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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(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 that 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 statements
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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EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A for the quarterly period ended March
31, 2001 is being filed solely to (i) revise a Note to Consolidated Financial
Statements - Derivative Financial Instruments and Hedging Activities and to add
a new Note 2 to the Notes to Consolidated Financial Statements - Basic and
Diluted Earnings per Share, each in Part I, Item 1, (ii) add a new page 28
related to Table 4 - Business Segments in Exhibit (19), the Financial
Supplement, (iii) revise footnote (f) to Table 18 - Risk Management Derivative
Financial Instruments in Exhibit (19), the Financial Supplement, and (iv) revise
certain portions of Exhibit (99) - First Union and Wachovia - Unaudited Pro
Forma Condensed Combined Financial Information.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT.
Note 1: 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.
Managing interest rate risk is fundamental to banking. The inherent maturity and
repricing characteristics of First Union's day-to-day lending and deposit
activities create a naturally asset-sensitive structure. By using combinations
of financial instruments, including derivatives, First Union manages the
sensitivity of earnings to changes in interest rates within the corporation's
established policy guidelines. First Union uses an earnings simulation model to
analyze interest rate sensitivity. The impact of derivatives on the
corporation's earnings and rate sensitivity is fully incorporated in the
earnings simulation model in the same manner as other financial assets and
liabilities.
First Union uses derivatives, including interest rate swaps, futures, options
and combinations thereof, as a cost- and capital-efficient way to hedge certain
assets, liabilities and forecasted transactions. 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.
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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.
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.
First Union's risk management derivative financial instruments by type of
hedging relationship are presented below.
RISK MANAGEMENT DERIVATIVE FINANCIAL
INSTRUMENTS (a)
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MARCH 31, 2001
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GROSS UNREALIZED IN- AVERAGE
NOTIONAL ------------------------------- EFFECTIVE- MATURITY IN
(In millions) AMOUNT GAINS LOSSES (e) EQUITY (f) NESS (f) YEARS (h)
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ASSET HEDGES
Cash flow hedges (b)
Interest rate swaps $ 33,286 1,238 (99) 707 (1) 7.74
Futures 25 - - - - 0.25
Fair value hedges
Interest rate swaps 5 - (1) - - 14.09
Futures 142 - (9) - - 0.25
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Total asset hedges $ 33,458 1,238 (109) 707 (1) 7.74
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LIABILITY HEDGES
Cash flow hedges (c)
Interest rate swaps $ 25,946 - (624) (386) (1) 8.59
Futures 77,466 - (429) (266) - 0.25
Fair value hedges (d)
Interest rate swaps 9,970 551 (2) - - 6.30
Options 300 1 - - - 2.21
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Total liability
hedges $ 113,682 552 (1,055) (652) (1) 2.69
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(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.
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(b) Receive-fixed interest rate swaps with a notional amount of $31.6 billion
and with pay rates based on one-to-six month LIBOR are primarily designated as
cash flow hedges of the variability in cash flows related to the forecasted
interest rate resets of one-to-six month LIBOR-indexed loans. Pay-fixed interest
rate swaps with a notional amount of $1.7 billion and with receive rates based
on one-month LIBOR are designated as cash flow hedges of securities and have a
loss, net of tax, of $60 million in accumulated other comprehensive income.
(c) Derivatives with a notional amount of $94.3 billion are designated as cash
flow hedges of the variability in cash flows attributable to the forecasted
issuance of fixed rate short-term liabilities that are part of a rollover
strategy, primarily repurchase agreements and deposit products. Of this amount,
$72.0 billion are Eurodollar futures and $22.3 billion are pay-fixed interest
rate swaps with receive rates based on one-to-three month LIBOR, of which $14.1
billion are forward-starting. Pay-fixed interest rate swaps with a notional
amount of $3.6 billion, of which $3.3 billion are forward-starting, and with
receive rates based on one-to-three month LIBOR are primarily designated as cash
flow hedges of the variability in cash flows related to the forecasted interest
rate resets of one-to-three month LIBOR-indexed long-term debt. Additionally,
Eurodollar futures with a notional amount of $5.5 billion are designated as cash
flow hedges of the variability in cash flows related to the forecasted interest
rate resets of three month LIBOR-indexed long-term debt.
(d) Receive-fixed interest rate swaps with a notional amount of $10.0 billion
and with pay rates based primarily on three-to-six month LIBOR are designated as
fair value hedges of fixed rate liabilities, primarily CDs, long-term debt and
bank notes.
(e) Represents the fair value of derivative financial instruments less accrued
interest receivable or payable.
(f) At March 31, 2001, the net unrealized gain on derivatives included in
accumulated other comprehensive income, which is a component of stockholders'
equity, was $145 million, net of tax. Of this net of tax amount, $55 million
represents the effective portion of the net gains (losses) on derivatives that
qualify as cash flow hedges. Gains (losses) will be reclassified into interest
income or expense as a yield adjustment of the hedged item in the same period
that the hedged cash flows impact earnings. This may occur as interest on the
floating rate instruments such as loans, long-term debt and bank notes is
accrued, or as fixed rate short-term liabilities are rolled over. As of March
31, 2001, $21 million of net gains, net of tax, recorded in accumulated other
comprehensive income are expected to be reclassified as interest income or
expense during the next twelve months. The maximum length of time over which
cash flow hedges are hedging the variability in future cash flows associated
with the forecasted transactions is 25.73 years.
(g) In the three months ended March 31, 2001, losses in the amount of $2 million
were recognized in other fee income representing the ineffective portion of the
net gains (losses) on derivatives that qualify as cash flow hedges. In addition,
net interest income in the three months ended March 31, 2001, includes a
reduction to net interest income of $29 million representing ineffectiveness of
cash flow hedges caused by differences between the critical terms of the
derivative and the hedged item, primarily differences in reset dates.
(h) Estimated maturity approximates average life.
Note 2: Basic and Diluted Earnings Per Share
The reconciliation between basic and diluted earnings per share for the three
months ended March 31, 2001 and March 31, 2000 is presented below:
Three Months
Ended March 31,
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(Dollars in millions, except per share data) 2001 2000
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Net income $ 584 840
Less imputed interest on the Corporation's transactions
in its common stock (7) (4)
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Income available to common stockholders $ 577 836
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Basic earnings per share $ 0.60 0.86
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Diluted earnings per share $ 0.59 0.85
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Average shares - basic (In thousands) 967,671 972,174
Share equivalents and unvested restricted stock (In thousands) 8,176 4,099
Incremental shares from equity forward transactions (In thousands) - 7,822
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Average shares - diluted (In thousands) 975,847 984,095
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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
43 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 44 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 45 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 45 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
15 through 17 and pages 37 and 38 of the Financial Supplement, and in Note 1 to
Notes to Consolidated Financial Statements 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 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, and
amended and restated, 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.
** Previously filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q/A Amendment No. 1 to be signed on its
behalf by the undersigned hereunto duly authorized.
FIRST UNION CORPORATION
Date: June 26, 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, and
amended and restated, 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.
** Previously filed.