Union Planters Corp. Third Quarter 2002 Form 10-Q

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2002

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period ________ to ________

Commission File No.   1-10160

UNION PLANTERS CORPORATION

(Exact name of registrant as specified in its charter)

        Tennessee        

        62-0859007        

(State of incorporation)

(IRS Employer Identification No.)

 

 

Union Planters Corporation

6200 Poplar Avenue

                         Memphis, Tennessee 38119                

(Address of principal executive offices)

 

Registrant's telephone number, including area code:  (901) 580-6000

 

 

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, and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  S No ¨

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

 

      Class        

        Outstanding at October 31, 2002        

Common stock $5 par value

198,127,037

 

UNION PLANTERS CORPORATION AND SUBSIDIARIES

Form 10-Q For the Three Months Ended September 30, 2002

 

 

INDEX

Page

PART I.  FINANCIAL INFORMATION *

Item 1 - Financial Statements (unaudited) *

CONSOLIDATED BALANCE SHEET *

CONSOLIDATED STATEMENT OF EARNINGS *

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY *

CONSOLIDATED STATEMENT OF CASH FLOWS *

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS *

Note 1. Principles of Accounting *

Note 2. Acquisitions *

Note 3. Investment Securities *

Note 4. Nonperforming Loans *

Note 5. Allowance for Losses on Loans *

Note 6. Borrowings *

Note 7. Shareholders' Equity *

Note 8. Other Noninterest Income and Expense *

Note 9. Income Taxes *

Note 10. Earnings Per Share *

Note 11. Mortgage Loan Servicing *

Note 12. Intangible Assets *

Note 13. Line of Business Reporting *

Note 14. Contingent Liabilities *

Note 15. Derivative Financial Instruments *

Note 16. Subsequent Event *

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations *

Item 3 - Quantitative and Qualitative Disclosures About Market Risk *

Item 4 - Controls and Procedures *

PART II - OTHER INFORMATION *

Item 1 - Legal Proceedings *

Item 2 - Changes in Securities *

Item 3 - Defaults Upon Senior Securities *

Item 4 - Submission of Matters to a Vote of Security Holders *

Item 5 - Other Information *

Item 6 - Exhibits and Reports on Form 8-K *

SIGNATURES *

CERTIFICATIONS *

 

PART I.  FINANCIAL INFORMATION

Item 1 - Financial Statements (unaudited)

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)

     September 30,     

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

Assets

  Cash and due from banks 

$        829,474 

$        762,923 

$        953,846 

  Interest-bearing deposits at financial institutions 

112,816 

 47,293 

54,351 

  Federal funds sold and securities purchased
     under agreements to resell 

41,139 


 52,539  


13,067 

  Trading account assets 

310,808 

237,292  

263,315 

  Loans held for resale 

1,870,863 

1,226,839  

1,862,637 

  Available for sale securities (amortized cost: $4,608,555,
     $4,981,800 and $4,694,248, respectively)

4,757,020 

5,123,428 

4,780,629 

  Loans:

    Commercial, financial and agricultural 

5,353,903 

5,280,743 

5,145,917 

    Foreign 

268,209 

407,733 

397,737 

    Accounts receivable - factoring 

758,269 

711,156 

640,312 

    Real estate - construction 

2,295,836 

2,346,178 

2,190,854 

    Real estate - mortgage 

      Secured by 1-4 family residential 

4,526,492 

5,542,735 

5,166,097 

      FHA/VA government-insured/guaranteed 

213,169 

177,182 

133,751 

      Non-farm, nonresidential properties 

5,028,295 

4,686,335 

4,821,293 

      Multi-family (5 or more) residential 

870,681 

817,264 

846,259 

      Secured by farmland 

491,637 

448,401 

462,676 

    Home equity 

1,383,561 

866,709 

935,841 

    Consumer 

2,088,879 

2,492,639 

2,338,560 

    Direct lease financing 

         81,487 

        105,879 

        104,705 

  Total loans 

23,360,418 

23,882,954 

23,184,002 

  Less:  Unearned income 

(24,652)

 (21,331)

 (20,963)

            Allowance for losses on loans 

      (356,561)

       (342,194)

       (341,930)

        Net loans 

22,979,205 

23,519,429 

22,821,109 

  Premises and equipment, net 

544,197 

577,608 

556,686 

  Accrued interest receivable 

210,883 

266,763 

245,847 

  FHA/VA claims receivable, net 

34,712 

62,281 

55,813 

  Mortgage servicing rights, net 

235,411 

162,612 

150,303 

  Goodwill, net 

769,491 

799,001 

780,612 

  Other intangibles, net 

132,789 

155,945 

146,695 

  Other assets  

         418,927 

         392,888 

         512,694 

         Total assets 

$  33,247,735 

$  33,386,841 

$  33,197,604 

Liabilities and shareholders' equity

  Deposits 

    Noninterest-bearing 

$  4,788,926 

$  4,239,866 

$   4,509,944 

    Certificates of deposit of $100,000 and over 

1,623,473 

1,817,284 

1,602,117 

    Other interest-bearing 

  16,902,336 

  17,441,908 

   17,318,441 

        Total deposits 

23,314,735 

23,499,058 

23,430,502 

  Short-term borrowings 

3,048,855 

3,224,990 

3,076,679 

  Short- and medium-term senior notes 

598,141 

20,000 

  Federal Home Loan Bank advances 

960,743 

1,461,530 

1,461,190 

  Other long-term debt 

1,249,688 

1,275,780 

1,275,509 

  Accrued interest, expenses and taxes 

247,482 

281,705 

282,211 

  Other liabilities 

         595,798 

        412,947 

        447,772 

        Total liabilities 

    30,015,442 

   30,176,010 

   29,973,863 

  Commitments and contingent liabilities (Note 14)

  Shareholders' equity 

    Convertible preferred stock 

12,959 

16,478 

16,101 

    Common stock, $5 par value; 300,000,000 shares authorized;
        200,055,546 issued and outstanding (206,035,884 at
        September 30, 2001 and 206,113,331 at December 31, 2001) 

1,000,278 



 1,030,179 



1,030,567 

    Additional paid-in capital 

538,007 

 534,690 

535,378 

    Retained earnings 

1,606,363 

1,553,309 

1,600,153 

    Unearned compensation 

(19,353)

 (13,472)

 (13,022)

    Accumulated other comprehensive income 

           94,039 

          89,647 

          54,564 

        Total shareholders' equity 

      3,232,293 

     3,210,831 

     3,223,741 

        Total liabilities and shareholders' equity 

$  33,247,735 

$ 33,386,841 

$ 33,197,604 

The accompanying notes are an integral part of these consolidated financial statements.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS

(Unaudited)

Three Months Ended

Nine Months Ended

      September 30,     

      September 30,   

     2002     

     2001     

     2002     

    2001    

(Dollars in thousands, except per share data)

Interest income

  Interest and fees on loans 

$   382,905 

$    475,446 

$   1,162,716 

$   1,507,139 

  Interest on investment securities

 

 

 

 

    Taxable 

58,353 

      63,511 

174,755 

     223,478 

    Tax-exempt 

9,666 

      14,656 

32,932 

       45,107 

  Interest on deposits at financial institutions 

680 

           409 

1,653 

         1,546 

  Interest on federal funds sold and securities purchased
    under agreements to resell 

214 


853 

1,263 


1,856 

  Interest on trading account assets 

2,522 

         3,418 

7,143 

      12,064 

  Interest on loans held for resale 

      19,469 

      21,773 

         59,035 

        52,006 

      Total interest income 

    473,809 

    580,066 

    1,439,497 

   1,843,196 

Interest expense

  Interest on deposits 

102,650 

     184,837 

336,792 

    609,196 

  Interest on short-term borrowings 

9,848 

        30,025 

25,384 

     160,542 

  Interest on long-term debt 

     36,954 

      42,526 

       113,606 

      123,590 

      Total interest expense 

   149,452 

    257,388 

       475,782 

      893,328 

      Net interest income 

324,357 

      322,678 

963,715 

949,868 

Provision for losses on loans 

     48,000 

      41,933 

       137,901 

        96,133 

     Net interest income after provision for losses on loans 

   276,357 

    280,745 

       825,814 

      853,735 

Noninterest income

  Service charges on deposit accounts 

61,126 

          53,694 

170,005 

        163,401 

  Mortgage banking revenue 

59,606 

          51,279 

154,123 

         138,689 

  Merchant services income 

528 

          10,430 

10,978 

          31,392 

  Factoring commissions and fees 

11,571 

            9,620 

31,142 

          28,700 

  Trust service income 

7,290 

            6,954 

21,529 

          21,026 

  Profits and commissions from trading activities 

1,831 

            1,339 

4,407 

            6,226 

  Investment securities (losses) gains 

(1,300)

              580 

10,736 

            8,934 

  Investments and insurance 

15,989 

          13,544 

42,997 

          37,199 

  Other income 

     37,465 

        48,901 

       106,187 

      112,859 

      Total noninterest income 

   194,106 

      196,341 

       552,104 

      548,426 

Noninterest expense

  Salaries and employee benefits 

139,476 

        139,062 

401,206 

        404,575 

  Net occupancy expense 

25,923 

          26,603 

77,463 

          78,143 

  Equipment expense 

20,679 

          22,026 

61,570 

          66,649 

  Goodwill amortization 

3,652 

          12,089 

10,956 

          36,184 

  Other intangibles amortization 

4,087 

            4,240 

12,303 

           12,968 

  Other expense 

      82,281 

      103,571 

       252,992 

      307,737 

      Total noninterest expense 

    276,098 

      307,591 

       816,490 

      906,256 

      Earnings before income taxes 

194,365 

        169,495 

561,428 

        495,905 

  Income taxes 

       60,136 

          57,491 

       173,706 

      168,209 

      Net earnings 

$   134,229 

$      112,004 

$     387,722 

$    327,696 

      Net earnings applicable to common shares 

$   133,969 

$      111,703 

$     386,968 

$    326,630 

Earnings per common share 

    Basic 

$           .67 

$              .54 

$           1.91 

$          1.59 

    Diluted 

.66 

.54 

1.88 

1.58 

Dividends per common share

.33 

.33 

1.00 

1.00 

Average common shares outstanding (in thousands)

    Basic 

200,501 

205,798 

203,049 

        205,397 

    Diluted 

202,918 

        208,330 

205,928 

        207,841 

The accompanying notes are an integral part of these consolidated financial statements.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

Convertible
Preferred
   Stock   

Common
  Stock  

Additional
Paid-in
Capital

Retained
Earnings

Unearned
Compensation

Accumulated
 Other 
Comprehensive
 Income

Total

(Dollars in thousands)

Balance, January 1, 2002 

$  16,101 

$ 1,030,567 

$   535,378 

 $  1,600,153 

     $     (13,022)

$       54,564

$   3,223,741 

Comprehensive income

 

     Net earnings 

387,722 

-

387,722 

Other comprehensive income, net of taxes

     Net change in unrealized gain on 
       available for sale securities 

39,475

        39,475 

      Total comprehensive income 

427,197 

Dividends

     Common dividends 

 (203,041)

-

(203,041)

     Preferred dividends - Series E 

(754)

-

(754)

Common stock issued under employee
  benefit plans, net of exchanges 

4,745 

22,654 

(7,778)

-

19,621 

Amortization of restricted stock grants

1,447 

1,447 

Conversion of preferred stock 

(3,142)

817 

2,325 

-

Cash paid for fractional shares relating to 
  stock split 



(5,628)


5,286 




-


(342)

Common stock purchased and retired 

           - 

      (30,223)

    (27,636)

     (177,717)

               - 

               -

      (235,576)

Balance, September 30, 2002 

$  12,959 

$ 1,000,278 

$  538,007 

$  1,606,363 

$     (19,353)

$      94,039

$   3,232,293 

 

 

Before Tax

Tax

Net of Tax

 
 

  Amount  

  Expense  

  Amount  

 

Disclosure of reclassification amount:

       

Change in the unrealized gain on available for sale securities arising
   during the period

$   51,348 

$  (18,576)

$  32,772 

 

Less:  Reclassification for gains included in net earnings

     10,736 

      (4,033)

      6,703 

 

Net change in the unrealized gain on available for sale securities

$   62,084 

$  (22,609)

$  39,475 

 

The accompanying notes are an integral part of these consolidated financial statements.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

Nine Months Ended

     September 30,     

   2002   

   2001   

(Dollars in thousands)

Operating activities

  Net earnings

$   387,722 

$     327,696 

  Reconciliation of net earnings to net cash provided (used) by operating activities:

    Provision for losses on loans

137,901 

96,133 

    Depreciation and amortization of premises and equipment

49,701 

58,582 

    Amortization of goodwill and other intangibles

23,259 

49,152 

    Amortization and impairment of mortgage servicing rights, net

13,171 

30,088 

    Net amortization of investment securities

9,620 

6,765 

    Net realized gains on sales of investment securities

(10,736)

(8,934)

    Gain on sale of residential mortgage loans

(48,608)

(21,555)

    Gain on sale of branches

(2,881)

(20,716)

    Deferred income tax expense 

22,632 

27,094 

    Increase in trading account assets and loans held for resale

(7,111)

(773,146)

    Decrease in other assets

49,882 

46,797 

    Net increase in accrued interest, expenses, taxes and other liabilities

284 

10,100 

    Other, net

               - 

         3,112 

          Net cash provided (used) by operating activities

      624,836 

    (168,832)

Investing activities

  Net (increase) decrease in short-term investments

(58,465)

1,751 

  Proceeds from sales of available for sale securities

370,292 

1,115,352 

  Proceeds from maturities, calls and prepayments of available for sale securities

892,941 

1,003,418 

  Purchases of available for sale securities

(1,027,577)

(207,125)

  Net (increase) decrease in loans

(366,532)

56,358 

  Net cash received from acquired institutions

15,891 

61,970 

  Sale of residential real estate loans

1,172,601 

  Purchases of premises and equipment, net

      (39,707)

      (25,300)

          Net cash (used) provided by investing activities

    (213,157)

  3,179,025 

Financing activities

  Net increase (decrease) in deposits

14,882 

(189,480)

  Net decrease in short-term borrowings

(27,824)

(2,870,466)

  Proceeds from issuance of long-term debt

598,593 

1,467,415 

  Repayment of long-term debt

(536,041)

(1,190,820)

  Net cash paid for sales of deposits

(137,455)

(189,908)

  Proceeds from issuance of common stock

19,621 

17,195 

  Cash paid for fractional shares relating to stock split

(342)

  Purchase and retirement of common stock

(235,576)

(87,692)

  Cash dividends paid

     (203,837)

    (205,677)

          Net cash used by financing activities 

     (507,979)

 (3,249,433)

  Net decrease in cash and cash equivalents

(96,300)

(239,240)

  Cash and cash equivalents at the beginning of the period

      966,913 

  1,054,702 

  Cash and cash equivalents at the end of the period

$    870,613 

$   815,462 

Supplemental disclosures

  Cash paid for

    Interest

$    502,004 

$    965,445 

    Income taxes 

150,454 

131,540 

  Non-cash items

    Unrealized gain on securities available for sale

148,465 

141,628 

    Available for sale securities, pending settlement

148,455 

The accompanying notes are an integral part of these consolidated financial statements.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Principles of Accounting

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The foregoing financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods have been included.

The accounting policies followed by Union Planters Corporation and its subsidiaries (collectively, Union Planters or the Company) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting except for newly issued accounting pronouncements discussed below. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in Appendix C of Union Planters Corporation's Definitive Proxy Statement for the Annual Shareholders' Meeting held April 18, 2002 (the Definitive Proxy Statement including the 2001 Annual Financial Disclosures are referred to as the Proxy and Annual Financial Disclosures). Certain prior period amounts have been reclassified to conform with the 2002 financial reporting presentation.

Goodwill and Other Intangible Assets. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This standard addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in the financial statements upon their acquisition and supercedes Accounting Principles Board (APB) Opinion No. 17, "Intangible Assets." SFAS No. 142 changes the accounting for goodwill and other intangible assets in the following significant respects:

Union Planters adopted this standard on January 1, 2002. For the three and nine months ended September 30, 2002, the net impact on the consolidated statement of earnings was an increase in net earnings of $8.0 million and $24.1 million, respectively. See Note 12 for further discussion.

In October 2001, the FASB issued interpretive guidance for SFAS No. 142 affirming that intangible assets acquired through the purchase of branches will continue to be amortized. This resulted in the continued amortization of certain unidentified intangibles included in goodwill associated with branch purchases. During the three and nine months ended September 30, 2002, this amortization expense was $3.7 million and $11.0 million, respectively.

In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." This statement amends the accounting for acquisitions of branches qualifying as a business. Such acquisitions will now be accounted for in accordance with SFAS No. 142. Thus, the requirement to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of this statement. During the fourth quarter, Union Planters, will adopt this standard and, as required, restate net earnings for the first three quarters of the year, reversing approximately $6.8 million of pretax amortization expense incurred during the first nine months of 2002. The effect on net earnings for the first nine months of 2002 is expected to be $4.7 million or $.02 per diluted share. Unidentifiable intangible assets included in goodwill with a book value of $61.4 million will continue to be amortized, resulting in quarterly amortization expense of $1.4 million.

Impairment or Disposal of Long-Lived Assets. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a business and amends Accounting Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." Significant changes in accounting include:

The provisions of this standard are required to be applied starting with fiscal years beginning after December 15, 2001. Union Planters adopted this standard on January 1, 2002. The adoption had an immaterial impact on the Company's financial condition, results of operations and cash flows.

Costs associated with Exit or Disposal Activities. In June of 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." Previous guidance required expenses for exit or disposal activities to be accrued when the exit or disposal plan was approved by management and the liability was probable and quantifiable regardless of when the expense would be incurred. This standard requires that liabilities or costs associated with such activities be recognized when incurred. This standard also requires that any such liability be recognized initially at fair value. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002 with earlier application permitted. Union Planters will adopt the new standard as required and does not expect it to have a material impact on the Company's financial condition, results of operations or cash flows.

Note 2. Acquisitions

On February 12, 2001, Union Planters acquired Jefferson Savings Bancorp, Inc. (Jefferson Savings) of Ballwin, Missouri, the parent of Jefferson Heritage Bank, a federal savings bank. Jefferson Savings had total assets of $1.6 billion, total loans of $1.3 billion and total deposits of $877 million at acquisition. Union Planters exchanged approximately 6.6 million shares of its common stock for all of the outstanding shares of Jefferson Savings. The acquisition was accounted for as a purchase. Goodwill and other intangibles resulting from the acquisition were $46.5 million.

Union Planters previously announced its intent to purchase common shares up to the number of shares issued in the transaction, and at September 30, 2002, all shares had been purchased and retired.

Note 3. Investment Securities

The amortized cost and fair value of investment securities are summarized as follows:

         September 30, 2002         

Amortized

    Unrealized     

   Cost   

   Gains   

   Losses   

  Fair Value  

(Dollars in thousands)

Available for sale securities

U.S. Government and federal agencies

  U.S. Treasury

$       64,523

$      2,788

$      -

$       67,311

  U.S. Government agencies

    Collateralized mortgage obligations

1,817,806

43,752

8

1,861,550

    Mortgage-backed

369,275

20,490

2

389,763

    Other

      154,552

       7,081

        16

     161,617

          Total U.S. Government and federal agencies

2,406,156

74,111

26

2,480,241

Obligations of states and political subdivisions

760,566

45,351

155

805,762

Other stocks and securities

   1,441,833

     30,580

   1,396

   1,471,017

          Total available for sale securities

$ 4,608,555

$ 150,042

$ 1,577

$ 4,757,020

      December 31, 2001      

Amortized

    Unrealized    

    Cost    

   Gains   

   Losses   

  Fair Value  

(Dollars in thousands)

Available for sale securities

U.S. Government and federal agencies

  U.S. Treasury

$      78,414

$   1,478

$       156

$      79,736

  U.S. Government agencies

    Collateralized mortgage obligations

1,699,771

34,352

1,480

1,732,643

    Mortgage-backed

355,830

9,323

621

364,532

    Other

      324,361

     9,421

          95

     333,687

          Total U.S. Government and federal agencies

2,458,376

54,574

2,352

2,510,598

Obligations of states and political subdivisions

1,084,757

24,065

4,049

1,104,773

Other stocks and securities

   1,151,115

   21,277

     7,134

   1,165,258

          Total available for sale securities

$ 4,694,248

$ 99,916

$ 13,535

$ 4,780,629

 

Investment securities having a fair value of approximately $2.2 billion at September 30, 2002 and December 31, 2001 were pledged to secure public and trust funds on deposit, securities sold under agreements to repurchase and Federal Home Loan Bank (FHLB) advances.

Included in available for sale investment securities is $271.1 million and $269.9 million of Federal Home Loan Bank and Federal Reserve Bank stock at September 30, 2002 and December 31, 2001, respectively, for which there is no readily determinable market value.

The following table presents the gross realized gains and losses on available for sale investment securities for the three and nine months ended September 30, 2002 and 2001:

 

Three Months Ended

 

Nine Months Ended

 

     September 30,     

 

     September 30,     

 

   2002   

 

   2001   

 

   2002   

 

   2001   

 

(Dollars in thousands)

               

Realized gains

$       564 

 

$     591 

 

$    12,789 

 

$    11,628 

Realized losses

1,864 

 

    11 

 

2,053 

 

 2,694 

The loss during the third quarter of 2002 is related to interest only strips arising from Union Planters' sales and securitizations of mortgage loans, which had an other than temporary decline in value due to increased prepayment speeds on the underlying mortgages that was accounted for as a realized loss.

Note 4. Nonperforming Loans

Nonperforming loans are summarized as follows:

September 30,

December 31,

   2002   

   2001   

(Dollars in thousands)

Nonaccrual loans

$ 298,689

$ 234,405

Restructured loans

          561

          868

          Total nonperforming loans

$ 299,250

$ 235,273

FHA/VA government-insured/guaranteed

  loans on nonaccrual status

$     1,659 

$    1,872 

Note 5. Allowance for Losses on Loans

The changes in the allowance for losses on loans for the three and nine months ended September 30, 2002 and 2001 are as follows:

Three Months Ended

Nine Months Ended

             September 30,             

             September 30,             

   2002   

   2001   

   2002   

   2001   

(Dollars in thousands)

Beginning balance

$  353,566 

$  342,868 

$ 341,930 

$  335,452 

Provision for losses on loans

48,000 

41,933 

137,901 

96,133 

Recoveries of loans previously charged off

10,911 

29,290 

28,860 

54,014 

Loans charged off

(55,916)

(71,222)

(152,130)

(145,867)

Increase due to acquisitions

5,753 

Decrease due to sale of loans

             - 

         (675)

            - 

      (3,291)

Ending balance

$  356,561 

$  342,194 

$ 356,561 

$  342,194 

 

Note 6. Borrowings

Short-Term Borrowings

Short-term borrowings include short-term FHLB advances, federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings. Short-term FHLB advances are borrowings from the FHLB, which are collateralized by mortgage-backed securities and mortgage loans. Federal funds purchased arise from Union Planters' market activity with its correspondent banks and generally mature in one business day. Securities sold under agreements to repurchase are collateralized by U.S. Government and agency securities.

Short-term borrowings are summarized as follows:

             September 30,             

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

Balances at period-end

  Short-term FHLB advances

$     400,000

$     400,000

$     400,000

  Federal funds purchased

1,293,935

1,414,345

1,266,804

  Securities sold under agreements to repurchase

1,329,758

1,408,905

1,408,134

  Other short-term borrowings

         25,162

           1,740

           1,741

          Total short-term borrowings

$  3,048,855

$  3,224,990

$  3,076,679

Federal funds purchased and securities sold under agreements to repurchase

  Year-to-date daily average balance

$  2,176,550

$  3,370,256

$  3,198,989

  Weighted average interest rate

1.49%

4.43%

2.54%

Short-term FHLB advances

  Year-to-date daily average balance

$       90,842

$  1,249,817

$  1,035,616

  Weighted average interest rate

1.80%

5.21%

4.93%

Short- and Medium-Term Senior Notes

Union Planters has a $5.0 billion senior and subordinated bank note program. Under the program, Union Planters Bank, N.A. (UPB) may issue senior bank notes with maturities ranging from 30 days to one year from their respective issue dates (Short-Term Senior Notes), senior bank notes with maturities more than one year to 30 years from their respective dates of issue (Medium-Term Senior Notes) and subordinated bank notes with maturities from 5 years to 30 years from their respective dates of issue (Subordinated Notes). At September 30, 2002, September 30, 2001 and December 31, 2001, there were no Subordinated Notes outstanding under this program. At September 30, 2002 and December 31, 2001, there were no Short-Term Senior Notes outstanding.

On June 7, 2002, UPB issued $600.0 million in Medium-Term Senior Notes. The notes carry an interest rate of 5.125% annually and mature in June 2007. A summary of the Medium-Term Senior Notes outstanding is as follows:

Medium-Term Senior Notes

             September 30,             

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

Fixed-rate notes at period-end

$ 598,141

$   20,000

$         -

Range of maturities

6/07

10/01

-

Federal Home Loan Bank Advances

Certain of Union Planters' banking and thrift subsidiaries had outstanding advances with original maturity dates of greater than one year from the FHLB under Blanket Agreements for Advances and Security Agreements (the Agreements). The Agreements enable these subsidiaries to borrow funds from the FHLB to fund mortgage loan programs and to satisfy certain other funding needs. The value of the mortgage-backed securities and mortgage loans pledged under the Agreements must be maintained at not less than 115% and 150%, respectively, of the outstanding advances. At September 30, 2002, Union Planters had an adequate amount of mortgage-backed securities and loans to satisfy the collateral requirements. A summary of the advances is as follows:

        September 30,        

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

Balance at period-end

$    960,743

$  1,461,530

$  1,461,190

Range of interest rates

1.71% - 6.92%

1.75% - 6.92%

1.75% - 6.92%

Range of maturities

2002 - 2021

2001 - 2021

2002 - 2021

Other Long-Term Debt

Union Planters' other long-term debt is summarized as follows. Reference is made to Note 9 to the consolidated financial statements in the Proxy and Annual Financial Disclosures for additional information regarding these borrowings.

        September 30,     

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

8.20% Trust Preferred Securities

$     207,244

$     199,106

$     199,115

6.25% Subordinated Notes due 2003

74,443

 74,391

74,404

6.75% Subordinated Notes due 2005

99,817

 99,758

99,773

7.75% Subordinated Notes due 2011

499,242

499,153

499,175

6.50% Putable/Callable Subordinated Notes due 2018

301,607

300,729

300,682

Variable-rate asset-backed certificates

66,667

100,000

100,000

Other long-term debt

              668

           2,643

           2,360

          Total other long-term debt

$  1,249,688

$  1,275,780

$  1,275,509

Note 7. Shareholders' Equity

Common Stock

During the second quarter of 2002, the Union Planters Board of Directors declared a three-for-two stock split, in the form of a 50% stock dividend, on the shares of Union Planters common stock. The additional shares were paid on June 6, 2002 to shareholders of record at the close of business on May 22, 2002. As a result of the stock split, 67.6 million shares were issued, and cash in the amount of $.3 million was paid in lieu of fractional shares. All share and per share information has been adjusted for the impact of the split.

Preferred Stock

Union Planters' outstanding preferred stock, all of which is convertible into shares of Union Planters' common stock, is summarized as follows:

 

        September 30,        

 

December 31,

 

   2002   

 

   2001   

 

   2001   

 

(Dollars in thousands)

Preferred stock, without par value, 10,000,000 shares authorized

 

  Series E, 8% cumulative, convertible, preferred stock (stated at liquidation value of
    $25 per share) 518,362 shares issued and outstanding (659,104 at September 30,
    2001 and 644,037 at December 31, 2001)

$  12,959

 


$  16,478

 


$  16,101

  Series F preferred stock

         

    300,000 shares authorized, none issued 

           -

 

           -

 

           -

       Total preferred stock

$  12,959

 

$  16,478

 

$  16,101

 

Note 8. Other Noninterest Income and Expense

     Three Months Ended     

   Nine Months Ended   

      September 30,      

   September 30,   

   2002   

   2001   

   2002   

   2001   

(Dollars in thousands)

Other noninterest income

  Bankcard transaction fees

$  10,313 

$     7,592 

$   28,414 

$      22,552 

  Letters of credit fees

2,761 

2,165 

6,950 

6,097 

  Net gain on sales of branches/deposits and other assets

522 

18,586 

2,851 

19,838 

  Earnings of equity method investments

1,251 

1,122 

3,820 

4,385 

  Professional employment services, net 

7,347 

6,180 

20,047 

19,303 

  Other income

   15,271 

   13,256 

     44,105 

       40,684 

          Total other noninterest income

$ 37,465 

$ 48,901 

$ 106,187 

$   112,859 

Other noninterest expense

  Communications 

$   7,387 

$   8,954 

$   22,075 

$     26,357 

  Other contracted services 

8,688 

8,583 

25,749 

26,366 

  Postage and carrier 

6,451 

7,227 

19,665 

23,247 

  Advertising and promotion 

4,640 

4,969 

18,151 

20,803 

  Stationery and supplies 

4,471 

5,415 

14,836 

17,523 

  Merchant services expense 

(13)

6,781 

945 

20,199 

  Other personnel services 

4,071 

3,853 

11,968 

10,494 

  Legal fees and litigation 

7,439 

3,248 

13,797 

8,751 

  Travel 

2,490 

2,531 

7,124 

8,254 

  Miscellaneous charge offs 

6,227 

10,586 

10,936 

17,828 

  Federal Reserve fees 

1,653 

1,970 

5,102 

6,106 

  Taxes other than income 

1,494 

1,837 

4,876 

5,563 

  Accounting and auditing fees 

1,521 

1,660 

4,879 

4,514 

  Consultant fees 

935 

934 

1,468 

15,923 

  Brokerage and clearing fees 

1,886 

1,183 

4,829 

5,363 

  Other real estate expense 

3,232 

1,462 

6,873 

4,564 

  FDIC insurance 

998 

1,091 

3,086 

3,351 

  Dues, subscriptions and contributions 

1,458 

2,081 

4,968 

4,118 

  Bank examiner fees 

935 

1,007 

2,910 

3,069 

  Insurance 

1,814 

902 

4,058 

2,726 

  Provision for losses on FHA/VA foreclosure claims 

130 

45 

503 

2,646 

  Loss (gain) on fixed assets 

299 

(4,000)

(1,439)

(3,285)

  UPExcel expense  

8,949 

9,846 

14,120 

17,880 

  Branch sale and closing expenses 

(450)

(2,163)

1,126 

(1,380)

  Mortgage intangibles expense

(3,478)

15,652 

13,171 

30,088 

  Write-off of software

3,790 

3,790 

  Other noninterest expense 

      9,054 

        4,127 

      37,216 

      22,879 

           Total other noninterest expense

$  82,281 

$  103,571 

$  252,992 

$  307,737 

Note 9. Income Taxes

Applicable income taxes for the nine months ended September 30, 2002 were $173.7 million, resulting in an effective tax rate of 30.94%. Applicable income taxes for the same period in 2001 were $168.2 million, resulting in an effective tax rate of 33.92%. The decrease in the effective rate in 2002, as compared to 2001, is due to the change in the mix of taxable and nontaxable revenues and the change in accounting treatment for goodwill. Additionally, other tax strategies were initiated that are designed to enhance the Company's ability to raise Tier I capital and have the added benefit of reducing both federal and state tax expense. The Company anticipates that over the next several quarters, it will sustain an effective tax rate comparable to that of the third quarter of 2002. The tax expense applicable to investment securities gains for the nine months ended September 30, 2002 and 2001 was $4.0 million and $3.3 million, respectively.

At September 30, 2002, the Company had a net deferred tax asset of $19.4 million compared to $67.4 million at December 31, 2001. The net deferred tax asset includes a deferred tax liability related to the net unrealized gain on available for sale securities of

$58.0 million and $31.8 million at September 30, 2002 and December 31, 2001, respectively. Based upon historical earnings and anticipated future earnings, management believes that normal operations will generate sufficient future taxable income to realize these deferred tax benefits in full. Therefore, no extraordinary strategies are deemed necessary by management to generate sufficient taxable income for purposes of realizing the net deferred tax asset.

Note 10. Earnings Per Share

The calculation of earnings per share is summarized as follows:

Three Months Ended

Nine Months Ended

              September 30,                  

               September 30,                 

   2002   

    2001   

   2002   

   2001   

(Amounts in thousands, except per share data)

Basic:

  Net earnings 

$  134,229

$  112,004

$  387,722

$   327,696

    Less:  Preferred dividends 

          260

          301

           754

        1,066

  Net earnings applicable to common shares 

$  133,969

$  111,703

$  386,968

$  326,630

  Average common shares outstanding 

200,501

205,798

203,049

205,397

  Earnings per common share-basic 

$        0.67

$        0.54

$        1.91

$        1.59

Diluted:

  Net earnings 

$  134,229

$  112,004

$  387,722

$  327,696

  Average common shares outstanding 

200,501

205,798

203,049

205,397

  Stock option adjustment 

1,438

1,237

1,882

1,042

  Preferred stock adjustment 

          979

       1,295

          997

      1,402

  Average common shares outstanding, adjusted

   202,918

   208,330

   205,928

  207,841

  Earnings per common share-diluted 

$       0.66

$       0.54

$       1.88

$        1.58

Note 11. Mortgage Loan Servicing

Union Planters acted as servicing agent for residential mortgage loans totaling approximately $18.9 billion at September 30, 2002, compared to $16.2 billion at December 31, 2001. The loans serviced for others are not included in Union Planters' consolidated balance sheet. The following table presents a reconciliation of the changes in mortgage servicing rights:

 

Nine Months Ended

 

           September 30,           

 

   2002   

   2001   

 

(Dollars in thousands)

   

Beginning balance

$   150,303 

$    123,940 

Additions

98,279 

68,760 

Amortization of servicing rights

(28,291)

(30,088)

Net recovery of provision for impairment

       15,120 

              - 

Ending balance

$   235,411 

$   162,612 

Union Planters had no valuation allowance associated with the mortgage servicing rights portfolio at September 30, 2002 compared to $15.1 million as of December 31, 2001. The estimated fair value of mortgage servicing rights at September 30, 2002 was $259.4 million. Significant assumptions utilized in estimating the fair value were as follows:

Estimated portfolio prepayment speed

7.0% - 20.6% CPR

Market discount rates

9.5% - 13.0%        

Both of the significant assumptions above directly relate to and move in concert with mortgage interest rates. In the view of management, in order to understand the hypothetical effect on the fair value of the mortgage servicing rights as a result of unfavorable variations in the significant assumptions, it is necessary to measure the effect that would result from a decline in mortgage interest rates. At September 30, 2002, the reduction in the current fair value of mortgage servicing rights resulting from an immediate 50 and 100 basis point decline in mortgage interest rates would be approximately $14.2 million and $82.2 million, respectively. The actual decline in fair value related to decreased mortgage interest rates could differ significantly from this estimate due to the propensity of borrowers to refinance in light of the remaining life and unpaid principal balance of their existing mortgage loan and the costs related to refinancing.

As a result of the implementation of a new modeling tool used to evaluate mortgage servicing rights, in July of 2002, the Company refined certain estimates, principally prepayment speed estimates, used in each market, which project cash flows from serviced mortgage loans and the fair value of mortgage servicing rights. These changes in estimates resulted in the recovery of $11.9 million in previously recorded impairment in mortgage servicing rights and thus an increase in earnings after taxes of $8.3 million, or $.04 per diluted share for both the quarter and the nine months ended September 30, 2002. As a result of these changes, the mortgage servicing rights for the two strata of mortgage loans having an impairment of $11.9 million at June 30, 2002 had an estimated fair value of $42.1 million more than their recorded value.

Note 12. Intangible Assets

In accordance with SFAS No. 142, most goodwill is no longer subject to amortization. The carrying value of goodwill not subject to amortization was $529.3 million at September 30, 2002 of which $50.7 million was in the "other operating units" line of business, with the remainder in the "banking" line of business. During the third quarter of 2002, Union Planters performed its annual evaluation of goodwill for impairment using a discounted cash flow method. The evaluation resulted in no impairment. Had SFAS No. 142 been implemented prior to 2001, net earnings for the third quarter and first nine months of 2001 would have increased $8.0 million and $24.1 million, respectively. Both basic and diluted earnings per share would have increased $.04 for the quarter and $.12 for the first nine months.

Union Planters' other intangible assets are core deposit intangibles acquired through bank acquisitions and are subject to amortization periods up to 15 years with no residual value. The gross amount of other intangible assets at September 30, 2002 and December 31, 2001 was $232.0 million, with accumulated amortization of $99.2 million at September 30, 2002 and $8.69 million at December 31, 2001. All other intangibles are in the "banking" line of business. The weighted average amortization period is 159.9 months.

Note 13. Line of Business Reporting

       Three Months Ended September 30, 2002            

       Nine Months Ended September 30, 2002            

Other

Other

Operating

Parent

Consolidated

Operating

Parent

Consolidated

   Banking  

   Units   

 Company 

   Total   

   Banking  

   Units   

 Company 

   Total   

(Dollars in thousands)

Net interest income (expense)

$  298,593 

$ 45,218 

$ (19,454)

$  324,357 

$  879,563 

$  128,442 

$  (44,290)

$  963,715 

Provision for losses on loans

(38,769)

(9,231)

--  

(48,000)

(112,163)

(25,738)

--  

(137,901)

Noninterest income (1)

94,932 

 

90,886 

8,288 

194,106 

296,446 

247,073 

8,585 

552,104 

Noninterest expense

  (224,068)

  (54,356)

       2,326 

   (276,098)

  (633,471)

  (181,485)

     (1,534)

  (816,490)

Earnings (loss) before taxes (1)

$  130,688 

$  72,517 

$   (8,840)

$   194,365 

$  430,375 

$  168,292 

$ (37,239)

$  561,428 

Average assets

$ 27,394,439 

$ 4,474,061 

$ 644,136 

$ 32,512,636 

$ 27,735,568 

$ 4,299,861 

$ 351,161 

$ 32,386,590 

       Three Months Ended September 30, 2001         

       Nine Months Ended September 30, 2001            

Other

Other

Operating

Parent

Consolidated

Operating

Parent

Consolidated

   Banking  

   Units   

 Company 

   Total   

  Banking  

   Units   

 Company 

   Total   

(Dollars in thousands)

Net interest income (expense)

$  294,699 

$   39,076 

$ (11,097)

$   322,678 

$   862,667 

$   111,683 

$ (24,482)

$   949,868 

Provision for losses on loans

(30,666)

(11,267)

--  

(41,933)

(79,362)

(16,771)

--  

(96,133)

Noninterest income (1) 

131,591 

64,696 

54 

196,341 

357,932 

190,091 

403 

548,426 

Noninterest expense

  (242,373)

   (62,002)

     (3,216)

   (307,591)

   (726,997)

   (171,436)

     (7,823)

   (906,256)

Earnings (loss) before taxes (1)

$  153,251 

$   30,503 

$ (14,259)

$   169,495 

$   414,240 

$   113,567 

$ (31,902)

$   495,905 

Average assets

$ 30,063,533 

$ 3,551,800 

$ 182,958 

$ 33,798,291 

$ 31,403,422 

$ 2,951,461 

$ 163,192 

$ 34,518,075 

____________________

  1. Parent company noninterest income and earnings before income taxes are net of the intercompany dividend eliminations of $120.5 million and $4.8 million for the three months ended September 30, 2002 and 2001, respectively, and $361.7 million and $67.6 million, respectively, for the nine months ended September 30, 2002 and 2001.

Note 14. Contingent Liabilities

Union Planters and/or its subsidiaries are parties to various legal proceedings that have arisen in the ordinary course of business and are parties to various pending civil actions, all of which are being defended vigorously. Certain proceedings previously outstanding have been subsequently settled within previously estimated amounts. While it is impossible to predict with certainty the outcome of any legal proceeding, based upon present information including evaluations by outside counsel, management is of the opinion that neither Union Planters' financial position, results of operations nor liquidity will be materially affected by the ultimate resolution of pending or threatened legal proceedings. Reference is made to Part II Item 1 for a discussion of legal proceedings.

Note 15. Derivative Financial Instruments

During the third quarter of 2002, Union Planters entered into an interest rate swap with a notional value of $185 million to hedge the fair value of certain debt. This transaction qualifies as a fair value hedge under SFAS No. 133. The swap and the debt are reported on the balance sheet at current fair value at the end of each period. The changes in fair value of both instruments and the net interest income or expense on the swap are netted against the interest expense related to the debt on the income statement.

At September 30, 2002, the swap had a fair value of $8.1 million, which is included in other assets. The ineffective portion of the hedge resulted in an increase in interest expense of less than $.1 million.

Note 16. Subsequent Event

On October 17, 2002, the Board of Directors approved the repurchase of up to 15 million shares of Union Planters common stock in addition to the 10.7 million shares previously approved. On October 22, 2002, Union Planters repurchased and retired 2.0 million shares of its common stock. To date, 9.0 million of the approved 25.7 million shares have been repurchased and retired.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following provides a narrative discussion and analysis of significant changes in Union Planters' results of operations and financial condition. This discussion should be read in conjunction with the notes to the consolidated financial statements included in Appendix C of Union Planters Corporation's Definitive Proxy Statement for the Annual Shareholders' Meeting held April 18, 2002 (the Definitive Proxy Statement including the 2001 Annual Financial Disclosures are referred to as the Proxy and Annual Financial Disclosures), the interim unaudited consolidated financial statements and notes for the three and nine months ended September 30, 2002 included in Part I hereof and the supplemental financial data included in this discussion.

Cautionary Statement Regarding Forward-Looking Information

This discussion contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). These statements are contained in certain sections that follow, such as Net Interest Income, Provision for Losses on Loans, Noninterest Income, Noninterest Expense, Loans, Interest Rate Risk, as well as Legal Proceedings in Part II, Item 1. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. The words "anticipate," "project," "expect," "believe," "intend," "estimate," "should," "is likely," "target" and other expressions that indicate future events and trends identify forward-looking statements. Forward-looking statements are based on management's expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Examples of factors that could cause future results to vary from current management expectations include the following: the timing and amount of interest rate movements (which can have a significant impact on a financial institution); effects of changes in general economic conditions, as well as economic conditions in markets in which Union Planters conducts business; market and monetary fluctuations and uncertainties in the financial markets; inflation; competition within and outside the financial services industry; technology; risks inherent in originating loans, including prepayment risks, fluctuations in collateral values and changes in customer profiles; loan loss experience, the rate of loan charge-offs and the level of the provision for losses on loans; and changes in accounting principles. Additionally, the policies of the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and insurance and securities regulatory agencies, unanticipated regulatory and judicial proceedings, unanticipated results in pending litigation or Internal Revenue Service examinations, changes in the laws, regulations and regulatory policies applicable to Union Planters and its subsidiaries, and Union Planters' success in executing its business plans and strategies and managing the risks involved in the foregoing, could cause actual results to differ materially from current expectations. Union Planters assumes no obligation to update any forward-looking statements that are made from time to time.

Critical Accounting Policies

The accounting and reporting policies of Union Planters and its subsidiaries conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Union Planters considers its critical accounting policies to include the following:

Allowance for Losses on Loans. The allowance for losses on loans represents management's best estimate of probable losses inherent in the existing loan portfolio. The allowance for losses on loans is increased by the provision for losses on loans charged to expense and reduced by loans charged off, net of recoveries. The provision for losses on loans is determined based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current and anticipated economic conditions and the related impact on specific borrowers and industry groups, historical loan loss experience, the level of classified and nonperforming loans and the results of regulatory examinations.

Loans are considered impaired if, based on current information and events, it is probable that Union Planters will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. In measuring the fair value of the collateral, management uses assumptions (e.g., discount rates) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties.

Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the conditions of the various markets in which collateral may be sold may all affect the required level of the allowance for losses on loans and the associated provision for loan losses.

Estimation of Fair Value. The estimation of fair value is significant to a number of Union Planters' assets, including trading account assets, loans held for resale, available for sale investment securities, mortgage servicing rights, goodwill, other real estate owned, as well as assets and liabilities associated with derivative financial instruments. These are all recorded at either fair value or at the lower of cost or fair value. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates and the shape of yield curves.

Fair values for trading account assets and most available for sale investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments. The fair values of loans held for resale are based on anticipated liquidation values, while the fair values of mortgage servicing rights are based on discounted cash flow analysis utilizing estimated portfolio prepayment speeds and market discount rates. The fair values of residual interests in loans securitized or sold (included as part of available for sale investment securities) are estimated based on prepayment speeds, weighted-average life, expected credit losses and an assumed discount rate. The fair values of other real estate owned are typically determined based on appraisals by third parties, less estimated costs to sell. The fair values of derivative financial instruments are calculated using market interest rates. The calculated valuations are periodically confirmed with recognized derivative dealers. Fair values of goodwill are estimated using the present value of discounted cash flows method. Cash flows are estimated by weighting the probability of several possible trends.

Selected Financial Data

The following table presents selected financial highlights for the three- and nine-month periods ended September 30, 2002 and 2001:

Three Months Ended

Nine Months Ended

       September 30,       

Percentage

       September 30,       

Percentage

   2002   

   2001   

   Change   

   2002   

   2001   

   Change   

(Dollars in thousands, except per share data)

Net earnings

$ 134,229

$ 112,004

19.8

%

$ 387,722

$ 327,696

18.3%

  Per share

    Basic

.67

.54

24.1

1.91

1.59

20.1   

    Diluted

.66

.54

22.2

1.88

1.58

19.0   

  Return on average assets

1.64

%

1.31

%

1.60

%

1.27

%

  Return on average common equity

16.62

14.18

16.20

14.33

Dividends per common share

$         .33

$         .33

$       1.00

$        1.00

Net interest margin (FTE)

4.42

%

4.27

%

4.47

%

4.14

%

Net interest spread (FTE)

3.96

3.61

3.98

3.45

Expense ratio

.83

1.20

1.47

1.23

Efficiency ratio

50.13

55.03

50.55

55.95

Book value per common share at period-end

$    16.09

$      15.50

Leverage ratio

7.75

%

7.23

%

Tier 1 Capital to risk weighted assets

9.45

9.36

Common share prices

  High closing price

$     32.64

$     31.29

$    33.63

$      31.29

  Low closing price

26.67

25.75

26.67

23.13

  Closing price at period-end

27.46

28.60

____________________

FTE = Fully taxable-equivalent basis

Net interest margin = Net interest income (FTE) as a percentage of average earning assets

Net interest spread = Difference in the FTE yield on average earning assets and the rate on average interest-bearing liabilities

Expense ratio = Net noninterest expense (noninterest expense minus noninterest income, excluding significant items identified in the discussions of noninterest income and noninterest expense on pages 19 and 20 as well as goodwill and other intangibles amortization) divided by average assets

Efficiency ratio = Noninterest expense (excluding significant items identified in the discussions of noninterest expense on page 20 and goodwill and other intangibles amortization) divided by net interest income (FTE) plus noninterest income, excluding significant items

 

The table that follows presents the contributions to diluted earnings per common share. A discussion of the operating results follows this table.

Union Planters Corporation

Contributions to Diluted Earnings per Common Share

Nine Months Ended

EPS

      September 30,       

Increase

    2002      

    2001      

(Decrease)

Net interest income-FTE 

$   4.78 

$   4.69 

$   0.09 

Provision for losses on loans 

   (0.67)

   (0.46)

   (0.21)

Net interest income after provision for losses on loans-FTE 

     4.11 

     4.23 

   (0.12)

Noninterest income

  Service charges on deposit accounts 

0.83 

0.79 

0.04 

  Mortgage banking revenue 

0.75 

0.67 

0.08 

  Merchant services income 

0.05 

0.15 

(0.10)

  Factoring commissions and fees 

0.15 

0.14 

0.01 

  Trust service income 

0.10 

0.10 

  Profits and commissions from trading activities 

0.02 

0.03 

(0.01)

  Investment securities gains 

0.05 

0.04 

0.01 

  Investments and insurance 

0.21 

0.18 

0.03 

  Other income 

    0.52 

    0.55 

  (0.03)

      Total noninterest income 

    2.68 

    2.65 

    0.03 

Noninterest expense

  Salaries and employee benefits 

1.95 

1.95 

  Net occupancy expense 

0.37 

0.38 

0.01 

  Equipment expense 

0.30 

0.32 

0.02 

  Goodwill amortization 

0.05 

0.17 

0.12 

  Other intangibles amortization 

0.06 

0.06 

  Other expense 

    1.23 

     1.48 

    0.25 

      Total noninterest expense 

    3.96 

     4.36 

    0.40 

      Earnings before income taxes-FTE 

2.83 

2.52 

0.31 

Income taxes-FTE 

     0.95 

     0.94 

   (0.01)

      Diluted earnings per common share 

$   1.88 

$   1.58 

$   0.30 

Change in net earnings applicable to 

  diluted earnings per share using

  previous year average shares outstanding 

$  0.29 

Change in average shares outstanding 

    0.01 

      Change in net earnings 

$  0.30 

Average diluted shares (in thousands) 

205,928 

207,841 

 

FTE = Fully taxable-equivalent basis

THIRD QUARTER EARNINGS OVERVIEW

For the third quarter of 2002, Union Planters reported net earnings of $134.2 million, or $.66 per diluted common share, an increase from $112.0 million, or $.54 per diluted common share, for the same period in 2001. These earnings represented annualized returns on average assets and average common equity of 1.64% and 16.62%, respectively, compared to 1.31% and 14.18%, respectively, for the same period in 2001.

EARNINGS ANALYSIS

Net Interest Income

Fully taxable-equivalent net interest income for the third quarter of 2002 was $330.4 million, a decrease of $.9 million over the same quarter last year and a $4.6 million increase from the second quarter of 2002.

The net interest margin for the third quarter of 2002 was 4.42%, which compares to 4.27% and 4.45%, respectively, for the third quarter of 2001 and second quarter of 2002. The net interest rate spread was 3.96% for the third quarter of 2002, an increase from 3.61% for the third quarter of 2001, and unchanged from the second quarter of 2002.

Changes in net interest income and net interest margin since September 30, 2001 are the result of repositioning the balance sheet, which was largely completed during the first quarter of 2002. Reference is made to Union Planters' average balance sheet, analysis of volume and rate changes and Market Risk and Asset/Liability Management section, which follow this discussion, for additional information regarding the changes in net interest income and balance sheet repositioning initiatives.

Over the first nine months of the year, management has established initiatives to reposition the balance sheet to make the most effective use of assets and capital. In this effort, Union Planters has grown transaction and savings accounts, which consists of demand deposit accounts, unlimited transaction interest-bearing accounts and limited transaction savings accounts, reduced reliance on wholesale funding, refinanced long-term debt, focused on pricing of relationships and reduced interest rate risk. The reduction in average rate paid for interest-bearing liabilities is attributable to these management initiatives and the lower interest rate environment. Reference is made to the Market Risk and Asset/Liability Management section for a discussion of the impact of changing interest rates.

Interest Income

The following table presents a breakdown of average earning assets:

     Three Months Ended     

Nine Months Ended

September 30,

June 30,

September 30,

   2002   

   2001   

   2002   

   2002   

   2001   

(Dollars in billions)

Average earning assets

$ 29.7

$ 30.8

$ 29.4

$ 29.5

$ 31.5

  Comprised of:

    Loans

83

%

82

%

82

%

83

%

81

%

    Investment securities

16

16

16

16

18

    Other earning assets 

1

2

2

1

1

____________________

Fully taxable-equivalent yield on average earning assets

6.42

%

7.58

%

6.61

%

6.62

%

7.93

%

Fully taxable-equivalent interest income decreased $108.7 million for the third quarter of 2002 compared to the same period in 2001. This decline was attributable primarily to a decrease in the average yield on earning assets from 7.58% to 6.42%, which reduced interest income by $87.5 million. The decline in yield is attributable primarily to decline in market interest rates. A $1.1 billion decrease in average earning assets, primarily loans, decreased interest income $21.2 million. Compared to the second quarter of 2002, interest income decreased $4.5 million, which was attributable to a decline in the average yield on earning assets, partly offset by an increase in earning assets.

For the first nine months of 2002, interest income decreased $409.1 million compared to the same period last year. The decrease was driven by a decrease in the average yield on earning assets from 7.93% to 6.62%, causing a $295.8 million decrease in interest income. Average earning assets, primarily investment securities and loans, decreased $2.0 billion, due to the balance sheet repositioning initiatives, which include reduction in available for sale securities, sale and securitization of loans and branch rationalization. The lower average earning assets caused a $113.3 million decrease in interest income.

The decline in average yields on earning assets during the third quarter of 2002 is a result of a lower interest rate environment. While the average yields on earning assets declined, average rates paid for interest-bearing liabilities also decreased, and overall net interest income improved. Reference is made to the Market Risk and Asset/Liability Management discussions for additional information regarding balance sheet management initiatives, changes in interest rates and how the Company is positioned to respond to the changes.

The percentage of loans to total earning assets has increased over the prior year. This change in mix is due to an effort by management to reposition the balance sheet and make more effective use of assets. In this effort, Union Planters has sold selected investment securities and sold or reduced portfolios of low return loan products.

Interest Expense

The following table presents a breakdown of average interest-bearing liabilities:

      Three Months Ended    

Nine Months Ended

     September 30,     

June 30,

     September 30,     

   2002   

   2001   

   2002   

   2002   

   2001   

(Dollars in billions)

Average interest-bearing liabilities

$24.1

$25.7

$24.0

$24.1

$26.7

  Comprised of:

    Deposits

78

%

76

%

80

%

79

%

73

%

    Short-term borrowings

10

13

9

9

17 

    FHLB advances and long-term debt

12

11

11

12

10 

____________________

Rate paid on average interest-bearing liabilities

2.46

%

3.97

%

2.65

%

2.64

%

4.48

%

Interest expense decreased $107.9 million in the third quarter of 2002 compared to the same quarter last year. This decrease was driven by a decrease in the average rate paid for interest-bearing liabilities from 3.97% to 2.46%, which primarily resulted from the decline in market interest rates and management pricing initiatives. This reduction in rates paid decreased interest expense $91.0 million. Average interest-bearing liabilities also decreased $1.6 billion, which decreased interest expense an additional $16.9 million. Compared to the second quarter of 2002, interest expense decreased $9.0 million due primarily to the decline in interest rates, slightly offset by an increase in average interest-bearing liabilities.

For the first nine months of 2002, interest expense decreased $417.5 million. The decrease was driven by a decrease in the average rate paid for interest-bearing liabilities from 4.48% to 2.64%, which contributed $330.1 million to the reduced expense. A $2.6 billion decrease in average interest-bearing liabilities also contributed an $86.7 million decrease to interest expense. The decrease in average interest-bearing liabilities related primarily to reduced funding requirements as evidenced by reduced short-term debt.

Provision for Losses on Loans

The provision for losses on loans for the third quarter of 2002 was $48.0 million, or .82% of average loans on an annualized basis. This compares to $41.9 million, or .61% of average loans, for the third quarter of 2001. The higher provision for losses on loans in 2002 is attributable to current economic conditions and the resulting increase in nonperforming loans. Reference is made to the Allowance for Losses on Loans and Nonperforming Loans discussions for additional information regarding loan charge-offs and other items impacting the provision for losses on loans.

Noninterest Income

Noninterest income for the third quarter of 2002 was $194.1 million, a decrease of $2.2 million, or 1.1%, from the third quarter of 2001 and an increase of $11.5 million, or 6.3%, from the second quarter of 2002. Adjusted for significant items, noninterest income as a percentage of total revenues (net interest income plus noninterest income) was 38% in the third quarter of 2002, compared to 35% for both the same quarter last year and the second quarter of 2002.

Items included in noninterest income that management considers significant are:

     Three Months Ended     

    Nine Months Ended    

     September 30,     

June 30, 

     September 30,     

   2002   

   2001   

   2002   

   2002   

   2001   

(Dollars in thousands)

  Gain on branch sales

$    522 

$ 18,586 

$   730

$  2,850

$ 19,838

  Expiration of merchant services obligation

8,924

8,924

  Investment securities (losses) gains

(1,300)

580 

2,800

10,736

8,934

Excluding these items, noninterest income was $194.9 million for the current quarter, an increase of $24.7 million from the second quarter of this year and $17.7 million from the same quarter last year. Noninterest income for the first nine months was $529.6 million, a decrease of $9.9 million from the same period last year.

Growth in noninterest income continues to be one of management's priorities, and as such, considerable effort has been devoted to improving its sources. In that effort, Union Planters has, among other things, implemented controls around the administration of pricing for products and services. The major components of noninterest income are presented on the consolidated statement of earnings; following is a discussion of the key components:

Service charges on deposit accounts. These fees were $61.1 million for the third quarter of 2002, an increase of $7.4 million compared to the same period in 2001 and $4.5 million compared to the second quarter of 2002. The increase compared to the second quarter of 2002 is attributable to a significant increase in the volume of insufficient fund fees assessed. For the first nine months of 2002, these fees increased $6.6 million from the same period of 2001 to $170.0 million. The increase from the third quarter and nine months of 2001 is attributable primarily to the implementation of UPExcel pricing initiatives and increased volume of insufficient fund fees assessed.

Mortgage banking revenues. These revenues increased $8.3 million in the third quarter of 2002 compared to the same period in 2001, and increased $14.4 million compared to the second quarter of 2002. For the first nine months of 2002, mortgage banking revenues increased $15.4 million, or 11.1%, to $154.1 million compared to the same period last year. The lower interest rate environment during 2002 increased mortgage loan production and the level of mortgage refinancing activity and resulted in increased mortgage origination fees and gains on mortgage loans sold to the secondary market. Mortgage production was $8.5 billion during the first nine months of 2002 compared to $7.3 billion during the first nine months of 2001. Mortgage production during the third quarter of 2002 was $3.7 billion compared to $2.6 billion during the third quarter of 2001.

Merchant services income. In the fourth quarter of 2001, Union Planters sold its nonstrategic merchant services business and entered into a long-term marketing agreement with the buyer to continue to offer this service to Union Planters' customers. Income was $.5 million in the third quarter of 2002 compared to $10.4 million for the third quarter of last year and $.7 million for the second quarter of 2002 (excluding $8.9 million related to certain obligations arising from the sale, which expired during the second quarter of 2002). For the nine months ended September 30, 2002 and 2001, these revenues were $2.1 million and $31.4 million, respectively.

Factoring commissions and fees. Commissions and fees earned by Capital Factors, a subsidiary of Union Planters, were $11.6 million for the third quarter of 2002, an increase of 9.7% from the second quarter of 2002 and 20.3% from the third quarter of last year. These increases are related to an increased volume of factored receivables and the development of new client relationships. For the first nine months of 2002, these revenues were $31.1 million compared to $28.7 million for the same period last year.

Insurance and investments. This category of noninterest income is comprised of insurance commissions, annuity sales commissions and brokerage fee income. For the third quarter of 2002, these revenues were $16.0 million, an increase of $1.2 million from the second quarter of 2002 and $2.4 million from the third quarter of 2001. For the first nine months of 2002, insurance and investments revenues were $43.0 million compared to $37.2 million for the same period in 2001. The increase during the third quarter and nine months ended September 30, 2002 compared to the third quarter and nine months ended September 30, 2001 is primarily due to a substantial increase in annuity sales.

Other noninterest income. The components of other noninterest income are presented in Note 8 to the unaudited interim consolidated financial statements.

Noninterest Expense

Noninterest expense for the third quarter of 2002 was $276.1 million, which compares to $307.6 million for the third quarter of 2001 and $272.3 million for the second quarter of 2002. For the first nine months of 2002, noninterest expense was $816.5 million compared to $906.3 million for the same period in 2001. The Company's efficiency ratio for the third quarter of 2002, excluding significant items and the amortization of goodwill and other intangibles, was 50.1%, compared to 50.7% for the second quarter of 2002 and 52.0% for the third quarter of 2001.

Items included in noninterest expense that management considers significant are:

 

    Three Months Ended    

   Nine Months Ended   

 

     September 30,     

June 30,

     September 30,     

 

   2002   

   2001   

   2002   

   2002   

   2001   

 

(Dollars in thousands)

   

  (Gain)/loss on fixed assets in sold branches

$  (450)

$ (2,163)

$  (151)

$ 1,126 

$ (1,380)

  Expiration of merchant services obligation

-

-

(647)

(647)

-

  Mortgage intangibles expense, net  

(3,478)

15,652 

12,317 

13,171 

30,088 

  UPExcel project expenses

8,949 

9,846 

1,323 

14,120 

17,880 

  Write-off of software

-

3,790 

-

-

3,790 

Excluding these items, noninterest expense was $271.1 million for the current quarter, a decrease of $9.4 million compared to the same quarter last year and an increase of $11.7 million from the second quarter of 2002. Noninterest expense for the first nine months of 2002 was $788.7 million, a decrease of $67.2 million compared to the same period last year.

UPExcel, a comprehensive strategic initiative introduced by management last year, has driven the reduction of noninterest expense by reducing the number of banking centers, streamlining back office operations and improving procurement practices.

The major components of noninterest expense are presented on the consolidated statement of earnings; following is a discussion of the key components:

Salaries and employee benefits. These expenses were $135.0 million for the third quarter of 2002, an increase of $1.5 million compared to the third quarter of 2001 and $6.4 million compared to the first quarter of 2002. For the first nine months of 2002, salaries and employee benefits decreased $8.6 million compared to the same period last year. The reduction is primarily due to the reduction in full-time equivalent employees. At September 30, 2002, Union Planters had 11,254 full-time equivalent employees, compared to 12,023 and 11,313, respectively, at September 30, 2001 and June 30, 2002.

Occupancy and equipment expense. Net occupancy and equipment expense was $46.6 million for the third quarter of 2002, a decrease of $2.0 million from the third quarter of 2001 and up $1.2 million from the second quarter of 2002. For the first nine months of 2002, these expenses were $138.1 million, a decrease of $6.7 million compared to the same period in 2001. The decreases are primarily attributable to better control over spending, renegotiated contracts with vendors, as well as a decrease in the number of banking locations since June 2001.

Goodwill and other intangibles amortization. These expenses decreased $8.6 million from the third quarter of 2001 and were relatively unchanged compared to the second quarter of 2002. For the nine months ended September 30, 2002, these expenses were $23.3 million compared to $49.2 million for the same period last year. The decrease is due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," which discontinued the amortization of goodwill for most acquisitions. Refer to Notes 1 and 12 to the unaudited interim consolidated financial statements for more information.

Mortgage intangibles expense. For the third quarter of 2002, these expenses were a net credit of $3.5 million representing $8.4 million of current quarter amortization of mortgage intangibles and an $11.9 million recovery of previous impairment of mortgage intangibles. See Note 11 to the Unaudited Consolidated Financial Statements for more information. These expenses for the third quarter of 2001 and the second quarter of 2002 were $15.7 million and $12.3 million, respectively.

Other noninterest expenses. The components of other noninterest expense are presented in Note 8 to the unaudited interim consolidated financial statements.

     
 

Three
   Months   

Nine
   Months   

Consulting fees

$    949

$   2,538

Severance accruals

4,111

4,111

Other payroll related expenses

363

1,089

Loss on fixed assets

3,483

4,076

Occupancy and equipment expense

-

938

Travel expense

33

655

Taxes other than income

-

600

Other

        10

        113

  Total UPExcel expenses

$ 8,949

$ 14,120

Accounting changes

For information regarding accounting standards issued which will be adopted in future periods, refer to Note 1 to the Unaudited Consolidated Financial Statements.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES

                          Three Months Ended September 30,                     

                  2002                

                  2001                

Interest

FTE

Interest

FTE

Average

Income/

Yield/

Average

Income/

Yield/

  Balance  

  Expense   

   Rate   

  Balance  

  Expense   

   Rate   

ASSETS

(Dollars in thousands)

Interest-bearing deposits at financial institutions 

$    117, 665 

$            680

2.29

%

$        37,747 

$           409

4.30

%

Federal funds sold and securities purchased under 
  agreements to resell 

50,082 

214

1.70

93,199 

853

3.63

Trading account assets 

249,225 

2,522

4.01

218,298 

3,418

6.21

Investment securities (1), (2)

  Taxable securities 

3,837,504 

58,353

6.03

3,934,180 

63,511

6.40

  Tax-exempt securities 

      761,339 

         14,592

7.60

   1,128,421 

      21,785

7.66

  Total investment securities

4,598,843 

72,945

6.29

5,062,601 

85,296

6.68

Commercial, financial and agricultural loans 

5,334,594 

70,526

5.25

5,317,872 

92,251

6.88

Foreign loans 

302,937 

2,211

2.90

452,942 

6,162

5.40

Accounts receivable - factoring 

765,311 

14,436

7.48

689,678 

16,730

9.62

Real estate - construction loans 

2,304,876 

33,465

5.76

2,324,065 

46,160

7.88

Real estate - mortgage loans 

  Secured by 1-4 family residential 

4,667,483 

91,472

7.78

5,806,047 

120,878

8.26

  FHA/VA government-insured/guaranteed 

178,310 

3,518

7.83

187,015 

4,142

8.79

  Non-farm, non-residential properties 

4,913,147 

82,211

6.64

4,593,928 

92,014

7.95

  Multifamily (5 or more) residential 

857,246 

14,793

6.85

816,099 

15,703

7.63

  Secured by farmland 

493,581 

8,430

6.78

441,458 

9,130

8.21

Home equity loans

1,294,517 

17,161

5.26

842,097 

15,818

7.45

Consumer loans 

2,128,011 

44,217

8.24

2,529,861 

55,828

8.76

Direct lease financing 

86,699 

1,627

7.44

106,493 

2,079

7.75

Loans held for resale 

     1,310,384 

         19,469

5.89

    1,279,379 

      21,774

6.75

Loans, net of unearned income (1), (3), (4) 

   24,637,096 

       403,536

6.50

  25,386,934 

     498,669

7.79

  Total earning assets (1), (2), (3), (4) 

29,652,911 

479,897

6.42

30,798,779 

   588,645

7.58

Cash and due from banks 

677,346 

731,088 

Premises and equipment 

550,560 

587,748 

Allowance for losses on loans 

(347,648)

(337,339)

Goodwill and other intangibles 

906,012 

960,290 

Other assets 

     1,073,455 

     1,057,725 

  Total assets

$ 32,512,636 

$ 33,798,291 

LIABILITIES AND SHAREHOLDERS' EQUITY

Money market accounts 

$   5,473,845 

19,079

1.38

$   4,855,052 

41,835

3.42

Interest-bearing checking 

3,392,750 

7,692

.90

3,111,517 

10,540

1.34

Savings deposits 

1,390,651 

2,886

.82

1,347,694 

4,783

1.41

Certificates of deposit of $100,000 and over 

1,602,051 

13,648

3.38

1,957,996 

25,240

5.11

Other time deposits 

     6,858,027 

        59,345

3.43

    8,212,303 

     102,439

4.95

  Total interest-bearing deposits 

   18,717,324 

      102,650

2.18

  19,484,562 

    184,837

3.76

Short-term borrowings

     Federal funds purchased and securities sold under 
       agreements to repurchase 

2,112,723 

7,815

1.47


2,847,994 


24,469

3.41

  Other 

       467,884 

             2,033

1.72

       599,437 

        5,556

3.68

  Total short-term debt 

    2,580,607 

          9,848

1.51

    3,447,431 

      30,025

3.46

Long-term debt

  Federal Home Loan Bank advances 

963,358 

7,641

3.15

1,461,160 

18,097

4.91

  Subordinated capital notes 

974,171 

17,557

7.15

974,030 

17,772

7.24

  Medium-term senior notes 

598,990 

7,924

5.25

41,739 

  713

6.78

  Trust Preferred Securities 

201,507 

2,864

5.64

199,102 

4,128

8.23

  Other 

         79,563 

           968

4.83

      102,727 

      1,816

7.01

  Total long-term debt 

    2,817,589 

      36,954

5.20

   2,778,758 

    42,526

6.07

  Total interest-bearing liabilities 

24,115,520 

149,452

2.46

25,710,751 

257,388

3.97

Noninterest-bearing demand deposits 

     4,468,380 

          - 

     4,172,497 

           -

  Total sources of funds 

  28,583,900 

   149,452

   29,883,248 

  257,388

Other liabilities 

718,552 

772,767 

Shareholders' equity

  Preferred stock 

13,066 

17,269 

  Common equity 

     3,197,118 

     3,125,007 

  Total shareholders' equity 

     3,210,184 

     3,142,276 

  Total liabilities and shareholders' equity 

$ 32,512,636 

$ 33,798,291 

Net interest income (1) 

$  330,445

$  331,257

Net interest rate spread (1) 

3.96

%

3.61

%

Net interest margin (1) 

4.42

%

4.27

%

 

Taxable-equivalent adjustments

          Loans 

$     1,162 

$       1,450

          Investment securities 

       4,926 

         7,129

                 Total 

$     6,088 

$       8,579

______________________

(1) Taxable-equivalent yields are calculated assuming a 35% federal income tax rate.

(3) Includes loan fees in both interest income and the calculation of the yield on income.

(2) Yields are calculated on historical cost and exclude the impact of the unrealized gain (loss) on available for sale securities.

(4) Includes loans on nonaccrual status.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

ANALYSIS OF VOLUME AND RATE CHANGES

Three Months Ended September 30, 2002 versus 2001

Increase

(Decrease)

Due to Change in: (1)

Average

Average

Increase

  Volume  

   Rate   

(Decrease)

       (Dollars in thousands)

Interest income

  Interest-bearing deposits at financial institutions 

$         535 

$      (264)

$       271 

  Federal funds sold and securities purchased under agreements to resell 

(297)

(342)

(639)

  Trading account assets 

435 

(1,331)

(896)

  Investment securities (FTE) 

(7,534)

(4,816)

(12,350)

  Loans, net of unearned income (FTE) 

    (14,360)

   (80,773)

    (95,133)

          Total interest income 

    (21,221)

   (87,526)

  (108,747)

Interest expense

  Money market accounts 

4,772 

(27,528)

(22,756)

  Interest-bearing checking 

885 

(3,734)

(2,849)

  Savings deposits 

148 

(2,045)

(1,897)

  Certificates of deposit of $100,000 and over 

(4,045)

(7,547)

(11,592)

  Other time deposits 

(15,082)

(28,010)

(43,092)

  Short-term borrowings 

(6,238)

(13,939)

(20,177)

  Long-term debt 

        2,623 

     (8,195)

     (5,572)

          Total interest expense 

    (16,937)

   (90,998)

 (107,935)

Change in net interest income 

$    (4,284)

$     3,472 

$      (812)

Percentage decrease in net interest income over the third quarter of 2001 

(0.25)%

____________________

FTE = Fully taxable-equivalent basis

(1) The change due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

 

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES

                             Nine Months Ended September 30,                     

                  2002                

               2001                  

 Interest

FTE

 Interest

FTE

  Average

 Income/

Yield/

  Average

 Income/

Yield/

  Balance

 Expense 

Rate

  Balance

 Expense 

Rate

ASSETS

(Dollars in thousands)

Interest-bearing deposits at financial institutions 

$        90,144 

$          1,653

2.45

%

$       43,979 

$       1,546

4.70

%

Federal funds sold and securities purchased under 
  agreements to resell 

96,708 

1,263

1.75


58,701 


1,856


4.23

Trading account assets 

240,778 

7,143

3.97

224,964 

12,064

7.17

Investment securities (1), (2) 

  Taxable securities 

3,797,114 

174,755

6.15

4,580,886 

223,478

6.52

  Tax-exempt securities 

        853,526 

          50,171

7.86

    1,156,343 

        66,876

7.73

     Total investment securities 

4,650,640 

224,926

6.47

5,737,229 

290,354

6.77

Commercial, financial & agricultural loans

5,198,283 

209,247

5.38

5,356,156 

298,034

7.44

Foreign loans

322,544 

8,694

3.60

472,346 

21,772

6.16

Accounts receivable - factoring 

692,505 

40,393

7.80

654,972 

54,248

11.07

Real estate - construction loans

2,247,045 

102,273

6.09

2,234,353 

140,281

8.39

Real estate - mortgage loans

  Secured by 1-4 family residential 

4,899,673 

290,451

7.93

6,258,206 

399,660

8.54

  FHA/VA government issued/guaranteed 

148,199 

9,090

8.20

258,541 

17,030

8.81

  Non-farm, nonresidential properties 

4,882,410 

250,576

6.86

4,460,503 

275,550

8.26

  Multifamily (5 or more) residential 

843,757 

42,443

6.73

789,328 

48,070

8.14

  Secured by farmland 

478,223 

24,528

6.86

426,460 

27,057

8.48

Home equity loans

1,133,665 

45,344

5.35

780,073 

49,063

8.41

Consumer loans

2,194,886 

138,004

8.41

2,607,420 

174,580

8.95

Direct lease financing 

94,778 

5,348

7.54

107,083 

6,378

7.96

Loans held for resale 

    1,263,265 

         59,035

          6.25

      1,055,602 

        52,006

      6.59

Loans, net of unearned income (1), (3), (4)

  24,399,233 

    1,225,426

          6.71

    25,461,043 

   1,563,729

      8.21

     Total earning assets (1), (2), (3), (4) 

  29,477,503 

    1,460,411

          6.62

    31,525,916 

   1,869,549

      7.93

Cash and due from banks 

754,279 

757,958 

Premises and equipment 

553,211 

597,606 

Allowance for losses on loans 

(344,296)

(339,423)

Goodwill and other intangibles 

914,496 

964,628 

Other assets 

    1,031,397 

      1,011,390 

     Total assets 

$32,386,590 

$  34,518,075 

LIABILITIES AND SHAREHOLDERS' EQUITY

Money market accounts 

$  5,685,775 

68,627

1.61

$    4,387,373 

126,730

3.86

Interest-bearing checking 

3,374,632 

25,604

1.01

3,133,237 

32,926

1.40

Savings deposits 

1,379,285 

10,439

1.01

1,357,941 

14,758

1.45

Certificates of deposit of $100,000 and over 

1,604,665 

42,600

3.55

2,115,872 

91,255

5.77

Other time deposits 

     6,987,396 

       189,522

3.63

    8,442,603 

   343,527

5.44

     Total interest-bearing deposits 

   19,031,753 

       336,792

2.37

   19,437,026 

   609,196

4.19

Short-term borrowings

  Federal funds purchased and securities sold under
    agreements to repurchase 

2,069,678 

22,809

1.47


3,370,256 


111,612

4.43

  Other 

        200,052 

         2,575

1.72

    1,252,332 

     48,930

5.22

     Total short-term debt 

     2,269,730 

       25,384

1.50

    4,622,588 

   160,542

4.64

Long-term debt

  Federal Home Loan Bank advances 

1,247,620 

36,478

3.91

1,395,093 

55,618

5.33

  Subordinated capital notes 

974,083 

52,669

7.23

869,818 

46,563

7.16

  Medium-term senior notes 

254,605 

10,067

5.29

53,846 

2,762

6.86

  Trust Preferred Securities 

199,927 

11,120

7.44

199,093 

12,383

8.32

  Other 

         93,247 

        3,272

4.69

       102,970 

       6,264

8.13

     Total long-term debt 

    2,769,482 

    113,606

5.48

     2,620,820 

   123,590

6.30

     Total interest-bearing liabilities 

24,070,965 

475,782

2.64

26,680,434 

893,328

4.48

Noninterest-bearing demand deposits 

    4,407,565 

             -

     4,047,788 

            -

     Total sources of funds 

28,478,530 

    475,782

  30,728,222 

   893,328

Other liabilities 

701,062 

722,948 

Shareholders' equity

  Preferred stock 

13,560 

18,693 

  Common equity 

     3,193,438 

     3,048,212 

     Total shareholders' equity 

     3,206,998 

     3,066,905 

     Total liabilities and shareholders' equity 

$ 32,386,590 

$ 34,518,075 

Net interest income (1) 

$   984,629

$   976,221

Net interest rate spread (1) 

3.98

%

3.45

%

Net interest margin (1) 

4.47

%

4.14

%

Taxable-equivalent adjustments

          Loans 

$   3,675

$   4,584

          Investment securities 

   17,239

   21,769

                 Total 

$ 20,914

$ 26,353

______________________

(1) Taxable-equivalent yields are calculated assuming a 35% federal income tax rate.

(3) Includes loan fees in both interest income and the calculation of the yield on income.

(2) Yields are calculated on historical cost and exclude the impact of the unrealized gain (loss) on available for sale securities.

(4) Includes loans on nonaccrual status.

UNION PLANTERS CORPORATION AND SUBSIDIARIES

ANALYSIS OF VOLUME AND RATE CHANGES

Nine Months Ended September 30, 2002 versus 2001

Increase (Decrease)

Due to Change in: (1)

Total

Average

Average

Increase

 Volume 

  Rate  

(Decrease)

Interest income

(Dollars in thousands)

  

  Interest-bearing deposits at financial institutions 

$       1,091 

$         (983)

$          108  

  Federal funds sold and securities purchased under agreements to resell 

832 

(1,424)

(592)

  Trading account assets 

797 

(5,718)

(4,921)

  Investment securities (FTE) 

(53,014)

(12,414)

(65,428)

  Loans, net of unearned income (FTE) 

     (62,999)

  (275,304)

   (338,303)

          Total interest income 

   (113,293)

  (295,843)

   (409,136)

Interest expense

  Money market accounts 

30,146 

(88,249)

(58,103)

  Interest-bearing checking 

2,383 

(9,705)

(7,322)

  Savings deposits 

228 

(4,547)

(4,319)

  Certificates of deposit of $100,000 and over 

(18,776)

(29,879)

(48,655)

  Other time deposits 

(52,484)

(101,521)

(154,005)

  Short-term borrowings 

(57,958)

(77,200)

(135,158)

  Long-term debt 

        9,726 

     (19,710)

       (9,984)

          Total interest expense 

    (86,735)

   (330,811)

   (417,546)

Change in net interest income 

$   (26,558)

$     34,968 

$      8,410 

Percentage increase in net interest income over the first nine months of 2001 

        0.86%

____________________

FTE = Fully taxable-equivalent basis

(1) The change due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts of the change in each.

FINANCIAL CONDITION

Union Planters' total assets were $33.2 billion at September 30, 2002 and December 31, 2001 compared to $33.4 billion at September 30, 2001. Average assets were $32.5 billion for the third quarter of 2002 compared to $33.8 billion for the third quarter of 2001.

Earning assets at September 30, 2002 were $30.4 billion compared to $30.1 billion at December 31, 2001 and $30.5 billion at September 30, 2001. Average earning assets were $29.7 billion for the third quarter of 2002, which compares to $30.8 billion for the same period last year and to $29.4 billion for the second quarter of 2002.

Investment Securities

Union Planters' investment securities portfolio of $4.8 billion at September 30, 2002 consisted entirely of available for sale securities, which are carried on the balance sheet at fair value. This compares to investment securities of $5.1 billion and $4.8 billion at September 30, 2001 and December 31, 2001, respectively. The decrease in investment securities from September 30, 2001 is consistent with management's strategy of using the investment portfolio to assist in managing the Company's interest rate risk profile and liquidity position. During the first nine months of 2002, Union Planters sold $359.6 million of investment securities at a gain of $10.7 million.

At September 30, 2002, these securities had net unrealized gains of $148.5 million (before income taxes). This compares to net unrealized gains of $141.6 million and $86.4 million, respectively, at September 30, 2001 and December 31, 2001. Refer to Note 3 to the Unaudited Consolidated Financial Statements for the composition of the investment portfolio at September 30, 2002 and December 31, 2001.

U.S. Treasury and U.S. Government agency obligations represented approximately 52% of the investment securities portfolio at September 30, 2002, including government Collateralized Mortgage Obligations (CMOs) and mortgage-backed securities issues, which represented 47% of the portfolio. Union Planters has limited credit risk in the investment portfolio which, at September 30, 2002 consisted of investment grade CMOs representing 25% of the portfolio, municipal obligations representing 17% of the portfolio, and other stocks and securities, primarily Federal Reserve Bank and FHLB stock representing 6% of the portfolio. Union Planters has some credit risk in the investment securities portfolio; however, management does not consider that risk to be significant and does not believe that cash flows will be significantly impacted. Reference is made to the Net Interest Income and Market Risk and Asset/Liability Management discussions for information regarding the market-risk in the investment securities portfolio.

Loans

Loans, net of unearned income, at September 30, 2002 were $23.3 billion compared to $23.9 billion and $23.2 billion at September 30, 2001 and December 31, 2001, respectively. Loans held for resale were $1.9 billion at September 30, 2002 and December 31, 2001 compared to $1.2 billion at September 30, 2001.

Average loans, excluding FHA/VA loans, were $23.1 billion for the third quarter of 2002 compared to $23.9 billion for the same quarter in 2001 and compared to $23.0 billion for the second quarter of 2002. Excluding the impact of loan divestitures of $659.3 million, average loans decreased slightly compared to the same quarter last year.

Allowance for Losses on Loans

The allowance for losses on loans (the Allowance) at September 30, 2002 was $356.6 million, an increase of $14.6 million from December 31, 2001. The Allowance at September 30, 2001 was $342.2 million. The increase in the allowance from December 31, 2001 related to higher provision for losses on loans in 2002 due to current economic conditions and the resulting increase in nonperforming loans. Annualized net charge-offs as a percentage of average loans were .77% for the third quarter of 2002, an increase from .69% in the third quarter of 2001. Union Planters' loan portfolio has no significant concentration in terms of industry, geography, product type or size of individual borrowing relationship. Management does not expect any significant changes in the level of nonperforming assets in the near future. While the timing of actual charge-off of loans for which reserves have been established is uncertain, management believes that all inherent loan losses have been adequately provided for in the allowance for loan losses. This is a forward-looking statement, and actual results could differ because of several factors, including those identified in this discussion and in the discussion of Cautionary Statements Regarding Forward-Looking Information.

Union Planters maintains the Allowance at a level deemed sufficient to absorb probable losses in the loan portfolio at the balance sheet date. The Allowance is reviewed quarterly to assess the risk in the portfolio. This methodology includes assigning loss factors to loans with similar characteristics for which inherent probable loss can be assessed. The loss factors are based on historical experience as adjusted for current business and economic conditions and are applied to the respective portfolios to assist in determination of the overall adequacy of the Allowance.

A periodic review of selected credits (based on loan size) is conducted to identify loans with heightened risk or inherent losses. The primary responsibility for this review rests with the management personnel assigned with accountability for the credit relationship. This review is supplemented with periodic reviews by Union Planters' credit review function, as well as periodic examination of both selected credits and the credit review process by the applicable regulatory agencies. These reviews provide information, which assists management in the timely identification of problems and potential problems and provides a basis for deciding whether the credit represents a probable loss or risk that should be recognized.

The following table provides a reconciliation of the Allowance at the dates indicated and certain key ratios for the nine-month periods ended September 30, 2002 and 2001 and for the year ended December 31, 2001:

Nine Months Ended

Year Ended

        September 30,      

December 31,

   2002   

   2001   

   2001   

(Dollars in thousands)

Beginning balance

$  341,930 

$  335,452 

$  335,452 

Loans charged off

Commercial, financial and agricultural 

(55,473)

(45,508)

(59,171)

Foreign 

(6,121)

(22)

(819)

Accounts receivable - factoring 

(10,300)

(7,993)

(13,123)

Real estate - construction 

(2,706)

(2,058)

(2,667)

Real estate - mortgage 

  Secured by 1-4 family residential 

(30,320)

(43,150)

(51,422)

  Non-farm, nonresidential properties 

(8,904)

(5,844)

(9,034)

  Multifamily (5 or more) residential 

(2,357)

(446)

(471)

  Secured by farmland 

(594)

(605)

(968)

Home equity 

(2,248)

(1,098)

(1,472)

Consumer 

(33,017)

(38,557)

(52,812)

Direct lease financing 

           (90)

         (586)

         (586)

    Total charge-offs 

  (152,130)

  (145,867)

  (192,545)

Recoveries on loans previously charged off

Commercial, financial and agricultural 

7,789 

11,723 

14,486 

Foreign 

143 

437 

531 

Accounts receivable - factoring 

981 

2,160 

3,744 

Real estate - construction 

466 

614 

721 

Real estate - mortgage

  Secured by 1-4 family residential 

3,057 

18,734 

19,287 

  Non-farm, nonresidential properties 

966 

2,178 

2,652 

  Multifamily (5 or more) residential 

144 

82 

91 

  Secured by farmland 

67 

218 

258 

Home equity 

281 

290 

326 

Consumer 

14,927 

17,500 

22,657 

Direct lease financing 

             39 

            78 

          109 

    Total recoveries 

      28,860 

     54,014 

     64,862 

Net charge-offs 

(123,270)

(91,853)

(127,683)

Provision charged to expense 

137,901 

96,133 

131,963 

Allowance related to the sale of certain loans 

(3,291)

(3,555)

Increase due to acquisition 

             - 

        5,753 

       5,753 

   Balance at end of period 

$  356,561 

$  342,194 

$ 341,930 

Total loans, net of unearned income, at end of period

$  23,335,765 

$  23,861,623 

$ 23,163,039 

 Less:  FHA/VA government insured/guaranteed loans

       (213,169)

       (177,182)

      (133,751)

          Loans used to calculate ratios

$  23,122,596 

$  23,684,441 

$ 23,029,288 

Average total loans, net of unearned income, during period

$  23,135,969 

$  24,405,442 

$ 24,187,130 

 Less:  Average FHA/VA government-insured/guaranteed loans

       (148,199)

       (258,541)

      (252,924)

          Average loans used to calculate ratios

$  22,987,770 

$  24,146,901 

$ 23,934,206 

Credit Quality Ratios (1)

  Allowance for losses on loans/loans, net of unearned income

1.54%

1.44%

1.48%

  Net charge-offs/average loans, net of unearned income (2)

.72   

.51   

.51   

  Provision for losses on loans/average loans, net of unearned income (2)

.80   

.53   

.53   

____________________

(1) Ratio calculations exclude FHA/VA government-insured/guaranteed loans (FHA/VA loans) since they represent minimal credit risk.

(2) Amounts annualized for September 30, 2002 and 2001.

Nonperforming Assets

Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties

 

      September 30,      

 

June 30,

 

   2002   

 

   2001   

 

   2002   

 

(Dollars in thousands)

Nonaccrual loans

$ 298,689

 

$ 219,722

 

$ 269,496

Restructured loans

          561

 

          873

 

          562

          Total nonperforming loans

   299,250

 

   220,595

 

   270,058

           

Foreclosed properties

         

  Other real estate owned, net

80,445

 

62,247

 

72,287

  Other foreclosed property

          557

 

       1,370

 

          794

          Total foreclosed properties

     81,002

 

     63,617

 

     73,081

           

          Total nonperforming assets

$ 380,252

 

$ 284,212

 

$ 343,139

           

Loans past due 90 days or more and still accruing interest

$ 186,440

 

$ 152,564

 

$ 201,647

           

FHA/VA government-insured/guaranteed loans

         

  Loans past due 90 days or more and still accruing interest

$   57,701

 

$   68,339

 

$   35,086

  Nonaccrual loans

1,659

 

1,985

 

1,668

           

Ratios (1)

         

  Nonperforming loans/loans, net of unearned income

1.29%

 

.93%

 

1.17%

  Nonperforming assets/loans, net of unearned income plus foreclosed properties

1.64   

 

1.20   

 

1.48   

  Allowance for losses on loans/nonperforming loans

119   

 

155   

 

131   

  Loans past due 90 days or more and still accruing interest/loans, net of unearned income

.81   

 

.64   

 

.87   

____________________

(1) FHA/VA government-insured/guaranteed loans are excluded from loans in the ratio calculations.

The breakdown of nonaccrual loans and loans past due 90 days or more and still accruing interest, both excluding FHA/VA loans, is as follows:

     Nonaccrual Loans (1)     

    Loans Past Due 90 Days or More (1)    

       September 30,       

June 30,

       September 30,       

June 30,

   2002   

   2001   

   2002   

   2002   

   2001   

   2002   

(Dollars in thousands)

Loan Type

  Commercial, financial and agricultural

$  128,639

$    63,070

$   117,941

$     20,451

$      20,746

$      22,806

  Foreign

6,822

792

30

-

30

-

  Real estate - construction

34,136

20,901

22,976

7,404

7,780

11,201

  Real estate - mortgage

     Secured by 1-4 family residential

37,672

60,141

40,758

135,045

92,633

142,181

     Non-farm, nonresidential properties

69,141

68,906

64,268

10,285

22,844

9,968

     Multifamily (5 or more) residential

14,154

-

14,688

6,129

-

8,288

     Secured by farmland

4,322

-

4,483

1,269

-

1,220

  Home equity

2,481

4,390

2,864

2,079

3,292

1,594

  Consumer

1,309

1,507

1,450

3,674

5,085

4,272

  Direct lease financing

            13

            15

            38

          104

          154

          117

          Total

$ 298,689

$ 219,722

$ 269,496

$ 186,440

$ 152,564

$ 201,647

____________________

(1) See the preceding table for the amount of FHA/VA government-insured guaranteed/loans on nonaccrual and past due 90 days or more and still accruing interest.

Loans Other than FHA/VA Loans. Nonperforming assets increased $37.1 million over the second quarter of 2002 and $96.0 million over September 30, 2001. A general increase in all categories of nonperforming assets has been experienced since the third quarter of 2001 primarily due to prevailing economic conditions. During the third quarter of 2002, there has been a decrease in loans past due more than 90 days and an increase in foreclosed property due to action taken on past due accounts. Management does not expect any significant changes in the level of nonperforming assets for the next several quarters and believes the risk of losses in nonperforming assets will be mitigated by the diversity of the loan portfolio and the generally sound collateralization practices across the banking franchise. These are forward-looking statements, and actual results could differ because of several factors, including those mentioned in the Cautionary Statements Regarding Forward-Looking Information at the beginning of this discussion.

Loans past due 90 days or more and still accruing interest totaled $186.4 million, or .81% of loans, at September 30, 2002 compared to $152.6 million, or .64%, and $201.6 million, or .87 % of loans, at September 30, 2001 and June 30, 2002, respectively. The preceding table details the composition of these loans. As discussed above, the increase in these loans related primarily to the slowing of the economy.

FHA/VA Loans. FHA/VA government-insured/guaranteed loans do not, in management's opinion, have traditional credit risk inherent in the balance of the loan portfolio, and risk of principal loss is considered minimal. FHA/VA loans past due 90 days or more and still accruing interest totaled $57.7 million at September 30, 2002, which compares to $68.3 million and $35.1 million at September 30, 2001 and June 30, 2002, respectively. At September 30, 2002, September 30, 2001 and June 30, 2002, $1.7 million, $2.0 million and $1.7 million, respectively, of these loans were placed on nonaccrual status by management because the contractual payment of interest by FHA/VA had stopped due to missed filing dates. No loss of principal is expected from these loans.

FHA/VA Foreclosure Claims

Provisions for losses related to FHA/VA claims are provided through noninterest expense as provisions for losses on FHA/VA foreclosure claims, and the corresponding liability is carried in other liabilities. The provision for losses on FHA/VA foreclosure claims was $.5 million for both the three and nine months ended September 30, 2002. At September 30, 2002, the Company had a reserve for FHA/VA claims losses of $2.4 million compared to $5.9 million and $2.9 million at September 30, 2001 and June 30, 2002, respectively.

Potential Problem Assets

Potential problem assets consist of assets that are generally secured and are not currently considered nonperforming. They include those assets where information about possible credit problems has raised serious doubts as to the ability of the borrowers to comply with present repayment terms. Historically, such assets have been loans, which have ultimately become nonperforming. At September 30, 2002, Union Planters had potential problem assets (all loans) aggregating $39.2 million, comprised of 11 loans, the largest of which was $10.0 million. This compares to potential problem assets (all loans) aggregating $55.5 million, comprised of 15 loans, at September 30, 2001 and $69.7 million, or 16 loans, at June 30, 2002.

Capital Expenditures

During the first nine months of 2002, the Company capitalized approximately $39.7 million in expenditures for premises and equipment. Included in this amount are expenditures for hardware and software, as well as consulting fees directly related to their installation.

Deposits

Union Planters' deposit base is its primary source of liquidity and consists of deposits from the communities served by Union Planters.

 

      Average Deposits      

 

     Three Months Ended     

 

Nine Months Ended

 

   September 30,   

 

June 30,

 

   September 30,   

 

   2002   

 

   2001   

 

   2002   

 

   2002   

 

   2001   

 

(Dollars in thousands)

                   

Noninterest-bearing demand

$   4,468,380

 

$  4,172,497

 

$   4,336,433

 

$   4,407,565

 

$   4,047,788

Money market

5,473,845

 

4,855,052

 

5,796,259

 

5,685,775

 

4,387,373

Interest-bearing checking

3,392,750

 

3,111,517

 

3,392,033

 

3,374,632

 

3,133,237

Savings

     1,390,651

 

     1,347,694

 

     1,398,395

 

     1,379,285

 

     1,357,941

  Total transaction and saving accounts

   14,725,626

 

   13,486,760

 

   14,923,120

 

   14,847,257

 

   12,926,339

Other time

     6,858,027

 

     8,212,303

 

     7,019,691

 

     6,987,396

 

     8,442,603

Certificates of deposit of $100,000 and over

     1,602,051

 

     1,957,996

 

     1,578,785

 

     1,604,665

 

     2,115,872

  Total time deposits

     8,460,078

 

   10,170,299

 

     8,598,476

 

     8,592,061

 

   10,558,475

          Total average deposits 

$ 23,185,704

 

$ 23,657,059

 

$ 23,521,596

 

$ 23,439,318

 

$ 23,484,814

Average deposits were $23.2 billion for the third quarter of 2002 compared to $23.7 billion for the third quarter of 2001 and $23.5 billion for the second quarter of 2002. Average transaction and savings accounts, which consists of demand deposit accounts, unlimited transaction interest-bearing accounts and limited transaction savings accounts, for the third quarter of 2002 increased $1.2 billion from the third quarter of 2001 and decreased $197.5 million from the second quarter of 2002. The increase from the third quarter of 2001 has been driven by weak performance in financial markets as well as the offering of a standard set of deposit products throughout the Union Planters organization. Overall, deposits decreased $471.4 million from September 30, 2001 and $242.0 million from the December 31, 2001. Average deposits were impacted over the past year by sales of branches having deposit balances of over $500 million. Excluding these sales, deposits for the third quarter of 2002 increased $98.9 million over the third quarter of 2001 and decreased $148.9 million from December 31, 2001.

Short-Term Borrowings

Short-term borrowings were $3.0 billion at September 30, 2002 compared to $3.2 billion at September 30, 2001 and $2.5 billion at June 30, 2002. Average short-term borrowings for the third quarter of 2002 declined $866.8 million and $509.4 million, respectively, compared to the same quarter last year and the second quarter of 2002. The composition of this decrease, primarily short-term FHLB advances, federal funds purchased and securities sold under agreements to repurchase, has resulted from the strategic repositioning of the balance sheet referenced in the Investment Securities, Loan, and Market Risk and Asset/Liability Management discussions. Reference is made to the Investment Securities, Loan, and Market Risk and Asset/Liability Management discussions for additional information.

Short- and Medium-Term Senior Notes

On June 7, 2002, UPB issued $600.0 million in Medium-Term Senior Notes under its $5.0 billion senior and subordinated bank note program. The notes carry an interest rate of 5.125% annually and mature in June 2007. The funds from the issuance were used for general corporate purposes. At December 31, 2001, there were no notes outstanding under this program. At September 30, 2001, there was $20.0 million outstanding.

Shareholders' Equity

Union Planters' total shareholders' equity increased $8.6 million from December 31, 2001 to $3.2 billion at September 30, 2002. The major items affecting shareholders' equity are as follows:

The Board of Directors authorized the purchase from time to time of up to 10.7 million shares. During 2002, 6.0 million shares were purchased, bringing the total purchased under this authorization to 7.0 million. The Board of Directors also authorized the purchase of 6.5 million shares issued in the Jefferson Heritage acquisition. During 2002, 3.0 million shares were purchased under this authorization, which completed the acquisition of the shares issued.

Subsequent to September 30, 2002, the Board of Directors' authorized the repurchase and retirement of up to an additional 15.0 million shares under the Company's share repurchase program. The Company intends to continue the repurchase program in a manner consistent with its objective to maintain a targeted leverage ratio of 7.5% or higher.

Capital Adequacy

The following table presents information concerning Union Planters Corporation's and Union Planters Bank, National Association's risk-based capital and capital adequacy ratios. The regulatory capital ratios qualify both entities for the "well-capitalized" regulatory classification.

Union Planters Corporation

Risk-Based Capital

 

     September 30,     

December 31,

 

   2002   

   2001   

   2001   

 

(Dollars in millions)

   

Tier 1 capital

$  2,442

 

$  2,371

 

$  2,440

 

Total capital

3,630

 

3,588

 

3,628

 

Risk-weighted assets

25,848

 

25,338

 

25,021

 

Ratios

           

  Leverage (1)

7.75%

 

7.23%

 

7.56%

 

  Tier 1 risk-based capital

9.45   

 

9.36   

 

9.75   

 

  Total risk-based capital

14.04   

 

14.16   

 

14.46   

 

  Total shareholders' equity/total assets (at period-end) 

9.72   

 

9.62   

 

9.71   

 

  Average shareholders' equity/average total assets 

9.90   

 

8.88   

 

9.06   

 

    1. Based on period-end capital and quarterly adjusted average assets.

 

Union Planters Bank, National Association

Risk-Based Capital

 

     September 30,     

December 31,

 

   2002   

   2001   

   2001   

 

(Dollars in millions)

             

Tier 1 capital

$    2,480

 

$   2,290

 

$   2,259

 

Total capital

3,091

 

2,887

 

2,854

 

Risk-weighted assets

25,621

 

24,480

 

24,406

 

Ratios

           

  Leverage (1)

7.97%

 

7.25%

 

7.24%

 

  Tier 1 risk-based capital

9.68   

 

9.36   

 

9.26   

 

  Total risk-based capital

12.07   

 

11.79   

 

11.70   

 

    1. Based on period-end capital and quarterly adjusted average assets.

Liquidity

Union Planters requires liquidity sufficient to meet cash requirements for deposit withdrawals, to make new loans and satisfy loan commitments, to take advantage of attractive investment opportunities and to repay borrowings at maturity. Deposits, available for sale securities and money market investments are Union Planters' primary sources of liquidity. Liquidity is also achieved through short-term borrowings, borrowings under available lines of credit, and issuance of securities and debt instruments in the financial markets. Union Planters believes it has adequate liquidity to meet its operating requirements.

Parent company liquidity is achieved and maintained by dividends received from subsidiaries, interest on advances to subsidiaries and interest on its available for sale investment securities portfolio. At September 30, 2002, the parent company had cash and cash equivalents totaling $434.7 million, which compares to $408.3 million and $518.4 million, respectively, at September 30, 2002 and December 31, 2001. Net working capital (total assets maturing within one year less similar liabilities) was $413.1 million, which compares to $393.1 million and $502.0 million, respectively, at September 30, 2001 and December 31, 2001.

At October 1, 2002, the parent company could have received dividends from subsidiaries of $357.7 million without prior regulatory approval. The payment of dividends by Union Planters' subsidiaries will be dependent on the future earnings and capital and liquidity considerations. Management believes that the parent company has adequate liquidity to meet its cash needs, including the payment of its regular dividends and servicing of its debt.

 

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Market Risk and Asset/Liability Management

Union Planters' assets and liabilities are principally financial in nature, and the resulting earnings, primarily net interest income, are subject to change as a result of fluctuations in market interest rates and the mix of the various assets and liabilities. Interest rates in the financial markets affect pricing decisions on assets and liabilities, and the resulting net interest income represents approximately 63% of Union Planters' revenues for the three months ended September 30, 2002. Consequently, a substantial part of Union Planters' risk-management activities are devoted to managing interest rate risk. Currently, Union Planters does not have significant risks related to foreign exchange, commodities or equity risk.

Interest Rate Risk

Since one of the most important aspects of management's efforts to sustain long-term profitability for Union Planters is the management of interest rate risk, management's goal is to optimize net interest income within acceptable levels of interest rate and liquidity risk. To achieve this goal, a proper balance must be maintained between assets and liabilities with respect to size, maturity, repricing date, rate of return and degree of risk. Reference is made to the Investment Securities, Loans and Other Earning Assets discussions for additional information regarding the risks related to these items.

Union Planters' Asset/Liability Management Committee (the ALCO Committee) oversees the management of interest rate risk, investments, capital and liquidity management activities. The ALCO Committee meets monthly and reviews the outlook for the economy and interest rates, Union Planters' balance sheet structure, yields on earning assets and rates on interest-bearing liabilities, and the impact of anticipated business activities on these items. The primary method of analyzing and managing interest rate risk at Union Planters is simulation analysis (projecting net interest income under various interest rate and balance sheet assumptions).

Interest rate risk is evaluated by conducting balance sheet simulations to project net interest income for twelve months forward under various interest rate scenarios. Each of these scenarios is compared with a base case scenario wherein current market rates and current period balances are held constant for the simulation period.

The scenarios include immediate "shocks" to current rates of 200 basis points up, 100 basis points down and a "most likely" scenario in which current rates are moved according to economic forecasts and management's expectations of changes in administered rates.

The results of these simulations are compared to policy guidelines approved by the ALCO Committee, which limit the change in net interest income to 20% of net earnings when compared with the base case (flat) scenario. Management targets a neutral rate risk profile.

The impact of changes in interest rates on net earnings, stated in terms of annual dollar amount and percentage of net earnings, are as follows:

  September 30, 2002  

  December 31, 2001  

(Dollars in millions)

Immediate 200 basis point rise in rates

$  31.5 

6.1%

$  (12.4)

(2.8)%

Immediate 100 basis point decline in rates

(20.7)

(4.0)  

(3.4)

(1.0)   

Most likely change in rates (a)

(7.4) 

(1.4)  

(0.9)

(1.0)   

____________________

(a) The most likely change scenario at September 30, 2002 was updated to reflect the 50 basis point reduction in the targeted federal funds rate by the Federal Open Market Committee on November 6, 2002. Inherent in the simulation is the assumption that the federal funds rate will remain at 1.25% through June 2003 and then increase to 1.75% by September 2003. At December 31, 2001 the scenario reflects a 175 basis point increase in federal funds rate over the last 8 months of simulation.

The key assumptions used in simulation analysis include the following:

The assumptions are inherently uncertain, and, as a result, the simulation cannot precisely estimate net interest income nor predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the characteristics assumed, as well as changes in market conditions and management strategies.

The following Repricing Gap analysis illustrates the cash flows and repricings under a stable rate environment that are fundamental to the simulations used by management to manage the interest rate risk position of the Company:

Union Planters Corporation and Subsidiaries

Repricing Gap Analysis at September 30, 2002

 

Interest-Sensitive Within (1) and (7)

 

0-90

91-180

181-365

1-3

3-5

5-15

Over

Noninterest-

 
 

 Days 

 Days 

 Days 

 Years 

 Years 

 Years 

 15 Years 

 Bearing 

 Total 

 

(Dollars in millions)

Assets

                 

  Loans and leases (2), (3) and (4)

$   10,870 

$   1,786 

$   2,776 

$   5,219 

$   1,624 

$    305 

$      17 

$     763 

$ 23,360 

  Investment securities (5) and (6) 

812 

328 

636 

1,485 

567 

694 

87 

148 

4,757 

  Other earning assets 

2,336 

2,336 

  Other assets 

           - 

         - 

          - 

          - 

         - 

       - 

       - 

    2,795 

     2,795 

    Total assets 

$  14,018 

$  2,114 

$   3,412 

$   6,704 

$  2,191 

$   999 

$   104 

$  3,706 

$ 33,248 

                   

Sources of funds

                 

  Money market deposits (7) and (8) 

$   4,357 

$     - 

$     531 

$     531 

$     - 

$     - 

$   - 

$     - 

$   5,419 

  Savings and interest-bearing checking

    deposits (7) and (8) 

1,567 

1,567 

1,614 

4,748 

  Other time deposits 

1,400 

1,249 

1,541 

1,833 

689 

21 

-

6,735 

  Certificates of deposit of $100,000 

    and over 

460 

260 

328 

391 

184 

1,624 

  Short-term borrowings 

3,049 

3,049 

  Federal Home Loan Bank advances 

500 

100 

141 

220 

961 

  Other long-term debt 

67 

75 

698 

801 

207 

1,848 

  Noninterest-bearing deposits 

4,788 

4,788 

  Other liabilities 

844 

844 

  Shareholders' equity 

          - 

        - 

        - 

        - 

        - 

        - 

      - 

   3,232 

     3,232 

    Total sources of funds 

$ 11,400 

$ 1,509 

$ 2,500 

$ 4,538 

$ 1,571 

$ 2,657 

$  209 

$ 8,864 

$ 33,248 

                   

Interest rate swaps (9)

(185)

185 

 

Interest rate sensitivity gap 

2,433 

605 

912 

2,166 

805 

(1,658)

(105)

(5,158)

 

Cumulative interest rate sensitivity gap (8)

2,433 

3,038 

3,950 

6,116 

6,921 

5,263 

5,158 

   

Cumulative gap as a percentage of total assets (8)

7%

9%

12%

18%

21%

16%

16%

   

____________________

Management has made the following assumptions in presenting the above analysis:

(1) Assets and liabilities are generally scheduled according to their earliest repricing dates regardless of their contractual maturities.

(2) Nonaccrual loans and accounts receivable-factoring are included in the noninterest-bearing category.

(3) Fixed-rate mortgage loan maturities include estimates of principal prepayments using industry estimates of prepayment speeds for various coupon segments of the portfolio.

(4) Delinquent FHA/VA loans are scheduled based on foreclosure and repayment patterns.

(5) The scheduled maturities of mortgage-backed securities and CMOs include principal prepayments of these securities using proprietary models and their estimates of prepayment speeds.

(6) Securities are generally scheduled according to their call dates when valued at a premium to par.

(7) Money market deposits, interest-bearing checking and savings deposits that have no contractual maturities are scheduled according to management's best estimate of their repricing in response to changes in market rates. The impact of changes in market rates would be expected to vary by product type and market.

  1. If all money market, interest-bearing checking and savings deposits had been included in the 0-90 Days category above, the cumulative gap as a percentage of total assets would have been negative 5% and 4%, respectively, for the 0-90 Days and 91-180 Days categories and positive 1%, 14%, 16% and 16%, respectively, for the 1-3 Years, 3-5 Years, 5-15 Years and over 15 Years categories at September 30, 2002.
  2. The notional value of interest rate swaps at September 30, 2002 is $185 million.

Item 4 - Controls and Procedures

Union Planters maintains disclosure controls and procedures that are designed to ensure that information Union Planters is required to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.

Union Planters' Chief Executive Officer and its Chief Financial Officer have evaluated the effectiveness of these disclosure controls and procedures as of a date within the 90 day period prior to the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that Union Planters' disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

There have been no significant changes in internal controls, or in other factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and the Chief Financial Officer completed their evaluation.

 

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

Union Planters and/or its various subsidiaries are parties to certain pending or threatened civil actions, which are described in Item 3, Part I of the Union Planters' 2001 Form 10-K, Form 8-K dated June 6, 2002 and in Note 20 to Union Planters' consolidated financial statements, in the Proxy and Annual Financial Disclosures, and Item 1, Part II of Union Planters' Form 10-Q for the quarter ended June 30, 2002, to which reference is made. Various other legal proceedings pending against Union Planters and /or its subsidiaries have arisen in the ordinary course of business.

While it is impossible to predict with certainty the outcome of any legal proceeding, based upon present information, including evaluations by outside counsel, management is of the opinion that neither Union Planters' financial position, results of operations nor liquidity will be materially affected by the ultimate resolution of pending or threatened legal proceedings. There were no material developments during the third quarter of 2002 in any of the pending or threatened actions that affected such opinion.

Item 2 - Changes in Securities

None

Item 3 - Defaults Upon Senior Securities

None

Item 4 - Submission of Matters to a Vote of Security Holders

None

Item 5 - Other Information

None

Item 6 - Exhibits and Reports on Form 8-K

Exhibits:

10

 

Union Planters Corporation Amended and Restated 1996 Executive Plan

99(a)

 

906 Certification of Chief Executive Officer

99(b)

 

906 Certification of Chief Financial Officer

Reports on Form 8-K:

 

Date of Current Report

Subject          

1.

July 18, 2002

Press release announcing second quarter 2002 earnings, reported under Item 5.

2.

August 13, 2002

Statements under oath of the Principal Executive Officer and the Principal Financial Officer in accordance with the Securities and Exchange Commissions June 27, 2002 order requiring sworn statements pursuant to Section 21 (a) (1) of the Securities Act of 1934, furnished under Item 9.

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 thereunto duly authorized.

   

UNION PLANTERS CORPORATION

   

(Registrant)

     
     

Date:  November 13, 2002

 

By: /s/ Jackson W. Moore                          

   

Jackson W. Moore, Chairman,

   

President and Chief Executive Officer

     

Date:  November 13, 2002

 

By: /s/ Bobby L. Doxey                             

   

Bobby L. Doxey,

   

Senior Executive Vice President, Chief Financial Officer and Chief Accounting Officer

 

CERTIFICATIONS

I, Jackson W. Moore certify that:

1. I have reviewed this quarterly report on Form 10-Q of Union Planters Corporation

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

 

 /s/ Jackson W. Moore                                 

Jackson W. Moore,

Chairman, President and Chief Executive Officer

CERTIFICATIONS

 

I, Bobby L. Doxey certify that:

1. I have reviewed this quarterly report on Form 10-Q of Union Planters Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

 

 /s/ Bobby L. Doxey                                                              

Bobby L. Doxey,

Senior Executive Vice President, Chief Financial Officer and

Chief Accounting Officer

Exhibit Index

Exhibit 
 number 

 


                      Description                     

10

 

Union Planters Corporation Amended and Restated 1996 Executive Plan

99(a)

 

906 Certification of Chief Executive Officer

99(b)

 

906 Certification of Chief Financial Officer