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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 1-10000
FIRST UNION CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0898180
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
FIRST UNION CORPORATION
ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28288-0013
(Address of principal executive offices)
(Zip Code)
(704) 374-6565
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
981,343,231 shares of Common Stock, par value $3.33 1/3 per share, were
outstanding as of April 30, 2001.
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First Union Corporation ("First Union") may from time to time make written
or oral forward-looking statements, including statements contained in First
Union's filings with the Securities and Exchange Commission (including this
Quarterly Report on Form 10-Q and the Exhibits hereto and thereto), in its
reports to stockholders and in other First Union communications, including
communications related to First Union's pending merger (the "Merger") with
Wachovia Corporation ("Wachovia"), which are made in good faith by First Union
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements include, among others, statements with
respect to First Union's, Wachovia's or, following the Merger, the combined
company's, beliefs, plans, objectives, goals, guidelines, expectations,
financial condition, results of operations, future performance and business of
First Union or the combined company, including without limitation, (i)
statements relating to the benefits of the Merger, including future financial
and operating results, cost savings, enhanced revenues, and the accretion to
reported earnings thay may be realized from the Merger, (ii) statements
regarding certain of First Union's goals and expectations with respect to
earnings, earnings per share, revenue, expenses, and the growth rate in such
items, as well as other measures of economic performance, including statemens
relating to estimates of credit quality trends, and (iii) statements preceded
by, followed by or that include the words "may", "could", "should", "would",
"believe", "anticipate", "estimate", "expect", "intend", "plan", "projects" or
similar expressions. These forward-looking statements involve certain risks and
uncertainties that are subject to change based on various factors (many of which
are beyond First Union's control). The following factors, among others, could
cause First Union's and/or the combined company's financial performance to
differ materially from that expressed in such forward-looking statements: (1)
the risk that the businesses of First Union and Wachovia will not be integrated
successfully or such integration may be more difficult, time-consuming or costly
than expected; (2) expected revenue synergies and cost savings from the Merger
may not be fully realized or realized within the expected time frame; (3)
revenues following the Merger may be lower than expected; (4) deposit attrition,
operating costs, customer loss and business disruption following the Merger,
including, without limitation, difficulties in maintaining relationships with
employees, may be greater than expected; (5) the ability to obtain governmental
approvals for the Merger on the proposed terms and schedule; (6) the failure of
First Union's and Wachovia's stockholders to approve the Merger; (7) the
strength of the United States economy in general and the strength of the local
economies in which First Union conducts operations may be different than
expected resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit, including the resultant effect on First Union's
loan portfolio and allowance for loan losses; (8) the effects of, and changes
in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Board of Governors of the Federal Reserve System; (9) inflation,
interest rate, market and monetary fluctuations; (10) adverse conditions in the
stock market, the public debt market and other capital markets (including
changes in interest rate conditions) and the impact of such conditions on First
Union's capital markets and capital management activities, including, without
limitation, First Union's mergers and acquisition advisory business, equity and
debt underwriting activities, private equity investment activities, derivative
securities activities, investment and wealth management advisory businesses, and
brokerage activities; (11) the timely development of competitive new products
and services by First Union and the acceptance of these products and services by
new and existing customers; (12) the willingness of customers to accept third
party products marketed by First Union; (13) the willingness of customers to
substitute competitors' products and services for First Union's products and
services and vice versa; (14) the impact of changes in financial services' laws
and regulations (including laws concerning taxes, banking, securities and
insurance); (15) technological changes; (16) changes in consumer spending and
saving habits; (17) the effect of corporate restructurings, acquisitions and/or
dispositions, including, without limitation, the Merger, and the actual
restructuring and other charges related thereto, and the failure to achieve the
expected revenue growth and/or expense savings from such corporate
restructurings, acquisitions and/or dispositions; (18) the growth and
profitability of First Union's noninterest or fee income being less than
expected; (19) unanticipated regulatory or judicial proceedings; (20) the impact
of changes in accounting policies by the Securities and Exchange Commission;
(21) adverse changes in financial performance and/or condition of First Union's
borrowers which could impact repayment of such borrowers' outstanding loans; and
(22) First Union's success at managing the risks involved in the foregoing.
First Union cautions that the foregoing list of important factors is not
exclusive. First Union does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of First Union.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following unaudited consolidated financial statements of First Union
within Item 1 include, in the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for fair presentation of such
consolidated financial statements for the periods indicated.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
Derivative Financial Instruments and Hedging Activities
On January 1, 2001, First Union adopted Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as subsequently amended by SFAS 137 and SFAS 138, which establishes
accounting and reporting standards for derivatives and hedging activities.
First Union uses interest rate swaps, futures, options and combinations thereof
to manage interest rate risk. Under SFAS 133, First Union may designate a
derivative as either a hedge of the fair value of a recognized fixed rate asset
or liability or an unrecognized firm commitment ("fair value" hedge), a hedge of
a forecasted transaction or of the variability of future cash flows of a
floating rate asset or liability ("cash flow" hedge) or a foreign-currency fair
value or cash flow hedge ("foreign currency" hedge). All derivatives are
recorded as assets or liabilities in the balance sheet and these instruments are
measured at fair value with unrealized gains and losses recorded either in other
comprehensive income or in the results of operations, depending on the purpose
for which the derivative is held. Derivatives that do not meet the criteria for
designation as a hedge under SFAS 133 at inception, or fail to meet them
thereafter, are accounted for as trading account assets.
Changes in the fair value of a derivative that is designated and qualifies as a
fair value hedge, along with the gain or loss on the hedged asset or liability
that is attributable to the hedged risk, are recorded in the results of
operations as other fee income. To the extent of the effectiveness of a hedge,
changes in the fair value of a derivative that is designated and qualifies as a
cash flow hedge are recorded in other comprehensive income, net of tax. For all
hedge relationships, ineffectiveness resulting from differences between the
changes in fair value or cash flows of the hedged item and changes in fair value
of the derivative are recognized in the results of operations as other fee
income. The net interest settlement on derivatives designated as fair value or
cash flow hedges is treated as an adjustment to the interest income or expense
of the hedged assets or liabilities.
At inception of a hedge transaction, First Union formally documents the hedge
relationship and the risk management objective and strategy for undertaking the
hedge. This process includes identification of the hedging instrument, hedged
item, risk being hedged and the methodology for measuring both effectiveness and
ineffectiveness. In addition, First Union assesses, both at the inception of the
hedge and on an ongoing quarterly basis, whether the derivative used in the
hedging transaction has been highly effective in offsetting changes in fair
value or cash flows of the hedged item, and whether the derivative is expected
to continue to be highly effective. When it is determined that the hedge
relationship is no longer highly effective, First Union discontinues hedge
accounting prospectively.
First Union will discontinue hedge accounting prospectively when either it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of a hedged item; the derivative expires or is
sold, terminated or exercised; the derivative is de-designated because it is
unlikely that a forecasted transaction will occur; or management determines that
designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, the derivative is reclassified as a
trading account asset. When a fair value hedge is discontinued, the hedged asset
or liability is no longer adjusted for changes in fair value and the existing
basis adjustment is amortized/accreted over the remaining life of the asset or
liability. When a cash flow hedge is discontinued but the hedged cash flows or
forecasted transaction are still expected to occur, gains and losses that were
accumulated in other comprehensive income are amortized/accreted into earnings,
or recognized in earnings immediately if the cash flow hedge was discontinued
because a forecasted transaction did not occur.
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First Union may occasionally purchase or originate a financial instrument or
enter into a contract that contains a derivative that is embedded in the
financial instrument. First Union determines whether the economic
characteristics of the embedded derivative are clearly and closely related to
the economic characteristics of the remaining components of the financial
instrument (the host contract) and whether a separate instrument with the same
terms as the embedded instrument would meet the definition of a derivative. If
applicable, an embedded derivative is separated from the host contract and can
be designated as a fair value, cash flow or foreign currency hedge; otherwise,
the derivative will be recorded as a freestanding derivative and classified as a
trading account asset. However, if the host contract is already accounted for at
fair value with changes reported in earnings, the embedded derivative is not
separated from the host contract.
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FIRST UNION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Consolidated Balance Sheets of First Union and subsidiaries at March
31, 2001, March 31, 2000, and December 31, 2000, respectively, set forth on page
42 of First Union's First Quarter Financial Supplement for the three months
ended March 31, 2001 (the "Financial Supplement"), are incorporated herein by
reference.
The Consolidated Statements of Income of First Union and subsidiaries for
the three months ended March 31, 2001 and 2000, set forth on page 43 of the
Financial Supplement, are incorporated herein by reference.
The Consolidated Statements of Cash Flows of First Union and subsidiaries
for the three months ended March 31, 2001 and 2000, set forth on page 44 of the
Financial Supplement, are incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations appears on pages 2 through 44 of the Financial Supplement and is
incorporated herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk appears on pages
16 and 17 and pages 36 and 37 of the Financial Supplement and is incorporated
herein by reference.
A copy of the Financial Supplement is being filed as Exhibit (19) to this
Report.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In 1999, in connection with its stock repurchase program, First Union sold
17 million shares of its common stock to an investment banking firm. In
connection therewith, First Union agreed to repurchase the 17 million shares or
otherwise settle the contract, at First Union's option. In October 2000, First
Union repurchased 4 million of those shares leaving 13 million shares to be
repurchased as of March 31, 2001. The offer and sale of the shares of common
stock by First Union were exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof because such offer and sale
did not involve a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
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(2) Agreement and Plan of Merger, dated as of April 15, 2001, by
and between First Union and Wachovia (incorporated by
reference to Exhibit 2.1 of First Union's Registration
Statement on Form S-4 (No. 333-59616).
(4) Instruments defining the rights of security holders, including
indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed
Charges.
(19) First Union's First Quarter 2001 Financial Supplement.
(99) First Union and Wachovia - Unaudited Pro Forma Condensed
Combined Financial Information.
* First Union agrees to furnish to the Commission upon request, copies of the
instruments, including indentures, defining the rights of the holders of the
long-term debt of First Union and its consolidated subsidiaries.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2001, a Current Report on Form 8-K,
dated January 18, 2001, was filed with the Commission by First Union. In
addition, Current Reports on Form 8-K, dated April 16, 2001, May 3, 2001, and
May 15, 2001, were filed with the Commission by First Union.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST UNION CORPORATION
Date: May 15, 2001
By: /s/ JAMES H. HATCH
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JAMES H. HATCH
SENIOR VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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(2) Agreement and Plan of Merger, dated as of April 15, 2001, by
and between First Union and Wachovia (incorporated by
reference to Exhibit 2.1 of First Union's Registration
Statement on Form S-4 (No. 333-59616).
(4) Instruments defining the rights of security holders, including
indentures.*
(12) Computations of Consolidated Ratios of Earnings to Fixed
Charges.
(19) First Union's First Quarter 2001 Financial Supplement.
(99) First Union and Wachovia - Unaudited Pro Forma Condensed
Combined Financial Information.
* First Union agrees to furnish to the Commission upon request, copies of the
instruments, including indentures, defining the rights of the holders of the
long-term debt of First Union and its consolidated subsidiaries.