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FIRST UNION CORPORATION AND SUBSIDIARIES
FIRST QUARTER 2001
MANAGEMENT'S ANALYSIS OF OPERATIONS
QUARTERLY FINANCIAL SUPPLEMENT
THREE MONTHS ENDED MARCH 31, 2001
[FIRST UNION Logo]
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FIRST UNION CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
THREE MONTHS ENDED MARCH 31, 2001
TABLE OF CONTENTS
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PAGE
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Financial Highlights 1
Management's Analysis of Operations 2
Selected Statistical Data 19
Summary Income, Per Share and Balance Sheet Data 20
Restructuring Charges 21
Business Segments 22
Fee and Other Income - Capital Markets 28
Selected Ratios 28
Securities 29
Loans - On-Balance Sheet, and Managed and Servicing Portfolios 30
Loans Held for Sale 31
Allowance for Loan Losses and Nonperforming Assets 32
Nonperforming Assets Activity 33
Goodwill and Other Intangible Assets 33
Deposits 33
Time Deposits in Amounts of $100,000 or More 34
Long-Term Debt 34
Changes in Stockholders' Equity 35
Capital Ratios 35
Risk Management Derivative Financial Instruments 36
Risk Management Derivative Financial Instruments - Expected Maturities 37
Risk Management Derivative Financial Instruments Activity 37
Net Interest Income Summaries - Five Quarters Ended March 31, 2001 38
Consolidated Condensed Statement of Income 40
Restructuring and Other Charges/Gains 40
Consolidated Statements of Operating Earnings - Five Quarters Ended March 31, 2001 41
Consolidated Balance Sheets 42
Consolidated Statements of Income (Loss) - Five Quarters Ended March 31, 2001 43
Consolidated Statements of Cash Flows 44
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FINANCIAL HIGHLIGHTS
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Three Months Ended
March 31,
------------------------ Percent
Increase
(Dollars in millions, except per share data) 2001 2000 (Decrease)
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FINANCIAL HIGHLIGHTS
OPERATING EARNINGS
Net interest income - tax-equivalent $ 1,734 1,989 (13)%
Fee and other income 1,546 1,842 (16)
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Total revenue - tax-equivalent 3,280 3,831 (14)
Provision for loan losses 219 192 14
Noninterest expense 2,138 2,387 (10)
Income taxes - tax-equivalent 313 414 (24)
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Income before restructuring, merger-related and
other charges (Operating earnings) 610 838 (27)
After-tax restructuring, merger-related and other charges (26) 2 -
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Net income (As reported) $ 584 840 (30)%
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DILUTED EARNINGS PER SHARE
Income before restructuring, merger-related and other charges $ 0.62 0.85 (27)%
Net income $ 0.59 0.85 (31)%
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PROFITABILITY (OPERATING EARNINGS)
Return on average stockholders' equity 15.64 % 20.31 -
Net interest margin 3.42 3.69 -
Fee and other income as % of total revenue 47.13 48.08 -
Overhead efficiency ratio 65.18 62.31 -
Effective income tax rate 31.54 % 31.81 -
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CASH OPERATING EARNINGS
Net income $ 684 932 (27)%
Diluted earnings per share 0.69 0.95 (27)%
Return on average tangible stockholders' equity 22.91 % 34.03 -
Return on average stockholders' equity 17.52 22.59 -
Overhead efficiency ratio 62.80 % 59.65 -
Operating leverage $ (67) (13) -
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BALANCE SHEET DATA
Securities $ 51,528 52,089 (1)%
Loans, net 122,853 135,803 (10)
Total assets 252,949 253,648 -
Total deposits 140,795 139,890 1
Long-term debt 36,092 33,043 9
Stockholders' equity $ 16,081 16,884 (5)%
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CAPITAL ADEQUACY
Tier I capital ratio 7.18 % 6.94 -
Total capital ratio 11.33 10.67 -
Leverage ratio 5.88 % 5.94 -
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ASSET QUALITY
Allowance as % of loans, net 1.43 % 1.30 -
Allowance as % of nonperforming assets 132 139 -
Net charge-offs as % of average loans, net 0.53 0.57 -
Nonperforming assets to loans, net, foreclosed
properties and assets held for sale 1.30 % 0.92 -
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OTHER DATA
Employees 69,368 72,016 (4)%
Branches 2,164 2,305 (6)
ATMs 3,676 3,786 (3)
Shares outstanding (In thousands) 981,268 984,148 -
Common stock price $ 33.00 37.25 (11)
Book value per common share 16.39 17.16 (4)
Common stock price to book value 201 217 -
Market capitalization 32,382 36,660 (12)
Dividends paid per common share $ 0.24 0.48 (50)%
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MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Quarterly Report contain
various forward-looking statements. Please refer to our 2001 First Quarter
Report on Form 10-Q for a discussion of various factors that could cause our
actual results to differ materially from those expressed in such forward-looking
statements.
SUMMARY OPERATING RESULTS
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2001 2000
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FIRST Fourth Third Second First
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
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OPERATING EARNINGS
Net interest income (a) $ 1,734 1,757 1,860 1,930 1,989
Fee and other income 1,546 1,582 1,645 1,746 1,842
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Total revenue (a) 3,280 3,339 3,505 3,676 3,831
Provision for loan losses 219 192 142 228 192
Noninterest expense 2,138 2,132 2,328 2,366 2,387
Income taxes (a) 313 334 333 368 414
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Operating earnings $ 610 681 702 714 838
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Net income $ 584 599 852 (2,199) 840
Cash operating earnings (b) 684 753 778 807 932
PER DILUTED SHARE
Operating earnings 0.62 0.69 0.71 0.73 0.85
Net income 0.59 0.60 0.86 (2.27) 0.85
Cash operating earnings (b) $ 0.69 0.76 0.79 0.82 0.95
RATIOS
Operating return on average equity 15.64 % 15.36 15.76 17.74 20.31
Cash operating return on
average tangible stockholders' equity (b) 22.91 % 21.55 22.15 30.18 34.03
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(a) Tax-equivalent.
(b) Cash operating earnings exclude goodwill and other intangible amortization.
EARNINGS HIGHLIGHTS
SUMMARY OF OPERATING RESULTS First Union reported net income of $584 million, or
59 cents per share, in the first quarter of 2001. Operating earnings in the
first quarter of 2001 were $610 million, or 62 cents per share, and cash
operating earnings, which exclude goodwill and other intangible amortization,
were $684 million, or 69 cents per share. Operating earnings exclude first
quarter 2001 after-tax net restructuring, merger-related and other charges and
gains of $26 million, or 3 cents per share, primarily connected to the strategic
repositioning. See Restructuring and Other Charges and Gains for further
information. Net income for the first quarter 2000 was $840 million, or 85 cents
per share.
Based on operating earnings, First Union's return on average stockholders'
equity was 15.64 percent in the first quarter of 2001 and 20.31 percent in the
first quarter of 2000. The cash return on average tangible stockholders' equity
was 22.91 percent in the first quarter of 2001 and 34.03 percent in the first
quarter of 2000.
On an operating basis, fee and other income was $1.5 billion in the first
quarter of 2001, down 16 percent from the first quarter of 2000. The first
quarter of 2001 included a $75 million gain recorded in connection with the sale
of Star Systems, Inc., an automated teller machine network in which First Union
held an interest. Difficult financial markets dampened fee and other income in
our Capital Markets and Capital Management businesses, particularly principal
investing, which was down $242 million from the first quarter of 2000, and
Retail Brokerage Services, which was down $89 million from record performance in
the first quarter of 2000. The decline in fee and other income
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also reflected the impact of businesses we divested in connection with the
strategic repositioning of the company announced in June 2000.
On an operating basis, noninterest expense was $2.1 billion in the first quarter
of 2001, a 10 percent decline from the first quarter of 2000 and unchanged from
the fourth quarter of 2000. The decrease in expenses from the first quarter of
2000 primarily reflected expense control initiatives and lower variable
compensation expense.
The provision for loan losses was $219 million in the first quarter of 2001, an
increase of $27 million from the first quarter of 2000. The provision exceeded
net charge-offs by $60 million in the first quarter of 2001, including a $15
million provision related to the transfer of nonperforming loans to assets held
for sale. Net charge-offs in the first quarter of 2001 decreased $30 million
from the first quarter of 2000 to $159 million. Net charge-offs were 0.53
percent of average net loans in the first quarter of 2001, down 4 basis points
from the first quarter of 2000. Nonperforming assets, including those in assets
held for sale, increased $68 million from December 31, 2000, to $1.7 billion at
March 31, 2001. As a percentage of net loans, foreclosed properties and assets
held for sale, nonperforming assets were 1.30 percent at March 31, 2001, and
1.22 percent at December 31, 2000.
Excluding the impact of divestitures and securitizations, loans grew 6 percent
from the first quarter of 2000 and deposits grew 3 percent.
OUTLOOK
On April 16, 2001, First Union and Wachovia Corporation announced a definitive
agreement to merge the two companies. The new company would be named Wachovia
Corporation and headquartered in Charlotte, North Carolina. On a pro forma
basis, based upon March 31, 2001 data, the combined company would have assets of
$336 billion and a market capitalization of $46 billion. The new company's 19
million customers (including 3.2 million online) would be served by 90,000
employees through a wide selection of distribution channels, including 2,900
branch offices, nearly 600 brokerage offices, over 5,000 ATMs, and online and
telephone banking 24 hours a day. It would be the fourth largest banking company
in the nation based on assets and the second largest based on U.S. deposits.
On May 14, 2001, SunTrust Banks, Inc., announced an unsolicited, hostile
proposal to acquire Wachovia. First Union subsequently announced its intent to
complete its merger of equals with Wachovia on the terms previously agreed to by
the two parties.
The terms of the merger, which will be accounted for as a purchase accounting
transaction, call for Wachovia shareholders to receive two First Union shares
for each Wachovia common share. The value of the new shares issued would be
approximately $14 billion at March 31, 2001. We expect to complete the
transaction in the third quarter of 2001, pending regulatory and shareholder
approvals. In connection with the merger, Wachovia will declare a special cash
dividend of 48 cents per share for Wachovia shareholders of record immediately
prior to the completion of the merger. The special dividend will be paid to
those Wachovia shareholders after the merger is completed upon exchanging their
Wachovia stock certificates for certificates of First Union common stock. On May
9, 2001, First Union filed an application with the Federal Reserve Board for
approval of the merger with Wachovia.
Since the merger agreement was announced, integration planning efforts have
proceeded rapidly:
- Key senior leadership positions for the major divisions and
key business units were named upon the announcement of the
merger;
- A merger transition team and steering committee, composed of
individuals from both organizations began immediate planning
work; and
- The state chief executive officers and regional presidents for
all five of the General Bank's geographic regions were
selected.
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The announcement of the merger came as First Union had substantially completed
key elements of its strategic repositioning, announced in June 2000 to focus on
improved earnings growth from our three core businesses -- the General Bank,
Capital Management and Capital Markets. In this strategic repositioning, we
disposed 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. In addition to the $1.7 billion in on-balance sheet
credit card loans, we also sold, or have committed to sell, $6.2 billion of
commercial and consumer loans. At March 31, 2001, the balance of loans held for
sale amounted to $689 million. As part of the strategic repositioning, we sold
84 retail branches representing deposits of $2.7 billion and loans of $597
million. Of this total, 26 retail branches, representing $617 million in
deposits and $115 million in loans, were sold in the first quarter of 2001. In
connection with the strategic repositioning, we have recorded $2.8 billion of
net after-tax restructuring and other charges and gains through March 31, 2001.
The repositioning is essentially behind us, and we are focused on increasing the
efficiency and competitiveness of our three 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. 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 may be expected.
CORPORATE RESULTS OF OPERATIONS
RESTRUCTURING AND OTHER CHARGES AND GAINS In the first quarter of 2001, we
reported $43 million pre-tax net restructuring, merger-related and other charges
and gains primarily in connection with the strategic repositioning. This
included charges of $116 million, offset by $73 million in gains on the sale of
branches. Included in the charges were $50 million in valuation adjustments
related to loans transferred to assets held for sale in June 2000 as part of the
strategic repositioning; $16 million in systems integration costs related to the
JWGenesis, EVEREN and First Albany acquisitions; and $69 million in other
noninterest expense, principally personnel termination and incentive
arrangements and professional fees related to actions taken as part of the
strategic repositioning. Also included in the $43 million net charge were $14
million in reversals of the March 1999 restructuring charge based on
finalization of estimates related to severance.
In 2000 we recorded restructuring charges of $2.1 billion in connection with the
strategic repositioning. Through March 31, 2001, $1.9 billion has been charged
against the accrual. The remaining balance of $201 million primarily represents
amounts still to be paid in contract cancellation penalties, employee
termination benefits and lease payments for space vacated in connection with the
strategic repositioning. The restructuring charges included $174 million in
employee termination benefits, of which $111 million has been paid through March
31, 2001, for the 4,871 employees terminated in connection with the
repositioning. Of the employees terminated, 1,141 were officers of the company
and 3,730 were non-officers.
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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.
AVERAGE BALANCE SHEET AND INTEREST RATES
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2001 2000
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FIRST QUARTER Fourth Quarter First Quarter
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AVERAGE Average Average
(In millions) BALANCE RATE Balance Rate Balance Rate
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Interest-bearing bank balances $ 1,826 5.69 % $ 1,266 4.34 % $ 666 4.40 %
Federal funds sold 7,036 5.49 5,994 5.86 9,555 5.40
Trading account assets 13,315 6.24 11,569 6.95 11,326 6.84
Securities 50,417 7.50 50,554 7.54 54,389 7.19
Commercial loans 77,270 8.51 76,253 9.11 73,939 8.92
Consumer loans 42,580 8.63 43,840 8.80 57,542 8.49
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Total loans 119,850 8.55 120,093 8.99 131,481 8.73
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Other earning assets 11,276 8.96 13,130 9.76 8,337 8.29
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Total earning assets 203,720 8.03 202,606 8.44 215,754 8.06
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Interest-bearing deposits 110,239 4.61 110,454 4.92 111,734 4.30
Federal funds purchased 25,005 6.13 23,686 6.72 35,286 5.50
Commercial paper 2,540 5.32 2,639 6.19 2,996 5.56
Other short-term borrowings 9,580 3.46 9,345 4.09 9,100 5.09
Long-term debt 36,631 6.30 35,708 7.03 32,564 6.30
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Total interest-bearing liabilities 183,995 5.10 181,832 5.55 191,680 4.92
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Net interest income and margin $ 1,734 3.42 % $ 1,757 3.46 % $ 1,989 3.69 %
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NET INTEREST MARGIN Net interest income on a tax-equivalent basis declined 13
percent from the first quarter of 2000 to $1.7 billion in the first quarter of
2001, largely due to the decreased contribution of strategic off-balance sheet
positions, branch divestitures in the first quarter of 2001 and in the fourth
quarter of 2000, and the sale of the credit card portfolio in the third quarter
of 2000. This was partially offset by wider spreads in a declining interest rate
environment as our liabilities generally repriced faster than our assets. The
net interest margin, which is the difference between the tax-equivalent yield on
earning assets and the equivalent rate paid to fund those assets, declined 27
basis points from the first quarter of 2000. The average rate earned on earning
assets declined 3 basis points from the first quarter of 2000 to 8.03 percent in
the first quarter of 2001, while the average rate paid on liabilities increased
18 basis points from the first quarter of 2000 to 5.10 percent in the first
quarter of 2001. The Risk Management section provides additional information on
our methodology for interest rate risk management.
FEE AND OTHER INCOME
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2001 2000
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FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
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Service charges and fees $ 468 481 508 491 486
Commissions 375 383 365 375 468
Fiduciary and asset management fees 381 387 384 374 366
Advisory, underwriting and other
Capital Markets fees 198 187 148 182 209
Principal investing (43) (43) 34 205 199
Other income 167 187 206 119 114
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Total fee and other income $ 1,546 1,582 1,645 1,746 1,842
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FEE AND OTHER INCOME On an operating basis, fee and other income was $1.5
billion in 2001, down 16 percent from the first quarter of 2000 largely due to
lower principal investing revenue and lower brokerage commissions.
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Commissions, which include brokerage and insurance commissions, decreased $93
million from the exceptionally strong first quarter of 2000 to $375 million in
the first quarter of 2001. Principal investing revenue, which includes the
results of investments in equity and mezzanine securities, declined $242 million
from the first quarter of 2000 to a loss of $43 million in the first quarter of
2001. We expect modest principal investing revenue in 2001.
Other income, which includes results from portfolio securities transactions and
asset sales and securitizations, increased 46 percent from the first quarter of
2000 to $167 million in the first quarter of 2001. Other income in the first
quarter of 2001 included a $75 million gain recorded in connection with the sale
of Star Systems, Inc., offset by $19 million in affordable housing write-downs,
$16 million in investment securities losses and $30 million in market value
write-downs on loans held for sale. This compares with the first quarter of
2000, which included a $47 million charge to provide additional reserves against
lease residuals on our discontinued indirect auto lending and leasing business,
$16 million in securities losses consisting principally of impairment losses on
residual interests and $31 million in market value write-downs on loans held for
sale. Asset securitization gains declined by $58 million from the first quarter
of 2000.
NONINTEREST EXPENSE
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2001 2000
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FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
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Salaries and employee benefits $ 1,329 1,243 1,381 1,396 1,429
Occupancy 163 150 157 155 157
Equipment 205 221 213 210 214
Advertising 9 16 14 31 30
Communications and supplies 110 123 117 122 125
Professional and consulting fees 73 97 87 82 71
Goodwill and other intangible amortization 78 80 79 100 102
Sundry expense 171 202 280 270 259
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Total noninterest expense $ 2,138 2,132 2,328 2,366 2,387
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NONINTEREST EXPENSE On an operating basis, noninterest expense declined 10
percent from the first quarter of 2000 to $2.1 billion in the first quarter of
2001, largely reflecting expense control initiatives, divestitures of certain
businesses in late 2000, lower variable compensation expense and a decline in
goodwill and other intangible amortization. The decline in goodwill and other
intangible assets 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.
On a cash operating basis, the overhead efficiency ratio was 62.80 percent in
the first quarter of 2001 and 59.65 percent in the first quarter of 2000.
BUSINESS SEGMENTS
First Union's operations are divided into four business segments encompassing
more than 60 distinct product and service units. These segments are the General
Bank, Capital Management, Capital Markets and the Parent. The following
discussion of segment results is on an operating basis, and accordingly,
excludes restructuring, merger-related and other charges and gains related to
the strategic repositioning.
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As the result of an in-depth review of our management reporting model, we have
designed new methodologies and systems that we believe better reflect the
evolution of our three core businesses. We implemented this new management
reporting model in the first quarter of 2001, and prior period information has
been restated. The key differences are a redefinition of our segments, a
significant change in the way intersegment revenues (referral fees) are recorded
and changes in cost allocation methodologies. Under our new methodologies,
intersegment revenues are paid from the segment that "owns" a product to the
segment that "sells" the product, and they are based on comparable fees paid in
the market and/or on negotiated amounts that approximate the relative value
provided by the selling party. Cost allocations are made for services provided
by one business segment to another. Activity-based costing studies are being
completed on many business units to better align costs with products and their
revenues. In addition, new financial metrics have been implemented, with
business units being measured on Risk Adjusted Return on Capital (RAROC) and
Economic Profit. RAROC is calculated by dividing economic net income (reported
net income adjusted for intangibles amortization and the after-tax impact of
expected losses) by economic capital (capital assigned based on a statistical
assessment of the credit, market and operating risks taken to generate profits
in a particular business unit or product). Economic Profit is economic net
income less a charge for the economic capital used to support the business. The
charge for economic capital reflects the minimum return that stockholders should
expect based on the capital asset pricing model. For 2001, we have calculated
First Union's cost of capital to be 12 percent.
GENERAL BANK
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2001 2000
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FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
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INCOME STATEMENT DATA
Net interest income $ 1,085 1,104 1,100 1,090 1,071
Fee and other income 340 351 347 295 299
Intersegment revenue 25 25 24 25 26
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Total revenue 1,450 1,480 1,471 1,410 1,396
Provision for loan losses 101 73 51 46 38
Noninterest expense 908 970 926 945 925
Income taxes 149 142 163 137 142
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Operating earnings $ 292 295 331 282 291
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PERFORMANCE AND OTHER DATA
Economic profit $ 218 198 214 165 173
Risk adjusted return on capital (RAROC) 36.62 % 33.44 33.97 29.01 30.55
Economic capital $ 3,586 3,692 3,897 3,918 3,766
Overhead efficiency ratio 61.41 % 63.99 61.56 65.51 64.78
Average loans, net $ 63,596 61,735 60,029 58,105 56,491
Average core deposits $ 98,535 98,184 97,186 97,499 97,552
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GENERAL BANK Our General Bank provides leading-edge, customized banking products
and a full line of retail investment products through its three major lines of
business: Consumer, Commercial and Small Business. Our strategic focus is on
providing exceptional customer service combined with leveraging improved
customer knowledge to retain and acquire customers, and to deepen and enhance
relationships through tailored service. Our retail strategy is to reduce the
number of single-service customers and to increase the proportion of our
customers who not only transact, but also invest and borrow with us. Our
wholesale strategy is to provide a comprehensive array of financial solutions,
including traditional commercial lending and cash management products, and to
provide access to more sophisticated asset management and capital markets
products and services through our sales and service partnerships with Capital
Management and Capital Markets.
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Our multiple channels are fully integrated, which enables customers to have a
single view of their accounts and a choice of using our full-service retail
financial centers, direct telephone bank, ATMs or the Internet.
On an operating basis, General Bank total revenue was $1.5 billion in the first
quarter of 2001. This represented a $54 million increase from the first quarter
of 2000 largely due to a $41 million increase in fee and other income, which
reflected improved service charge income and strong debit card revenues and a
modest increase in net interest income, reflecting average loan growth of $7
billion. The $30 million decline in total revenue from the fourth quarter of
2000 reflected a $19 million decline in net interest income primarily due to
deposit spread compression. Fee and other income also declined modestly from the
fourth quarter of 2000 largely due to seasonal declines in ATM, debit card and
service charge income.
Loan growth from the first quarter of 2000 was largely due to across-the-board
growth in Consumer loans, led by home equity loans and lines of credit. The $1.8
billion increase in average commercial loans from the first quarter of 2000 to
$30 billion in the first quarter of 2001 was driven by a $1.4 billion increase
in commercial real estate loans. Average core deposits were $99 billion in the
first quarter of 2001, an increase of $983 million from the first quarter of
2000. The majority of the increase was in Consumer deposits, primarily in
interest checking, savings and money market accounts that have low funding
costs.
CAPITAL MANAGEMENT
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2001 2000
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FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
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INCOME STATEMENT DATA
Net interest income $ 78 89 87 91 90
Fee and other income 765 777 761 752 851
Intersegment revenue (12) (12) (13) (13) (13)
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Total revenue 831 854 835 830 928
Provision for loan losses -- -- -- -- --
Noninterest expense 658 650 647 619 708
Income taxes 60 70 64 72 75
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Operating earnings $ 113 134 124 139 145
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PERFORMANCE AND OTHER DATA
Economic profit $ 83 103 94 108 112
Risk adjusted return on capital (RAROC) 45.96 % 54.39 50.08 56.91 54.57
Economic capital $ 987 971 977 972 1,059
Overhead efficiency ratio 79.12 % 76.09 77.37 74.56 76.26
Average loans, net $ 4,535 4,424 4,295 4,250 4,026
Average core deposits $ 8,004 7,879 7,935 7,888 7,740
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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 three
major lines of business: Retail Brokerage Services, which includes the retail
brokerage, insurance and retail investment group; Asset Management, which
includes mutual funds and customized investment advisory services; and Wealth
and Trust Services, which includes private capital management and corporate and
institutional trust services. 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 declined $3
billion from year-end 2000 to $168 billion at March 31, 2001, reflecting
declines in market valuations principally in trust assets.
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On an operating basis, Capital Management total revenue was $831 million in the
first quarter of 2001. This represented a $97 million decline from an
exceptionally strong first quarter of 2000 , largely reflecting lower brokerage
commissions, and a $23 million decline from the fourth quarter of 2000, largely
reflecting lower market valuations. Net interest income declined $12 million
from the first quarter of 2000 to $78 million in the first quarter of 2001.
Noninterest expense declined $50 million from the first quarter of 2000 to $658
million in the first quarter of 2001 primarily reflecting decreased incentives
tied to revenue production.
Fee and other income in Retail Brokerage Services declined $89 million from the
first quarter of 2000 to $492 million in the first quarter of 2001. Brokerage
client assets decreased 4 percent from year-end 2000 to $196 billion at March
31, 2001, due to declines in the market values in equities. In the same period,
the NASDAQ Composite was down 25 percent and the S&P 500 was down 12 percent.
Asset Management fee and other income was unchanged from the first quarter of
2000 at $156 million. Despite a challenging economic environment, assets in the
First Union-advised Evergreen mutual funds increased $2 billion from year-end
2000 to $87 billion at March 31, 2001, reflecting strong fund sales,
particularly record sales of money market funds in a flight to quality in
unstable market conditions.
Wealth and Trust Services fee and other income declined $3 million from the
first quarter of 2000 to $128 million in the first quarter of 2001, also
reflecting the decline in equity market values. Wealth and Trust Services had
$4.5 billion in average net loans in the first quarter of 2001, an increase of
$507 million from the first quarter of 2000, and average deposits of $7.9
billion, an increase of $270 million from the first quarter of 2000.
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CAPITAL MARKETS
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2001 2000
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FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Net interest income $ 426 410 393 371 397
Fee and other income 312 267 362 533 544
Intersegment revenue (12) (13) (12) (12) (12)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 726 664 743 892 929
Provision for loan losses 70 124 83 126 89
Noninterest expense 467 429 529 479 454
Income taxes 39 (50) 19 72 108
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 150 161 112 215 278
==============================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AND OTHER DATA
Economic profit $ (24) 19 (52) 87 141
Risk adjusted return on capital (RAROC) 10.46 % 13.22 8.67 17.96 22.33
Economic capital $ 6,282 6,252 6,127 5,871 5,480
Overhead efficiency ratio 60.84 % 53.38 67.30 51.13 46.83
Average loans, net $ 42,642 42,325 42,452 43,069 41,560
Average core deposits $ 9,472 9,251 9,099 8,928 9,210
==============================================================================================================================
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, debt and equity
financing, and trade finance and foreign exchange for domestic customers and
correspondent financial institutions around the world.
Capital Markets has two primary lines of business:
- Investment Banking, which includes principal investing; equity
capital markets; loan syndications; high yield debt; merger
and acquisition advisory services; fixed income sales and
trading; the municipal group; foreign exchange; derivatives;
structured products; real estate capital markets; and asset
securitization; and
- Corporate Banking, which includes large corporate lending,
commercial leasing and rail, and international operations.
On an operating basis, Capital Markets total revenue was $726 million in the
first quarter of 2001. Revenue declined from the first quarter of 2000 due to a
decline in fee and other income, largely the result of a $242 million decline in
principal investing revenue. Revenue increased $62 million from the fourth
quarter of 2000 due largely to strong performance in fixed income sales and
trading. Capital Markets noninterest expense increased 3 percent from the first
quarter of 2000 to $467 million in the first quarter of 2001. The increase was
largely due to higher personnel, occupancy and other infrastructure expenses
related to Corporate Banking and equity capital markets.
Investment Banking fee and other income declined $235 million from the first
quarter of 2000 to $147 million in the first quarter of 2001, primarily as a
result of declines in principal investing revenue and results for certain agency
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businesses related to more difficult market conditions. This was offset by a
strong performance in fixed income, with revenue growth of $77 million from the
first quarter of 2000.
Results in the agency businesses were mixed. Merger and acquisition activity and
loan syndication fees were hampered by market conditions. This was somewhat
offset by improvement in high yield and equity capital markets. Results in the
structured products businesses were negatively affected by $46 million in
trading losses recorded in other income in the first quarter of 2001 resulting
from certain nonperforming securities.
Corporate Banking fee and other income increased $3 million from the first
quarter of 2000 to $165 million in the first quarter of 2001, with improved
results in international operations offset by lower corporate lending results.
International fee and other income increased 9 percent from the first quarter of
2000 to $62 million in the first quarter of 2001 as a result of improved service
charges and letters of credit 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.
PARENT Parent includes all of our asset and liability management functions.
Parent also includes restructuring, merger-related and other charges and gains;
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 divested mortgage, credit card, The
Money Store and indirect auto lending and leasing businesses.
The Funding Sources and Risk Management sections provide information about our
funding sources and asset and liability management functions.
BALANCE SHEET ANALYSIS
SECURITIES The securities portfolio, all of which was classified as securities
available for sale at March 31, 2001, consists primarily of U.S. Government
agency 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 March 31, 2001, we had securities available for sale with a
market value of $52 billion, an increase of $3 billion from December 31, 2000.
Included in securities at March 31, 2001, were residual interests with a market
value of $303 million, which included a net unrealized gain of $57 million.
These residual interests resulted from securitizations of SBA, student, auto and
home equity loans. At December 31, 2000, securities included residual interests
with a market value of $298 million, which included a net unrealized gain of $43
million.
The average rate earned on securities was 7.50 percent in the first quarter of
2001 and 7.19 percent in the first quarter of 2000. The average maturity of the
portfolio was 6.14 years at March 31, 2001.
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LOANS - ON-BALANCE SHEET
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------- ----------------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 52,687 54,207 53,325 53,870 54,082
Real estate - construction and other 3,345 3,104 2,751 2,600 2,344
Real estate - mortgage 9,187 9,218 9,286 9,239 9,275
Lease financing 16,625 15,465 13,997 13,181 12,511
Foreign 5,396 5,453 5,548 4,956 4,587
- ------------------------------------------------------------------------------------------------------------------------------
Total commercial 87,240 87,447 84,907 83,846 82,799
- ------------------------------------------------------------------------------------------------------------------------------
Consumer
Real estate - mortgage 17,678 17,708 19,108 25,204 27,528
Installment loans 23,253 22,972 22,634 21,797 26,897
Vehicle leasing 1,640 2,115 2,600 3,112 3,822
- ------------------------------------------------------------------------------------------------------------------------------
Total consumer 42,571 42,795 44,342 50,113 58,247
- ------------------------------------------------------------------------------------------------------------------------------
Total loans 129,811 130,242 129,249 133,959 141,046
Unearned income 6,958 6,482 5,830 5,600 5,243
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net (on-balance sheet) $ 122,853 123,760 123,419 128,359 135,803
==============================================================================================================================
LOANS - MANAGED PORTFOLIO
(Including on-balance sheet)
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------- ----------------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Commercial $ 94,173 93,277 90,971 89,583 88,046
Real estate - mortgage 22,692 22,274 23,621 26,394 29,361
Installment loans 50,216 50,208 50,547 54,815 54,079
Vehicle leasing 1,640 2,115 2,600 3,112 3,822
- ------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 168,721 167,874 167,739 173,904 175,308
==============================================================================================================================
LOANS Net loans were $123 billion at March 31, 2001, and $124 billion at
December 31, 2000. Commercial loans represented 67 percent and consumer loans 33
percent of the loan portfolio at March 31, 2001. Managed loans increased $847
million from December 31, 2000, to $169 billion at March 31, 2001. The average
rate earned on loans decreased 18 basis points from the first quarter of 2000 to
8.55 percent in the first quarter of 2001, which was in line with reductions in
interest rates.
At March 31, 2001, unused loan commitments related to commercial and consumer
loans were $97 billion and $28 billion, respectively. Commercial and standby
letters of credit were $13 billion. Loan participations sold to other lenders
amounted to $3.9 billion at March 31, 2001.
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ASSET QUALITY
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------- ----------------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net $ 122,853 123,760 123,419 128,359 135,803
Allowance for loan losses $ 1,759 1,722 1,720 1,706 1,760
Allowance as % of loans, net 1.43 % 1.39 1.39 1.33 1.30
Allowance as % of nonperforming assets 132 % 135 181 193 139
Net charge-offs $ 159 192 142 228 189
Net charge-offs as % of average loans, net 0.53 % 0.64 0.46 0.69 0.57
Nonperforming assets
Nonaccrual loans $ 1,231 1,176 854 791 1,175
Foreclosed properties 106 103 97 93 95
Loans held for sale 344 334 349 331 30
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,681 1,613 1,300 1,215 1,300
- ------------------------------------------------------------------------------------------------------------------------------
Nonperforming assets to loans, net,
foreclosed properties and assets held for sale 1.30 % 1.22 0.98 0.87 0.92
==============================================================================================================================
NONPERFORMING ASSETS At March 31, 2001, nonperforming assets were $1.7 billion,
an increase of $68 million from December 31, 2000. This included $344 million in
nonperforming loans in assets held for sale. As a percentage of net loans,
foreclosed properties and assets held for sale, nonperforming assets were 1.30
percent at March 31, 2001, and 1.22 percent at December 31, 2000. We continue to
expect nonperforming assets to increase during 2001 in line with industry
trends.
Nonperforming loans reduce interest income because the contribution from these
loans is eliminated or sharply reduced. In the first quarter of 2001, $46
million 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). The amount of interest income
recorded on these loans in the first quarter of 2001 was $4 million.
Impaired loans, which are included in nonperforming loans, amounted to $1.1
billion at March 31, 2001, and $923 million at December 31, 2000. Included in
the allowance for loan losses at March 31, 2001, was $132 million related to
$655 million of impaired loans. The remaining impaired loans were recorded at or
below either fair value or the present value of expected future cash flows. In
the first quarter of 2001, the average recorded investment in impaired loans was
$943 million, and $4 million of interest income was recognized on impaired
loans. This income was recognized using the cash-basis method of accounting.
PAST DUE LOANS Accruing loans 90 days or more past due, excluding loans that are
classified as assets held for sale, amounted to $220 million at March 31, 2001,
and $183 million at December 31, 2000. Of these past due loans at March 31,
2001, $25 million were commercial loans or commercial real estate loans and $195
million were consumer loans. Loans 30 to 89 days past due were $674 million at
March 31, 2001. The increase in past due loans in both periods consisted
primarily of residential real estate loans.
NET CHARGE-OFFS Net charge-offs declined $30 million from the first quarter of
2000 to $159 million in the first quarter of 2001. This reflected a $40 million
decline in consumer charge-offs primarily related to the sale of the credit card
portfolio, partially offset by a $10 million increase in charge-offs in the
commercial portfolio in the first quarter of 2001. Net charge-offs were 0.53
percent of average net loans in the first quarter of 2001 and 0.57 percent in
the first quarter of 2000.
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses increased
$27 million from the first quarter of 2000 to $219 million in the first quarter
of 2001, including a $15 million provision related to the transfer of
nonperforming loans to assets held for sale. The provision related to the
transfer of loans was recorded to reduce the carrying value of these loans to
their respective fair values.
The allowance for loan losses was $1.8 billion at March 31, 2001, and $1.7
billion at December 31, 2000. The allowance as a percentage of net loans was
1.43 percent at March 31, 2001, and 1.39 percent at December 31, 2000.
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Loans transferred to assets held for sale are recorded 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.
ASSETS HELD FOR SALE In the first quarter of 2001, we securitized $3.2 billion
of The Money Store home equity loans that had been classified as held for sale.
In connection with this securitization, we retained as securities available for
sale $754 million of investment grade securities, $129 million of non-investment
grade securities and $34 million of residual interests. We also sold $158
million of commercial loans from assets held for sale. Of the $7.9 billion of
loans that were transferred to assets held for sale in the second and third
quarters of 2000 in connection with the strategic repositioning, $689 million
remained in assets held for sale at March 31, 2001.
FUNDING SOURCES
CORE DEPOSITS Core deposits were $121 billion at March 31, 2001, a decline of
$1.6 billion from December 31, 2000. Average core deposits increased modestly
from year-end 2000 excluding a $1.8 billion impact from the divestiture of
deposits in the first quarter of 2001 and fourth quarter of 2000.
Our renewed focus on gathering deposits has stemmed a negative growth trend of
the previous two years, and led to deposit growth in low cost core deposits in
the first quarter of 2001, offsetting a decline in consumer CD balances. We also
continue to meet customer demand for alternative investment products or
deposits, depending on customers' needs.
In the first quarters of 2001 and 2000, average noninterest-bearing deposits
were 23 percent and 24 percent, respectively, of average core deposits.
The portion of core deposits in higher-rate, other consumer time deposits was 28
percent at March 31, 2001, and 29 percent at December 31, 2000. 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 $56 billion in the first quarter of 2001
and $70 billion in the first quarter of 2000. The decrease from the first
quarter of 2000 was due to lower funding needs, primarily the result of the sale
of $13 billion in securities in connection with our strategic repositioning.
Purchased funds at March 31, 2001, and at December 31, 2000, were $60 billion.
LONG-TERM DEBT Long-term debt was $36 billion at March 31, 2001, and at December
31, 2000. In 2001, scheduled maturities of long-term debt amount to $9.7
billion. We anticipate rolling over these obligations.
Long-term debt included $2 billion of trust capital securities at March 31,
2001, and at December 31, 2000. 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, $18 billion of long-term debt has been
issued and was outstanding at March 31, 2001. 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
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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 $16 billion at March 31, 2001, and $15 billion at
December 31, 2000. Common shares outstanding amounted to 981 million at March
31, 2001, and 980 million at December 31, 2000. In the first quarter of 2001, we
repurchased 2 million shares at a cost of $105 million under a forward purchase
contract. At March 31, 2001, we had authority to repurchase up to 102 million
shares of our common stock. In the first quarter of 2000, we repurchased 7
million shares of common stock at a cost of $221 million. Since April 16, 2001
(the date on which the proposed merger of Wachovia and First Union was
announced), Wachovia and its affiliates have purchased approximately $18 million
of First Union common stock in the open market. Wachovia and its affiliates may
continue to purchase First Union common stock from time to time in the future
consistent with applicable legal and regulatory requirements.
At March 31, 2001, we had equity forward contracts outstanding involving 13
million shares at an aggregate cost of $600 million and forward purchase
contracts outstanding involving 27 million shares at an aggregate cost of $971
million. These contracts mature at various times in 2001 and 2002 and can be
extended by mutual consent of the counterparties. In the first quarter of 2001,
we settled a forward purchase contract by purchasing 2 million shares at a cost
of $105 million, and we settled a contract for 4 million shares on a net shares
basis resulting in no net repurchase of shares. The forward price of the shares
subject to equity forward and forward purchase contracts is the share price at
the inception of the contract plus a premium that accrues over the life of the
contract, net of dividends paid to the counterparty.
In calculating diluted earnings per share, the premium component of the forward
price on equity forward contracts is subtracted in calculating income available
to common stockholders. For forward purchase contracts, diluted shares include
the share equivalent of the excess of the forward price over the current market
price of the shares. In the first quarter of 2001, this had the effect of
reducing diluted earnings per share by one cent. We anticipate that the impact
of outstanding contracts on diluted earnings per share for 2001 will be
approximately 3 cents.
We paid $235 million in dividends to common stockholders in the first quarter of
2001 and $478 million in the first quarter of 2000. The decline from the first
quarter of 2000 reflected a 50 percent reduction in the dividend rate to 24
cents per share, effective with the March 2001 dividend. This represented a
dividend payout ratio on operating earnings of 38.71 percent in the first
quarter of 2001 and 56.47 percent in the first quarter of 2000.
At March 31, 2001, stockholders' equity included $222 million in accumulated
other comprehensive income, net, of which $145 million was related to the impact
of derivative instruments, which are discussed further in the Risk Management
and Accounting and Regulatory Matters sections.
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 March 31,
2001, our subsidiaries had $934 million available for dividends that could be
paid without prior regulatory approval. Our subsidiaries paid $379 million in
dividends to the parent company in the first quarter of 2001.
REGULATORY CAPITAL At March 31, 2001, our tier 1 and total capital ratios were
7.18 percent and 11.33 percent, respectively, and 6.94 percent and 10.67
percent, respectively, at March 31, 2000. Our leverage ratio at March 31, 2001,
was 5.88 percent and at March 31, 2000, 5.94 percent. At March 31, 2001, our
deposit-taking subsidiary banks met the capital and leverage ratio requirements
for well capitalized banks.
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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.
All of our credit, market and operational risk management activities are
combined 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
Committee of the Board of Directors has oversight of the broad risk policies and
practices adopted by the senior management committees. The policies, strategies
and methodologies underlying our management of credit, market, operational,
liquidity and interest rate risk are discussed in more detail in our 2000 Annual
Report on Form 10-K. Our credit risk management activities are addressed in the
Asset Quality section.
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
policies provided for a 1-day VAR limit of $30 million for the first quarter of
2001.
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 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 $10 million at March 31, 2001, and $15
million at December 31, 2000, and primarily related to interest rate risk and
equity risk. The high, low and average VARs in the first quarter of 2001 were
$25 million, $8 million and $12 million, respectively.
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 combinations of 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 5.00 percent through March 2002. Based on our March 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), our earnings
sensitivity
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model indicates earnings during the policy measurement period would be
negatively affected by 3.1 percent. Our model indicates that earnings would
benefit by 2.5 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 4.75 percent by the end
of March 2002. 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 3.1 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
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 12-month policy period. For example, based on our March 2001
outlook, if interest rates remain consistent with our "market rate" scenario
until March 1, 2002, and then decrease by 200 basis points during 2002, earnings
in 2002 would benefit by 0.1 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.
DERIVATIVE INSTRUMENTS USED 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 hedge certain assets, liabilities and forecasted
transactions. 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 other financial assets and liabilities.
On January 1, 2001, we adopted Statement of Financial Accounting Standard (SFAS)
No. 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. The Accounting and Regulatory
Matters section provides more information on SFAS 133. In anticipation of
adopting this standard, we repositioned our portfolio of risk management
derivatives in 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.
At March 31, 2001, the fair value of derivatives used to manage our interest
rate sensitivity was $626 million, based on a notional amount of $147 billion,
and $761 million, based on a notional amount of $176 billion, at December 31,
2000. The net impact of hedge-related derivatives on the results of operations
in the first quarter of 2001 amounted to a 14 basis point contribution to net
interest margin and a net loss of $2 million in other fee income.
Although derivatives do not expose us to credit risk equal to the notional
amount, we are exposed to credit risk equal to the extent of the fair value gain
in a derivative 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 March
31, 2001, the total mark-to-market related credit risk for derivative
transactions in excess of counterparty thresholds was $1.0 billion. 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.
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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 were 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, which was amended by SFAS 137 and SFAS 138. These standards
establish the accounting and reporting model 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").
On January 1, 2001, we recorded the cumulative effect of adopting SFAS 133,
which consisted of two components, one included in the results of operations and
the other in other comprehensive income. The cumulative effect included in the
results of operations 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 included the fair
value of freestanding derivatives and certain derivatives that are embedded in
other contracts. This cumulative effect of adopting SFAS 133 that was recognized
in the results of operations on January 1, 2001, amounted to a $3 million
after-tax gain.
The cumulative effect of adopting SFAS 133 that was included in other
comprehensive income on January 1, 2001, represented the fair value of all
derivatives that were designated as cash flow hedges, which amounted to a net
after-tax unrealized gain of $138 million, and the net after-tax unrealized gain
related to the securities that were reclassified to securities available for
sale was $53 million.
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.
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 non-affiliated third parties unless customers
have the opportunity to "opt out" of the disclosure.
Various 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.
18
21
TABLE 1
SELECTED STATISTICAL DATA
- -------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ ---------------------------------------------
FIRST Fourth Third Second First
(Dollars in millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
PROFITABILITY (a)
Diluted earnings per share $ 0.62 0.69 0.71 0.73 0.85
Diluted earnings per share - cash earnings $ 0.69 0.76 0.79 0.82 0.95
Return on average stockholders' equity 15.64 % 15.36 15.76 17.74 20.31
Return on average tangible stockholders' equity - cash earnings 22.91 21.55 22.15 30.18 34.03
Net interest margin (b) 3.42 3.46 3.52 3.51 3.69
Fee and other income as % of total revenue 47.13 47.38 46.93 47.50 48.08
Overhead efficiency ratio - cash earnings 62.80 % 61.46 64.17 61.64 59.65
Operating leverage - cash earnings (c) $ (67) 31 (154) (136) (13)
Effective income tax rate 31.54 % 31.21 30.43 32.45 31.81
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
Tier 1 capital ratio 7.18 % 7.02 7.00 6.65 6.94
Total capital ratio 11.33 % 11.19 11.32 10.57 10.67
- -------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Allowance as % of loans, net 1.43 % 1.39 1.39 1.33 1.30
Allowance as % of nonperforming assets (d) 132 135 181 193 139
Net charge-offs as % of average loans, net 0.53 0.64 0.46 0.69 0.57
Nonperforming assets as % of loans, net,
foreclosed properties and assets held for sale 1.30 % 1.22 0.98 0.87 0.92
- -------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Employees 69,368 69,971 70,533 72,890 72,016
Branches 2,164 2,193 2,253 2,258 2,305
ATMs 3,676 3,772 3,831 3,832 3,786
Shares outstanding (In thousands) 981,268 979,963 986,004 986,394 984,148
Common stock price $ 33.00 27.81 32.19 25.00 37.25
Market capitalization $ 32,382 27,253 31,739 24,660 36,660
=========================================================================================================================
(a) Based on operating earnings.
(b) Tax-equivalent.
(c) Incremental change on a quarter-to-quarter 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.
19
22
TABLE 2
SUMMARY INCOME, PER SHARE AND BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 4,025 4,264 4,465 4,492 4,313
======================================================================================================================
Interest income (a) $ 4,057 4,289 4,491 4,517 4,336
Interest expense 2,323 2,532 2,631 2,587 2,347
- ----------------------------------------------------------------------------------------------------------------------
Net interest income (a) 1,734 1,757 1,860 1,930 1,989
Provision for loan losses 219 192 322 1,030 192
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 1,515 1,565 1,538 900 1,797
Securities transactions - portfolio (16) (72) (456) (581) (16)
Fee and other income 1,590 1,825 2,639 1,515 1,858
Restructuring and merger-related charges 2 33 52 2,110 (5)
Other noninterest expense 2,207 2,344 2,396 2,393 2,387
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) and
cumulative effect of a change in accounting
principle (a) 880 941 1,273 (2,669) 1,257
Income taxes (benefits) 264 271 395 (495) 394
Tax-equivalent adjustment 32 25 26 25 23
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in
accounting principle 584 645 852 (2,199) 840
Cumulative effect of a change in the accounting for
beneficial interests, net of tax - (46) - - -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 584 599 852 (2,199) 840
======================================================================================================================
PER SHARE DATA
Basic
Income (loss) before change in accounting principle $ 0.60 0.66 0.87 (2.27) 0.86
Net income (loss) 0.60 0.61 0.87 (2.27) 0.86
Diluted
Income (loss) before change in accounting principle 0.59 0.65 0.86 (2.27) 0.85
Net income (loss) 0.59 0.60 0.86 (2.27) 0.85
Cash dividends $ 0.24 0.48 0.48 0.48 0.48
Average shares - Basic (In thousands) 967,671 969,097 971,453 969,707 972,174
Average shares - Diluted (In thousands) 975,847 990,445 986,763 981,940 984,095
Average stockholders' equity
Quarter-to-date $ 15,846 14,753 14,236 16,614 16,583
Year-to-date 15,846 15,541 15,805 16,599 16,583
Book value 16.39 15.66 15.00 14.14 17.16
Common stock price
High 34.09 34.13 32.63 38.88 37.94
Low 27.81 24.00 25.00 25.00 28.44
Period-end $ 33.00 27.81 32.19 25.00 37.25
To earnings ratio (b) (150.00)X 397.29 107.30 89.29 10.80
To book value 201 % 178 215 177 217
BALANCE SHEET DATA
Assets $ 252,949 254,170 246,640 257,994 253,648
Long-term debt $ 36,092 35,809 36,258 33,140 33,043
======================================================================================================================
(a) Tax-equivalent.
(b) Based on diluted earnings per share.
20
23
TABLE 3
RESTRUCTURING CHARGES
- -----------------------------------------------------------------------------------------------------------------------
THREE
MONTHS
ENDED
MARCH 31,
(In millions) 2001
- -----------------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES (Includes merger-related charges)
Employee termination benefits $ 2
Other asset impairments (1)
Contract cancellations (1)
- -----------------------------------------------------------------------------------------------------------------------
Total restructuring charges -
Reversal of restructuring accruals related primarily to employee
termination benefits (14)
- -----------------------------------------------------------------------------------------------------------------------
Net restructuring charges (14)
Merger-related charges 16
- -----------------------------------------------------------------------------------------------------------------------
Total $ 2
=======================================================================================================================
2000 March 1999
Strategic Restructuring CoreStates
(In millions) Repositioning Charge Acquisition Other Total
- -----------------------------------------------------------------------------------------------------------------------
ACTIVITY IN THE RESTRUCTURING
ACCRUAL
Balance, December 31, 2000 $ 249 30 33 30 342
Cash payments (34) (1) - (2) (37)
Reversal of prior accruals - (14) - - (14)
Noncash write-downs and
other adjustments (14) (1) - - (15)
- -----------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $ 201 14 33 28 276
=======================================================================================================================
21
24
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
GENERAL BANK COMBINED (a)
Net interest income $ 1,085 1,104 1,100 1,090 1,071
Fee and other income 340 351 347 295 299
Intersegment revenue 25 25 24 25 26
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 1,450 1,480 1,471 1,410 1,396
Provision for loan losses 101 73 51 46 38
Noninterest expense 908 970 926 945 925
Income taxes 149 142 163 137 142
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 292 295 331 282 291
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 36.62 % 33.44 33.97 29.01 30.55
Overhead efficiency ratio 61.41 % 63.99 61.56 65.51 64.78
Economic profit $ 218 198 214 165 173
Average loans, net 63,596 61,735 60,029 58,105 56,491
Average core deposits 98,535 98,184 97,186 97,499 97,552
Economic capital $ 3,586 3,692 3,897 3,918 3,766
======================================================================================================================
CONSUMER
Net interest income $ 756 757 760 758 737
Fee and other income 259 268 252 232 218
Intersegment revenue 12 12 12 13 13
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 1,027 1,037 1,024 1,003 968
Provision for loan losses 59 34 31 25 25
Noninterest expense 696 728 710 717 708
Income taxes 94 94 97 90 80
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 178 181 186 171 155
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 42.35 % 40.08 36.84 33.05 32.83
Overhead efficiency ratio 66.60 % 69.01 68.11 70.26 71.83
Economic profit $ 146 134 132 114 103
Average loans, net 33,300 32,136 30,765 29,324 27,779
Average core deposits 80,249 79,897 79,504 79,838 79,553
Economic capital $ 1,955 1,914 2,129 2,188 2,007
======================================================================================================================
(a) General Bank Combined represents the consolidation of the General Bank's
Consumer, Commercial and Small Business lines of business.
(Continued)
22
25
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
======================================================================================================================
COMMERCIAL
Net interest income $ 170 177 170 169 174
Fee and other income 29 30 27 26 32
Intersegment revenue 12 13 12 12 12
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 211 220 209 207 218
Provision for loan losses 21 30 16 18 9
Noninterest expense 127 156 134 144 135
Income taxes 18 4 15 9 20
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 45 30 44 36 54
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 15.47 % 10.46 12.14 10.31 13.79
Overhead efficiency ratio 58.06 % 66.93 61.75 66.21 59.48
Economic profit $ 10 (5) - (5) 6
Average loans, net 22,976 22,472 22,076 21,926 22,047
Average core deposits 9,601 9,267 8,708 8,767 9,184
Economic capital $ 1,114 1,247 1,227 1,219 1,249
======================================================================================================================
SMALL BUSINESS
Net interest income $ 159 170 170 163 160
Fee and other income 52 53 68 37 49
Intersegment revenue 1 - - - 1
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 212 223 238 200 210
Provision for loan losses 21 9 4 3 4
Noninterest expense 85 86 82 84 82
Income taxes 37 44 51 38 42
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 69 84 101 75 82
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 60.52 % 63.41 72.20 56.30 62.70
Overhead efficiency ratio 39.65 % 38.53 34.18 42.02 39.04
Economic profit $ 62 69 82 56 64
Average loans, net 7,320 7,127 7,188 6,855 6,665
Average core deposits 8,685 9,020 8,974 8,894 8,815
Economic capital $ 517 531 541 511 510
======================================================================================================================
(Continued)
23
26
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT COMBINED (a)
Net interest income $ 78 89 87 91 90
Fee and other income 765 777 761 752 851
Intersegment revenue (12) (12) (13) (13) (13)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 831 854 835 830 928
Provision for loan losses - - - - -
Noninterest expense 658 650 647 619 708
Income taxes 60 70 64 72 75
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 113 134 124 139 145
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 45.96 % 54.39 50.08 56.91 54.57
Overhead efficiency ratio 79.12 % 76.09 77.37 74.56 76.26
Economic profit $ 83 103 94 108 112
Average loans, net 4,535 4,424 4,295 4,250 4,026
Average core deposits 8,004 7,879 7,935 7,888 7,740
Economic capital 987 971 977 972 1,059
Assets under management $ 168,343 170,730 173,145 165,630 175,000
======================================================================================================================
RETAIL BROKERAGE SERVICES
Net interest income $ 36 41 38 38 39
Fee and other income 492 491 480 485 581
Intersegment revenue (11) (12) (12) (13) (13)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 517 520 506 510 607
Provision for loan losses - - - - -
Noninterest expense 451 442 446 424 512
Income taxes 23 27 21 29 32
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 43 51 39 57 63
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 26.57 % 32.01 23.99 35.70 34.29
Overhead efficiency ratio 87.39 % 84.95 88.26 82.95 84.21
Economic profit $ 23 32 19 38 41
Average loans, net 1 - 1 - 1
Average core deposits 104 79 70 74 116
Economic capital $ 650 640 646 645 739
======================================================================================================================
ASSET MANAGEMENT
Net interest income $ (11) (9) (8) (6) (5)
Fee and other income 156 162 164 152 156
Intersegment revenue - - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 145 153 156 146 151
Provision for loan losses - - - - -
Noninterest expense 89 95 88 87 91
Income taxes 20 20 23 20 21
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 36 38 45 39 39
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 121.77 % 121.95 142.18 128.70 131.45
Overhead efficiency ratio 61.62 % 61.87 56.49 59.37 60.43
Economic profit $ 33 35 41 35 36
Average loans, net 1 - - - -
Average core deposits 5 - - - -
Economic capital $ 121 125 125 122 120
======================================================================================================================
(a) Capital Management Combined represents the consolidation of Capital
Management's Retail Brokerage Services, Asset Management, and Wealth and Trust
Services lines of business, and Other, which primarily serves to eliminate
intersegment revenue.
(Continued)
24
27
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
======================================================================================================================
WEALTH AND TRUST SERVICES
Net interest income $ 52 55 56 57 55
Fee and other income 128 133 130 129 131
Intersegment revenue (1) (1) (1) (1) (1)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 179 187 185 185 185
Provision for loan losses - - - - -
Noninterest expense 127 122 121 118 124
Income taxes 18 21 22 23 20
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 34 44 42 44 41
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 61.62 % 79.97 77.82 84.15 77.49
Overhead efficiency ratio 70.46 % 64.94 65.45 63.47 66.71
Economic profit $ 27 36 34 37 33
Average loans, net 4,533 4,423 4,295 4,249 4,026
Average core deposits 7,895 7,800 7,865 7,814 7,625
Economic capital $ 218 209 208 207 205
======================================================================================================================
OTHER
Net interest income $ 1 2 1 2 1
Fee and other income (11) (9) (13) (14) (17)
Intersegment revenue - 1 - 1 1
- ----------------------------------------------------------------------------------------------------------------------
Total revenue (10) (6) (12) (11) (15)
Provision for loan losses - - - - -
Noninterest expense (9) (9) (8) (10) (19)
Income taxes (1) 2 (2) - 2
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ - 1 (2) (1) 2
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital - % - - - -
Overhead efficiency ratio - % - - - -
Economic profit $ - - - (2) 2
Average loans, net - 1 (1) 1 (1)
Average core deposits - - - - (1)
Economic capital $ (2) (3) (2) (2) (5)
======================================================================================================================
(Continued)
25
28
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL MARKETS COMBINED (a)
Net interest income $ 426 410 393 371 397
Fee and other income 312 267 362 533 544
Intersegment revenue (12) (13) (12) (12) (12)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 726 664 743 892 929
Provision for loan losses 70 124 83 126 89
Noninterest expense 467 429 529 479 454
Income taxes 39 (50) 19 72 108
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 150 161 112 215 278
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 10.46 % 13.22 8.67 17.96 22.33
Overhead efficiency ratio 60.84 % 53.38 67.30 51.13 46.83
Economic profit $ (24) 19 (52) 87 141
Average loans, net 42,642 42,325 42,452 43,069 41,560
Average core deposits 9,472 9,251 9,099 8,928 9,210
Economic capital $ 6,282 6,252 6,127 5,871 5,480
======================================================================================================================
INVESTMENT BANKING
Net interest income $ 83 62 51 44 64
Fee and other income 147 100 202 377 382
Intersegment revenue (4) (4) (2) (2) (3)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 226 158 251 419 443
Provision for loan losses (1) 1 3 12 33
Noninterest expense 228 207 269 255 232
Income taxes (26) (105) (33) 26 37
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 25 55 12 126 141
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 3.03 % 7.92 1.76 22.06 29.73
Overhead efficiency ratio 86.07 % 69.59 91.32 54.87 48.04
Economic profit $ (61) (27) (67) 60 95
Average loans, net 5,775 6,554 6,557 6,707 6,928
Average core deposits 2,002 1,866 1,737 1,625 1,562
Economic capital $ 2,752 2,645 2,598 2,384 2,145
======================================================================================================================
CORPORATE BANKING
Net interest income $ 343 348 342 327 333
Fee and other income 165 167 160 156 162
Intersegment revenue (8) (9) (10) (10) (9)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 500 506 492 473 486
Provision for loan losses 71 123 80 114 56
Noninterest expense 239 222 260 224 222
Income taxes 65 55 52 46 71
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 125 106 100 89 137
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 16.25 % 17.10 13.75 15.16 17.56
Overhead efficiency ratio 47.47 % 43.83 52.95 47.46 45.64
Economic profit $ 37 46 15 27 46
Average loans, net 36,867 35,771 35,895 36,362 34,632
Average core deposits 7,470 7,385 7,362 7,303 7,648
Economic capital $ 3,530 3,607 3,529 3,487 3,335
======================================================================================================================
(a) Capital Markets Combined represents the consolidation of Capital Markets'
Investment Banking and Corporate Banking lines of business.
(Continued)
26
29
TABLE 4
BUSINESS SEGMENTS
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
PARENT
Net interest income $ 113 129 254 353 408
Fee and other income 129 187 175 166 148
Intersegment revenue (1) - 1 - (1)
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 241 316 430 519 555
Provision for loan losses 48 (5) 8 56 65
Noninterest expense 105 83 226 323 300
Income taxes 33 147 61 62 66
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings $ 55 91 135 78 124
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 35.35 % 34.40 40.97 25.16 40.63
Overhead efficiency ratio 18.91 % 2.25 36.62 45.77 37.47
Economic profit $ 94 90 137 89 154
Average loans, net 9,077 11,609 16,699 27,190 29,404
Average core deposits 2,181 3,630 3,854 3,941 3,570
Economic capital $ 1,651 1,590 1,881 2,708 2,174
======================================================================================================================
CONSOLIDATED
Net interest income $ 1,702 1,732 1,834 1,905 1,966
Fee and other income 1,546 1,582 1,645 1,746 1,842
Intersegment revenue - - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 3,248 3,314 3,479 3,651 3,808
Provision for loan losses 219 192 142 228 192
Noninterest expense 2,138 2,132 2,328 2,366 2,387
Income taxes 281 309 307 343 391
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings 610 681 702 714 838
- ----------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring, merger-related
and other charges/gains
Provision for loan losses - - (180) (802) -
Fee and other income 28 171 538 (812) -
Noninterest expense (71) (245) (120) (2,137) 5
Income tax benefit (expense) 17 38 (88) 838 (3)
- ----------------------------------------------------------------------------------------------------------------------
After-tax restructuring, merger-
related and other charges/gains (26) (36) 150 (2,913) 2
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of a change in accounting
principle 584 645 852 (2,199) 840
Cumulative effect of a change in
the accounting for beneficial
interests, net of tax - (46) - - -
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 584 599 852 (2,199) 840
- ----------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 24.05 % 25.08 24.18 25.43 30.73
Overhead efficiency ratio 62.80 % 61.46 64.17 61.64 59.65
Economic profit $ 371 410 393 449 580
Average loans, net 119,850 120,093 123,475 132,614 131,481
Average core deposits 118,192 118,944 118,074 118,256 118,072
Economic capital $ 12,506 12,505 12,882 13,469 12,479
======================================================================================================================
27
30
TABLE 5
FEE AND OTHER INCOME - CAPITAL MARKETS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT BANKING
Agency $ 44 120 86 116 111
Principal investing (43) (43) 34 205 199
Fixed income 165 87 93 74 88
Affordable housing (19) (64) (11) (18) (16)
- ------------------------------------------------------------------------------------------------------------------------
Total 147 100 202 377 382
Intersegment revenue (4) (4) (2) (2) (3)
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Banking Unit 143 96 200 375 379
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BANKING
Lending 58 70 62 34 60
Leasing 45 37 35 63 45
International 62 60 63 59 57
- ------------------------------------------------------------------------------------------------------------------------
Total 165 167 160 156 162
Intersegment revenue (8) (9) (10) (10) (9)
- ------------------------------------------------------------------------------------------------------------------------
Total Corporate Banking Unit 157 158 150 146 153
- ------------------------------------------------------------------------------------------------------------------------
Total fee and other income - Capital Markets $ 300 254 350 521 532
========================================================================================================================
(a) The aggregate amounts of trading account profits included in this table in
the first quarter of 2001 and in the fourth, third, second and first quarters of
2000 were $83 million, $57 million, $70 million, $73 million and $98 million,
respectively.
TABLE 6
SELECTED RATIOS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 15.49 X 16.23 17.34 15.38 14.97
Return on assets 0.97 % 1.00 1.37 (3.46) 1.36
Return on stockholders' equity 14.95 % 16.15 23.81 (53.24) 20.38
========================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings 38.71 % 69.57 67.42 65.75 56.47
Net income (b) 40.68 % 80.00 55.59 - 56.47
========================================================================================================================
OTHER RATIOS
Operating earnings
Return on assets 1.01 % 1.12 1.12 1.13 1.36
Return on stockholders' equity 15.64 % 15.36 15.76 17.74 20.31
========================================================================================================================
(a) Based on average balances and net income.
(b) Dividend payout ratios are not presented for periods in which there is a net
loss.
28
31
TABLE 7
SECURITIES (a)
- -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
----------------------------------------------------------------------------------------------------
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 $ - 2 2 243 247 - 13 260 26.40
U.S. Government agencies 40 13,302 12,579 - 25,921 161 263 26,023 5.61
Asset-backed 65 10,620 6,036 338 17,059 214 19 16,864 4.35
State, county and municipal 37 150 350 1,446 1,983 166 2 1,819 21.87
Sundry 319 589 3,951 1,459 6,318 67 85 6,336 8.11
- -----------------------------------------------------------------------------------------------------------------------
Total market value $ 461 24,663 22,918 3,486 51,528 608 382 51,302 6.14
===================================================================================================================================
MARKET VALUE
Debt securities $ 461 24,663 22,916 2,347 50,387 602 361 50,146
Equity securities - - 2 1,139 1,141 6 21 1,156
- -----------------------------------------------------------------------------------------------------------------------
Total market value $ 461 24,663 22,918 3,486 51,528 608 382 51,302
=======================================================================================================================
AMORTIZED COST
Debt securities $ 460 24,412 22,995 2,280 50,147
Equity securities - - 2 1,153 1,155
- --------------------------------------------------------------------------------------
Total amortized cost $ 460 24,412 22,997 3,433 51,302
======================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury - % 4.98 8.04 5.33 5.34
U.S. Government agencies 6.80 6.92 6.35 - 6.64
Asset-backed 10.44 9.32 7.17 8.13 8.54
State, county and municipal 8.72 9.85 10.84 7.13 7.98
Sundry 8.38 7.52 7.54 5.56 7.11
Consolidated 8.56 % 7.98 6.83 6.41 7.36
======================================================================================
(a) At March 31, 2001, all securities are classified as available for sale.
Securities with an aggregate amortized cost of $25.6 billion at March 31,
2001, 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" are $3.5 billion of securities denominated in
currencies other than the U.S. dollar. These securities had a weighted average
maturity of 8.71 years and a weighted average yield of 6.91 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 March 31, 2001, there were forward commitments to purchase securities at
a cost which approximates a market value of $47 million, and commitments to sell
securities at a cost which approximates a market value of $47 million.
Gross gains and losses realized on the sale of debt securities for the three
months ended March 31, 2001, were $44 million and $42 million, respectively, and
gross gains and losses realized on equity securities were $3 million and $21
million, respectively.
29
32
TABLE 8
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET LOAN PORTFOLIO
COMMERCIAL
Commercial, financial and agricultural $ 52,687 54,207 53,325 53,870 54,082
Real estate - construction and other 3,345 3,104 2,751 2,600 2,344
Real estate - mortgage 9,187 9,218 9,286 9,239 9,275
Lease financing 16,625 15,465 13,997 13,181 12,511
Foreign 5,396 5,453 5,548 4,956 4,587
- --------------------------------------------------------------------------------------------------------------------
Total commercial 87,240 87,447 84,907 83,846 82,799
- --------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 17,678 17,708 19,108 25,204 27,528
Installment loans (a) 23,253 22,972 22,634 21,797 26,897
Vehicle leasing 1,640 2,115 2,600 3,112 3,822
- --------------------------------------------------------------------------------------------------------------------
Total consumer 42,571 42,795 44,342 50,113 58,247
- --------------------------------------------------------------------------------------------------------------------
Total loans 129,811 130,242 129,249 133,959 141,046
Unearned income 6,958 6,482 5,830 5,600 5,243
- --------------------------------------------------------------------------------------------------------------------
Loans, net (on-balance sheet) $ 122,853 123,760 123,419 128,359 135,803
====================================================================================================================
MANAGED PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL
On-balance sheet loan portfolio $ 87,240 87,447 84,907 83,846 82,799
Securitized loans - off-balance sheet 2,190 2,259 1,117 1,139 1,173
Securitized loans included in other assets 3,447 2,618 2,953 2,220 1,879
Loans held for sale included in other assets 1,296 953 1,994 2,378 2,195
- --------------------------------------------------------------------------------------------------------------------
Total commercial 94,173 93,277 90,971 89,583 88,046
- --------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage
On-balance sheet loan portfolio 17,678 17,708 19,108 25,204 27,528
Securitized loans included in securities 3,081 3,455 3,711 408 492
Loans held for sale included in other assets 1,933 1,111 802 782 1,341
- --------------------------------------------------------------------------------------------------------------------
Total real estate - mortgage 22,692 22,274 23,621 26,394 29,361
- --------------------------------------------------------------------------------------------------------------------
Installment loans (a)
On-balance sheet loan portfolio 23,253 22,972 22,634 21,797 26,897
Securitized loans - off-balance sheet 13,229 11,862 11,883 16,342 17,259
Securitized loans included in securities 10,173 9,292 9,735 9,200 8,584
Loans held for sale included in other assets 3,561 6,082 6,295 7,476 1,339
- --------------------------------------------------------------------------------------------------------------------
Total installment loans 50,216 50,208 50,547 54,815 54,079
- --------------------------------------------------------------------------------------------------------------------
Vehicle leasing - on-balance sheet loan portfolio 1,640 2,115 2,600 3,112 3,822
- --------------------------------------------------------------------------------------------------------------------
Total consumer 74,548 74,597 76,768 84,321 87,262
- --------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 168,721 167,874 167,739 173,904 175,308
====================================================================================================================
SERVICING PORTFOLIO
Commercial $ 38,343 31,028 29,739 29,000 28,985
Consumer $ 2,123 2,964 1,352 37,722 37,108
====================================================================================================================
(a) Installment loans include credit card, instant cash reserve, signature and
First Choice.
30
33
TABLE 9
LOANS HELD FOR SALE
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
2000 STRATEGIC REPOSITIONING
Balance, beginning of period $ 4,263 4,983 6,326 - -
Loans transferred to assets held for sale - - 719 7,182 -
Allowance for loan losses related to loans transferred
to assets held for sale - 2 (166) (856) -
Lower of cost or market valuation adjustments (50) (111) - - -
Loans sold (3,327) (289) (1,756) - -
Other, net (a) (197) (322) (140) - -
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period 689 4,263 4,983 6,326 -
- ------------------------------------------------------------------------------------------------------------------------
OTHER (B)
Balance, beginning of period 3,883 4,108 4,310 4,875 4,866
Originations 4,773 2,701 2,495 1,568 1,781
Loans transferred from assets held for sale, net 282 (556) (24) (515) (298)
Allowance for loan losses related to loans transferred
to assets held for sale (23) - - - -
Lower of cost or market valuation adjustments (30) (33) (46) (53) (31)
Loans sold (2,628) (2,204) (2,587) (1,408) (1,397)
Other, net (a) (156) (133) (40) (157) (46)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period 6,101 3,883 4,108 4,310 4,875
- ------------------------------------------------------------------------------------------------------------------------
Loans held for sale, end of period $ 6,790 8,146 9,091 10,636 4,875
========================================================================================================================
(a) Other, net represents primarily loan payments.
(b) Other, net includes primarily student, mortgage warehouse, home equity and
syndication loans.
31
34
TABLE 10
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------
2001 2000
------------ ------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $ 1,722 1,720 1,706 1,760 1,757
Provision for loan losses 219 192 322 1,030 192
Allowance relating to loans transferred
to other assets or sold (23) 2 (166) (856) -
Loan losses, net (159) (192) (142) (228) (189)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,759 1,722 1,720 1,706 1,760
==================================================================================================================
as a % of loans, net 1.43 % 1.39 1.39 1.33 1.30
==================================================================================================================
as a % of nonaccrual and restructured loans (a) 143 % 146 202 215 150
==================================================================================================================
as a % of nonperforming assets (a) 132 % 135 181 193 139
==================================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 121 159 108 157 107
Real estate - commercial construction and mortgage 4 7 3 1 2
Real estate - residential mortgage 1 3 1 5 4
Installment loans and vehicle leasing (b) 63 52 53 101 104
- ------------------------------------------------------------------------------------------------------------------
Total loan losses 189 221 165 264 217
- ------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 16 12 10 21 10
Real estate - commercial construction and mortgage 1 1 1 - 1
Real estate - residential mortgage - - 1 1 -
Installment loans and vehicle leasing (b) 13 16 11 14 17
- ------------------------------------------------------------------------------------------------------------------
Total loan recoveries 30 29 23 36 28
- ------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 159 192 142 228 189
==================================================================================================================
Commercial loan net charge-offs as %
of average commercial loans, net (c) 0.56 % 0.80 0.53 0.73 0.53
Consumer loan net charge-offs as %
of average consumer loans, net (c) 0.48 0.36 0.35 0.63 0.64
Total net charge-offs as % of average loans, net (c) 0.53 % 0.64 0.46 0.69 0.57
==================================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial, financial and agricultural $ 993 884 596 562 729
Real estate - commercial construction and mortgage 33 55 58 59 62
Real estate - residential mortgage 74 63 52 28 148
Installment loans and vehicle leasing (b) 131 174 148 142 236
- ------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,231 1,176 854 791 1,175
Foreclosed properties (d) 106 103 97 93 95
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,337 1,279 951 884 1,270
==================================================================================================================
Nonperforming loans included in assets held for sale (e) $ 344 334 349 331 30
Nonperforming assets included in loans and in assets
held for sale $ 1,681 1,613 1,300 1,215 1,300
==================================================================================================================
as % of loans, net, and foreclosed properties (a) 1.09 % 1.03 0.77 0.69 0.93
==================================================================================================================
as % of loans, net, foreclosed properties and loans in
other assets as held for sale (e) 1.30 % 1.22 0.98 0.87 0.92
==================================================================================================================
Accruing loans past due 90 days $ 220 183 145 84 134
==================================================================================================================
(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) Annualized.
(d) Restructured loans are not significant.
(e) 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.
32
35
TABLE 11
NONPERFORMING ASSETS ACTIVITY (A)
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 1,279 951 884 1,270 1,066
- ------------------------------------------------------------------------------------------------------------------------
Commercial loan activity
New nonaccrual loans 251 481 217 242 303
Advances 15 6 6 - -
Charge-offs (69) (112) (27) (93) (70)
Transfers (to) from assets held for sale - 11 (46) (223) -
Payments (59) (22) (29) (11) (5)
Sales - (15) - - -
Other (activity under $5 million) (53) (69) (93) (78) (40)
- ------------------------------------------------------------------------------------------------------------------------
Commercial loan activity 85 280 28 (163) 188
- ------------------------------------------------------------------------------------------------------------------------
Consumer loan activity
Transfers to assets held for sale (90) - - (243) -
Other, net 63 48 39 20 16
- ------------------------------------------------------------------------------------------------------------------------
Consumer loan activity (27) 48 39 (223) 16
- ------------------------------------------------------------------------------------------------------------------------
Change in nonperforming assets 58 328 67 (386) 204
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,337 1,279 951 884 1,270
========================================================================================================================
(a) Excludes nonperforming loans included in assets held for sale.
Table 12
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Goodwill $ 3,524 3,481 3,551 3,510 5,065
Deposit base premium 157 174 195 215 236
Origination network - - - - 269
Other 9 9 10 11 11
- ------------------------------------------------------------------------------------------------------------------------
Total goodwill and other intangible assets $ 3,690 3,664 3,756 3,736 5,581
========================================================================================================================
TABLE 13
DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ ---------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 28,582 30,315 28,501 30,229 29,885
Savings and NOW accounts 37,599 36,215 34,620 35,346 36,955
Money market accounts 20,737 20,630 18,382 17,988 18,207
Other consumer time 33,868 35,223 36,814 35,789 34,881
- ------------------------------------------------------------------------------------------------------------------------
Total core deposits 120,786 122,383 118,317 119,352 119,928
OTHER DEPOSITS
Foreign 7,810 7,795 8,596 9,178 7,062
Other time 12,199 12,490 11,957 16,334 12,900
- ------------------------------------------------------------------------------------------------------------------------
Total deposits $ 140,795 142,668 138,870 144,864 139,890
========================================================================================================================
33
36
TABLE 14
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
-----------------------
(In millions)
- ------------------------------------------------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 6,015
Over 3 months through 6 months 2,492
Over 6 months through 12 months 5,859
Over 12 months 4,114
- ------------------------------------------------------------------------------------------------------------------------
Total $ 18,480
========================================================================================================================
TABLE 15
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES ISSUED BY
THE PARENT COMPANY
Notes
6.625% to 7.70%, due 2004 to 2005 $ 3,084 3,084 3,082 1,790 2,039
Floating rate, due 2001 to 2005 2,368 2,367 2,118 1,770 1,087
Floating rate extendible, due 2005 10 10 10 10 10
Subordinated notes
6.00% to 9.45%, due 2001 to 2009 2,664 2,664 2,662 2,662 2,662
7.18% to 8.00%, due 2009 to 2011 208 208 208 208 208
6.30%, Putable/Callable, due 2028 200 200 200 200 200
Floating rate, due 2003 150 150 150 150 150
Subordinated debentures
6.55% to 7.574%, due 2026 to 2035 794 794 794 794 794
- ------------------------------------------------------------------------------------------------------------------------
Total notes and debentures issued by the
Parent Company 9,478 9,477 9,224 7,584 7,150
- ------------------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes, primarily notes issued under global
note programs, varying rates and terms to 2006 16,929 16,457 17,583 16,988 17,339
Subordinated notes
5.875% to 9.375%, due 2002 to 2006 925 1,075 1,075 1,075 1,074
Bank, 5.80% to 7.875%, due 2006 to 2036 2,548 2,548 2,548 1,549 1,549
6.625% to 8.375%, due 2002 to 2007 570 570 570 570 570
- ------------------------------------------------------------------------------------------------------------------------
Total notes issued by subsidiaries 20,972 20,650 21,776 20,182 20,532
- ------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Trust preferred securities 2,027 2,028 2,020 2,010 1,992
4.556% auto securitization financing, due 2008 828 861 944 944 945
Advances from the Federal Home Loan Bank 2,762 2,762 2,262 2,387 2,387
Capitalized leases 19 25 26 26 30
Mortgage notes and other debt of subsidiaries 6 6 6 7 7
- ------------------------------------------------------------------------------------------------------------------------
Total other debt 5,642 5,682 5,258 5,374 5,361
- ------------------------------------------------------------------------------------------------------------------------
Total $ 36,092 35,809 36,258 33,140 33,043
========================================================================================================================
34
37
TABLE 16
CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 15,347 14,795 13,951 16,884 16,709
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss) 584 599 852 (2,199) 840
Net unrealized gain (loss) on debt and equity securities 290 625 348 (212) (44)
Net unrealized gain on derivative financial instruments 145 - - - -
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 1,019 1,224 1,200 (2,411) 796
Purchases of common stock (102) (294) (43) (132) (221)
Common stock issued for
Stock options and restricted stock 90 (2) 33 76 47
Dividend reinvestment plan 14 19 19 19 20
Acquisitions - - 34 - -
Deferred compensation, net (52) 75 70 (14) 11
Cash dividends paid (235) (470) (469) (471) (478)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 16,081 15,347 14,795 13,951 16,884
========================================================================================================================
TABLE 17
CAPITAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------ --------------------------------------------
FIRST Fourth Third Second First
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 14,212 13,952 13,933 13,452 14,422
Total capital 22,408 22,253 22,528 21,385 22,191
Adjusted risk-weighted assets 197,854 198,849 199,078 202,391 207,955
Adjusted leverage ratio assets $ 241,814 235,749 243,106 251,895 242,869
Ratios
Tier 1 capital 7.18 % 7.02 7.00 6.65 6.94
Total capital 11.33 11.19 11.32 10.57 10.67
Leverage 5.88 5.92 5.73 5.34 5.94
STOCKHOLDERS' EQUITY TO ASSETS
Quarter-end 6.36 6.04 6.00 5.41 6.66
Average 6.46 % 6.16 5.77 6.50 6.68
========================================================================================================================
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 7.38 % 6.92 7.35 7.16 7.38
First Union National Bank of Delaware 11.97 12.20 12.07 12.02 11.43
Total capital
First Union National Bank 11.39 10.73 11.28 10.58 10.54
First Union National Bank of Delaware 13.82 13.97 14.01 14.05 12.45
Leverage
First Union National Bank 5.95 6.04 6.30 6.09 6.74
First Union National Bank of Delaware 8.08 % 7.76 8.74 8.20 7.33
========================================================================================================================
(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.
35
38
TABLE 18
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS (a)
- ------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
-----------------------------------------------------------------------
GROSS UNREALIZED IN- AVERAGE
NOTIONAL ---------------- EFFECTIVE- MATURITY IN
(In millions) AMOUNT GAINS LOSSES(e) EQUITY (f) NESS (g) YEARS (h)
- ------------------------------------------------------------------------------------------------------------------------
ASSET HEDGES
Cash flow hedges (b)
Interest rate swaps $ 33,286 1,238 (99) 707 (1) 7.74
Futures 25 - - - - 0.25
Fair value hedges
Interest rate swaps 5 - (1) - - 14.09
Futures 142 - (9) - - 0.25
- -----------------------------------------------------------------------------------------------------------
Total asset hedges $ 33,458 1,238 (109) 707 (1) 7.74
========================================================================================================================
LIABILITY HEDGES
Cash flow hedges (c)
Interest rate swaps $ 25,946 - (624) (386) (1) 8.59
Futures 77,466 - (429) (266) - 0.25
Fair value hedges (d)
Interest rate swaps 9,970 551 (2) - - 6.30
Options 300 1 - - - 2.21
- -----------------------------------------------------------------------------------------------------------
Total liability hedges $ 113,682 552 (1,055) (652) (1) 2.69
========================================================================================================================
(a) Includes only derivative financial instruments related to interest rate risk
management activities. All of the company's other derivative financial
instruments are classified as trading.
(b) Receive-fixed interest rate swaps with a notional amount of $31.6 billion
and with pay rates based on one-to-six month LIBOR are primarily designated as
cash flow hedges of the variability in cash flows related to the forecasted
interest rate resets of one-to-six month LIBOR-indexed loans. Pay-fixed interest
rate swaps with a notional amount of $1.7 billion and with receive rates based
on one-month LIBOR are designated as cash flow hedges of securities and have a
loss, net of tax, of $60 million in accumulated other comprehensive income.
(c) Derivatives with a notional amount of $94.3 billion are designated as cash
flow hedges of the variability in cash flows attributable to the forecasted
issuance of fixed rate short-term liabilities that are part of a rollover
strategy, primarily repurchase agreements and deposit products. Of this amount,
$72.0 billion are Eurodollar futures and $22.3 billion are pay-fixed interest
rate swaps with receive rates based on one-to-three month LIBOR, of which $14.1
billion are forward-starting. Pay-fixed interest rate swaps with a notional
amount of $3.6 billion, of which $3.3 billion are forward-starting, and with
receive rates based on one-to-three month LIBOR are primarily designated as cash
flow hedges of the variability in cash flows related to the forecasted interest
rate resets of one-to-three month LIBOR-indexed long-term debt. Additionally,
Eurodollar futures with a notional amount of $5.5 billion are designated as cash
flow hedges of the variability in cash flows related to the forecasted interest
rate resets of one-to-three month LIBOR-indexed long-term debt. Additionally,
Eurodollar futures with a notional amount of $5.5 billion are designated as cash
flow hedges of the variability in cash flows related to the forecasted interest
rate resets of three month LIBOR-indexed long-term debt.
(d) Receive-fixed interest rate swaps with a notional amount of $10.0 billion
and with pay rates based primarily on three-to-six month LIBOR are designated as
fair value hedges of fixed rate liabilities, primarily CDs, long-term debt and
bank notes.
(e) Represents the fair value of derivative financial instruments less accrued
interest receivable or payable.
(f) Represents the effective portion of the net gains (losses), net of tax, on
derivatives that qualify as cash flow hedges. Gains (losses) will be
reclassified into interest income or expense as a yield adjustment of the hedged
item in the same period that the hedged cash flows impact earnings. This may
occur as interest on the floating rate instruments such as loans, long-term debt
and bank notes is accrued, or as fixed rate short-term liabilities are rolled
over. As of March 31, 2001, $21 million of net gains, net of tax, recorded in
accumulated other comprehensive income are expected to be reclassified as
interest income or expense during the next twelve months. The maximum length of
time over which cash flow hedges are hedging the variability in future cash
flows associated with the forecasted transactions is 25.73 years.
(g) In the three months ended March 31, 2001, losses in the amount of $2 million
were recognized in other fee income representing the ineffective portion of the
net gains (losses) on derivatives that qualify as cash flow hedges. In addition,
net interest income in the three months ended March 31, 2001, includes a
reduction to net interest income of $29 million representing ineffectiveness of
cash flow hedges caused by differences between the critical terms of the
derivative and the hedged item, primarily differences in reset dates.
(h) Estimated maturity approximates average life.
36
39
TABLE 19
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS - EXPECTED MATURITIES
- ---------------------------------------------------------------------------------------------------------------------------
MARCH 31, 2001
-----------------------------------------------------------------------
1 YEAR 1 -2 2 -5 5 -10 AFTER 10
(In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOW ASSET HEDGES
Notional amount - swaps $ 1,659 5,531 2,340 16,620 7,136 33,286
Notional amount - other - 25 - - - 25
Weighted average receive rate (a) 6.35 % 7.15 6.39 5.94 7.03 6.41
Weighted average pay rate (a) 5.13 % 5.22 5.43 5.09 5.15 5.15
Unrealized gain (loss) $ 12 185 56 249 637 1,139
- ---------------------------------------------------------------------------------------------------------------------------
FAIR VALUE ASSET HEDGES
Notional amount - swaps $ - - - - 5 5
Notional amount - other - - 127 15 - 142
Weighted average receive rate (a) - % - - - 5.68 5.68
Weighted average pay rate (a) - % - - - 7.36 7.36
Unrealized gain (loss) $ - - (8) (1) (1) (10)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOW LIABILITY HEDGES
Notional amount - swaps $ 584 808 2,932 18,169 3,453 25,946
Notional amount - other 61,516 15,950 - - - 77,466
Weighted average receive rate (a) 5.00 % 5.54 5.73 5.36 5.48 5.50
Weighted average pay rate (a) 6.82 % 6.15 5.83 6.26 6.62 6.20
Unrealized gain (loss) $ (368) (73) (51) (351) (210) (1,053)
- ---------------------------------------------------------------------------------------------------------------------------
FAIR VALUE LIABILITY HEDGES
Notional amount - swaps $ 635 700 4,125 4,000 510 9,970
Notional amount - other - - 300 - - 300
Weighted average receive rate (a) 7.26 % 7.29 6.90 7.06 6.75 7.01
Weighted average pay rate (a) 4.98 % 6.08 5.10 6.03 5.28 5.54
Unrealized gain (loss) $ 4 25 239 259 23 550
===========================================================================================================================
(a) 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. All of the interest rate swaps have
variable pay or receive rates based on one-to-six month LIBOR, and they are the
pay or receive rates in effect at March 31, 2001.
TABLE 20
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS ACTIVITY
- ---------------------------------------------------------------------------------------------------------------------------
Asset Liability
(In millions) Hedges Hedges Total
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 34,519 141,032 175,551
Additions 12,325 34,095 46,420
Maturities and amortizations (1,286) (15,922) (17,208)
Terminations (100) (100) (200)
Redesignations and transfers to trading account assets (12,000) (45,423) (57,423)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 $ 33,458 113,682 147,140
===========================================================================================================================
37
40
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ----------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2001 FOURTH QUARTER 2000
------------------------------- ------------------------------
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 $ 1,826 25 5.69 % $ 1,266 14 4.34 %
Federal funds sold and securities
purchased under resale agreements 7,036 95 5.49 5,994 89 5.86
Trading account assets (a) 13,315 206 6.24 11,569 201 6.95
Securities (a) 50,417 945 7.50 50,554 952 7.54
Loans (a) (b)
Commercial
Commercial, financial and agricultural 53,416 1,130 8.56 53,554 1,233 9.17
Real estate - construction and other 3,231 62 7.76 3,011 65 8.69
Real estate - mortgage 9,195 180 7.95 9,130 198 8.63
Lease financing 6,084 161 10.62 5,272 150 11.37
Foreign 5,344 92 7.01 5,286 97 7.29
- ------------------------------------------------------------------ --------------------
Total commercial 77,270 1,625 8.51 76,253 1,743 9.11
- ------------------------------------------------------------------ --------------------
Consumer
Real estate - mortgage 17,610 331 7.52 18,805 362 7.70
Installment loans and vehicle leasing 24,970 580 9.41 25,035 606 9.63
- ------------------------------------------------------------------ --------------------
Total consumer 42,580 911 8.63 43,840 968 8.80
- ------------------------------------------------------------------ --------------------
Total loans 119,850 2,536 8.55 120,093 2,711 8.99
- ------------------------------------------------------------------ --------------------
Other earning assets 11,276 250 8.96 13,130 322 9.76
- ------------------------------------------------------------------ --------------------
Total earning assets 203,720 4,057 8.03 202,606 4,289 8.44
==================== ===================
Cash and due from banks 7,749 7,653
Other assets 34,000 29,116
- ------------------------------------------------------- ---------
Total assets $ 245,469 $ 239,375
======================================================= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 38,756 264 2.76 37,640 301 3.17
Money market accounts 17,941 200 4.52 17,008 202 4.74
Other consumer time 34,452 506 5.96 36,421 541 5.91
Foreign 6,851 94 5.59 7,483 110 5.85
Other time 12,239 189 6.27 11,902 213 7.13
- ------------------------------------------------------------------ --------------------
Total interest-bearing deposits 110,239 1,253 4.61 110,454 1,367 4.92
Federal funds purchased and securities
sold under repurchase agreements 25,005 378 6.13 23,686 400 6.72
Commercial paper 2,540 33 5.32 2,639 42 6.19
Other short-term borrowings 9,580 82 3.46 9,345 96 4.09
Long-term debt 36,631 577 6.30 35,708 627 7.03
- ------------------------------------------------------------------ --------------------
Total interest-bearing liabilities 183,995 2,323 5.10 181,832 2,532 5.55
==================== ===================
Noninterest-bearing deposits 27,043 27,875
Other liabilities 18,585 14,915
Stockholders' equity 15,846 14,753
- ------------------------------------------------------- ---------
Total liabilities and
stockholders' equity $ 245,469 $ 239,375
======================================================= =========
Interest income and rate earned $ 4,057 8.03 % $ 4,289 8.44 %
Interest expense and equivalent rate paid 2,323 4.61 2,532 4.98
- ----------------------------------------------------------------------------- -------------------
Net interest income and margin (c) $ 1,734 3.42 % $ 1,757 3.46 %
============================================================================= ===================
(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.
38
41
------------------------------------------------------------------------------------------------------
THIRD QUARTER 2000 SECOND QUARTER 2000 FIRST QUARTER 2000
------------------------------ ----------------------------- ------------------------------
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
------------------------------------------------------------------------------------------------------
$ 1,465 20 5.28 % $ 977 13 5.52 % $ 666 7 4.40 %
6,367 97 6.11 9,318 132 5.72 9,555 129 5.40
12,204 214 6.99 12,950 220 6.83 11,326 193 6.84
52,780 988 7.48 56,027 1,035 7.40 54,389 978 7.19
53,226 1,250 9.34 54,486 1,251 9.22 52,809 1,174 8.95
2,676 59 8.65 2,458 52 8.49 2,406 48 8.08
9,294 203 8.70 9,302 195 8.44 8,979 183 8.19
5,168 148 11.45 5,123 153 11.90 5,213 160 12.29
5,016 91 7.17 4,582 80 7.08 4,532 74 6.56
--------------------- -------------------- ---------------------
75,380 1,751 9.24 75,951 1,731 9.15 73,939 1,639 8.92
--------------------- -------------------- ---------------------
23,163 432 7.47 25,760 469 7.28 27,551 499 7.24
24,932 596 9.51 30,903 740 9.61 29,991 719 9.63
--------------------- -------------------- ---------------------
48,095 1,028 8.53 56,663 1,209 8.55 57,542 1,218 8.49
--------------------- -------------------- ---------------------
123,475 2,779 8.96 132,614 2,940 8.90 131,481 2,857 8.73
--------------------- -------------------- ---------------------
14,798 393 10.63 8,175 177 8.66 8,337 172 8.29
--------------------- -------------------- ---------------------
211,089 4,491 8.48 220,061 4,517 8.24 215,754 4,336 8.06
=================== =================== ===================
7,446 7,830 8,078
28,283 27,692 24,458
---------- --------- ----------
$ 246,818 $ 255,583 $ 248,290
========== ========= ==========
37,680 296 3.13 38,940 283 2.92 39,830 289 2.92
15,629 175 4.46 14,959 154 4.13 15,564 151 3.89
36,328 524 5.74 35,386 478 5.43 33,991 423 5.00
9,721 151 6.18 8,795 130 5.92 9,125 123 5.44
15,317 276 7.16 14,153 240 6.82 13,224 209 6.37
--------------------- -------------------- ---------------------
114,675 1,422 4.93 112,233 1,285 4.60 111,734 1,195 4.30
28,363 459 6.43 36,762 552 6.04 35,286 482 5.50
2,588 40 6.25 3,308 49 6.03 2,996 42 5.56
9,257 110 4.74 11,096 149 5.37 9,100 115 5.09
35,263 600 6.80 33,555 552 6.58 32,564 513 6.30
--------------------- -------------------- ---------------------
190,146 2,631 5.51 196,954 2,587 5.28 191,680 2,347 4.92
=================== =================== ===================
28,437 28,971 28,687
13,999 13,044 11,340
14,236 16,614 16,583
---------- --------- ----------
$ 246,818 $ 255,583 $ 248,290
========== ========= ==========
$ 4,491 8.48 % $ 4,517 8.24 % $ 4,336 8.06 %
2,631 4.96 2,587 4.73 2,347 4.37
------------------- ------------------- -------------------
$ 1,860 3.52 % $ 1,930 3.51 % $ 1,989 3.69 %
=================== =================== ===================
(c) The net interest margin includes (in basis points): 14, 15, 22, 27 and 27
for the quarters ended March 31, 2001, December 31, 2000, September 30, 2000,
June 30, 2000 and March 31, 2000, respectively, related to net interest income
from derivative transactions.
39
42
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF INCOME
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2001
-----------------------------------
RESTRUCTURING
OPERATING AND OTHER AS
(In millions) EARNINGS CHARGES/GAINS REPORTED
- ----------------------------------------------------------------------------------------------------------------
Net interest income $ 1,702 - 1,702
Provision for loan losses 219 - 219
- ----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,483 - 1,483
- ----------------------------------------------------------------------------------------------------------------
Fee and other income
Service charges and fees 468 - 468
Advisory, underwriting and other Capital Markets fees 198 - 198
Other income
Security transactions - portfolio (16) - (16)
Asset sales and securitization 12 (44) (32)
Gain on sale of branches - 73 73
Other 884 (1) 883
- ----------------------------------------------------------------------------------------------------------------
Total fee and other income 1,546 28 1,574
- ----------------------------------------------------------------------------------------------------------------
Noninterest expense
Restructuring charges - 2 2
Other noninterest expense 2,138 69 2,207
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,138 71 2,209
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 891 (43) 848
Income taxes (benefits) 281 (17) 264
- ----------------------------------------------------------------------------------------------------------------
Net income $ 610 (26) 584
================================================================================================================
Diluted earnings per share $ 0.62 (0.03) 0.59
================================================================================================================
FIRST UNION CORPORATION AND SUBSIDIARIES
RESTRUCTURING AND OTHER CHARGES/GAINS
- ----------------------------------------------------------------------------------------------------------------
THREE
MONTHS
ENDED
MARCH 31,
(In millions) 2001
- ----------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES (Includes merger-related charges)
Employee termination benefits $ 2
Other asset impairments (1)
Contract cancellations (1)
- ----------------------------------------------------------------------------------------------------------------
Total restructuring charges -
Reversal of restructuring accruals related primarily to employee
termination benefits (14)
- ----------------------------------------------------------------------------------------------------------------
Net restructuring charges (14)
Merger-related charges 16
- ----------------------------------------------------------------------------------------------------------------
Total 2
- ----------------------------------------------------------------------------------------------------------------
OTHER CHARGES/GAINS
Other income (28)
Other noninterest expense 69
- ----------------------------------------------------------------------------------------------------------------
Total other charges/gains 41
- ----------------------------------------------------------------------------------------------------------------
Total restructuring and other charges/gains (43)
Income tax benefits (17)
- ----------------------------------------------------------------------------------------------------------------
After-tax restructuring and other charges/gains $ (26)
================================================================================================================
40
43
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,526 2,701 2,768 2,929 2,848
Interest and dividends on securities 925 939 975 1,023 966
Trading account interest 204 199 212 218 191
Other interest income 370 425 510 322 308
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 4,025 4,264 4,465 4,492 4,313
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,253 1,367 1,422 1,285 1,195
Interest on short-term borrowings 493 538 609 750 639
Interest on long-term debt 577 627 600 552 513
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 2,323 2,532 2,631 2,587 2,347
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 1,702 1,732 1,834 1,905 1,966
Provision for loan losses 219 192 142 228 192
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,483 1,540 1,692 1,677 1,774
- ---------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 468 481 508 491 486
Commissions 375 383 365 375 468
Fiduciary and asset management fees 381 387 384 374 366
Advisory, underwriting and other Capital Markets fees 198 187 148 182 209
Principal investing (43) (43) 34 205 199
Other income 167 187 206 119 114
- ---------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,546 1,582 1,645 1,746 1,842
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,329 1,243 1,381 1,396 1,429
Occupancy 163 150 157 155 157
Equipment 205 221 213 210 214
Advertising 9 16 14 31 30
Communications and supplies 110 123 117 122 125
Professional and consulting fees 73 97 87 82 71
Goodwill and other intangible amortization 78 80 79 100 102
Sundry expense 171 202 280 270 259
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,138 2,132 2,328 2,366 2,387
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 891 990 1,009 1,057 1,229
Income taxes 281 309 307 343 391
- ---------------------------------------------------------------------------------------------------------------------
Net operating earnings $ 610 681 702 714 838
=====================================================================================================================
Diluted earnings per share $ 0.62 0.69 0.71 0.73 0.85
=====================================================================================================================
(a) Operating earnings exclude restructuring, merger-related and other charges
and gains and cumulative effect of a change in accounting principle.
41
44
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,857 9,906 7,063 8,028 7,854
Interest-bearing bank balances 2,971 3,239 4,585 1,913 1,037
Federal funds sold and securities purchased under
resale agreements (carrying amount of collateral
$5,956 at March 31,2001, $4,678 repledged) 11,866 11,240 5,395 9,054 8,206
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 22,694 24,385 17,043 18,995 17,097
- ---------------------------------------------------------------------------------------------------------------------
Trading account assets 20,431 21,630 17,417 18,237 17,076
Securities (carrying amount of collateral $ 25,573 at
March 31,2001) 51,528 49,246 52,065 55,203 52,089
Loans, net of unearned income 122,853 123,760 123,419 128,359 135,803
Allowance for loan losses (1,759) (1,722) (1,720) (1,706) (1,760)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 121,094 122,038 121,699 126,653 134,043
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,968 5,024 5,090 5,211 5,171
Due from customers on acceptances 894 874 968 839 842
Goodwill and other intangible assets 3,690 3,664 3,756 3,736 5,581
Other assets 27,650 27,309 28,602 29,120 21,749
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 252,949 254,170 246,640 257,994 253,648
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 28,582 30,315 28,501 30,229 29,885
Interest-bearing deposits 112,213 112,353 110,369 114,635 110,005
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 140,795 142,668 138,870 144,864 139,890
Short-term borrowings 39,719 39,446 39,388 50,883 49,389
Bank acceptances outstanding 902 880 976 847 847
Trading account liabilities 8,130 7,475 5,138 4,541 4,605
Other liabilities 11,230 12,545 11,215 9,768 8,990
Long-term debt 36,092 35,809 36,258 33,140 33,043
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 236,868 238,823 231,845 244,043 236,764
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2 billion shares 3,271 3,267 3,287 3,288 3,280
Paid-in capital 6,307 6,272 6,211 6,066 6,021
Retained earnings 6,281 6,021 6,135 5,783 8,557
Accumulated other comprehensive income, net 222 (213) (838) (1,186) (974)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,081 15,347 14,795 13,951 16,884
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 252,949 254,170 246,640 257,994 253,648
=====================================================================================================================
42
45
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------------------
2001 2000
----------- -------------------------------------------
FIRST Fourth Third Second First
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,526 2,701 2,768 2,929 2,848
Interest and dividends on securities 925 939 975 1,023 966
Trading account interest 204 199 212 218 191
Other interest income 370 425 510 322 308
- --------------------------------------------------------------------------------------------------------------------
Total interest income 4,025 4,264 4,465 4,492 4,313
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,253 1,367 1,422 1,285 1,195
Interest on short-term borrowings 493 538 609 750 639
Interest on long-term debt 577 627 600 552 513
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,323 2,532 2,631 2,587 2,347
- --------------------------------------------------------------------------------------------------------------------
Net interest income 1,702 1,732 1,834 1,905 1,966
Provision for loan losses 219 192 322 1,030 192
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,483 1,540 1,512 875 1,774
- --------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 468 481 506 447 486
Commissions 375 383 365 375 468
Fiduciary and asset management fees 381 387 384 374 366
Advisory, underwriting and other Capital Markets fees 198 182 145 182 209
Principal investing (43) (43) 34 205 199
Other income 195 363 749 (649) 114
- --------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,574 1,753 2,183 934 1,842
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,373 1,407 1,427 1,396 1,429
Occupancy 164 150 160 155 157
Equipment 211 233 213 210 214
Advertising 14 35 18 31 30
Communications and supplies 110 130 125 123 125
Professional and consulting fees 83 104 91 82 71
Goodwill and other intangible amortization 78 80 79 100 102
Restructuring and merger-related charges 2 33 52 2,110 (5)
Sundry expense 174 205 283 296 259
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,209 2,377 2,448 4,503 2,382
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) and
cumulative effect of a change in accounting principle 848 916 1,247 (2,694) 1,234
Income taxes (benefits) 264 271 395 (495) 394
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 584 645 852 (2,199) 840
Cumulative effect of a change in the accounting for
beneficial interests, net of tax - (46) - - -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 584 599 852 (2,199) 840
====================================================================================================================
PER SHARE DATA
Basic
Income (loss) before change in accounting principle $ 0.60 0.66 0.87 (2.27) 0.86
Net income (loss) 0.60 0.61 0.87 (2.27) 0.86
Diluted
Income (loss) before change in accounting principle 0.59 0.65 0.86 (2.27) 0.85
Net income (loss) 0.59 0.60 0.86 (2.27) 0.85
Cash dividends $ 0.24 0.48 0.48 0.48 0.48
AVERAGE SHARES (IN THOUSANDS)
Basic 967,671 969,097 971,453 969,707 972,174
Diluted 975,847 990,445 986,763 981,940 984,095
====================================================================================================================
43
46
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------
(In millions) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 584 840
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 44 73
Provision for loan losses 219 192
Securitization (gains) losses 32 (70)
Gain on sale of mortgage servicing rights (12) (3)
Securities transactions 16 16
Depreciation, goodwill and other amortization 284 315
Trading account assets, net 1,228 (2,130)
Mortgage loans held for resale (823) 163
Gain on sales of premises and equipment (1) (10)
Other assets, net 1,835 (1,642)
Trading account liabilities, net 655 1,036
Other liabilities, net (3,016) 368
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 1,045 (852)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities 2,771 881
Maturities of securities 1,313 1,615
Purchases of securities (4,870) (3,074)
Origination of loans, net (45) (2,447)
Sales of premises and equipment 38 36
Purchases of premises and equipment (160) (184)
Goodwill and other intangible assets, net (102) (57)
Purchase of bank-owned separate account life insurance (21) (24)
Cash equivalents acquired, net of purchases of banking organizations (13) -
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,089) (3,254)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Sales of deposits, net (1,873) (1,157)
Securities sold under repurchase agreements and other short-term borrowings, net 271 (718)
Issuances of long-term debt 2,470 3,683
Payments of long-term debt (2,187) (2,615)
Sales of common stock 9 32
Purchases of common stock (102) (221)
Cash dividends paid (235) (478)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (1,647) (1,474)
- -------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (1,691) (5,580)
Cash and cash equivalents, beginning of year 24,385 22,677
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 22,694 17,097
===================================================================================================================
NONCASH ITEMS
Transfer to securities from loans $ 95 -
Transfer to securities from other assets 908 -
Transfer to other assets from securities - 1,307
Transfer to other assets from loans $ 282 (298)
===================================================================================================================
44