31, 1997 and 1996, were paid in the succeeding year with the exception of
certain contractual severance payments related to the Signet merger in 1997 for
which payment extends into 1999. The Corporation expects that substantially all
of the unpaid restructuring charges at December 31, 1998, will be paid in 1999.
NOTE 3: SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
Information related to Securities Available for Sale and Investment
Securities for each of the years in the two-year period ended December 31, 1998,
is disclosed in Table 7 on pages T-9 and T-10, and in Table 8 on pages T-11 and
T-12, respectively, which are incorporated herein by reference.
Audited Financial Statements C-14
NOTE 4: LOANS
December 31,
------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 53,961 46,117
Real estate - construction and other 2,628 3,037
Real estate - mortgage 8,565 13,160
Lease financing 9,730 8,610
Foreign 4,805 3,885
- ------------------------------------------------------------------------------------------------------------
Total commercial 79,689 74,809
- ------------------------------------------------------------------------------------------------------------
RETAIL
Real estate - mortgage 21,729 28,998
Installment loans - Bankcard 2,779 3,914
Installment loans - other 29,050 22,271
Vehicle leasing 6,162 5,331
- ------------------------------------------------------------------------------------------------------------
Total retail 59,720 60,514
- ----------------------------------------------------------------------------------------====================
Total loans $ 139,409 135,323
- ----------------------------------------------------------------------------------------====================
Directors and executive officers of the Parent Company and their related
interests were indebted to the Corporation in the aggregate amounts of $3.1
billion and $2.4 billion at December 31, 1998 and 1997, respectively. From
January 1, 1998, through December 31, 1998, directors and executive officers of
the Parent Company and their related interests borrowed $1.6 billion and repaid
$884 million. In the opinion of management, these loans do not involve more than
the normal risk of collectibility, nor do they include other unfavorable
features.
At December 31, 1998 and 1997, nonaccrual and restructured loans amounted
to $742 million and $878 million, respectively. Interest related to nonaccrual
and restructured loans for the years ended December 31, 1998, 1997 and 1996,
amounted to $67 million, $72 million and $77 million, respectively. Interest
collected on such loans and included in the results of operations for each of
the years in the three-year period ended December 31, 1998, amounted to $19
million, $36 million and $22 million, respectively.
At December 31, 1998 and 1997, impaired loans, which are included in
nonaccrual loans, amounted to $424 million and $485 million, respectively.
Included in the allowance for loan losses is $80 million related to $397 million
of impaired loans at December 31, 1998, and $89 million related to $384 million
of impaired loans at December 31, 1997. For the years ended December 31, 1998
and 1997, the average recorded investment in impaired loans was $428 million and
$479 million, respectively; and $29 million and $37 million, respectively, of
interest income was recognized on loans while they were impaired. As of December
31, 1998 and 1997, there were no accruing impaired loans.
Loan fair values are disclosed in Note 15.
C-15 Audited Financial Statements
NOTE 5: ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,847 2,212 2,308
Provision for loan losses 691 1,103 678
Allowance relating to loans acquired, transferred
to accelerated disposition or sold (74) (596) 50
- ------------------------------------------------------------------------------------------------------------
2,464 2,719 3,036
- ------------------------------------------------------------------------------------------------------------
Loan losses 799 1,074 1,076
Loan recoveries 161 202 252
- ------------------------------------------------------------------------------------------------------------
Loan losses, net 638 872 824
- ------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,826 1,847 2,212
============================================================================================================
NOTE 6: SHORT-TERM BORROWINGS
Short-term borrowings of the Corporation at December 31, 1998, 1997 and
1996, which include securities sold under repurchase agreements and accrued
interest thereon, and the related maximum amounts outstanding at the end of any
month during such periods are presented below.
December 31, Maximum Outstanding
------------------------- ------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Securities sold under repurchase agreements $ 25,644 20,344 18,539 33,592 21,070 22,258
Federal funds purchased 2,267 3,418 3,211 7,965 3,865 5,625
Fixed and variable rate bank notes 4,262 1,114 1,155 4,768 2,076 2,485
Interest-bearing demand deposits issued to
the U. S. Treasury 389 649 805 950 793 1,183
Commercial paper 1,904 1,737 1,696 2,190 2,467 2,123
Other 6,972 4,419 2,214 10,328 4,765 3,319
- ------------------------------------------------------------------------------
Total $ 41,438 31,681 27,620
============================================================================================================
At December 31, 1998, 1997 and 1996, the combined weighted average
interest rates related to federal funds purchased and securities sold under
repurchase agreements were 5.31 percent, 6.14 percent and 6.06 percent,
respectively. Maturities related to such instruments in each of the years in the
three-year period ended December 31, 1998, were not greater than 350 days.
At December 31, 1998, 1997 and 1996, the weighted average interest rates
for fixed and variable rate bank notes were 5.33 percent, 5.71 percent and 5.53
percent, respectively. Weighted average maturities related to such notes in each
of the years in the three-year period ended December 31, 1998, were 70 days, 153
days and 109 days, respectively.
At December 31, 1998, 1997 and 1996, the weighted average interest rates
for commercial paper were 4.42 percent, 5.59 percent and 5.49 percent,
respectively. Weighted average maturities related to such commercial paper in
each of the years in the three-year period ended December 31, 1998, were 10
days, 4 days and 21 days, respectively.
Included in "Other" are Federal Home Loan Bank borrowings and securities
sold short of $700 million and $5.7 billion, respectively, at December 31, 1998;
$286 million and $3.5 billion, respectively, at December 31, 1997; and $211
million and $1.9 billion, respectively, at December 31, 1996.
Substantially all short-term borrowings are due within 90 days, and
accordingly, their carrying amounts are deemed to be a reasonable estimate of
fair value.
Audited Financial Statements C-16
NOTE 7: LONG-TERM DEBT
1998 1997
------------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES ISSUED BY THE PARENT COMPANY
Notes
Floating rate extendible, due June 15, 2005 (a) $ 10 10 10 10
6.60%, due June 15, 2000 (par value $250) (b) 250 254 249 252
Floating rate - - 300 300
6-3/4% - - 250 250
Subordinated notes
6.30%, Putable/Callable, due April 15, 2028 (par value $200) 200 214 - -
7.18%, due April 15, 2011 (par value $60) 59 69 59 65
8%, due August 15, 2009 (par value $150) 149 165 149 162
6-3/8%, due January 15, 2009 (par value $150) (b) 148 155 148 148
6%, due October 30, 2008 (par value $200) (b) 198 204 198 192
6.40%, due April 1, 2008 (par value $300) (b) 297 315 - -
7-1/2%, due July 15, 2006 (par value $300) (b) 298 331 298 321
7%, due March 15, 2006 (par value $200) (b) 199 216 199 207
6-7/8%, due September 15, 2005 (par value $250) (b) 249 266 249 257
7.05%, due August 1, 2005 (par value $250) (b) 249 267 248 259
6-5/8%, due July 15, 2005 (par value $250) (b) 249 267 249 253
8.77%, due November 15, 2004 (par value $150) 149 154 149 171
Floating rate, due July 22, 2003 (par value $150) (b) 149 150 149 150
7-1/4%, due February 15, 2003 (par value $150) (b) 149 159 149 156
8%, due November 15, 2002 (par value $225) (b) 224 239 224 237
8-1/8%, due June 24, 2002 (par value $250) (b) 249 269 249 267
9.45%, due August 15, 2001 (par value $150) (b) 149 162 149 165
Fixed rate medium-term, varying rates and terms - - 54 58
9.45%, due June 15, 1999 (par value $250) (b) 250 253 249 262
Subordinated debentures
6.55%, due October 15, 2035 (par value $250) 249 264 249 256
7-1/2%, due April 15, 2035 (par value $250) 247 285 246 279
6.824%/7.574%, due August 1, 2026 (par value $300) 298 321 298 317
============================================================================================================
Total notes and debentures issued by the Parent Company 4,668 4,989 4,771 4,994
- ------------------------------------------------------------------------------------------------------------
C-17 Audited Financial Statements
1998 1997
------------------------- -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes
9-3/4% senior -- -- 120 140
Medium-term, varying rates and
terms to July 7, 2003 (c) 10,775 10,693 1,640 1,638
Varying rates and terms to January 26, 2004 (d) 70 75 62 63
Floating rate -- -- 500 497
Senior notes from acquired companies, varying rate
and terms to April 15, 2004 (e) 569 600 150 152
Subordinated notes
Bank, varying rates and terms to December 15, 2036 1,200 1,270 1,205 1,219
7.95%, due December 1, 2007 (par value $100) (b) 100 115 -- --
6-3/4%, due November 15, 2006 (par value $200) (b) (f) 200 214 199 202
6-5/8%, due March 15, 2005 (par value $175) (b) (f) 175 182 174 177
5-7/8%, due October 15, 2003 (par value $200) (b) (f) 200 200 200 195
6.80%, due June 15, 2003 (par value $150) (b) (f) 149 156 149 153
9-3/8%, due April 15, 2003 (par value $100) (b) (f) 100 113 100 113
6-5/8%, due March 15, 2003 (par value $150) (b) 150 155 149 149
7.30%, due December 1, 2002 (par value $150) (b) 150 159 -- --
7-7/8%, due July 15, 2002 (par value $100) (b) (f) 100 107 100 106
9-5/8%, due February 15, 2001 (par value $150) (b) (f) 150 160 150 164
9-5/8%, due August 15, 1999 (par value $150) (b) (f) 150 153 150 156
9-5/8%, due June 1, 1999 (par value $100) (b) (f) 100 102 100 105
Floating rate -- -- 100 100
Subordinated capital notes
9-5/8%, due June 15, 1999 (par value $75) (b) (f) 75 76 75 79
9-7/8%, due May 15, 1999 (par value $75) (b) (f) 75 76 75 79
8-1/2% -- -- 149 150
- ------------------------------------------------------------------------------------------------------------------------------------
Total notes of subsidiaries 14,488 14,606 5,547 5,637
====================================================================================================================================
OTHER DEBT
Trust preferred securities 1,736 1,937 1,735 1,801
Advances from the Federal Home Loan Bank 986 986 1,385 1,385
4.556% auto securitization financing, due September 30, 2008 (f) 1,023 951 -- --
Mortgage notes and other debt of subsidiaries, varying rates and terms 8 8 16 16
Capitalized leases, rates generally ranging from 7-1/2% to 15.20% 40 40 33 33
- ------------------------------------------------------------------------------------------------------------------------------------
Total other debt 3,793 3,922 3,169 3,235
- ------------------------------------------------------------------------------------------------------------------------------------
Total $22,949 23,517 13,487 13,866
====================================================================================================================================
(a) Redeemable in whole or in part at the option of the Parent Company.
(b) Not redeemable prior to maturity.
(c) $995 million assumed by the Parent Company.
(d) $28 million assumed by the Parent Company.
(e) $269 million assumed by the Parent Company.
(f) Assumed by the Parent Company.
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Corporation for debt with the same remaining maturities.
The interest rate on the floating rate extendible notes is 5.40 percent to
March 16, 1999.
The 6.30 percent putable/callable notes are subject to mandatory
redemption on April 15, 2008, and under certain specified conditions, they may
be put to the Parent Company by the trustee on or after such date.
The 7.18 percent subordinated notes are redeemable in whole and not in
part at the option of the Parent Company on April 15, 2000, and on each October
15 and April 15 thereafter.
Audited Financial Statements C-18
The 8 percent subordinated notes due August 15, 2009, are redeemable in
whole and not in part at the option of the Parent Company on August 15, 2004.
The 8.77 percent subordinated notes are redeemable in whole or in part at
the option of the Parent Company on November 15, 1999. The interest rate on the
floating rate subordinated notes is 5.31344 percent to January 22, 1999.
Fixed rate medium-term senior and subordinated notes can be issued
periodically. Interest rates, maturities, redemption and other terms are
determined at the date of issuance.
Holders of the 6.55 percent subordinated debentures and the 7-1/2 percent
subordinated debentures may elect to redeem a part or all of such debentures on
October 15, 2005, and April 15, 2005, respectively. Otherwise such debentures
are not redeemable prior to maturity.
Holders of the 6.824 percent/7.754 percent subordinated debentures may
elect to redeem a part or all of such debentures on August 1, 2006, or August 1,
2016. Otherwise such debentures are not redeemable prior to maturity.
At December 31, 1998, bank notes of $3.8 billion had floating rates of
interest ranging from 4.17 percent to 5.57 percent, and $7.2 billion of the
notes had fixed rates of interest ranging from 4.65 percent to 7.80 percent.
In 1996 and 1997, First Union Institutional Capital I, First Union
Institutional Capital II and First Union Capital I, statutory business trusts
(the "Trusts") created by the Parent Company, issued capital securities with an
aggregate par value of $1.0 billion to the Parent Company (the "Capital
Securities"). The Capital Securities have interest rates ranging from 7.85
percent to 8.04 percent and maturities ranging from December 1, 2026, to January
15, 2027. The principal assets of the Trusts are $1.031 billion of the Parent
Company's Junior Subordinated Deferrable Interest Debentures (the "Subordinated
Debentures") with identical rates of interest and maturities as the Capital
Securities. Additionally, the Trusts have issued $30 million of common
securities (the "Common Securities") to the Parent Company. The estimated fair
value of each of the Capital Securities and the related Subordinated Debentures
at December 31, 1998 and 1997, was $1.099 billion and $1.064 billion,
respectively.
The Capital Securities, the assets of the Trust and the Common Securities
issued by the Trusts are redeemable in whole or in part beginning on or after
December 1, 2006, or at any time in whole but not in part from the date of
issuance on the occurrence of certain events. The obligations of the Parent
Company with respect to the issuance of the Capital Securities constitute a full
and unconditional guarantee by the Parent Company of the Trusts' obligations
with respect to the Capital Securities. Subject to certain exceptions and
limitations, the Parent Company may elect from time to time to defer
subordinated debenture interest payments, which would result in a deferral of
distribution payments on the related Capital Securities.
Additionally, in 1996 and 1997, an acquired bank subsidiary (the
"Acquired Bank") issued through a statutory business trust, trust capital
securities (the "Acquired Bank Capital Securities" and together with the Capital
Securities, the "trust preferred securities") with a par value of $300 million
and an 8 percent rate of interest, and with a par value of $450 million and a
LIBOR-indexed floating rate of interest. The Acquired Bank Capital Securities
have maturities ranging from December 15, 2026, to February 15, 2027. The
Acquired Bank issued related junior subordinated deferrable interest rate
debentures, all with terms substantially the same as the Capital Securities and
Subordinated Debentures issued by the Parent Company. The aggregate estimated
fair values of the Acquired Bank Capital Securities at December 31, 1998 and
1997, were $838 million and $737 million, respectively.
The trust preferred securities are included in tier 1 capital for
regulatory capital adequacy determination purposes.
At January 31, 1999, $1.9 billion of senior or subordinated debt
securities or equity securities remained available for issuance under a shelf
registration statement filed with the Securities and Exchange Commission.
At December 31, 1998, First Union National Bank had $15 billion of senior
or subordinated notes available for issuance under a $20 billion global note
program.
The weighted average rate paid for long-term debt in 1998, 1997 and 1996
was 6.28 percent, 6.53 percent and 6.27 percent, respectively. Interest rate
swaps entered into at the time of issuance of certain long-term debt reduced
related interest expense.
Long-term debt maturing in each of the five years subsequent to December
31, 1998, is as follows (in millions): 1999, $9,154; 2000, $2,705; 2001, $841;
2002, $1,350; and 2003, $903.
C-19 Audited Financial Statements
NOTE 8: COMMON STOCK AND CAPITAL RATIOS
1998 1997 1996
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
(Options and shares of Exercise of Exercise of Exercise
in thousands) Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK OPTION PLANS
Options outstanding, beginning of year 29,453 $ 26.85 30,188 $ 20.70 32,184 $ 16.75
Granted 16,804 51.97 10,444 37.10 10,760 26.00
Exercised (11,502) 24.31 (10,382) 18.90 (12,195) 14.92
Cancelled (1,755) 48.25 (797) 31.11 (561) 21.09
- ----------------------------------------------------------------- -------- --------
Options outstanding, end of year 33,000 $ 39.53 29,453 $ 26.85 30,188 $ 20.70
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 18,001 $ 29.01 17,988 $ 21.48 20,122 $ 17.66
- ------------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PLANS
Options outstanding, beginning of year 2,537 $ 27.26 6,923 $ 27.26 2,766 $ 19.18
Granted 8,735 50.31 -- -- 9,588 27.26
Exercised (3,007) 31.60 (4,210) 27.26 (4,946) 23.21
Cancelled (95) 27.26 (176) 27.26 (485) 22.43
- ----------------------------------------------------------------- ------- ------
Options outstanding, end of year 8,170 $ 50.31 2,537 $ 27.26 6,923 $ 27.26
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable, end of year 8,170 $ 50.31 2,537 $ 27.26 6,923 $ 27.26
- ------------------------------------------------------------------------------------------------------------------------------------
STOCK OPTION, EMPLOYEE STOCK AND DIVIDEND REINVESTMENT PLANS
The Corporation has stock option plans under which incentive and
nonqualified stock options may be granted periodically to key employees. The
options are granted at a price not less than the fair value of the shares at the
date of grant, they generally vest one year following the date of grant, and
they have a term of ten years. Stock option grants in 1998 include 6.9 million
shares that relate to acquired companies.
Restricted stock may also be granted under the stock option plans. The
restricted stock generally vests over a five-year period, during which time the
holder receives dividends and has full voting rights. Restricted stock
outstanding under the stock options plans were (in thousands): 7,451 shares,
4,725 shares and 3,879 shares for the years ended December 31, 1998, 1997 and
1996, respectively. Compensation cost recognized for restricted stock was $57
million, $43 million and $23 million in 1998, 1997 and 1996, respectively.
The range of exercise prices and the related number of options with
respect to the 33 million stock options outstanding at December 31, 1998, are as
follows (shares in thousands): $2.99-$9.95, 710 shares; $10.07-$19.98, 4,078
shares; $20.73-$29.60, 7,416 shares; $30.13-$38.03, 2,465 shares; $40.13-$49.83,
9,865 shares; and $51.19-$62.13, 8,466 shares.
As of December 31, 1998, the Corporation had 55 million shares of
common stock reserved for issuance under the stock option plans.
The Corporation also has employee stock plans. Under these plans, in
1998 and 1996, substantially all employees were granted options to purchase
shares of common stock with the number of options granted based on compensation.
From this date, and generally for approximately a two-year period thereafter,
employees have the option to purchase all or a portion of the optioned shares.
The employee plans provide that at the end of the two-year period (the "Final
Purchase Date"), the option price will be the lesser of 85 percent of the fair
market value as of the plan date or 85 percent of the fair market value as of
the Final Purchase Date. As of December 31, 1998, the Corporation had 8 million
shares of common stock reserved for issuance under the employee plans.
Under the terms of the Dividend Reinvestment Plan, a participating
stockholder's cash dividend and optional cash payments can be used to purchase
the Corporation's common stock. Common stock issued under the Dividend
Reinvestment Plan was (in thousands): 1,476 shares, 2,225 shares and 2,250
shares for the years ended December 31, 1998, 1997 and 1996, respectively. As of
December 31, 1998, the Corporation had 5 million shares of common stock reserved
for issuance under the Dividend Reinvestment Plan.
Audited Financial Statements C-20
The Corporation accounts for stock options using the intrinsic value
method, and accordingly, no expense is recognized for options where the option
price equals fair value of the shares on the date of grant. Pro forma net income
and earnings per share information for each of the years in the three-year
period ended December 31, 1998, calculated as if the Corporation had accounted
for stock options using the fair value method, are as follows: pro forma net
income, $2.741 billion, $2.669 billion and $2.194 billion, respectively; and pro
forma diluted earnings per share, $2.80, $2.76 and $2.23, respectively. The
Black-Scholes option pricing model methodology was used in estimating the fair
value of stock option plans. Option pricing models require the use of highly
subjective assumptions, including expected stock price volatility, which when
changed can materially affect fair value estimates. Accordingly, the model does
not necessarily provide a reliable single measure of the fair value of the
Corporation's stock options. The more significant assumptions used in
determining pro forma net income and earnings per share information for 1998
include risk-free interest rates of 5.34 percent to 6.72 percent; a dividend
yield of 3.26 percent; volatility of the Corporation's common stock of 19
percent; and a weighted average expected life of the stock options of 2.9 years.
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
In accordance with a Shareholder Protection Rights Agreement dated
December 18, 1990, as amended, the Corporation issued a dividend of one right
for each share of the Corporation's common stock outstanding as of such date and
they continue to attach to all common stock issued thereafter. The rights will
become exercisable if any person or group commences a tender or exchange offer
that would result in (i) their becoming the beneficial owner of 15 percent or
more of the Corporation's common stock, or (ii) any person being determined by
the Federal Reserve Board to control the Corporation within the meaning of the
Bank Holding Company Act of 1956, as amended.
The rights will also become exercisable if a person or group acquires
beneficial ownership of 15 percent or more of the Corporation's common stock.
Each right (other than rights owned by such person or group) will entitle its
holder to purchase, for an exercise price of $105.00, a number of shares of the
Corporation's common stock (or at the option of the Board of Directors, shares
of junior participating class A preferred stock) having a market value of twice
the exercise price. If any person or group acquires beneficial ownership of
between 15 percent and 50 percent of the Corporation's common stock, the Board
of Directors may, at its option, exchange for each outstanding right (other than
rights owned by such person or group) either two shares of common stock or two
one-hundredths of a share of junior participating class A preferred stock having
economic and voting terms similar to two shares of common stock. The rights are
subject to adjustment if certain events occur, and they will expire on December
28, 2000, if not redeemed or terminated sooner.
CAPITAL RATIOS
Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4 percent and a minimum ratio of total
capital to risk-weighted assets of 8 percent. The minimum leverage ratio of tier
1 capital to adjusted average quarterly assets is from 3 percent to 5 percent.
At December 31, 1998, the Corporation's tier 1 capital ratio, total
capital ratio and leverage ratio were 6.94 percent, 11.12 percent and 6.02
percent, respectively. At December 31, 1997, such ratios were 8.43 percent,
13.02 percent and 7.09 percent, respectively. The Corporation does not
anticipate or foresee any conditions that would reduce such ratios to levels at
or below minimum or that would cause its deposit-taking banking affiliates to be
less than well capitalized.
Additional information related to the consolidated capital ratios of the
Corporation for each of the years in the two-year period ended December 31,
1998, can be found in "Management's Analysis of Operations" - "Stockholders'
Equity; Regulatory Capital" on page 21 and in Table 17 on page T-19, which are
incorporated herein by reference.
C-21 Audited Financial Statements
NOTE 9: BUSINESS SEGMENTS
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which establishes standards for reporting information
about operating segments using the management approach. Operating segments are
defined as components of a company that engage in business activities, that have
discrete financial information and that provide operating results which are used
by management to assess performance and to allocate resources. Under the
management approach prescribed by the Standard, operating segment information
must be reported based on the internal management reporting system. Information
about operating segments which exceed certain quantitative thresholds
("reportable segments") must be disclosed.
The Corporation has five operating segments ("business segments") all of
which are reportable segments. They include the Consumer Bank, Capital
Management, the Commercial Bank, Capital Markets and Treasury/Nonbank. Each of
these reportable segments is separately managed, and each offers a different
array of products and services.
The accounting policies of these reportable segments are the same as those
of the Corporation as disclosed in Note 1. There are no significant intersegment
transactions, and there are no significant reconciling items between the
reportable segments and consolidated amounts. Certain amounts are not allocated
to reportable segments, and as a result, they are included in the
Treasury/Nonbank segment as discussed below.
Substantially all of the Corporation's revenues are earned from customers
in the United States, and no single customer accounts for a significant amount
of any reportable segment's revenues.
An internal performance reporting model is used to measure business
segment results. Because of the complexity of the Corporation, various estimates
and allocation methodologies are used in preparing business segment financial
information. The 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 expense to each
segment. A risk-based methodology is used to allocate equity based on the
credit, market and operational risks associated with each business segment. A
provision for loan losses is allocated to each business segment based on net
charge-offs, and any excess is included in the Treasury /Nonbank segment. Income
tax expense or benefit is allocated to each business segment at the statutory
rate, and any difference between the total provision for all business segments
and the consolidated amount is included in the Treasury/Nonbank segment.
Exposure to market risk is managed centrally within the Treasury/Nonbank
segment. In order to remove interest rate risk from each business segment, the
internal performance reporting model employs a funds transfer pricing ("FTP")
system. The FTP system matches the duration of the funding used by each segment
to the duration of the assets and liabilities contained in each segment.
Matching the duration, or the effective term until an instrument can be
repriced, allocates interest income and/or interest expense to each segment so
its resulting net interest income is insulated from interest rate risk.
The Treasury/Nonbank segment retains all unallocated equity, and most of
the interest rate risk resulting from the mismatch in the duration of assets and
liabilities held by the other business segments. The Treasury/Nonbank segment
also holds the Corporation's investment portfolio and off-balance sheet
portfolio. Additionally, noninterest expense retained in the Treasury/Nonbank
segment reflects the costs of portfolio management activities, goodwill
amortization and other corporate charges, including merger-related and
restructuring charges.
Additional information related to the business segments of the
Corporation for each of the years in the two-year period ended December 31,
1998, including a description of the products and services from which each
business segment derives its revenues, is disclosed in "Management's Analysis of
Operations" - "Business Segments" on pages 9 through 13 and in Table 4 on pages
T-3 through T-6, which are incorporated herein by reference. Relevant
information from acquired companies for the year ended December 31, 1996, is not
available, and accordingly, business segment data is not presented for the year
then ended.
Audited Financial Statements C-22
NOTE 10: PERSONNEL EXPENSE AND RETIREMENT BENEFITS
Personnel expense for each of the years in the three-year period ended December
31, 1998, is presented below.
Years Ended December 31,
--------------------------------------------
(In millions) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
PERSONNEL EXPENSE
Salaries $ 3,567 2,909 2,649
Savings plan 121 87 80
Pension expense 25 58 81
Other benefits 537 496 467
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,250 3,550 3,277
- ------------------------------------------------------------------------------------------------------------------------------------
The Corporation has a savings plan under which eligible employees are
permitted to make basic contributions to the plan of up to six percent of base
compensation and supplemental contributions of up to nine percent of base
compensation. Annually, on approval of the Board of Directors, employee basic
contributions may be matched up to six percent of the employee's base
compensation.
Group insurance expense for active employees in 1998, 1997 and 1996 was
$160 million, $157 million and $157 million, respectively.
The Corporation has noncontributory, tax-qualified defined benefit
pension plans (the "Qualified Pension") covering substantially all employees
with one year of service. The Qualified Pension benefit expense is determined
annually by an actuarial valuation, which includes service costs for the current
year and amortization of amounts related to prior years. Contributions are made
each year to a trust in an amount that is determined by the actuary to meet the
minimum requirements of ERISA and to fall at or below the maximum amount that
can be deducted on the Corporation's tax return. Amounts related to prior years
are determined using the projected unit credit valuation method. The difference
between the pension expense included in current income and the funded amount is
included in other assets or other liabilities, as appropriate. Actuarial
assumptions are evaluated annually.
At December 31, 1998, Qualified Pension assets include U.S. Government and
Government agency securities, equity securities and other investments. Also
included are 4.5 million shares of the Parent Company's common stock. All
Qualified Pension assets are held by First Union National Bank (the "Bank") in a
Bank-administered trust fund.
The Corporation has noncontributory, nonqualified pension plans (the
"Nonqualified Pension") covering certain employees. The Nonqualified Pension
benefit expense is determined annually by an actuarial valuation, and it is
included in current income.
The Corporation also provides certain health care and life insurance
benefits for retired employees (the "Other Postretirement Benefits").
Substantially all of the Corporation's employees may become eligible for Other
Postretirement Benefits if they reach retirement age while working for the
Corporation. Life insurance benefits, medical and other benefits are provided
through a tax-exempt trust formed by the Corporation.
The change in benefit obligation and the change in fair value of plan
assets related to each of the Qualified Pension, the Nonqualified Pension and
the Other Postretirement Benefits for each of the years in the two-year period
ended December 31, 1998, follows. In 1998, the curtailment gain resulted from
employee terminations in connection with the CoreStates acquisition.
C-23 Audited Financial Statements
Other Postretirement
Qualified Pension Nonqualified Pension Benefits
----------------- ---------------------- --------------------
December 31, December 31, December 31,
----------------- ---------------------- --------------------
(In millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 2,020 1,807 182 159 350 344
Service cost 89 80 4 4 8 7
Interest cost 140 136 14 12 24 26
Retiree contributions -- -- -- -- 6 7
Plan amendments 22 -- 32 -- (4) --
Benefit payments (143) (150) (12) (7) (29) (27)
Business combinations -- 11 -- -- -- 1
Curtailment (gain) loss (39) -- -- -- 1 --
Special and/or contractual termination benefits 3 3 -- -- -- --
Actuarial (gains) losses 241 133 30 14 34 (8)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, end of year 2,333 2,020 250 182 390 350
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN FAIR VALUE OF
PLAN ASSETS
Fair value of plan assets, beginning of year 2,446 2,099 -- -- 67 57
Actual return on plan assets 57 399 -- -- 3 2
Employer contributions 67 82 12 7 33 28
Retiree contributions -- -- -- -- 6 7
Business combinations -- 16 -- -- -- --
Benefit payments (143) (150) (12) (7) (29) (27)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, end of year 2,427 2,446 -- -- 80 67
- ------------------------------------------------------------------------------------------------------------------------------------
Funded status of plans 94 426 (250) (182) (310) (283)
Unrecognized net transition obligation (21) (30) 1 2 55 59
Unrecognized prior service costs 54 42 64 42 (22) (32)
Unrecognized net (gains) losses 324 (59) 59 31 (54) (94)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit expense $ 451 379 (126) (107) (331) (350)
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate, end of year 6.75 % 7.25 6.75 7.25 6.75 7.25
Expected return on plan assets 9.50 9.00-9.50 -- -- 6.00 6.00
Weighted average rate of increase in
future compensation levels 4.00 % 4.25-5.00 4.00 4.25-5.00 4.00 4.25-5.00
- ------------------------------------------------------------------------------------------------------------------------------------
The components of the retirement benefits cost for each of the years in the
three-year period ended December 31, 1998, are presented below.
Qualified Pension Nonqualified Pension
------------------------------ ---------------------------
Years Ended December 31, Years Ended December 31,
----------------------------- ---------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 89 80 87 4 4 3
Interest cost 140 136 124 14 12 8
Expected return on plan assets (203) (180) (152) -- -- --
Amortization of transition (gains) losses (9) (11) (11) 1 1 1
Amortization of prior service cost 6 5 7 9 6 4
Actuarial gains 3 1 5 1 1 --
Curtailment (gain) loss (35) 2 (8) 1 1 1
Special and/or contractual termination benefits 3 3 4 -- -- 7
- ------------------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ (6) 36 56 30 25 24
- ------------------------------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-24
Other Postretirement Benefits
------------------------------------------------
Years Ended December 31,
------------------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 8 7 8
Interest cost 24 26 28
Expected return on plan assets (4) (3) (3)
Amortization of transition gains 4 4 5
Amortization of prior service cost (2) (2) (4)
Actuarial losses (4) (3) (1)
Curtailment (gain) loss (12) 3 2
- --------------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ 14 32 35
- --------------------------------------------------------------------------------------------------------------------------------
Medical trend rates assumed with respect to Other Postretirement
Benefits at the beginning of 1998 ranged from 5.50 percent to 6.00 percent
(pre-65 years of age) and 5.00 percent to 8.75 percent (post-65 years of age)
grading to 5.00 percent to 5.50 percent; and at the end of 1998, 6.00 percent
(pre-65 years of age) and 5.00 percent (post-65 years of age). Medical trend
rates assumed with respect to Other Postretirement Benefits at the beginning and
end of 1997 ranged from 5.50 percent to 6.00 percent (pre-65 years of age) and
5.00 percent to 8.75 percent (post-65 years of age) grading to 5.00 percent to
5.50 percent.
The effect of a one percentage point increase or decrease in the assumed
health care cost trend rate on service and interest costs and on the accumulated
postretirement benefit obligation at December 31, 1998, is presented below.
December 31, 1998
------------------------
(In millions) Increase Decrease
- ------------------------------------------------------------------------------------------------------------------------------------
EFFECT OF A ONE PERCENTAGE POINT
INCREASE OR DECREASE IN THE
HEALTH CARE COST TREND RATE ON
Service and interest costs $ 1 (1)
Accumulated postretirement benefit obligation $ 11 (10)
- ------------------------------------------------------------------------------------------------------------------------------------
C-25 Audited Financial Statements
NOTE 11: INCOME TAXES
The Corporation accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Accordingly, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The provision for income taxes for each of the years in the three-year
period ended December 31, 1998, is presented below.
Years Ended December 31,
------------------------------------------------
(In millions) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT INCOME TAX EXPENSE
Federal $ 395 480 622
State 40 39 73
- ----------------------------------------------------------------------------------------------------------------------------------
Total 435 519 695
Foreign 15 12 12
- ----------------------------------------------------------------------------------------------------------------------------------
Total 450 531 707
- ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX EXPENSE
Federal 598 526 544
State 26 27 10
- ----------------------------------------------------------------------------------------------------------------------------------
Total 624 553 554
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,074 1,084 1,261
- ----------------------------------------------------------------------------------------------------------------------------------
The reconciliation of federal income tax rates and amounts to the
effective income tax rates and amounts for each of the years in the three-year
period ended December 31, 1998, is presented below.
Years Ended December 31,
---------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------- ---------------------------
Percent of Percent of Percent of
Pre-tax Pre-tax Pre-tax
(In millions) Amount Income Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 3,965 $ 3,793 $ 3,534
---------- ---------- ---------
Tax at federal income tax rate $ 1,388 35.0 % $ 1,327 35.0 % $ 1,237 35.0 %
Reasons for difference in federal income
tax rate and effective tax rate
Tax-exempt interest, net of cost to carry (50) (1.3) (53) (1.4) (62) (1.7)
Non-taxable distributions from
corporate reorganizations (270) (6.8) (264) (7.0) - -
State income taxes, net of federal tax
benefit 43 1.1 43 1.1 54 1.5
Goodwill amortization 67 1.7 50 1.3 40 1.1
Change in the beginning-of-the-year
deferred tax assets valuation allowance - - (11) (0.3) (12) (0.3)
Other items, net (104) (2.6) (8) (0.2) 4 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,074 27.1 % $ 1,084 28.5 % $ 1,261 35.7 %
- ----------------------------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-26
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax assets and liabilities for each of
the years in the three-year period ended December 31, 1998, are presented below.
December 31,
---------------------------------
(In millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX ASSETS
Provision for loan losses, net $ 765 857 803
Accrued expenses, deductible when paid 711 524 413
Foreclosed properties 26 7 9
Sale and leaseback transactions - 15 10
Deferred income - 18 25
Purchase accounting adjustments (primarily loans and securities) 328 79 144
Net operating loss carryforwards 324 71 55
Tax credit carryforwards 207 54 5
Other 142 108 131
- ---------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 2,503 1,733 1,595
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance 24 24 35
- ---------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES
Depreciation 178 303 131
Unrealized gain on debt and equity securities 224 154 15
Intangible assets 166 115 99
Leasing activities 3,019 2,082 1,527
Loan products 99 46 25
Prepaid pension assets 175 128 105
Loan loss reserve recapture 28 30 49
Securitizations 354 - -
Other 142 126 148
- ---------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 4,385 2,984 2,099
- ---------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 1,906 1,275 539
- ---------------------------------------------------------------------------------------------------------------
A portion of the current year change in the net deferred tax liability
relates to unrealized gains and losses on securities available for sale. The
related 1998, 1997 and 1996 deferred tax expense (benefit) of $70 million, $139
million and $(85) million, respectively, have been recorded directly to
stockholders' equity. Purchase acquisitions also increased (decreased) the net
deferred tax liability by $(63) million, $44 million and $(43) million in 1998,
1997 and 1996, respectively.
Changes to the deferred tax assets valuation allowance for each of the
years in the three-year period ended December 31, 1998, are presented below.
December 31,
(In millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance, beginning of year $ 24 35 43
Current year deferred provision, change in deferred tax assets valuation allowance - (11) (12)
Purchase acquisitions - - 4
- ---------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance, end of year $ 24 24 35
- ---------------------------------------------------------------------------------------------------------------
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
in certain periods and the utilization of tax planning strategies. Management
has determined that it is more likely than not that the deferred tax assets can
be supported by carrybacks to federal taxable income in excess of $787 million
in the two-year federal carryback period and by expected future taxable income
that will far exceed amounts necessary to fully realize remaining deferred tax
assets resulting from net operating loss carryforwards and from the scheduling
of temporary differences. The valuation allowance primarily relates to certain
state temporary differences and to federal and state net operating loss
carryforwards. To the extent that the valuation allowance attributable to
purchase acquisitions in the amount of $22 million is subsequently recognized,
such income tax benefit will reduce goodwill.
C-27 Audited Financial Statements
At December 31, 1998, the Corporation has net operating loss carryforwards
of $571 million, principally related to The Money Store, that are available to
offset future federal taxable income through 2017, subject to annual
limitations. The Corporation also has net operating loss carryforwards of
approximately $5.2 billion that are available to offset future state taxable
income through 2013.
Income tax expense related to securities available for sale transactions
was $137 million, $11 million, and $14 million in 1998, 1997 and 1996,
respectively. Income tax expense related to investment security transactions was
$2 million, $1 million, and $1 million in 1998, 1997 and 1996, respectively.
The Corporation has reached agreement with the Internal Revenue Service
(the "IRS") for the tax years 1991 through 1993, subject to final review by
Joint Committee, with no material impact on the Corporation's financial position
or results of operations. The IRS is currently examining the Corporation's
federal income tax returns for the years 1994 through 1996 and federal income
tax returns for certain acquired subsidiaries for periods prior to acquisition.
In 1998, 1997 and 1996, tax liabilities for certain acquired subsidiaries for
periods prior to their acquisition by the Corporation were settled with the IRS
with no significant impact on the Corporation's financial position or results of
operations.
NOTE 12: BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
net income applicable to common stockholders by the sum of the weighted average
number of shares and the number of shares that would have been outstanding if
potentially dilutive shares had been issued. The reconciliation between basic
and diluted earnings per common share for each of the years in the three-year
period ended December 31, 1998, is presented below.
Years Ended December 31,
(Dollars in millions, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,891 2,709 2,273
Preferred stock dividends -- -- (9)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,891 2,709 2,264
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 2.98 2.84 2.33
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 2.95 2.80 2.30
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares - basic (In thousands) 969,131 955,241 973,712
Options - including unvested restricted stock awards (In thousands) 10,981 11,551 9,043
- ------------------------------------------------------------------------------------------------------------------------------------
Average common shares - diluted (In thousands) 980,112 966,792 982,755
- ------------------------------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-28
NOTE 13: ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
On January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and displaying of comprehensive income.
Comprehensive income is defined as the change in equity from all transactions
other than those with stockholders, and it includes net income and other
comprehensive income. Other comprehensive income includes net unrealized gains
or losses on certain debt and equity securities, foreign currency transactions
and minimum pension liability adjustments. The Corporation's only significant
item of other comprehensive income is net unrealized gains or losses on certain
debt and equity securities and the reclassification adjustments related thereto.
Reclassification adjustments include the amount of gains or losses realized in
the current period on certain debt and equity securities that was included in
accumulated other comprehensive income at the beginning of the period. The
Standard does not require disclosure of reclassification adjustments for periods
prior to January 1, 1998. Accumulated other comprehensive income, net, for each
of the years in the three-year period ended December 31, 1998, is presented
below.
Income Tax
Pre-tax (Expense) After-tax
(In millions) Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Accumulated other comprehensive income, net, December 31, 1995 $ 321 (114) 207
Unrealized net holding loss arising in 1996 (273) 95 (178)
- ------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 1996 48 (19) 29
Unrealized net holding gain arising in 1997 396 (139) 257
- ------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 1997 444 (158) 286
Unrealized net holding gain arising in 1998 469 (168) 301
Reclassification adjustment for gains and losses realized in net income (277) 97 (180)
- ------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 1998 $ 636 (229) 407
- ------------------------------------------------------------------------------------------------------------------
NOTE 14: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers, to reduce its own exposure to fluctuations in interest rates and to
conduct lending activities. These financial instruments include commitments to
extend credit; standby and commercial letters of credit; forward and futures
contracts; interest rate swaps; options, interest rate caps, floors, collars and
swaptions; foreign currency and exchange rate swap commitments; commodity swaps;
and commitments to purchase and sell securities. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of amounts
recognized in the consolidated financial statements.
The Corporation's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby and commercial letters of credit is represented by the contract
amount of those instruments. The Corporation uses the same credit policies in
entering into commitments and conditional obligations as it does for on-balance
sheet instruments. For forward and futures contracts, interest rate swaps,
options, interest rate caps, floors, collars and swaptions, the contract or
notional amounts do not represent the exposure to credit loss. The Corporation
controls the credit risk of its forward and futures contracts, interest rate
swap agreements, foreign currency and exchange rate swaps, and securities
transactions through collateral arrangements, credit approvals, limits and
monitoring procedures.
Our policy requires all swaps and options to be governed by an
International Swaps and Derivatives Association Master Agreement. Bilateral
collateral agreements are in place for substantially all dealer counterparties.
Collateral for dealer transactions is delivered by either party when the credit
risk associated with a particular transaction, or group of transactions to the
extent netting exists, exceeds defined thresholds of credit risk. Thresholds are
determined based on the strength of the individual counterparty. As of December
31, 1998, the total credit risk in excess of thresholds was $594 million. The
fair value of collateral held approximated the total credit risk in excess of
the thresholds.
C-29 Audited Financial Statements
For non-dealer transactions, the need for collateral is evaluated on an
individual transaction basis, and it is primarily dependent on the financial
strength of the counterparty.
The carrying amount of financial instruments used for interest rate risk
management includes amounts for deferred gains and losses related to terminated
positions. Such gains and losses at December 31, 1998, were not significant.
Additional information related to derivative financial instruments used
for the Corporation's interest rate risk management purposes as of December 31,
1998 and 1997, can be found in Table 18 through Table 20 on pages T-20 through
T-25, which are incorporated herein by reference.
Additional information related to other off-balance sheet financial
instruments as of December 31, 1998 and 1997, is presented below.
December 31, 1998 December 31, 1997
-------------------------------------------------------------------------------
Contract Contract
Estimated or Estimated or
Carrying Fair Notional Carrying Fair Notional
(In millions) Amount Value Amount Amount Value Amount
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WHOSE
CONTRACT AMOUNTS REPRESENT
CREDIT RISK
Commitments to extend credit $ - 556 131,483 - 180 87,707
Standby and commercial letters of credit - 106 10,782 - 26 9,275
FINANCIAL INSTRUMENTS WHOSE
CONTRACT OR NOTIONAL
AMOUNTS EXCEED THE AMOUNT
OF CREDIT RISK (a)
Trading and dealer activities
Forward and futures contracts 83 83 87,038 81 79 28,727
Interest rate swap agreements (213) (213) 72,698 (204) (225) 45,950
Purchased options, interest rate
caps, floors, collars and swaptions 368 368 44,485 250 254 12,424
Written options, interest rate caps,
floors, collars and swaptions (299) (299) 18,218 (136) (99) 15,064
Foreign currency and exchange
rate swap commitments 6 6 5,293 44 48 7,462
Commodity and equity swaps $ 10 10 69 - - 24
- --------------------------------------------------------------------------------------------------------------------------------
(a) Commitments to purchase or sell trading account assets are not significant.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and they may require payment of a fee. Since many of the commitments are
expected to expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements.
Standby and commercial letters of credit are conditional commitments
issued by the Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. Except for short-term guarantees of $5 billion, guarantees extend
for more than one year, and they expire in varying amounts primarily through
2020. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The Corporation
holds various assets as collateral to support those commitments for which
collateral is deemed necessary.
Audited Financial Statements C-30
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. Generally, for fixed rate loan commitments, fair value also
considers the difference between the current level of interest rates and the
committed rates. The fair value of commitments and letters of credit is based on
fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties.
Forward and futures contracts are contracts for delayed delivery of
securities or money market instruments in which the seller agrees to make
delivery of a specified instrument at a specified future date, at a specified
price or yield. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities values and
interest rates.
The Corporation enters into a variety of interest rate contracts,
including options, interest rate caps, floors, collars and swaptions written,
and interest rate swap agreements, in its trading activities and in managing its
interest rate exposure. As a writer of options, the Corporation receives a
premium at the outset and bears the risk of an unfavorable change in the price
of the financial instrument underlying the contract.
Interest rate swap transactions generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal amounts. Entering into interest rate swap agreements
involves not only the risk of dealing with counterparties and their ability to
meet the terms of the contracts but also the interest rate risk associated with
unmatched positions. Notional amounts often are used to express the volume of
these transactions, but the amounts potentially subject to credit risk are much
smaller.
Generally, futures contracts are exchange traded, and all other
off-balance sheet instruments are transacted in the over-the-counter markets.
In the normal course of business, the Corporation has entered into certain
transactions that have recourse options. These recourse options, if acted on,
would not have a material impact on the Corporation's financial position.
Substantially all time drafts accepted by December 31, 1998, met the
requirements for discount with Federal Reserve Banks. Average daily Federal
Reserve Bank balance requirements for the year ended December 31, 1998, amounted
to $363 million.
Minimum operating lease payments due in each of the five years subsequent
to December 31, 1998, are as follows (in millions): 1999, $213; 2000, $198;
2001, $180; 2002, $160; 2003, $137; and subsequent years, $1 billion. Rental
expense for all operating leases for the three years ended December 31, 1998,
was $326 million, 1997; $316 million, 1997; and $314 million, 1996.
In the normal course of business, the Corporation enters into underwriting
commitments. Transactions relating to these underwriting commitments that were
open at December 31, 1998, and that were subsequently settled, had no material
impact on the Corporation's consolidated financial position.
The Parent Company and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which damages in various amounts are claimed. Although the amount
of any ultimate liability with respect to such matters cannot be determined, in
the opinion of management, based on the opinions of counsel, any such liability
will not have a material impact on the Corporation's consolidated financial
position.
C-31 Audited Financial Statements
NOTE 15: CARRYING AMOUNT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments at
December 31, 1998 and 1997, which should be read in conjunction with Note 14 and
certain other notes to the consolidated financial statements presented elsewhere
herein, is set forth below.
December 31, 1998 December 31, 1997
----------------- -----------------
Estimated Estimated
Carrying Fair Carrying Fair
(In millions) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 28,637 28,637 21,888 21,888
Trading account assets 9,759 9,759 5,952 5,952
Securities available for sale 37,434 37,434 23,524 23,524
Investment securities 2,025 2,162 3,526 3,670
Loans
Commercial, financial and agricultural 53,856 53,845 45,563 45,825
Real estate - construction and other 2,628 2,634 3,032 3,081
Real estate - commercial mortgage 8,565 8,637 13,143 13,361
Lease financing 6,596 6,596 5,786 5,786
Foreign 4,805 4,776 3,875 3,874
Real estate - mortgage 21,729 21,890 28,980 29,420
Installment loans - Bankcard 2,779 2,813 3,914 3,981
Installment loans - other and vehicle leasing 34,425 34,771 27,394 27,477
- --------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 135,383 135,962 131,687 132,805
Allowance for loan losses (1,826) - (1,847) -
- --------------------------------------------------------------------------------------------------------------
Loans, net 133,557 135,962 129,840 132,805
- --------------------------------------------------------------------------------------------------------------
Other assets $ 11,464 11,464 9,313 9,313
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 35,614 35,614 31,005 31,005
Interest-bearing deposits
Savings and NOW accounts 38,649 38,649 37,281 37,281
Money market accounts 22,762 22,762 21,240 21,240
Other consumer time 35,809 36,268 37,324 37,867
Foreign 3,487 3,487 3,928 3,928
Other time 6,146 6,156 6,299 6,398
- --------------------------------------------------------------------------------------------------------------
Total deposits 142,467 142,936 137,077 137,719
Short-term borrowings 41,438 41,438 31,681 31,681
Other liabilities 8,099 8,099 3,690 3,690
Long-term debt $ 22,949 23,517 13,487 13,866
- --------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-32
Fair values are estimated for loans with similar financial
characteristics. These loans are segregated by type of loan, considering credit
risk and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair values of performing loans for all portfolios are calculated by
discounting estimated cash flows through expected maturity dates using estimated
market yields that reflect the credit and interest rate risks inherent in each
category of loans. These market yields also include a component for the
estimated cost of servicing the portfolio. A prepayment assumption is used as an
estimate of the number of loans that will be repaid prior to their contractual
maturity.
For performing residential mortgage loans, fair values are estimated using
a discounted cash flow analysis utilizing yields of comparable mortgage-backed
securities. The loan portfolio is segmented into homogeneous pools based on loan
types, coupon rates, maturities, prepayment characteristics and credit risk.
These pools are compared with similar mortgage-backed securities to arrive at an
appropriate discount rate; whole loan liquidity and risk characteristics are
considered within the comparison.
The fair value of nonperforming loans is calculated by estimating the
timing and amount of cash flows. These cash flows are discounted using estimated
market yields commensurate with the risk associated with such cash flows.
Estimates of cash flows are made using data specific to the borrower and
available market data.
Estimated fair values for the commercial loan portfolio were based on
weighted average discount rates ranging from 5.52 percent to 7.64 percent and
6.57 percent to 8.68 percent at December 31, 1998 and 1997, respectively, and
for the retail portfolio from 7.08 percent to 12.94 percent and 7.24 percent to
14.71 percent, respectively.
The fair value of noninterest-bearing deposits, savings and NOW accounts,
and money market accounts is the amount payable on demand at December 31, 1998
and 1997. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities. The fair value
estimates do not include the benefit that results from the low-cost funding
provided by deposit liabilities compared to the cost of borrowing funds in the
market.
Under the applicable accounting standards, fair value estimates are based
on existing financial instruments, as defined, without estimating the value of
certain ongoing businesses, the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
In the opinion of management, these add significant value to the Corporation.
Significant items that are not included are long-term relationships with
customers through the deposit base, the mortgage banking operation and the
brokerage network. The fair value of off-balance sheet derivative financial
instruments has not been considered in determining on-balance sheet fair value
estimates.
C-33 Audited Financial Statements
NOTE 16: FIRST UNION CORPORATION (PARENT COMPANY)
The Parent Company's principal assets are investments in its subsidiaries,
interest-bearing balances with bank subsidiary, securities purchased under
resale agreements, securities available for sale and loans to subsidiaries. The
significant sources of income of the Parent Company are dividends from its
subsidiaries, interest and fees charged on loans made to its subsidiaries,
interest on eurodollars purchased from bank subsidiaries and interest on
securities available for sale. Additionally, a significant amount of sundry
income includes fees the Parent Company charges to its subsidiaries for
providing various services.
In addition, the Parent Company serves as the primary source of funding
for the mortgage banking and other activities of its nonbank subsidiaries. The
Parent Company has available a $175 million, four-year line of credit that
expires in July 2002 and a $175 million, 364-day line of credit which expires in
July 1999. Annual facility fees related to the four-year line of credit and the
364-day line of credit range from 7.00 basis points to 17.50 basis points and
5.00 basis points to 15.00 basis points, respectively. The annual facility fee
is based on both the commitment amount, and on the senior, unsecured debt
ratings of the Parent Company. Generally, interest rates will be determined when
the credit line is used, and they will vary based on the type of loan extended
to the Parent Company. Additionally, each line of credit contains financial
covenants related to tangible net worth and double leverage ratios, and each
requires that the Parent Company's banking affiliates maintain certain capital
levels. At December 31, 1998, the Parent Company was in compliance with such
covenants and requirements.
Certain regulatory and other requirements restrict the (i) lending of
funds by the bank subsidiaries to the Parent Company and to the Parent Company's
nonbank subsidiaries, and (ii) amount of dividends that can be paid to the
Parent Company by the bank subsidiaries and certain of the Parent Company's
other subsidiaries. On December 31, 1998, the Parent Company was indebted to
subsidiary banks in the amount of $261 million that, under the terms of
revolving credit agreements, was collateralized by certain interest-bearing
balances, securities available for sale, loans, premises and equipment, and it
was payable on demand. On such date, a subsidiary bank had loans outstanding to
Parent Company nonbank subsidiaries in the amount of $139 million that, under
the terms of a revolving credit agreement, were collateralized by securities
available for sale and certain loans, and they were payable on demand. The
Parent Company has guaranteed certain borrowings of its subsidiaries that at
December 31, 1998, amounted to $670 million. Parent Company long-term debt
issuances include assumed debt from acquired companies of $2.8 billion in 1998.
Industry regulators limit dividends that can be paid by the Corporation's
subsidiaries. National banks are limited in their ability to pay dividends in
two principal ways. First, dividends cannot exceed the bank's undivided profits,
less statutory bad debt in excess of the bank's allowance for loan losses; and
second, in any year, dividends may not exceed a bank's net profits for that
year, plus its retained earnings from the preceding two years, less any required
transfers to surplus. At December 31, 1998, the Parent Company's subsidiaries,
including its bank subsidiaries, had available retained earnings of $1.3 billion
for the payment of dividends to the Parent Company without regulatory or other
restrictions. Dividends from subsidiaries includes $1.5 billion and $835 million
in equity transfers to the Parent Company related to internal bank
consolidations in 1998 and 1997, respectively. Subsidiary net assets of $17
billion were restricted from being transferred to the Parent Company at December
31, 1998, under regulatory or other restrictions.
The operating results of the Parent Company and its eligible subsidiaries
are included in a consolidated federal income tax return. Each subsidiary pays
its allocation of federal income taxes to the Parent Company or receives payment
from the Parent Company to the extent tax benefits are realized. Where state
income tax laws do not permit consolidated income tax returns, applicable state
income tax returns are filed.
At December 31, 1998 and 1997, the estimated fair value of the Parent
Company's loans was $3.5 billion and $2.8 billion, respectively. See Note 7 for
information related to the Parent Company's junior subordinated deferrable
interest debentures.
The Parent Company's condensed balance sheets as of December 31, 1998 and
1997, and the related condensed statements of income and cash flows for each of
the years in the three-year period ended December 31, 1998, are presented below.
Audited Financial Statements C-34
CONDENSED BALANCE SHEETS
December 31,
------------------------
(In millions) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing balances with bank subsidiary $ 3,568 4,215
Securities purchased under resale agreements 1,912 381
- --------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 5,480 4,596
- --------------------------------------------------------------------------------------------------------------------------------
Trading account assets 9 -
Securities available for sale (amortized cost $610 in 1998; $452 in 1997) 618 453
Investment securities - 28
Loans, net 14 154
Loans due from subsidiaries
Banks 2,300 1,912
Bank holding companies - 174
Other subsidiaries 1,549 531
Investments in wholly owned subsidiaries
Arising from investments in equity in undistributed net income of subsidiaries
Banks 18,913 12,346
Bank holding companies - 2,357
Other subsidiaries 1,311 1,274
- --------------------------------------------------------------------------------------------------------------------------------
20,224 15,977
Arising from purchase acquisitions 262 101
- --------------------------------------------------------------------------------------------------------------------------------
Total investments in wholly owned subsidiaries 20,486 16,078
- --------------------------------------------------------------------------------------------------------------------------------
Other assets 823 628
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 31,279 24,554
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits - 1
Commercial paper 1,629 871
Other short-term borrowings with affiliates 2,533 1,114
Other liabilities 456 901
Long-term debt 8,457 5,377
Junior subordinated deferrable interest debentures 1,031 1,021
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 14,106 9,285
Stockholders' equity 17,173 15,269
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 31,279 24,554
- --------------------------------------------------------------------------------------------------------------------------------
C-35 Audited Financial Statements
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
-------------------------------------
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 303 177 158
Interest and dividends on securities available for sale 35 29 22
Interest and dividends on investment securities 1 3 -
Other interest income from subsidiaries 195 172 73
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 534 381 253
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on short-term borrowings 129 95 74
Interest on long-term debt 596 434 301
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 725 529 375
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (191) (148) (122)
Provision for loan losses - (1) -
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (191) (147) (122)
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Dividends from subsidiaries
Banks 1,766 2,226 1,268
Bank holding companies - 452 1,693
Other subsidiaries 5 116 42
Trading account profits 2 15 -
Securities transactions 5 9 -
Sundry income 845 708 529
- --------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,623 3,526 3,532
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE 733 650 561
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) and equity in undistributed
net income of subsidiaries 1,699 2,729 2,849
Income taxes (benefits) 9 13 (33)
- --------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries 1,690 2,716 2,882
Equity in undistributed net income of subsidiaries 1,201 (7) (609)
- --------------------------------------------------------------------------------------------------------------------------------
Net income 2,891 2,709 2,273
Dividends on preferred stock - - 9
- --------------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stockholders $ 2,891 2,709 2,264
- --------------------------------------------------------------------------------------------------------------------------------
Audited Financial Statements C-36
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------------
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 2,891 2,709 2,148
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Equity in undistributed net income of subsidiaries (1,201) 7 734
Accretion and revaluation losses on securities 4 2 1
Provision for loan losses - (1) -
Securities transactions (5) (9) -
Depreciation and amortization 53 13 10
Deferred income taxes (benefits) 36 (46) 5
Trading account assets, net (9) - -
Other assets, net (193) (79) 131
Other liabilities, net (448) 828 42
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,128 3,424 3,071
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales and maturities of securities available for sale 389 161 104
Purchases of securities available for sale (556) (335) (171)
Calls and underdeliveries of investment securities 29 153 718
Purchases of investment securities - (96) (707)
Advances to subsidiaries, net (1,232) 402 (316)
Investments in subsidiaries (549) 196 (581)
Longer-term loans originated or acquired (155) (382) (244)
Principal repaid on longer-term loans 295 336 212
Purchases of premises and equipment, net (68) (18) (26)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,847) 417 (1,011)
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits (1) 1 -
Commercial paper 758 (150) 79
Other short-term borrowings, net 1,419 104 190
Issuance of junior subordinated deferrable interest debentures - 511 510
Issuances of long-term debt 4,018 525 852
Payments of long-term debt (943) (17) (364)
Sales of common stock 932 815 367
Redemption of preferred stock - - (109)
Purchases of common stock (3,056) (2,360) (1,584)
Cash dividends paid (1,524) (1,141) (1,040)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,603 (1,712) (1,099)
- -------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 884 2,129 961
Cash and cash equivalents, beginning of year 4,596 2,467 1,506
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,480 4,596 2,467
- -------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 706 464 346
Income taxes 85 200 225
NONCASH ITEMS
Increase in investments in subsidiaries as a result of acquisitions of institutions
for common stock $ 2,540 3 1,008
- -------------------------------------------------------------------------------------------------------------------------------
C-37 Audited Financial Statements