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FIRST UNION CORPORATION AND SUBSIDIARIES
Second Quarter 2001
Management's Analysis of Operations
Quarterly Financial Supplement
Six Months Ended June 30, 2001
[FIRST UNION Logo]
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FIRST UNION CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL SUPPLEMENT
SIX MONTHS ENDED JUNE 30, 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 20
Summary Income, Per Share and Balance Sheet Data 21
Restructuring Charges 22
Business Segments 23
Fee and Other Income - Corporate and Investment Banking 37
Selected Ratios 37
Securities 38
Loans - On-Balance Sheet, and Managed and Servicing Portfolios 39
Loans Held for Sale 40
Allowance for Loan Losses and Nonperforming Assets 41
Nonperforming Assets Activity 42
Goodwill and Other Intangible Assets 42
Deposits 43
Time Deposits in Amounts of $100,000 or More 43
Long-Term Debt 44
Changes in Stockholders' Equity 45
Capital Ratios 45
Risk Management Derivative Financial Instruments 46
Risk Management Derivative Financial Instruments - Expected Maturities 47
Risk Management Derivative Financial Instruments Activity 48
Net Interest Income Summaries - Five Quarters Ended June 30, 2001 49
Net Interest Income Summaries - Six Months Ended June 30, 2001 and 2000 51
Consolidated Condensed Statements of Income 52
Restructuring and Other Charges/Gains 52
Consolidated Statements of Operating Earnings - Five Quarters Ended June 30, 2001 53
Consolidated Statements of Operating Earnings - Six Months Ended June 30, 2001 and 2000 54
Consolidated Balance Sheets 55
Consolidated Statements of Income (Loss) - Five Quarters Ended June 30, 2001 56
Consolidated Statements of Income (Loss) - Six Months Ended June 30, 2001 and 2000 57
Consolidated Statements of Cash Flows 58
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FINANCIAL HIGHLIGHTS
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Three Months Ended Six Months Ended
June 30, June 30,
------------------------ Percent --------------------- Percent
Increase Increase
(Dollars in millions, except per share data) 2001 2000 (Decrease) 2001 2000 (Decrease)
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FINANCIAL HIGHLIGHTS
OPERATING EARNINGS
Net interest income - tax-equivalent $ 1,742 1,930 (10)% $ 3,476 3,919 (11)%
Fee and other income 1,629 1,746 (7) 3,175 3,588 (12)
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Total revenue - tax-equivalent 3,371 3,676 (8) 6,651 7,507 (11)
Provision for loan losses 223 228 (2) 442 420 5
Noninterest expense 2,169 2,366 (8) 4,307 4,753 (9)
Income taxes - tax-equivalent 330 368 (10) 643 782 (18)
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Income before restructuring, merger-related and
other charges (Operating earnings) 649 714 (9) 1,259 1,552 (19)
After-tax restructuring, merger-related and other charges (16) (2,913) - (42) (2,911) -
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Net income (As reported) $ 633 (2,199) - % $ 1,217 (1,359) - %
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DILUTED EARNINGS PER SHARE
Income before restructuring, merger-related and
other charges $ 0.66 0.73 (10)% $ 1.28 1.58 (19)%
Net income $ 0.64 (2.27) - % $ 1.23 (1.41) - %
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PROFITABILITY (OPERATING EARNINGS)
Return on average stockholders' equity 16.19 % 17.74 - 15.92 19.04 -
Net interest margin 3.41 3.51 - 3.42 3.60 -
Fee and other income as % of total revenue 48.32 47.50 - 47.74 47.80 -
Overhead efficiency ratio 64.34 64.36 - 64.76 63.31 -
Effective income tax rate 31.54 % 32.45 - 31.54 32.11 -
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CASH OPERATING EARNINGS
Net income $ 723 807 (10)% $ 1,407 1,739 (19)%
Diluted earnings per share 0.73 0.82 (11)% $ 1.43 1.77 (19)%
Return on average tangible stockholders' equity 23.35 % 30.18 - 23.14 32.13 -
Return on average stockholders' equity 18.04 20.04 - 17.78 21.33 -
Overhead efficiency ratio 62.06 % 61.64 - 62.43 60.62 -
Operating leverage $ 59 (136) - - - -
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BALANCE SHEET DATA
Securities $ 48,055 55,203 (13)% $ 48,055 55,203 (13)%
Loans, net 122,492 128,359 (5) 122,492 128,359 (5)
Total assets 245,941 257,994 - 245,941 257,994 -
Total deposits 138,567 144,864 (4) 138,567 144,864 (4)
Long-term debt 36,060 33,140 9 36,060 33,140 9
Stockholders' equity $ 16,144 13,951 16 % $ 16,144 13,951 16 %
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CAPITAL ADEQUACY
Tier I capital ratio 7.37 % 6.65 - 7.37 6.65 -
Total capital ratio 11.45 10.57 - 11.45 10.57 -
Leverage ratio 6.00 % 5.34 - 6.00 5.34 -
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ASSET QUALITY
Allowance as % of loans, net 1.44 % 1.33 - 1.44 1.33 -
Allowance as % of nonperforming assets 133 193 - 133 193 -
Net charge-offs as % of average loans, net 0.52 0.69 - 0.53 0.63 -
Nonperforming assets to loans, net, foreclosed
properties and assets held for sale 1.23 % 0.87 - 1.23 0.87 -
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OTHER DATA
Employees 67,420 72,890 (8)% 67,420 72,890 (8)%
Branches 2,162 2,258 (4) 2,162 2,258 (4)
ATMs 3,419 3,832 (11) 3,419 3,832 (11)
Shares outstanding (In thousands) 979,205 986,394 - 979,205 986,394 -
Common stock price $ 34.94 25.00 40 $ 34.94 25.00 40
Book value per common share 16.49 14.14 17 16.49 14.14 17
Common stock price to book value 212 177 - 212 177 -
Market capitalization 34,213 24,660 39 34,213 24,660 39
Dividends paid per common share $ 0.24 0.48 (50)% $ 0.48 0.96 (50)%
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The following discussion and other portions of this Quarterly Report contain
various forward-looking statements. Please refer to our 2001 Second Quarter
Report on Form 10-Q for a discussion of various factors that could cause our
actual results to differ materially from those expressed in such forward-looking
statements.
EARNINGS HIGHLIGHTS
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SUMMARY OPERATING RESULTS
Three Months Ended Six Months Ended
June 30, June 30,
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(In millions, except per share data) 2001 2000 2001 2000
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OPERATING EARNINGS
Net interest income (a) $ 1,742 1,930 3,476 3,919
Fee and other income 1,629 1,746 3,175 3,588
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Total revenue (a) 3,371 3,676 6,651 7,507
Provision for loan losses 223 228 442 420
Noninterest expense 2,169 2,366 4,307 4,753
Income taxes (a) 330 368 643 782
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Operating earnings $ 649 714 1,259 1,552
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Net income (loss) $ 633 (2,199) 1,217 (1,359)
Cash operating earnings (b) 723 807 1,407 1,739
PER DILUTED SHARE
Operating earnings 0.66 0.73 1.28 1.58
Net income (loss) 0.64 (2.27) 1.23 (1.41)
Cash operating earnings (b) $ 0.73 0.82 1.43 1.77
RATIOS
Operating return on average equity 16.19 % 17.74 15.92 19.04
Cash operating return on
average tangible stockholders' equity (b) 23.35 % 30.18 23.14 32.13
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(a) Tax-equivalent.
(b) Cash operating earnings exclude goodwill and other intangible amortization.
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SUMMARY OF OPERATING RESULTS First Union reported net income of $1.2 billion, or
$1.23 per share, in the first six months of 2001. Operating earnings in the
first six months of 2001 were $1.3 billion, or $1.28 per share, and cash
operating earnings, which exclude goodwill and other intangible amortization,
were $1.4 billion, or $1.43 per share. Operating earnings exclude after-tax net
restructuring, merger-related and other charges and gains of $42 million, or 5
cents per share, primarily connected with the completion of the strategic
repositioning we announced in June 2000. See Restructuring and Other Charges and
Gains for further information. The net loss for the first six months of 2000 was
$1.4 billion, or $1.41 per share, including after-tax net restructuring,
merger-related and other charges of $2.9 billion. Operating earnings in the
first six months of 2000 were $1.6 billion, or $1.58 per share, and cash
operating earnings were $1.7 billion or $1.77 per share.
Based on operating earnings, First Union's return on average stockholders'
equity was 15.92 percent in the first six months of 2001 and 19.04 percent in
the first six months of 2000. The cash return on average tangible stockholders'
equity was 23.14 percent in the first six months of 2001 and 32.13 percent in
the first six months of 2000.
On an operating basis, fee and other income was $3.2 billion in the first six
months of 2001, down 12 percent from the first six months of 2000. The decline
largely reflected the difficult financial markets that dampened principal
investing revenue, which was down $505 million from the first six months of
2000, and commissions, which were down $79 million. The first six months 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.
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On an operating basis, noninterest expense was $4.3 billion in the first six
months of 2001, down 9 percent from the first six months of 2000. The decrease
in expenses from the first six months of 2000 primarily reflected expense
control initiatives and lower variable compensation expense.
On an operating basis, the provision for loan losses was $442 million in the
first six months of 2001, an increase of $22 million from the first six months
of 2000. The provision exceeded net charge-offs in the first six months of 2001
by $126 million, which included $52 million in provision related to loan sales
or transfers to loans held for sale. Net charge-offs in the first six months of
2001 decreased $101 million from the first six months of 2000 to $316 million.
Net charge-offs were 0.53 percent of average net loans in the first six months
of 2001, down 10 basis points from the first six months of 2000. Nonperforming
assets, including those in loans held for sale, decreased $36 million from
December 31, 2000, to $1.6 billion at June 30, 2001. As a percentage of net
loans, foreclosed properties and loans held for sale, nonperforming assets were
1.23 percent at June 30, 2001, and 1.22 percent at December 31, 2000.
Excluding the impact of divestitures, transfers and securitizations, period-end
loans grew 4 percent from the first six months of 2000 and core deposits also
grew 4 percent.
OUTLOOK
On April 16, 2001, First Union and Wachovia Corporation announced a definitive
agreement to merge the two companies. The new company will be named Wachovia
Corporation and will be headquartered in Charlotte, North Carolina. On a pro
forma basis, based on June 30, 2001 data, the combined company would have assets
of $322 billion and a market capitalization of $48 billion. The new company's 19
million customers (including 3.4 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.
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. In connection with the merger, Wachovia
shareholders will have the right to choose either a one-time cash payment of 48
cents per Wachovia common share or two shares of a new class of preferred stock
on which the dividend will be the difference between the common stock dividend
declared by the combined company and the current Wachovia dividend of 30 cents
per share. We expect to complete the transaction in the third quarter of 2001.
On July 31, First Union's shareholders approved the merger and on August 3,
Wachovia shareholders approved the merger, based on preliminary proxy results,
which will be certified by an independent vote tabulation service. The Federal
Reserve Board approved the merger on August 13, 2001. First Union's Second
Quarter Report on Form 10-Q for details about First Union's 2001 Annual
Shareholders Meeting.
Since the merger agreement was announced, integration planning efforts have
proceeded rapidly:
o Key senior leadership positions for the major divisions and
key business units were named upon the announcement of the
merger;
o A merger transition team and steering committee, composed of
individuals from both organizations began immediate planning
work;
o The state chief executive officers and regional presidents for
all five of the General Bank's geographic regions were
selected; and
o Business unit reviews have been completed, and a high level
operating model for the new Wachovia has been finalized.
In addition, First Union completed on time and on budget the strategic
repositioning announced in June 2000 to focus on improved earnings growth from
our three core businesses -- the General Bank, Capital Management, and Corporate
and Investment Banking (formerly known as 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
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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 we also
sold $5.6 billion of commercial and consumer loans. Of the loans transferred to
held for sale in connection with the strategic repositioning, $317 million
remained to be sold at June 30, 2001. Nearly half of the $317 million were sold
early in the third quarter of 2001. 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 since June 2000.
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 six months of 2001, we
reported a net charge of $70 million pre-tax in restructuring, merger-related
and other charges and gains primarily in connection with the completion of the
strategic repositioning. The more significant items related to the strategic
repositioning included $73 million in branch sale gains; $71 million in market
value write-downs of certain loans held for sale; $45 million of gains related
to loan sales and other recoveries from the held for sale portfolio; $166
million of noninterest expense, principally employee termination costs,
professional fees, premises consolidation costs and system deconversion costs;
and $73 million of net reversals of previously recorded restructuring charges
principally related to finalization of estimates related to employee
termination, contract cancellation and occupancy costs. Also included in the $70
million net charge were $20 million in systems integration costs related to the
JWGenesis and EVEREN acquisitions, and $14 million in reversals of amounts
recorded in the March 1999 restructuring charge based on finalization of
employee termination costs.
In 2000 we recorded a restructuring charge of $2.1 billion in connection with
the strategic repositioning. At June 30, 2001, the remaining balance of the
restructuring accrual was $25 million, which represented amounts still to be
paid in employee termination benefits. The restructuring charge included $148
million in employee termination benefits, of which $123 million had been paid
through June 30, 2001, for the 4,321 employees terminated in connection with the
repositioning. Of the employees terminated, 1,012 were officers of the company
and 3,309 were non-officers.
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.
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AVERAGE BALANCE SHEET AND INTEREST RATES
MONTHS ENDED Six Months Ended
JUNE 30, 2001 June 30, 2000
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AVERAGE Average
(In millions) BALANCE RATE Balance Rate
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Interest-bearing bank balances $ 2,179 5.04 % $ 822 5.07 %
Federal funds sold 7,985 4.89 9,436 5.56
Trading account assets 13,642 6.00 12,138 6.84
Securities 50,173 7.35 55,208 7.29
Commercial loans 76,821 8.30 74,945 9.04
Consumer loans 42,708 8.47 57,103 8.52
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Total loans 119,529 8.36 132,048 8.81
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Other earning assets 10,691 8.35 8,256 8.47
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Total earning assets 204,199 7.78 217,908 8.15
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Interest-bearing deposits 109,917 4.49 111,983 4.45
Federal funds purchased 26,072 5.68 36,024 5.77
Commercial paper 2,487 4.71 3,152 5.81
Other short-term borrowings 9,695 3.21 10,098 5.24
Long-term debt 36,442 5.71 33,060 6.44
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Total interest-bearing liabilities 184,613 4.83 194,317 5.10
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Net interest income and margin $ 3,476 3.42 % $ 3,919 3.60 %
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NET INTEREST MARGIN Net interest income on a tax-equivalent basis declined 11
percent from the first six months of 2000 to $3.5 billion in the first six
months of 2001, largely due to the decreased contribution of strategic
derivative positions, branch divestitures in the first quarter of 2001 and in
the fourth quarter of 2000, the sale of the credit card portfolio in the third
quarter of 2000 and the securitization and sale of home equity loans in the
first and second quarters of 2001. This was partially offset by wider spreads in
a declining interest rate environment as liabilities repriced faster than
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 18 basis points from the first six months of 2000. The
average rate earned on earning assets declined 37 basis points from the first
six months of 2000 to 7.78 percent in the first six months of 2001 and the
average rate paid on liabilities decreased 27 basis points from the first six
months of 2000 to 4.83 percent in the first six months of 2001. The Risk
Management section provides additional information on our methodology for
interest rate risk management.
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FEE AND OTHER INCOME
Three Months Ended Six Months Ended
June 30, June 30,
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(In millions) 2001 2000 2001 2000
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Service charges and fees $ 486 491 954 977
Commissions 389 375 764 843
Fiduciary and asset management fees 384 374 765 740
Advisory, underwriting and other
investment banking fees 238 182 436 391
Principal investing (58) 205 (101) 404
Other income 190 119 357 233
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Total fee and other income $ 1,629 1,746 3,175 3,588
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FEE AND OTHER INCOME On an operating basis, fee and other income was $3.2
billion in the first half of 2001, down 12 percent from the first six months of
2000 largely due to lower principal investing results and lower commissions in
difficult financial markets.
The 2 percent decline in services charges and fees reflected the impact of
branches we divested in connection with the strategic repositioning.
Commissions, which include brokerage and insurance commissions, decreased $79
million from the exceptionally strong first six months of 2000 to $764 million
in the first six months of 2001. Fiduciary and asset management fees grew
modestly despite a challenging market environment, reflecting a balanced mix of
funds. Mutual fund assets reached a record $90 billion. Advisory, underwriting
and other investment banking fees increased 12 percent from the first six months
of 2000 primarily due to improved results in fixed income businesses in
Corporate and Investment Banking.
Principal investing, which includes the results of investments in equity and
mezzanine securities, declined $505 million from the first six months of 2000 to
a loss of $101 million in the first six months of 2001.
Other income, which includes results from portfolio securities transactions and
asset sales and securitizations, increased $124 million from the first six
months of 2000 to $357 million in the first six months of 2001. Other income in
the first six months of 2001 included a $75 million gain recorded in connection
with the sale of Star Systems, Inc., offset by $34 million in affordable housing
write-downs, $16 million in investment securities losses and $44 million in
market value write-downs on loans held for sale. The first six months of 2000
included a $47 million charge to provide additional reserves against lease
residuals on our discontinued indirect auto lending and leasing business, $19
million in securities losses consisting principally of impairment losses on
residual interests, $66 million in market value write-downs on loans held for
sale and $34 million in affordable housing write-downs. Asset sales and
securitization gains amounted to $76 million in the first six months of 2001, a
decline of $36 million from the first six months of 2000.
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NONINTEREST EXPENSE
Three Months Ended Six Months Ended
June 30, June 30,
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(In millions) 2001 2000 2001 2000
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Salaries and employee benefits $ 1,363 1,396 2,692 2,825
Occupancy 155 155 318 312
Equipment 198 210 403 424
Advertising 11 31 20 61
Communications and supplies 111 122 221 247
Professional and consulting fees 69 82 142 153
Goodwill and other intangible amortization 77 100 155 202
Sundry expense 185 270 356 529
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Total noninterest expense $ 2,169 2,366 4,307 4,753
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NONINTEREST EXPENSE On an operating basis, noninterest expense declined 9
percent from the first six months of 2000 to $4.3 billion in the first six
months 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 amortization 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 62.43 percent in
the first six months of 2001 and 60.62 percent in the first six months 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, Corporate and Investment Banking, and the Parent. The
following discussion of segment results is on an operating basis, and
accordingly, excludes restructuring and other charges and gains related to the
strategic repositioning.
As the result of an in-depth review of our management reporting 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 (CAPM). For 2001, we have
calculated First Union's cost of capital to be 12 percent.
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GENERAL BANK
PERFORMANCE SUMMARY
Three Months Ended Six Months Ended
June 30, June 30,
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(In millions) 2001 2000 2001 2000
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INCOME STATEMENT DATA
Net interest income $ 1,128 1,086 2,213 2,155
Fee and other income 390 301 733 607
Intersegment revenue 27 25 52 51
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Total revenue 1,545 1,412 2,998 2,813
Provision for loan losses 98 51 199 70
Noninterest expense 935 966 1,843 1,911
Income taxes 169 127 318 269
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Operating earnings $ 343 268 638 563
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PERFORMANCE AND OTHER DATA
Economic profit $ 251 165 471 336
Risk adjusted return on capital (RAROC) 38.93 % 30.70 37.82 31.09
Economic capital $ 3,744 3,555 3,682 3,546
Overhead efficiency ratio 59.29 % 66.83 60.21 66.39
Average loans, net $ 65,501 58,105 64,641 57,298
Average core deposits $ 99,424 97,499 98,923 97,526
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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 save, 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 partnership with Capital
Management and with Corporate and Investment Banking.
Our multiple channels are fully integrated, which enables customers to have a
single view of their accounts and a choice on whether to use our full-service
retail financial centers, direct telephone bank, ATMs or the Internet.
On an operating basis, General Bank total revenue increased 7 percent to $3
billion in the first six months of 2001 largely due to improved sales production
and a renewed focus on attracting low cost core deposits. Fee and other income,
which reflected improved service charge income, higher mortgage-related income
and strong debit card revenues, increased 21 percent to $733 million. Net
interest income, reflecting average loan growth of $7 billion, increased
modestly. The provision for loan losses increased $129 million from the first
half of 2000. The Consumer provision increased $83 million, of which $31 million
was related to a write-down on nonperforming loans moved to assets held for sale
and increased charge-offs related to the normal aging of a growing First Union
Home Equity portfolio. The Commercial and Small Business provisions increased
$46 million.
Average net loans grew 13 percent from the first half of 2000, largely due to
across-the-board growth in Consumer loans, which increased $5 billion. The $2
billion increase in average commercial and small business loans from the first
six months of 2000 to $31 billion in the first six months of 2001 was driven by
a $1 billion increase in commercial real estate loans. General Bank average core
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deposits were $99 billion in the first six months of 2001, an increase of $1
billion from the first six months of 2000. Both Consumer and Commercial deposits
increased, primarily in interest checking, savings and money market accounts,
reflecting our focus on acquiring low cost core deposits.
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CAPITAL MANAGEMENT
PERFORMANCE SUMMARY
Three Months Ended Six Months Ended
June 30, June 30,
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(In millions) 2001 2000 2001 2000
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INCOME STATEMENT DATA
Net interest income $ 78 90 156 180
Fee and other income 771 752 1,536 1,603
Intersegment revenue (11) (13) (23) (26)
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Total revenue 838 829 1,669 1,757
Provision for loan losses - - - -
Noninterest expense 667 624 1,326 1,338
Income taxes 58 70 117 142
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Operating earnings $ 113 135 226 277
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PERFORMANCE AND OTHER DATA
Economic profit $ 82 105 164 214
Risk adjusted return on capital (RAROC) 45.32 % 55.54 45.63 54.55
Economic capital $ 986 972 986 1,012
Overhead efficiency ratio 79.47 % 75.23 79.31 76.09
Average loans, net $ 4,559 4,250 4,528 4,138
Average core deposits $ 7,976 7,888 7,989 7,814
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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 increased
modestly from year-end 2000 to $172 billion at June 30, 2001, as the trust and
mutual fund units continued to gain net new assets despite the unsettled market
conditions.
On an operating basis, Capital Management total revenue was $1.7 billion in the
first six months of 2001. This represented a 5 percent decline from an
exceptionally strong first six months of 2000, largely reflecting lower
brokerage commissions and the impact of lower market valuations. Net interest
income declined $24 million from the first six months of 2000 to $156 million in
the first six months of 2001. Noninterest expense was relatively flat at $1.3
billion in the first six months of 2000 and of 2001.
Fee and other income in Retail Brokerage Services declined $75 million from the
first six months of 2000 to $991 million in the first six months of 2001. Broker
client assets increased modestly from year-end 2000 to $205 billion at June 30,
2001. In the same period, the NASDAQ Composite declined 13 percent and the S&P
500 declined 7 percent.
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Asset Management fee and other income was essentially unchanged from the first
six months of 2000 at $309 million. Despite a challenging economic environment,
assets in the First Union-advised Evergreen mutual funds increased $5 billion
from year-end 2000 to $90 billion at June 30, 2001, reflecting period-end
improvement in the equity markets and solid net money market sales.
Wealth and Trust Services fee and other income declined $3 million from the
first six months of 2000 to $257 million in the first six months 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 six months of 2001, an increase
of $386 million from the first six months of 2000, and average core deposits of
$7.9 billion, an increase of $167 million from the first six months of 2000.
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CORPORATE AND INVESTMENT BANKING
PERFORMANCE SUMMARY
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
(In millions) 2001 2000 2001 2000
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INCOME STATEMENT DATA
Net interest income $ 455 376 880 778
Fee and other income 333 533 645 1,078
Intersegment revenue (15) (12) (27) (24)
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Total revenue 773 897 1,498 1,832
Provision for loan losses 93 126 163 215
Noninterest expense 490 509 957 964
Income taxes 37 63 75 172
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Operating earnings $ 153 199 303 481
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PERFORMANCE AND OTHER DATA
Economic profit $ (4) 72 (26) 217
Risk adjusted return on capital (RAROC) 11.74 % 16.91 11.16 19.62
Economic capital $ 6,112 5,940 6,195 5,739
Overhead efficiency ratio 59.93 % 54.36 60.38 50.53
Average loans, net $ 41,145 42,787 41,824 42,033
Average core deposits $ 10,202 8,928 9,835 9,069
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CORPORATE AND INVESTMENT BANKING Our Corporate and Investment Banking 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.
Corporate Banking includes large corporate lending, commercial leasing and rail,
and international operations. Investment Banking 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.
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On an operating basis, Corporate and Investment Banking total revenue was $1.5
billion in the first six months of 2001, a decline of $334 million from the
first six months of 2000 largely the result of a $505 million decline in
principal investing revenue. Excluding principal investing, total revenue
increased 13 percent and operating earnings were up 77 percent from the first
six months of 2000, representing broad growth in Corporate and Investment
Banking businesses, particularly in fixed income sales and trading. Corporate
and Investment Banking noninterest expense decreased 1 percent from the first
six months of 2000 to $957 million in the first six months of 2001 reflecting
expense control initiatives and the impact of the 2000 strategic repositioning.
Corporate Banking fee and other income increased $18 million from the first six
months of 2000 to $339 million in the first six months of 2001, with improved
results in international operations and corporate lending, offset by lower
structured products leasing results.
Investment Banking fee and other income declined $451 million from the first
six months of 2000 to $306 million in the first six months of 2001, primarily
as a result of a $101 million net loss in principal investing compared with a
gain of $404 million in the same period of 2000. The net loss in principal
investing was primarily from $206 million of net impairment losses in private
equity securities. Results for certain agency businesses also were dampened due
to the difficult market conditions. This was offset by a strong performance in
fixed income, where revenue grew by $117 million from the first six months of
2000.
Overall results in the agency businesses were relatively flat in difficult
markets. Increases in equity capital markets offset declines in loan
syndication. Results in the structured products businesses were negatively
affected by $75 million in losses in asset securitization related to certain
nonperforming securities, offset by increases in corporate real estate and
structured finance.
The revenues from Investment Banking 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 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 home equity lines 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 is classified as securities
available for sale, 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 June 30, 2001, we had securities with a market value of $48
billion, a decrease of $1 billion from December 31, 2000.
Included in securities at June 30, 2001, were residual interests with a market
value of $392 million, which included a net unrealized gain of $48 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.
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The average rate earned on securities was 7.35 percent in the first six months
of 2001 and 7.29 percent in the first six months of 2000. The average maturity
of the portfolio was 6.42 years at June 30, 2001.
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LOANS - ON-BALANCE SHEET
2001 2000
---------------------------- -------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
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COMMERCIAL
Commercial, financial and agricultural $ 52,516 52,687 54,207 53,325 53,870
Real estate - construction and other 3,060 3,345 3,104 2,751 2,600
Real estate - mortgage 7,964 9,187 9,218 9,286 9,239
Lease financing 16,903 16,625 15,465 13,997 13,181
Foreign 5,920 5,396 5,453 5,548 4,956
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Total commercial 86,363 87,240 87,447 84,907 83,846
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CONSUMER
Real estate - mortgage 17,277 17,678 17,708 19,108 25,204
Installment loans 24,597 23,253 22,972 22,634 21,797
Vehicle leasing 1,231 1,640 2,115 2,600 3,112
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Total consumer 43,105 42,571 42,795 44,342 50,113
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Total loans 129,468 129,811 130,242 129,249 133,959
Unearned income 6,976 6,958 6,482 5,830 5,600
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Loans, net (on-balance sheet) $ 122,492 122,853 123,760 123,419 128,359
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LOANS - MANAGED PORTFOLIO
(Including on-balance sheet)
2001 2000
---------------------------- -------------------------------------
SECOND Second Second Second Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
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Commercial $ 93,016 94,838 93,277 90,971 89,583
Real estate - mortgage 22,196 22,692 22,274 23,621 26,394
Installment loans 50,561 50,216 50,208 50,547 54,815
Vehicle leasing 1,231 1,640 2,115 2,600 3,112
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Total managed portfolio $ 167,004 169,386 167,874 167,739 173,904
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LOANS Net loans were $122 billion at June 30, 2001, and $124 billion at December
31, 2000. Commercial loans represented 67 percent and consumer loans 33 percent
of the loan portfolio at June 30, 2001. Managed loans decreased $870 million
from December 31, 2000, to $167 billion at June 30, 2001, largely related to a
decline in vehicle leasing. The average rate earned on loans decreased 45 basis
points from the first half of 2000 to 8.36 percent in the first half of 2001,
which was in line with reductions in interest rates.
At June 30, 2001, unused loan commitments related to commercial and consumer
loans were $95 billion and $34 billion, respectively. Commercial and standby
letters of credit were $14 billion. Loan participations sold to other lenders
amounted to $4.2 billion at June 30, 2001.
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ASSET QUALITY
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
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Loans, net $ 122,492 122,853 123,760 123,419 128,359
Allowance for loan losses $ 1,760 1,759 1,722 1,720 1,706
Allowance as % of loans, net 1.44 % 1.43 1.39 1.39 1.33
Allowance as % of nonperforming assets 133 % 132 135 181 193
Net charge-offs $ 157 159 192 142 228
Net charge-offs as % of average loans, net 0.52 % 0.53 0.64 0.46 0.69
Nonperforming assets
Nonaccrual loans $ 1,223 1,231 1,176 854 791
Foreclosed properties 104 106 103 97 93
Loans held for sale 250 344 334 349 331
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Total nonperforming assets $ 1,577 1,681 1,613 1,300 1,215
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Nonperforming assets to loans, net,
foreclosed properties and assets held for sale 1.23 % 1.30 1.22 0.98 0.87
- ----------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS At June 30, 2001, nonperforming assets were $1.6 billion, a
decrease of $36 million from December 31, 2000. This included $250 million in
nonperforming loans classified as assets held for sale. As a percentage of net
loans, foreclosed properties and loans held for sale, nonperforming assets were
1.23 percent at June 30, 2001, and 1.22 percent at December 31, 2000.
Nonperforming loans reduce interest income because the contribution from these
loans is eliminated or sharply reduced. In the first half of 2001, $107 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 half of 2001 was $22 million.
Impaired loans, which are included in nonperforming loans, amounted to $1.3
billion at June 30, 2001, and $923 million at December 31, 2000. Included in the
allowance for loan losses at June 30, 2001, was $116 million related to $788
million of impaired loans. The remaining impaired loans were recorded at or
below either the fair value of collateral or the present value of expected
future cash flows. In the first half of 2001, the average recorded investment in
impaired loans was $1.0 billion, and $11 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 held for sale, amounted to $213 million at June 30, 2001, and $183
million at December 31, 2000. Of these past due loans at June 30, 2001, $26
million were commercial loans or commercial real estate loans and $187 million
were consumer loans. Loans 30 to 89 days past due were $679 million at June 30,
2001.
NET CHARGE-OFFS Net charge-offs were 0.53 percent of average net loans in the
first half of 2001 and 0.63 percent in the first half of 2000. Net charge-offs
declined $101 million from the first half of 2000 to $316 million in the first
half of 2001. This reflected a $79 million decline in consumer net charge-offs
primarily related to the sale of the credit card portfolio and a $22 million
decrease in net charge-offs in the commercial portfolio in the first half of
2001.
PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses declined
$780 million from the first half of 2000 to $442 million in the first half of
2001. The provision in the first half of 2001 included $52 million related to
the sale or transfer of loans to held for sale compared with $537 million, most
of which related to the strategic repositioning, in the same period of 2000. The
provision related to the transfer of loans was recorded to reduce the carrying
value of these loans to their respective fair values.
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The allowance for loan losses was $1.8 billion at June 30, 2001, and $1.7
billion at December 31, 2000. The allowance as a percentage of net loans was
1.44 percent at June 30, 2001, and 1.39 percent at December 31, 2000.
Loans transferred to held for sale are carried at the lower of cost or market
value and, accordingly, they are not included in the evaluation of the adequacy
of the allowance for loan losses subsequent to the transfer.
LOANS HELD FOR SALE In the first half 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, at June 30, 2001, we retained as securities
available for sale $757 million of investment grade securities, $117 million of
non-investment grade securities and $12 million of residual interests. We also
sold $226 million of commercial loans from loans held for sale. Of the $7.9
billion of loans that were transferred to held for sale in the second and third
quarters of 2000 in connection with the strategic repositioning, $317 million
remained in held for sale at June 30, 2001, and nearly half of these were sold
early in the third quarter of 2001.
FUNDING SOURCES
CORE DEPOSITS Core deposits were $121 billion at June 30, 2001, a decline of $1
billion from December 31, 2000. Core deposits increased 4 percent from the first
half of 2000 excluding a $2.8 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 half of 2001, offsetting a decline in consumer CD balances. We also
continue to meet customer demand for alternative investment products or
deposits, depending on the customers' needs.
In the first half 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 27
percent at June 30, 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 $57 billion in the first half of 2001 and
$72 billion in the first half of 2000. The decrease from the first half 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
June 30, 2001, were $52 billion and at December 31, 2000, $60 billion.
LONG-TERM DEBT Long-term debt was $36 billion at June 30, 2001, and at December
31, 2000. In the second half of 2001, scheduled maturities of long-term debt
amount to $5.1 billion. We anticipate either extending the maturities of these
obligations or replacing the maturing obligations.
Long-term debt included $2 billion of trust capital securities at June 30, 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.
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, $16 billion of long-term debt has been
issued and was outstanding at June 30, 2001. The sale of any additional notes
will depend on future market conditions, funding needs and other factors.
Additionally in the second quarter of 2001, a subsidiary of First Union National
Bank issued $2.5 billion of 5.65 percent collateralized notes due in 2006. The
notes are collateralized primarily by investment grade securities and prime home
equity loans and they are redeemable at any time at the subsidiary's option.
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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.
CREDIT LINES We have a $175 million committed back-up line of credit that
expires in July 2002. This credit facility contains covenants that require First
Union to maintain a minimum level of tangible net worth, restrict double
leverage ratios and require capital levels at subsidiary banks to meet
regulatory standards. First Union has not used this line of credit.
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 June 30, 2001, and $15 billion at
December 31, 2000. Common shares outstanding amounted to 979 million at June 30,
2001, and 980 million at December 31, 2000. In the first half of 2001, we
repurchased 2 million shares at a cost of $105 million under a forward purchase
contract. We also repurchased 2 million shares of common stock at a cost of $67
million in the open market. At June 30, 2001, we had authority to repurchase up
to 99 million shares of our common stock. In the first half of 2000, we
repurchased 11 million shares of common stock at a cost of $353 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
$550 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 June 30, 2001, we had equity forward contracts outstanding involving 13
million shares at an aggregate cost of $600 million and forward purchase
contracts outstanding involving 33 million shares at an aggregate cost of $1.2
billion. These contracts mature at various times in 2001 and 2002 and can be
extended by mutual consent of the counterparties. In the first half 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 half of 2001, this had the effect of reducing
diluted earnings per share by 2 cents. We anticipate that the impact on diluted
earnings per share for 2001 will be approximately 3 cents. We anticipate that we
will settle approximately $500 million in equity forward contracts in the third
quarter of 2001.
We paid $471 million in dividends to common stockholders in the first half of
2001 and $949 million in the first half of 2000. The decline from the first half
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 37.50 percent in the first half of 2001
and 60.76 percent in the first half of 2000.
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 may pay.
Under these and other limitations, which include an internal requirement to
maintain all deposit-taking banks at the well-capitalized level, at June 30,
2001, our subsidiaries had $756 million available for dividends that could be
paid without prior regulatory approval. Our subsidiaries paid $1.0 billion in
dividends to the parent company in the first half of 2001.
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REGULATORY CAPITAL At June 30, 2001, our tier 1 and total capital ratios were
7.37 percent and 11.45 percent, respectively, and 6.65 percent and 10.57
percent, respectively, at June 30, 2000. Our leverage ratio at June 30, 2001,
was 6.00 percent and at June 30, 2000, 5.34 percent. At June 30, 2001, our
deposit-taking subsidiary banks met the capital and leverage ratio requirements
for well capitalized banks.
RISK MANAGEMENT
First Union is in the business of managing risk to create shareholder value. Our
objective is to earn competitive returns from our various business activities at
acceptable risk levels. This involves identifying and monitoring the risks, and
ensuring that the risks taken are within prudent limits and that they are
appropriately priced. 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 in the first half 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 June 30, 2001, and $15 million
at December 29, 2000, and primarily relates to interest rate risk and equity
risk. The high, low and average VARs in the first half of 2001 were $16 million,
$9 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 a combination 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 3.75 percent through June 2002. Based on our June 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"
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scenario), our earnings sensitivity model indicates earnings during the policy
measurement period would be negatively affected by 2.9 percent. Our model
indicates that earnings would benefit by 3.8 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 3.60 percent by October
2001, then gradually rises to 4.50 percent by the end of June 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 2.9 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 June 2001
outlook, if interest rates remain consistent with our "market rate" scenario
until June 1, 2002, and then increase by 200 basis points during 2002, earnings
in 2002 would decline by 2.9 percent.
While our interest rate sensitivity modeling assumes that management takes no
action, we regularly assess the viability of strategies to reduce unacceptable
risks to earnings, and we implement such strategies when we believe those
actions are prudent. As new monthly outlooks become available, 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.
At June 30, 2001, the fair value of derivatives used to manage our interest rate
sensitivity was $397 million, based on a notional amount of $139 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 half of 2001 amounted to a 14 basis point contribution to net interest
margin and net loss of $4 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 June 30,
2001, the total mark-to-market related credit risk for derivative transactions
in excess of counterparty thresholds was $869 million. The fair value of
collateral held exceeded the total mark-to-market related credit risk in excess
of counterparty thresholds as of that date. For nondealer transactions, the need
for collateral is evaluated on an individual transaction basis, and it is
primarily dependent on the financial strength of the counterparty.
ACCOUNTING AND REGULATORY MATTERS
In July 2001 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method. Also under SFAS 141, identified intangible assets acquired in a
purchase business combination must be separately valued and recognized on the
balance sheet if they meet certain requirements.
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Under the provisions of SFAS 142, goodwill and identified intangible assets with
indefinite useful lives are not subject to amortization. Rather they are subject
to impairment testing on an annual basis, or more often if events or
circumstances indicate that there may be impairment. Identified intangible
assets that have a finite useful life are amortized over that life in a manner
that reflects the estimated decline in the economic value of the intangible
asset, and reviewed for impairment when events or circumstances indicate that
there may be impairment.
The corporation is required to adopt the provisions of SFAS 141 immediately and
SFAS 142 on January 1, 2002. Any goodwill and any identified intangible assets
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001, will not be subject to
amortization. Goodwill and intangible assets acquired in purchase business
combinations completed before July 1, 2001, will continue to be amortized
through December 31, 2001. Upon adoption of SFAS 142 on January 1, 2002, all
amortization of goodwill and identified intangible assets with indefinite useful
lives will cease.
The goodwill and identified intangible assets with indefinite useful lives
recorded in connection with the acquisition of Wachovia will not be subject to
amortization. All other goodwill and identified intangible assets with
indefinite useful lives for acquisitions completed before July 1, 2001, will
continue to be amortized for the rest of 2001, after which all goodwill
amortization will cease. Goodwill amortization expense will amount to
approximately $60 million in each of the third and fourth quarters of 2001.
Under the provisions of SFAS 142, all goodwill and identified intangible assets
with an indefinite useful life must be tested for impairment as of January 1,
2002. This test involves assigning tangible and intangible assets, liabilities
and goodwill to reporting units and comparing the fair value of each reporting
unit to its carrying value. If the fair value is less that the carrying value, a
further test is required to measure the amount of goodwill impairment. In
accordance with the timetable specified in the standard, any resulting
impairment will be recorded in the statement of income as the cumulative effect
of a change in accounting principle.
The only significant identified intangible asset currently recorded on our
balance sheet is deposit base intangible (DBI) that, under the provision of SFAS
141, is an identified intangible asset subject to amortization. Accordingly, we
will continue to amortize the existing DBI as well as the amount recorded in
connection with the Wachovia acquisition that we estimate at approximately $1.8
billion. We are currently in the process of determining whether there are other
intangible assets associated with the Wachovia acquisition and the methodology
we will use to determine their respective fair values as of the acquisition
date.
Because of the recent release of these new standards and the extensive analysis
that will be required to adopt them, including performing the transitional
impairment tests, we are not in a position to estimate the impact of adopting
these standards, including whether any impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle.
In September 2000, the FASB issued 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 related to
transfers of financial assets and extinguishments of liabilities were adopted on
April 1, 2001. The effect of SFAS 140 on the corporation was not material.
In 1998 the FASB issued SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, which was subsequently 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.
18
21
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. 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 on January 1, 2001, amounted to a net after-tax unrealized gain of
$138 million and the net after-tax unrealized gain on 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.
19
22
TABLE 1
SELECTED STATISTICAL DATA
- -------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
Second First Fourth Third Second
(Dollars in millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
PROFITABILITY (a)
Diluted earnings per share $ 0.66 0.62 0.69 0.71 0.73
Diluted earnings per share - cash earnings $ 0.73 0.69 0.76 0.79 0.82
Return on average stockholders' equity 16.19 % 15.64 15.36 15.76 17.74
Return on average tangible stockholders' equity - cash earnings 23.35 22.91 21.55 22.15 30.18
Net interest margin (b) 3.41 3.42 3.46 3.52 3.51
Fee and other income as % of total revenue 48.32 47.13 47.38 46.93 47.50
Overhead efficiency ratio - cash earnings 62.06 % 62.80 61.46 64.17 61.64
Operating leverage - cash earnings (c) $ 59 (67) 31 (154) (136)
Effective income tax rate 31.54 % 31.54 31.21 30.43 32.45
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
Tier 1 capital ratio 7.37 % 7.18 7.02 7.00 6.65
Total capital ratio 11.45 % 11.33 11.19 11.32 10.57
- -------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Allowance as % of loans, net 1.44 % 1.43 1.39 1.39 1.33
Allowance as % of nonperforming assets (d) 133 132 135 181 193
Net charge-offs as % of average loans, net 0.52 0.53 0.64 0.46 0.69
Nonperforming assets as % of loans, net,
foreclosed properties and assets held for sale 1.23 % 1.30 1.22 0.98 0.87
- -------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Employees 67,420 69,362 70,639 70,533 72,890
Branches 2,162 2,164 2,193 2,253 2,258
ATMs 3,419 3,676 3,772 3,831 3,832
Shares outstanding (In thousands) 979,205 981,268 979,963 986,004 986,394
Common stock price $ 34.94 33.00 27.81 32.19 25.00
Market capitalization $ 34,213 32,382 27,253 31,739 24,660
=========================================================================================================================
(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.
20
23
TABLE 2
SUMMARY INCOME, PER SHARE AND BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- --------------------------------
Second First Fourth Third Second
(In millions, except per share data) Quarter Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 3,820 4,025 4,264 4,465 4,492
======================================================================================================================
Interest income (a) $ 3,851 4,057 4,289 4,491 4,517
Interest expense 2,109 2,323 2,532 2,631 2,587
- ----------------------------------------------------------------------------------------------------------------------
Net interest income (a) 1,742 1,734 1,757 1,860 1,930
Provision for loan losses 223 219 192 322 1,030
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 1,519 1,515 1,565 1,538 900
Securities transactions - portfolio - (16) (72) (456) (581)
Fee and other income 1,630 1,590 1,825 2,639 1,515
Restructuring and merger-related charges (69) 2 33 52 2,110
Other noninterest expense 2,266 2,207 2,344 2,396 2,393
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) and
cumulative effect of a change in accounting
principle (a) 952 880 941 1,273 (2,669)
Income taxes (benefits) 288 264 271 395 (495)
Tax-equivalent adjustment 31 32 25 26 25
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in
accounting principle 633 584 645 852 (2,199)
Cumulative effect of a change in the accounting for
beneficial interests, net of tax - - (46) - -
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 633 584 599 852 (2,199)
======================================================================================================================
PER SHARE DATA
Basic
Income (loss) before change in accounting principle $ 0.65 0.60 0.66 0.87 (2.27)
Net income (loss) 0.65 0.60 0.61 0.87 (2.27)
Diluted
Income (loss) before change in accounting principle 0.64 0.59 0.65 0.86 (2.27)
Net income (loss) 0.64 0.59 0.60 0.86 (2.27)
Cash dividends $ 0.24 0.24 0.48 0.48 0.48
Average shares - Basic (In thousands) 969,333 967,671 969,097 971,453 969,707
Average shares - Diluted (In thousands) 978,185 975,847 990,445 986,763 981,940
Average stockholders' equity
Quarter-to-date $ 16,026 15,846 14,753 14,236 16,614
Year-to-date 15,937 15,846 15,541 15,805 16,599
Book value 16.49 16.39 15.66 15.00 14.14
Common stock price
High 34.94 34.09 34.13 32.63 38.88
Low 29.70 27.81 24.00 25.00 25.00
Period-end $ 34.94 33.00 27.81 32.19 25.00
To earnings ratio (b) 12.99 X (150.00) 397.29 107.30 89.29
To book value 212 % 201 178 215 177
BALANCE SHEET DATA
Assets $ 245,941 252,949 254,170 246,640 257,994
Long-term debt $ 36,060 36,092 35,809 36,258 33,140
======================================================================================================================
(a) Tax-equivalent.
(b) Based on diluted earnings per share.
21
24
TABLE 3
RESTRUCTURING CHARGES
- -----------------------------------------------------------------------------------------------------------------------
Six
Months
Ended
June 30,
(In millions) 2001
- -----------------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES (REVERSALS)
Strategic repositioning
restructuring charges
(reversals), net
Employee termination benefits $ (24)
Occupancy (32)
Other asset impairments (1)
Contract cancellations (16)
- -----------------------------------------------------------------------------------------------------------------------
Total restructuring charges (reversals) (73)
Reversal of March 1999 restructuring accruals related
primarily to employee termination benefits (14)
- -----------------------------------------------------------------------------------------------------------------------
Net restructuring charges (87)
Merger-related charges 20
- -----------------------------------------------------------------------------------------------------------------------
Total $ (67)
=======================================================================================================================
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
Cash payments (57) (4) (2) (1) (64)
Reversal of prior accruals (73) - - - (73)
Noncash write-downs and
other adjustments (46) - - - (46)
- -----------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 25 10 31 27 93
=======================================================================================================================
22
25
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL BANK COMBINED (a)
Net interest income $ 1,128 1,085 1,093 1,097 1,086
Fee and other income 390 343 355 352 301
Intersegment revenue 27 25 25 24 25
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,545 1,453 1,473 1,473 1,412
Provision for loan losses 98 101 74 52 51
Noninterest expense 935 908 992 948 966
Income taxes 169 149 129 154 127
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 343 295 278 319 268
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 38.93 % 36.65 31.97 35.33 30.70
Overhead efficiency ratio 59.29 % 61.19 65.77 62.89 66.83
Economic profit $ 251 220 183 212 165
Average loans, net 65,501 63,771 61,735 60,029 58,105
Average core deposits 99,424 98,415 98,184 97,186 97,499
Economic capital $ 3,744 3,618 3,653 3,615 3,555
==============================================================================================================================
CONSUMER
Net interest income $ 793 755 746 759 755
Fee and other income 299 256 267 251 231
Intersegment revenue 12 12 12 12 13
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,104 1,023 1,025 1,022 999
Provision for loan losses 62 59 35 32 31
Noninterest expense 731 704 751 732 738
Income taxes 106 90 81 88 77
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 205 170 158 170 153
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 43.26 % 41.12 34.73 37.44 34.71
Overhead efficiency ratio 65.15 % 67.61 72.03 70.42 72.58
Economic profit $ 162 140 112 124 108
Average loans, net 34,307 33,034 31,942 30,703 29,246
Average core deposits 80,607 80,241 79,897 79,504 79,838
Economic capital $ 2,076 1,952 1,960 1,936 1,907
==============================================================================================================================
(a) General Bank Combined represents the consolidation of the General Bank's
Consumer, Commercial and Small Business lines of business.
(Continued)
23
26
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Net interest income $ 172 169 179 172 170
Fee and other income 39 35 36 33 33
Intersegment revenue 14 12 13 12 12
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 225 216 228 217 215
Provision for loan losses 17 21 29 17 18
Noninterest expense 112 107 150 129 139
Income taxes 28 27 9 20 13
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 68 61 40 51 45
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 22.99 % 20.76 14.59 16.05 14.20
Overhead efficiency ratio 47.39 % 47.92 62.26 56.71 61.18
Economic profit $ 30 24 7 11 6
Average loans, net 23,320 23,204 22,472 22,077 21,926
Average core deposits 10,106 9,479 9,467 8,908 8,967
Economic capital $ 1,098 1,116 1,146 1,130 1,129
==============================================================================================================================
SMALL BUSINESS
Net interest income $ 163 161 168 166 161
Fee and other income 52 52 52 68 37
Intersegment revenue 1 1 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 216 214 220 234 198
Provision for loan losses 19 21 10 3 2
Noninterest expense 92 97 91 87 89
Income taxes 35 32 39 46 37
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 70 64 80 98 70
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 53.89 % 53.06 58.56 67.60 51.89
Overhead efficiency ratio 42.26 % 44.21 40.62 36.18 44.24
Economic profit $ 59 56 64 77 51
Average loans, net 7,874 7,533 7,321 7,249 6,933
Average core deposits 8,711 8,695 8,820 8,774 8,694
Economic capital $ 570 550 547 549 519
==============================================================================================================================
(Continued)
24
27
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT COMBINED (a)
Net interest income $ 78 78 89 86 90
Fee and other income 771 765 777 761 752
Intersegment revenue (11) (12) (12) (13) (13)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 838 831 854 834 829
Provision for loan losses - - - - -
Noninterest expense 667 659 654 652 624
Income taxes 58 59 68 62 70
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 113 113 132 120 135
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 45.32 % 45.93 53.10 48.45 55.54
Overhead efficiency ratio 79.47 % 79.15 76.66 78.11 75.23
Economic profit $ 82 82 101 90 105
Average loans, net 4,559 4,497 4,424 4,295 4,250
Average core deposits 7,976 8,003 7,879 7,935 7,888
Economic capital 986 985 974 979 972
Assets under management $ 172,158 168,343 170,730 173,145 165,630
==============================================================================================================================
RETAIL BROKERAGE SERVICES
Net interest income $ 36 36 41 38 38
Fee and other income 499 492 491 480 485
Intersegment revenue (11) (11) (12) (12) (13)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 524 517 520 506 510
Provision for loan losses - - - - -
Noninterest expense 459 451 446 449 427
Income taxes 21 23 24 20 28
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 44 43 50 37 55
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 27.50 % 26.57 30.73 22.75 34.41
Overhead efficiency ratio 87.28 % 87.39 85.55 88.90 83.62
Economic profit $ 26 23 30 18 36
Average loans, net - 1 - 1 -
Average core deposits 79 104 79 70 74
Economic capital $ 643 650 643 648 646
==============================================================================================================================
ASSET MANAGEMENT
Net interest income $ (14) (11) (8) (8) (5)
Fee and other income 153 156 162 164 152
Intersegment revenue - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 139 145 154 156 147
Provision for loan losses - - - - -
Noninterest expense 90 89 95 89 88
Income taxes 16 20 20 23 20
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 33 36 39 44 39
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 109.52 % 121.75 123.11 139.70 129.11
Overhead efficiency ratio 64.21 % 61.62 61.93 57.16 59.68
Economic profit $ 29 33 35 40 35
Average loans, net 9 1 - - -
Average core deposits 19 5 - - -
Economic capital $ 122 121 125 125 122
==============================================================================================================================
(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)
25
28
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
WEALTH AND TRUST SERVICES
Net interest income $ 54 52 54 55 56
Fee and other income 129 128 133 130 129
Intersegment revenue 1 (1) (1) (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 184 179 186 184 184
Provision for loan losses - - - - -
Noninterest expense 128 128 123 122 119
Income taxes 20 17 21 21 22
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 36 34 42 41 43
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 61.68 % 61.62 77.65 75.64 81.84
Overhead efficiency ratio 69.69 % 70.60 65.82 66.32 64.33
Economic profit $ 27 27 34 33 36
Average loans, net 4,550 4,496 4,423 4,295 4,249
Average core deposits 7,878 7,894 7,800 7,865 7,814
Economic capital $ 225 217 209 208 207
==============================================================================================================================
OTHER
Net interest income $ 2 1 2 1 1
Fee and other income (10) (11) (9) (13) (14)
Intersegment revenue (1) - 1 - 1
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue (9) (10) (6) (12) (12)
Provision for loan losses - - - - -
Noninterest expense (10) (9) (10) (8) (10)
Income taxes 1 (1) 3 (2) -
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ - - 1 (2) (2)
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital - % - - - -
Overhead efficiency ratio - % - - - -
Economic profit $ - (1) 2 (1) (2)
Average loans, net - (1) 1 (1) 1
Average core deposits - - - - -
Economic capital $ (4) (3) (3) (2) (3)
==============================================================================================================================
(Continued)
26
29
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
CORPORATE AND INVESTMENT
BANKING COMBINED (a)
Net interest income $ 455 425 415 398 376
Fee and other income 333 312 268 363 533
Intersegment revenue (15) (12) (13) (12) (12)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 773 725 670 749 897
Provision for loan losses 93 70 124 83 126
Noninterest expense 490 467 431 498 509
Income taxes 37 38 (53) 30 63
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 153 150 168 138 199
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 11.74 % 10.60 13.81 10.38 16.91
Overhead efficiency ratio 59.93 % 60.85 53.28 62.99 54.36
Economic profit $ (4) (22) 28 (25) 72
Average loans, net 41,145 42,511 41,922 42,169 42,787
Average core deposits 10,202 9,465 9,251 9,099 8,928
Economic capital $ 6,112 6,278 6,259 6,167 5,940
==============================================================================================================================
CORPORATE BANKING
Net interest income $ 345 343 363 354 337
Fee and other income 174 165 169 162 157
Intersegment revenue (8) (8) (9) (10) (10)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 511 500 523 506 484
Provision for loan losses 95 71 123 80 114
Noninterest expense 231 239 217 254 220
Income taxes 63 65 63 58 50
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 122 125 120 114 100
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 17.65 % 16.48 18.85 15.33 16.59
Overhead efficiency ratio 45.02 % 47.51 41.58 50.15 45.31
Economic profit $ 49 39 63 30 40
Average loans, net 35,737 36,735 35,729 35,836 36,304
Average core deposits 7,753 7,470 7,385 7,362 7,303
Economic capital $ 3,478 3,526 3,636 3,565 3,528
==============================================================================================================================
INVESTMENT BANKING
Net interest income $ 110 82 52 44 39
Fee and other income 159 147 99 201 376
Intersegment revenue (7) (4) (4) (2) (2)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 262 225 147 243 413
Provision for loan losses (2) (1) 1 3 12
Noninterest expense 259 228 214 244 289
Income taxes (26) (27) (116) (28) 13
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 31 25 48 24 99
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 3.94 % 3.06 6.82 3.60 17.37
Overhead efficiency ratio 84.80 % 80.60 74.61 85.83 64.06
Economic profit $ (53) (61) (35) (55) 32
Average loans, net 5,408 5,776 6,193 6,333 6,483
Average core deposits 2,449 1,995 1,866 1,737 1,625
Economic capital $ 2,634 2,752 2,623 2,602 2,412
==============================================================================================================================
(a) Corporate and Investment Banking Combined represents the consolidation of
Corporate and Investment Banking's Corporate Banking and Investment Banking
lines of business.
(Continued)
27
30
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------ ----------------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------
PARENT
Net interest income $ 50 114 135 253 353
Fee and other income 135 126 182 169 160
Intersegment revenue (1) (1) - 1 -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 184 239 317 423 513
Provision for loan losses 32 48 (6) 7 51
Noninterest expense 77 104 55 230 267
Income taxes 35 35 165 61 83
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 40 52 103 125 112
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 34.82 % 34.98 34.74 35.03 33.11
Overhead efficiency ratio 9.32 % 18.46 (4.58) 40.57 37.23
Economic profit $ 79 94 99 116 123
Average loans, net 8,007 9,071 12,012 16,982 27,472
Average core deposits 1,433 2,309 3,630 3,854 3,941
Economic capital $ 1,382 1,642 1,730 2,009 2,325
==============================================================================================================================
CONSOLIDATED
Net interest income $ 1,711 1,702 1,732 1,834 1,905
Fee and other income 1,629 1,546 1,582 1,645 1,746
Intersegment revenue - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 3,340 3,248 3,314 3,479 3,651
Provision for loan losses 223 219 192 142 228
Noninterest expense 2,169 2,138 2,132 2,328 2,366
Income taxes 299 281 309 307 343
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings 649 610 681 702 714
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring, merger-related
and other charges/gains
Provision for loan losses - - - (180) (802)
Fee and other income 1 28 171 538 (812)
Noninterest expense (28) (71) (245) (120) (2,137)
Income tax benefit (expense) 11 17 38 (88) 838
- ------------------------------------------------------------------------------------------------------------------------------
After-tax restructuring, merger-
related and other charges/gains (16) (26) (36) 150 (2,913)
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of a change in accounting
principle 633 584 645 852 (2,199)
Cumulative effect of a change in
the accounting for beneficial
interests, net of tax - - (46) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 633 584 599 852 (2,199)
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 25.39 % 24.10 24.97 24.24 26.62
Overhead efficiency ratio 62.06 % 62.80 61.46 64.17 61.64
Economic profit $ 408 374 411 393 465
Average loans, net 119,212 119,850 120,093 123,475 132,614
Average core deposits 119,035 118,192 118,944 118,074 118,256
Economic capital $ 12,224 12,523 12,616 12,770 12,792
==============================================================================================================================
(Continued)
28
31
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
GENERAL BANK COMBINED (a)
Net interest income $ 2,213 2,155
Fee and other income 733 607
Intersegment revenue 52 51
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,998 2,813
Provision for loan losses 199 70
Noninterest expense 1,843 1,911
Income taxes 318 269
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 638 563
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 37.82 % 31.09
Overhead efficiency ratio 60.21 % 66.39
Economic profit $ 471 336
Average loans, net 64,641 57,298
Average core deposits 98,923 97,526
Economic capital $ 3,682 3,546
==============================================================================================================================
CONSUMER
Net interest income $ 1,548 1,492
Fee and other income 555 449
Intersegment revenue 24 26
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,127 1,967
Provision for loan losses 121 38
Noninterest expense 1,435 1,467
Income taxes 196 156
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 375 306
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 42.23 % 33.52
Overhead efficiency ratio 66.34 % 73.30
Economic profit $ 302 202
Average loans, net 33,674 28,465
Average core deposits 80,425 79,696
Economic capital $ 2,014 1,888
==============================================================================================================================
(a) General Bank Combined represents the consolidation of the General Bank's
Consumer, Commercial and Small Business lines of business.
(Continued)
29
32
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
Net interest income $ 341 343
Fee and other income 74 72
Intersegment revenue 26 24
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 441 439
Provision for loan losses 38 28
Noninterest expense 219 269
Income taxes 55 36
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 129 106
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 21.87 % 15.87
Overhead efficiency ratio 47.65 % 58.14
Economic profit $ 54 22
Average loans, net 23,263 21,986
Average core deposits 9,794 9,110
Economic capital $ 1,107 1,138
==============================================================================================================================
SMALL BUSINESS
Net interest income $ 324 320
Fee and other income 104 86
Intersegment revenue 2 1
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 430 407
Provision for loan losses 40 4
Noninterest expense 189 175
Income taxes 67 77
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 134 151
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 53.49 % 55.61
Overhead efficiency ratio 43.23 % 42.37
Economic profit $ 115 112
Average loans, net 7,704 6,847
Average core deposits 8,704 8,720
Economic capital $ 561 520
==============================================================================================================================
(Continued)
30
33
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT COMBINED (a)
Net interest income $ 156 180
Fee and other income 1,536 1,603
Intersegment revenue (23) (26)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,669 1,757
Provision for loan losses - -
Noninterest expense 1,326 1,338
Income taxes 117 142
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 226 277
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 45.63 % 54.55
Overhead efficiency ratio 79.31 % 76.09
Economic profit $ 164 214
Average loans, net 4,528 4,138
Average core deposits 7,989 7,814
Economic capital 986 1,012
Assets under management $ 172,158 165,630
==============================================================================================================================
RETAIL BROKERAGE SERVICES
Net interest income $ 72 78
Fee and other income 991 1,066
Intersegment revenue (22) (26)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,041 1,118
Provision for loan losses - -
Noninterest expense 910 942
Income taxes 44 60
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 87 116
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 26.62 % 33.87
Overhead efficiency ratio 87.51 % 84.25
Economic profit $ 49 75
Average loans, net - 1
Average core deposits 92 95
Economic capital $ 647 690
==============================================================================================================================
ASSET MANAGEMENT
Net interest income $ (25) (10)
Fee and other income 309 308
Intersegment revenue - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 284 298
Provision for loan losses - -
Noninterest expense 179 180
Income taxes 36 40
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 69 78
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 115.58 % 130.51
Overhead efficiency ratio 62.90 % 60.31
Economic profit $ 62 70
Average loans, net 5 -
Average core deposits 12 -
Economic capital $ 121 120
==============================================================================================================================
(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)
31
34
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
WEALTH AND TRUST SERVICES
Net interest income $ 106 111
Fee and other income 257 260
Intersegment revenue - (2)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 363 369
Provision for loan losses - -
Noninterest expense 256 244
Income taxes 37 42
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 70 83
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 61.65 % 78.76
Overhead efficiency ratio 70.14 % 65.88
Economic profit $ 54 68
Average loans, net 4,523 4,137
Average core deposits 7,886 7,719
Economic capital $ 221 206
==============================================================================================================================
OTHER
Net interest income $ 3 1
Fee and other income (21) (31)
Intersegment revenue (1) 2
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue (19) (28)
Provision for loan losses - -
Noninterest expense (19) (28)
Income taxes - -
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ - -
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital - % -
Overhead efficiency ratio - % -
Economic profit $ (1) 1
Average loans, net - -
Average core deposits (1) -
Economic capital $ (3) (4)
==============================================================================================================================
(Continued)
32
35
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
CORPORATE AND INVESTMENT
BANKING COMBINED (a)
Net interest income $ 880 778
Fee and other income 645 1,078
Intersegment revenue (27) (24)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,498 1,832
Provision for loan losses 163 215
Noninterest expense 957 964
Income taxes 75 172
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 303 481
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 11.16 % 19.62
Overhead efficiency ratio 60.38 % 50.53
Economic profit $ (26) 217
Average loans, net 41,824 42,033
Average core deposits 9,835 9,069
Economic capital $ 6,195 5,739
==============================================================================================================================
CORPORATE BANKING
Net interest income $ 688 678
Fee and other income 339 321
Intersegment revenue (16) (19)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,011 980
Provision for loan losses 166 170
Noninterest expense 470 437
Income taxes 128 126
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 247 247
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 17.06 % 17.59
Overhead efficiency ratio 46.26 % 44.56
Economic profit $ 88 95
Average loans, net 36,234 35,440
Average core deposits 7,612 7,475
Economic capital $ 3,502 3,444
==============================================================================================================================
INVESTMENT BANKING
Net interest income $ 192 100
Fee and other income 306 757
Intersegment revenue (11) (5)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 487 852
Provision for loan losses (3) 45
Noninterest expense 487 527
Income taxes (53) 46
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 56 234
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 3.50 % 22.67
Overhead efficiency ratio 87.13 % 56.82
Economic profit $ (114) 122
Average loans, net 5,590 6,593
Average core deposits 2,223 1,594
Economic capital $ 2,693 2,295
==============================================================================================================================
(a) Corporate and Investment Banking Combined represents the consolidation of
Corporate and Investment Banking's Corporate Banking and Investment Banking
lines of business.
(Continued)
33
36
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
------------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
PARENT
Net interest income $ 164 758
Fee and other income 261 300
Intersegment revenue (2) (1)
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 423 1,057
Provision for loan losses 80 135
Noninterest expense 181 540
Income taxes 70 151
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings $ 92 231
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 34.91 % 35.05
Overhead efficiency ratio 14.55 % 36.26
Economic profit $ 173 272
Average loans, net 8,536 28,579
Average core deposits 1,869 3,755
Economic capital $ 1,510 2,366
==============================================================================================================================
CONSOLIDATED
Net interest income $ 3,413 3,871
Fee and other income 3,175 3,588
Intersegment revenue - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 6,588 7,459
Provision for loan losses 442 420
Noninterest expense 4,307 4,753
Income taxes 580 734
- ------------------------------------------------------------------------------------------------------------------------------
Operating earnings 1,259 1,552
- ------------------------------------------------------------------------------------------------------------------------------
Adjustments from operating
earnings to net income
Restructuring, merger-related
and other charges/gains
Provision for loan losses - (802)
Fee and other income 29 (812)
Noninterest expense (99) (2,132)
Income tax benefit (expense) 28 835
- ------------------------------------------------------------------------------------------------------------------------------
After-tax restructuring, merger-
related and other charges/gains (42) (2,911)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,217 (1,359)
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 24.74 % 28.51
Overhead efficiency ratio 62.43 % 60.62
Economic profit $ 782 1,039
Average loans, net 119,529 132,048
Average core deposits 118,616 118,164
Economic capital $ 12,373 12,663
==============================================================================================================================
(Continued)
34
37
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2001
-------------------------------------------------------------------------------------
RESTRUCTURING,
MERGER-
CORPORATE RELATED
AND AND OTHER
GENERAL CAPITAL INVESTMENT CHARGES/
(In millions) BANK MANAGEMENT BANKING PARENT GAINS (a) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income $ 1,128 78 455 50 - 1,711
Fee and other income 390 771 333 135 1 1,630
Intersegment revenue 27 (11) (15) (1) - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,545 838 773 184 1 3,341
Provision for loan losses 98 - 93 32 - 223
Noninterest expense 935 667 490 77 28 2,197
Income taxes 169 58 37 35 (11) 288
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 343 113 153 40 (16) 633
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 38.93 % 45.32 11.74 34.82 - 25.39
Overhead efficiency ratio 59.29 % 79.47 59.93 9.32 - 62.06
Economic profit $ 251 82 (4) 79 - 408
Average loans, net 65,501 4,559 41,145 8,007 - 119,212
Average core deposits 99,424 7,976 10,202 1,433 - 119,035
Economic capital $ 3,744 986 6,112 1,382 - 12,224
==============================================================================================================================
(a) See "Restructuring and Other Charges and Gains" on page 4 of Management's
Analysis of Operations and the Consolidated Condensed Statements of Income on
page 52 for information related to the restructuring charges and gains.
Three Months Ended June 30, 2000
-------------------------------------------------------------------------------------
Restructuring,
Merger-
Corporate Related
and and Other
General Capital Investment Charges/
(In millions) Bank Management Banking Parent Gains Total
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income $ 1,086 90 376 353 - 1,905
Fee and other income 301 752 533 160 (812) 934
Intersegment revenue 25 (13) (12) - - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 1,412 829 897 513 (812) 2,839
Provision for loan losses 51 - 126 51 802 1,030
Noninterest expense 966 624 509 267 2,137 4,503
Income taxes 127 70 63 83 (838) (495)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 268 135 199 112 (2,913) (2,199)
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 30.70 % 55.54 16.91 33.11 - 26.62
Overhead efficiency ratio 66.83 % 75.23 54.36 37.23 - 61.64
Economic profit $ 165 105 72 123 - 465
Average loans, net 58,105 4,250 42,787 27,472 - 132,614
Average core deposits 97,499 7,888 8,928 3,941 - 118,256
Economic capital $ 3,555 972 5,940 2,325 - 12,792
==============================================================================================================================
(Continued)
35
38
TABLE 4
BUSINESS SEGMENTS
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------------------------------------------------------
RESTRUCTURING,
MERGER-
CORPORATE RELATED
AND AND OTHER
GENERAL CAPITAL INVESTMENT CHARGES/
(In millions) BANK MANAGEMENT BANKING PARENT GAINS (a) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income $ 2,213 156 880 164 - 3,413
Fee and other income 733 1,536 645 261 29 3,204
Intersegment revenue 52 (23) (27) (2) - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,998 1,669 1,498 423 29 6,617
Provision for loan losses 199 - 163 80 - 442
Noninterest expense 1,843 1,326 957 181 99 4,406
Income taxes 318 117 75 70 (28) 552
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 638 226 303 92 (42) 1,217
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 37.82 % 45.63 11.16 34.91 - 24.74
Overhead efficiency ratio 60.21 % 79.31 60.38 14.55 - 62.43
Economic profit $ 471 164 (26) 173 - 782
Average loans, net 64,641 4,528 41,824 8,536 - 119,529
Average core deposits 98,923 7,989 9,835 1,869 - 118,616
Economic capital $ 3,682 986 6,195 1,510 - 12,373
==============================================================================================================================
(a) See "Restructuring and Other Charges and Gains" on page 4 of Management's
Analysis of Operations and the Consolidated Condensed Statements of Income on
page 52 for information related to the restructuring charges and gains.
Six Months Ended June 30, 2000
-------------------------------------------------------------------------------------
Restructuring,
Merger-
Corporate Related
and and Other
General Capital Investment Charges/
(In millions) Bank Management Banking Parent Gains Total
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income $ 2,155 180 778 758 - 3,871
Fee and other income 607 1,603 1,078 300 (812) 2,776
Intersegment revenue 51 (26) (24) (1) - -
- ------------------------------------------------------------------------------------------------------------------------------
Total revenue 2,813 1,757 1,832 1,057 (812) 6,647
Provision for loan losses 70 - 215 135 802 1,222
Noninterest expense 1,911 1,338 964 540 2,132 6,885
Income taxes 269 142 172 151 (835) (101)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 563 277 481 231 (2,911) (1,359)
- ------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 31.09 % 54.55 19.62 35.05 - 28.51
Overhead efficiency ratio 66.39 % 76.09 50.53 36.26 - 60.62
Economic profit $ 336 214 217 272 - 1,039
Average loans, net 57,298 4,138 42,033 28,579 - 132,048
Average core deposits 97,526 7,814 9,069 3,755 - 118,164
Economic capital $ 3,546 1,012 5,739 2,366 - 12,663
==============================================================================================================================
36
39
TABLE 5
FEE AND OTHER INCOME - CORPORATE AND INVESTMENT BANKING (a)
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE BANKING
Lending $ 64 58 72 64 36
Leasing 48 45 37 35 62
International 62 62 60 63 59
- ------------------------------------------------------------------------------------------------------------------------
Total 174 165 169 162 157
Intersegment revenue (8) (8) (9) (10) (10)
- ------------------------------------------------------------------------------------------------------------------------
Total Corporate Banking 166 157 160 152 147
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT BANKING
Agency 117 44 120 85 114
Principal investing (58) (43) (43) 34 205
Fixed income 115 165 87 93 75
Affordable housing (15) (19) (65) (11) (18)
- ------------------------------------------------------------------------------------------------------------------------
Total 159 147 99 201 376
Intersegment revenue (7) (4) (4) (2) (2)
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Banking 152 143 95 199 374
- ------------------------------------------------------------------------------------------------------------------------
Total fee and other income - Corporate
and Investment Banking $ 318 300 255 351 521
========================================================================================================================
(a) The aggregate amounts of trading account profits included in this table in
the second and first quarters of 2001 and in the fourth, third and second
quarters of 2000 were $110 million, $83 million, $57 million, $70 million and
$73 million, respectively.
TABLE 6
SELECTED RATIOS
- -------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, 2001 2000
------------------------- ------------------------- ---------------------------------
SECOND First Fourth Third Second
2001 2000 QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 15.46 X 15.18 15.43 15.49 16.23 17.34 15.38
Return on assets 1.00 % (1.08) 1.03 0.97 1.00 1.37 (3.46)
Return on stockholders' equity 15.40 % (16.47) 15.84 14.95 16.15 23.81 (53.24)
=========================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings 37.50 % 60.76 36.36 38.71 69.57 67.42 65.75
Net income (b) 39.02 % - 37.50 40.68 80.00 55.59 -
=========================================================================================================================
OTHER RATIOS
Operating earnings
Return on assets 1.03 % 1.24 1.05 1.01 1.12 1.12 1.13
Return on stockholders' equity 15.92 % 19.04 16.19 15.64 15.36 15.76 17.74
=========================================================================================================================
(a) Based on average balances and net income.
(b) Dividend payout ratios are not presented for periods in which there is a net
loss.
37
40
TABLE 7
SECURITIES (a)
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 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 $ - 1 2 235 238 - 21 259 26.14
U.S. Government agencies 40 6,624 16,562 - 23,226 57 418 23,587 6.31
Asset-backed 92 10,120 5,942 289 16,443 206 72 16,309 4.14
State, county and municipal 31 169 346 1,317 1,863 145 3 1,721 21.24
Sundry 316 586 3,863 1,520 6,285 60 94 6,319 8.21
- -------------------------------------------------------------------------------------------------------------------------
Total market value $ 479 17,500 26,715 3,361 48,055 468 608 48,195 6.42
====================================================================================================================================
MARKET VALUE
Debt securities $ 479 17,500 26,715 2,216 46,910 460 590 47,040
Equity securities - - - 1,145 1,145 8 18 1,155
- -------------------------------------------------------------------------------------------------------------------------
Total market value $ 479 17,500 26,715 3,361 48,055 468 608 48,195
=========================================================================================================================
AMORTIZED COST
Debt securities $ 478 17,296 27,092 2,174 47,040
Equity securities - - - 1,155 1,155
- -----------------------------------------------------------------------------------------
Total amortized cost $ 478 17,296 27,092 3,329 48,195
=========================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury - % 4.64 8.04 5.33 5.34
U.S. Government agencies 6.69 6.53 6.50 - 6.51
Asset-backed 11.51 8.76 7.31 7.66 8.23
State, county and municipal 9.17 9.84 11.35 7.11 8.12
Sundry 7.50 7.90 7.64 5.54 7.14
Consolidated 8.29 % 7.89 6.89 6.29 7.22
=========================================================================================
(a) At June 30, 2001, all securities are classified as available for sale.
Securities with an aggregate amortized cost of $22 billion at June 30, 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 8.30 years and a weighted average yield of 6.85 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 June 30, 2001, there were forward commitments to purchase securities at a
cost which approximates a market value of $3.2 billion, and commitments to sell
securities at a cost which approximates a market value of $466 million.
Gross gains and losses realized on the sale of debt securities for the six
months ended June 30, 2001, were $102 million and $83 million, respectively, and
gross gains and losses realized on equity securities were $7 million and $42
million, respectively.
38
41
TABLE 8
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- --------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET LOAN PORTFOLIO
COMMERCIAL
Commercial, financial and agricultural $ 52,516 52,687 54,207 53,325 53,870
Real estate - construction and other 3,060 3,345 3,104 2,751 2,600
Real estate - mortgage 7,964 9,187 9,218 9,286 9,239
Lease financing 16,903 16,625 15,465 13,997 13,181
Foreign 5,920 5,396 5,453 5,548 4,956
- --------------------------------------------------------------------------------------------------------------------
Total commercial 86,363 87,240 87,447 84,907 83,846
- --------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 17,277 17,678 17,708 19,108 25,204
Installment loans 24,597 23,253 22,972 22,634 21,797
Vehicle leasing 1,231 1,640 2,115 2,600 3,112
- --------------------------------------------------------------------------------------------------------------------
Total consumer 43,105 42,571 42,795 44,342 50,113
- --------------------------------------------------------------------------------------------------------------------
Total loans 129,468 129,811 130,242 129,249 133,959
Unearned income 6,976 6,958 6,482 5,830 5,600
- --------------------------------------------------------------------------------------------------------------------
Loans, net (on-balance sheet) $ 122,492 122,853 123,760 123,419 128,359
====================================================================================================================
MANAGED PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL
On-balance sheet loan portfolio $ 86,363 87,240 87,447 84,907 83,846
Securitized loans - off-balance sheet 6,284 6,302 4,877 4,070 3,359
Loans held for sale included in other assets 369 1,296 953 1,994 2,378
- --------------------------------------------------------------------------------------------------------------------
Total commercial 93,016 94,838 93,277 90,971 89,583
- --------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage
On-balance sheet loan portfolio 17,277 17,678 17,708 19,108 25,204
Securitized loans included in securities 2,625 3,081 3,455 3,711 408
Loans held for sale included in other assets 2,294 1,933 1,111 802 782
- --------------------------------------------------------------------------------------------------------------------
Total real estate - mortgage 22,196 22,692 22,274 23,621 26,394
- --------------------------------------------------------------------------------------------------------------------
Installment loans
On-balance sheet loan portfolio 24,597 23,253 22,972 22,634 21,797
Securitized loans - off-balance sheet 12,909 13,229 11,862 11,883 16,342
Securitized loans included in securities 9,755 10,173 9,292 9,735 9,200
Loans held for sale included in other assets 3,300 3,561 6,082 6,295 7,476
- --------------------------------------------------------------------------------------------------------------------
Total installment loans 50,561 50,216 50,208 50,547 54,815
- --------------------------------------------------------------------------------------------------------------------
Vehicle leasing - on-balance sheet loan portfolio 1,231 1,640 2,115 2,600 3,112
- --------------------------------------------------------------------------------------------------------------------
Total consumer 73,988 74,548 74,597 76,768 84,321
- --------------------------------------------------------------------------------------------------------------------
Total managed portfolio $ 167,004 169,386 167,874 167,739 173,904
====================================================================================================================
SERVICING PORTFOLIO
Commercial $ 38,943 37,678 31,028 29,739 29,000
Consumer $ 1,551 2,123 2,964 1,352 37,722
====================================================================================================================
39
42
TABLE 9
LOANS HELD FOR SALE
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
2000 STRATEGIC REPOSITIONING
Balance, beginning of period $ 689 4,263 4,983 6,326 -
Loans transferred to (from) assets held for sale, net (98) - - 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 (21) (50) (111) - -
Loans sold (190) (3,327) (289) (1,756) -
Other, net (a) (63) (197) (322) (140) -
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period 317 689 4,263 4,983 6,326
- ------------------------------------------------------------------------------------------------------------------------
OTHER (b)
Balance, beginning of period 6,101 3,883 4,108 4,310 4,875
Originations 5,279 4,773 2,701 2,495 1,568
Loans transferred to (from) assets held for sale, net 37 282 (556) (24) (515)
Allowance for loan losses related to loans transferred
to assets held for sale (40) (23) - - -
Lower of cost or market valuation adjustments (14) (30) (33) (46) (53)
Loans sold (5,475) (2,628) (2,204) (2,587) (1,408)
Other, net (a) (242) (156) (133) (40) (157)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period 5,646 6,101 3,883 4,108 4,310
- ------------------------------------------------------------------------------------------------------------------------
Loans held for sale, end of period $ 5,963 6,790 8,146 9,091 10,636
========================================================================================================================
(a) Other, net represents primarily loan payments.
(b) Other includes primarily student, mortgage warehouse, home equity and
syndication loans.
40
43
TABLE 10
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- ------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- -------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of period $ 1,759 1,722 1,720 1,706 1,760
Provision for loan losses 223 219 192 322 1,030
Allowance relating to loans transferred
to other assets or sold (65) (23) 2 (166) (856)
Loan losses, net (157) (159) (192) (142) (228)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,760 1,759 1,722 1,720 1,706
==================================================================================================================
as a % of loans, net 1.44 % 1.43 1.39 1.39 1.33
==================================================================================================================
as a % of nonaccrual and restructured loans (a) 144 % 143 146 202 215
==================================================================================================================
as a % of nonperforming assets (a) 133 % 132 135 181 193
==================================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 122 121 159 108 157
Real estate - commercial construction and mortgage 3 4 7 3 1
Real estate - residential mortgage 2 1 3 1 5
Installment loans and vehicle leasing (b) 64 63 52 53 101
- ------------------------------------------------------------------------------------------------------------------
Total loan losses 191 189 221 165 264
- ------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 15 16 12 10 21
Real estate - commercial construction and mortgage 5 1 1 1 -
Real estate - residential mortgage - - - 1 1
Installment loans and vehicle leasing (b) 14 13 16 11 14
- ------------------------------------------------------------------------------------------------------------------
Total loan recoveries 34 30 29 23 36
- ------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 157 159 192 142 228
- ------------------------------------------------------------------------------------------------------------------
Commercial loan net charge-offs as %
of average commercial loans, net (c) 0.55 % 0.56 0.80 0.53 0.73
Consumer loan net charge-offs as %
of average consumer loans, net (c) 0.48 0.48 0.36 0.35 0.63
Total net charge-offs as % of average loans, net (c) 0.52 % 0.53 0.64 0.46 0.69
==================================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial, financial and agricultural $ 1,069 993 884 596 562
Real estate - commercial construction and mortgage 19 33 55 58 59
Real estate - residential mortgage 45 74 63 52 28
Installment loans and vehicle leasing (b) 90 131 174 148 142
- ------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,223 1,231 1,176 854 791
Foreclosed properties (d) 104 106 103 97 93
- ------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,327 1,337 1,279 951 884
==================================================================================================================
Nonperforming loans included in assets held for sale (e) $ 250 344 334 349 331
Nonperforming assets included in loans and in assets
held for sale $ 1,577 1,681 1,613 1,300 1,215
==================================================================================================================
as % of loans, net, and foreclosed properties (a) 1.08 % 1.09 1.03 0.77 0.69
==================================================================================================================
as % of loans, net, foreclosed properties and loans in
other assets as held for sale (e) 1.23 % 1.30 1.22 0.98 0.87
==================================================================================================================
Accruing loans past due 90 days $ 213 220 183 145 84
==================================================================================================================
(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.
41
44
TABLE 11
NONPERFORMING ASSETS ACTIVITY (a)
- ---------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------- ----------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 1,337 1,279 951 884 1,270
- ---------------------------------------------------------------------------------------------------------------------------
Commercial loan activity
New nonaccrual loans and advances 361 314 532 280 284
Charge-offs (125) (125) (166) (111) (158)
Transfers (to) from assets held for sale - - 11 (46) (223)
Sales (50) - (15) - -
Other, principally payments (125) (104) (82) (95) (66)
- ---------------------------------------------------------------------------------------------------------------------------
Commercial loan activity 61 85 280 28 (163)
- ---------------------------------------------------------------------------------------------------------------------------
Consumer loan activity
Transfers to assets held for sale (123) (90) - - (243)
Other, net 52 63 48 39 20
- ---------------------------------------------------------------------------------------------------------------------------
Consumer loan activity (71) (27) 48 39 (223)
- ---------------------------------------------------------------------------------------------------------------------------
Change in nonperforming assets (10) 58 328 67 (386)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,327 1,337 1,279 951 884
===========================================================================================================================
(a) Excludes nonperforming loans included in assets held for sale.
TABLE 12
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Goodwill $ 3,476 3,524 3,481 3,551 3,510
Deposit base premium 140 157 174 195 215
Other 9 9 9 10 11
- ------------------------------------------------------------------------------------------------------------------------
Total goodwill and other intangible assets $ 3,625 3,690 3,664 3,756 3,736
========================================================================================================================
42
45
TABLE 13
DEPOSITS
- -------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 29,633 28,582 30,315 28,501 30,229
Savings and NOW accounts 37,266 37,599 36,215 34,620 35,346
Money market accounts 21,330 20,737 20,630 18,382 17,988
Other consumer time 32,793 33,868 35,223 36,814 35,789
- -------------------------------------------------------------------------------------------------------------------------
Total core deposits 121,022 120,786 122,383 118,317 119,352
OTHER DEPOSITS
Foreign 6,977 7,810 7,795 8,596 9,178
Other time 10,568 12,199 12,490 11,957 16,334
- -------------------------------------------------------------------------------------------------------------------------
Total deposits $ 138,567 140,795 142,668 138,870 144,864
=========================================================================================================================
TABLE 14
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2001
-----------------------
(In millions)
- -------------------------------------------------------------------------------------------------------------------------
MATURITY OF
3 months or less $ 4,506
Over 3 months through 6 months 3,612
Over 6 months through 12 months 4,654
Over 12 months 3,875
- -------------------------------------------------------------------------------------------------------------------------
Total $ 16,647
=========================================================================================================================
43
46
TABLE 15
LONG-TERM DEBT
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(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 3,084 3,082 1,790
Floating rate, due 2001 to 2005 2,368 2,368 2,367 2,118 1,770
Floating rate extendible, due 2005 10 10 10 10 10
Subordinated notes
6.00% to 9.45%, due 2001 to 2009 2,665 2,664 2,664 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 9,479 9,478 9,477 9,224 7,584
- ------------------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes, primarily notes issued under global
note programs, varying rates and terms to 2006 14,784 16,929 16,457 17,583 16,988
Subordinated notes
5.875% to 9.375%, due 2002 to 2006 925 925 1,075 1,075 1,075
Bank, 5.80% to 7.875%, due 2006 to 2036 2,548 2,548 2,548 2,548 1,549
6.625% to 8.375%, due 2002 to 2007 570 570 570 570 570
- ------------------------------------------------------------------------------------------------------------------------
Total notes issued by subsidiaries 18,827 20,972 20,650 21,776 20,182
- ------------------------------------------------------------------------------------------------------------------------
OTHER DEBT
Trust preferred securities 2,007 2,027 2,028 2,020 2,010
Collateralized notes, 5.65%, due 2006 2,463 - - - -
4.556% auto securitization financing, due 2008 698 828 861 944 944
Advances from the Federal Home Loan Bank 2,562 2,762 2,762 2,262 2,387
Capitalized leases 18 19 25 26 26
Mortgage notes and other debt of subsidiaries 6 6 6 6 7
- ------------------------------------------------------------------------------------------------------------------------
Total other debt 7,754 5,642 5,682 5,258 5,374
- ------------------------------------------------------------------------------------------------------------------------
Total $ 36,060 36,092 35,809 36,258 33,140
========================================================================================================================
44
47
TABLE 16
CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------ ---------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 16,081 15,347 14,795 13,951 16,884
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income (loss) 633 584 599 852 (2,199)
Net unrealized gain (loss) on debt and equity securities (176) 290 625 348 (212)
Net unrealized gain (loss) on derivative financial instruments (138) 145 - - -
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 319 1,019 1,224 1,200 (2,411)
Purchases of common stock (67) (102) (294) (43) (132)
Common stock issued for
Stock options and restricted stock (17) 90 (2) 33 76
Dividend reinvestment plan 15 14 19 19 19
Acquisitions - - - 34 -
Deferred compensation, net 49 (52) 75 70 (14)
Cash dividends paid (236) (235) (470) (469) (471)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 16,144 16,081 15,347 14,795 13,951
========================================================================================================================
TABLE 17
CAPITAL RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------- ----------------------------------
SECOND First Fourth Third Second
(In millions) QUARTER Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 14,631 14,212 13,952 13,933 13,452
Total capital 22,727 22,408 22,253 22,528 21,385
Adjusted risk-weighted assets 198,536 197,854 198,849 199,078 202,391
Adjusted leverage ratio assets $ 243,660 241,814 235,749 243,106 251,895
Ratios
Tier 1 capital 7.37 % 7.18 7.02 7.00 6.65
Total capital 11.45 11.33 11.19 11.32 10.57
Leverage 6.00 5.88 5.92 5.73 5.34
STOCKHOLDERS' EQUITY TO ASSETS
Quarter-end 6.56 6.36 6.04 6.00 5.41
Average 6.48 % 6.46 6.16 5.77 6.50
============================================================================================================================
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 7.62 % 7.38 6.92 7.35 7.16
First Union National Bank of Delaware 12.61 11.97 12.20 12.07 12.02
Total capital
First Union National Bank 11.61 11.39 10.73 11.28 10.58
First Union National Bank of Delaware 14.39 13.82 13.97 14.01 14.05
Leverage
First Union National Bank 6.12 5.95 6.04 6.30 6.09
First Union National Bank of Delaware 7.97 % 8.08 7.76 8.74 8.20
============================================================================================================================
(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.
45
48
TABLE 18
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS (a)
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, 2001
-------------------------------------------------------------------------
GROSS UNREALIZED IN- AVERAGE
NOTIONAL ------------------------ EFFECTIVE- MATURITY IN
(In millions) AMOUNT GAINS LOSSES(F) EQUITY(G) NESS (H) YEARS (I)
- -------------------------------------------------------------------------------------------------------------------------
ASSET HEDGES
Cash flow hedges (b)
Interest rate swaps $ 35,883 821 (374) 279 (2) 7.51
Forward purchase commitments 2,988 - (10) (6) - 0.29
Futures 25 - - - - 0.25
Fair value hedges (c)
Interest rate swaps 6 - - - - 13.85
Forward sale commitments 1,109 4 (1) - (2) 0.09
Futures 187 - (5) - - 0.25
- -----------------------------------------------------------------------------------------------------------
Total asset hedges $ 40,198 825 (390) 273 (4) 6.74
=========================================================================================================================
LIABILITY HEDGES
Cash flow hedges (d)
Interest rate swaps $ 25,778 272 (338) (40) - 8.35
Futures 55,203 - (311) (193) - 0.25
Put options on Eurodollar futures 5,000 - - - - 0.59
Fair value hedges (e)
Interest rate swaps 12,295 373 (34) - - 5.92
Interest rate options 300 - - - - 1.96
- -----------------------------------------------------------------------------------------------------------
Total liability hedges $ 98,576 645 (683) (233) - 3.10
=========================================================================================================================
(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 $34.2 billion,
of which $4 billion are forward-starting, 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 $40 million in
accumulated other comprehensive income. Forward purchase commitments of $3
billion are designated as a cash flow hedge of the variability of the
consideration to be paid in the forecasted purchase of available for sale
securities that will occur upon gross settlement of the commitment in October
2001.
(c) Forward sale commitments of $1.1 billion are designated as fair value hedges
of mortgage loans in the warehouse.
(d) Derivatives with a notional amount of $78.5 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,
$51.3 billion are Eurodollar futures, $5 billion are purchased put options on
Eurodollar futures and $22.2 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 $3.9 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.
(e) Receive-fixed interest rate swaps with a notional amount of $12.3 billion
and with pay rates based primarily on one-to-six month LIBOR are designated as
fair value hedges of fixed rate liabilities, primarily CDs, long-term debt and
bank notes.
(f) Represents the fair value of derivative financial instruments less accrued
interest receivable or payable.
(g) At June 30, 2001, the net unrealized gain on derivatives included in
accumulated other comprehensive income, which is a component of stockholders'
equity, was $7 million, net of tax. Of this net of tax amount, a $40 million
gain represents the effective portion of the net gains (losses) on derivatives
that qualify as cash flow hedges, and a $73 million loss related to terminated
and/or redesignated derivatives. Gains (losses) will be classified 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 the 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 June 30,
2001, $54 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 25.48 years.
(h) In the six months ended June 30, 2001, losses in the amount of $4 million
were recognized in other fee income representing the ineffective portion of the
net gains (losses) on derivatives that qualify as cash flow and fair value
hedges. In addition, net interest income in the six months ended June 30, 2001,
includes a reduction to net interest income of $58 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.
(i) Estimated maturity approximates average life.
46
49
TABLE 19
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS - EXPECTED MATURITIES
- ---------------------------------------------------------------------------------------------------------------------------
JUNE 30, 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 $ 4,161 3,042 2,029 19,585 7,066 35,883
Notional amount - other 2,988 25 - - - 3,013
Weighted average receive rate (a) 7.01 % 6.88 6.37 5.87 7.05 6.37
Weighted average pay rate (a) 3.90 % 4.04 4.39 3.78 3.95 3.89
Unrealized gain (loss) $ 82 93 30 (194) 427 438
- ---------------------------------------------------------------------------------------------------------------------------
FAIR VALUE ASSET HEDGES
Notional amount - swaps $ - - - - 6 6
Notional amount - other 1,109 30 112 45 - 1,296
Weighted average receive rate (a) - % - - - 6.80 6.80
Weighted average pay rate (a) - % - - - 7.36 7.36
Unrealized gain (loss) $ 2 (1) (4) - - (3)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOW LIABILITY HEDGES
Notional amount - swaps $ 784 909 2,740 17,928 3,417 25,778
Notional amount - other 52,228 7,975 - - - 60,203
Weighted average receive rate (a) 3.90 % 3.98 3.97 3.84 3.88 3.91
Weighted average pay rate (a) 6.83 % 5.86 5.28 6.26 6.62 6.01
Unrealized gain (loss) $ (292) (41) (32) 104 (115) (376)
- ---------------------------------------------------------------------------------------------------------------------------
FAIR VALUE LIABILITY HEDGES
Notional amount - swaps $ 425 450 6,910 4,060 450 12,295
Notional amount - other - 150 150 - - 300
Weighted average receive rate (a) 7.86 % 7.14 6.45 7.06 6.69 6.74
Weighted average pay rate (a) 3.89 % 4.45 4.24 4.52 4.05 4.32
Unrealized gain (loss) $ 10 15 154 151 8 338
===========================================================================================================================
(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 June 30, 2001.
47
50
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 19,547 41,552 61,099
Maturities and amortizations (1,688) (38,025) (39,713)
Terminations (180) (180) (360)
Redesignations and transfers to trading account assets (12,000) (45,803) (57,803)
- -------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 $ 40,198 98,576 138,774
=========================================================================================================================
48
51
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- -------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001 FIRST QUARTER 2001
-------------------------------- -------------------------------
AVERAGE Average
INTEREST RATES Interest Rates
AVERAGE INCOME/ EARNED/ Average Income/ Earned/
(In millions) BALANCES EXPENSE PAID Balances Expense Paid
- -------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing bank balances $ 2,529 29 4.57 % $ 1,826 25 5.69 %
Federal funds sold and securities
purchased under resale agreements 8,923 99 4.41 7,036 95 5.49
Trading account assets (a) 13,965 202 5.78 13,315 206 6.24
Securities (a) 49,931 899 7.21 50,417 945 7.50
Loans (a) (b)
Commercial
Commercial, financial and agricultural 53,160 1,098 8.29 53,416 1,130 8.56
Real estate - construction and other 3,193 52 6.56 3,231 62 7.76
Real estate - mortgage 8,525 149 7.01 9,195 180 7.95
Lease financing 6,075 157 10.29 6,084 161 10.62
Foreign 5,425 83 6.12 5,344 92 7.01
- ------------------------------------------------------------------- ---------------------
Total commercial 76,378 1,539 8.08 77,270 1,625 8.51
- ------------------------------------------------------------------- ---------------------
Consumer
Real estate - mortgage 17,435 318 7.29 17,610 331 7.52
Installment loans and vehicle leasing 25,399 572 9.02 24,970 580 9.41
- ------------------------------------------------------------------- ---------------------
Total consumer 42,834 890 8.32 42,580 911 8.63
- ------------------------------------------------------------------- ---------------------
Total loans 119,212 2,429 8.17 119,850 2,536 8.55
- ------------------------------------------------------------------- ---------------------
Other earning assets 10,113 193 7.68 11,276 250 8.96
- ------------------------------------------------------------------- ---------------------
Total earning assets 204,673 3,851 7.54 203,720 4,057 8.03
==================== ====================
Cash and due from banks 7,568 7,749
Other assets 35,013 34,000
- -------------------------------------------------------- ----------
Total assets $ 247,254 $ 245,469
======================================================== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 39,640 267 2.70 38,756 264 2.76
Money market accounts 18,746 225 4.81 17,941 200 4.52
Other consumer time 33,268 477 5.76 34,452 506 5.96
Foreign 6,357 73 4.62 6,851 94 5.59
Other time 11,587 150 5.20 12,239 189 6.27
- ------------------------------------------------------------------- ---------------------
Total interest-bearing deposits 109,598 1,192 4.36 110,239 1,253 4.61
Federal funds purchased and securities
sold under repurchase agreements 27,128 356 5.27 25,005 378 6.13
Commercial paper 2,435 25 4.08 2,540 33 5.32
Other short-term borrowings 9,809 73 2.98 9,580 82 3.46
Long-term debt 36,254 463 5.11 36,631 577 6.30
- ------------------------------------------------------------------- ---------------------
Total interest-bearing liabilities 185,224 2,109 4.57 183,995 2,323 5.10
==================== ====================
Noninterest-bearing deposits 27,381 27,043
Other liabilities 18,623 18,585
Stockholders' equity 16,026 15,846
- -------------------------------------------------------- ----------
Total liabilities and stockholders'
equity $ 247,254 $ 245,469
======================================================== ==========
Interest income and rate earned $ 3,851 7.54 % $ 4,057 8.03 %
Interest expense and equivalent rate paid 2,109 4.13 2,323 4.61
- ------------------------------------------------------------------------------ -------------------------------
Net interest income and margin (c) $ 1,742 3.41 % $ 1,734 3.42 %
============================================================================== ===============================
(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.
49
52
--------------------------------------------------------------------------------------------------------
FOURTH QUARTER 2000 THIRD QUARTER 2000 SECOND 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
--------------------------------------------------------------------------------------------------------
$ 1,266 14 4.34 % $ 1,465 20 5.28 % $ 977 13 5.52 %
5,994 89 5.86 6,367 97 6.11 9,318 132 5.72
11,569 201 6.95 12,204 214 6.99 12,950 220 6.83
50,554 952 7.54 52,780 988 7.48 56,027 1,035 7.40
53,554 1,233 9.17 53,226 1,250 9.34 54,486 1,251 9.22
3,011 65 8.69 2,676 59 8.65 2,458 52 8.49
9,130 198 8.63 9,294 203 8.70 9,302 195 8.44
5,272 150 11.37 5,168 148 11.45 5,123 153 11.90
5,286 97 7.29 5,016 91 7.17 4,582 80 7.08
--------------------- --------------------- ---------------------
76,253 1,743 9.11 75,380 1,751 9.24 75,951 1,731 9.15
--------------------- --------------------- ---------------------
18,805 362 7.70 23,163 432 7.47 25,760 469 7.28
25,035 606 9.63 24,932 596 9.51 30,903 740 9.61
--------------------- --------------------- ---------------------
43,840 968 8.80 48,095 1,028 8.53 56,663 1,209 8.55
--------------------- --------------------- ---------------------
120,093 2,711 8.99 123,475 2,779 8.96 132,614 2,940 8.90
--------------------- --------------------- ---------------------
13,130 322 9.76 14,798 393 10.63 8,175 177 8.66
--------------------- --------------------- ---------------------
202,606 4,289 8.44 211,089 4,491 8.48 220,061 4,517 8.24
=================== ==================== ===================
7,653 7,446 7,830
29,116 28,283 27,692
---------- --------- ----------
$ 239,375 $ 246,818 $ 255,583
========== ========= ==========
37,640 301 3.17 37,680 296 3.13 38,940 283 2.92
17,008 202 4.74 15,629 175 4.46 14,959 154 4.13
36,421 541 5.91 36,328 524 5.74 35,386 478 5.43
7,483 110 5.85 9,721 151 6.18 8,795 130 5.92
11,902 213 7.13 15,317 276 7.16 14,153 240 6.82
--------------------- --------------------- ---------------------
110,454 1,367 4.92 114,675 1,422 4.93 112,233 1,285 4.60
23,686 400 6.72 28,363 459 6.43 36,762 552 6.04
2,639 42 6.19 2,588 40 6.25 3,308 49 6.03
9,345 96 4.09 9,257 110 4.74 11,096 149 5.37
35,708 627 7.03 35,263 600 6.80 33,555 552 6.58
--------------------- --------------------- ---------------------
181,832 2,532 5.55 190,146 2,631 5.51 196,954 2,587 5.28
=================== ==================== ===================
27,875 28,437 28,971
14,915 13,999 13,044
14,753 14,236 16,614
---------- --------- ----------
$ 239,375 $ 246,818 $ 255,583
========== ========= ==========
$ 4,289 8.44 % $ 4,491 8.48 % $ 4,517 8.24 %
2,532 4.98 2,631 4.96 2,587 4.73
------------------- -------------------- -------------------
$ 1,757 3.46 % $ 1,860 3.52 % $ 1,930 3.51 %
=================== ==================== ===================
(c) The net interest margin includes (in basis points): 13, 14, 15, 22 and 27 in
the second and first quarters of 2001 and in the fourth, third and second
quarters of 2000, respectively, related to net interest income from
hedge-related derivative transactions.
50
53
FIRST UNION CORPORATION
NET INTEREST INCOME SUMMARIES
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED 2001 SIX MONTHS ENDED 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 $ 2,179 54 5.04 % $ 822 20 5.07 %
Federal funds sold and securities
purchased under resale agreements 7,985 194 4.89 9,436 261 5.56
Trading account assets (a) 13,642 408 6.00 12,138 413 6.84
Securities (a) 50,173 1,844 7.35 55,208 2,013 7.29
Loans (a) (b)
Commercial
Commercial, financial and agricultural 53,286 2,228 8.43 53,647 2,425 9.09
Real estate - construction and other 3,212 114 7.16 2,432 100 8.29
Real estate - mortgage 8,858 329 7.50 9,141 378 8.32
Lease financing 6,080 318 10.46 5,168 313 12.10
Foreign 5,385 175 6.56 4,557 154 6.82
- ----------------------------------------------------------------- --------------------
Total commercial 76,821 3,164 8.30 74,945 3,370 9.04
- ----------------------------------------------------------------- --------------------
Consumer
Real estate - mortgage 17,522 649 7.41 26,655 968 7.26
Installment loans and vehicle leasing 25,186 1,152 9.22 30,448 1,459 9.62
- ----------------------------------------------------------------- --------------------
Total consumer 42,708 1,801 8.47 57,103 2,427 8.52
- ----------------------------------------------------------------- --------------------
Total loans 119,529 4,965 8.36 132,048 5,797 8.81
- ----------------------------------------------------------------- --------------------
Other earning assets 10,691 443 8.35 8,256 349 8.47
- ----------------------------------------------------------------- --------------------
Total earning assets 204,199 7,908 7.78 217,908 8,853 8.15
==================== ===================
Cash and due from banks 7,658 7,954
Other assets 34,510 26,074
- ------------------------------------------------------- ----------
Total assets $ 246,367 $ 251,936
======================================================= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 39,200 531 2.73 39,385 572 2.92
Money market accounts 18,346 425 4.67 15,262 305 4.01
Other consumer time 33,857 983 5.86 34,688 901 5.22
Foreign 6,603 167 5.12 8,960 253 5.68
Other time 11,911 339 5.75 13,688 449 6.60
- ----------------------------------------------------------------- --------------------
Total interest-bearing deposits 109,917 2,445 4.49 111,983 2,480 4.45
Federal funds purchased and securities
sold under repurchase agreements 26,072 734 5.68 36,024 1,034 5.77
Commercial paper 2,487 58 4.71 3,152 91 5.81
Other short-term borrowings 9,695 155 3.21 10,098 264 5.24
Long-term debt 36,442 1,040 5.71 33,060 1,065 6.44
- ----------------------------------------------------------------- --------------------
Total interest-bearing liabilities 184,613 4,432 4.83 194,317 4,934 5.10
==================== ===================
Noninterest-bearing deposits 27,213 28,829
Other liabilities 18,604 12,191
Stockholders' equity 15,937 16,599
- ------------------------------------------------------- ----------
Total liabilities and stockholders'
equity $ 246,367 $ 251,936
======================================================= ==========
Interest income and rate earned $ 7,908 7.78 % $ 8,853 8.15 %
Interest expense and equivalent rate paid 4,432 4.36 4,934 4.55
- ---------------------------------------------------------------------------- -------------------
Net interest income and margin (c) $ 3,476 3.42 % $ 3,919 3.60 %
============================================================================ ===================
(a) Yields related to securities and loans exempt from federal and state income
taxes are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates. Lease financing amounts include related
deferred income taxes. (b) The loan averages are stated net of unearned income,
and the averages include loans on which the accrual of interest has been
discontinued. (c) The net interest margin includes (in basis points): 14 and 27
for the six months ended June 30, 2001, and June 30, 2000, respectively, related
to net interest income from hedge-related derivative transactions.
51
54
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------- ---------------------------------------
RESTRUCTURING RESTRUCTURING
OPERATING AND OTHER AS OPERATING AND OTHER AS
(In millions) EARNINGS CHARGES/GAINS REPORTED EARNINGS CHARGES/GAINS REPORTED
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,711 - 1,711 3,413 - 3,413
Provision for loan losses 223 - 223 442 - 442
- -------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,488 - 1,488 2,971 - 2,971
- -------------------------------------------------------------------------------------------------------------------
Fee and other income
Service charges and fees 486 - 486 954 - 954
Advisory, underwriting and other
investment banking fees 238 - 238 436 - 436
Other income
Security transactions - portfolio - - - (16) - (16)
Asset sales and securitization 64 (8) 56 76 (52) 24
Gain on sale of branches - - - - 73 73
Other 841 9 850 1,725 8 1,733
- -------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,629 1 1,630 3,175 29 3,204
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense
Restructuring charges - (69) (69) - (67) (67)
Other noninterest expense 2,169 97 2,266 4,307 166 4,473
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,169 28 2,197 4,307 99 4,406
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits) 948 (27) 921 1,839 (70) 1,769
Income taxes (benefits) 299 (11) 288 580 (28) 552
- -------------------------------------------------------------------------------------------------------------------
Net income $ 649 (16) 633 1,259 (42) 1,217
===================================================================================================================
Diluted earnings per share $ 0.66 (0.02) 0.64 1.28 (0.05) 1.23
===================================================================================================================
FIRST UNION CORPORATION AND SUBSIDIARIES
RESTRUCTURING AND OTHER CHARGES/GAINS
- -------------------------------------------------------------------------------------------------------------------
THREE SIX
MONTHS MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(In millions) 2001 2001
- -------------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGES (REVERSALS)
Strategic repositioning
restructuring charges
(reversals), net
Employee termination benefits $ (26) (24)
Occupancy (32) (32)
Other asset impairments - (1)
Contract cancellations (15) (16)
- -------------------------------------------------------------------------------------------------------------------
Total restructuring charges (reversals) (73) (73)
Reversal of March 1999 restructuring accruals related
primarily to employee termination benefits - (14)
- -------------------------------------------------------------------------------------------------------------------
Net restructuring charges (73) (87)
Merger-related charges 4 20
- -------------------------------------------------------------------------------------------------------------------
Total (69) (67)
- -------------------------------------------------------------------------------------------------------------------
OTHER CHARGES/GAINS
Other income (1) (29)
Other noninterest expense 97 166
- -------------------------------------------------------------------------------------------------------------------
Total other charges/gains 96 137
- -------------------------------------------------------------------------------------------------------------------
Total restructuring and other charges/gains (27) (70)
Income tax benefits (11) (28)
- -------------------------------------------------------------------------------------------------------------------
After-tax restructuring and other charges/gains $ (16) (42)
===================================================================================================================
52
55
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- --------------------------------
SECOND First Fourth Third Second
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,420 2,526 2,701 2,768 2,929
Interest and dividends on securities 881 925 939 975 1,023
Trading account interest 198 204 199 212 218
Other interest income 321 370 425 510 322
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 3,820 4,025 4,264 4,465 4,492
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,192 1,253 1,367 1,422 1,285
Interest on short-term borrowings 454 493 538 609 750
Interest on long-term debt 463 577 627 600 552
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 2,109 2,323 2,532 2,631 2,587
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 1,711 1,702 1,732 1,834 1,905
Provision for loan losses 223 219 192 142 228
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,488 1,483 1,540 1,692 1,677
- ---------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 486 468 481 508 491
Commissions 389 375 383 365 375
Fiduciary and asset management fees 384 381 387 384 374
Advisory, underwriting and other investment banking fees 238 198 187 148 182
Principal investing (58) (43) (43) 34 205
Other income 190 167 187 206 119
- ---------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,629 1,546 1,582 1,645 1,746
- ---------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,363 1,329 1,243 1,381 1,396
Occupancy 155 163 150 157 155
Equipment 198 205 221 213 210
Advertising 11 9 16 14 31
Communications and supplies 111 110 123 117 122
Professional and consulting fees 69 73 97 87 82
Goodwill and other intangible amortization 77 78 80 79 100
Sundry expense 185 171 202 280 270
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,169 2,138 2,132 2,328 2,366
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 948 891 990 1,009 1,057
Income taxes 299 281 309 307 343
- ---------------------------------------------------------------------------------------------------------------------
Net operating earnings $ 649 610 681 702 714
=====================================================================================================================
Diluted earnings per share $ 0.66 0.62 0.69 0.71 0.73
=====================================================================================================================
(a) Operating earnings exclude restructuring, merger-related and other charges
and gains and cumulative effect of a change in accounting principle.
53
56
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
(In millions, except per share data) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 4,946 5,777
Interest and dividends on securities 1,806 1,989
Trading account interest 402 409
Other interest income 691 630
- --------------------------------------------------------------------------------------------------------------------
Total interest income 7,845 8,805
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,445 2,480
Interest on short-term borrowings 947 1,389
Interest on long-term debt 1,040 1,065
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 4,432 4,934
- --------------------------------------------------------------------------------------------------------------------
Net interest income 3,413 3,871
Provision for loan losses 442 420
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,971 3,451
- --------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 954 977
Commissions 764 843
Fiduciary and asset management fees 765 740
Advisory, underwriting and other investment banking fees 436 391
Principal investing (101) 404
Other income 357 233
- --------------------------------------------------------------------------------------------------------------------
Total fee and other income 3,175 3,588
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,692 2,825
Occupancy 318 312
Equipment 403 424
Advertising 20 61
Communications and supplies 221 247
Professional and consulting fees 142 153
Goodwill and other intangible amortization 155 202
Sundry expense 356 529
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,307 4,753
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,839 2,286
Income taxes 580 734
- --------------------------------------------------------------------------------------------------------------------
Net operating earnings $ 1,259 1,552
====================================================================================================================
Diluted earnings per share $ 1.28 1.58
====================================================================================================================
(a) Operating earnings exclude restructuring, merger-related and other charges
and gains.
54
57
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- --------------------------------
SECOND First Fourth Third Second
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 8,665 7,857 9,906 7,063 8,028
Interest-bearing bank balances 1,666 2,971 3,239 4,585 1,913
Federal funds sold and securities purchased under
resale agreements (carrying amount of collateral
$2,255 at June 30,2001, $819 repledged) 9,161 11,866 11,240 5,395 9,054
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 19,492 22,694 24,385 17,043 18,995
- ---------------------------------------------------------------------------------------------------------------------
Trading account assets 23,181 20,431 21,630 17,417 18,237
Securities (carrying amount of collateral $ 21,674 at
June 30,2001) 48,055 51,528 49,246 52,065 55,203
Loans, net of unearned income 122,492 122,853 123,760 123,419 128,359
Allowance for loan losses (1,760) (1,759) (1,722) (1,720) (1,706)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 120,732 121,094 122,038 121,699 126,653
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,852 4,968 5,024 5,090 5,211
Due from customers on acceptances 856 894 874 968 839
Goodwill and other intangible assets 3,625 3,690 3,664 3,756 3,736
Other assets 25,148 27,650 27,309 28,602 29,120
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 245,941 252,949 254,170 246,640 257,994
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 29,633 28,582 30,315 28,501 30,229
Interest-bearing deposits 108,934 112,213 112,353 110,369 114,635
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 138,567 140,795 142,668 138,870 144,864
Short-term borrowings 34,754 39,719 39,446 39,388 50,883
Bank acceptances outstanding 859 902 880 976 847
Trading account liabilities 7,907 8,130 7,475 5,138 4,541
Other liabilities 11,650 11,230 12,545 11,215 9,768
Long-term debt 36,060 36,092 35,809 36,258 33,140
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 229,797 236,868 238,823 231,845 244,043
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - - - - -
Common stock, $3.33-1/3 par value;
authorized 2 billion shares 3,264 3,271 3,267 3,287 3,288
Paid-in capital 6,345 6,307 6,272 6,211 6,066
Retained earnings 6,627 6,281 6,021 6,135 5,783
Accumulated other comprehensive income, net (92) 222 (213) (838) (1,186)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,144 16,081 15,347 14,795 13,951
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 245,941 252,949 254,170 246,640 257,994
=====================================================================================================================
55
58
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------------------------------------------
2001 2000
----------------------- --------------------------------
SECOND First Fourth Third Second
(In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,420 2,526 2,701 2,768 2,929
Interest and dividends on securities 881 925 939 975 1,023
Trading account interest 198 204 199 212 218
Other interest income 321 370 425 510 322
- --------------------------------------------------------------------------------------------------------------------
Total interest income 3,820 4,025 4,264 4,465 4,492
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,192 1,253 1,367 1,422 1,285
Interest on short-term borrowings 454 493 538 609 750
Interest on long-term debt 463 577 627 600 552
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,109 2,323 2,532 2,631 2,587
- --------------------------------------------------------------------------------------------------------------------
Net interest income 1,711 1,702 1,732 1,834 1,905
Provision for loan losses 223 219 192 322 1,030
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,488 1,483 1,540 1,512 875
- --------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 486 468 481 506 447
Commissions 389 375 383 365 375
Fiduciary and asset management fees 384 381 387 384 374
Advisory, underwriting and other investment banking fees 238 198 182 145 182
Principal investing (58) (43) (43) 34 205
Other income 191 195 363 749 (649)
- --------------------------------------------------------------------------------------------------------------------
Total fee and other income 1,630 1,574 1,753 2,183 934
- --------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,400 1,373 1,407 1,427 1,396
Occupancy 180 164 150 160 155
Equipment 207 211 233 213 210
Advertising 16 14 35 18 31
Communications and supplies 111 110 130 125 123
Professional and consulting fees 84 83 104 91 82
Goodwill and other intangible amortization 77 78 80 79 100
Restructuring and merger-related charges (69) 2 33 52 2,110
Sundry expense 191 174 205 283 296
- --------------------------------------------------------------------------------------------------------------------
Total noninterest expense 2,197 2,209 2,377 2,448 4,503
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) and
cumulative effect of a change in accounting principle 921 848 916 1,247 (2,694)
Income taxes (benefits) 288 264 271 395 (495)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
in accounting principle 633 584 645 852 (2,199)
Cumulative effect of a change in the accounting for
beneficial interests, net of tax - - (46) - -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 633 584 599 852 (2,199)
====================================================================================================================
PER SHARE DATA
Basic
Income (loss) before change in accounting principle $ 0.65 0.60 0.66 0.87 (2.27)
Net income (loss) 0.65 0.60 0.61 0.87 (2.27)
Diluted
Income (loss) before change in accounting principle 0.64 0.59 0.65 0.86 (2.27)
Net income (loss) 0.64 0.59 0.60 0.86 (2.27)
Cash dividends $ 0.24 0.24 0.48 0.48 0.48
AVERAGE SHARES (IN THOUSANDS)
Basic 969,333 967,671 969,097 971,453 969,707
Diluted 978,185 975,847 990,445 986,763 981,940
====================================================================================================================
56
59
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
-----------------------
(In millions, except per share data) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 4,946 5,777
Interest and dividends on securities 1,806 1,989
Trading account interest 402 409
Other interest income 691 630
- -------------------------------------------------------------------------------------------------------------------
Total interest income 7,845 8,805
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 2,445 2,480
Interest on short-term borrowings 947 1,389
Interest on long-term debt 1,040 1,065
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 4,432 4,934
- -------------------------------------------------------------------------------------------------------------------
Net interest income 3,413 3,871
Provision for loan losses 442 1,222
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,971 2,649
- -------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 954 933
Commissions 764 843
Fiduciary and asset management fees 765 740
Advisory, underwriting and other investment banking fees 436 391
Principal investing (101) 404
Other income 386 (535)
- -------------------------------------------------------------------------------------------------------------------
Total fee and other income 3,204 2,776
- -------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 2,773 2,825
Occupancy 344 312
Equipment 418 424
Advertising 30 61
Communications and supplies 221 248
Professional and consulting fees 167 153
Goodwill and other intangible amortization 155 202
Restructuring and merger-related charges (67) 2,105
Sundry expense 365 555
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,406 6,885
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefits) 1,769 (1,460)
Income taxes (benefits) 552 (101)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,217 (1,359)
===================================================================================================================
PER SHARE DATA
Basic earnings $ 1.24 (1.41)
Diluted earnings 1.23 (1.41)
Cash dividends $ 0.48 0.96
AVERAGE SHARES (IN THOUSANDS)
Basic 968,502 970,940
Diluted 976,978 983,147
===================================================================================================================
57
60
FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------
(In millions) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,217 (1,359)
Adjustments to reconcile net income to net cash provided (used) by operating activities
Accretion and amortization of securities discounts and premiums, net 101 130
Provision for loan losses 442 1,222
Securitization gains (24) (112)
Gain on sale of mortgage servicing rights (28) (5)
Securities transactions 16 597
Depreciation, goodwill and other amortization 560 635
Goodwill impairments - 1,754
Trading account assets, net (1,723) (3,291)
Mortgage loans held for resale (1,155) 795
(Gain) loss on sales of premises and equipment 9 (6)
Other assets, net 3,430 (2,780)
Trading account liabilities, net 432 972
Other liabilities, net (1,126) 1,146
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,151 (302)
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities 4,504 1,364
Maturities of securities 3,441 2,190
Purchases of securities (5,681) (5,425)
Origination of loans, net 211 (5,543)
Sales of premises and equipment 47 63
Purchases of premises and equipment (222) (421)
Goodwill and other intangible assets, net (114) (66)
Purchase of bank-owned separate account life insurance (47) (57)
Cash equivalents acquired, net of purchases of banking organizations (13) -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,126 (7,895)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Sales of deposits, net (4,101) 3,817
Securities sold under repurchase agreements and other short-term borrowings, net (4,694) 776
Issuances of long-term debt 7,511 7,239
Payments of long-term debt (7,260) (6,074)
Sales of common stock 14 59
Purchases of common stock (169) (353)
Cash dividends paid (471) (949)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (9,170) 4,515
- -------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (4,893) (3,682)
Cash and cash equivalents, beginning of year 24,385 22,677
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 19,492 18,995
===================================================================================================================
NONCASH ITEMS
Transfer to securities from loans $ 95 2,829
Transfer to securities from other assets 908 -
Transfer to other assets from trading account assets 201 -
Transfer to other assets from securities - 1,335
Transfer to other assets from loans, net $ 221 7,182
===================================================================================================================
58