1
FIRST UNION CORPORATION 2000 ANNUAL REPORT
FIRST UNION
LOGO APPEARS HERE
2
- -------------------------------------------------------
ABOUT FIRST UNION
- -------------------------------------------------------
CONTENTS
2 LETTER TO OUR
STOCKHOLDERS
12 MANAGEMENT'S
ANALYSIS OF
OPERATIONS
33 FINANCIAL TABLES
54 MANAGEMENT'S
STATEMENT OF
RESPONSIBILITY
55 INDEPENDENT
AUDITORS' REPORT
56 AUDITED FINANCIAL
STATEMENTS
First Union [NYSE: FTU], founded in 1908 as Union National Bank in Charlotte,
North Carolina, is the nation's sixth largest nationwide banking company with
$254 billion in assets and sixth largest nationwide broker-dealer with 7,400
registered representatives at December 31, 2000. Primary banking operations in
11 East Coast states and Washington, D.C. Brokerage operations in 47 states
nationwide.
SUPERIOR ASSET-GATHERING FRANCHISE
- East Coast marketplace encompasses 33 percent of nation's
population and businesses and eight of nation's 10 highest per
capita income markets
- No. 1 deposit share on the East Coast; No. 5 nationally
- 7 million retail households; 21 percent market penetration in
footprint
- Top 5 commercial lender nationally
- 800,000 small business customers; 11 percent market
penetration in footprint
- Expanding national brokerage business with 3 million accounts
ASSET MANAGEMENT POWERHOUSE WITH $171 BILLION IN ASSETS UNDER MANAGEMENT
- $3.9 billion in revenue generated by brokerage, insurance,
trust, 401(k), wealth and asset management businesses
- 23rd largest mutual fund family with $85 billion in assets
under management
- 3rd largest among banks in brokerage operations, 5th largest
in mutual funds and 2nd largest in annuity sales
- Long legacy of personal trust and wealth services for high net
worth clients
NICHE CAPITAL MARKETS BUSINESS
- $3.1 billion in revenue generated by more than 20 distinct
business units
- Broad-based capabilities in corporate and investment banking,
fixed income and equity capital markets
MULTI-CHANNEL DISTRIBUTION NETWORK
- 2,200 financial centers -- nation's 3rd largest branch network
- 375 full-service brokerage offices nationwide
- 160 home equity loan originators in 31 states
- 3,800 automated teller machines-- nation's 6th largest network
- 3rd largest and fastest-growing Internet channel,
firstunion.com
- First Union Direct, 1-800-413-7898
3
-------------------------------------------------------
FINANCIAL HIGHLIGHTS
-------------------------------------------------------
Years Ended December 31, Percent
--------------------------- Increase
(Dollars in millions, except per share data) 2000 1999 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
OPERATING EARNINGS
Net interest income - tax-equivalent $ 7,536 7,570 --%
Fee and other income 6,830 6,996 (2)
- -----------------------------------------------------------------------------------------------------------------
Total revenue - tax-equivalent 14,366 14,566 (1)
Provision for loan losses 754 692 9
Securities transactions - portfolio (15) (63) (76)
Noninterest expense 9,213 8,458 9
Income taxes - tax-equivalent 1,449 1,867 (22)
- -----------------------------------------------------------------------------------------------------------------
Income before restructuring, merger-related and other charges and
cumulative effect of a change in accounting principle (Operating earnings) 2,935 3,486 (16)
After-tax restructuring, merger-related and other charges (2,797) (263) --
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 138 3,223 (96)
Cumulative effect of a change in accounting for beneficial interests, net of tax (46) -- --
- -----------------------------------------------------------------------------------------------------------------
Net income (As reported) $ 92 3,223 (97)%
- ------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before restructuring, merger-related and other charges and
cumulative effect of a change in accounting principle $ 2.97 3.60 (18)%
Income before cumulative effect of a change in accounting principle 0.12 3.33 (96)
Net income 0.07 3.33 (98)
Cash operating earnings $ 3.30 3.94 (16)%
- ------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY
Return on average stockholders' equity - operating earnings 17.23% 21.60 --
Return on average stockholders' equity - cash operating earnings 26.33 34.67 --
Net interest margin 3.55 3.79 --
Fee and other income to total revenue - operating earnings 47.54 48.03 --
Overhead efficiency ratio - cash operating earnings 61.68% 55.62 --
Operating leverage - cash operating earnings $ (918) 102 --
Effective income tax rate 31.51% 33.41 --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Securities $ 49,246 53,035 (7)%
Loans, net of unearned income 123,760 133,177 (7)
Total assets 254,170 253,024 --
Total deposits 142,668 141,047 1
Long-term debt 35,809 31,975 12
Stockholders' equity $ 15,347 16,709 (8)%
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
Tier 1 capital ratio 7.02% 7.08 --
Total capital ratio 11.19% 10.87 --
- ------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Allowance as % of loans, net 1.39% 1.32 --
Allowance as % of nonperforming assets 135 165 --
Net charge-offs as % of average loans, net 0.59 0.53 --
Nonperforming assets as % of loans, net,
foreclosed properties and assets held for sale 1.22% 0.78 --
- ------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Employees 71,262 71,659 (1)%
Branches 2,193 2,318 (5)
Shares outstanding (In thousands) 979,963 988,315 (1)
Common stock price $ 27.81 32.94 (16)
Market capitalization 27,253 32,553 (16)
Cash dividends per share $ 1.92 1.88 2%
- ------------------------------------------------------------------------------------------------------------------------------
1
4
- -------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
- -------------------------------------------------------
[PHOTO]
G. Kennedy Thompson
President and Chief Executive Officer
Dear Stockholders,
2000 was a year of intensive work throughout First Union as we sharpened our
focus on our three core businesses -- the General Bank, Capital Management and
Capital Markets -- and streamlined your company for greater efficiency and
increased competitiveness.
The actions we took in 2000 to restructure, control expense growth and create
sustainable competitive advantages established a new strategic path for your
company. We were guided by our belief that the leading companies of the future
will be those that anticipate changing conditions and take proactive steps to
prepare for success in any environment. The actions we took in 2000 were just
such steps. We look forward to validating our strategies as stronger results
emerge by the end of 2001.
This is my first Letter to Stockholders since becoming chief executive officer
in April of 2000. I would like to spend the next few pages going into some depth
on what we achieved in 2000, and what we anticipate going forward.
We have clear strengths as we contemplate the future, foremost being our new,
energetic management team that will be introduced later in this letter. We have
a superior franchise for gathering a leading share of household assets in the
years ahead -- the sixth largest banking network in the nation with the largest
deposit share on the East Coast, combined with a growing asset management
operation encompassing the sixth largest brokerage firm in the nation. This
combination of bank and brokerage, coupled with multi-channel distribution, is
virtually unique in its ability to meet the overall financial needs of today's
customers.
2000: REPOSITIONED, RESET BUSINESS STRATEGIES In June of 2000, we announced the
results of an intensive six-month review that led us to focus more strategically
on our three core growth businesses. We began paring away businesses and units
that had minimal connection to our growth strategy, areas where we did not have
scale or competitive strength and areas with limited prospects for net income
growth. We intensified our energies around risk management, financial discipline
and prudent use of capital, and we instilled a new fervor for expense control.
As a result of these decisions, we exited or divested several businesses.
For example, we immediately ceased loan originations at The Money Store, because
we believed there was little prospect for realizing a return on that investment.
In addition, we sold our credit card and mortgage servicing portfolios to third
parties. These were profitable operations for us, with hardworking and dedicated
employees, but we lacked the scale to be dominant players. In our commitment to
meet customers' needs, we now offer a complete selection of these products and
services through strategic partnerships and alliances.
2
5
-------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
-------------------------------------------------------
We also sold branch offices in areas where we lacked market share advantages.
While we plan to complete the sale of 84 branches during this restructuring, our
retail franchise will maintain its leading position in our attractive East Coast
marketplace.
With these and other actions in motion, we spent the rest of the year executing
strategies that we believe will lead to balanced and consistent growth in our
three core businesses.
STOCK PRICE AND DIVIDEND As we developed our strategic plan in 2000, we fully
anticipated that the stock market would take a "wait and see" stance pending
proof of renewed revenue momentum. We have been pleased with how quickly the
market has recognized our progress. While our stock declined 16 percent in 2000,
the story has been different since we announced our intention to align the
dividend payout ratio with industry standards and to improve capital ratios by
halving the dividend on our stock. From December 20, 2000, through February 20,
2001, it has returned 20 percent compared with a 4 percent return for the S&P
bank composite index and 1 percent for the S&P 500. We believe this is evidence
that the marketplace recognizes the wisdom of our strategy.
Let me put the dividend decision in context. As we solidified and focused our
business strategies, it became clear that a stronger balance sheet would provide
more flexibility to invest in core businesses and to make other prudent capital
deployment decisions. At the same time, we established a new goal of becoming
one of the nation's best capitalized banking institutions. We anticipate
generating $1 billion in additional capital annually resulting from the dividend
reduction -- capital that will be focused on strategies that we believe will
enhance overall shareholder value.
The actions we took in 2000 established a much sounder operational and financial
path for your company. We believe these actions will enable us in the years
ahead to produce strong, consistent growth in revenue and in earnings. Long
term, our goal is to consistently produce 10 to 12 percent earnings growth over
any three- to five-year business cycle. However, we believe 2001 will be a
challenging year for much of the industry, and we expect our growth rate to be
below 10 percent in light of the economic environment. That being said, we are
encouraged by such signs of progress as 9 percent core loan growth and 2 percent
core deposit growth in 2000 (excluding branch sales). More encouragement came
from our cost control efforts, which have moderated expense growth, and strong
evidence that customer service is improving dramatically.
In 2000, our operating earnings were $2.9 billion, or $2.97 per share. After
$2.8 billion restructuring and other charges taken to shift our strategic
direction, net income was $92 million. Operating earnings were down 16 percent
from 1999 due to the strategic repositioning. On an operating basis, the return
on stockholders' equity (ROE) was 17.2 percent. More information is in the
Management's Analysis of Operations section.
PRIORITY NO. 1: CREATING SUPERIOR SHAREHOLDER VALUE With the decisions of 2000
behind us, our number one priority today is creating superior shareholder value.
We believe the key is execution in these four areas:
- Consistent, strong growth in revenue and earnings;
- Rigorous, comprehensive risk management;
- Improved financial discipline as evidenced by expense control
and prudent capital deployment; and
- Progress in achieving our objective of being among the
nation's best capitalized financial institutions.
Our fundamental strengths -- broad distribution, a full selection of financial
and investment products and leading share in attractive markets -- give us a
sustainable competitive advantage for long-term success. These strengths
support:
- A growing General Bank that is far from a "traditional bank,"
with innovative segmentation strategies using advanced
customer knowledge to ensure we provide the right product to
the right customer at the right time;
- An asset management growth engine in our Capital Management
Group, which is uniquely suited to serve the wealth creation
and wealth management needs of customers; and
- The ability to provide a full suite of financial solutions not
offered by traditional banking companies through our Capital
Markets Group.
We believe these strengths add up to a virtually unparalleled customer value
proposition.
3
6
- -------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
- -------------------------------------------------------
[PHOTO]
BOB KELLY
Chief Financial
Officer
"First Union has made great strides toward improved financial discipline,
enhanced risk management and prudent use of capital. I joined First Union
because I was impressed with its unique strengths and capabilities as the
nation's sixth largest bank/brokerage operation. We're already focused on the
right things and ahead of a number of our peers in getting ready for an even
more competitive environment."
[PHOTO]
ROB NIMMO
Chief Risk Officer
"Our essential mission is to strike the right balance between the amount and
type of risk we take and to ensure we receive an adequate return. We have to do
this within a balanced control framework, where everyone clearly understands
their role and where performance is measured consistently and comprehensively."
NEW MANAGEMENT TEAM We have assembled an exceptional management team over the
past 24 months that is disciplined, broadly experienced and creative.
In addition to myself, this team includes a new chief financial officer, Bob
Kelly; a new chief risk officer, Rob Nimmo; a new general counsel, Mark Treanor;
and a new treasurer, Tom Wurtz. Our three core businesses are headed by Ben
Jenkins in the General Bank, Don McMullen in Capital Management, and Steve
Cummings and Barnes Hauptfuhrer in Capital Markets. Further powering all of our
businesses and internal processes is the Internet and advanced technology; David
Carroll heads our eCommerce and Technology operations and Sue Perrotty heads our
Operations Division. The pages following this letter describe the strategies in
our business units.
NEW FINANCIAL DISCIPLINE In 2000, the new management team in Finance refocused
efforts on improved financial discipline and solidified the systems, controls,
accountabilities and culture to enforce that discipline.
This involved implementing a new capital allocation methodology with rigorous
risk-adjusted return on capital and economic profit metrics to guide internal
and external investment decisions. In addition, beginning in 2001, incentive
compensation for the top 150 managers will be tied to achieving earnings per
share and economic profit objectives.
Through the application of this new methodology, we will make more informed
decisions for investing in higher growth, less capital intensive businesses, and
for divesting low growth, high capital intensive businesses.
The goals of this team are to:
- Strengthen the balance sheet to provide more flexibility to
invest in core business growth;
- Become one of the better capitalized banking companies in the
nation; and
- Improve the clarity and transparency of our financial
reporting.
Key to this will be the new economic profit metrics and the new segment
reporting that will be presented in first quarter 2001 financial reports. More
information is in the Management's Analysis of Operations section.
COMPREHENSIVE RISK MANAGEMENT In 2000, we enhanced our management of risk by
combining our credit risk, operational risk and market risk management
activities. This action was driven by the recognition that the same capital base
must bear the risk for all of the different activities in which we are involved
as a company.
As we enter a more challenging economic cycle, the highest concern naturally
centers on credit risk. We believe we're in a significantly stronger position
today than we were during the early '90s because of the diversified model we've
built, which produces balanced profitability from fee-based businesses as well
as from our traditional credit income-producing businesses.
Our loan portfolio, which amounts to $124 billion, is well diversified by
product, by geography and by industry concentration. We have a long history of
strong credit quality -- and in fact, during the adverse credit cycle of the
early '90s, we outperformed the industry. As we prepare for more challenging
conditions, we are tightening credit standards, we are monitoring potential risk
areas very tightly and we are actively managing the portfolio to keep risk areas
in check.
POISED FOR THE FUTURE We believe our emphasis on revenue growth, risk
management, financial discipline and prudent use of capital will ultimately help
us grow revenue faster than expense, and distinguish First Union from the
competition in the years ahead.
4
7
-------------------------------------------------------
LETTER TO OUR STOCKHOLDERS
-------------------------------------------------------
In other words, all the pieces are in place for higher growth. We believe First
Union has a great deal going for it in today's more challenging and competitive
environment.
As I end this letter, I want to express my sincere appreciation to our customers
for their business; to our employees, who have gone to extraordinary lengths to
find ways to serve their customers better and better; to our directors, for
their wise counsel and guidance; and to our shareholders for their continued
support.
We continue to review and assess our corporate governance policies, including
board structure and size. It has become clear that a smaller board would be more
effective going forward. Therefore, six directors have agreed to retire. After
ensuring the board continues to represent a breadth of business knowledge,
experience and diversity, the nominating committee accepted the retirements
effective with the April 2001 board meeting. As we say farewell, we also would
like to express our admiration and deep gratitude for the tremendous
contributions of these directors who will retire: Edward E. Barr, W. Waldo
Bradley, Norwood H. Davis, Jr., Frank M. Henry, Ernest E. Jones and James M.
Seabrook.
In addition, we also say a very fond farewell to our longtime chairman of the
executive committee, B.F. Dolan, who is retiring in 2001 after reaching the
mandatory retirement age. He has been a great leader for our company, embodying
the best attributes of both strategic thinking and personal thoughtfulness.
Most notably, we wish all the best to our chairman since 1985, Edward E.
Crutchfield, who retires in March 2001. Ed joined First Union in 1965 and was
chief executive officer for 16 years. He is widely regarded as one of the
handful of leaders who led the banking industry into the 21st century with an
expanded product offering and services that fulfill the needs of today's
customers. He had the leadership and vision to build First Union from a $7
billion, North Carolina bank into a $250 billion, diversified financial
institution and the sixth largest bank holding company in the nation. I have
been very moved this past year, as Ed successfully fought his battle with
cancer, to know that he was equally courageous in providing support as we
restructured this company for the next phase of its existence.
Thank you, again, for your interest in First Union.
Sincerely,
/s/ Ken Thompson
Ken Thompson
President and Chief Executive Officer
February 20, 2001
5
8
- -------------------------------------------------------
BUSINESS UNITS - GENERAL BANK
- -------------------------------------------------------
[PHOTO]
BEN JENKINS
Head of the
General Bank
"The General Bank is the foundation -- the core of our company. It's the face of
First Union to so many of our customers. Today we are focused on knowing our
customers and their needs better than anyone else. We use our integrated
customer information capability to weave our distribution network and product
line into a unique value proposition."
GENERAL BANK BUSINESS PROFILE
- Leading-edge, customized banking products.
- Full line of retail investment products.
- Four major business lines: Retail, Small Business, Commercial
and Commercial Real Estate.
- Sales and service partner with Capital Management and Capital
Markets.
- Distribution scale: 2,200 financial centers, 375 full-service
brokerage offices, 200 remote business bankers, 11 call
centers, 3,800 ATMs and 24x7 online service.
- 21 percent penetration of retail market and 11 percent
penetration of small business market in East Coast footprint.
STRATEGIC FOCUS
- Grow deposits, loans and investment products.
- Leverage customer information to retain and acquire customers
and deepen and enhance relationships through tailored service.
- Increase share of small business market.
The General Bank is distinguished by a balanced source of earnings -- more so
than traditional banks because of its integrated distribution network and its
bridge to investment products through our Capital Management Group.
The General Bank has developed sophisticated customer management strategies
focused on customer retention, acquisition and deepening and enhancing
relationships. The goal is to improve profitability by cross-selling additional
products and services to our single service customers, who tend to be less
profitable and more inclined to turnover. These strategies are designed to
encourage customers not just to transact, but also to borrow, save and invest
with us. In a select group of customers, we improved the ratio of these multiple
service customers from 20 percent in 1999 to 25 percent in 2000.
Customer satisfaction scores measured by the Gallup organization have risen for
the past seven consecutive quarters. This dramatic improvement, coupled with
improved customer household retention, shows we have turned the corner on the
serious customer service issues that emerged in 1998 and 1999. We attacked these
issues on many fronts, including monthly meetings to review progress on 80
different service improvement measures. We added staff to retail branch and
servicenter operations that had been cut too deeply in early 1999. We changed
our incentive system to reward service and sales equally, and we improved
systems for tracking customer inquiries.
In 2000, the Consumer and Commercial segments contributed 47 percent of revenue
and 39 percent of operating earnings. The General Bank is intensely focused on
growing top-line revenue and improving bottom-line contribution. Underlying
momentum in loans, deposits and investment product growth in 2000 was masked by
the asset securitizations and sales that were part of the company's strategic
repositioning.
6
9
-------------------------------------------------------
BUSINESS UNITS - CAPITAL MANAGEMENT
-------------------------------------------------------
[PHOTO]
DON MCMULLEN
Head of the Capital
Management Group
"The Capital Management Group makes First Union more than a bank and more than a
brokerage firm. As an asset management powerhouse with the sixth largest
national brokerage firm and a long legacy of trust services, we strive to be the
firm of choice for individual, institutional and corporate clients. We build
long-term relationships, tailoring options to meet the needs of each client."
CAPITAL MANAGEMENT BUSINESS PROFILE
- $171 billion in assets under management, including $85 billion
in mutual funds.
- Brokerage, insurance, trust, 401(k), wealth and asset
management businesses.
- 6th largest brokerage firm in the nation and among banks, 3rd
largest brokerage firm, 5th largest mutual fund family and 2nd
largest in annuity sales.
- 7,400 registered representatives in 47 states and Washington,
D.C.
- Multiple channel distribution: 375 full-service brokerage
offices, 2,200 retail financial centers, 1,900 third party
financial service providers and online brokerage.
- Three million brokerage client accounts.
- Evergreen Funds in highest tier on DALBAR service quality
rankings.
STRATEGIC FOCUS
- Capitalize on distribution scale, product offerings and
demographic trends to deepen customer relationships.
- Maximize linkage to General Bank products and customers.
- Provide maximum brokerage channels for clients and financial
advisors.
- Particular focus on investments, trust, 401(k) and insurance
services.
The Capital Management business is a key component of First Union's quest to
build a balanced earnings stream with half of all revenue coming from fee-based
businesses -- a goal we expect to reach in 2001. The Capital Management team has
combined a diversified product set with multiple distribution capabilities to
become a key growth engine for the company. This business has grown at a 30
percent compound annual growth rate since 1995, when we had $47 billion in
assets under management, to $171 billion in 2000. In 2000, brokerage client
assets increased 6 percent from 1999 to $205 billion.
In the asset management business, First Union is the adviser for the Evergreen
family of mutual funds, the nation's fifth largest among banks and 23rd
industry-wide. Evergreen assets grew 6 percent to $85 billion in 2000 despite
the difficult market environment. Numerous Evergreen Funds were recognized for
excellent performance in 2000, among them the Evergreen Capital Growth Fund A
and Evergreen Healthcare Fund, cited as category leaders in third party
rankings.
With the Capital Management Group, we have the expertise, products and
distribution to help clients manage assets at all stages of their lives. For the
Generation Xers who are beginning to focus on their accumulation plans, we offer
systematic investment plans requiring low minimum balances, self-directed as
well as bank-managed IRAs and other services. For clients who have accumulated
substantial assets, we provide trust services, private capital management
services, tax strategies, teams of asset managers and other specialized
services. For corporate and institutional trust clients, we offer a complete
range of services including employee benefit plans and trust, custody and
institutional debt management, while 401(k) customers may purchase insurance,
brokerage, bank products and other services from us. We serve the high net worth
market through 76 offices across the nation, supported by relationship managers
and a team of specialists. For the affluent client, our full-service nationwide
brokerage offices provide a link to trust, estate planning and other financial
services, while our mutual funds, insurance and other investment products are
available through our multi-channel distribution network.
In 2000, the Capital Management Group contributed 27 percent of revenue and 24
percent of operating earnings.
7
10
- -------------------------------------------------------
BUSINESS UNITS - CAPITAL MARKETS
- -------------------------------------------------------
[PHOTO]
STEVE CUMMINGS
Co-Head of
Capital Markets
"In spite of the difficult financial markets, we have a great opportunity to
differentiate ourselves by offering creative capital solutions when our clients
need them most. We have never been better focused or more efficient, and we're
very optimistic about our ability to grow this business in the future."
[PHOTO]
BARNES HAUPTFUHRER
Co-Head of
Capital Markets
"We see 2000 and 2001 as important transitional years for the company and the
Capital Markets Group. Our goal during this transition period is to position the
company for maximum creation of long-term shareholder value."
CAPITAL MARKETS BUSINESS PROFILE
Broad selection of value-added products and services to corporate and
institutional clients. Major product and service categories include:
- Fixed income products (corporate and asset-based lending; loan
syndications; leasing; derivatives; foreign exchange; bond
sales, trading, research and underwriting).
- Equity products (private equity and mezzanine capital; equity
derivatives and equity and convertible securities; sales,
trading, research and underwriting).
- Structured products (asset securitizations and real estate
capital markets products).
- Advisory services (mergers and acquisitions and other
corporate finance advisory services).
STRATEGIC FOCUS
- Attract and retain customers across all business units.
- Optimize allocation of capital from a risk/return perspective.
- Continue to refine the business model to generate maximum
economic value.
Industry and product expertise and an unparalleled commitment to clients are the
three core drivers of our Capital Markets growth plan. Whether it's investing in
growth companies, developing sophisticated hedging strategies, advising CEOs on
acquisitions or structuring and arranging complex debt and equity securities
offerings to achieve corporate and institutional client objectives, our goal is
to consistently distinguish ourselves through the delivery of creative ideas and
capital to our clients.
2000 was a year of significant change and restructuring in the Capital Markets
Group. We exited (and entered) certain businesses, we changed management in
selected areas and streamlined our organization. Improved efficiency and
profitability will continue to be a key focus in 2001.
In 2000, the Capital Markets Group contributed 22 percent of revenue and 28
percent of operating earnings.
8
11
-------------------------------------------------------
BUSINESS UNITS - eCOMMERCE AND TECHNOLOGY
-------------------------------------------------------
[PHOTO]
David Carroll
Chief eCommerce and
Technology Officer
"We think the web is very powerful when it's combined with our financial centers
and First Union Direct (our advanced telephone banking operation). Our focus
is on deepening and enhancing, retaining and acquiring customers by building the
kind of functionality that they want -- not technology for technology's sake. We
have industry-leading growth and solid penetration."
eCOMMERCE AND TECHNOLOGY BUSINESS PROFILE
- The nation's 3rd largest and fastest growing Internet banking
channel for the past two years.
- 2.4 million online enrollments at year-end 2000, including
59,000 online brokerage and 88,000 online wholesale
enrollments.
- Forrester survey ranked firstunion.com 4th overall in online
services, 1st in online customer service and 2nd in online
features.
- Internet channel originated 11,000 deposit accounts and $243
million in loans in 2000 -- equivalent to the volume generated
by a small to medium sized market.
- First Union Direct opened 500,000 deposit accounts and
originated $1 billion in loans in 2000.
- Competitive advantage in common operating systems and a
web-based platform for human resources, procurement and
finance.
STRATEGIC FOCUS
- Further introduce the online channel and, in particular,
electronic bill payment to customers.
- "Web enable" First Union's internal processes and
infrastructure, including online forms and processing for
employee benefits, the 401(k) plan, interactive training,
travel arrangements, job postings and purchasing.
- Joint ventures, alliances and equity investments that expand
our brand cost-efficiently through multiple points of presence
and acquire early or proprietary access to emerging technology
and business models.
- Further leverage eCommerce capability to build capacity and
lower costs company-wide.
First Union has built one of the industry's most comprehensive online financial
services capabilities, with financial planning tools, real-time credit approval,
online account opening for deposits, customer service, bill pay, shopping,
mortgage loan origination, small business, foreign exchange and a
business-to-business marketplace for small and mid-sized companies, among other
offerings. More than 15 percent of our customers now use this channel regularly.
Coupled with our significant online capability is our advanced telephone banking
operation, First Union Direct. This telephone and e-mail based relationship
management business is focused on effectively and efficiently serving the needs
of our retail and wholesale customers. By providing high-quality sales and
service customer experiences (over 133 million in 2000), this business unit will
continue to contribute to the top-line revenue growth and profitability of First
Union.
We intend to fully leverage the convergence of technologies that power both the
telephone and Internet channels to further reduce costs and improve the customer
experience. Innovations such as natural language speech recognition, knowledge
management tools, and fully integrated customer information will be deployed
over the next 12 months. First Union Direct's intense focus on the customer and
intelligent application of new technologies will be the impetus for continued
growth in this most important adjunct to our General Banking and Capital
Management activities.
Through the continued integration of our Internet and telephone capabilities
with our financial centers, we will provide a superior sales and service
experience to customers -- anywhere, anyhow and any time they choose.
9
12
- -------------------------------------------------------
ENGAGING WITH OUR COMMUNITIES
- -------------------------------------------------------
"By far our strongest assets are the employees who live and work in our
communities and represent the spirit of First Union every day."
-- Ken Thompson, President and CEO
First Union is deeply committed to demonstrating its social leadership by
meeting the needs of the communities it serves. We focus resources and employee
talents on two main priorities -- improving education and strengthening
neighborhoods. In so doing, we enhance the quality of life and make a positive
difference where we work and live.
Through corporate contributions, community involvement and community development
programs, First Union continues to be a major force in building strong and
vibrant communities.
EDUCATION FIRST
Education, with special emphasis on early childhood literacy, was again First
Union's top community involvement priority in 2000, anchored by our signature
Reading First program. We believe there is no single greater opportunity to
shape our children's future than helping them learn -- and love -- to read.
Last year, thousands of employees volunteered as mentors, tutors and readers to
young children -- made possible by First Union's Time Away from Work policy,
which offers four hours of paid time-off each month to volunteer in schools. We
established more than 1,000 partnerships with local elementary schools and
donated 64,000 books during classroom visits. As a result, First Union fulfilled
its pledge to America's Promise, the national youth alliance and education
program chaired by Secretary of State Colin L. Powell, by volunteering 2.4
million hours to education.
That level of time and energy proved instrumental in winning the President's
Service Award this past June -- the nation's highest honor for volunteer
community service -- for our vision and execution of Education First. Sponsored
by the Points of Light Foundation and the Corporation for National Service, the
award is testament to the dedication of employees who truly make a difference in
the communities we serve.
In tandem with our volunteer program, First Union also supports its communities
with financial resources. We gave more than $59 million in charitable
contributions last year through company, foundation and employee gifts.
BUILDING COMMUNITIES
First Union's Community Development Group echoes that same sense of urgency. In
partnership with community organizations, we help others achieve the American
dream of home ownership, launch their own business, improve their neighborhood
and learn financial skills that can lead to greater economic freedom.
First Union originated more than $10 billion in community development loans and
investments in 2000, including more than $615 million for affordable housing,
community service, economic development and revitalization projects benefiting
low- to moderate-income neighborhoods. As part of this, we invested more than
$29 million in Community Development Financial Institutions, helping 20
organizations in seven states and Washington, D.C. That effort resulted in a
$3.4 million Bank Enterprise Award from the U.S. Treasury Department -- the
largest amount given in 2000.
The community development team structures partnerships that promote win-win
outcomes, as evidenced by two innovative deals in 2000 serving as national
models:
- A $5.3 million community development loan for the Green Earth
Development is the first and largest of its kind in the
continental United States under a new U.S. Housing and Urban
Development program. The loan provides for affordable housing,
retail space, social service facilities and recreational areas
on the Catawba Indian Reservation in Rock Hill, South
Carolina.
- First Union is providing up to $30 million in mortgage
financing in partnership with the University of Pennsylvania
to help promote and develop moderate-cost rental housing
opportunities -- and stimulate urban renewal -- for
Philadelphia's University City community.
eCOMMUNITIES FIRST
To address the educational and economic disparities caused by the "digital
divide" -- the gap created by insufficient access to technology -- First Union
launched the innovative eCommunities First training program in Charlotte. In
partnership with seven community organizations, we provided resources at four
sites to offer basic computer, Internet and money management training to low- to
moderate-income families. In six months, First Union and its partners conducted
71 classes for 342 people.
First Union was honored with a gold medal from Computerworld magazine and
inclusion of an eCommunities First case study in the Smithsonian Institution's
National Museum of American History archives.
10
13
-------------------------------------------------------
ACROSS THE NATION
-------------------------------------------------------
[MAP]
GENERAL BANK REGIONS
Atlantic Region
New Jersey
Branches: 344
ATMs: 627
Market Share: 11.65%
Ranking: 2
New York
Branches: 54
ATMs: 100
Market Share: 4.20%
Ranking: 5
Connecticut
Branches: 87
ATMs: 125
Market Share: 7.06%
Ranking: 4
Mid-Atlantic Region
Virginia
Branches: 172
ATMs: 294
Market Share: 11.07%
Ranking: 2
Maryland
Branches: 78
ATMs: 115
Market Share: 6.41%
Ranking: 5
Washington, D.C.
Branches: 28
ATMs: 60
Market Share: 15.20%
Ranking: 3
Southeast Region
North Carolina
Branches: 212
ATMs: 435
Market Share: 12.23%
Ranking: 4
South Carolina
Branches: 56
ATMs: 106
Market Share: 5.36%
Ranking: 6
Georgia
Branches: 138
ATMs: 374
Market Share: 9.09%
Ranking: 4
PennDel Region
Pennsylvania
Branches: 353
ATMs: 582
Market Share: 11.74%
Ranking: 3
Delaware
Branches: 21
ATMs: 46
Market Share: 1.86%
Ranking: 8
Florida Region
Florida
Branches: 621
ATMs: 893
Market Share: 14.93%
Ranking: 2
Source: FDIC market share data represents deposits at June 30, 2000.
FOREIGN BRANCHES AND REPRESENTATIVE OFFICES
Foreign Branches
Nassau, Bahamas
Hong Kong, China
(Restricted License Branch)
London, England
Tokyo, Japan
Seoul, South Korea
Taipei, Taiwan
Representative Offices
Buenos Aires, Argentina
Sydney, Australia
Sao Paulo, Brazil
Santiago, Chile
Beijing, China
Guangzhou, China
Hong Kong, China
Shanghai, China
Bogota, Colombia
Guayaquil, Ecuador
Cairo, Egypt
London, England
Paris, France
Frankfurt, Germany
Hamburg, Germany
Mumbai, India
Jakarta, Indonesia
Milan, Italy
Tokyo, Japan
Kuala Lumpur, Malaysia
Mexico City, Mexico
Panama City, Panama
Manila, Philippines
Singapore
Johannesburg, South Africa
Seoul, South Korea
Madrid, Spain
Taipei, Taiwan
Bangkok, Thailand
Istanbul, Turkey
Dubai, United Arab Emirates
San Diego, California
11
14
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
CONTENTS
12 Management's
Analysis of
Operations
33 Financial Tables
50 Five-Year Net
Interest Income
Summaries
52 Consolidated
Condensed
Statement of
Income
52 Restructuring and
Other Charges/
Gains
53 Consolidated
Statements of
Operating Earnings
54 Management's
Statement of
Responsibility
55 Independent
Auditors' Report
56 Consolidated
Balance Sheets
57 Consolidated
Statements
of Income
58 Consolidated
Statements
of Changes in
Stockholders'
Equity
59 Consolidated
Statements
of Cash Flows
60 Notes to
Consolidated
Financial
Statements
The following discussion and other portions of this Annual Report contain
various forward-looking statements. Please refer to our 2000 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
SUMMARY OF OPERATING RESULTS First Union reported net income of $92 million, or
7 cents per share, in 2000. The reported results in 2000 were net of after-tax
restructuring, merger-related and other charges and gains of $2.8 billion, or
$2.85 per share, and an after-tax $46 million charge, or 5 cents per share, for
the cumulative effect of a change in the accounting for beneficial interests.
The net restructuring and other charges and gains were recorded in connection
with our strategic repositioning, which was announced on June 26, 2000.
Operating earnings, which exclude net restructuring, merger-related and other
charges and gains and the accounting change, were $2.9 billion, or $2.97 per
share, in 2000. Net income in 1999 was $3.2 billion, or $3.33 per share, which
included after-tax restructuring and merger-related charges of $263 million, or
27 cents per share. Operating earnings in 1999 were $3.5 billion, or $3.60 per
share.
In the fourth quarter of 2000, reported net income was $599 million, or 60 cents
per share, after net after-tax restructuring, merger-related and other charges
and gains of $36 million, or 4 cents per share, and an after-tax $46 million
charge, or 5 cents per share, for the accounting change. Operating earnings were
$681 million, or 69 cents per share, in the fourth quarter of 2000. In the
fourth quarter of 1999, net income and operating earnings were $842 million and
$846 million, respectively, or 86 cents per share, for both.
Diluted cash operating earnings before net restructuring, merger-related and
other charges and gains and the accounting change were 76 cents per share in the
fourth quarter of 2000 and $3.30 per share in 2000, down 20 percent from the
fourth quarter of 1999 and 16 percent from 1999. Cash operating earnings are
operating earnings before goodwill and other intangible amortization.
Based on operating earnings, First Union's return on average stockholders'
equity (ROE) was 17.23 percent in 2000 and 21.60 percent in 1999. The cash
return on average tangible stockholders' equity was 26.33 percent in 2000 and
34.67 percent in 1999.
SUMMARY OPERATING RESULTS
Years Ended December 31,
Dollars in millions, -------------------------------------------
except per share data 2000 1999 1998
- --------------------------------------------------------------------------------------------------------
OPERATING EARNINGS
Net interest income(*) $ 7,536 7,570 7,394
Fee and other income 6,815 6,933 6,435
- --------------------------------------------------------------------------------------------------------
Total revenue(*) 14,351 14,503 13,829
Provision for loan losses 754 692 691
Noninterest expense 9,213 8,458 7,844
Income taxes(*) 1,449 1,867 1,598
- --------------------------------------------------------------------------------------------------------
Operating earnings $ 2,935 3,486 3,696
- --------------------------------------------------------------------------------------------------------
Net income $ 92 3,223 2,891
Net income -- cash basis(**) 3,270 3,817 3,982
PER DILUTED SHARE
Operating earnings 2.97 3.60 3.77
Net income .07 3.33 2.95
Cash operating earnings(**) $ 3.30 3.94 4.06
RATIOS
Operating return on
average equity 17.23% 21.60 22.70
Cash operating return on
average equity(**) 26.33% 34.67 32.62
- --------------------------------------------------------------------------------------------------------
(*) Tax-equivalent.
(**) Cash operating earnings exclude goodwill and other intangible amortization.
On an operating basis, fee and other income, excluding portfolio securities
transactions, was $6.8 billion in 2000, down 2 percent from 1999. The year over
year comparison includes $286 million in one-time gains in 1999 related to the
sale of certain assets and investments. Difficult financial markets in 2000
dampened results in several Capital Markets businesses, particularly principal
investing, which was down $200 million, and loan syndication, which was down $75
million. These declines were partially offset by a 38 percent rise in
commissions and fiduciary and asset management fees, with strong performances in
brokerage, mutual funds and CAP Account. The 2000 results included $754 million
in brokerage and other fee income from the former EVEREN Capital Corporation, a
full-service brokerage and asset management firm acquired on October 1, 1999.
On an operating basis, noninterest expense was $9.2 billion in 2000, a 9 percent
increase from 1999. The increase in expenses in 2000 primarily reflected the
addition of expenses related to EVEREN, which was included in all of 2000 and
only three months of 1999 following consummation of this purchase acquisition on
October 1, 1999.
12
15
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
The provision for loan losses was $1.7 billion in 2000 ($754 million on an
operating basis), an increase of $1.0 billion from 1999. The 2000 provision
included a $325 million incremental provision and $657 million of provision
recorded in connection with the transfer of loans to assets held for sale. Net
charge-offs in 2000 increased $63 million from 1999 to $751 million. This
increase reflected higher charge-offs in the commercial portfolio, principally
due to charge-offs on a large problem credit to a single borrower, partially
offset by a decline in consumer charge-offs related primarily to the third
quarter 2000 sale of the credit card portfolio. Net charge-offs were 0.59
percent of average net loans in 2000 and 0.53 percent in 1999. Nonperforming
assets increased $533 million from December 31, 1999, to $1.6 billion at
December 31, 2000. As a percentage of net loans, foreclosed properties and
assets held for sale, nonperforming assets were 1.22 percent at December 31,
2000, and 0.78 percent at December 31, 1999. Excluding the large problem credit,
nonperforming assets increased $320 million.
OUTLOOK First Union established a new strategic direction in 2000 focused on
improved earnings growth from our three core businesses -- the General Bank,
Capital Management and Capital Markets. After a six-month review, on June 26,
2000, we announced the strategic repositioning of our company, which resulted in
the disposition of certain businesses, assets and branches that did not provide
scale or strategic advantages. We ceased subprime mortgage lending at The Money
Store and sold our $35 billion residential mortgage servicing portfolio, our
$5.7 billion credit card portfolio (of which $1.7 billion was on-balance sheet)
and $13 billion of securities. We also committed to sell $6.2 billion in certain
commercial and consumer loans, and 84 nonstrategic branch locations -- 58 of
which were sold in 2000 and 26 additional branches are under contract for sale
in the first quarter of 2001 -- representing approximately $2.7 billion in
deposits and $600 million in loans. Associated with the strategic repositioning
in 2000, we recorded $2.8 billion in after-tax restructuring and other charges
and gains. The contribution to operating earnings in 2000 from divested
businesses and certain balance sheet strategies was approximately $545 million.
We anticipate that contributions from divested businesses and balance sheet
strategies will be modest in 2001.
With the repositioning essentially behind us, we are focusing our resources on
increasing the efficiency and competitiveness of our three core businesses.
While the winding down of some divested businesses will continue through the
first half of 2001, we believe our core strengths will become apparent as 2001
progresses and we move beyond restructuring and transition. We believe all of
these actions, including the decision in late 2000 to reduce the dividend on our
common stock by 50 percent to build capital and to provide strategic
flexibility, position us well in a more challenging economic and competitive
environment. We will continue to fine-tune and make appropriate capital
allocation decisions going forward as we focus our resources on our three core
businesses.
The broad asset management product set in our Capital Management Group,
underscored by multiple distribution capabilities, position this business to
benefit from key demographic trends that are turning spenders into savers and
investors. The Capital Management Group also benefits by leveraging the
General Bank's broad distribution, as well as by making First Union products and
services available through our nationwide brokerage network. The General Bank,
with long-term relationships in commercial, small business and consumer
lending and deposit activities, is emerging from service quality issues and has
been energized through new leadership. Capital Markets, which primarily targets
middle market and growth companies in specific industry groups, is leveraging a
combination of corporate banking, investment banking and principal investing to
provide a more integrated value proposition for clients. With this strong
platform in place, we believe we are solidly positioned to focus on our
strengths and on growing our core businesses.
We will continue to evaluate our operations and organizational structures to
ensure they are closely aligned with our goal of maximizing performance in our
core businesses. When consistent with our overall business strategy, we may
consider the disposition of certain assets, branches, subsidiaries or lines of
business. While acquisitions are no longer a primary business activity, we
continue to routinely explore acquisition opportunities, particularly in areas
that would complement our core businesses, and frequently conduct due diligence
activities in connection with possible acquisitions. As a result, acquisition
discussions and, in some cases, negotiations frequently take place and future
acquisitions involving cash, debt or equity securities can be expected.
CORPORATE RESULTS OF OPERATIONS
RESTRUCTURING AND OTHER CHARGES AND GAINS In 2000, we reported $3.5 billion
pretax of net restructuring, merger-related and other charges and gains in
connection with the strategic repositioning. This included $2.1 billion of
restructuring charges and $2.8 billion of other charges, net of gains of $1.4
billion. These gains included $937 million from the sale of our credit card
portfolio, $71 million from the sale of our mortgage servicing portfolio and
$357 million from branch sales. Also in connection primarily with the EVEREN
acquisition, we incurred $78 million in merger-related charges in 2000.
13
16
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
RESTRUCTURING CHARGES The restructuring charges of $2.1 billion included $172
million of employee termination benefits, occupancy-related charges of $108
million, a $1.8 billion write-down of goodwill and other identified intangibles
associated with The Money Store, write-downs of $18 million associated with the
impairment of certain long-lived assets and contract cancellation costs of $74
million.
OTHER CHARGES The $2.8 billion of other charges associated with the strategic
repositioning includes an incremental loan loss provision of $982 million, which
is described further in the Provision and Allowance for Loan Losses section;
$1.1 billion of losses on the sale of securities and other impairment charges as
described further in the Securities Available for Sale section; and a charge of
$175 million in additional reserves against the lease residuals in the auto
leasing portfolio. In the first quarter of 1999, we exited the indirect auto
lending and leasing business. The $175 million of additional lease reserves
relate to this portfolio, which is in a run-off phase. This business has been
affected by the deterioration in the used car resale market. Other charges also
included $307 million in other noninterest expense, principally
personnel-related retention incentives as well as termination arrangements
associated with exiting businesses.
The rest of this discussion of Corporate Results of Operations is on an
operating basis and, accordingly, excludes these restructuring, merger-related
and other charges and gains.
NET INTEREST MARGIN Net interest income on a tax-equivalent basis declined
slightly from 1999 to $7.5 billion in 2000. The net interest margin, which is
the difference between the tax-equivalent yield on earning assets and the rate
paid to fund those assets, was 3.55 percent in 2000 and 3.79 percent in 1999.
The average rate on earning assets increased 66 basis points from 1999 to 8.30
percent in 2000, while the average rate paid on liabilities increased 89 basis
points from 1999 to 5.31 percent in 2000.
The sale of the credit card business put downward pressure on the margin. This
was partially offset by the sale of $13 billion of lower-yielding securities as
part of our strategic repositioning. The sale of these securities will have a
favorable impact on our net interest margin going forward, as will recent
Federal Reserve actions to decrease interest rates after a series of increases.
The Risk Management section provides additional information on our methodology
for interest rate risk management. It should be noted that we focus on net
income and economic contribution when evaluating corporate strategies and we
place less importance on the net interest margin impact of these decisions.
AVERAGE BALANCE SHEET AND INTEREST RATES
Years Ended December 31,
----------------------------------------------
2000 1999
------------------- -------------------
Average Average
In millions Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------
Interest-bearing
bank balances $ 1,095 4.93% $ 835 4.58%
Federal funds sold 7,800 5.73 9,526 4.82
Trading account assets 12,011 6.90 9,638 6.32
Securities available
for sale 51,751 7.37 43,767 6.83
Investment securities 1,677 8.20 1,863 8.19
Commercial loans 75,383 9.11 73,293 8.14
Consumer loans 51,505 8.59 56,498 8.37
- -----------------------------------------------------------------------------------------------
Total loans 126,888 8.89 129,791 8.24
Other earning assets 11,125 9.56 4,516 7.23
- -----------------------------------------------------------------------------------------------
Total earning assets 212,347 8.30 199,936 7.64
- -----------------------------------------------------------------------------------------------
Interest-bearing deposits 112,275 4.69 104,117 3.89
Short-term borrowings
Federal funds purchased 30,997 6.11 30,046 4.83
Commercial paper 2,882 6.00 2,224 4.81
Other short-term
borrowings 9,697 4.85 9,188 5.01
Long-term debt 34,279 6.69 28,738 5.66
- -----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 190,130 5.31 174,313 4.42
- -----------------------------------------------------------------------------------------------
Net interest income
and margin $ 7,536 3.55% $ 7,570 3.79%
- -----------------------------------------------------------------------------------------------
FEE AND OTHER INCOME We are continually 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, over the years we have broadened
our product lines significantly, particularly in Capital Management and Capital
Markets, to provide additional sources of fee income that complement our
long-standing banking products and services. The success of this strategy is
seen in the growth of fee income as a percentage of total revenue, excluding
portfolio securities transactions, which on an operating basis was 48 percent in
2000 and in 1999. This compares with 31 percent in 1996 at the beginning of our
move into new lines of business.
On an operating basis, fee and other income, excluding portfolio securities
transactions, was $6.8 billion in 2000, down 2 percent from 1999 due in part to
lower principal investing revenues. In addition, 1999 included $286 million of
gains from the sale of certain assets and investments.
Commissions, which include brokerage and insurance commissions, increased $577
million from 1999 to $1.6 billion in 2000, reflecting strong results from
14
17
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
retail brokerage and insurance services, including a $448 million increase in
commissions from the former EVEREN. Additionally, fiduciary and asset management
fees, which include personal trust, personal financial consulting, corporate
trust, institutional trust, mutual funds, CAP Account and other fee income,
increased $273 million from 1999 to $1.5 billion in 2000. Advisory, underwriting
and other capital markets fees increased modestly despite the difficult
financial markets.
FEE AND OTHER INCOME
Years Ended December 31,
---------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Service charges and fees $ 1,966 1,987 2,027
Commissions 1,591 1,014 753
Fiduciary and asset
management fees 1,511 1,238 1,055
Advisory, underwriting and
other Capital Markets fees 724 702 364
Principal investing 392 592 237
Other income 631 1,400 1,999
- ------------------------------------------------------------------------------------------------------------
Total fee and other income $ 6,815 6,933 6,435
- ------------------------------------------------------------------------------------------------------------
Principal investing, which includes the results of investments in equity and
mezzanine securities, declined $200 million from 1999 to $392 million in 2000
due largely to market value adjustments in volatile markets. We expect principal
investing revenue to remain modest in 2001.
Other income, which includes results from portfolio securities transactions and
asset sales and securitizations, declined $769 million from 1999 to $631 million
in 2000. Other income in 1999 included $286 million of gains from the sale of
certain assets and investments. Portfolio securities transactions resulted in a
net loss of $15 million in 2000, which included $27 million of impairment losses
on certain strategic equity investments and $17 million of impairment losses on
residual interests in certain securitizations. This compares with a net loss of
$63 million in 1999, which included a $79 million impairment loss on residual
interests.
Asset sales and securitizations resulted in a net gain of $263 million in 2000,
including gains from the securitization and sale of credit card receivables,
Small Business Administration (SBA) loans, student loans, equity lines and
municipal securities. In 1999, these gains were $417 million, which included
$126 million of gains from the securitization and sale of residential mortgage
loans and higher levels of gains from the other categories. Also included in
2000 other income was $163 million of market value write-downs on certain
commercial loans classified as assets held for sale and a $20 million gain from
the sale of securities received in a demutualization. Branch sales gains of $23
million were included in other income in 1999.
The more significant of these activities are discussed further in the Business
Segments section.
NONINTEREST EXPENSE On an operating basis, noninterest expense increased 9
percent from 1999 to $9.2 billion in 2000, largely reflecting the full-year
impact of EVEREN and increased variable compensation in the Capital Management
Group.
NONINTEREST EXPENSE
Years Ended December 31,
-----------------------------------
In millions 2000 1999 1998
- ---------------------------------------------------------------------------------------------
Salaries and employee benefits $ 5,449 4,716 4,250
Occupancy 619 546 561
Equipment 858 793 723
Advertising 91 234 223
Communications and supplies 487 481 480
Professional and consulting fees 337 287 311
Goodwill and other
intangible amortization 361 391 348
Sundry expense 1,011 1,010 948
- ---------------------------------------------------------------------------------------------
Total noninterest expense $ 9,213 8,458 7,844
- ---------------------------------------------------------------------------------------------
Sundry expense includes a credit of $29 million representing fees received from
the purchaser of the credit card portfolio for subservicing. The expenses
incurred in connection with the subservicing agreement are included in other
line items within noninterest expense.
In the fourth quarter of 2000, we recorded a $69 million credit in noninterest
expense to adjust liabilities for certain incentive compensation and benefit
arrangements to reflect declines in fee income and reductions in the workforce,
particularly Capital Markets.
We had $3.7 billion in goodwill and other intangible assets at December 31,
2000, a decline of $2.0 billion from 1999. This decline was principally the
result of the second quarter 2000 write-down of $1.8 billion of goodwill and
other identified intangibles that were determined to be impaired as a result of
the decision to discontinue subprime mortgage lending at The Money Store. This
write-down will have the effect of reducing annual amortization expense by $85
million.
On an operating basis, the overhead efficiency ratio was 64.2 percent in 2000
and 58.3 percent in 1999.
INCOME TAXES On an operating basis, income taxes declined $399 million from 1999
to $1.4 billion in 2000 and the effective tax rate was 31.5 percent in 2000 and
33.4 percent in 1999. The primary reason for the decline in the effective tax
rate was the reduction in operating income in 2000, which resulted in a
correspondingly larger decline in income tax expense due to a higher marginal
tax rate than effective tax rate.
15
18
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
Additional benefits from tax credits generated from growth in our affordable
housing business also contributed to the decrease in the effective tax rate.
Based on current projections, we anticipate the 2001 effective tax rate to
remain substantially unchanged from 2000.
The effective tax rate reflected in the computation of net income was 85.4
percent in 2000 and 33.3 percent in 1999. Net income in 2000 included a $1.8
billion write-down for impairment of intangible assets, primarily goodwill. This
charge is not deductible for federal or state income tax purposes and has the
effect of significantly increasing the effective tax rate, because deferred
taxes are not recorded on goodwill.
BUSINESS SEGMENTS
First Union's operations are divided into five business segments encompassing
more than 60 distinct product and service units. These segments are Capital
Management, Capital Markets, Consumer, Commercial and Treasury/Nonbank.
Additional information can be found in Note 11: Business Segments to the audited
consolidated financial statements and in Exhibit 99 to our 2000 Annual Report on
Form 10-K. The following discussion of segment results is on an operating basis
and, accordingly, excludes restructuring and other charges and gains related to
the strategic repositioning.
As the result of an in-depth review of our management reporting system that is
the basis for the segment data that follows, we have designed new methodologies
and systems that will better reflect the evolution of our three core businesses.
We will implement this new management reporting model in the first quarter of
2001, and prior period information will be restated. The key differences will be
a redefinition of our segments, the use of an economic profit (EP) model, a
significant change in the way referral fees among business units are recorded
and refinements in cost allocation methodologies.
CAPITAL MANAGEMENT Our Capital Management Group (CMG) has created a growing and
diversified brokerage, insurance, trust, wealth and asset management business
with products and services that provide the link between traditional banking and
investing for retail and institutional customers. CMG is organized into four
major lines of business: Retail Brokerage and Insurance Services, Wealth and
Trust Services, Mutual Funds and CAP Account. CMG offers a full line of
investment products and services distributed through multiple channels,
including our national retail brokerage branch network, full-service retail
financial centers in our East Coast marketplace and online brokerage. Assets
under management increased $1.0 billion from year-end 1999 to $171 billion at
December 31, 2000.
On an operating basis, Capital Management net income increased $128 million from
1999 to $716 million in 2000, with strong increases in net interest income and
fee and other income partially offset by a rise in noninterest expense. Net
interest income increased $121 million from 1999 to $643 million in 2000, while
fee and other income increased $898 million from 1999 to a record $3.2 billion
in 2000. The former EVEREN operations contributed $564 million of the increase
in fee and other income.
CAPITAL MANAGEMENT
YEARS ENDED DECEMBER 31,
----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
Net interest income $ 643 522 409
Provision for loan losses 1 -- 5
Fee and other income 3,215 2,317 1,802
Noninterest expense 2,697 1,886 1,524
Income taxes 444 365 262
- ------------------------------------------------------------------------------
Operating earnings $ 716 588 420
- ------------------------------------------------------------------------------
Return on average
stockholders' equity 50.29% 52.50 47.30
Average loans, net $ 4,383 3,793 3,683
Average deposits 19,569 19,981 16,723
Average stockholders' equity $ 1,425 1,123 892
- ------------------------------------------------------------------------------
CAPITAL MANAGEMENT FEE AND OTHER INCOME
YEARS ENDED DECEMBER 31,
----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
Retail brokerage and
insurance services $ 1,886 1,137 778
Wealth and trust services 727 695 621
Mutual funds 532 460 412
CAP Account 164 119 76
- ------------------------------------------------------------------------------
Total 3,309 2,411 1,887
Eliminations (94) (94) (85)
- ------------------------------------------------------------------------------
Total fee and other income $ 3,215 2,317 1,802
- ------------------------------------------------------------------------------
Noninterest expense increased $811 million from 1999 to $2.7 billion in 2000
primarily reflecting increased variable compensation, largely salaries and
incentives, associated with the strong growth in our Retail Brokerage and
Insurance Services business and the impact of the EVEREN acquisition.
Fee and other income from Retail Brokerage and Insurance Services increased $749
million from 1999 to $1.9 billion in 2000. Retail brokerage results in 2000
included the impact of EVEREN. Brokerage client assets increased $12 billion
from 1999 to $205 billion at December 31, 2000.
Our Wealth and Trust Services businesses encompass personal trust and private
client banking, corporate trust and benefit services, and institutional trust
services.
16
19
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
Wealth and Trust Services fee and other income increased $32 million from 1999
to $727 million in 2000. Wealth and Trust Services had $4.4 billion in average
net loans in 2000, an increase of $589 million from 1999, and average deposits
of $5.9 billion in 2000, an increase of $148 million from 1999.
Mutual fund fee and other income increased 16 percent from 1999 to $532 million
in 2000, primarily as a result of average asset growth. Despite a challenging
economic environment, assets in the First Union-advised Evergreen mutual funds
increased $5 billion from year-end 1999 to $85 billion at December 31, 2000.
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 both Retail
Brokerage and Insurance Services and in Mutual Funds. CAP Account amounts
reflect CAP Account fees and the funding benefit attributed to the on-balance
sheet deposits. Fee and other income in CAP Account increased $45 million from
1999 to $164 million in 2000, attributable to both an increase in sales and
growth in customer asset balances. CAP Account customer assets were $61 billion
at December 31, 2000, an increase of $5 billion from 1999. The number of
brokerage trades in CAP Account in 2000 increased 41 percent from 1999.
CAPITAL MARKETS Our Capital Markets products and services are designed to
provide a full range of capital raising, market making and financial advisory
services to meet the needs of corporate and institutional clients. Our strategy
is to focus on middle-market and growth companies, and we leverage the strong
relationship coverage in our East Coast banking markets with an integrated
investment banking and corporate banking approach focused on eight key
industries nationwide: technology, telecommunications, communications,
healthcare, business and consumer services, industrial growth, real estate and
financial institutions. We provide full execution including corporate finance,
equity research, merger and acquisition advisory services, and debt and equity
financing. In addition, our International unit continues to develop and utilize
strong correspondent banking relationships overseas.
In anticipation of more difficult financial markets and as part of our strategic
repositioning, Capital Markets restructured in 2000 to better execute
industry-specific client management strategies, to create more efficiency, and
to redeploy key resources to enhance, deepen and retain client relationships.
The goal is to focus on and invest resources in areas where we can have the
greatest impact and expect to be the most successful. Also as part of the
restructuring, we exited certain fixed income businesses and certain sectors in
equity research.
CAPITAL MARKETS
Years Ended December 31,
----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
Net interest income $ 1,551 1,553 1,434
Provision for loan losses 413 252 156
Fee and other income 1,516 1,709 1,150
Noninterest expense 1,605 1,472 1,314
Income taxes 227 459 339
- ------------------------------------------------------------------------------
Operating earnings $ 822 1,079 775
- ------------------------------------------------------------------------------
Return on average
stockholders' equity 13.74% 19.36 15.62
Average loans, net $44,530 43,216 40,589
Average deposits 17,124 15,526 14,315
Average stockholders' equity $ 5,975 5,570 4,957
- ------------------------------------------------------------------------------
Capital Markets has three primary lines of business:
- Investment Banking, which includes merger and acquisition
advisory services; principal investing; loan syndication;
investment grade debt; high yield debt; equity sales, trading,
research and underwriting; fixed income sales and trading;
risk management; asset securitization; and commercial real
estate investment banking;
- Corporate Banking, which includes lending activities for
corporate clients; asset-based lending; operating, finance and
leveraged leasing; and railcar leasing; and
- International, whose mission is to meet the trade finance and
foreign exchange needs of our domestic customers and
correspondent financial institutions around the world, and to
provide commercial banking products to financial institutions
and corporate clients overseas.
CAPITAL MARKETS FEE AND OTHER INCOME
Years Ended December 31,
----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
INVESTMENT BANKING
Investment banking $ 498 526 217
Principal investing 392 592 237
Risk management 263 189 175
Fixed income and other 130 161 146
- ------------------------------------------------------------------------------
Total investment banking 1,283 1,468 775
Corporate banking 229 184 243
International 226 205 214
- ------------------------------------------------------------------------------
Eliminations (222) (148) (82)
- ------------------------------------------------------------------------------
Total fee and other income $ 1,516 1,709 1,150
- ------------------------------------------------------------------------------
17
20
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
On an operating basis, Capital Markets net income declined $257 million from
1999 to $822 million in 2000 as a result of an increased provision for loan
losses and a decline in fee and other income in difficult financial markets. The
provision for loan losses rose 64 percent primarily due to charge-offs related
to a large problem credit to a single borrower and deterioration in the
healthcare industry. Fee and other income declined $193 million from 1999 to
$1.5 billion in 2000.
Investment banking fee and other income declined 6 percent from 1999 to $498
million in 2000, primarily as a result of a general market decline and the
impact of market value write-downs in loan syndications. Also in investment
banking, principal investing fee and other income declined in 2000 because of
some unusually large gains in 1999 and because market conditions in 2000 were
not as conducive to initial public offerings (IPOs) and other types of
transactions that result in gain recognition. We expect modest principal
investing gains in 2001 as the portfolio continues to season. In 2000, we made
$1.6 billion of new investments in this area. At year-end 2000, invested funds
amounted to $3.0 billion.
Commercial real estate results declined from 1999, which was an unusually strong
year due to recoveries of market losses in commercial mortgage-backed
securitization activities that had occurred in 1998. Also within investment
banking, risk management fee and other income increased 39 percent from 1999 to
$263 million in 2000, primarily due to higher levels of client transactions in
fixed income derivatives and equity derivatives in 2000. Growth in the fixed
income and other fee income declined 19 per-cent from 1999 to $130 million in
2000 primarily due to trading losses in high yield and corporate bonds.
Corporate Banking fee and other income increased 24 percent from 1999 to $229
million in 2000, primarily due to increased leasing revenues.
International fee and other income increased 10 percent from 1999 to $226
million in 2000 as a result of increased trade letters of credit and wire
transfer fees.
The revenues from Capital Markets businesses are typically more volatile than
revenues from more traditional banking businesses and can vary significantly
from period to period with market conditions.
Noninterest expense increased 9 percent from 1999 to $1.6 billion in 2000. The
increase was largely due to higher personnel and related costs, much of which
relates to the build-out of our equity capital markets business.
CONSUMER Our strategic repositioning is being felt most broadly in our Consumer
segment. As we chose to focus on areas with higher growth potential and where we
can leverage our competitive strengths, we identified the manufacture of certain
proprietary products as no longer being essential to our core strategies. In the
mortgage servicing and credit card businesses, for example, we lacked scale to
be a dominant player, and therefore believed we could offer a better selection
and more competitive products if we repositioned those businesses to meet our
customers' needs through third party agreements. As part of our strategic
repositioning, we sold the credit card portfolio and our mortgage servicing
portfolio. Both of these sales closed in the third quarter of 2000. In addition,
we ceased subprime mortgage lending at The Money Store on June 26, 2000.
Our retail distribution strategy is premised on building lifetime customer
relationships by providing quality customer service, a full range of superior
products and flexible delivery across all channels. Our multiple channels,
including full-service retail financial centers, direct telephone bank, ATMs and
the Internet, are integrated, enabling customers to have a single view of their
accounts.
The Consumer segment includes:
- First Union Mortgage Corporation (FUMC), which includes our continuing
mortgage origination business and the servicing business that was sold
in the third quarter of 2000;
- Home Equity, encompassing First Union Home Equity (FUHEB) and The Money
Store which, as discussed above, ceased subprime origination activity
midyear 2000. Its loan servicing platform, based in Sacramento,
California, has become our primary home equity servicing platform;
- Credit Cards, a business that was sold in the third quarter of 2000;
and
- Retail Branch Products, which includes installment loans, ATM, consumer
credit, the Internet and the various consumer deposit products with the
exception of the CAP Account, which is included in Capital Management.
On an operating basis, Consumer net income declined $73 million from 1999 to
$660 million in 2000. Fee and other income declined $313 million from 1999 to
$1.4 billion in 2000, reflecting declines in FUMC, Home Equity and Credit Cards.
Results from these businesses were affected by the impact of a rising interest
rate environment, a reduction in securitizations and loan sales and the impact
of strategic repositioning decisions.
18
21
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
CONSUMER
Years Ended December 31,
------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Net interest income $ 3,328 3,285 3,320
Provision for loan losses 237 308 326
Fee and other income 1,388 1,701 1,894
Noninterest expense 3,411 3,492 3,243
Income taxes 408 453 629
- --------------------------------------------------------------------------------
Operating earnings $ 660 733 1,016
- --------------------------------------------------------------------------------
Return on average
stockholders' equity 18.64% 19.46 29.98
Average loans, net $25,267 28,072 27,050
Average deposits 69,299 70,666 77,632
Average stockholders' equity $ 3,536 3,763 3,386
- --------------------------------------------------------------------------------
The sale of the FUMC mortgage servicing portfolio closed on September 1, 2000.
We will continue to originate mortgages, but we will sell the servicing or enter
into subservicing arrangements going forward. We do not anticipate that the sale
of the servicing portfolio will negatively affect origination volume. In
connection with the sale, we entered into a subservicing agreement with the
purchaser under which we will continue to service the portfolio for a period of
approximately six months and for which we will be paid a market-based fee.
FUMC had break-even results in 2000 and net income of $80 million in 1999. FUMC
net interest income declined $23 million from 1999 to $53 million in 2000
primarily as a result of lower loan production volume in a higher interest rate
environment. Fee and other income declined $140 million from 1999 to $169
million in 2000 largely due to a lower level of loan sales and securitization
activity and the related gains and lower loan production volume in 2000.
Noninterest expense decreased $36 million from 1999 to $218 million in 2000,
reflecting lower personnel, incentive and servicing costs related to the lower
production levels.
Operating earnings in the Home Equity businesses increased $43 million from 1999
to $48 million in 2000. Net interest income increased $48 million from 1999 to
$582 million in 2000 largely due to an increase in average loans originated
through FUHEB. Net charge-offs increased $11 million from 1999 to $80 million in
2000 due to an increase in loan balances and the maturity of The Money Store and
FUHEB portfolios. Fee and other income in the Home Equity businesses declined
$76 million from 1999 to $127 million in 2000 primarily due to a decrease in
sale and securitization volume and the related gains. Also, noninterest expense
decreased by $108 million primarily due to discontinuing the subprime mortgage
lending business at The Money Store.
Operating earnings from Credit Cards declined $27 million from 1999 to $82
million in 2000. The sale of the credit card portfolio closed on September 30,
2000. Accordingly, these results include the credit card business for the first
nine months of 2000 compared with a full year in 1999. In the fourth quarter of
2000, we began originating First Union-branded credit cards under a referral
arrangement with the purchaser of the portfolio. In connection with the sale, we
entered into a subservicing agreement with the purchaser under which we will
continue to service the portfolio for a period of approximately nine months.
RETAIL BRANCH Products operating earnings decreased slightly from 1999 to $530
million in 2000, driven primarily by a $74 million increase in net interest
income to $2.5 billion in 2000, offset by a $96 million increase in noninterest
expense largely related to costs associated with Internet development projects
and the right staffing initiative in the retail financial centers and call
centers. Average loans were $11 billion in 2000 and $13 billion in 1999. The
decline in average loans year over year was the result of the securitization and
transfer to the securities available for sale portfolio of prime equity loans
with a balance of $7.3 billion in 1999. Average deposits declined modestly due
to customer movement into alternative investment products and higher yielding
promotional products, as well as the sale of branch locations in the fourth
quarters of 1999 and 2000. Adjusted for these branch sales, average deposits
would have grown modestly.
COMMERCIAL Our wholesale delivery strategy is to provide a comprehensive array
of financial solutions, including traditional commercial lending and cash
management products, primarily to small-business customers (annual sales up to
$10 million) and commercial customers (annual sales of $10 million to $250
million). Corporate client relationships are managed in the Capital Markets
segment.
COMMERCIAL
Years Ended December 31,
------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Net interest income $ 1,369 1,384 1,400
Provision for loan losses 75 68 64
Fee and other income 564 554 535
Noninterest expense 1,082 1,061 1,048
Income taxes 292 287 300
- --------------------------------------------------------------------------------
Operating earnings $ 484 522 523
- --------------------------------------------------------------------------------
Return on average
stockholders' equity 23.34% 24.48 25.23
Average loans, net $26,702 25,997 26,532
Average deposits 22,050 22,665 23,067
Average stockholders' equity $ 2,072 2,127 2,074
- --------------------------------------------------------------------------------
19
22
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
We have an integrated approach that leverages the strong relationships in our
Commercial business with the capabilities of our Capital Markets business to
provide complex financing solutions, risk management products and international
services. We also leverage the capabilities of our Capital Management business
to provide property and casualty insurance, pension plans and 401(k) plans. The
Commercial segment is divided into four lines of business:
- Small Business Banking, which represents only the lending that is done
through our Small Business Banking Division (SBBD);
- Lending, which is all other commercial lending within our state
delivery network and loans to small businesses originated within our
state delivery network rather than through SBBD;
- Real Estate Banking, which is lending by our
specialized real estate bankers; and
- Cash Management and Deposit Services.
The majority of SBA lending is included in the Consumer segment. Our combined
portfolio of $9.7 billion in small business loans at December 31, 2000, includes
loans originated through the SBBD, the SBA loan program and other origination
channels.
On an operating basis, Commercial net income declined modestly from 1999 to $484
million in 2000. In the same period, net interest income decreased slightly to
$1.4 billion due to higher funding costs as a result of a $615 million decrease
in average deposits. Fee and other income rose a modest $10 million from 1999 to
$564 million in 2000.
The $705 million increase in average commercial loans to $27 billion in 2000
primarily reflected an $867 million increase in Real Estate Banking and a $119
million increase in Small Business Banking, offset by a $281 million decrease in
Lending. The decline in other commercial lending reflected our emphasis on
providing capital markets financing alternatives for our clients.
Average deposits were $22 billion in 2000 and $23 billion in 1999, largely due
to the sale of branch locations. The majority of the decline was in commercial
money market deposits and commercial demand deposit accounts, partially offset
by an increase in commercial savings and commercial certificate of deposit
accounts.
TREASURY/NONBANK Treasury/Nonbank includes all of our asset and liability
management functions. Treasury/Nonbank also includes restructuring and
merger-related charges; the goodwill asset and the associated amortization
expense and funding cost; certain nonrecurring revenue items discussed in the
Fee and Other Income section; certain expenses that are not allocated to the
business segments; corporate charges; and the results of our discontinued
indirect auto lending and leasing business.
The $1.0 billion in gains on the sale of the credit card and mortgage servicing
portfolios, as well as the restructuring charge of $2.1 billion and merger-
related charges of $78 million, are reflected in fee and other income and in
noninterest expense, respectively, within the Treasury/Nonbank segment. If we
were to allocate the restructuring charge to the various segments affected,
substantially all of the charges would be allocated to the Consumer segment. The
Funding Sources and Risk Management sections provide information about our
funding sources, asset and liability management functions and securities
portfolios.
LOANS -- ON-BALANCE SHEET
Years Ended December 31,
----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial
and agricultural $ 54,207 51,683 53,961
Real estate - construction
and other 3,104 2,435 2,628
Real estate - mortgage 9,218 8,768 8,565
Lease financing 15,465 12,742 9,730
Foreign 5,453 4,991 4,805
- ------------------------------------------------------------------------------
Total commercial 87,447 80,619 79,689
- ------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 17,708 27,793 21,729
Installment loans 22,972 25,795 30,595
Vehicle leasing 2,115 4,483 6,162
- ------------------------------------------------------------------------------
Total consumer 42,795 58,071 58,486
- ------------------------------------------------------------------------------
Total loans 130,242 138,690 138,175
Unearned income 6,482 5,513 4,026
- ------------------------------------------------------------------------------
Loans, net (on-balance sheet) $123,760 133,177 134,149
- ------------------------------------------------------------------------------
LOANS -- MANAGED PORTFOLIO
(Including on-balance sheet)
Years Ended December 31,
-----------------------------------------
In millions 2000 1999 1998
- ------------------------------------------------------------------------------
Commercial $ 93,277 86,095 80,605
Real estate - mortgage 22,274 29,296 21,729
Installment loans 50,208 52,951 51,098
Vehicle leasing 2,115 4,483 6,162
- ------------------------------------------------------------------------------
Total managed portfolio $167,874 172,825 159,594
- ------------------------------------------------------------------------------
BALANCE SHEET ANALYSIS
Loans Net loans were $124 billion at December 31, 2000, a decline of $9 billion
from December 31, 1999, and average net loans were $127 billion, a decline of
$3 billion.
20
23
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
Commercial loans represented 67 percent and consumer loans 33 percent of the
loan portfolio at December 31, 2000. Managed loans declined $5 billion from 1999
to $168 billion at December 31, 2000. Managed commercial loans increased $7
billion from year-end 1999, while managed consumer loans declined $12 billion
primarily as a result of the sale of our credit card portfolio and the run-off
of the portfolio associated with our discontinued indirect auto lending and
leasing business. The average rate earned on loans increased 65 basis points
from 1999 to 8.89 percent in 2000, in line with the rising interest rate
environment through much of 2000.
YEAR-END COMMERCIAL AND INDUSTRIAL LOANS (a)
Industry Classification Committed
In millions Outstandings Exposure
- --------------------------------------------------------------------------------
Manufacturing $13,453 31,491
Services 9,015 24,667
Financial services 8,104 35,174
Public utilities 7,296 17,384
Wholesale trade 5,040 10,619
Individuals 4,428 7,678
Retail trade 3,884 10,470
Transportation 3,443 6,330
Property management 2,774 4,971
Public administration 1,546 7,470
Building contractors 1,359 2,945
Mining 1,240 2,837
Insurance 890 3,770
Agriculture/forestry/fishing 616 979
Other 5,790 5,919
- --------------------------------------------------------------------------------
Total $68,878 172,704
- --------------------------------------------------------------------------------
(a) Net of unearned income.
YEAR-END COMMERCIAL REAL ESTATE LOANS (a)
Project Type Committed
In millions Outstandings Exposure
- --------------------------------------------------------------------------------
Apartments $ 2,270 2,964
Office building 2,269 2,852
Retail trade 2,040 2,324
Industrial 1,217 1,422
Land - improved 604 867
Single family 459 869
Condominiums 249 533
Lodging 172 240
Land - unimproved 168 187
Other 2,874 3,189
- --------------------------------------------------------------------------------
Total $12,322 15,447
- --------------------------------------------------------------------------------
Distribution By Facility Size (Percent)
- --------------------------------------------------------------------------------
Less than $10 million 63% 57
$10 million to $25 million 25 27
$25 million to $50 million 11 13
All Other 1 3
- --------------------------------------------------------------------------------
Total 100% 100
- --------------------------------------------------------------------------------
(a) Net of unearned income.
At December 31, 2000, unused loan commitments related to commercial and consumer
loans were $102 billion and $26 billion, respectively. Commercial and standby
letters of credit were $13 billion. Loan participations sold to other lenders
amounted to $3.4 billion at December 31, 2000.
NONPERFORMING ASSETS At December 31, 2000, nonperforming assets were $1.6
billion, an increase of $533 million from December 31, 1999. This included $334
million in nonperforming loans in assets held for sale. Excluding a previously
disclosed large problem credit to a single borrower that was classified as
nonperforming at December 31, 2000, nonperforming assets increased $320 million
in 2000. As a percentage of net assets, foreclosed properties and assets held
for sale, nonperforming assets were 1.22 percent and 0.78 percent, respectively.
In 2001, we expect nonperforming assets to rise in line with industry trends.
PAST DUE LOANS Accruing loans 90 days or more past due, excluding loans that are
classified as assets held for sale, amounted to $183 million at December 31,
2000, and $144 million at December 31, 1999. Of these past due loans at December
31, 2000, $8 million were commercial loans or commercial real estate loans and
$175 million were consumer loans.
NET CHARGE-OFFS Net Charge-offs increased $63 million from 1999 to $751 million
in 2000. The increase reflects higher charge-offs in the commercial portfolio,
largely related to a large commercial credit to a single borrower, partially
offset by a decline in consumer charge-offs related to the sale of the credit
card portfolio. Net charge-offs were 0.59 percent of average net loans in 2000
and 0.53 percent in 1999.
ASSET QUALITY
Years Ended December 31,
--------------------------------------------------
In millions 2000 1999 1998
- --------------------------------------------------------------------------------
Loans, net $123,760 133,177 134,149
Allowance for loan losses $ 1,722 1,757 1,826
Allowance/loans, net 1.39% 1.32 1.36
Allowance/NPAs 135% 165 216
Net charge-offs $ 751 688 638
Net charge-offs/
average loans 0.59% 0.53 0.48
Nonperforming assets
Nonaccrual loans $ 1,176 968 741
Foreclosed properties 103 98 103
Loans held for sale 334 14 --
- --------------------------------------------------------------------------------
Total nonperforming
assets (NPAs) $ 1,613 1,080 844
- --------------------------------------------------------------------------------
NPAs/loans 1.22% 0.78 0.63
- --------------------------------------------------------------------------------
21
24
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses increased
$1.0 billion from 1999 to $1.7 billion in 2000, including a $325 million
incremental provision and a $657 million provision recorded in connection with
the transfer of loans to assets held for sale to reduce the carrying value of
these loans to their respective fair values.
YEAR-END NONPERFORMING
COMMERCIAL AND INDUSTRIAL LOANS
Industry Classification In millions
- ---------------------------------------------------------
Manufacturing $440
Services 110
Transportation 61
Agriculture/forestry/fishing 52
Retail trade 43
Individuals 38
Wholesale trade 32
Financial services 21
Insurance 16
Mining 13
Property management 11
Building contractors 6
Public utilities 2
Public administration 1
Other 38
- ---------------------------------------------------------
Total $884
- ---------------------------------------------------------
YEAR-END NONPERFORMING LOANS HELD FOR SALE
Industry Classification In millions
- ---------------------------------------------------------
Healthcare $ 97
Theaters 85
Restaurants 14
Manufacturing 38
Public utilities 17
Financial services 12
Transportation 5
Other (a) 66
- ---------------------------------------------------------
Total $334
- ---------------------------------------------------------
(a) Consumer home equity loans.
The allowance for loan losses was $1.7 billion at December 31, 2000, and $1.8
billion at December 31, 1999. The allowance as a percentage of net loans was
1.39 percent at December 31, 2000, and 1.32 percent at year-end 1999.
Loans transferred to assets held for sale are carried at the lower of cost or
market value and, accordingly, they are not included in the evaluation of the
adequacy of the allowance for loan losses subsequent to the transfer.
Our methodology for determining the allowance for loan losses establishes both
an allocated and an unallocated component. The allocated component of the
allowance for commercial loans is based principally on current loan grades and
historical loan loss rates adjusted to reflect current conditions, as well as
analyses of other factors that may have affected the collectibility of loans in
the portfolio. The allocated component of the allowance for consumer loans is
based principally on loan payment status and historical loss rates adjusted to
reflect current conditions. The unallocated component of the allowance for loan
losses represents the results of analyses that estimate probable losses inherent
in the portfolio that are not fully captured in the allocated allowance
analyses. These analyses include industry concentrations, current economic
factors, model imprecision and the estimated impact of current economic
conditions on certain historical loss rates used in the allocated model. In
assessing the impact of current economic factors and the estimated impact of
current economic conditions on certain historical loss rates, we continuously
monitor trends in loan portfolio qualitative factors, including past due loans,
criticized loans and nonperforming loans. The trends in these factors are used
to evaluate the reasonableness of the unallocated component and the level of the
provision relative to charge-offs. To the extent we believe it is necessary,
based upon our assessment of these factors and trends, we may increase or
decrease the provision for loan losses.
ASSETS HELD FOR SALE In connection with the strategic repositioning, we decided
to sell $7.9 billion of loans. These loans were transferred to assets held for
sale, which is included in other assets.
The transfer included $1.7 billion of on-balance sheet credit card receivables,
$4.8 billion of The Money Store subprime mortgage loans, $1.3 billion of
commercial loans and $123 million of residential real estate loans.
The assets held for sale are recorded at the lower of cost or market value, and
we have developed marketing plans to sell these assets in an orderly manner. The
valuations of the assets held for sale and the impact of discontinuing the
subprime mortgage lending business at The Money Store on the valuation of
certain securities, specifically residual interests from The Money Store
securitizations, were made based on our best estimates given information
currently available. In these valuations, we have used the best available
information to develop reasonable assumptions; however, changes in market
conditions and the illiquid nature of some of the markets may cause future
valuations and/or the ultimate proceeds to differ from our December 31, 2000,
estimates.
22
25
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
In 2000, we completed the sale of the credit card portfolio and certain
commercial and consumer loans. As a result of these sales, the balance of loans
in assets held for sale at December 31, 2000, amounted to $8.1 billion, of which
$4.3 billion related to our strategic repositioning.
FUNDING SOURCES
CORE DEPOSITS Core deposits, which include savings, negotiable order of
withdrawal (NOW), money market, noninterest-bearing and other consumer time
deposits, were $122 billion at December 31, 2000, and at December 31, 1999. Our
renewed focus on gathering deposits helped to turn around and then stabilize the
negative growth trend of the previous two years. Because of this emphasis,
period-end deposits remained flat in 2000 from 1999 despite the sale of $2
billion of deposits in connection with the sale of branches. We continue to meet
customer demand for alternative investment products or deposits, depending on
the customers' needs.
Average core deposits were $118 billion in 2000, down $4 billion from 1999,
largely reflecting a higher interest rate environment, which resulted in
corporate customers maintaining lower compensating balances. The decline also
reflects customer movement into investment options and into non-FDIC insured
deposit alternatives.
In 2000 and in 1999, average noninterest-bearing deposits were 24 percent and 25
percent, respectively, of average core deposits.
The portion of core deposits in higher-rate, other consumer time deposits was 29
percent at December 31, 2000, and 28 percent at December 31, 1999. 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.
PURCHASED FUNDS Average purchased funds, which include wholesale borrowings with
maturities of 12 months or less, were $66 billion in 2000 and $55 billion in
1999. The increase from 1999 represents funding for the growth in average
earning assets early in 2000. Purchased funds at December 31, 2000, were $60
billion and at December 31, 1999, $69 billion, with the decline reflecting the
impact of balance sheet reductions associated with the strategic repositioning.
LONG-TERM DEBT Long-term debt, which includes any wholesale borrowings with an
original maturity in excess of 12 months, increased $4 billion from
December 31, 1999, to $36 billion at December 31, 2000. In 2000, we issued $4
billion of notes with varying rates and maturities. In 2001, scheduled
maturities of long-term debt amount to $13 billion. We anticipate rolling over
these obligations.
Long-term debt included $2 billion of trust capital securities at December 31,
2000, and at December 31, 1999. Subsidiary trusts issued these capital
securities and used the proceeds to purchase junior subordinated debentures from
the parent company. These capital securities are considered tier 1 capital for
regulatory purposes.
Under a shelf registration statement filed with the Securities and Exchange
Commission, we have $2.4 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.
Our principal banking subsidiary, First Union National Bank, has available
global note programs for the issuance of up to $45 billion of senior and
subordinated notes. Under these programs, $24 billion of long-term debt has been
issued and was outstanding at December 31, 2000. The sale of any additional
notes will depend on future market conditions, funding needs and other factors.
CREDIT LINES We have a $175 million committed back-up line of credit that
expires in July 2002 and an additional $160 million committed back-up line of
credit that expires in August 2001. 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 while maintaining sufficient
capital levels and related ratios to satisfy regulatory requirements. We have
historically generated attractive returns on equity to our stockholders while
maintaining sufficient regulatory capital ratios.
Stockholders' equity was $15 billion at December 31, 2000, and $17 billion at
December 31, 1999. Common shares outstanding amounted to 980 million at December
31, 2000, a decrease of 8 million from December 31, 1999. In 2000, we
repurchased 19 million shares at a cost of $690 million, 15 million shares of
which were
23
26
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
pursuant to a Board of Directors authorization in April 1999 to repurchase a
number of shares equal to the number issued in the EVEREN acquisition. Of the
approximately 31 million shares authorized for repurchase in connection with
this acquisition, a total of 28 million shares had been repurchased as of
December 31, 2000. Based on Board authorizations for share repurchases in
November 1998, May 1999 and June 2000, each for 50 million shares, at December
31, 2000, we had authority to repurchase up to 101 million shares of our common
stock, which is incremental to share repurchases related to EVEREN and the
forward contracts described below. In 1999, we repurchased 39 million shares of
common stock at a cost of $2.1 billion and 13 million common shares at a cost of
$559 million related to EVEREN.
In early 1999, the Board authorized the use of forward equity sales transactions
(equity forwards) in connection with our buyback programs. The use of equity
forwards is intended to provide us with the ability to purchase shares under the
buyback programs in the open market and then issue shares in private trans-
actions to counterparties in the amounts necessary to maintain targeted capital
ratios. In addition to equity forwards, we have also entered into forward
purchase contracts with various counterparties.
The equity forwards and forward purchase contracts mature at various times in
2001 and can be extended by mutual consent of the counterparties. At December
31, 2000, we had equity forwards involving 13 million shares at a cost of $600
million and forward purchase contracts involving 33 million shares at a cost of
$1.2 billion. The forward price of the shares subject to these contracts is cost
plus a premium, net of dividends paid to the counterparty. The more dilutive of
the net premium or the share equivalent of the amount by which the forward price
exceeds the current market price is included in the calculation of earnings per
share. In 2000, this had the effect of reducing diluted earnings per share by 2
cents. We anticipate that the impact on reported earnings per share in each
quarter of 2001 will be comparable to the fourth quarter of 2000, and has been
factored into our 2001 forecasts. See Note 10: Common Stock and Capital Ratios
and Note 14: Basic and Diluted Earnings per Share to the audited consolidated
financial statements for additional information related to these transactions.
We paid $1.9 billion in dividends to common stockholders in 2000 and $1.8
billion in 1999. This represented a dividend payout ratio on operating earnings
of 64.75 percent in 2000. In December 2000, the Board of Directors announced its
intention to reduce the annual dividend on common stock to 96 cents per share, a
50 percent reduction from the current annual rate of $1.92 per share. The new
dividend rate will be reflected in the quarterly dividend payable March 15,
2001.
At December 31, 2000, stockholders' equity was reduced by $213 million in
accumulated other comprehensive income, net, substantially all of which was
related to net unrealized losses on debt and equity securities.
SUBSIDIARY DIVIDENDS First Union National Bank is the largest source of parent
company dividends. Capital requirements established by regulators limit
dividends that this subsidiary and certain other of our subsidiaries can pay.
Under these and other limitations, which include an internal requirement to
maintain all deposit-taking banks at the well capitalized level, at December 31,
2000, our subsidiaries had $1.1 billion available for dividends that could be
paid without prior regulatory approval. Our subsidiaries paid $3.1 billion in
dividends and, in connection with the consolidation of two of our banking
subsidiaries, returned $75 million in capital to the parent company in 2000.
REGULATORY CAPITAL At December 31, 2000, our tier 1 and total capital ratios
were 7.02 percent and 11.19 percent, respectively, and 7.08 percent and 10.87
percent, respectively, at December 31, 1999. Our leverage ratio at December
31, 2000, was 5.92 percent and at December 31, 1999, 5.97 percent. At December
31, 2000, our deposit-taking subsidiary banks met the capital and leverage ratio
requirements for well capitalized banks.
RISK MANAGEMENT
First Union is in the business of managing risk to create shareholder value. Our
objective is to earn competitive returns from our various business activities at
acceptable risk levels. This involves identifying and monitoring the risks, and
ensuring that the risks taken are within prudent limits and that they are
appropriately priced.
In 2000, we substantially enhanced our approach to risk management by combining
all of our credit, market and operational risk management activities together
under the chief risk officer.
The principal responsibility for risk management lies with our line management.
The Risk Management Group, led by the chief risk officer, provides strategic
risk direction and an independent check and balance on the risk taking
activities of our business units. Key senior management committees have
oversight responsibility for credit, market, operational, and asset and
liability management risk. The Credit/Market Risk
24
27
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
Committee of the Board of Directors has oversight of the broad risk policies and
practices adopted by the senior management committees.
CREDIT RISK MANAGEMENT Our lending strategy stresses quality growth and
portfolio diversification by product, geography and industry. A common credit
underwriting structure is in place throughout the company.
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.
Consumer lending is conducted through our full-service bank branches and
specialty finance businesses using sophisticated underwriting, servicing and
collection systems and industry standards to determine acceptable levels of
customer debt capacity and collateral valuation. These guidelines are monitored
for overall effectiveness and for compliance with fair lending practices.
MARKET RISK MANAGEMENT We trade a variety of debt securities and foreign
exchange instruments, as well as financial and foreign currency derivatives, in
order to provide customized solutions for the risk management needs of our
customers. We maintain diversified trading positions in the interest rate,
equity and foreign exchange markets. Risk is controlled through the use of
value-at-risk (VAR) limits and an active, independent monitoring process. Our
1-day VAR limit for 2000 was $30 million.
VAR PROFILE BY RISK TYPE
In millions 2000 1999
---------------------------------------------------
RISK CATEGORY HIGH LOW AVG High Low Avg
- ----------------------------------------------------------------------
Interest rate 15.3 1.2 8.9 23.5 5.4 11.3
Foreign exchange 3.3 0.3 1.3 2.7 0.3 0.8
Equity 7.8 0.3 4.0 2.7 0.1 0.9
- ----------------------------------------------------------------------
AGGREGATE 15.5 5.5 10.2 23.9 5.7 11.6
- ----------------------------------------------------------------------
We use the VAR methodology for measuring the market risk of our trading
positions. This statistical methodology uses recent market volatility to
estimate within a given level of confidence the maximum trading loss over a
period of time that we would expect to incur from an adverse movement in market
rates and prices over the period. We calculate 1-day and 10-day VAR at the 97.5
percent and 99 percent confidence levels, respectively. VAR is estimated using
the variance-covariance methodology. The VAR model accounts for correlation
among the various risk drivers and uses historical data from the most recent 252
trading days. The Daily VAR Backtesting table shows the daily trading profit and
loss, and compares this to the daily VAR. The VAR model is supplemented by
stress testing on a daily basis. The analysis captures all financial instruments
that are considered trading positions. The total 1-day VAR was $15 million at
December 29, 2000, and $6 million at December 31, 1999, and primarily relates to
interest rate risk and equity risk. High, low and average 1-day VAR by major
risk category and on an aggregate basis is shown in the VAR Profile by Risk Type
table. The Histogram of Daily Profit and Loss in 2000 table shows the
distribution of daily trading revenues versus 1-day VAR projections and it shows
the consistency of the trading pattern in terms of daily profitability. There
were no days with losses greater than the VAR projections.
DAILY VAR BACKTESTING
Dollars of revenue in millions
12/29/00 01/03/00
-------- --------
ACTUAL $10 $ (5)
P/L $5 $(10)
VAR $0 $(15)
$(20)
HISTOGRAM OF DAILY PROFIT AND LOSS IN 2000
Dollars of revenue in millions
50
40
30
20
10
$(6) $(5) $(4) $(3) $(2) $(1) 0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10
25
28
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
OPERATIONAL RISK MANAGEMENT Operational risk is the risk to earnings and capital
arising from operational failure; rapid, unexpected changes in a competitive
environment; or other events that reduce the economic value of a business. This
risk crosses all divisions and products of the company.
In 2000, we benefited from actions taken in 1999 to centralize risk management.
A corporate committee was formed to address ongoing strategies and policies with
the goal of diminishing the potential for losses.
With the increasing incidence of identity fraud in the industry, we developed
new methods to authenticate our customers. We also developed programs to educate
our customers on ways that they can prevent fraud and packages to assist them if
they do become victims.
In 2001, we will continue our focus on controls and we will implement a new
approach to allocate internal capital for operational risk. Customer privacy
concerns, including pending regulations, will also be on our agenda to ensure
customer information is protected as we introduce new products and technologies.
LIQUIDITY RISK MANAGEMENT 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 company's needs.
Funding sources primarily include customer-based core deposits but also include
purchased funds and cash flows from operations. First Union is one of the
nation's largest core deposit-funded banking institutions. Our large 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.
Liquidity is maintained through maturity management and through our ability to
liquidate assets, primarily through sales or securitizations.
INTEREST RATE RISK MANAGEMENT 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 Asset/Liability Management Committee oversees the interest rate risk
management process and approves policy guidelines. Balance sheet management and
finance personnel monitor the day-to-day exposure to changes in interest rates
in response to loan and deposit flows. They make adjustments within established
policy guidelines.
In analyzing interest rate sensitivity for policy measurement, we compare our
forecasted earnings per share in both a "high rate" and "low rate" scenario to
base-line scenarios. 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 next 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" and the "flat rate" base-line scenarios. The policy measurement
period is 12 months in length, beginning with the first month of the forecast.
EARNINGS SENSITIVITY Our "flat rate" scenario holds the federal funds rate
constant at 6.00 percent through December 2002. Based on the January 2001
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 earnings during the policy measurement period would be
negatively affected by 2.2 percent. Our model indicates that earnings would
benefit by 1.4 percent in our "low rate" scenario (i.e., a 200 basis point
decline in short-term rates from our "flat rate" scenario).
For our "most likely rate" scenario, we currently believe the market forward
implied rate ("market rate") is the most appropriate. This scenario assumes the
federal funds rate gradually declines to approximately 4.80 percent by the end
of December 2001. Sensitivity to the "market rate" scenario is measured using a
gradual 200 basis point increase over a 12-month period. Our model indicates
that earnings would be negatively affected by 2.0 percent in a "high rate"
scenario relative to the market rate over the policy period.
In addition to the 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 that are higher, lower and more
volatile than those used for policy measurement. We also perform our analysis
for time periods that reach beyond the
26
29
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
12-month policy period. For example, based on our January 2001 outlook, if
interest rates remain consistent with our "market rate" scenario until January
1, 2002, and then decrease by 200 basis points during 2002, earnings in 2002
would benefit by 0.4 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, we formulate
strategies aimed at protecting earnings from the potential negative effects of
changes in interest rates.
SECURITIES AVAILABLE FOR SALE The securities available for sale portfolio
consists primarily of U.S. Treasury, U.S. Government agency, municipal and
asset-backed securities. 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. At December 31, 2000, we had securities available for sale with a
market value of $48 billion, down $3.7 billion from year-end 1999.
Included in securities available for sale at December 31, 2000, were residual
interests with a market value of $298 million, which included a net unrealized
gain of $43 million. These residual interests resulted from securitizations of
SBA, credit card, student, auto and home equity loans. At December 31, 1999,
securities available for sale included residual interests with a market value of
$583 million and a net unrealized gain of $84 million.
In 2000, we converted $9.3 billion of first mortgage loans to agency securities
to facilitate funding flexibility. These securities are classified as securities
available for sale.
In connection with the strategic repositioning, restructuring and other charges
in 2000 included securities losses of $1.1 billion, composed of $596 million of
impairment losses on securities available for sale and $524 million of losses on
the sale of $13 billion of securities. Of the total of $596 million of
impairment losses in restructuring and other charges, $438 million is described
below and $158 million is impairment losses on other residual interests.
In 1999, we transferred $744 million of mortgage-related residual interests and
$8.7 billion of other mortgage-related securities to a trust in exchange for a
new security representing substantially all of the interest in the assets
transferred to the trust. Substantially all of the investment in
mortgage-related retained interests from the securitization of The Money Store
subprime mortgage loans was included in the transfer. The decision as part of
our strategic repositioning to discontinue the subprime mortgage lending
business at The Money Store caused us to revise the assumptions we used to
estimate the amount and timing of the cash flows associated with this security,
particularly the assumptions related to credit losses. Based on the revised
assumptions, we concluded that the fair value of the security had declined on an
other-than-temporary basis to an amount less than its book value at June 30,
2000. Accordingly, in connection with the strategic repositioning, we recorded a
$438 million impairment loss on the security to reduce the book value to its
fair value. There was no further impairment of this security in 2000. The
carrying value of this security was $9.3 billion at December 31, 2000.
The average rate earned on securities available for sale was 7.37 percent in
2000 and 6.83 percent in 1999. The average maturity of the portfolio was 7.21
years at December 31, 2000.
On October 1, 2000, we adopted the consensus under Emerging Issues Task Force
Issue No. 99-20, Recognition of Interest Income and Impairment on Certain
Investments (EITF 99-20). In connection with the adoption of EITF 99-20, we
recorded an after-tax charge of $46 million ($71 million before tax) which is
presented in the statement of income as the cumulative effect of changing our
method in accounting for beneficial interests.
OFF-BALANCE SHEET DERIVATIVES FOR INTEREST RATE RISK MANAGEMENT As part of our
overall interest rate risk management strategy, we use derivatives as a cost-
and capital-efficient way to modify the repricing or maturity characteristics of
on-balance sheet assets and liabilities. Derivatives 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
company. 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. The impact of derivatives on our
earnings and rate sensitivity is fully incorporated in the earnings simulation
model in the same manner as on-balance sheet instruments.
The fair value of off-balance sheet derivatives used to manage our interest rate
sensitivity was $761 million, based on a notional amount of $176 billion, at
December 31, 2000, and $213 million, based on a notional amount of $190 billion,
at December 31, 1999. From time to time, we rebalance our off-balance sheet
positions to reflect current market conditions and
27
30
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
management's assessment of desired balance sheet characteristics, and this can
result in significant changes in derivative notional amounts. The balances of
deferred gains and losses at December 31, 2000, which are recorded as
adjustments to the basis of the related assets or liabilities, will be amortized
over approximately 12 years and the annual net amortization is not significant.
In connection with the strategic repositioning, we terminated certain risk
management derivatives that were associated with assets sold, principally
securities available for sale, and the gain or loss was included in the
calculation of the gain or loss on the sale of the securities. Also in
connection with the strategic repositioning, certain other risk management
derivatives were redesignated.
Although off-balance sheet derivative financial instruments do not expose the
company 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. At December 31, 2000, the total mark-to-market related credit risk for
derivative transactions in excess of counterparty thresholds was $832 million.
The fair value of collateral held exceeded the total mark-to-market related
credit risk in excess of counterparty thresholds as of that 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.
ACCOUNTING AND REGULATORY MATTERS
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
which revises the criteria for accounting for securitizations and other
transfers of financial assets and collateral, and introduces new disclosures.
SFAS 140 replaces SFAS 125, which was issued in June 1996. The enhanced
disclosure requirements are effective for year-end 2000. The other provisions of
SFAS 140 apply prospectively to transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Earlier or
retroactive application is not permitted. The effect of SFAS 140 on the company
is not expected to be material.
In 1998, the FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS 137 and SFAS 138, which establishes
accounting and reporting standards for derivatives and hedging activities. SFAS
133 requires that all derivatives be recognized as assets or liabilities in the
balance sheet and that these instruments be measured at fair value through
adjustments to either other comprehensive income or to current earnings,
depending on the purpose for which the derivative is held. SFAS 133
significantly changes the accounting for derivatives. Under SFAS 133, a
derivative instrument can be designated as either a hedge of the fair value of a
recognized fixed rate asset or liability or an unrecognized firm commitment (a
"fair value hedge"), a hedge of a forecasted transaction or of the variability
of future cash flows of a floating rate asset or liability (a "cash flow
hedge"), or a foreign currency fair value or cash flow hedge (a "foreign
currency hedge").
We adopted SFAS 133 on January 1, 2001. In anticipation of adopting this
standard, we repositioned our portfolio of risk management derivatives during
the fourth quarter of 2000, which involved terminating certain derivative
contracts and reclassifying others as trading account assets. In accordance with
the provisions of SFAS 133, we redesignated anew all hedging relationships on
January 1, 2001. Also, in connection with the adoption of SFAS 133, we
reclassified $1.6 billion of investment securities to securities available for
sale.
On January 1, 2001, we recorded the cumulative effect of adopting SFAS 133,
which consists of two components, one included in the statement of income and
the other in other comprehensive income. The cumulative effect included in the
statement of income represents the fair value of all derivatives that are
designated as fair value hedges and the unrealized gain or loss on the related
hedged assets and liabilities. This cumulative effect also includes the fair
value of freestanding derivatives and certain derivatives that are embedded in
other contracts. This cumulative effect of adopting SFAS 133 that will be
recognized in the statement of income in the first quarter of 2001 amounts to a
$5 million after-tax gain.
The cumulative effect of adopting SFAS 133 that will be included in other
comprehensive income in the first quarter of 2001 represents the fair value of
all derivatives that are designated as cash flow hedges, which amounted to a
$141 million after-tax gain, and the net unrealized gain on the securities that
were reclassified to securities available for sale, which amounted to a $53
million after-tax gain.
Legislation has been enacted providing that deposits and certain claims for
administrative expenses and employee compensation against an insured depository
institution are afforded a priority over other general unsecured claims against
an institution, including federal funds and letters of credit, in the
liquidation or other resolution of such an institution by any receiver.
28
31
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
In 1999, the Gramm-Leach-Bliley Financial Modernization Act of 1999
(Modernization Act) became law. The Modernization Act allows bank holding
companies meeting management, capital and Community Reinvestment Act standards
to engage in a substantially broader range of nonbanking activities than was
permissible before enactment, including underwriting insurance and making
merchant banking investments in commercial and financial companies. It also
allows insurers and other financial services companies to acquire banks; removes
various restrictions that currently apply to bank holding company ownership of
securities firms and mutual fund advisory companies; and establishes the overall
regulatory structure applicable to bank holding companies that also engage in
insurance and securities activities. This part of the Modernization Act became
effective in March 2000. In 2000, First Union became a financial holding company
pursuant to the Modernization Act and is thereby permitted to engage in the
broader range of activities that the Modernization Act permits.
The Modernization Act also modifies current law related to financial privacy and
community reinvestment. The new privacy provisions will generally prohibit
financial institutions, including First Union, from disclosing nonpublic
personal financial information to nonaffiliated third parties unless customers
have the opportunity to "opt out" of the disclosure.
Various other legislative and regulatory proposals concerning the financial
services industry are pending in Congress, the legislatures in states in which
we conduct operations and before various regulatory agencies that supervise our
operations. Given the uncertainty of the legislative and regulatory process, we
cannot assess the impact of any such legislation or regulations on our financial
condition or results of operations.
EARNINGS AND BALANCE SHEET ANALYSIS
(1999 COMPARED WITH 1998)
First Union's operating earnings in 1999 were $3.5 billion, or $3.60 per share,
and $3.7 billion in 1998, or $3.77. Excluding nonrecurring gains, which amounted
to 20 cents per share related to the sale of certain assets and investments,
operating earnings in 1999 were $3.3 billion, or $3.40 per share. Operating
earnings exclude restructuring and merger-related charges of $263 million after
tax, or 27 cents per share, in 1999 and $805 million after tax, or 82 cents, in
1998. After restructuring and merger-related charges, net income in 1999 was
$3.2 billion, or $3.33 per share, and $2.9 billion, or $2.95, in 1998. Operating
earnings in 1999 represent a return on average stockholders' equity of 21.60
percent and a return on average assets of 1.51 percent.
Fee and other income, excluding portfolio securities transactions, increased 15
percent to $7.0 billion in 1999 from $6.1 billion in 1998. The majority of the
increase in fee income came from Capital Markets and Capital Management, which
generated a 36 percent increase in fee income to $4.0 billion in 1999 from $3.0
billion in 1998. In addition to very strong internal growth, these results
include approximately $190 million in brokerage fee income from EVEREN.
Noninterest expense, excluding restructuring and merger-related charges,
amounted to $8.5 billion in 1999 and $7.8 billion in 1998. Expenses in 1999
include approximately $200 million related to EVEREN.
Tax-equivalent net interest income was $7.6 billion in 1999 and $7.4 billion in
1998. The net interest margin was 3.79 percent in 1999 and 3.81 percent in 1998.
There was a decrease in the average rate on earning assets from 7.77 percent in
1998 to 7.64 percent in 1999. Our average rate paid on liabilities decreased
from 4.59 percent in 1998 to 4.42 percent in 1999. The net interest margin was
negatively affected by the funding cost associated with an increase in the level
of net noninterest earning assets. This was somewhat offset by a lower average
interest rate environment in 1999. Deposit divestitures in late 1998 related
primarily to the CoreStates merger, which occurred in April 1998, also
contributed to a declining margin as lower cost deposit funding was replaced
with higher cost borrowings.
On an operating basis, fee and other income from Capital Management and Capital
Markets amounted to 58 percent of fee and other income, excluding portfolio
securities transactions, in 1999. Led by strong results in investment banking
and trading, Capital Markets fee and other income increased 49 percent from 1998
to $1.7 billion in 1999, which was a period of diminished trading activities due
to significant turmoil in the global financial markets. Investment banking
results included $578 million of principal investing revenue in 1999 and $236
million in 1998. Capital Management fee and other income increased 29 percent
from 1998 to $2.3 billion in 1999.
Other income, which includes results from portfolio securities transactions and
asset sales and securitizations, declined $599 million from 1998 to $1.4 billion
in 1999. Other income in 1999 included securitization income of $417 million and
gains of $286 million from the sale of certain assets and investments. Other
income in 1999 also included branch sale gains amounting to $23 million and
securities losses of $63 million. In 1998, securities gains were $357 million,
branch sale gains amounted to $254 million, which included $117 million of
CoreStates-related branch sale gains, and
29
32
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
securitization income was $248 million. In 1998, we also recognized previously
deferred gains of $156 million in connection with two equity method investments.
Also included in other income in 1998 was a $57 million gain on the sale of our
merchant card business.
Noninterest expense was $8.9 billion in 1999 and $9.1 billion in 1998.
Noninterest expense included EVEREN and The Money Store from the date these
purchase accounting acquisitions closed on October 1, 1999, and June 30, 1998,
respectively. In addition, 1999 expenses included $404 million of restructuring
and merger-related charges and $1.2 billion in 1998. In 1999, this included a
$347 million restructuring charge related to the restructuring plan announced in
March 1999 and merger-related expenses of $75 million related to CoreStates and
$20 million related to EVEREN.
In addition to expenses associated with The Money Store and EVEREN and to the
restructuring and merger-related charges, expenses in 1999 reflected higher
personnel costs, primarily incentives associated with revenue growth in Capital
Markets and Capital Management, and continued spending related to increased
training and staffing in our retail financial centers. The operating overhead
efficiency ratio before restructuring and merger-related charges was 58.3
percent in 1999 and 56.7 percent in 1998.
Income taxes were $1.6 billion in 1999 and $1.1 billion in 1998. As a result of
corporate reorganization decisions, we realized an after-tax benefit of $270
million in 1998. The effective tax rate increased to 33.3 percent in 1999 from
27.1 percent in 1998.
Capital Markets operating earnings increased 39 percent from 1998 to $1.1
billion in 1999. Net interest income increased 8 percent from 1998 to $1.6
billion in 1999, with average loans up 6 percent as a result of significant
growth in cross-border leasing. Fee and other income increased 49 percent from
1998 to $1.7 billion in 1999. In addition to a modest contribution from EVEREN,
this increase principally reflected strength in Investment Banking, which was
driven by strong principal investing revenue. Also contributing to the
significant increase in fee and other income in Investment Banking were third
party asset securitizations, with a $54 million increase from 1998 to $83
million in 1999, and loan syndications, with a $37 million increase from 1998 to
$116 million in 1999, as well as increased contributions from merger and
acquisition advisory services and high yield debt.
Investment Banking showed strong results in trading account profits, as well as
significant contributions from fixed income and equity derivatives and foreign
exchange. Trading account profits included in the Investment Banking unit
increased from $111 million in 1998 to $305 million in 1999. The 1998 results
included the negative impact of the turmoil in the global financial markets that
occurred in the last half of 1998. Trading account assets were $14.9 billion at
December 31, 1999, and $9.8 billion at December 31, 1998.
Capital Markets noninterest expense was $1.5 billion in 1999 and $1.3 billion in
1998. The increase in expenses from 1998 was largely due to higher personnel
costs, including incentives associated with increased headcount and increased
revenue. The increase also included a modest impact from EVEREN.
Capital Markets average net loans were $43 billion in 1999 and $41 billion in
1998. Loan growth between the two periods was generated primarily in the
corporate banking, commercial leasing and leveraged finance units.
Capital Management operating earnings increased 40 percent from 1998 to $588
million in 1999. Net interest income amounted to $522 million in 1999 and $409
million in 1998. Capital Management fee and other income increased 29 percent
from 1998 to $2.3 billion in 1999. Growth in fee and other income was strong
across all business lines, with exceptional growth in Retail Brokerage and
Insurance Services and CAP Account.
Capital Management noninterest expense was $1.9 billion in 1999 and $1.5 billion
in 1998. This increase reflected higher personnel costs, primarily incentives
associated with revenue growth, as well as the impact of EVEREN.
Fee and other income from Retail Brokerage and Insurance Services increased 46
percent from 1998 to $1.1 billion in 1999. In addition to very strong internal
growth, retail brokerage results in 1999 included approximately $190 million in
brokerage fee income from EVEREN. Wealth and Trust Services fee and other income
increased 12 percent in 1999 from 1998. Personal trust fees amounted to more
than 50 percent of trust fees in 1999 and in 1998. Mutual fund fees increased 12
percent from 1998 to $460 million in 1999.
Consumer generated $733 million in operating earnings in 1999 and $1.0 billion
in 1998. The decrease was the result of a decline in fee and other income to
$1.7 billion in 1999 from $1.9 billion in 1998 and an increase in noninterest
expense.
Consumer net interest income was essentially unchanged at $3.3 billion in 1999
and in 1998. Net interest income
30
33
-------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
-------------------------------------------------------
in Retail Branch Products was negatively affected by a decline in average
balances primarily as a result of branch divestitures in late 1998 and the
movement of deposits to Capital Management. In Credit Cards, net interest income
was negatively affected by the securitization of $1.1 billion and $1.7 billion
of credit card receivables in 1999 and in 1998, respectively. These credit card
securitizations resulted in gains of $77 million and $119 million in 1999 and in
1998, respectively. FUMC net interest income declined due to lower originations
resulting from the higher interest rate environment. Partially offsetting this
decline in net interest income was an increase in the home equity businesses
reflecting our decision in early 1999 to retain home equity loans as on-balance
sheet loans.
The decline in fee and other income in Consumer primarily resulted from the
impact of branch divestitures in 1998 and lower securitization gains. Retail
Branch Products fees were affected by decreased levels of mortgage loan
securitization gains and lower service fees related to the divestiture of
deposits in late 1998, and the movement of approximately $5.6 billion of
deposits into our alternative customer investment products in 1999. Mortgage
loan securitization or sale gains declined to $83 million in 1999 from $136
million in 1998. In addition, Credit Card fees declined due to lower
securitization gains. In the home equity businesses, fee and other income
decreased due to impairment losses of $79 million related to residual interests
on certain home equity securitizations, partially offset by the impact of a full
year of The Money Store. Home Equity securitization gains were $136 million in
1999 and $128 million in 1998. The gains in 1998 were related to subprime home
equity loans. FUMC fees declined as a result of lower originations due to the
higher interest rate environment.
Consumer noninterest expense was $3.5 billion in 1999 and $3.2 billion in 1998.
The increase in the year over year comparisons was largely related to the
addition of The Money Store for a full year.
Average consumer loans were $28 billion in 1999 and $27 billion in 1998. In
addition to the impact from $298 million in loans sold in connection with
CoreStates-related branch divestitures, the decrease in the consumer loan
portfolio reflected the sale or securitization of $5.6 billion in mortgage and
credit card loans in 1999 and $7.9 billion in 1998. We also securitized and
retained as securities available for sale $7.3 billion in prime equity lines in
1999 and $2.9 billion in 1998 to facilitate funding flexibility.
Average consumer deposits were $71 billion in 1999 and $78 billion in 1998,
largely reflecting the divestiture of $3.4 billion of deposits primarily in late
1998, $2.2 billion of which related to the CoreStates merger. The decline also
reflected the movement of deposits into our alternative customer investment
products.
Commercial generated operating earnings of $522 million in 1999 and $523 million
in 1998. The decline largely reflected lower net interest income as a result of
tightening spreads due to competitive pricing and to lower loan balances. Net
interest income was $1.4 billion in 1999 and in 1998. Fee and other income
increased 4 percent from 1998 to $554 million in 1999, led by strong cash
management results. Noninterest expense was $1.1 billion in 1999 and $1.0
billion in 1998.
On a consolidated basis, net loans were $133 billion at December 31, 1999, and
$134 billion at December 31, 1998. Commercial loans represented 58 percent and
consumer loans 42 percent of the loan portfolio at December 31, 1999.
Increases in loan originations in 1999 were partially offset by the
securitization of certain consumer loans, primarily $7.3 billion in prime equity
lines that were securitized and retained as securities available for sale in
1999. Average net loans were $130 billion in 1999 and $132 billion in 1998. The
average rate earned on loans was 8.24 percent in 1999 and 8.46 percent in 1998.
At December 31, 1999, nonperforming assets were $1.1 billion, or 0.78 percent of
net loans, foreclosed properties and assets held for sale, and $844 million,
or 0.63 percent, at December 31, 1998. Weakness in parts of the healthcare
industry due to changes in federal reimbursement policies contributed $54
million to the increase. The increase in installment loan nonperforming assets
reflected our decision to hold The Money Store home equity loans in the loan
portfolio rather than securitize them. The Money Store nonperforming assets were
$138 million at December 31, 1999, an increase of $100 million from December 31,
1998. Over the same period, The Money Store loans increased $1.9 billion to $5.6
billion.
Accruing loans 90 days or more past due were $144 million at December 31, 1999,
and $346 million at December 31, 1998. Of these past due loans at December 31,
1999, $11 million were commercial loans or commercial real estate loans and $133
million were consumer loans, of which $13 million related to The Money Store.
Net charge-offs amounted to $688 million in 1999 and $638 million in 1998. Net
charge-offs were 0.53 percent of average net loans in 1999 and 0.48 percent in
1998.
31
34
- -------------------------------------------------------
MANAGEMENT'S ANALYSIS OF OPERATIONS
- -------------------------------------------------------
The provision for loan losses was $692 million in 1999 and $691 million in 1998.
The allowance for loan losses was $1.8 billion at December 31, 1999, and at
December 31, 1998. The allowance as a percentage of loans was 1.32 percent at
December 31, 1999, and 1.36 percent at year-end 1998.
Core deposits were $122 billion at December 31, 1999, and $131 billion at
December 31, 1998. The $9 billion decline from year-end 1998 primarily reflected
the movement of noninterest-bearing and time deposits into alternative
investment products.
The portion of core deposits in higher-rate, other consumer time deposits was 28
percent at December 31, 1999, and 27 percent at December 31, 1998. Average core
deposit balances were $122 billion in 1999 and $126 billion in 1998. In 1998, we
divested $3.4 billion of consumer deposits. These were primarily
regulatory-required divestitures in connection with acquisitions, principally
CoreStates.
In 1999 and in 1998, average noninterest-bearing deposits were 25 percent and 24
percent, respectively, of average core deposits. Average balances in savings and
NOW and noninterest-bearing deposits were higher in 1999 when compared with
1998, while money market and other consumer time deposits were lower.
Average purchased funds, which include wholesale borrowings with maturities of
12 months or less, were $55 billion in 1999 and $57 billion in 1998. This
decline reflected our strategy to fund more of our balance sheet with long-term
debt and with wholesale borrowings with original maturities of greater than 12
months. Purchased funds at December 31, 1999, were $69 billion and $53 billion
at year-end 1998. The December 31, 1999, balance was unusually high as a result
of balance sheet positioning in preparation for potential Year 2000 computer
issues. Conversely, purchased funds at December 31, 1998, were unusually low as
a result of asset sales late in 1998, the proceeds from which were not
reinvested until early 1999.
Long-term debt amounted to $32 billion at December 31, 1999, and $23 billion at
year-end 1998. 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, 1999, long-term debt included $2.0 billion of trust
capital securities and at December 31, 1998, $1.7 billion. In 1999, we issued
$1.4 billion of senior notes.
Stockholders' equity was $17 billion at December 31, 1999, and at December 31,
1998. Common shares outstanding amounted to 988 million at December 31, 1999,
and 982 million at December 31, 1998. In 1999, we repurchased 39 million shares
of First Union common stock at a cost of $2.1 billion, and in 1998, we
repurchased 50 million shares at a cost of $3.1 billion (38 million shares
related to The Money Store acquisition). In addition, as of December 31, 1999,
we also had repurchased 13 million shares at a cost of $559 million related to
the EVEREN acquisition. We paid $1.8 billion in dividends to common stockholders
in 1999 and $1.5 billion in 1998. This represented a dividend payout ratio on
operating earnings of 52.22 percent in 1999. At December 31, 1999, stock-
holders' equity was reduced by $930 million in accumulated other comprehensive
income, net, substantially all of which was net unrealized losses on debt and
equity securities.
At December 31, 1999, our tier 1 and total capital ratios were 7.08 percent and
10.87 percent, respectively, and 6.81 percent and 10.99 percent, respectively,
at December 31, 1998. Our leverage ratio at December 31, 1999, was 5.97 percent
and at December 31, 1998, 5.91 percent.
At December 31, 1999, we had securities available for sale with a market value
of $51 billion and $37 billion at year-end 1998. Securities available for sale
transactions resulted in net realized losses of $63 million in 1999, including
$79 million of impairment losses on certain residual interests, and net realized
gains of $353 million in 1998, including a $7 million impairment loss. The
average rate earned on securities available for sale was 6.83 percent in 1999
and 6.60 percent in 1998. The average maturity of the portfolio was 8.36 years
at December 31, 1999.
The fair value of off-balance sheet derivatives used to manage our interest rate
sensitivity was $213 million, based on a notional amount of $190 billion, at
December 31, 1999, and $1.1 billion, based on a notional amount of $49 billion,
at December 31, 1998. The increase in the notional amount of derivatives in 1999
primarily resulted from additional interest rate swaps and futures contracts.
32
35
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 1
SELECTED STATISTICAL DATA
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------
(Dollars in millions, except per share data) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
PROFITABILITY (a)
Diluted earnings per share $ 2.97 3.60 3.77 3.01 2.68
Diluted earnings per share - cash earnings $ 3.30 3.94 4.06 3.26 2.90
Return on average stockholders' equity 17.23 % 21.60 22.70 20.29 18.84
Return on average stockholders' equity - cash earnings 26.33 34.67 32.62 28.06 25.66
Net interest margin (b) 3.55 3.79 3.81 4.53 4.55
Fee and other income to total revenue 47.54 48.03 45.12 35.09 30.78
Overhead efficiency ratio - cash earnings 61.68 % 55.62 54.20 54.20 53.91
Operating leverage - cash earnings (c) $ (918) 102 721 423 747
Effective income tax rate 31.51 % 33.41 28.61 28.55 35.87
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
Tier 1 capital ratio 7.02 % 7.08 6.81 8.36 7.86
Total capital ratio 11.19 % 10.87 10.99 12.95 12.53
- -------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Allowance as % of loans, net 1.39 % 1.32 1.36 1.40 1.64
Allowance as % of nonperforming assets (d) 135 165 216 186 211
Net charge-offs as % of average loans, net 0.59 0.53 0.48 0.65 0.64
Nonperforming assets as % of loans, net,
foreclosed properties and assets held for sale 1.22 % 0.78 0.63 0.75 0.78
- -------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Employees 71,262 71,659 71,486 65,943 67,793
Branches 2,193 2,318 2,400 2,771 2,801
Shares outstanding (In thousands) 979,963 988,315 982,223 960,984 988,594
Common stock price $ 27.81 32.94 60.81 51.25 37.00
Market capitalization $ 27,253 32,555 59,729 49,250 36,578
=========================================================================================================================
(a) Based on operating earnings.
(b) Tax-equivalent.
(c) Incremental change on a year-to-year basis in net interest income and fee
and other income, less noninterest expense, excluding goodwill and other
intangible amortization.
(d) These ratios do not include nonperforming loans included in assets held for
sale.
33
36
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 2
CONSOLIDATED SUMMARIES OF INCOME, PER COMMON SHARE, BALANCE SHEET AND OTHER DATA
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------
(In millions, except per share and other data) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 17,534 15,151 14,988 14,362 13,758
=====================================================================================================================
Interest income (a) $ 17,633 15,269 15,105 14,461 13,876
Interest expense 10,097 7,699 7,711 6,568 6,151
- ---------------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,536 7,570 7,394 7,893 7,725
Provision for loan losses 1,736 692 691 1,103 678
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 5,800 6,878 6,703 6,790 7,047
Securities transactions - portfolio (1,134) (63) 357 55 100
Fee and other income 7,846 6,996 6,078 4,267 3,435
Restructuring and merger-related charges (b) 2,190 404 1,212 284 421
Other noninterest expense 9,520 8,458 7,844 6,936 6,509
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes, dividends on preferred
stock and cumulative effect of a change in
accounting principle (a) 802 4,949 4,082 3,892 3,652
Income taxes 565 1,608 1,074 1,084 1,261
Tax-equivalent adjustment 99 118 117 99 118
- ---------------------------------------------------------------------------------------------------------------------
Income before dividends on preferred stock and
cumulative effect of a change in accounting principle 138 3,223 2,891 2,709 2,273
Dividends on preferred stock - - - - 9
- ---------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle 138 3,223 2,891 2,709 2,264
Cumulative effect of a change in the accounting for
beneficial interests, net of tax (46) - - - -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 92 3,223 2,891 2,709 2,264
=====================================================================================================================
PER COMMON SHARE DATA
Basic
Income before change in accounting principle $ 0.12 3.35 2.98 2.84 2.33
Net income 0.07 3.35 2.98 2.84 2.33
Diluted
Income before change in accounting principle 0.12 3.33 2.95 2.80 2.30
Net income 0.07 3.33 2.95 2.80 2.30
Cash dividends $ 1.92 1.88 1.58 1.22 1.10
Average shares - Basic (In thousands) 970,608 959,390 969,131 955,241 973,712
Average shares - Diluted (In thousands) 974,172 966,863 980,112 966,792 982,755
Average common stockholders' equity $ 15,541 15,932 15,878 14,327 13,726
Book value 15.66 16.91 17.20 15.82 14.77
Common stock price
High 38.88 65.06 65.69 52.88 38.50
Low 24.00 32.44 44.69 36.63 25.75
Year-end $ 27.81 32.94 60.81 51.25 37.00
To earnings ratio (c) 397.29 X 9.89 20.61 18.30 16.09
To book value 178 % 195 353 324 251
BALANCE SHEET DATA
Assets $ 254,170 253,024 237,087 205,609 197,259
Long-term debt $ 35,809 31,975 22,949 13,487 11,604
OTHER DATA
ATMs 3,772 3,778 3,690 3,701 3,458
Common stockholders 157,524 168,989 146,775 120,437 103,538
=====================================================================================================================
(a) Tax-equivalent.
(b) After-tax restructuring, merger-related and other charges amounted to $2.8
billion in 2000; $263 million in 1999; $805 million in 1998; $204 million in
1997; and $272 million in 1996.
(c) Based on diluted earnings per share.
34
37
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 3
FEE AND OTHER INCOME - CAPITAL MARKETS
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Principal investing $ 392 592 237
Risk management (a) 263 189 175
Investment banking (a) 498 526 217
Corporate banking 229 184 243
International 226 205 214
Fixed income and other (a) 130 161 146
- -------------------------------------------------------------------------------------------------------------------------
Total 1,738 1,857 1,232
Eliminations (222) (148) (82)
- -------------------------------------------------------------------------------------------------------------------------
Total fee and other income - Capital Markets $ 1,516 1,709 1,150
=========================================================================================================================
(a) The aggregate amounts of trading account profits included in this table in
2000, 1999 and 1998 were $305 million, $285 million and $111 million,
respectively. This includes risk management and proprietary trading as well as
amounts included in investment banking and fixed income and other trading.
TABLE 4
SELECTED PERFORMANCE, DIVIDEND PAYOUT AND OTHER RATIOS
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 15.93 X 14.46 13.99 13.68 13.68
Return on assets 0.04 % 1.40 1.30 1.38 1.20
Return on total stockholders' equity 0.59 % 20.23 18.21 18.91 16.43
=========================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 64.75 % 52.22 41.24 39.18 39.18
Preferred and common shares 64.75 52.22 41.24 39.18 39.38
Net income
Common shares 2,742.86 56.46 52.72 42.12 45.55
Preferred and common shares 2,742.86 % 56.46 52.72 42.12 45.76
=========================================================================================================================
OTHER RATIOS
Operating earnings
Return on assets 1.18 % 1.51 1.66 1.49 1.39
Return on common stockholders' equity (b) 17.23 21.60 22.70 20.29 18.84
Net income
Return on common stockholders' equity 0.59 % 20.23 18.21 18.91 16.50
=========================================================================================================================
(a) Based on average balances and net income.
(b) The operating earnings return on common stockholders' equity excludes only
current year restructuring, merger-related and other charges and common
stockholders' equity is not adjusted for prior year charges.
35
38
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 5
SELECTED QUARTERLY DATA
- -----------------------------------------------------------------------------------------------------------------------
2000 1999
--------------------------------------------- ------------------------------------------
(In millions, except per
share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------
Interest income $ 4,264 4,465 4,492 4,313 4,143 3,812 3,624 3,572
Interest expense 2,532 2,631 2,587 2,347 2,198 1,930 1,779 1,792
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 1,732 1,834 1,905 1,966 1,945 1,882 1,845 1,780
Provision for loan losses 192 322 1,030 192 173 175 180 164
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,540 1,512 875 1,774 1,772 1,707 1,665 1,616
Securities transactions -
portfolio (76) (457) (582) (19) (7) (80) (1) 25
Fee and other income 1,829 2,640 1,516 1,861 1,844 1,520 1,707 1,925
Restructuring and
merger-related charges 33 52 2,110 (5) 6 - - 398
Other noninterest expense 2,344 2,396 2,393 2,387 2,354 1,940 2,053 2,111
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes (benefits) and
cumulative effect of a
change in accounting
principle 916 1,247 (2,694) 1,234 1,249 1,207 1,318 1,057
Income taxes (benefits) 271 395 (495) 394 407 405 445 351
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of a
change in accounting
principle 645 852 (2,199) 840 842 802 873 706
Cumulative effect of a change
in the accounting for
beneficial interests,
net of tax (46) - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 599 852 (2,199) 840 842 802 873 706
=======================================================================================================================
PER SHARE DATA
Basic
Income (loss) before change
in accounting principle $ 0.66 0.87 (2.27) 0.86 0.86 0.84 0.92 0.73
Net income (loss) 0.61 0.87 (2.27) 0.86 0.86 0.84 0.92 0.73
Diluted
Income (loss) before change
in accounting principle 0.65 0.86 (2.27) 0.85 0.86 0.84 0.90 0.73
Net income (loss) 0.60 0.86 (2.27) 0.85 0.86 0.84 0.90 0.73
Cash dividends 0.48 0.48 0.48 0.48 0.47 0.47 0.47 0.47
Common stock price
High 34.13 32.63 38.88 37.94 43.63 48.38 55.94 65.06
Low 24.00 25.00 25.00 28.44 32.44 35.31 42.06 48.63
Period-end $ 27.81 32.19 25.00 37.25 32.94 35.63 47.13 53.44
=======================================================================================================================
SELECTED RATIOS (a)
Return on assets 1.00 % 1.37 (3.46) 1.36 1.37 1.39 1.56 1.28
Return on stockholders'
equity 16.15 23.81 (53.24) 20.38 20.00 20.82 22.30 17.85
Stockholders' equity to assets 6.16 % 5.77 6.50 6.68 6.85 6.68 7.01 7.15
=======================================================================================================================
SELECTED RATIOS (a)(b)
Return on assets 1.12 % 1.12 1.13 1.36 1.38 1.39 1.56 1.74
Return on stockholders'
equity 15.36 % 15.76 17.74 20.31 19.78 20.47 21.94 24.32
=======================================================================================================================
(a) Based on average balances and net income (loss).
(b) Based on average balances and net income (loss) excluding after-tax
restructuring, merger-related and other charges and the cumulative effect of the
change in accounting for beneficial interests.
36
39
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 6
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------
(In millions) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET LOAN PORTFOLIO
COMMERCIAL
Commercial, financial and agricultural $ 54,207 51,683 53,961 46,117 41,489
Real estate - construction and other 3,104 2,435 2,628 3,037 3,474
Real estate - mortgage 9,218 8,768 8,565 13,160 14,300
Lease financing 15,465 12,742 9,730 8,610 6,348
Foreign 5,453 4,991 4,805 3,885 2,842
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 87,447 80,619 79,689 74,809 68,453
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 17,708 27,793 21,729 28,998 33,181
Installment loans (a) 22,972 25,795 30,595 26,185 31,150
Vehicle leasing 2,115 4,483 6,162 5,331 4,529
- ----------------------------------------------------------------------------------------------------------------------
Total consumer 42,795 58,071 58,486 60,514 68,860
- ----------------------------------------------------------------------------------------------------------------------
Total loans 130,242 138,690 138,175 135,323 137,313
Unearned income 6,482 5,513 4,026 3,636 2,666
- ----------------------------------------------------------------------------------------------------------------------
Loans, net (on-balance sheet) $ 123,760 133,177 134,149 131,687 134,647
======================================================================================================================
MANAGED PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL
On-balance sheet loan portfolio $ 87,447 80,619 79,689 74,809 68,453
Securitized loans - off-balance sheet 2,259 1,223 666 - -
Securitized loans included in other assets 2,618 1,788 250 - -
Loans held for sale included in other assets 953 2,465 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total commercial 93,277 86,095 80,605 74,809 68,453
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage
On-balance sheet loan portfolio 17,708 27,793 21,729 28,998 33,181
Securitized loans included in securities
available for sale 3,455 - - - -
Loans held for sale included in other assets 1,111 1,503 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total real estate - mortgage 22,274 29,296 21,729 28,998 33,181
- ----------------------------------------------------------------------------------------------------------------------
Installment loans (a)
On-balance sheet loan portfolio 22,972 25,795 30,595 26,185 31,150
Securitized loans - off-balance sheet 11,862 18,146 20,074 7,614 5,392
Securitized loans included in securities
available for sale 9,292 8,112 429 - -
Loans held for sale included in other assets 6,082 898 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total installment loans 50,208 52,951 51,098 33,799 36,542
- ----------------------------------------------------------------------------------------------------------------------
Vehicle leasing - on-balance sheet loan portfolio 2,115 4,483 6,162 5,331 4,529
- ----------------------------------------------------------------------------------------------------------------------
Total consumer 74,597 86,730 78,989 68,128 74,252
- ----------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 167,874 172,825 159,594 142,937 142,705
======================================================================================================================
SERVICING PORTFOLIO
Commercial $ 31,028 29,193 19,646 9,774 2,977
Consumer $ 2,964 38,218 41,943 35,597 29,765
======================================================================================================================
(a) Installment loans include credit card, instant cash reserve, signature and
First Choice.
37
40
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 7
LOANS HELD FOR SALE
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
-----------------------
(In millions)
- ------------------------------------------------------------------------------------------------------------------------
2000 STRATEGIC REPOSITIONING
Balance, beginning of year $ -
Loans transferred to assets held for sale 7,901
Allowance for loan losses related to loans transferred
to assets held for sale (1,020)
Lower of cost or market valuation adjustments (111)
Loans sold (2,045)
Other, net (a) (462)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 4,263
- ------------------------------------------------------------------------------------------------------------------------
OTHER (b)
Balance, beginning of year 4,866
Originations 8,545
Loans transferred from assets held for sale, net (1,393)
Lower of cost or market valuation adjustments (163)
Loans sold (7,596)
Other, net (a) (376)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,883
- ------------------------------------------------------------------------------------------------------------------------
Total loans held for sale, end of year $ 8,146
========================================================================================================================
(a) Other, net represents primarily loan payments.
(b) Other includes primarily student, mortgage warehouse, home equity and
syndication loans.
TABLE 8
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES (a)
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
----------------------------------------------------------------
REAL
COMMERCIAL, ESTATE-
FINANCIAL CONSTRUCTION REAL
AND AND ESTATE-
(In millions) AGRICULTURAL OTHER MORTGAGE FOREIGN TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
FIXED RATE
1 year or less $ 2,184 20 354 3,154 5,712
1-5 years 3,086 23 1,283 50 4,442
After 5 years 3,047 85 617 - 3,749
- ----------------------------------------------------------------------------------------------------------------------------
Total fixed rate 8,317 128 2,254 3,204 13,903
- ----------------------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE
1 year or less 17,825 923 1,203 1,924 21,875
1-5 years 24,573 1,739 3,930 305 30,547
After 5 years 3,492 314 1,831 20 5,657
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable rate 45,890 2,976 6,964 2,249 58,079
- ----------------------------------------------------------------------------------------------------------------------------
Total $ 54,207 3,104 9,218 5,453 71,982
============================================================================================================================
(a) Excludes lease financing.
38
41
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 9
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------------------------
(In millions) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year $ 1,757 1,826 1,847 2,212 2,308
Provision for loan losses 1,736 692 691 1,103 678
Allowance relating to loans transferred to
other assets, sold or acquired (1,020) (73) (74) (596) 50
Loan losses, net (751) (688) (638) (872) (824)
- --------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,722 1,757 1,826 1,847 2,212
====================================================================================================================
as % of loans, net 1.39 % 1.32 1.36 1.40 1.64
====================================================================================================================
as % of nonaccrual and restructured loans (a) 146 % 181 246 211 241
====================================================================================================================
as % of nonperforming assets (a) 135 % 165 216 186 211
====================================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 531 355 281 172 221
Real estate - commercial construction and mortgage 13 24 15 49 98
Real estate - residential mortgage 13 20 27 54 60
Installment loans and vehicle leasing (b) 310 429 476 799 697
- --------------------------------------------------------------------------------------------------------------------
Total loan losses 867 828 799 1,074 1,076
- --------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 53 63 65 74 120
Real estate - commercial construction and mortgage 3 9 11 23 33
Real estate - residential mortgage 2 3 1 9 12
Installment loans and vehicle leasing (b) 58 65 84 96 87
- --------------------------------------------------------------------------------------------------------------------
Total loan recoveries 116 140 161 202 252
- --------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 751 688 638 872 824
====================================================================================================================
Commercial loan net charge-offs as % of
average commercial loans, net 0.65 % 0.42 0.31 0.18 0.26
Consumer loan net charge-offs as % of
average consumer loans, net 0.51 0.67 0.69 1.12 1.00
Total net charge-offs as % of average loans, net 0.59 % 0.53 0.48 0.65 0.64
====================================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial, financial and agricultural $ 884 551 362 384 324
Real estate - commercial construction and mortgage 55 55 67 135 218
Real estate - residential mortgage 63 150 184 233 240
Installment loans and vehicle leasing (b) 174 212 128 124 123
- --------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,176 968 741 876 905
Foreclosed properties (c) 103 98 103 115 142
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,279 1,066 844 991 1,047
====================================================================================================================
Nonperforming loans included in assets held for sale (d) $ 334 14 - - -
Nonperforming assets included in loans and in assets
held for sale $ 1,613 1,080 844 991 1,047
====================================================================================================================
as % of loans, net, and foreclosed properties (a) 1.03 % 0.80 0.63 0.75 0.78
====================================================================================================================
as % of loans, net, foreclosed properties and loans in
other assets as held for sale (d) 1.22 % 0.78 0.63 0.75 0.78
====================================================================================================================
Accruing loans past due 90 days $ 183 144 346 326 474
====================================================================================================================
(a) These ratios do not include nonperforming loans included in assets held for
sale.
(b) Installment loans and vehicle leasing include loan losses, loan recoveries
and nonperforming assets related to credit card, instant cash reserve, signature
and First Choice.
(c) Restructured loans are not significant.
(d) These ratios reflect nonperforming loans included in assets held for sale.
Assets held for sale are recorded at the lower of cost or market value, and
accordingly, the amount shown and included in the ratios is net of the
transferred allowance for loan losses and the lower of cost or market valuation
adjustments.
39
42
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 10
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- ---------------- ---------------- ----------------
LOANS Loans Loans Loans Loans
% OF % of % of % of % of
TOTAL Total Total Total Total
(In millions) AMT. LOANS Amt. Loans Amt. Loans Amt. Loans Amt. Loans
- ---------------------------------------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural $ 763 42 % $ 754 37 % $ 724 $ 39 % $ 480 35 % $ 543 30 %
Real estate -
Construction and
other 33 2 20 2 34 2 44 2 90 3
Mortgage 83 21 83 26 103 22 149 31 284 34
Installment loans and
vehicle leasing 168 19 358 22 352 27 452 23 751 26
Lease financing 42 12 15 9 5 7 46 6 73 5
Foreign 37 4 19 4 12 3 49 3 39 2
Unallocated 596 - 508 - 596 - 627 - 432 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,722 100 % $ 1,757 100 % $ 1,826 $100 % $ 1,847 100 % $ 2,212 100 %
=================================================================================================================================
40
43
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 11
NONPERFORMING ASSETS ACTIVITY (a)
- ------------------------------------------------------------------------------------------------------------------------
Years Ended
December 31,
-----------------------
(In millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,066 844
- ------------------------------------------------------------------------------------------------------------------------
Commercial loan activity
New nonaccrual loans 1,243 599
Advances 12 -
Charge-offs (302) (174)
Return to accrual status - (14)
Transfers to assets held for sale (258) (51)
Payments (67) (86)
Sales (15) (13)
Other (activity under $5 million) (280) (99)
- ------------------------------------------------------------------------------------------------------------------------
Commercial loan activity 333 162
Consumer loan activity, net (120) 60
- ------------------------------------------------------------------------------------------------------------------------
Change in nonperforming assets 213 222
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,279 1,066
========================================================================================================================
(a) Excludes nonperforming loans included in assets held for sale.
TABLE 12
DEPOSITS
- -------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------
(In millions) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 30,315 31,375 35,614 31,005 29,713
Savings and NOW accounts 36,215 37,748 38,649 37,281 35,892
Money market accounts 20,630 19,405 20,822 21,240 21,193
Other consumer time 35,223 33,812 35,809 37,324 42,457
- -------------------------------------------------------------------------------------------------------------------------
Total core deposits 122,383 122,340 130,894 126,850 129,255
OTHER DEPOSITS
Foreign 7,795 6,729 5,427 3,928 3,307
Other time 12,490 11,978 6,146 6,299 3,867
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $ 142,668 141,047 142,467 137,077 136,429
=========================================================================================================================
41
44
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 13
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
-----------------------
(In millions)
- -------------------------------------------------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 5,874
Over 3 months through 6 months 3,941
Over 6 months through 12 months 4,752
Over 12 months 4,499
- -------------------------------------------------------------------------------------------------------------------------
Total $ 19,066
=========================================================================================================================
TABLE 14
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------------------
(In millions) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 13,952 14,204 13,327 13,846 11,276
Total capital 22,253 21,810 21,518 21,459 17,976
Adjusted risk-weighted assets 198,849 200,704 195,757 165,676 143,467
Adjusted leverage ratio assets $ 235,749 238,082 225,534 196,962 168,384
Ratios
Tier 1 capital 7.02 % 7.08 6.81 8.36 7.86
Total capital 11.19 10.87 10.99 12.95 12.53
Leverage 5.92 5.97 5.91 7.03 6.70
STOCKHOLDERS' EQUITY TO ASSETS
Year-end 6.04 6.60 7.13 7.36 7.37
Average 6.28 % 6.92 7.15 7.31 7.31
============================================================================================================================
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 6.92 % 7.26 7.48 6.97 6.43
First Union National Bank of Delaware (b) 12.20 10.83 11.44 11.83 13.61
Total capital
First Union National Bank 10.73 10.22 10.38 10.20 10.20
First Union National Bank of Delaware (b) 13.97 11.89 12.82 13.09 14.87
Leverage
First Union National Bank 6.04 6.48 6.69 6.02 5.95
First Union National Bank of Delaware (b) 7.76 % 7.08 6.96 6.24 10.60
============================================================================================================================
(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 percent to 4.00
percent.
(b) On June 26, 2000, First Union National Bank of Delaware was formed through
the merger of First Union Bank of Delaware and First Union Home Equity Bank.
42
45
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 15
UNREALIZED GAINS (LOSSES) IN CERTAIN FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------
(In millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
SECURITIES PORTFOLIOS (a)
Securities available for sale (b) $ (327) (1,431)
Investment securities 85 51
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized losses - securities portfolios (242) (1,380)
Less unrealized losses in securities considered
an economic hedge of mortgage servicing rights - (79)
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized losses - securities portfolios (242) (1,301)
- ------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET DERIVATIVE FINANCIAL
INSTRUMENTS (a)
Asset rate conversions (b) 935 (504)
Liability rate conversions (270) 338
Rate sensitivity hedges - 4
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) - off-balance sheet
derivative financial instruments 665 (162)
Less unrealized gains (losses) in interest rate swaps
designated as rate conversions of long-term fixed rate debt 370 (262)
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized gains - off-balance sheet
derivative financial instruments 295 100
- ------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) $ 53 (1,201)
========================================================================================================================
(a) Additional information related to the securities portfolios can be found in
Tables 16 and 17. Additional information related to off-balance sheet derivative
financial instruments can be found in Tables 18, 19 and 20.
(b) As of December 31, 2000, unrealized losses of $72 million associated with
$1.7 billion of interest rate swaps that qualify as asset rate conversions of
securities available for sale are included in net unrealized gain on debt and
equity securities in the consolidated statements of stockholders' equity.
43
46
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 16
SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
--------------------------------------------------------------------------------------------------
GROSS UNREALIZED AVERAGE
1 YEAR 1-5 5-10 AFTER 10 ------------------ AMORTIZED MATURITY
(In millions) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES COST IN YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ - 1 581 407 989 30 11 970 15.23
U.S. Government agencies 3 4,233 19,222 1 23,459 58 442 23,843 7.18
Asset-backed 23 10,320 5,060 358 15,761 256 201 15,706 4.44
State, county and municipal 21 1 22 1,379 1,423 59 3 1,367 27.84
Sundry 122 537 3,727 1,585 5,971 57 130 6,044 8.83
- -----------------------------------------------------------------------------------------------------------------------
Total market value $ 169 15,092 28,612 3,730 47,603 460 787 47,930 7.21
===================================================================================================================================
MARKET VALUE
Debt securities $ 169 15,092 28,612 2,656 46,529 438 773 46,864
Equity securities - - - 1,074 1,074 22 14 1,066
- -----------------------------------------------------------------------------------------------------------------------
Total market value $ 169 15,092 28,612 3,730 47,603 460 787 47,930
=======================================================================================================================
AMORTIZED COST
Debt securities $ 171 15,034 29,027 2,632 46,864
Equity securities - - - 1,066 1,066
- --------------------------------------------------------------------------------------
Total amortized cost $ 171 15,034 29,027 3,698 47,930
======================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury - % 5.14 5.99 5.56 5.81
U.S. Government agencies 6.13 7.08 6.48 4.63 6.59
Asset-backed 7.33 9.56 6.82 8.11 8.64
State, county and municipal 6.90 6.38 6.48 6.75 6.75
Sundry 6.58 7.72 7.41 6.17 7.10
Consolidated 6.72 % 8.79 6.65 6.50 7.31
======================================================================================
December 31, 1999
--------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 3 1 1,660 517 2,181 - 167 2,348 12.75
U.S. Government agencies 32 803 21,621 1,806 24,262 1 1,216 25,477 8.89
Asset-backed 378 10,295 5,821 568 17,062 290 409 17,181 6.31
State, county and municipal - 1 39 856 896 1 13 908 27.96
Sundry 1,032 741 2,845 2,258 6,876 223 141 6,794 7.10
- -----------------------------------------------------------------------------------------------------------------------------------
Total market value $ 1,445 11,841 31,986 6,005 51,277 515 1,946 52,708 8.36
===================================================================================================================================
MARKET VALUE
Debt securities $ 1,445 11,841 31,986 4,098 49,370 320 1,916 50,966
Equity securities - - - 1,907 1,907 195 30 1,742
- -----------------------------------------------------------------------------------------------------------------------
Total market value $ 1,445 11,841 31,986 6,005 51,277 515 1,946 52,708
=======================================================================================================================
AMORTIZED COST
Debt securities $ 1,389 11,681 33,544 4,352 50,966
Equity securities - - - 1,742 1,742
- --------------------------------------------------------------------------------------
Total amortized cost $ 1,389 11,681 33,544 6,094 52,708
======================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 5.17 % 4.56 5.76 5.70 5.74
U.S. Government agencies 5.76 7.03 6.47 6.47 6.49
Asset-backed 8.63 8.16 6.87 10.66 7.79
State, county and municipal - 9.34 7.43 9.09 9.02
Sundry 5.33 6.71 7.55 3.90 5.98
Consolidated 6.10 % 7.99 6.60 6.28 6.86
======================================================================================
44
47
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
- --------------------------------------------------------------------------------
Securities available for sale with an aggregate amortized cost of $25.5
billion at December 31, 2000, are pledged to secure U.S. Government and other
public deposits and for other purposes as required by various statutes or
agreements.
Included in "Sundry" at December 31, 2000, are $3.3 billion of securities
denominated in currencies other than the U.S. dollar. At December 31, 2000,
these securities had a weighted average maturity of 9.32 years and a weighted
average yield of 6.89 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, 2000 and 1999, there were forward commitments to purchase
securities at a cost which approximates a market value of $2.2 billion and $22
million, respectively. At December 31, 2000 and 1999, there were commitments to
sell securities at a cost which approximates a market value of $1.6 billion and
$46 million, respectively.
Gross gains and losses realized on the sale of debt securities in 2000
were $144 million and $1.3 billion, respectively, and gross gains and losses
realized on equity securities were $24 million and $28 million, respectively.
Gross gains and losses realized on the sale of debt securities in 1999 were $69
million and $131 million, respectively, and gross gains and losses realized on
equity securities were $147 million and $14 million, 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.
45
48
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 17
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------
GROSS UNREALIZED AVERAGE
1 YEAR 1-5 5-10 AFTER 10 ------------------ MARKET MATURITY
(In millions) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES VALUE IN YEARS
- --------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 14 1 - - 15 - - 15 0.35
U.S. Government agencies 35 957 35 - 1,027 12 5 1,034 4.26
CMOs 21 9 - - 30 - - 30 0.97
State, county and municipal 29 145 279 93 546 78 - 624 7.08
Sundry 9 14 2 - 25 - - 25 2.24
- --------------------------------------------------------------------------------------------------------------------
Total carrying value $ 108 1,126 316 93 1,643 90 5 1,728 5.07
================================================================================================================================
MARKET VALUE
Debt securities $ 108 1,143 366 111 1,728
=====================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.25 % 4.71 - - 6.18
U.S. Government agencies 6.66 7.00 6.28 - 6.97
CMOs 8.49 6.68 - - 7.92
State, county and municipal 8.91 9.72 11.20 10.05 10.49
Sundry 7.73 6.46 6.56 - 6.91
Consolidated 7.67 % 7.34 10.62 10.05 8.15
=====================================================================================
December 31, 1999
----------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ------------------ Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- --------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 11 - 1 - 12 - - 12 0.63
U.S. Government agencies 41 148 854 1 1,044 7 23 1,028 5.31
CMOs 58 - 1 - 59 - - 59 0.65
State, county and municipal 49 142 277 147 615 68 1 682 7.64
Sundry 3 22 1 2 28 - - 28 2.95
- --------------------------------------------------------------------------------------------------------------------
Total carrying value $ 162 312 1,134 150 1,758 75 24 1,809 5.90
- --------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
Debt securities $ 163 322 1,154 170 1,809
=====================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 4.72 % - 4.74 - 4.72
U.S. Government agencies 6.86 7.17 6.60 5.26 6.69
CMOs 8.22 - 10.39 - 8.27
State, county and municipal 9.35 10.21 11.86 11.41 11.17
Sundry 7.52 7.02 7.60 6.61 7.07
Consolidated 7.95 % 8.54 7.89 11.33 8.31
=====================================================================================
Investment securities with an aggregate amortized cost of $827 million at
December 31, 2000, 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, 2000 and 1999.
Gross gains realized on repurchase agreement underdeliveries and calls of
investment securities were $355,000, $238,000 and $5 million in 2000, 1999 and
1998, respectively. Gross losses realized on repurchase agreement
underdeliveries and calls of investment securities were $422,000, $67,000 and
$806,000 in 2000, 1999 and 1998, respectively.
46
49
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
TABLE 18
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
---------------------------------------------------------------------
GROSS UNREALIZED AVERAGE
NOTIONAL CARRYING ------------------- MARKET MATURITY IN
(In millions) AMOUNT AMOUNT(f) GAINS LOSSES VALUE YEARS(g)
- ----------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS (b)
Interest rate swaps $ 34,377 345 968 99 1,214 6.58
Futures 142 - - 6 (6) 0.25
- ----------------------------------------------------------------------------------------------------------
Total asset rate conversions $ 34,519 345 968 105 1,208 6.55
======================================================================================================================
LIABILITY RATE CONVERSIONS (c)
Interest rate swaps $ 20,995 (177) 378 273 (72) 6.07
Options (d) 300 - - - - 2.45
Futures 119,737 - - 375 (375) 0.25
- ----------------------------------------------------------------------------------------------------------
Total liability rate conversions $ 141,032 (177) 378 648 (447) 1.12
======================================================================================================================
December 31, 1999
---------------------------------------------------------------------
Gross Unrealized Average
Notional Carrying ------------------- Market Maturity in
(In millions) Amount Amount(f) Gains Losses Value Years(g)
- ----------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS (b)
Interest rate swaps $ 50,910 39 63 200 (98) 2.81
Options (d) 6,451 115 - 353 (238) 8.48
Futures 190 - - - - 0.25
- ----------------------------------------------------------------------------------------------------------
Total asset rate conversions $ 57,551 154 63 553 (336) 3.44
======================================================================================================================
LIABILITY RATE CONVERSIONS (c)
Interest rate swaps $ 62,988 18 661 437 242 5.65
Options (d) 11,170 31 115 1 145 1.56
- ----------------------------------------------------------------------------------------------------------
Total liability rate conversions $ 74,158 49 776 438 387 5.04
======================================================================================================================
RATE SENSITIVITY HEDGES (e)
Basis swaps $ 706 - - - - 3.11
Options (d) 9,743 158 1 30 129 1.19
Futures 46,122 - 33 - 33 0.25
Options on futures 2,000 - - - - 0.72
- ----------------------------------------------------------------------------------------------------------
Total rate sensitivity hedges $ 58,571 158 34 30 162 0.46
======================================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Off-balance sheet derivative financial instruments with a notional amount of
$32.8 billion and $49.3 billion at December 31, 2000 and 1999, respectively,
primarily convert variable rate loans to fixed rate. In addition, interest rate
swaps with a notional amount of $1.7 billion and $8.3 billion at December 31,
2000 and 1999, respectively, are rate conversions of securities available for
sale.
(c) Off-balance sheet derivative financial instruments with a notional amount of
$15.8 billion and $36.2 billion at December 31, 2000 and 1999, respectively,
convert fixed rate liabilities, primarily CD's, long-term debt and bank notes,
to variable rate. At December 31, 2000, off-balance sheet derivative financial
instruments with a notional amount of $125.2 billion convert or hedge variable
rate liabilities. Of this amount, $5.3 billion are forward-starting swaps that
convert variable rate liabilities, primarily short-term and long-term debt, to
fixed rate, and $119.7 billion are futures that hedge variable rate liabilities.
At December 31, 1999, off-balance sheet derivative financial instruments with a
notional amount of $38.0 billion, of which $27.0 billion are forward-starting
swaps, convert variable rate liabilities, primarily deposits and long-term debt,
to fixed rate.
(d) Includes purchased interest rate floors and caps.
(e) Off-balance sheet derivative financial instruments designated as rate
sensitivity hedges are primarily used to modify the interest rate
characteristics of pay-variable interest rate swaps under asset rate conversions
or liability rate conversions.
(f) Carrying amount includes accrued interest receivable or payable and
unamortized premiums.
(g) Estimated maturity approximates average life.
47
50
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
TABLE 19
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES (a)
- ------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
-----------------------------------------------------------------
1 YEAR 1 -2 2 -5 5 -10 AFTER 10
(In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount - swaps $ 2,577 8,658 2,516 10,758 9,868 34,377
Notional amount - other - - 127 15 - 142
Weighted average receive rate (b) 6.56 % 6.68 6.60 6.96 7.20 6.89
Weighted average pay rate (b) 6.67 % 7.03 6.62 6.58 6.64 6.72
Estimated fair value $ 42 103 54 361 648 1,208
- ------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount - swaps $ 2,102 1,371 6,994 6,898 3,630 20,995
Notional amount - other 95,752 23,985 300 - - 120,037
Weighted average receive rate (b) 6.86 % 6.88 6.93 7.08 6.66 6.93
Weighted average pay rate (b) 7.14 % 7.01 6.98 6.90 7.18 7.01
Estimated fair value $ (327) (44) 158 (168) (66) (447)
==================================================================================================================
December 31, 1999
-----------------------------------------------------------------
1 Year 1 -2 2 -5 5 -10 After 10
(In millions) or Less Years Years Years Years Total
- ------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount - swaps $ 32,386 2,041 2,219 3,647 10,617 50,910
Notional amount - other 115 67 221 6,238 - 6,641
Weighted average receive rate (b) 6.91 % 6.36 6.28 6.47 7.04 6.86
Weighted average pay rate (b) 6.08 % 6.20 6.22 6.10 6.14 6.11
Estimated fair value $ 18 (3) (24) (289) (38) (336)
- ------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount - swaps $ 20,926 734 2,550 22,213 16,565 62,988
Notional amount - other - 11,000 170 - - 11,170
Weighted average receive rate (b) 6.61 % 7.30 6.75 6.49 7.37 6.63
Weighted average pay rate (b) 6.10 % 6.09 6.25 6.04 6.15 6.09
Estimated fair value $ (105) 150 (14) 258 98 387
- ------------------------------------------------------------------------------------------------------------------
RATE SENSITIVITY HEDGES
Notional amount - swaps $ 82 87 355 182 - 706
Notional amount - other 55,622 2,243 - - - 57,865
Weighted average receive rate (b) 6.46 % 6.46 6.46 6.46 - 6.46
Weighted average pay rate (b) 5.58 % 5.58 5.58 5.58 - 5.58
Estimated fair value $ 144 18 - - - 162
==================================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
(b) Weighted average receive and pay rates include the impact of currently
effective interest rate swaps and basis swaps only and not the impact of
forward-starting interest rate swaps. Substantially all of the currently
effective interest rate swaps are receive-fixed/pay-variable with pay rates
generally based on one-to-six month LIBOR, and they are the pay rates in effect
at December 31, 2000 and 1999.
48
51
-------------------------------------------------------
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, 1998 $ 25,908 9,068 14,454 49,430
Additions 39,631 69,045 85,659 194,335
Maturities and amortizations (6,559) (3,955) (35,793) (46,307)
Terminations (3,121) - (4,057) (7,178)
Redesignations 1,692 - (1,692) -
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 57,551 74,158 58,571 190,280
Additions 19,131 179,595 64,940 263,666
Maturities and amortizations (33,599) (54,544) (109,356) (197,499)
Terminations (23,240) (31,114) (12,406) (66,760)
Redesignations and transfers to trading account assets 14,676 (27,063) (1,749) (14,136)
- -------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 34,519 141,032 - 175,551
=========================================================================================================================
(a) Includes only off-balance sheet derivative financial instruments related to
interest rate risk management activities.
TABLE 21
INTEREST DIFFERENTIAL
- --------------------------------------------------------------------------------------------------------------------------
2000 COMPARED TO 1999 1999 Compared to 1998
---------------------------------- ----------------------------------
INTEREST VARIANCE Interest Variance
INCOME/ ATTRIBUTABLE TO (c) Income/ Attributable to (c)
EXPENSE ---------------------- Expense ----------------------
(In millions) VARIANCE RATE VOLUME Variance Rate Volume
- --------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest-bearing bank balances $ 15 3 12 (95) (17) (78)
Federal funds sold and securities
purchased under resale agreements (12) 79 (91) (167) (26) (141)
Trading account assets (a) 219 62 157 54 (12) 66
Securities available for sale (a) 827 260 567 667 90 577
Investment securities (a)
U.S. Government and other (2) 3 (5) (43) (4) (39)
State, county and municipal (14) (2) (12) (13) 4 (17)
- --------------------------------------------------------------------------------------------------------------------------
Total investment securities (16) 1 (17) (56) - (56)
- --------------------------------------------------------------------------------------------------------------------------
Loans (a) (b) 593 842 (249) (478) (289) (189)
Other earning assets (b) 738 183 555 239 (5) 244
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets (b) $ 2,364 1,430 934 164 (259) 423
==========================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits 1,215 865 350 (262) (198) (64)
Short-term borrowings 517 404 113 (354) (118) (236)
Long-term debt 666 324 342 604 (140) 744
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,398 1,593 805 (12) (456) 444
==========================================================================================================================
Net interest income (b) $ (34) (163) 129 176 197 (21)
==========================================================================================================================
(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) Certain prior year amounts have been reclassified to conform to the
presentation in 2000.
(c) Changes attributable to rate/volume are allocated to both rate and volume on
an equal basis.
49
52
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED 2000 YEAR ENDED 1999
------------------------------ ------------------------------
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 $ 1,095 54 4.93 % $ 835 39 4.58 %
Federal funds sold and securities
purchased under resale agreements 7,800 447 5.73 9,526 459 4.82
Trading account assets (a) (d) 12,011 828 6.90 9,638 609 6.32
Securities available for sale (a) (d) 51,751 3,816 7.37 43,767 2,989 6.83
Investment securities (a) (d)
U.S. Government and other 1,095 76 6.93 1,163 78 6.73
State, county and municipal 582 61 10.58 700 75 10.62
- -------------------------------------------------------------- -------------------
Total investment securities 1,677 137 8.20 1,863 153 8.19
- -------------------------------------------------------------- -------------------
Loans (a) (b) (d)
Commercial
Commercial, financial and agricultural 53,518 4,908 9.17 52,710 4,197 7.96
Real estate - construction and other 2,639 224 8.49 2,648 202 7.63
Real estate - mortgage 9,176 779 8.49 8,468 663 7.82
Lease financing 5,194 611 11.75 4,967 629 12.65
Foreign 4,856 342 7.04 4,500 273 6.08
- -------------------------------------------------------------- -------------------
Total commercial 75,383 6,864 9.11 73,293 5,964 8.14
- -------------------------------------------------------------- -------------------
Consumer
Real estate - mortgage (c) 23,804 1,762 7.40 23,435 1,661 7.09
Installment loans and vehicle
leasing (c) 27,701 2,661 9.60 33,063 3,069 9.28
- -------------------------------------------------------------- -------------------
Total consumer 51,505 4,423 8.59 56,498 4,730 8.37
- -------------------------------------------------------------- -------------------
Total loans 126,888 11,287 8.89 129,791 10,694 8.24
- -------------------------------------------------------------- -------------------
Other earning assets (c) 11,125 1,064 9.56 4,516 326 7.23
- -------------------------------------------------------------- -------------------
Total earning assets 212,347 17,633 8.30 199,936 15,269 7.64
=================== ==================
Cash and due from banks 7,751 9,178
Other assets 27,394 21,205
- ---------------------------------------------------- --------
Total assets $ 247,492 $ 230,319
==================================================== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 38,518 1,169 3.03 37,448 1,035 2.77
Money market accounts 15,793 682 4.32 20,031 631 3.15
Other consumer time 35,536 1,966 5.53 33,557 1,675 4.99
Foreign 8,780 514 5.85 5,553 259 4.66
Other time 13,648 938 6.87 7,528 454 6.03
- -------------------------------------------------------------- -------------------
Total interest-bearing deposits 112,275 5,269 4.69 104,117 4,054 3.89
Federal funds purchased and securities
sold under repurchase agreements 30,997 1,893 6.11 30,046 1,452 4.83
Commercial paper 2,882 173 6.00 2,224 107 4.81
Other short-term borrowings 9,697 470 4.85 9,188 460 5.01
Long-term debt 34,279 2,292 6.69 28,738 1,626 5.66
- -------------------------------------------------------------- -------------------
Total interest-bearing liabilities 190,130 10,097 5.31 174,313 7,699 4.42
=================== ==================
Noninterest-bearing deposits 28,491 30,995
Other liabilities 13,330 9,079
Stockholders' equity 15,541 15,932
- ---------------------------------------------------- --------
Total liabilities and
stockholders' equity $ 247,492 $ 230,319
==================================================== ========
Interest income and rate earned $ 17,633 8.30 % $ 15,269 7.64 %
Interest expense and equivalent rate paid 10,097 4.75 7,699 3.85
- ------------------------------------------------------------------------ ------------------
Net interest income and margin (e) $ 7,536 3.55 % $ 7,570 3.79 %
======================================================================== ==================
(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. (c) Certain prior year amounts have been reclassified to conform
to the presentation in 2000.
50
53
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
----------------------------------------------------------------------------------------------
YEAR ENDED 1998 YEAR ENDED 1997 YEAR ENDED 1996
---------------------------- ---------------------------- ----------------------------
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
----------------------------------------------------------------------------------------------
$ 2,331 134 5.76 % $ 3,184 182 5.68 % $ 2,298 130 5.67 %
12,381 626 5.06 7,219 399 5.51 7,104 377 5.32
8,598 555 6.46 5,174 341 6.59 4,811 320 6.64
35,177 2,322 6.60 20,844 1,423 6.83 21,869 1,449 6.62
1,727 121 6.99 2,478 179 7.22 3,497 241 6.89
867 88 10.12 1,085 105 9.67 1,370 132 9.64
------------------- ------------------- -------------------
2,594 209 8.04 3,563 284 7.97 4,867 373 7.66
------------------- ------------------- -------------------
50,080 3,926 7.84 43,118 3,464 8.03 40,089 3,285 8.20
2,912 245 8.42 3,295 293 8.89 3,562 302 8.48
9,663 821 8.50 13,619 1,180 8.67 14,230 1,283 9.02
4,454 502 11.28 4,199 423 10.09 3,124 264 8.44
4,297 287 6.68 3,349 215 6.43 2,144 136 6.33
------------------- ------------------- -------------------
71,406 5,781 8.10 67,580 5,575 8.25 63,149 5,270 8.35
------------------- ------------------- -------------------
26,114 1,968 7.54 31,241 2,426 7.77 32,856 2,514 7.65
34,540 3,423 9.91 35,696 3,831 10.73 33,115 3,443 10.40
------------------- ------------------- -------------------
60,654 5,391 8.89 66,937 6,257 9.35 65,971 5,957 9.03
------------------- ------------------- -------------------
132,060 11,172 8.46 134,517 11,832 8.80 129,120 11,227 8.70
------------------- ------------------- -------------------
1,175 87 7.41 - - - - - -
------------------- ------------------- -------------------
194,316 15,105 7.77 174,501 14,461 8.29 170,069 13,876 8.16
================= ================= =================
9,132 8,695 8,620
18,765 12,784 10,525
--------- --------- ---------
$ 222,213 $ 195,980 $ 189,214
========= ========= =========
34,917 937 2.68 33,104 898 2.71 33,360 828 2.48
22,742 755 3.32 24,033 694 2.89 22,179 622 2.80
37,291 1,987 5.33 39,752 2,067 5.20 42,226 2,198 5.21
4,429 238 5.38 3,092 164 5.29 3,307 167 5.07
6,342 399 6.29 5,377 325 6.05 3,853 216 5.60
------------------- ------------------- -------------------
105,721 4,316 4.08 105,358 4,148 3.94 104,925 4,031 3.84
33,121 1,676 5.06 22,759 1,147 5.04 22,815 1,133 4.97
1,954 102 5.23 1,948 112 5.76 1,865 98 5.27
11,109 595 5.36 5,680 338 5.96 4,228 234 5.53
16,268 1,022 6.28 12,596 823 6.53 10,443 655 6.27
------------------- ------------------- -------------------
168,173 7,711 4.59 148,341 6,568 4.43 144,276 6,151 4.26
================= ================= =================
30,609 27,489 26,351
7,553 5,823 4,753
15,878 14,327 13,834
--------- --------- ---------
$ 222,213 $ 195,980 $ 189,214
========= ========= =========
$ 15,105 7.77 % $ 14,461 8.29 % $ 13,876 8.16 %
7,711 3.96 6,568 3.76 6,151 3.61
----------------- ----------------- -----------------
$ 7,394 3.81 % $ 7,893 4.53 % $ 7,725 4.55 %
================= ================= =================
(d) Tax-equivalent adjustments included in trading account assets, securities
available for sale, investment securities, commercial, financial and
agricultural loans, and lease financing are (in millions): $8, $32, $18, $28 and
$13, respectively, in 2000; $9, $20, $24, $50 and $15, respectively, in 1999;
and $9, $18, $27, $49 and $14, respectively, in 1998. (e) The net interest
margin includes (in basis points): 23, 21 and 12 for the years ended 2000, 1999
and 1998, respectively, related to net interest income from off-balance sheet
derivative instruments.
51
54
- -------------------------------------------------------
FINANCIAL TABLES
- -------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
-------------------------------------
RESTRUCTURING
OPERATING AND OTHER AS
(In millions) EARNINGS CHARGES/GAINS REPORTED
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 7,437 - 7,437
Provision for loan losses 754 982 1,736
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,683 (982) 5,701
- -----------------------------------------------------------------------------------------------------------------
Fee and other income
Service charges and fees 1,966 (46) 1,920
Advisory, underwriting and other Capital Markets fees 724 (8) 716
Other income
Security transactions - portfolio (15) (1,119) (1,134)
Asset sales and securitization 263 2 265
Gain on sale of credit card portfolio - 937 937
Gain on sale of mortgage servicing portfolio - 71 71
Gain on sale of branches - 357 357
Other 3,877 (297) 3,580
- -----------------------------------------------------------------------------------------------------------------
Total fee and other income 6,815 (103) 6,712
- -----------------------------------------------------------------------------------------------------------------
Noninterest expense
Restructuring and merger-related charges - 2,190 2,190
Other noninterest expense 9,213 307 9,520
- -----------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,213 2,497 11,710
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) and
cumulative effect of a change in accounting principle 4,285 (3,582) 703
Income taxes (benefits) 1,350 (785) 565
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 2,935 (2,797) 138
Cumulative effect of a change in the accounting for beneficial interests,
net of tax (46) - (46)
- -----------------------------------------------------------------------------------------------------------------
Net income $ 2,889 (2,797) 92
=================================================================================================================
Diluted earnings per share
Income before a change in accounting principle $ 2.97 (2.85) 0.12
Net income $ 2.92 (2.85) 0.07
=================================================================================================================
FIRST UNION CORPORATION AND SUBSIDIARIES
RESTRUCTURING AND OTHER CHARGES/GAINS
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
(In millions) 2000
- -----------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES (Includes merger-related charges)
Employee termination benefits $ 172
Occupancy 108
Goodwill and other intangible impairments (noncash) 1,754
Other asset impairments 18
Contract cancellations 74
Other 3
- -----------------------------------------------------------------------------------------------------------------
Total 2,129
Reversal of March 1999 and other accruals (17)
- -----------------------------------------------------------------------------------------------------------------
Total 2,112
EVEREN and other merger-related charges 78
- -----------------------------------------------------------------------------------------------------------------
Total 2,190
- -----------------------------------------------------------------------------------------------------------------
OTHER CHARGES/GAINS
Provision for loan losses 982
Service charges and fees 46
Advisory, underwriting and other Capital Markets fees 8
Other income 49
Other noninterest expense 307
- -----------------------------------------------------------------------------------------------------------------
Total other charges/gains 1,392
- -----------------------------------------------------------------------------------------------------------------
Total restructuring and other charges/gains (3,582)
Income taxes (benefits) (785)
- -----------------------------------------------------------------------------------------------------------------
After-tax restructuring, merger-related and other charges/gains $ (2,797)
=================================================================================================================
52
55
-------------------------------------------------------
FINANCIAL TABLES
-------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
(In millions, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 11,246 10,629 11,109
Interest and dividends on securities available for sale 3,784 2,969 2,304
Interest and dividends on investment securities 119 129 182
Trading account interest 820 600 546
Other interest income 1,565 824 847
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 17,534 15,151 14,988
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 5,269 4,054 4,316
Interest on short-term borrowings 2,536 2,019 2,373
Interest on long-term debt 2,292 1,626 1,022
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 10,097 7,699 7,711
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 7,437 7,452 7,277
Provision for loan losses 754 692 691
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,683 6,760 6,586
- ---------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 1,966 1,987 2,027
Commissions 1,591 1,014 753
Fiduciary and asset management fees 1,511 1,238 1,055
Advisory, underwriting and other Capital Markets fees 724 702 364
Principal investing 392 592 237
Other income 631 1,400 1,999
- ---------------------------------------------------------------------------------------------------------------------
Total fee and other income 6,815 6,933 6,435
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,449 4,716 4,250
Occupancy 619 546 561
Equipment 858 793 723
Advertising 91 234 223
Communications and supplies 487 481 480
Professional and consulting fees 337 287 311
Goodwill and other intangible amortization 361 391 348
Sundry expense 1,011 1,010 948
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,213 8,458 7,844
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,285 5,235 5,177
Income taxes 1,350 1,749 1,481
- ---------------------------------------------------------------------------------------------------------------------
Net operating earnings $ 2,935 3,486 3,696
=====================================================================================================================
Diluted earnings per share $ 2.97 3.60 3.77
=====================================================================================================================
(a) Operating earnings exclude restructuring, merger-related and other charges
and cumulative effect of a change in accounting principle.
53
56
- -------------------------------------------------------
STATEMENT OF RESPONSIBILITY
- -------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
- --------------------------------------------------------------------------------
Management of First Union Corporation and its subsidiaries (the
"Corporation") is committed to the highest standards of quality customer service
and the enhancement of stockholder value. Management expects the Corporation's
employees to respect its customers and to assign the highest priority to
customer needs.
Management of the Corporation is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this report. The accompanying consolidated financial statements
were prepared in conformity with accounting principles generally accepted in the
United States of America 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 controls are 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. The internal control system
includes an organizational structure that provides appropriate delegation of
authority and segregation of duties, established policies and procedures, and
comprehensive internal audit and loan review programs. To enhance the
reliability of internal controls, management recruits and trains highly
qualified personnel, and maintains sound risk management practices.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal controls may vary over
time. The Internal Audit Division of the Corporation reviews, evaluates,
monitors and makes recommendations on policies and procedures, which serves as
an integral, but independent, component of internal control.
The consolidated financial statements have been audited by KPMG LLP,
independent auditors, in accordance with auditing standards generally accepted
in the United States of America. In performing its audit, KPMG LLP considers the
Corporation's internal control structure to the extent it deems necessary in
order to issue its opinion on the consolidated financial statements. KPMG LLP
reviews the results of its audit with both management and the Audit Committee.
The Corporation's financial reporting and internal controls are under the
general oversight of the Board of Directors, acting through the Audit Committee.
The Audit Committee is composed entirely of independent directors. KPMG LLP and
internal auditors have direct and unrestricted access to the Audit Committee at
all times. The Audit Committee 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.
G. Kennedy Thompson Robert P. Kelly
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
January 18, 2001
54
57
-------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
-------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
First Union Corporation
We have audited the consolidated balance sheets of First Union Corporation
and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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, 2000 and 1999, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Charlotte, North Carolina
January 18, 2001
55
58
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------
(In millions, except per share data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 9,906 10,081
Interest-bearing bank balances 3,239 1,073
Federal funds sold and securities purchased under resale agreements 11,240 11,523
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 24,385 22,677
- ---------------------------------------------------------------------------------------------------------------------
Trading account assets 21,630 14,946
Securities available for sale (amortized cost $47,930 in 2000; $52,708 in 1999;
amortized cost of collateral $25,453 in 2000) 47,603 51,277
Investment securities (market value $1,728 in 2000; $1,809 in 1999; carrying
amount of collateral $827 in 2000) 1,643 1,758
Loans, net of unearned income ($6,482 in 2000; $5,513 in 1999) 123,760 133,177
Allowance for loan losses (1,722) (1,757)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 122,038 131,420
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment 5,024 5,180
Due from customers on acceptances 874 995
Goodwill and other intangible assets 3,664 5,626
Other assets 27,309 19,145
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 254,170 253,024
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 30,315 31,375
Interest-bearing deposits 112,353 109,672
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 142,668 141,047
Short-term borrowings 39,446 50,107
Bank acceptances outstanding 880 995
Trading account liabilities 7,475 3,569
Other liabilities 12,545 8,622
Long-term debt 35,809 31,975
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 238,823 236,315
- ---------------------------------------------------------------------------------------------------------------------
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
980 million shares in 2000; 988 million shares in 1999 3,267 3,294
Paid-in capital 6,272 5,980
Retained earnings 6,021 8,365
Accumulated other comprehensive income, net (213) (930)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,347 16,709
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 254,170 253,024
=====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
56
59
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
(In millions, except per share data) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 11,246 10,629 11,109
Interest and dividends on securities available for sale 3,784 2,969 2,304
Interest and dividends on investment securities 119 129 182
Trading account interest 820 600 546
Other interest income 1,565 824 847
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 17,534 15,151 14,988
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 5,269 4,054 4,316
Interest on short-term borrowings 2,536 2,019 2,373
Interest on long-term debt 2,292 1,626 1,022
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 10,097 7,699 7,711
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 7,437 7,452 7,277
Provision for loan losses 1,736 692 691
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,701 6,760 6,586
- ---------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 1,920 1,987 2,027
Commissions 1,591 1,014 753
Fiduciary and asset management fees 1,511 1,238 1,055
Advisory, underwriting and other Capital Markets fees 716 702 364
Principal investing 392 592 237
Other income 582 1,400 1,999
- ---------------------------------------------------------------------------------------------------------------------
Total fee and other income 6,712 6,933 6,435
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,659 4,716 4,250
Occupancy 622 546 561
Equipment 870 793 723
Advertising 114 234 223
Communications and supplies 503 481 480
Professional and consulting fees 348 287 311
Goodwill and other intangible amortization 361 391 348
Restructuring and merger-related charges 2,190 404 1,212
Sundry expense 1,043 1,010 948
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 11,710 8,862 9,056
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 703 4,831 3,965
Income taxes 565 1,608 1,074
- ---------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 138 3,223 2,891
Cumulative effect of a change in the accounting for beneficial
interests, net of tax (46) - -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 92 3,223 2,891
=====================================================================================================================
PER SHARE DATA
Basic
Income before change in accounting principle $ 0.12 3.35 2.98
Net income 0.07 3.35 2.98
Diluted
Income before change in accounting principle 0.12 3.33 2.95
Net income 0.07 3.33 2.95
Cash dividends $ 1.92 1.88 1.58
AVERAGE SHARES (IN THOUSANDS)
Basic 970,608 959,390 969,131
Diluted 974,172 966,863 980,112
=====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
57
60
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
(Shares in thousands, ----------------------- Paid-in Retained Comprehensive
dollars in millions) Shares Amount Capital Earnings Income, Net Total
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 960,984 3,203 1,456 10,198 286 15,143
- ------------------------------------------------------------------------------------------------------------------------
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
Purchases of common stock (49,738) (165) (384) (2,507) (3,056)
Common stock issued for
Stock options and restricted stock 19,271 64 787 - - 851
Dividend reinvestment plan 1,476 4 77 - - 81
Acquisitions 50,230 168 2,243 129 - 2,540
Deferred compensation, net - - (150) - - (150)
Cash dividends paid by
First Union Corporation
$1.58 per common share - - (1,423) - - (1,423)
Acquired companies - - - (101) - (101)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 982,223 3,274 4,029 9,187 407 16,897
Comprehensive income
Net income - - - 3,223 - 3,223
Net unrealized loss on debt and
equity securities, net of
reclassification adjustment - - - - - (1,337)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 3,223 (1,337) 1,886
Purchases of common stock (35,508) (118) 533 (2,228) - (1,813)
Common stock issued for
Stock options and restricted stock 8,644 29 379 - - 408
Dividend reinvestment plan 1,937 6 78 - - 84
Acquisitions 31,019 103 1,148 - - 1,251
Deferred compensation, net - - (187) - - (187)
Cash dividends paid, $1.88 per share - - - (1,817) - (1,817)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 988,315 3,294 5,980 8,365 (930) 16,709
Comprehensive income
Net income - - - 92 - 92
Net unrealized gain on debt and
equity securities, net of
reclassification adjustment - - - - 717 717
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income - - - 92 717 809
Purchases of common stock (19,060) (63) (79) (548) - (690)
Common stock issued for
Stock options and restricted stock 6,922 23 131 - - 154
Dividend reinvestment plan 2,599 9 68 - - 77
Acquisitions 1,187 4 30 - - 34
Deferred compensation, net - - 142 - - 142
Cash dividends paid, $1.92 per share - - - (1,888) - (1,888)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 979,963 3,267 6,272 6,021 (213) 15,347
========================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
58
61
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------
(In millions) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 92 3,223 2,891
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Cumulative effect of a change in accounting principle 46 - -
Accretion and amortization of securities discounts and premiums, net 264 281 249
Provision for loan losses 1,736 692 691
Securitization gains (265) (417) (529)
(Gain) loss on sale of mortgage servicing rights 2 (44) (22)
Securities transactions 1,134 63 (357)
Depreciation, goodwill and other amortization 1,253 1,172 1,141
Goodwill impairments 1,754 - -
Deferred income taxes 91 1,079 624
Trading account assets, net (6,684) (6,626) (380)
Mortgage loans held for resale 381 1,677 (1,464)
Gain on sales of premises and equipment (18) (16) (11)
Gain on sales of credit card and mortgage servicing portfolios (1,008) - -
Other assets, net 1,384 79 (2,513)
Trading account liabilities, net 3,906 2,027 878
Other liabilities, net 3,838 (3,535) 2,212
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 7,906 (345) 3,410
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities available for sale 16,356 17,391 28,698
Maturities of securities available for sale 3,089 4,104 5,201
Purchases of securities available for sale (8,127) (27,954) (47,477)
Calls and underdeliveries of investment securities 23 - 387
Maturities of investment securities 324 523 1,480
Purchases of investment securities (234) (263) (366)
Origination of loans, net (9,334) (9,986) (872)
Sales of premises and equipment 398 280 475
Purchases of premises and equipment (884) (957) (1,139)
Goodwill and other intangible assets, net (40) (101) (179)
Purchase of bank-owned separate account life insurance (135) (576) (359)
Cash equivalents acquired, net of purchase acquisitions 3 168 366
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 1,439 (17,371) (13,785)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net 1,621 (1,420) 5,139
Securities sold under repurchase agreements and other short-term borrowings, net (10,661) 7,637 7,525
Issuances of long-term debt 17,491 17,612 11,493
Payments of long-term debt (13,662) (8,586) (3,153)
Sales of common stock 152 143 700
Purchases of common stock (690) (1,813) (3,056)
Cash dividends paid (1,888) (1,817) (1,524)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (7,637) 11,756 17,124
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,708 (5,960) 6,749
Cash and cash equivalents, beginning of year 22,677 28,637 21,888
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 24,385 22,677 28,637
====================================================================================================================
CASH PAID FOR
Interest $ 9,759 7,568 7,566
Income taxes 203 30 152
NONCASH ITEMS
Transfer to securities available for sale from trading account assets - 1,529 -
Transfer to securities available for sale from loans 9,342 8,259 -
Transfer to trading account assets from loans - - 2,212
Transfer to other assets from securities available for sale 1,335 - -
Transfer to assets held for sale from loans $ 7,901 - 133
====================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
59
62
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
FIRST UNION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
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 Securities, Inc., an investment
banking company; and First Union Mortgage Corporation, a mortgage banking
company. The Corporation is a diversified financial services company whose
operations are principally domestic.
The accounting and reporting policies of First Union Corporation and
subsidiaries (the "Corporation") are in accordance with accounting principles
generally accepted in the United States of America, and they conform to general
practices within the applicable industries. The consolidated financial
statements include the accounts of the Parent Company and all its subsidiaries.
In consolidation, all significant intercompany accounts and transactions are
eliminated.
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 accounting principles generally accepted
in the United States of America. 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
these 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
Securities are classified at the date of commitment or purchase as trading
account assets, securities available for sale or investment securities, based on
management's intention. 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 and
securities sold not owned, are recorded at fair value. Realized and unrealized
gains and losses are included in fee and other income. Interest on trading
account assets is recorded in interest income.
Securities available for sale generally 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. Securities available for sale are recorded at fair value with
unrealized gains and losses recorded net of tax as a component of other
comprehensive income. Equity securities for which there are no readily
determinable fair values are recorded at cost.
Investment securities are recorded at cost, net of the amortization of
premium and the accretion of discount. The Corporation has the intent and the
ability to hold these securities until maturity.
The fair value of trading account assets and securities is based on quoted
market prices or, if quoted market prices are not available, then the fair value
is estimated using quoted market prices for similar securities, pricing models
or discounted cash flow analyses.
Securities available for sale and investment securities on which there is
an unrealized loss that is deemed to be other-than-temporary are written down to
fair value with the write-down recorded as a realized loss.
DERIVATIVES USED FOR RISK MANAGEMENT
The Corporation uses interest rate swaps, futures, forwards, net purchased
options (including caps and floors) and combinations thereof to manage interest
rate risk by either altering the interest rate risk characteristics (rate
conversions) of assets or liabilities or hedging certain exposures to risk.
To qualify for rate conversion accounting, a derivative must be designated
to specific assets, liabilities or pools of similar assets or liabilities and
must effectively alter the interest rate characteristics of the designated
assets or liabilities.
60
63
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
To qualify as a hedge of interest rate exposure, a derivative must reduce
overall interest rate risk, must be designated as a hedge of specific assets,
liabilities or pools of similar assets or liabilities, and the interest rate
indices on the derivative and the hedged item must be highly correlated at
inception and over the life of the derivative. Instruments that do not meet
these requirements at inception or fail to meet them thereafter are accounted
for as trading account assets from inception or the date that the criteria are
no longer met.
The net interest settlement on derivatives designated as rate conversions
or hedges is treated as an adjustment to the interest income or expense on the
designated assets or liabilities. Premiums paid and realized gains or losses
from the settlement or termination of the derivatives are deferred and amortized
as a yield adjustment over the shorter of the remaining term of the underlying
assets or liabilities or the term of the derivative. Derivatives designated as
rate conversions or hedges of securities available for sale are recorded at fair
value with unrealized gains and losses recorded net of tax as a component of
other comprehensive income.
If rate converted or hedged assets or liabilities are sold or otherwise
disposed of, deferred gains or losses on the derivatives are included in the
calculation of the gain or loss on sale or disposal, and the derivative is
either terminated, accounted for as trading account assets or redesignated to
another asset, liability or pool of similar assets or liabilities.
LOANS
Loans are recorded at the principal balance outstanding, net of unearned
income. Interest income is recognized on an accrual basis. Loan origination fees
and direct costs as well as unearned premiums and discounts are amortized as an
adjustment to the yield over the term of the loan. Loan commitment fees are
generally deferred and amortized on a straight-line basis over the commitment
period.
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 flow analyses using
stated loan rates, or the estimated fair value of collateral are used in
determining the fair value of impaired loans.
When the ultimate collectibility of the principal balance of an impaired
loan is in doubt, 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. 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 a loan, except
consumer loans, that becomes 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 classified as nonaccrual, the
loan is returned to accrual status.
ALLOWANCE FOR LOAN LOSSES
The Corporation's methodology for determining the allowance for loan
losses establishes both an allocated and an unallocated component. The allocated
component of the allowance for commercial loans is based principally on current
loan grades and historical loan loss rates adjusted to reflect current
conditions, as well as analyses of other factors that may have affected the
collectibility of loans in the portfolio. The allocated component of the
allowance for consumer loans is based principally on loan payment status and
historical loss rates adjusted to reflect current conditions. The unallocated
component of the allowance for loan losses represents the results of analyses
that estimate probable losses inherent in the portfolio that are not fully
captured in the allocated allowance analyses. These analyses include industry
concentrations, current economic factors, model imprecision and the estimated
impact of current economic conditions on certain historical loss rates used in
the allocated model.
Management believes the allowance for loan 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 loan 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.
61
64
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized on a straight-line basis generally over periods
ranging from fifteen years to twenty-five years. Unamortized goodwill associated
with disposed assets is included in the determination of gain or loss on sale of
the disposed assets. Credit card premiums are amortized over the estimated
period of benefit not to exceed ten years using the sum-of-the-years' digits
method. Deposit base premiums are amortized principally over a ten-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. The Corporation's unamortized goodwill and other intangibles
are periodically reviewed to determine whether there have been any events or
circumstances to indicate that the recorded amount is not recoverable from
projected undiscounted net operating cash flows. If the projected undiscounted
net operating cash flows are less than the carrying amount, a loss is recognized
to reduce the carrying amount to fair value, and when appropriate, the
amortization period is also reduced.
OTHER ASSETS
Assets Held for Sale
Assets held for sale are recorded at the lower of aggregate cost or market
value (less cost to sell), where loans are aggregated by reference to loan type
and marketing strategy. Market value for residential mortgage loans is
determined based on quoted market prices, outstanding commitments from investors
or discounted cash flow analyses using current investor yield requirements.
Market value of commercial loans is determined based on quoted market prices for
the same or similar loans, or by discounted cash flow analyses. Loans are
transferred to assets held for sale at the lower of their aggregate cost, which
is the carrying value net of deferred fees and costs and applicable allowance
for loan losses, or market value. If at the time of transfer, the market value
is less than the cost, the differential is recorded as additional provision for
loan losses. Subsequent declines in the market value of assets held for sale are
recorded as a charge that is included in the other income classification of fee
and other income in the consolidated statements of income. Sales of loans are
recorded when the proceeds are received.
Principal Investments
Principal investments are recorded at market value with realized and
unrealized gains and losses included in principal investing income in the
consolidated statements of income. For publicly traded securities, market value
is based on quoted market prices, net of applicable discounts for trading
restrictions and liquidity. Investments in non-public securities are recorded at
management's estimate of market value which is generally the cost or, if the
investee has raised additional debt or capital, the value implied by these
financings adjusted for differences in the terms of the securities.
Beneficial Interests
On October 1, 2000, the Corporation adopted the consensus under Emerging
Issues Task Force Issue No. 99-20, Recognition of Interest Income and Impairment
on Certain Investments (EITF 99-20). EITF 99-20 conforms the accounting for
income recognition and impairment on certain beneficial interests to the
accounting for securities available for sale. Under EITF 99-20, if cash flow
estimates indicate that the holder of a beneficial interest will not collect all
estimated cash flows, then the security is considered impaired, and
consequently, it is written down to fair value. In connection with the adoption
of EITF 99-20, the Corporation recorded an after-tax charge of $46 million ($71
million before tax) in 2000, which is presented in the consolidated statements
of income as the cumulative effect of a change in accounting principle.
Servicing Assets
In connection with certain businesses where the Corporation securitizes
and sells originated or purchased loans with servicing retained, servicing
assets or liabilities are recorded based on the relative fair value of the
servicing rights on the date the loans are sold. Servicing assets are amortized
in proportion to and over the estimated period of net servicing income. At
December 31, 2000 and 1999, servicing assets, which are included in other
assets, were $221 million and $703 million, respectively. At December 31, 2000,
servicing liabilities, which are included in other liabilities, were $15
million; there were no servicing liabilities at December 31, 1999.
Servicing assets are periodically evaluated for impairment based on the
fair value of those assets. If, by individual stratum, the carrying amount of
servicing assets exceeds fair value, a valuation reserve is established. The
valuation reserve is adjusted in subsequent periods as the fair value changes.
For purposes of impairment evaluation and measurement, the Corporation
stratifies servicing assets based on predominant risk characteristics of the
underlying loans, including loan type, amortization type, loan coupon rate, and
in certain circumstances, period of origination. The assumptions utilized in
evaluating servicing assets for impairment include cumulative net loss and
prepayment rates on the underlying loans, and the discount rate.
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.
62
65
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation using the intrinsic
value method under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Corporation's stock options are
typically either noncompensatory or compensatory with the exercise price equal
to the fair value of the stock on the date of grant, and accordingly, no expense
is recognized for either noncompensatory or compensatory options. For restricted
stock, which generally vests based on continued service with the Corporation,
the expense is measured as the fair value of the shares on the date of grant,
and the expense is amortized in accordance with the applicable vesting schedule,
which is generally straight-line.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income less the
premium on the Corporation's transactions in its common stock, by the weighted
average number of shares of common stock outstanding for the period. Diluted
earnings per share is computed by dividing income available 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. For purposes of computing diluted earnings per share, the more
dilutive of the following two alternatives is used for the effect of the
Corporation's transactions in its common stock: subtract the premium on these
instruments from net income or include in average shares the shares that the
Corporation would be required to issue if these transactions were settled on a
net share basis.
RECLASSIFICATIONS
Certain amounts in 1999 and 1998 were reclassified to conform with the
presentation in 2000. These reclassifications have no effect on stockholders'
equity or net income as previously reported.
- --------------------------------------------------------------------------------
NOTE 2: ACQUISITIONS
In 2000, the Corporation acquired four entities which, at the date of the
respective acquisitions, had assets of $58 million in the aggregate. These
entities were acquired at a combined cost of $124 million for 1.2 million shares
of the Corporation's common stock and $90 million in cash. These acquisitions
were accounted for as purchases and the resulting goodwill of $130 million is
being amortized over 15 years. In September 2000, the Corporation announced the
pending acquisition of a brokerage business which was consummated in January
2001 for $103 million in cash. The resulting goodwill is being amortized over
fifteen years.
On October 1, 1999, the Corporation acquired EVEREN Capital Corporation
("EVEREN"), which at June 30, 1999, had assets of $2.9 billion, for 31 million
shares of the Corporation's common stock, 13 million of which were repurchased
in the open market at a cost of $559 million in 1999, and 15 million of which
were repurchased in the open market at a cost of $479 million in 2000. In
connection with this purchase accounting acquisition, the Corporation recorded
$901 million of goodwill based on a purchase price of $1.1 billion. The goodwill
is being amortized over twenty years.
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. The amortization periods of the goodwill and the
network intangible were twenty-five years and fifteen years, respectively.
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 was restated to include CoreStates
historical financial information as if the combining companies had been
consolidated for all periods presented herein. At December 31, 1997, CoreStates
had assets of $48 billion, net loans of $35 billion, deposits of $34 billion,
stockholders' equity of $3 billion and net income of $813 million. Each of the
204 million shares of CoreStates' common stock was exchanged for 1.62 shares of
the Corporation's common stock.
63
66
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
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 was not considered material to the historical
results of the Corporation, and accordingly, the Corporation's financial
statements were not restated.
Restructuring and merger-related charges related to certain of the
acquisitions and the Corporation's decision to close substantially all of the
TMSI operations in June 2000 are described more fully in Note 3.
- --------------------------------------------------------------------------------
NOTE 3: RESTRUCTURING AND MERGER-RELATED CHARGES
RESTRUCTURING CHARGES
As a result of restructuring plans in 2000, 1999 and 1998, the Corporation
displaced employees and recorded charges for the resulting employee termination
benefits to be paid. In addition, the Corporation recorded occupancy-related
charges that included write-downs to fair value (less cost to sell) of owned
premises that were held for disposition as a result of the plans, and
cancellation payments or the present values of the remaining lease obligations
for leased premises, or portions thereof, that were associated with lease
abandonments. Other assets, primarily computer hardware and software, the value
of which was considered to be impaired since they no longer would be used as a
result of the closure of facilities or the reduction in workforce, were also
written down to fair value. Contract cancellation costs were also recorded
representing the cost to buy out 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 these plans.
In 2000, $2.1 billion in restructuring charges were recorded in connection
with the Corporation's strategic repositioning plan. Through December 31, 2000,
$1.9 billion had been charged against the accrual. At December 31, 2000, $249
million of the accrual remained, principally representing amounts still to be
paid in employee termination benefits and contract cancellations.
In 1999, a $347 million restructuring charge related to the restructuring
plan announced in March 1999 was recorded. In addition, $42 million in
restructuring accruals related principally to CoreStates were reversed. Through
December 31, 2000, $299 million had been charged against the accrual. Based on
revised estimates, $18 million of the initial accrual, primarily relating to
asset write-downs, has been reversed by a credit to the restructuring charge in
the statements of income, $2 million of which was reversed in 1999 and $16
million of which was reversed in 2000. At December 31, 2000, $30 million of the
accrual remained, principally representing amounts still to be paid in employee
termination benefits and contract cancellations. Components of the restructuring
charges in 2000 and 1999 are discussed below.
Employee termination benefits of $172 million in 2000 and $200 million in
1999 included severance payments, which may be paid in a lump sum or over a
defined period, and related benefits and outplacement services for 5,683
employees in 2000 and 5,635 employees in 1999 terminated in connection with
these plans. The Corporation notified substantially all of the employees about
their termination on or before the announcement of these plans. Of the
terminated employees in 2000, approximately 80 percent were from the Consumer
segment, 8 percent were from the Capital Markets segment and 12 percent were
primarily from corporate staff units (Treasury/Nonbank segment). Of the
terminated employees in 1999, approximately 40 percent were from corporate staff
units (Treasury/Nonbank segment), 40 percent were from the Consumer segment, 10
percent were from the branch network and 10 percent were from areas within the
Capital Management and Capital Markets segments. Through December 31, 2000, $81
million in employee termination benefits related to the terminations in 2000 and
$181 million related to the terminations in 1999 has been paid, leaving $91
million and $19 million, respectively, for future payments.
Occupancy charges were $108 million in 2000 and $55 million in 1999. These
charges included $18 million in 2000 and $24 million in 1999 related to the
write-down of owned property as well as leasehold improvements and furniture and
equipment. These write-downs resulted from excess space due to exiting of
businesses, the reduction in the workforce and from branch closings. The amount
of the write-down represents the difference between the carrying value of the
property at the time that it was no longer held for use and the estimated net
proceeds expected to be received upon disposal. The fair value was estimated
using customary appraisal techniques such as evaluating the real estate market
conditions in the region and comparing market values to comparable properties.
The remainder of the occupancy charges in 2000 and in 1999 represents the
present value of future lease obligations or lease cancellation penalties in
connection with the closure of branches and sales offices as well as certain
other corporate space.
64
67
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
As a result of the decision in 2000 to discontinue the subprime mortgage
lending business at TMSI, and therefore generate no future cash flows from that
business, the Corporation concluded that the goodwill associated with that
business and the related network intangible were no longer recoverable.
Therefore, an impairment charge for the unamortized balance of these intangibles
of $1.8 billion was included in the restructuring charge. The unamortized
balance of goodwill associated with the small business and student lending
businesses of TMSI is fully recoverable from future cash flows, and accordingly,
is not impaired.
Other asset impairments, which were the direct result of the reduction in
the workforce and certain other restructuring activities, amounted to $18
million in 2000 and $70 million in 1999. They consisted primarily of computer
hardware write-offs. Depreciation was discontinued at the time the assets were
determined to be held for disposal. The net book value of long-lived assets held
for sale at December 31, 2000, was not significant.
Also included in the restructuring charge was $74 million in 2000 and $25
million in 1999 related to contract cancellations, $60 million of which
represents termination fees for contracts cancelled in connection with the sale
of the credit card portfolio in 2000, and $14 million of which related to
exiting the indirect auto finance business in 1999.
In 1998, in connection with the acquisition of CoreStates, the Corporation
recorded a $753 million restructuring charge. From the date of the acquisition
through December 31, 2000, $666 million had been charged against the initial
accrual representing payments of employee termination benefits, costs to close
duplicate or excess facilities, write-offs of computer hardware and software no
longer in use, and contract cancellation costs. The remaining balance of the
accrual of $33 million at December 31, 2000, represents employee termination
benefits to be paid over future periods, at the election of the employees as
well as the remaining payments due on property leases and service contracts that
no longer provided benefit to the Corporation as a result of the restructuring.
MERGER-RELATED CHARGES
Merger-related charges are those charges which are directly related to
mergers but which do not qualify for recognition until they are incurred.
Merger-related charges consist principally of transaction costs and expenses
related to combining operations and instituting efficiencies such as systems
conversions and integration costs. 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.
In 2000 and 1999, the Corporation incurred merger-related charges of $78
million and $20 million, respectively, related primarily to the EVEREN
acquisition. In 1999 and 1998, the Corporation incurred merger-related charges
of $75 million and $414 million, respectively, related to the CoreStates merger.
Restructuring and merger-related charges for each of the years in the
three-year period ended December 31, 2000, are presented below.
Years Ended December 31,
----------------------------------------
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES
Employee termination benefits $ 172 200 310
Occupancy 108 55 242
Goodwill and other intangible impairments (noncash) 1,754 - -
Other asset impairments 18 70 110
Contract cancellations 74 25 108
Other 3 3 58
- ------------------------------------------------------------------------------------------------------------------------
Total restructuring charges 2,129 353 828
Reversal of restructuring accruals related primarily to
employee termination benefits, occupancy and other (17) (44) (30)
- ------------------------------------------------------------------------------------------------------------------------
Net restructuring charges 2,112 309 798
- ------------------------------------------------------------------------------------------------------------------------
MERGER-RELATED CHARGES
Merger-related charges 78 95 599
Less gain on regulatory-mandated branch sales - - (185)
- ------------------------------------------------------------------------------------------------------------------------
Total merger-related charges 78 95 414
- ------------------------------------------------------------------------------------------------------------------------
Total $ 2,190 404 1,212
========================================================================================================================
65
68
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the unpaid restructuring accruals for each of the
years in the three-year period ended December 31, 2000, is presented below.
2000 March 1999
Strategic Restructuring CoreStates
(In millions) Repositioning Charge Acquisition Other Total
- ------------------------------------------------------------------------------------------------------------------------
ACTIVITY IN THE RESTRUCTURING
ACCRUAL
Balance, December 31, 1997 $ - - - 199 199
Restructuring charges - - 753 75 828
Cash payments - - (158) (81) (239)
Reversal of prior accruals - - (30) - (30)
Noncash write-downs and
other adjustments - - (279) (81) (360)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 - - 286 112 398
Restructuring charges - 347 - 6 353
Cash payments - (206) (167) (61) (434)
Reversal of prior accruals - (2) (24) (18) (44)
Noncash write-downs and
other adjustments - (55) (57) 1 (111)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 - 84 38 40 162
Restructuring charges 2,129 - - - 2,129
Cash payments (92) (30) (11) (7) (140)
Reversal of prior accruals - (16) - (1) (17)
Noncash write-downs and
other adjustments (1,788) (8) 6 (2) (1,792)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 249 30 33 30 342
========================================================================================================================
- --------------------------------------------------------------------------------
NOTE 4: 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, 2000,
is disclosed in Table 16 and in Table 17, respectively, which is incorporated
herein by reference.
66
69
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5: SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS
The original key economic assumptions used in measuring the retained
interests at the date of securitization for transactions completed in 2000, the
key economic assumptions used to measure the retained interests at December 31,
2000, the sum of the actual and projected static pool credit losses for
transactions completed in 2000, the sensitivity of the current fair value to
adverse changes in the assumptions and the cash flows between the securitization
trusts and the Corporation as transferor in 2000 are presented below.
DECEMBER 31, 2000
--------------------------------------------------------------------------------------
REAL ESTATE COLLATERALIZED
------------------------------- LOAN/DEBT MUNICIPAL
(Dollars in millions) COMMERCIAL RESIDENTIAL OBLIGATIONS SBA STUDENT SECURITIES(d)
- -------------------------------------------------------------------------------------------------------------------------
ORIGINAL ECONOMIC
ASSUMPTIONS
Prepayment speed (CPR) - % 48.00 20.00 13.60 - -
Weighted average life 8.97 yrs 1.72 11.08 5.72 - 11.27
Expected credit losses 3.11 % 0.25 2.53 2.50 - -
Residual cash flow discount rate 6.78 % 11.00 19.47 15.00 - 15.68
- -------------------------------------------------------------------------------------------------------------------------
CREDIT LOSSES
Sum of actual and projected 3.11 % 0.25 2.72 2.50 - -
- -------------------------------------------------------------------------------------------------------------------------
SENSITIVITY ANALYSIS (a)
Carrying value (fair value) of
retained interests $ 1,548 10,150 73 182 80 188
Weighted average life 9.23 yrs 2.03 10.28 7.52 8.64 10.66
Prepayment speed - % 36.79 20.00 12.30 8.63 -
Impact of 10% adverse change $ - (38) - (5) (2) -
Impact of 20% adverse change $ - (72) - (10) (4) -
Expected credit losses 2.89 % 1.91 3.64 3.20 0.21 -
Impact of 10% adverse change $ (4) (40) (1) (4) (1) -
Impact of 20% adverse change $ (9) (70) (2) (9) (1) -
Residual cash flow
discount rate 7.01 % 13.69 15.00 15.00 15.00 16.00
Impact of 10% adverse change $ (69) (15) (4) (13) (4) (9)
Impact of 20% adverse change $ (133) (30) (7) (21) (8) (17)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOW ACTIVITY (b) (c)
Proceeds from
New securitizations $ 1,535 959 1,545 209 - 1,610
Collections used by trust to
purchase new balances in
revolving securitizations - 26 111 - - -
Service fees received 6 5 10 14 37 2
Cash flow received from
retained interests 17 24 11 36 10 21
Servicing advances, net $ 1 - - 2 - -
=========================================================================================================================
(a) As of December 31, 2000, the fair value of retained interests in agency
securitizations is $3.5 billion. The fair value of these securities would
decrease by $82 million and by $177 million if the discount rate were to
increase by 10 percent and by 20 percent, respectively. The fair value of these
securities would decrease by $3.9 million and by $8.1 million if the prepayment
speeds were to increase by 10 percent and by 20 percent, respectively.
(b) In 2000, we completed the sale of credit card receivables. Credit card cash
flow activity in 2000 included new securitizations of $225 million, collections
used by trust to purchase new balances in revolving securitizations of $3.8
billion, service fees received of $7 million, and cash flow received from
retained interests of $127 million.
(c) There were no purchases of delinquent or foreclosed assets in 2000 for all
securitization types. The Corporation purchased $55 million of loans from the
collateralized loan/debt obligations.
(d) Price sensitivity attributable to prepayment and credit risk is
insignificant.
67
70
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
The sensitivity analysis is hypothetical and should be used with caution.
For example, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear.
Additionally, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption, when in reality, changes in any one factor may result in changes in
another factor.
Managed loans at December 31, 2000, and related loans past due 90 days and
net loan losses are presented below.
DECEMBER 31, 2000
--------------------------------------
LOANS PAST LOAN
DUE 90 LOSSES,
(In millions) BALANCE DAYS (a) NET
- -------------------------------------------------------------------------------------------------------------------------
MANAGED LOANS
Commercial
Loans held in portfolio $ 87,447 8 488
Securitized loans 4,877 68 32
Loans held for sale included in other assets 953 - -
Consumer
Loans held in portfolio 42,795 175 263
Securitized loans 11,862 718 295
Securitized loans included in securities available for sale 12,747 92 55
Loans held for sale included in other assets 7,193 23 108
- -------------------------------------------------------------------------------------------------------------------------
Total managed loans 167,874 1,084 1,241
Less
Securitized loans (16,739) (786) (327)
Securitized loans included in securities available for sale (12,747) (92) (55)
Loans held for sale included in other assets (8,146) (23) (108)
- -------------------------------------------------------------------------------------------------------------------------
Loans held in portfolio $ 130,242 183 751
=========================================================================================================================
(a) Includes bankruptcies and foreclosures.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
which revised the criteria for accounting for securitizations and other
transfers of financial assets and collateral, and introduces new disclosures.
SFAS 140 replaces SFAS 125, which was issued in June 1996. The enhanced
disclosure requirements are effective for year-end 2000. The other provisions of
SFAS 140 apply prospectively to transfers of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The above
disclosures are in accordance with the requirements of SFAS 140.
In an asset securitization transaction that meets the applicable criteria
to be accounted for as a sale, loans are securitized and sold, and a gain or
loss is recognized at the time of the sale. In addition, for transactions in
which the Corporation retains an interest in the cash flows of the assets sold,
an interest-only or residual certificate ("retained interest") is recorded. Gain
or loss on the sale of receivables depends, in part, on the previous carrying
amount of the financial assets involved in the transfer, allocated between the
assets sold and the retained interests based on their relative fair value at the
date of transfer. To obtain fair values, quoted market prices are used if
available. Quotes are generally not available for retained interests, so complex
modeling techniques are used. These modeling techniques estimate the amount and
timing of cash flows over the estimated life of the retained interests using
assumptions for discount rates, collateral prepayment, and delinquency and loss
trends.
68
71
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 6: LOANS
December 31,
-----------------------
(In millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 54,207 51,683
Real estate - construction and other 3,104 2,435
Real estate - mortgage 9,218 8,768
Lease financing 15,465 12,742
Foreign 5,453 4,991
- ------------------------------------------------------------------------------------------------------------------------
Total commercial 87,447 80,619
- ------------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 17,708 27,793
Installment loans 22,972 25,795
Vehicle leasing 2,115 4,483
- ------------------------------------------------------------------------------------------------------------------------
Total consumer 42,795 58,071
- ------------------------------------------------------------------------------------------------------------------------
Total loans $ 130,242 138,690
========================================================================================================================
Directors and executive officers of the Parent Company and their related
interests were indebted to the Corporation in the aggregate amounts of $3.3
billion and $3.4 billion at December 31, 2000 and 1999, respectively. From
January 1, 2000, through December 31, 2000, directors and executive officers of
the Parent Company and their related interests borrowed $1.5 billion and repaid
$1.6 billion. In the opinion of management, these loans do not involve more than
the normal risk of collectibility, nor do they include other features
unfavorable to the Corporation.
At December 31, 2000 and 1999, nonaccrual and restructured loans amounted
to $1.5 billion and $984 million, respectively. In 2000, 1999 and 1998, $126
million, $81 million and $67 million, respectively, in gross interest income
would have been recorded if all nonaccrual and restructured loans had been
performing in accordance with their original terms and if they had been
outstanding throughout the entire period, or since origination if held for part
of the period. Interest collected on these loans and included in interest income
in 2000, 1999 and 1998 amounted to $31 million, $23 million and $19 million,
respectively.
At December 31, 2000 and 1999, impaired loans amounted to $923 million and
$603 million, respectively. Included in the allowance for loan losses was $167
million related to $642 million of impaired loans at December 31, 2000, and $106
million related to $526 million of impaired loans at December 31, 1999. For the
years ended December 31, 2000 and 1999, the average recorded investment in
impaired loans was $711 million and $518 million, respectively; and $27 million
and $25 million, respectively, of interest income was recognized on loans while
they were impaired.
At December 31, 2000 and 1999, loans held for sale, which are classified
in other assets, amounted to $8.1 billion and $4.9 billion, respectively. In
2000, net write-downs to the lower of cost or market value of $274 million were
recorded. There were none in 1999 and 1998.
69
72
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 7: ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
-----------------------------------
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,757 1,826 1,847
Provision for loan losses 1,736 692 691
Allowance relating to loans transferred
to other assets or sold (1,020) (73) (74)
- ------------------------------------------------------------------------------------------------------------------------
Total 2,473 2,445 2,464
- ------------------------------------------------------------------------------------------------------------------------
Loan losses (867) (828) (799)
Loan recoveries 116 140 161
- ------------------------------------------------------------------------------------------------------------------------
Loan losses, net (751) (688) (638)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 1,722 1,757 1,826
========================================================================================================================
70
73
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings of the Corporation at December 31, 2000, 1999 and
1998, 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) 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Federal funds purchased $ 2,090 1,909 2,267 5,033 4,611 7,965
Securities sold under repurchase agreements 26,511 34,122 25,644 35,305 34,122 33,592
Fixed and variable rate bank notes 55 435 4,262 560 3,671 4,768
Interest-bearing demand deposits issued to
the U. S. Treasury 979 4,569 389 5,384 4,569 950
Commercial paper 2,320 2,364 1,904 3,943 2,871 2,190
Other 7,491 6,708 6,972 8,480 7,987 10,328
- -----------------------------------------------------------------------------------
Total $ 39,446 50,107 41,438
========================================================================================================================
December 31,
-----------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE INTEREST RATES
Federal funds purchased and securities sold
under repurchase agreements 6.37 % 5.06 5.31
Fixed and variable rate bank notes 7.04 5.80 5.33
Commercial paper 6.14 % 4.10 4.42
WEIGHTED AVERAGE MATURITIES (IN DAYS)
Fixed and variable rate bank notes 47 48 70
Commercial paper 10 7 10
========================================================================================================================
Maturities of federal funds purchased and securities sold under repurchase
agreements in each of the years in the three-year period ended December 31,
2000, were not greater than 341 days.
Included in Other are Federal Home Loan Bank borrowings and securities
sold short of $400 million and $4.4 billion, respectively, at December 31, 2000;
$600 million and $4.5 billion, respectively, at December 31, 1999; and $700
million and $5.7 billion, respectively, at December 31, 1998.
Substantially all short-term borrowings have maturities of 90 days or
less, and accordingly, their carrying amounts are deemed to be a reasonable
estimate of fair value.
71
74
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9: LONG-TERM DEBT
December 31,
-----------------------
(In millions) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES ISSUED BY THE PARENT COMPANY
Notes
6.625% to 7.70%, due 2004 to 2005 (par value $350 to $1,300) (a) $ 3,084 1,592
Floating rate, due 2001 to 2005 (par value $50 to $400) (a) 2,367 90
Floating rate extendible, due 2005 (b) 10 10
Subordinated notes
6.00% to 9.45%, due 2001 to 2009 (par value $150 to $300) (a) 2,664 2,661
7.18% to 8.00%, due 2009 to 2011 (par value $60 to $150) (c) 208 208
6.30%, Putable/Callable, due 2028 (par value $200) 200 200
Floating rate, due 2003 (par value $150) (a) 150 150
Subordinated debentures
6.55% to 7.574%, due 2026 to 2035 (par value $250 to $300) (d) 794 794
- -------------------------------------------------------------------------------------------------------------------------
Total notes and debentures issued by the Parent Company 9,477 5,705
- -------------------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes, primarily notes issued under global note programs,
varying rates and terms to 2005 (e) 16,457 18,026
Subordinated notes
5.875% to 9.625%, due 2001 to 2006 (par value $100 to $200) (a) (f) 1,075 1,074
Bank, 5.80% to 7.875%, due 2006 to 2036 (par value $50 to $1,000) 2,548 1,200
6.625% to 8.375%, due 2002 to 2007 (par value $100 to $150) (a) 570 570
- -------------------------------------------------------------------------------------------------------------------------
Total notes issued by subsidiaries 20,650 20,870
- -------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Trust preferred securities 2,028 2,027
4.556% auto securitization financing, due 2008 (f) 861 945
Advances from the Federal Home Loan Bank 2,762 2,387
Capitalized leases, rates generally ranging from 7.30% to 11.66% 25 34
Mortgage notes and other debt of subsidiaries, varying rates and terms 6 7
- -------------------------------------------------------------------------------------------------------------------------
Total other debt 5,682 5,400
- -------------------------------------------------------------------------------------------------------------------------
Total $ 35,809 31,975
=========================================================================================================================
(a) Not redeemable prior to maturity.
(b) Redeemable in whole or in part at the option of the Parent Company only on
certain specified dates.
(c) Redeemable in whole and not in part at the option of the Parent Company only
on certain specified dates.
(d) Redeemable in whole or in part at the option of the holders only on certain
specified dates.
(e) $183 million assumed by the Parent Company.
(f) Assumed by the Parent Company.
72
75
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 2000, floating rate notes of $2.4 billion had rates of
interest ranging from 6.73 percent to 7.22 percent.
The interest rate on the floating rate extendible notes is 6.78 percent to
March 15, 2001.
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 this date.
The interest rate on the floating rate subordinated notes is 5.77 percent
to April 23, 2001.
At December 31, 2000, bank notes of $15.4 billion had floating rates of
interest ranging from 4.91 percent to 7.14 percent, and $1.1 billion of the
notes had fixed rates of interest ranging from 5.25 percent to 10.00 percent.
At December 31, 2000 and 1999, four statutory business trusts (the
"Trusts") created by the Parent Company had outstanding with the Parent Company
trust preferred securities with an aggregate par value of $1.3 billion. The
trust preferred securities have interest rates ranging from 7.85 percent to 8.04
percent and maturities ranging from December 1, 2026, to November 15, 2029. The
principal assets of the Trusts are $1.4 billion of the Parent Company's
subordinated debentures with identical rates of interest and maturities as the
trust preferred securities. Additionally, the Trusts have issued $31 million of
common securities to the Parent Company. The estimated fair value of the trust
preferred securities and the related subordinated debentures at December 31,
2000 and 1999, was $1.4 billion, respectively.
The trust preferred securities, the assets of the Trusts 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 trust preferred securities
constitute a full and unconditional guarantee by the Parent Company of the
Trusts' obligations with respect to the trust preferred 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 trust preferred securities.
Additionally, a bank subsidiary has outstanding trust preferred securities
with a par value of $300 million and an 8 percent rate of interest, and a par
value of $450 million and a LIBOR-indexed floating rate of interest. The related
maturities range from December 15, 2026, to February 15, 2027. The related
subordinated debentures all have terms substantially the same as the trust
preferred securities and subordinated debentures issued by the Parent Company.
The aggregate estimated fair values of these trust preferred securities at
December 31, 2000 and 1999, were $774 million and $762 million, respectively.
At December 31, 2000, $2.4 billion of senior or subordinated debt
securities or equity securities remained available for issuance under a shelf
registration statement filed with the Securities and Exchange Commission.
At December 31, 2000, First Union National Bank has available global note
programs for issuance up to $45 billion of senior or subordinated notes. Under
these programs, $24 billion of long-term debt has been issued and was
outstanding at December 31, 2000.
The weighted average rate paid for long-term debt in 2000, 1999 and 1998
was 6.69 percent, 5.66 percent and 6.28 percent, respectively. See Note 16 for
information on interest rate swaps entered into in connection with the issuance
of long-term debt.
Long-term debt maturing in each of the five years subsequent to December
31, 2000, is as follows (in millions): 2001, $12,504; 2002, $5,358; 2003,
$2,325; 2004, $3,537; and 2005, $4,254.
73
76
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 10: COMMON STOCK AND CAPITAL RATIOS
2000 1999 1998
------------------------ ---------------------- ---------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
(Options in thousands) NUMBER PRICE(a) Number Price(a) Number Price(a)
- ------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS
Options outstanding, beginning of year 38,657 $ 40.17 25,549 $ 37.56 24,728 $ 25.75
Granted 14,375 31.68 18,508 41.12 12,279 50.72
Exercised (1,796) 15.79 (4,270) 25.23 (10,017) 23.27
Cancelled (4,093) 43.46 (1,130) 51.90 (1,441) 49.68
- ------------------------------------------------------------ ---------- ---------
Options outstanding, end of year 47,143 $ 38.22 38,657 $ 40.17 25,549 $ 37.56
========================================================================================================================
Options exercisable, end of year 35,491 $ 40.64 25,459 $ 23.12 18,001 $ 29.01
========================================================================================================================
RESTRICTED STOCK
Unvested shares, beginning of year 11,796 $ 47.86 7,451 $ 46.30 4,725 $ 32.58
Granted 4,566 28.55 7,133 48.19 4,525 55.38
Exercised (3,955) 43.97 (2,664) 44.54 (1,485) 31.30
Cancelled (1,306) 47.50 (124) 48.40 (314) 41.67
- ------------------------------------------------------------ ---------- ---------
Unvested shares, end of year 11,101 $ 41.35 11,796 $ 47.86 7,451 $ 46.30
========================================================================================================================
EMPLOYEE STOCK OPTIONS
Options outstanding, beginning of year 38,519 $ 47.32 8,170 $ 50.31 2,537 $ 27.26
Granted - 34,372 46.75 8,735 50.31
Exercised (2,905) 21.25 (503) 50.31 (3,007) 31.60
Cancelled (9,001) 37.38 (3,520) 48.22 (95) 27.26
- ------------------------------------------------------------ ---------- ---------
Options outstanding, end of year 26,613 $ 46.75 38,519 $ 47.32 8,170 $ 50.31
========================================================================================================================
Options exercisable, end of year 5,839 $ 46.75 6,213 $ 50.31 8,170 $ 50.31
========================================================================================================================
(a) The weighted-average price for stock options is the weighted-average
exercise price of the options, and for restricted stock, the weighted-average
fair value of the stock at the date of grant.
STOCK 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 an exercise price equal to the fair value of the
underlying shares at the date of grant, they generally vest one year following
the date of grant, and they have a term of ten years.
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. Compensation cost
recognized for restricted stock was $101 million, $99 million and $57 million in
2000, 1999 and 1998, respectively.
The range of exercise prices and the related number of options outstanding
at December 31, 2000, are as follows (shares in thousands): $2.99-$9.31, 903
shares; $10.12-$19.98, 3,493 shares; $20.73-$29.64, 7,343 shares; $30.13-$38.03,
16,586 shares; $40.13-$49.83, 5,760 shares; and $51.19-$62.13, 13,058 shares.
The weighted average exercise prices, remaining contractual maturities and
weighted average exercise price of options currently exercisable for each
exercise price range are as follows: $5.02, 4.6 years and $5.02; $16.00, 4.1
years and $16.00; $26.74, 6.3 years and $26.45; $32.85, 8.8 years and $34.71;
$43.55, 6.7 years and $43.55; and $57.59, 7.9 years and $57.59, respectively.
At December 31, 2000, the Corporation had 43.7 million additional shares
of common stock reserved for issuance under the stock option plans.
The Corporation also has an employee stock plan (the "1999 plan") in place
and a plan that matured in 2000 (the "1998 plan"). Under the terms of the 1999
plan, substantially all employees were granted options with an exercise price
equal to the fair value of the underlying shares on the date of grant of August
2, 1999. Twenty percent of the options vested on August 2, 2000. An additional
20 percent of the options vest annually on each March 1 from 2001 through 2004
if certain annual return on stockholders' equity goals are met. If the annual
goal is not met in any one year, the options for the applicable 20 percent
portion remain unvested until an annual goal is met at which time they vest. On
April 30, 2004, any unvested options will automatically vest, and if they are
not exercised by September 30, 2004, they will expire. As of December 31, 2000,
the Corporation had 12.4 million additional shares of common stock reserved for
issuance under the 1999 plan.
74
77
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
Under the terms of the 1998 plan, substantially all employees were granted
options with the number of options granted based on compensation. The options
vested upon grant and had a two-year term. During the two-year term, the
exercise price was equal to 85 percent of the fair value of the Corporation's
common stock on the date of grant of August 3, 1998, (an exercise price of
$50.31 per share). At the end of the two-year period on June 30, 2000 (the
"Final Purchase Date"), the exercise price was the lesser of 85 percent of the
fair value on the date of grant or 85 percent of the fair value on the Final
Purchase Date. In accordance with the terms of the 1998 plan, the exercise price
on June 30, 2000, was $21.25, at which time 2.9 million options were exercised
and 3.0 million options were forfeited.
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, 2000, calculated as if the Corporation had accounted
for stock options at their respective fair values at the date of grant, are as
follows: pro forma net income (loss), $(38) million, $3.121 billion and $2.741
billion, respectively; and pro forma diluted earnings per share, $(.06), $3.23
and $2.80, respectively. The weighted average grant date fair values of options
under the stock option plans were $8.76, $10.24 and $10.63 in 2000, 1999 and
1998, respectively. The weighted average grant date fair value of options under
the 1999 plan and 1998 plan was $7.90 in 1999. There were no shares granted in
2000 under an employee stock plan. The Black-Scholes option pricing model was
used to estimate the fair value of stock options. 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 estimating the fair value of stock options in 2000, 1999 and
1998 include risk-free interest rates of 5.71 percent to 6.73 percent, 4.63
percent to 6.12 percent and 5.34 percent to 6.72 percent, respectively; dividend
yields of 6.06 percent, 4.22 percent and 3.26 percent, respectively; weighted
average expected lives of the stock options of 4.0 years, 4.7 years and 2.9
years, respectively; and volatility of the Corporation's common stock of 45
percent in 2000 and 19 percent in both 1999 and 1998.
The Corporation realized income tax benefits of $7 million, $35 million
and $68 million in 2000, 1999 and 1998, respectively, related to employee
exercises of stock options.
DIVIDEND REINVESTMENT PLAN
Under the terms of the Dividend Reinvestment Plan, a participating
stockholder's cash dividends and optional cash payments may be used to purchase
the Corporation's common stock. Common stock issued under the Dividend
Reinvestment Plan was (in thousands): 2,599 shares, 1,937 shares and 1,476
shares in 2000, 1999 and 1998, respectively. As of December 31, 2000, the
Corporation had 71,000 additional shares of common stock reserved for issuance
under the Dividend Reinvestment Plan.
TRANSACTIONS BY THE CORPORATION IN ITS COMMON STOCK
In connection with a 50 million share buyback program announced in
November 1998, the Corporation repurchased 10 million shares of common stock at
a cost of $617 million in 1998, and 39 million shares at a cost of $2.1 billion
in 1999. In addition, in May 1999 and in June 2000, the Board of Directors of
the Corporation authorized separate 50 million share buyback programs, which
have not been utilized. Shares repurchased in connection with purchase
accounting acquisitions disclosed in Note 2 are incremental to the buyback
programs.
In early 1999, the Board of Directors authorized the use of forward equity
sales transactions ("equity forwards") in connection with the buyback programs.
The use of equity forwards is intended to provide the Corporation with the
ability to purchase shares under the buyback programs in the open market and
then issue shares in private transactions to counterparties in the amounts
necessary to maintain targeted capital ratios. Under the terms of the equity
forwards, the Corporation issued shares of common stock to an investment banking
firm at a specified price that approximated market value. Simultaneously, the
Corporation entered into a forward contract with the same counterparty to
repurchase the shares at the same price plus a premium (the "forward price").
In addition to equity forwards, the Corporation has also entered into
forward purchase contracts with various counterparties. Under the terms of these
contracts, the Corporation has agreed to purchase shares on a specific future
date at the forward price. The counterparties to these contracts generally
purchase the shares to which the contract is subject in the open market and hold
the shares for the duration of the contract.
75
78
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
The equity forwards and forward purchase contracts mature at various times
in 2001, and they can be extended by mutual consent of the counterparties. At
December 31, 2000, the Corporation had equity forwards involving 13 million
shares at a cost of $600 million and forward purchase contracts involving 33
million shares at a cost of $1.2 billion. This aggregate cost of $1.8 billion
does not include the premium component of the forward price. Premiums accrue
over the period that the contracts are outstanding, and they will be settled at
maturity. In October 2000, the Corporation settled an equity forward contract by
purchasing the shares at the forward price, which reduced shares outstanding by
4 million, and which reduced stockholders' equity by $211 million. Additionally,
in January 2001, the Corporation settled a forward purchase contract by
purchasing the shares at the forward price, which reduced shares outstanding by
2 million and stockholders' equity by $105 million.
For shares under equity forwards and forward purchase contracts, the
counterparties have all of the legal rights attendant to ownership of the
underlying shares, including the right to vote the shares and the right to sell
or pledge the shares at the counterparty's discretion. The counterparty will
receive all dividends to which stockholders of record during the time covered by
the term of the equity forwards are entitled. For purposes of the Corporation's
earnings per share calculation, the shares are considered outstanding until
repurchased.
Under the terms of these contracts, the Corporation has the sole option of
determining the method of settlement when the equity forwards mature from among
the following options: gross physical settlement, net share settlement and net
cash settlement. Net share settlement and net cash settlement could result in
the sale of all underlying shares (and in certain circumstances additional
shares) to third parties by the counterparty in public or private sales. At
December 31, 2000, these contracts conformed to the requirements of EITF Issue
No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock.
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
In accordance with a Shareholder Protection Rights Agreement, the
Corporation issued a dividend of one right for each share of the Corporation's
common stock outstanding as of December 28, 2000, and they continue to attach to
all common stock issued thereafter. The rights will become exercisable if any
person or group either commences a tender or exchange offer that would result in
their becoming the beneficial owner of 10 percent or more of the Corporation's
common stock or acquires beneficial ownership of 10 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 participating class A preferred stock) having a
market value of twice the exercise price, and under certain conditions, common
stock of an acquiring company having a market value of twice the exercise price.
If any person or group acquires beneficial ownership of 10 percent or more 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 acquiring
person or group) two shares of the Corporation's common stock or 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 initially expire on December 28, 2010, if not 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 4 percent.
At December 31, 2000, the Corporation's tier 1 capital ratio, total
capital ratio and leverage ratio were 7.02 percent, 11.19 percent and 5.92
percent, respectively. At December 31, 1999, the Corporation's tier 1 capital
ratio, total capital ratio and leverage ratio were 7.08 percent, 10.87 percent
and 5.97 percent, respectively.
Additional information related to the consolidated capital ratios of the
Corporation in 2000 and 1999, can be found in "Management's Analysis of
Operations - Stockholders' Equity; Regulatory Capital", which is incorporated
herein by reference.
76
79
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 11: BUSINESS SEGMENTS
The Corporation has five operating segments ("business segments") all of
which, by virtue of exceeding certain quantitative thresholds, are reportable
segments. They include Capital Management, Capital Markets, Consumer, Commercial
and Treasury/Nonbank. Each of these reportable segments 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, except as noted below. 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.
The Corporation's management 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 management 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 certain corporate charges 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 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
management 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. Included in fee and other income in the Treasury/Nonbank segment in
2000 are gains of $937 million, $71 million and $357 million related to the sale
of the Corporation's credit card portfolio, mortgage servicing portfolio and 58
branches. In 1998, noninterest expense included a $185 million gain resulting
from regulatory mandated branch divestitures related to the CoreStates
acquisition. Additionally, noninterest expense retained in the Treasury/Nonbank
segment reflects the costs of portfolio management activities, goodwill
amortization and certain other corporate charges, including restructuring and
merger-related charges.
In early 2000, significant refinements were made to certain of the
allocation methodologies, and as a result, prior year information has been
restated to conform to the information presented in 2000. These refinements
include the allocation of certain nonearning assets and liabilities and the
related funding cost from Treasury/Nonbank to other business segments;
elimination of the tax-equivalization of net interest income such that the tax
effect is now included in income tax expense; and adjustments to certain capital
attribution formulas. These refinements increased net income in Treasury/Nonbank
and reduced net income in the other segments.
The following items not disclosed elsewhere in the consolidated financial
statements exceeded one percent of the sum of interest income and fee and other
income. In 2000, 1999 and 1998, Capital Markets fee and other income included
investment banking amounts of $1.3 billion, $1.5 billion and $775 million,
respectively; in 1998 corporate banking and international amounts were $243
million and $214 million, respectively. In 2000, Capital Management fee and
other income included retail brokerage and insurance services, wealth and trust
services, and mutual funds amounts of $1.9 billion, $727 million and $532
million, respectively; in 1999, $1.1 billion, $695 million and $460 million,
respectively; and in 1998, $778 million, $621 million and $412 million,
respectively. In 2000, 1999 and 1998, Consumer fee and other income included
retail branch products amounts of $871 million, $841 million and $922 million,
respectively; in 1999 and 1998, First Union Mortgage amounts were $309 million
and $350 million, respectively; in 1999 and 1998, credit cards amounts were
$348 million and $394 million, respectively; the amount for Home Equity and The
Money Store was $228 million in 1998. In 2000, 1999, and 1998, Commercial fee
and other income included cash management and deposit services amounts of $564
million, $554 million and $535 million respectively.
The results of operations for each of the Corporation's business segments
for each of the years in the three-year period ended December 31, 2000, follows.
77
80
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------
CAPITAL CAPITAL TREASURY/
(In millions) MGT. MARKETS CONSUMER COMMERCIAL NONBANK TOTAL
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 643 1,551 3,328 1,369 546 7,437
Provision for loan losses 1 413 237 75 28 754
Fee and other income 3,215 1,516 1,388 564 132 6,815
Noninterest expense 2,697 1,605 3,411 1,082 418 9,213
Income tax expense 444 227 408 292 (21) 1,350
- ------------------------------------------------------------------------------------------------------------------------
Operating earnings 716 822 660 484 253 2,935
- ------------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring, merger-related
and other charges/gains
Provision for loan losses - - - - (982) (982)
Fee and other income - - - - (103) (103)
Noninterest expense - - - - (2,497) (2,497)
Income tax benefit - - - - 785 785
- ------------------------------------------------------------------------------------------------------------------------
After-tax restructuring, merger-
related and other charges/gains - - - - (2,797) (2,797)
- ------------------------------------------------------------------------------------------------------------------------
Net income before cumulative
effect of a change in accounting
principle 716 822 660 484 (2,544) 138
- ------------------------------------------------------------------------------------------------------------------------
Cumulative effect of a change in
the accounting for beneficial
interests, net of tax - - - - (46) (46)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 716 822 660 484 (2,590) 92
- ------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity 50.29 % 13.74 18.64 23.34 9.99 17.23
Average loans, net $ 4,383 44,530 25,267 26,702 26,006 126,888
Average deposits 19,569 17,124 69,299 22,050 12,724 140,766
Average attributed stockholders'
equity (a) $ 1,425 5,975 3,536 2,072 2,533 15,541
========================================================================================================================
78
81
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
--------------------------------------------------------------------------
Capital Capital Treasury/
(In millions) Mgt. Markets Consumer Commercial Nonbank Total
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 522 1,553 3,285 1,384 708 7,452
Provision for loan losses - 252 308 68 64 692
Fee and other income 2,317 1,709 1,701 554 652 6,933
Noninterest expense 1,886 1,472 3,492 1,061 547 8,458
Income tax expense 365 459 453 287 185 1,749
- ------------------------------------------------------------------------------------------------------------------------
Operating earnings 588 1,079 733 522 564 3,486
- ------------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring and
merger-related charges
Noninterest expense - - - - (404) (404)
Income tax benefit - - - - 141 141
- ------------------------------------------------------------------------------------------------------------------------
After-tax restructuring and
merger-related charges - - - - (263) (263)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 588 1,079 733 522 301 3,223
- ------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity 52.50 % 19.36 19.46 24.48 16.84 21.60
Average loans, net $ 3,793 43,216 28,072 25,997 28,713 129,791
Average deposits 19,981 15,526 70,666 22,665 6,274 135,112
Average attributed stockholders'
equity (a) $ 1,123 5,570 3,763 2,127 3,349 15,932
========================================================================================================================
79
82
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
--------------------------------------------------------------------------
Capital Capital Treasury/
(In millions) Mgt. Markets Consumer Commercial Nonbank Total
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Income statement data
Net interest income $ 409 1,434 3,320 1,400 714 7,277
Provision for loan losses 5 156 326 64 140 691
Fee and other income 1,802 1,150 1,894 535 1,054 6,435
Noninterest expense 1,524 1,314 3,243 1,048 715 7,844
Income tax expense 262 339 629 300 (49) 1,481
- ------------------------------------------------------------------------------------------------------------------------
Operating earnings 420 775 1,016 523 962 3,696
- ------------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring and
merger-related charges
Noninterest expense - - - - (1,212) (1,212)
Income tax benefit - - - - 407 407
- ------------------------------------------------------------------------------------------------------------------------
After-tax restructuring and
merger-related charges - - - - (805) (805)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 420 775 1,016 523 157 2,891
- ------------------------------------------------------------------------------------------------------------------------
Performance and other data
Return on average attributed
stockholders' equity 47.30 % 15.62 29.98 25.23 21.05 22.70
Average loans, net $ 3,683 40,589 27,050 26,532 34,206 132,060
Average deposits 16,723 14,315 77,632 23,067 4,593 136,330
Average attributed stockholders'
equity (a) $ 892 4,957 3,386 2,074 4,569 15,878
========================================================================================================================
(a) Average attributed stockholders' equity excludes restructuring,
merger-related and other charges and the cumulative effect of a change in
accounting principle for the Capital Management, Capital Markets, Consumer and
Commercial segments. Average attributed stockholders' equity includes
restructuring, merger-related and other charges and the cumulative effect of a
change in accounting principle for the Treasury/Nonbank segment and consolidated
amounts.
80
83
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 12: PERSONNEL EXPENSE AND RETIREMENT BENEFITS
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. A six percent matching level was in place for each of the periods
presented. Beginning in 1999, the first one percent of the Corporation's
matching contribution is made in the Corporation's common stock. Savings plan
expense in 2000, 1999 and 1998 was $125 million, $102 million and $121 million,
respectively.
Group insurance expense for active employees in 2000, 1999 and 1998 was
$210 million, $201 million and $160 million, respectively.
The Corporation has noncontributory, tax-qualified defined benefit pension
plans (the "Qualified Pension") covering substantially all employees with at
least one year of service. The Qualified Pension benefit expense is determined
by an actuarial valuation, and it is based on assumptions that are evaluated
annually. 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.
At December 31, 2000, Qualified Pension assets included U.S. Government
and Government agency securities, equity securities and other investments. Also
included are 4.5 million shares of the Corporation'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 noninterest expense.
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 using a September 30 measurement date for each
of the years in the two-year period ended December 31, 2000, follows.
81
84
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Other Postretirement
Qualified Pension Nonqualified Pension Benefits
---------------------- ---------------------- ----------------------
(In millions) 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, October 1 $ 2,055 2,333 202 250 404 390
Service cost 90 108 3 5 8 9
Interest cost 153 153 15 16 30 25
Retiree contributions - - - - 14 7
Plan amendments 7 - - - 18 4
Benefit payments (260) (212) (109) (51) (40) (31)
Business combinations - - - - - 16
Curtailment - - (20) - - -
Special and/or contractual termination benefits - - 20 - 2 3
Actuarial (gains) losses (35) (327) 44 (18) 78 (19)
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation, September 30 2,010 2,055 155 202 514 404
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN FAIR VALUE OF
PLAN ASSETS
Fair value of plan assets, October 1 2,472 2,360 - - 75 70
Actual return on plan assets 425 257 - - 8 4
Employer contributions 197 67 109 51 19 24
Retiree contributions - - - - 14 7
Benefit payments (260) (212) (109) (51) (40) (30)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, September 30 2,834 2,472 - - 76 75
- ------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS
Funded status of plans 824 417 (155) (202) (438) (329)
Unrecognized net transition obligation (5) (13) - - 48 51
Unrecognized prior service costs 48 47 - 39 3 (16)
Unrecognized net (gains) losses (245) (34) 32 27 2 (73)
Employer contributions in the fourth quarter - 104 - - - (7)
- ------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit expense at
December 31, $ 622 521 (123) (136) (385) (374)
========================================================================================================================
ASSUMPTIONS
Discount rate, September 30 7.75 % 7.75 7.75 7.75 7.75 7.75
Expected return on plan assets 10.00 9.75 - - 6.00 6.00
Weighted average rate of increase in
future compensation levels 4.25 % 4.25 4.25 4.25 4.25 4.25
========================================================================================================================
82
85
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
As of December 31, 2000, the Corporation terminated one of its
Nonqualified Pension plans and settled the obligation with each participant by
either making a cash payment to the participant or by purchasing an annuity
contract. This settlement, along with the retirement of certain key officers,
resulted in a charge of $48 million to salaries and employee benefits in the
statement of income. Salaries and employee benefits in 2000 also included a $20
million charge related to a new Nonqualified Pension plan. In 1998, the $35
million curtailment gain resulted from employee terminations in connection with
the CoreStates merger. These and other components of the retirement benefits
cost included in salaries and employee benefits for each of the years in the
three-year period ended December 31, 2000, are presented below.
Qualified Pension Nonqualified Pension
--------------------------------- ---------------------------------
Years Ended December 31, Years Ended December 31,
--------------------------------- ---------------------------------
(In millions) 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 90 108 89 3 5 4
Interest cost 153 153 140 15 16 14
Expected return on plan assets (249) (230) (203) - - -
Amortization of transition (gains) losses (9) (9) (9) - 1 1
Amortization of prior service cost 7 7 6 9 11 9
Amortization of actuarial losses - 5 3 1 5 1
Curtailment (gain) loss - - (35) 30 - 1
Settlement loss - - - 18 - -
Special and/or contractual termination benefits - - 3 20 - -
- ------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ (8) 34 (6) 96 38 30
========================================================================================================================
Other Postretirement Benefits
---------------------------------
Years Ended December 31,
---------------------------------
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 8 9 8
Interest cost 30 25 24
Expected return on plan assets (4) (4) (4)
Amortization of transition losses 4 4 4
Amortization of prior service cost (1) (1) (2)
Amortization of actuarial gains (2) (1) (4)
Curtailment gain - - (12)
Special termination benefit cost 1 2 -
- ------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ 36 34 14
========================================================================================================================
Medical trend rates assumed with respect to Other Postretirement Benefits
at the beginning and at the end of 2000 were 6.00 percent (pre-65 years of age)
and 5.00 percent (post-65 years of age), respectively. Medical trend rates
assumed with respect to Other Postretirement Benefits at the beginning and at
the end of 1999 were 6.00 percent (pre-65 years of age) and 5.00 percent
(post-65 years of age), respectively.
At December 31, 2000, the effect of a one percentage point increase or
decrease in the assumed health care cost trend rate on service and interest
costs is a $1 million increase and a $1 million decrease, respectively, and on
the accumulated postretirement benefit obligation, a $19 million increase and a
$17 million decrease, respectively.
83
86
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 13: INCOME TAXES
The provision for income taxes for each of the years in the three-year
period ended December 31, 2000, is presented below.
Years Ended December 31,
------------------------------------
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
CURRENT INCOME TAX EXPENSE
Federal $ 340 451 395
State 91 63 40
- -------------------------------------------------------------------------------------------------------------------------
Total 431 514 435
Foreign 18 15 15
- -------------------------------------------------------------------------------------------------------------------------
Total 449 529 450
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX EXPENSE
Federal 162 1,090 598
State (71) (11) 26
- -------------------------------------------------------------------------------------------------------------------------
Total 91 1,079 624
- -------------------------------------------------------------------------------------------------------------------------
Total $ 540 1,608 1,074
=========================================================================================================================
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, 2000, is presented below.
Years Ended December 31,
---------------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- --------------------
PERCENT OF Percent of Percent of
PRE-TAX Pre-tax Pre-tax
(In millions) AMOUNT INCOME Amount Income Amount Income
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 632 $ 4,831 $ 3,965
========= ========= =========
Tax at federal income tax rate $ 221 35.0 % $ 1,691 35.0 % $ 1,388 35.0 %
Reasons for difference in federal income
tax rate and effective tax rate
Tax-exempt interest, net of cost to carry (55) (8.7) (45) (0.9) (50) (1.3)
Non-taxable distributions from
corporate reorganizations - - - - (270) (6.8)
State income taxes, net of federal tax
benefit 13 2.0 34 0.7 43 1.1
Life insurance, increase in cash
surrender value (79) (12.5) (74) (1.5) (62) (1.6)
Foreign taxes, net of federal tax benefit 16 2.5 13 0.3 10 0.3
Subsidiary stock, recognition of
deferred taxes on basis difference (80) (12.7) - - - -
Goodwill amortization 86 13.6 86 1.8 67 1.7
Goodwill write-down, The Money Store, Inc. 521 82.4 - - - -
Tax credits, net of related basis
adjustments (114) (18.0) (85) (1.8) (54) (1.4)
Change in the beginning-of-the-year
deferred tax assets valuation allowance 3 0.5 (1) - - -
Other items, net 8 1.3 (11) (0.3) 2 0.1
- -------------------------------------------------------------------------------------------------------------------------
Total $ 540 85.4 % $ 1,608 33.3 % $ 1,074 27.1 %
=========================================================================================================================
84
87
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
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 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, 2000, are presented below.
December 31,
------------------------------------
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX ASSETS
Provision for loan losses, net $ 668 674 695
Accrued expenses, deductible when paid 768 681 711
Asset write-downs - restructuring 348 - -
Unrealized loss on debt and equity securities 125 507 -
Loan products 10 - -
Purchase accounting adjustments (primarily loans and securities) 124 67 104
Net operating loss carryforwards 152 178 324
Tax credit carryforwards 529 392 207
Other 183 129 138
- -------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 2,907 2,628 2,179
- -------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance 26 23 24
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES
Depreciation 172 114 174
Unrealized gain on debt and equity securities - - 224
Intangible assets - 112 166
Deferred income 176 168 70
Leasing activities 4,756 3,822 3,019
Prepaid pension assets 237 199 175
Loan products - 101 99
Securitizations 80 101 33
Other 56 138 101
- -------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 5,477 4,755 4,061
- -------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $ 2,596 2,150 1,906
=========================================================================================================================
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 2000, 1999 and 1998 deferred tax expense (benefit) of $382 million,
$(731) million and $70 million, respectively, have been recorded directly to
stockholders' equity. Purchase acquisitions also decreased the net deferred tax
liability by $27 million, $104 million and $63 million in 2000, 1999 and 1998,
respectively.
The realization of deferred tax assets may be based on the utilization of
carrybacks to prior taxable periods, the anticipation of future taxable income
in certain periods and the utilization of tax planning strategies. Management
has determined that it is more likely than not that the deferred tax assets can
be supported by carrybacks to federal taxable income in the two-year federal
carryback period and by expected future taxable income which will 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 state net operating loss carryforwards.
85
88
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
Federal tax carryforwards at December 31, 2000, consisted of $24 million
of net operating losses, $288 million of general business tax credits and $237
million of alternative minimum tax credits. The utilization of these
carryforwards is subject to limitations under federal income tax laws. Except
for the alternative minimum tax credits which do not expire, the other federal
tax carryforwards expire in varying amounts through 2020.
State tax carryforwards at December 31, 2000, consisted of approximately
$4.4 billion of net operating losses available to offset future state taxable
income through 2020 and $4 million of general business tax credits available to
offset future state income taxes through 2003.
Income tax expense (benefit) related to securities available for sale
transactions was $(400) million, $63 million and $137 million in 2000, 1999 and
1998, respectively. Income tax expense related to investment security
transactions was $2 million in 1998. Amounts in 2000 and 1999 were not
significant.
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 or combined income tax returns,
applicable separate company state income tax returns are filed.
The Internal Revenue Service (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 1999, the IRS examination of the Corporation's federal income
tax returns for the years 1991 through 1993 was settled with no significant
impact on the Corporation's financial position or results of operations. In
2000, 1999 and 1998, 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.
86
89
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 14: BASIC AND DILUTED EARNINGS PER SHARE
The reconciliation between basic and diluted earnings per share for each
of the years in the three-year period ended December 31, 2000, is presented
below.
Years Ended December 31,
----------------------------------
(Dollars in millions, except per share data) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle $ 138 3,223 2,891
Less imputed interest on the Corporation's transactions
in its common stock (21) (6) -
- ----------------------------------------------------------------------------------------------------------------------
Income available to common stockholders before cumulative
effect of a change in accounting principle 117 3,217 2,891
Cumulative effect of a change in the accounting for beneficial
interests, net of tax (46) - -
- ----------------------------------------------------------------------------------------------------------------------
Income available to common stockholders $ 71 3,217 2,891
======================================================================================================================
Basic earnings per share
Income before change in accounting principle $ 0.12 3.35 2.98
Change in the accounting for beneficial interests (0.05) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.07 3.35 2.98
======================================================================================================================
Diluted earnings per share
Income before change in accounting principle $ 0.12 3.33 2.95
Change in the accounting for beneficial interests (0.05) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 0.07 3.33 2.95
======================================================================================================================
Average shares - basic (In thousands) 970,608 959,390 969,131
Options and unvested restricted stock (In thousands) 3,564 7,473 10,981
- ----------------------------------------------------------------------------------------------------------------------
Average shares - diluted (In thousands) 974,172 966,863 980,112
======================================================================================================================
87
90
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 15: ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
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. 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 gains or losses realized in the current
period on certain debt and equity securities that were included in accumulated
other comprehensive income at the beginning of the period. Accumulated other
comprehensive income, net, for each of the years in the three-year period ended
December 31, 2000, 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, 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
Unrealized net holding loss arising in 1999 (1,820) 644 (1,176)
Reclassification adjustment for gains and losses realized in net income (247) 86 (161)
- ------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 1999 (1,431) 501 (930)
Unrealized net holding gain arising in 2000 588 (206) 382
Reclassification adjustment for gains and losses realized in net income 516 (181) 335
- ------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 2000 $ (327) 114 (213)
========================================================================================================================
88
91
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers, to reduce its own exposure to fluctuations in interest rates and to
conduct lending activities. These financial instruments include commitments to
extend credit, standby and commercial letters of credit, derivatives, 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 counterparty for commitments to extend credit and standby and commercial
letters of credit is represented by the contract amount of those instruments.
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. The Corporation uses the same credit policies in entering
into commitments and conditional obligations as it does for on-balance sheet
instruments. For derivatives, the contract or notional amounts do not represent
the exposure to credit loss. The Corporation controls the credit risk of its
derivatives through collateral arrangements, credit approvals, limits and
monitoring procedures.
The Corporation's 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, 2000, the total credit risk in excess of thresholds was $832 million. The
fair value of collateral held exceeded the total credit risk in excess of the
thresholds.
For non-dealer transactions, the need for collateral is evaluated on an
individual transaction basis, and it is primarily dependent on the financial
strength of the counterparty.
Additional information related to derivatives used for the Corporation's
interest rate risk management purposes as of December 31, 2000 and 1999, can be
found in Table 18 through Table 20, which are incorporated herein by reference.
Additional information related to other off-balance sheet financial
instruments as of December 31, 2000 and 1999, is presented below.
December 31,
-------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------
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 $ - 140 128,214 - 172 141,176
Standby and commercial letters of credit - 26 13,320 - 25 11,512
FINANCIAL INSTRUMENTS WHOSE
CONTRACT OR NOTIONAL
AMOUNTS EXCEED THE AMOUNT
OF CREDIT RISK
Trading and dealer activities
Forward and futures contracts 2,249 2,249 209,312 748 748 108,177
Interest rate swap agreements (2,806) (2,806) 226,364 (385) (385) 121,394
Purchased options, interest rate
caps, floors, collars and swaptions 1,703 1,703 290,484 724 724 88,896
Written options, interest rate caps,
floors, collars and swaptions (1,713) (1,713) 223,056 (682) (682) 63,406
Foreign currency and exchange
rate swap commitments (25) (25) 10,537 (26) (26) 2,794
Commodity and equity swaps $ 15 15 2,519 1 1 28
=========================================================================================================================
89
92
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and they may require payment of a fee by the counterparty. 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 $7 billion, guarantees extend
for more than one year, and they expire in varying amounts primarily through
2033.
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 derivatives including
interest rate swaps, options, caps, floors and swaptions 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 notional 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 enters into underwriting
commitments. Transactions relating to these underwriting commitments that were
open at December 31, 2000, and that were subsequently settled, had no material
impact on the Corporation's consolidated financial position.
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, 2000, met the
requirements for discount with Federal Reserve Banks. Average daily Federal
Reserve Bank balance requirements for the year ended December 31, 2000, amounted
to $308 million.
Minimum operating lease payments due in each of the five years subsequent
to December 31, 2000, are as follows (in millions): 2001, $272; 2002, $262;
2003, $236; 2004, $209; 2005, $180; and subsequent years, $1.1 billion. Rental
expense for all operating leases for the three years ended December 31, 2000,
was $404 million, 2000; $319 million, 1999; and $326 million, 1998.
The Corporation and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which varying amounts are claimed. Although the amount of any
ultimate liability with respect to those matters cannot be determined, in
management's opinion, based upon the opinions of counsel, any such liability
will not have a material effect on the Corporation's and its subsidiaries'
consolidated financial position.
A number of purported class actions were filed in June through August 1999
against the Corporation in the United States District Courts for the Western
District of North Carolina and for the Eastern District of Pennsylvania. These
actions named the Corporation and certain of its executive officers as
defendants and were purported to be on behalf of persons who purchased shares of
the Corporation's common stock from August 14, 1998, through May 24, 1999. These
actions were consolidated into one case in the United States District Court for
the Western District of North Carolina in October 1999. These complaints alleged
various violations of federal securities law, including violations of Section
10(b) of the Securities Exchange Act of 1934, and that the defendants made
materially misleading statements and/or material omissions which artificially
inflated prices for the Corporation's common stock. Plaintiffs sought a judgment
awarding damages and other relief. On January 10, 2001, the United States
District Court for the Western District of North Carolina granted the
Corporation's motion to dismiss the litigation for failure to state a claim upon
which relief could be granted. It is unknown at this time whether the plaintiffs
plan to appeal the court's order. If the plaintiffs do appeal that order, the
Corporation believes the allegations contained in these actions are without
merit and will vigorously defend them.
90
93
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- --------------------------------------------------------------------------------
On July 26, 2000, a jury in the Philadelphia County (PA) Court of Common
Pleas returned a verdict in the case captioned Pioneer Commercial Funding
Corporation v. American Financial Mortgage Corporation, CoreStates Bank, N.A.,
et al. The verdict against CoreStates Bank, N.A. ("CoreStates"), a predecessor
of First Union National Bank, included consequential damages of $13.5 million
and punitive damages of $337.5 million. The trial court had earlier directed a
verdict against CoreStates for compensatory damages of $1.7 million. The
plaintiff, who was not a CoreStates customer, alleged that the sum of $1.7
million, which it claims it owned, was improperly setoff by CoreStates. Upon the
Corporation's motion, the trial court reduced the amount of the punitive damages
award to $40.5 million in December 2000. The Corporation believes that numerous
reversible errors occurred at the trial, and that the facts do not support the
damages awards. The Corporation will vigorously pursue its pending post-trial
motions and its right of appeal. The Corporation believes, after consultation
with external counsel, that the ultimate outcome of this litigation will not
have a material adverse effect on its consolidated financial position.
- --------------------------------------------------------------------------------
NOTE 17: FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about the fair value of on-balance sheet financial instruments
at December 31, 2000 and 1999, is presented below.
December 31,
------------------------------------------------
2000 1999
------------------------- ---------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
(In millions) AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and cash equivalents $ 24,385 24,385 22,677 22,677
Trading account assets 21,630 21,630 14,946 14,946
Securities available for sale 47,603 47,603 51,277 51,277
Investment securities 1,643 1,728 1,758 1,809
Loans, net of unearned income and
allowance for loan losses 122,038 121,985 131,420 131,374
Other financial assets $ 16,022 16,022 14,259 14,259
=========================================================================================================================
FINANCIAL LIABILITIES
Deposits 142,668 142,752 141,047 141,477
Short-term borrowings 39,446 39,446 50,107 50,107
Trading account liabilities 7,475 7,475 3,569 3,569
Other financial liabilities 6,539 6,539 5,515 5,515
Long-term debt $ 35,809 35,919 31,975 31,807
=========================================================================================================================
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 and prepayment assumptions. Estimated fair values for the
commercial loan portfolio were based on weighted average discount rates ranging
from 6.97 percent to 8.54 percent and 6.88 percent to 8.08 percent at December
31, 2000 and 1999, respectively, and for the consumer portfolio from 7.00
percent to 9.67 percent and 8.21 percent to 12.94 percent, respectively. For
performing residential mortgage loans, fair values are estimated using a
discounted cash flow analysis utilizing yields for comparable mortgage-backed
securities. 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.
91
94
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- --------------------------------------------------------------------------------
The fair values of noninterest-bearing deposits, savings and NOW accounts,
and money market accounts were the amounts payable on demand at December 31,
2000 and 1999. 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.
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 similar terms.
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.
- --------------------------------------------------------------------------------
NOTE 18: FIRST UNION CORPORATION (PARENT COMPANY)
The Parent Company serves as the primary source of funding for the
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 $160 million,
364-day line of credit which expires in August 2001. 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, 2000, the Parent Company was in compliance with these covenants and
requirements.
On December 31, 2000, the Parent Company was indebted to subsidiary banks
in the amount of $1.7 billion 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 December 31, 2000, a subsidiary bank had loans outstanding to Parent Company
nonbank subsidiaries in the amount of $155 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, 2000,
amounted to $470 million.
At December 31, 2000, the Parent Company's subsidiaries, including its
bank subsidiaries, had available retained earnings of $1.1 billion for the
payment of dividends to the Parent Company without regulatory or other
restrictions. Subsidiary net assets of $16 billion were restricted from being
transferred to the Parent Company at December 31, 2000, under regulatory or
other restrictions.
At December 31, 2000 and 1999, the estimated fair value of the Parent
Company's loans was $7.1 billion and $4.7 billion, respectively. See Note 9 for
information related to the Parent Company's junior subordinated deferrable
interest debentures.
The Parent Company's condensed balance sheets as of December 31, 2000 and
1999, and the related condensed statements of income and cash flows for each of
the years in the three-year period ended December 31, 2000, are presented below.
92
95
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31,
---------------------
(In millions) 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 45 5
Interest-bearing balances with bank subsidiary 3,977 3,013
Securities purchased under resale agreements 1,729 1,648
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 5,751 4,666
- -------------------------------------------------------------------------------------------------------------------------
Trading account assets 28 33
Securities available for sale (amortized cost $1,351 in 2000; $1,171 in 1999) 1,311 1,198
Loans, net 64 58
Loans due from subsidiaries
Banks 2,875 2,066
Nonbanks 4,166 2,623
Investments in wholly owned subsidiaries
Banks 15,414 17,362
Nonbanks 2,811 2,284
- -------------------------------------------------------------------------------------------------------------------------
Total 18,225 19,646
Investments arising from purchase acquisitions 979 1,041
- -------------------------------------------------------------------------------------------------------------------------
Total investments in wholly owned subsidiaries 19,204 20,687
- -------------------------------------------------------------------------------------------------------------------------
Other assets 578 196
- -------------------------------------------------------------------------------------------------------------------------
Total $ 33,977 31,527
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper 1,929 2,028
Other short-term borrowings with affiliates 3,092 2,546
Other liabilities 682 628
Long-term debt 11,596 8,285
Junior subordinated deferrable interest debentures 1,331 1,331
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 18,630 14,818
Stockholders' equity 15,347 16,709
- -------------------------------------------------------------------------------------------------------------------------
Total $ 33,977 31,527
=========================================================================================================================
93
96
- -------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
- -------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries
Banks $ 2,836 3,150 1,766
Nonbanks 368 40 5
Interest income 757 470 534
Fee and other income 854 1,130 852
- -------------------------------------------------------------------------------------------------------------------------
Total income 4,815 4,790 3,157
- -------------------------------------------------------------------------------------------------------------------------
EXPENSE
Interest on short-term borrowings 228 134 129
Interest on long-term debt 802 576 596
Noninterest expense 941 898 733
- -------------------------------------------------------------------------------------------------------------------------
Total expense 1,971 1,608 1,458
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits), equity in undistributed net income
of subsidiaries and cumulative effect of a change in accounting principle 2,844 3,182 1,699
Income taxes (benefits) (64) 2 9
- -------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income of subsidiaries
and cumulative effect of a change in accounting principle 2,908 3,180 1,690
Equity in undistributed net income (loss) of subsidiaries (2,770) 43 1,201
- -------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 138 3,223 2,891
Cumulative effect of a change in the accounting for beneficial
interests, net of tax (46) - -
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 92 3,223 2,891
=========================================================================================================================
94
97
-------------------------------------------------------
AUDITED FINANCIAL STATEMENTS
-------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------
(In millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 92 3,223 2,891
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Equity in undistributed net (income) loss of subsidiaries 2,770 (43) (1,201)
Cumulative effect of a change in accounting principle 46 - -
Accretion and revaluation losses on securities 3 9 4
Securities transactions (2) (4) (5)
Depreciation, goodwill and other amortization 284 202 136
Deferred income taxes 10 13 36
Trading account assets, net 5 (24) (9)
Other assets, net (457) 275 (44)
Other liabilities, net 69 162 (448)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,820 3,813 1,360
- -------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales and maturities of securities available for sale 794 352 389
Purchases of securities available for sale (975) (918) (556)
Calls and underdeliveries of investment securities - - 29
Advances to subsidiaries, net (2,352) (840) (1,232)
Investments in subsidiaries (530) (253) (549)
Longer-term loans originated or acquired (149) (84) (155)
Principal repaid on longer-term loans 143 40 295
Purchases of premises and equipment, net 2 27 (68)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,067) (1,676) (1,847)
- -------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Deposits - - (1)
Commercial paper (99) 399 758
Other short-term borrowings, net 546 13 1,419
Issuance of junior subordinated deferrable interest debentures - 300 -
Issuances of long-term debt 4,024 1,378 4,018
Payments of long-term debt (713) (1,554) (943)
Sales of common stock 152 143 700
Purchases of common stock (690) (1,813) (3,056)
Cash dividends paid (1,888) (1,817) (1,524)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,332 (2,951) 1,371
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,085 (814) 884
Cash and cash equivalents, beginning of year 4,666 5,480 4,596
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,751 4,666 5,480
=========================================================================================================================
CASH PAID FOR
Interest $ 970 705 706
Income taxes 127 115 85
NONCASH ITEM
Increase in investments in subsidiaries as a result of acquisitions of institutions
for common stock $ 34 1,251 2,540
=========================================================================================================================
95
98
- -------------------------------------------------------
BOARD OF DIRECTORS
- -------------------------------------------------------
EXECUTIVE OFFICERS BOARD OF DIRECTORS
Edward E. Crutchfield* Edward E. Barr* B.F. Dolan* Patricia A. McFate
Chairman Chairman Investor Senior Scientist of
Sun Chemical Charlotte, North Carolina the Strategies Group
G. Kennedy Thompson** Corporation Science Applications
President and Chief Fort Lee, New Jersey International
Executive Officer Roddey Dowd, Sr. Corporation
G. Alex Bernhardt, Sr. Chairman of Executive Santa Fe, New Mexico
Benjamin P. Jenkins, III Chairman and Chief Committee
Vice Chairman Executive Officer Charlotte Pipe and Joseph Neubauer
Bernhardt Furniture Foundry Company Chairman and Chief
Donald A. McMullen, Jr. Company Charlotte, North Carolina Executive Officer
Vice Chairman Lenoir, North Carolina ARAMARK Corporation
Philadelphia, Pennsylvania
B.J. Walker Erskine B. Bowles William H. Goodwin, Jr.
Vice Chairman General Partner Chairman James M. Seabrook*
Forstmann, Little CCA Industries, Inc. Chairman and Chief
Robert P. Kelly and Co. Richmond, Virginia Executive Officer
Executive Vice New York, New York Seabrook Brothers and
President and Chief Frank M. Henry* Sons, Inc.
Financial Officer W. Waldo Bradley* Chairman Seabrook, New Jersey
Chairman Frank Martz Coach
Mark C. Treanor Bradley Plywood Company Ruth G. Shaw
Executive Vice Corporation Wilkes-Barre, Executive Vice President
President, Savannah, Georgia Pennsylvania and Chief
Secretary and Administrative Officer
General Counsel Robert J. Brown Ernest E. Jones* Duke Energy Corporation
Chairman and Chief President and Chief Charlotte, North Carolina
Robert T. Atwood* Executive Officer Executive Officer
Executive Vice B&C Associates, Inc. Philadelphia Workforce Lanty L. Smith
President High Point, North Development Corporation Chairman
Carolina Philadelphia, Soles Brower Smith & Co.
David M. Carroll Pennsylvania Greensboro, North Carolina
Executive Vice Edward E. Crutchfield*
President Chairman Herbert Lotman G. Kennedy Thompson**
First Union Chairman and Chief President and Chief
Don R. Johnson Corporation Executive Officer Executive Officer
Executive Vice Charlotte, North Keystone Foods Holding First Union Corporation
President Carolina Company, Inc. Charlotte, North Carolina
Bala Cynwyd,
Robert W.J. Nimmo A. Dano Davis Pennsylvania
Executive Vice Chairman
President Winn-Dixie Stores, Inc. Radford D. Lovett
Jacksonville, Florida Chairman
P. Sue Perrotty Commodores Point
Executive Vice Terminal Corporation
President Jacksonville, Florida
Norwood H. Davis, Jr.*
Chairman Emeritus Mackey J. McDonald
Trigon Healthcare, Inc. Chairman, President
Richmond, Virginia and Chief Executive
Officer
VF Corporation * Retiring in 2001.
Greensboro, North Carolina **Chairman as of March 1, 2001.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE NOMINATING COMMITTEE FINANCIAL SERVICES COMMITTEE
B.F. Dolan, Chairman* G. Alex Bernhardt, Sr., Chairman Ruth G. Shaw, Chairman
Lanty L. Smith, Vice Chairman William H. Goodwin, Jr., Vice Chairman Erskine B. Bowles, Vice Chairman
Edward E. Crutchfield* Erskine B. Bowles Edward E. Barr*
William H. Goodwin, Jr. B.F. Dolan* Radford D. Lovett
Radford D. Lovett Herbert Lotman James M. Seabrook*
Mackey J. McDonald Radford D. Lovett Benjamin P. Jenkins, III (Staff)
Joseph Neubauer Mackey J. McDonald Donald A. McMullen, Jr. (Staff)
G. Kennedy Thompson Lanty L. Smith
Robert P. Kelly (Staff) AUDIT COMMITTEE
Mark C. Treanor (Staff) CREDIT/MARKET RISK COMMITTEE Lanty L. Smith, Chairman
Mackey J. McDonald, Chairman Norwood H. Davis, Jr., Vice Chairman*
HUMAN RESOURCES COMMITTEE William H. Goodwin, Jr., Vice Chairman W. Waldo Bradley*
Herbert Lotman, Chairman G. Alex Bernhardt, Sr. A. Dano Davis
Robert J. Brown, Vice Chairman Roddey Dowd, Sr. Ernest E. Jones*
B.F. Dolan* Frank M. Henry* Robert P. Kelly (Staff)
Patricia A. McFate Joseph Neubauer James H. Hatch (Staff)
Don R. Johnson (Staff) Robert W.J. Nimmo (Staff) Peter J. Schild (Staff)
Brian E. Simpson (Staff)
* Retiring in 2001.
96
99
-------------------------------------------------------
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 Ginny Mackin, senior vice president, Corporate Relations, at
704-374-2138.
PRINT. Printed financial materials, including our 2000 Annual Report on Form
10-K, may be obtained from Investor Relations at 704-374-6782.
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 about 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, 301 South College Street, Suite 4000, Charlotte, North Carolina
28288-0001, or call 704-374-6161.
INTERNET. Customers nationwide who wish to manage their checking, bill payment
and brokerage activities through the convenience of a single access code may do
so at www.firstunion.com. Open a checking, savings or brokerage account online.
Apply and, if qualified, receive online approval for a mortgage loan, a home
equity loan or a credit card within minutes. Our e-mail address is
comments@firstunion.com.
PHONE. Customers nationwide also may conduct their banking transactions by
calling First Union Direct toll-free at 1-800-413-7898.
ANNUAL MEETING
The annual meeting of stockholders will be at 9:30 a.m. on Tuesday, April 17,
2001, at the Hilton Charlotte, 222 E. Third Street, 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 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
if we receive the consent authorization from each registered stockholder named
on the account to mail only one report per address. Please send the written
consent 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 A by Fitch. Subordinated debt is rated A2 by Moody's and A-
by Fitch. Short-term obligations are rated A-1 by S&P; P-1 by Moody's; and F-1
by Fitch.
First Union National Bank ratings for long-term letters of credit, bank notes
and certificates of deposit are A+ by S&P; Aa3 by Moody's; and A+ by Fitch.
Short-term letters of credit and certificates of deposit are rated A-1, P-1, and
F-1 by S&P, Moody's, and Fitch, respectively.
100
www.firstunion.com
FIRST UNION CORPORATION
ONE FIRST UNION CENTER
CHARLOTTE, NC 28288-0570
(Recycle Logo) This publication is printed on recycled paper.