UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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 June 30, 2003

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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 July 31, 2003        

Common stock $5 par value

196,009,493

 

UNION PLANTERS CORPORATION AND SUBSIDIARIES

Form 10-Q For the Three Months Ended June 30, 2003

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 Consolidation and Basis of Presentation *

Note 2. Available for Sale Securities *

Note 3. Allowance for Losses on Loans and Nonperforming Loans *

Note 4. Transfers of Financial Assets *

Note 5. Intangible Assets *

Note 6. Borrowings *

Note 7. Shareholders' Equity *

Note 8. Preferred Stock of Subsidiary *

Note 9. Other Noninterest Income and Expense *

Note 10. Income Taxes *

Note 11. Earnings Per Share *

Note 12. Derivative Financial Instruments *

Note 13. Lines of Business Reporting *

Note 14. Contingent Liabilities *

Note 15. 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 and Use of Proceeds *

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)

     June 30,     

December 31,

   2003   

   2002   

   2002  

(Dollars in thousands)

Assets

  Cash and due from banks

$     925,500 

$     734,841 

$   1,008,078 

  Interest-bearing deposits at financial institutions

145,910 

148,029 

116,208 

  Federal funds sold and securities purchased
     under agreements to resell


74,598 


61,232 


122,069 

  Trading account assets

291,728 

258,438 

266,322 

  Loans held for resale

2,647,721 

1,066,449 

2,430,298 

  Available for sale securities

6,596,273 

4,929,238 

5,467,283 

  Loans:

    Commercial, financial and agricultural

5,244,088 

5,338,494 

5,216,820 

    Foreign

255,392 

324,302 

217,570 

    Accounts receivable - factoring

633,367 

701,895 

666,731 

    Real estate - construction

2,408,361 

2,248,047 

2,261,893 

    Real estate - mortgage 

 

 

      Secured by 1-4 family residential

3,691,072 

4,989,259 

4,472,626 

      Non-farm, nonresidential properties

5,112,378 

4,926,978 

5,027,161 

      Multi-family (5 or more) residential

796,127 

841,253 

843,631 

      Secured by farmland

489,412 

484,446 

489,584 

    Home equity

1,811,300 

1,201,772 

1,538,088 

    Consumer

1,847,013 

2,162,755 

1,989,835 

    Direct lease financing

         60,661 

         92,602 

          73,768 

        Total loans

22,349,171 

23,311,803 

22,797,707 

  Less:  Unearned income

 (23,589)

 (22,282)

 (22,975)

            Allowance for losses on loans

      (344,756)

      (353,566)

      (350,931)

  Net loans

21,980,826 

22,935,955 

22,423,801 

  Premises and equipment, net

521,219 

549,701 

540,183 

  Accrued interest receivable

204,991 

215,128 

207,869 

  Mortgage servicing rights, net

226,354 

199,215 

264,295 

  Goodwill, net

743,185 

714,988 

743,212 

  Other intangibles, net

178,251 

199,608 

188,729 

  Other assets

        450,665 

        395,629 

        366,016 

         Total assets

$ 34,987,221 

$ 32,408,451 

$ 34,144,363 

Liabilities and shareholders' equity

  Deposits 

    Noninterest-bearing

$  5,691,928 

$  4,435,648 

$  5,035,464 

    Time deposits of $100,000 and over

1,582,463 

1,636,034 

1,674,952 

    Other interest-bearing

  17,724,131 

   17,132,471 

  16,620,024 

        Total deposits

24,998,522 

23,204,153 

23,330,440 

  Short-term borrowings

3,029,537 

2,484,822 

3,639,763 

  Short- and medium-term senior notes

613,091 

600,000 

600,045 

  Federal Home Loan Bank advances

459,345 

961,086 

960,029 

  Other long-term debt

1,204,813 

1,265,511 

1,227,699 

  Accrued interest, expenses and taxes

206,736 

266,443 

260,275 

  Other liabilities

     1,192,975 

        376,392 

        899,830 

        Total liabilities

   31,705,019 

   29,158,407 

   30,918,081 

  Commitments and contingent liabilities (Note 14)

  Shareholders' equity 

    Convertible preferred stock

9,946 

13,107 

10,194 

    Common stock, $5 par value; 300,000,000 shares authorized;
        196,315,446 issued and outstanding (202,799,858 at
        June 30, 2002 and 198,434,384 at December 31, 2002)



 981,577 



 1,013,999 



 992,172 

    Additional paid-in capital

 543,862 

 547,177 

 537,417 

    Retained earnings

1,709,998 

1,606,664 

1,639,465 

    Unearned compensation

 (23,751)

 (18,627)

 (20,118)

    Accumulated other comprehensive income

          60,570 

          87,724 

          67,152 

        Total shareholders' equity

     3,282,202 

     3,250,044 

     3,226,282 

        Total liabilities and shareholders' equity

$ 34,987,221 

$ 32,408,451 

$ 34,144,363 

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

Six Months Ended

      June 30,      

      June 30,      

     2003     

     2002     

     2003     

2002

(Amounts in thousands, except per share data)

Interest income

  Interest and fees on loans

$       334,166 

$      386,152 

$      676,475 

$      779,812 

  Interest on available for sale securities

 

 

 

 

    Taxable

          53,236 

          61,360 

        104,993 

        116,401 

    Tax-exempt

          8,339 

          10,121 

          16,972 

          23,266 

  Interest on deposits at financial institutions

               482 

               397 

               934 

               973 

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


 235 


351 


390 


1,049 

  Interest on trading account assets

2,470 

            2,343 

            4,758 

            4,621 

  Interest on loans held for resale

          30,122 

          17,041 

          58,131 

          39,566 

      Total interest income

        429,050 

        477,765 

        862,653 

        965,688 

Interest expense

  Interest on deposits

          84,072 

        112,494 

        164,484 

        234,142 

  Interest on short-term borrowings

            8,266 

          7,632 

          17,538 

          15,535 

  Interest on long-term debt

          28,632 

          38,375 

          61,245 

          76,653 

      Total interest expense

        120,970 

        158,501 

        243,267 

        326,330 

      Net interest income

        308,080 

        319,264 

        619,386 

        639,358 

Provision for losses on loans

          46,000 

          44,911 

          94,649 

          89,901 

     Net interest income after provision for losses on loans

        262,080 

        274,353 

        524,737 

        549,457 

Noninterest income

  Service charges on deposit accounts

          57,405 

          56,585 

        115,127 

        108,878 

  Mortgage banking revenues

          42,564 

          33,353 

          47,238 

          78,683 

  Factoring commissions and fees

          10,189 

            10,546 

          20,089 

          19,571 

  Professional employment organization, net revenues

            7,531 

            7,247 

          13,922 

          12,701 

  Bankcard transaction fees

          10,620 

            10,088 

          20,304 

          18,101 

  Investment securities gains

          46,354 

            2,800 

          65,311 

          12,036 

  Financial services revenues

          19,968 

          21,758 

          37,703 

          41,246 

  Other income

          18,992 

          27,931 

          43,473 

          50,133 

      Total noninterest income

        213,623 

        170,308 

        363,167 

        341,349 

Noninterest expense

  Salaries and employee benefits

        137,327 

        128,967 

        274,245 

        261,730 

  Net occupancy expense

          25,390 

          25,733 

          51,134 

          51,541 

  Equipment expense

          20,937 

          19,836 

          41,131 

          40,891 

  Other intangibles amortization

            5,189 

            5,490 

          10,480 

            10,948 

  Other expense

          93,371 

        77,624 

        174,885 

        154,061 

      Total noninterest expense

        282,214 

        257,650 

        551,875 

        519,171 

      Earnings before income taxes

        193,489 

        187,011 

        336,029 

        371,635 

  Income taxes

          59,982 

          57,862 

          68,810 

        114,984 

      Net earnings

$      133,507 

$      129,149 

$      267,219 

$      256,651 

      Net earnings applicable to common shares

$      133,307 

$      128,888 

$      266,818 

$      256,156 

Earnings per common share 

    Basic

$              .68 

$              .63 

$            1.35 

$            1.24 

    Diluted

                .67 

                .63 

              1.34 

              1.24 

Dividends per common share

.33 

.33 

.67 

.67 

Average common shares outstanding

    Basic

        197,332 

        203,252 

        197,938 

        204,344 

    Diluted

        199,550 

        206,564 

        199,950 

        207,459 

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



Retained



Unearned

Accumulated
 Other 
Comprehensive



Shares

Amount

Shares

Amount

  Capital  

Earnings

Compensation

      Income     

  Total  

(Amounts in thousands)

Balance, December 31, 2002

408 

$ 10,194 

198,434 

$ 992,172 

$ 537,417 

$ 1,639,465 

$ (20,118)

$ 67,152 

$ 3,226,282 

Comprehensive income

 

     Net earnings

-

267,219 

-

267,219 

Other comprehensive income, net of taxes:

     Net change in unrealized gain on 
       available for sale securities


-


(6,582)

       (6,582)

      Total comprehensive income

260,637 

Dividends

     Common dividends

-

 (132,418)

-

(132,418)

     Preferred dividends - Series E

-

(401)

-

(401)

Common stock issued under employee       benefit plans, net of exchanges


-

862 

4,312 

14,516 

(4,992)

-

13,836 

Amortization of restricted stock grants

-

-

1,359 

1,359 

Conversion of preferred stock

 (10)

      (248)

        19 

            93 

          155 

               - 

              - 

         - 

               - 

Common stock repurchased and retired

       

               

 (3,000)

   (15,000)

     (8,226)

      (63,867)

              - 

            - 

      (87,093)

Balance, June 30, 2003

398 

$   9,946 

196,315 

$ 981,577 

$ 543,862 

$ 1,709,998 

$ (23,751)

$ 60,570 

$ 3,282,202 

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

UNION PLANTERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

Six Months Ended

     June 30,     

   2003   

   2002   

(Dollars in thousands)

Operating activities

  Net earnings

$    267,219 

$    256,651 

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

    Provision for losses on loans

94,649 

89,901 

    Depreciation and amortization of premises and equipment

33,524 

33,018 

    Amortization of goodwill and other intangibles

10,480 

10,948 

    Amortization and impairment of mortgage servicing rights, net

148,829 

16,649 

    Net amortization of available for sale securities

14,325 

3,812 

    Net realized gains on sales of available for sale securities

(65,311)

(12,036)

    Gain on sale of residential mortgage loans held for resale

(86,784)

(29,183)

    Gain on sale of residential mortgage loans

(22,695)

    Gain on sale of branches

(1,948)

(2,328)

    Deferred income tax benefit

(3,462)

(5,535)

    (Increase) decrease in trading account assets and loans held for resale

(156,045)

840,517 

    (Increase) decrease in other assets

(127,759)

82,691 

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

(21,518)

(59,622)

    Other, net

        1,157 

         1,662 

          Net cash provided by operating activities

      84,661 

  1,227,145 

Investing activities

  Net increase in short-term investments

(29,702)

(93,678)

  Proceeds from sales of available for sale securities

3,200,999 

377,275 

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

1,384,659 

556,779 

  Purchases of available for sale securities

(5,469,546)

(1,018,269)

  Net increase in loans

(158,001)

(210,603)

  Proceeds from sales of residential mortgage loans

467,158 

             - 

  Purchases of premises and equipment

     (17,717)

     (32,856)

  Proceeds from sales of premises and equipment

        2,475 

         4,191 

          Net cash used by investing activities

   (619,675)

   (417,161)

Financing activities

  Net increase (decrease) in deposits

1,649,834 

(89,799)

  Net decrease in short-term borrowings

(610,226)

(589,442)

  Proceeds from issuance of long-term debt

600,568 

  Repayment of long-term debt

(542,354)

(510,696)

  Net cash paid for sales of deposits

(16,106)

(127,089)

Net cash received from deposits assumed

37,286 

Proceeds from sale of subsidiary stock, net

86,893 

  Proceeds from issuance of common stock

19,417 

20,916 

  Cash paid for fractional shares relating to stock split

(343)

  Purchase and retirement of common stock

(87,093)

(148,021)

  Cash dividends paid

   (132,686)

   (136,918)

          Net cash provided (used) by financing activities

     404,965 

   (980,824)

  Net decrease in cash and cash equivalents

(130,049)

(170,840)

  Cash and cash equivalents at the beginning of the period

    1,130,147 

     966,913 

  Cash and cash equivalents at the end of the period

$  1,000,098 

$   796,073 

Supplemental disclosures

  Cash paid for

    Interest

$      263,102

$    345,454

    Income taxes

88,933

95,359

  Non-cash items

    Unrealized gain on securities available for sale at period-end

96,438

138,491

    Purchases of available for sale securities, pending settlement at period-end

710,431

-

    Transfers to other real estate from loans

61,862

3,614

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 Consolidation and Basis of Presentation

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 recently adopted accounting pronouncements and a change in the classification of mortgage servicing rights amortization and impairment discussed below. The notes included herein should be read in conjunction with the 2002 Annual Financial Disclosures (Annual Financial Disclosures) attached as Appendix F of Union Planters Definitive Proxy Statement for the Annual Shareholders' Meeting held April 17, 2003, which is filed on Schedule 14A and incorporated by reference in Union Planters' Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform with the 2003 financial reporting presentation.

In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147, Acquisitions of Certain Financial Institutions, which amended the accounting for acquisitions of branches qualifying as a business. Such acquisitions are now accounted for in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. During the fourth quarter of 2002, Union Planters adopted SFAS No. 147 and, as required, reversed approximately $6.8 million of pre-tax amortization expense incurred during the first nine months of 2002. The financial position and results of operations for the three and six months ended June 30, 2002 have been restated, as required, to reflect the adoption of SFAS No. 147.

In the second quarter of 2003, Union Planters began netting amortization and impairment expense associated with mortgage servicing rights against mortgage banking revenues in the consolidated statement of earnings. This classification is more consistent with prevailing practice in the mortgage banking industry. All prior periods have been adjusted to conform with this presentation.

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 management approved the exit or disposal plan 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. Union Planters adopted the new standard on January 1, 2003. The adoption did not have a material impact on the Company's financial condition, results of operations or cash flows.

Stock-Based Compensation. Union Planters has currently elected not to adopt the recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which requires a fair value-based method of accounting for stock options and similar equity awards. As permitted under SFAS No. 123, Union Planters continues to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock compensation plans and, accordingly, does not recognize compensation cost, except for stock grants. Had compensation cost for Union Planters' stock option plans been consistently expensed based on fair value at the grant date for awards under the methodology prescribed by SFAS No. 123, Union Planters' net earnings and earnings per share would have been reduced as shown in the table below. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions as of June 30, 2003 and 2002, respectively: expected dividend yield of 4.51% and 4.36%; expected volatility of 27.00% and 32.08%; risk-free interest rate of 2.28% and 1.70%; and an expected life of 2.5 years for both periods. Forfeitures are recognized as they occur. This schedule excludes the earnings impact of options acquired and accelerated through acquisitions.

Three Months Ended

Six Months Ended

             June 30,             

             June 30,             

   2003   

   2002   

   2003   

   2002   

(Dollars in millions, except per share data)

Weighted average fair value per share, at grant date

$   4.75

$   5.23

$   3.90

$   4.39

Net earnings - as reported

$ 133.5

$ 129.1

$ 267.2

$ 256.7

Less: Total stock-based employee compensation expense    determined under fair value-based method, net of tax    benefit

       3.1

       2.8

       6.2

       6.2

Net earnings - pro-forma

$ 130.4

$ 126.3

$ 261.0

$ 250.5

Earnings per share - as reported

 

  Basic

$     .68

$     .63

$   1.35

$   1.24

  Diluted

.67

.63

1.34

1.24

Earnings per share - pro-forma

  Basic (1)

.66

.62

1.32

1.22

  Diluted

.65

.61

1.31

1.21

(1) For the purpose of calculating basic earnings per share, net earnings is adjusted by the dividend on preferred stock, which was approximately $200,000 and $261,000 for the quarters ended June 30, 2003 and 2002, respectively, and $401,000 and $494,800 for the first half of 2003 and 2002, respectively.

Recent Accounting Pronouncements

Derivative Financial Instruments. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This standard amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and is effective for contracts entered into or modified after June 30, 2003. Union Planters does not expect this standard to have a material effect on the Company's financial condition, results of operations or cash flows.

Financial Instruments with Characteristics of both Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This standard establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments, including some previously classified as equity, as a liability (or an asset in some circumstances). These include:

  • A financial instrument in the form of shares that is mandatorily redeemable.
  • A financial instrument, other than an outstanding share, that, at inception, embodies an obligation to repurchase the issuer's equity shares, or is indexed to such an obligation, and that requires or may require the issuer to settle the obligation by transferring assets.
  • A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares, if, at inception, the monetary value of the obligation is based solely or predominantly on any of the following:
    1. A fixed monetary amount known at inception, for example, a payable settleable with a variable number of the issuer's equity shares;
    2. Variations in something other than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer's equity shares; and
    3. Variations inversely related to changes in the fair value of the issuer's equity shares, for example, a written put option that could be net share settled.

This standard became effective for financial instruments entered into or modified after May 31, 2003, and otherwise, in the case of Union Planters, on July 1, 2003. The adoption did not have a material impact on the Company's financial condition, results of operations or cash flows.

Consolidation of Variable Interest Entities. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. As issued, FIN No. 46 would require the Company, beginning in the third quarter of 2003, to deconsolidate Union Planters Capital Trust A (the UPC Trust). The sole assets of the UPC Trust are 8.20% Junior Subordinated Deferrable Interest Debentures of Union Planters (the Junior Subordinated Debentures). The UPC Trust's liabilities are primarily represented by 8.20% Trust Preferred Securities, which are presently included in other long-term debt in the Union Planters consolidated balance sheet. Under FIN No. 46, the Junior Subordinated Debentures, which are substantially equal in amount to the Trust Preferred Securities would cease to be eliminated in consolidation and would be included in other long-term debt in the Union Planters consolidated balance sheet.

The Trust Preferred Securities presently qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory reports as a minority interest in a consolidated subsidiary. The Junior Subordinated Debentures do not qualify as Tier 1 regulatory capital. The Federal Reserve Bank has reached no final conclusion on the continued qualification of Trust Preferred Securities but has indicated that until further notice, they will continue to count as Tier 1 regulatory capital, even if, as a result of deconsolidation, they are no longer included on the consolidated balance sheet. Should the Federal Reserve Bank ever reach a conclusion that Trust Preferred Securities no longer included on the consolidated balance sheet would cease to qualify as Tier 1 regulatory capital, Union Planters' Tier 1 regulatory capital would be reduced by approximately $200 million.

Further guidance may be issued by the end of the third quarter that could either change or reaffirm the guidance in FIN No. 46.

Note 2. Available for Sale Securities

The following is a summary of Union Planters available for sale securities:

Amortized

    Unrealized     

   Cost   

   Gains   

   Losses   

  Fair Value  

(Dollars in thousands)

June 30, 2003

U.S. Government and federal agencies

  U.S. Treasury

$      264,692

$      2,386

$     1,502

$      265,576

  U.S. Government agencies

    Collateralized mortgage obligations

1,018,910

12,724

27

1,031,607

    Mortgage-backed

1,505,778

16,904

634

1,522,048

    Other

   1,943,693

      10,634

       9,219

   1,945,108

          Total U.S. Government and federal agencies

4,733,073

42,648

11,382

4,764,339

Obligations of states and political subdivisions

653,386

50,691

68

704,009

Private label collateralized mortgage obligations

657,178

11,294

1,345

667,127

Other stocks and securities

      456,198

        5,085

          485

      460,798

          Total available for sale securities

$ 6,499,835

$  109,718

$   13,280

$ 6,596,273

December 31, 2002

U.S. Government and federal agencies

  U.S. Treasury

$      65,732

$     2,529

$            7

$      68,254

  U.S. Government agencies

    Collateralized mortgage obligations

927,983

14,763

9

942,737

    Mortgage-backed

1,190,094

24,866

1,197

1,213,763

    Other

   1,009,661

      13,312

            17

   1,022,956

          Total U.S. Government and federal agencies

3,193,470

55,470

1,230

3,247,710

Obligations of states and political subdivisions

715,187

34,508

135

749,560

Private label collateralized mortgage obligations

1,016,480

17,356

2,649

1,031,187

Other stocks and securities

      435,906

        3,620

          700

      438,826

          Total available for sale securities

$ 5,361,043

$  110,954

$     4,714

$ 5,467,283

Other Comprehensive Income

The following table presents a reconciliation of the net change in unrealized gains/losses on available for sale securities for the six months ended June 30, 2003:

 

Before Tax

Tax

Net of Tax

 

  Amount  

  Expense  

  Amount  

 

(Dollars in thousands)

Change in the unrealized gains/losses on available for sale securities arising
   during the period

$  55,509 

$  (20,554)

$  34,955 

Less:  Reclassification for gains/losses included in net earnings

   65,311 

    (23,774)

   41,537 

Net change in the unrealized gains/losses on available for sale securities

$  (9,802)

$      3,220 

$  (6,582)

Available for sale securities having a fair value of approximately $2.4 billion at June 30, 2003 and at December 31, 2002 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 securities is $282.9 million and $273.6 million of FHLB and Federal Reserve Bank stock at June 30, 2003 and December 31, 2002, respectively, for which there is no readily determinable market value.

The following table presents the gross realized gains and losses on available for sale securities for the three and six months ended June 30, 2003 and 2002:

 

Three Months Ended

 

Six Months Ended

 

     June 30,     

 

     June 30,     

 

   2003   

 

   2002   

 

   2003   

 

   2002   

 

(Dollars in thousands)

Realized gains

$  46,468 

 

$  2,800

 

$  65,877 

 

$  12,225 

Realized losses

(114)

 

-

 

(566)

 

(189)

The losses during 2003 are 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 3. Allowance for Losses on Loans and Nonperforming Loans

The changes in the allowance for losses on loans for the three and six months ended June 30, 2003 and 2002 are as follows:

Three Months Ended

Six Months Ended

             June 30,             

             June 30,             

   2003   

   2002   

   2003   

   2002   

(Dollars in thousands)

Beginning balance

$  350,962 

$  351,452 

$  350,931 

$  341,930 

Provision for losses on loans

46,000 

44,911 

94,649 

89,901 

Recoveries of loans previously charged off

11,286 

9,151 

20,379 

17,949 

Loans charged off

    (63,492)

    (51,948)

  (121,203)

    (96,214)

Ending balance

$  344,756 

$  353,566 

$  344,756 

$  353,566 

Nonperforming loans are summarized as follows:

June 30,

December 31,

   2003   

   2002   

(Dollars in thousands)

Nonaccrual loans

$ 235,065

$ 264,099

Restructured loans

          446

          511

          Total nonperforming loans

$ 235,511

$ 264,610

Note 4. Transfers of Financial Assets

During the second quarter of 2003, Union Planters completed the sale of $444.5 million in residential mortgage loans from its loan portfolio in multiple transactions. Approximately $322.7 million of the loans were sold servicing retained, and the remainder was sold servicing released. A total gain of $22.7 million was recognized in association with these sales, including $1.4 million in mortgage servicing rights arising from the loans sold servicing retained.

Union Planters acted as servicing agent on behalf of others for residential mortgage loans totaling approximately $21.8 billion at June 30, 2003, compared to $20.0 billion at December 31, 2002. The principal balances of loans serviced for others are not included in Union Planters' consolidated balance sheet. The following tables present reconciliations of the changes in mortgage servicing rights and the related valuation allowance:

 

Six Months Ended

 

           June 30,           

 

   2003   

   2002   

 

(Dollars in thousands)

Mortgage servicing rights, net

 

Beginning balance

$ 264,295 

$ 150,303 

Additions

110,889 

65,561 

Amortization of servicing rights

(28,581)

(19,915)

(Provision for) recovery of impairment

  (120,249)

       3,266 

Ending balance

$ 226,354 

$ 199,215 

 

Six Months Ended

 

           June 30,           

 

   2003   

   2002   

 

(Dollars in thousands)

Valuation allowance

   

Beginning balance

$  12,297

$ 15,120 

Provision for (recovery of) impairment

  120,249

    (3,266)

Ending balance

$132,546

$ 11,854 

The estimated fair value of mortgage servicing rights at June 30, 2003 was $227.0 million. Significant assumptions utilized in estimating the fair value were as follows:

Estimated portfolio prepayment speeds

12.0% - 56.7% CPR

Market discount rates

9.0% - 12.0%       

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 June 30, 2003, 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 $47.0 million and $86.8 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 loans and the costs related to refinancing.

Note 5. Intangible Assets

In accordance with SFAS No. 142, goodwill is no longer subject to amortization but is assessed at least annually for impairment. The carrying value of goodwill not subject to amortization was $743.2 million at June 30, 2003 and December 31, 2002 and $715.0 million at June 30, 2002. At each of these dates, $50.7 million of the goodwill was in the "other operating units" line of business, with the remainder in the "banking" line of business.

Union Planters' other intangible assets are core deposit intangibles acquired through bank acquisitions and other unidentified intangibles arising from branch purchases and are subject to amortization periods up to 15 years with no residual value. The gross amount of other intangible assets at June 30, 2003, December 31, 2002 and June 30, 2002 was $316.3 million, with accumulated amortization of $138.1 million, $127.6 million and $116.7 million, respectively. All other intangibles are in the "banking" line of business. The weighted average amortization period is 165.3 months. Amortization expense over the next five years on current other intangibles is expected to be:

(Dollars in thousands)

Total 2003

$  20,857

2004

20,757

2005

20,628

2006

20,279

2007

18,340

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 with maturities ranging up to 180 days; the majority 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:

             June 30,             

December 31,

2003

2002

2002

(Dollars in thousands)

Balances at period-end

  Short-term FHLB advances

$    600,000

$                -

$                -

  Federal funds purchased with maturities ranging up to 180 days

723,933

    657,840

    898,670

  Securities sold under agreements to repurchase

1,298,022

1,319,110

1,394,899

  Other short-term borrowings

      407,582

      507,872

   1,346,194

          Total short-term borrowings

$ 3,029,537

$ 2,484,822

$ 3,639,763

Federal funds purchased and securities sold under agreements to repurchase

  Year-to-date daily average balance

$ 2,430,215

$ 2,047,800

$ 2,182,949

  Weighted average interest rate

1.06%

1.48%

1.40%

Short-term FHLB advances

  Year-to-date daily average balance

$    536,464

$      28,729

$    167,945

  Weighted average interest rate

1.28%

1.84%

1.69%

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, National Association (UPB), an indirect wholly-owned subsidiary of the Company, 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 June 30, 2003, there were no Subordinated Notes and no Short-term Senior Notes outstanding under this program.

During 2002, UPB issued $600.0 million in 5.125% fixed-rate Medium-term Senior Notes. The notes mature in June 2007. The amount of Medium-term Senior Notes outstanding at June 30, 2003 and December 31, 2002 was $613.1 million and $600.0 million, respectively. These amounts include valuation adjustments related to hedging activities of $14.7 million and $1.8 million at June 30, 2003 and December 31, 2002, respectively.

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 June 30, 2003, 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:

        June 30,        

December 31,

   2003   

   2002   

   2002   

(Dollars in thousands)

Balance at period-end

$    459,345

$  961,086

$  960,029

Range of interest rates

1.75% - 6.55%

1.75% - 6.92%

1.35% - 6.55%

Range of maturities

2003 - 2021

2002 - 2021

2003 - 2021

Other Long-Term Debt

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

 June 30, 

December 31,

   2003   

   2002   

   2002   

(Dollars in thousands)

8.20% Trust Preferred Securities

$     199,168

$       199,133

$     199,151

6.25% Subordinated Notes due 2003

74,483

74,431

74,457

6.75% Subordinated Notes due 2005

99,862

99,803

99,832

7.75% Subordinated Notes due 2011

499,310

499,220

499,265

6.50% Putable/Callable Subordinated Notes due 2018

301,322

300,589

301,512

Variable-rate asset-backed certificates

-

91,667

41,667

Other long-term debt

659

668

663

Valuation adjustments related to hedging activities

         30,009

                  -

         11,152

          Total other long-term debt

$  1,204,813

$  1,265,511

$  1,227,699

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.

During the three months ended June 30, 2003, Union Planters repurchased and retired 3.0 million shares of its common stock. As of June 30, 2003, Union Planters has repurchased and retired 12.0 million of the total 25.7 million shares that have been authorized for repurchase under repurchase plans previously approved by the Board of Directors.

Preferred Stock

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

 

        June 30,  

 

December 31,

 

   2003  

 

   2002  

 

   2002  

 

(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) 397,848 shares issued and outstanding (524,289 at June 30,
    2002 and 407,770 at December 31, 2002)

$ 9,946

 


$ 13,107

 


$ 10,194

  Series F preferred stock 300,000 shares authorized, none issued

           -

 

             -

 

             -

       Total preferred stock

$ 9,946

 

$ 13,107

 

$ 10,194

Note 8. Preferred Stock of Subsidiary

In March 2003, Union Planters Preferred Funding Corporation (UPPFC), an indirect majority-owned, consolidated subsidiary of Union Planters, issued 1,000 shares of 7.75% non-cumulative, perpetual preferred stock, Series B (Series B Preferred Shares), with a liquidation value of $100,000 per share to another indirect wholly-owned subsidiary of Union Planters, U.P. REIT Holdings, Inc. (UP REIT Holdings). UPPFC is a real-estate investment trust (REIT) established for the purpose of acquiring, holding and managing real estate mortgage assets. All of the Series B Preferred Shares were subsequently sold privately to non-affiliates without registration. These securities qualify as Tier I capital and are included in the consolidated balance sheet in other liabilities. Dividends on the Series B Preferred Shares are payable quarterly and will be recorded in the consolidated statement of earnings in other noninterest expense.

The Series B Preferred Shares are redeemable on or after July 15, 2023 and redeemable at the discretion of UPPFC in the event that the Series B Preferred Shares cannot be accounted for as Tier 1 regulatory capital or there is more than an insubstantial risk that dividends paid with respect to the Series B Preferred Shares will not be fully tax deductible. The total amount of Series B Preferred Shares issued and outstanding on June 30, 2003, as reported in other liabilities on the consolidated balance sheet net of discount and issuance costs, was $87.2 million.

Concurrent with the issuance of the Series B Preferred Shares, UPPFC also issued 3,736 shares of non-cumulative, perpetual preferred stock, Series C (Series C Preferred Shares), with a liquidation value of $100,000 per share to UP REIT Holdings. The holder of each of the Series C Preferred Shares is entitled to dividends, payable quarterly, at an annual rate of three month LIBOR plus 3% on the liquidation value. Additionally, the Series C Preferred Shares rank equal to the Series B Preferred Shares. At June 30, 2003, UP REIT Holdings continued to own all of the Series C Preferred Shares. So long as the Series C Preferred Shares are owned by Union Planters or a consolidated subsidiary, the shares and dividends paid thereon are eliminated in the consolidated financial statements.

The Series B Preferred Shares and the Series C Preferred Shares are not convertible into any other securities of UPPFC, Union Planters or any of its subsidiaries. The Series B Preferred Shares are, however, automatically exchangeable at the direction of the Office of the Comptroller of the Currency (OCC) for preferred stock of UPB, having substantially the same terms as the Series B Preferred Shares in the event UPB becomes undercapitalized under the OCC's "prompt corrective actions" regulations, insolvent or, in the OCC's sole discretion, in danger of becoming undercapitalized. Should UPPFC not pay dividends on the Series B Preferred Shares or the Series C Preferred Shares, both UPPFC and UPB will be precluded from paying dividends on their common stock until dividends have been paid on the Series B Preferred Shares for four consecutive quarters.

Note 9. Other Noninterest Income and Expense

     Three Months Ended     

   Six Months Ended   

      June 30,      

   June 30,   

   2003   

   2002   

   2003   

   2002   

(Dollars in thousands)

Other noninterest income

  Merchant servicing income

$      503 

$     9,647 

$     1,921 

$      10,450 

  Profits and commissions from Small Business Administration trading     activities

1,452 

1,262 

2,559 

2,576 

  Letters of credit fees

2,433 

2,236 

5,174 

4,189 

  Other real estate revenue

931 

2,131 

2,216 

4,803 

  Net (loss)/gain on sales of branches/deposits and other assets 

(78)

729 

1,948 

2,328 

  Earnings of equity method investments

2,216 

1,215 

4,030 

2,570 

  Other income

   11,535 

   10,711 

    25,625 

       23,217 

          Total other noninterest income

$ 18,992 

$  27,931 

$  43,473 

$     50,133 

Other noninterest expense

  Communications 

$   6,927 

$   7,387 

$    13,969 

$     14,688 

  Other contracted services 

11,107 

8,372 

21,793 

17,062 

  Postage and carrier 

6,324 

6,556 

12,698 

13,215 

  Advertising and promotion 

5,831 

6,257 

15,540 

13,510 

  Stationery and supplies 

4,057 

5,681 

8,242 

10,365 

  Other personnel services 

4,604 

3,974 

8,701 

7,909 

  Legal fees and litigation 

3,411 

3,290 

6,059 

6,358 

  Travel 

2,677 

2,770 

5,022 

5,256 

  Miscellaneous charge-offs 

5,150 

3,292 

9,770 

5,251 

  Federal Reserve fees 

1,434 

1,736 

2,935 

3,449 

  Taxes other than income 

1,399 

1,709 

1,986 

3,981 

  Accounting, tax and audit fees 

1,003 

1,481 

1,768 

3,358 

  Consultant fees 

1,427 

1,695 

3,433 

2,122 

  Brokerage and clearing fees on trading activities

2,034 

1,470 

3,356 

2,943 

  Other real estate expense 

2,250 

2,629 

4,042 

3,641 

  FDIC insurance 

959 

1,055 

1,884 

2,089 

  Dues, subscriptions and contributions 

1,983 

1,389 

2,918 

3,510 

  Bank examiner fees 

976 

986 

1,972 

1,975 

  Insurance 

2,346 

1,257 

4,333 

2,244 

  Credit related expenses 

12,276 

9,876 

22,896 

19,713 

  Dividends on preferred stock of consolidated subsidiaries 

2,378 

2,378 

  Other noninterest expense 

    12,818 

      4,762 

      19,190 

      11,422 

           Total other noninterest expense

$  93,371 

$  77,624 

$  174,885 

$  154,061 

 

 

Note 10. Income Taxes

Applicable income taxes for the three months ended June 30, 2003 were $60.0 million, resulting in an effective tax rate of 31.00% for the quarter, compared to $57.9 million and 30.94%, respectively, for the three months ended June 30, 2002. Applicable income taxes for the six months ended June 30, 2003 were $68.8 million, resulting in an effective tax rate of 20.48%, compared to $115.0 million and 30.94%, respectively, for the six months ended June 30, 2002. The change in the effective rate in 2003, as compared to 2002, is due primarily to the change in the mix of taxable and nontaxable revenues and federal and state tax benefits related to the issuance of preferred stock used to raise Tier I capital. The tax expense applicable to available for sale securities gains for the six months ended June 30, 2003 and 2002 was $23.8 million and $4.5 million, respectively.

At June 30, 2003, the Corporation had a net deferred tax asset of $19.3 million, compared to $14.3 million at December 31, 2002. The net deferred tax asset includes a deferred tax liability related to the net unrealized gain on available for sale securities of $38.7 million and $39.1 million at June 30, 2003 and December 31, 2002, respectively. Based upon historical earnings and anticipated future earnings, management believes that normal operations will generate sufficient future taxable income to realize in full these deferred tax benefits. Therefore, no extraordinary strategies are deemed necessary by management to generate sufficient taxable income for purposes of realizing the net deferred tax asset.

Note 11. Earnings Per Share

The calculation of earnings per share is summarized as follows:

Three Months Ended

Six Months Ended

              June 30,                  

               June 30,                 

   2003   

    2002   

   2003   

   2002   

(Amounts in thousands, except per share data)

Basic:

  Net earnings 

$      133,507

$      129,149

$     267,219

$    256,651

    Less:  Preferred dividends 

               200

               261

              401

             495

  Net earnings applicable to common shares 

$      133,307

$      128,888

$     266,818

$    256,156

  Average common shares outstanding 

197,332

203,252

197,938

204,344

  Earnings per common share-basic 

 $            0.68

 $            0.63

$          1.35

$         1.24

Diluted:

  Net earnings 

 $      133,507

 $      129,149

$    267,219

$    256,651

  Average common shares outstanding 

197,332

203,252

197,938

204,344

  Stock option adjustment 

1,465

2,318

1,255

2,108

  Preferred stock adjustment 

               753

               994

            757

          1,007

  Adjusted average common shares outstanding

        199,550

        206,564

     199,950

      207,459

  Earnings per common share-diluted 

 $             0.67

 $             0.63

 $         1.34

 $          1.24

Excluded from the computation of diluted shares were options to purchase .8 million and .4 million shares that were outstanding at June 30, 2003 and 2002, respectively, because the exercise price of these options was greater than the average market price of the common shares, and therefore, the effect would be antidilutive.

Note 12. Derivative Financial Instruments

Union Planters uses derivative financial instruments to manage risk associated with certain assets and liabilities.

The Company's mortgage commitment pipeline is exposed to interest rate risk associated with interest rate lock commitments (IRLCs) extended to individuals who have applied for loan funding and meet certain defined credit and underwriting criteria. IRLCs are considered derivative financial instruments under SFAS No. 133 and are recorded at fair value, with changes in value recorded in current earnings. The Company is also exposed to credit and interest-rate risk related to its mortgage inventory from the time a loan is closed until completion of normal post-closing review and the subsequent sale of the loan, normally 60 to 90 days.

To mitigate interest rate risk associated with mortgage activities, Union Planters enters into mandatory and optional short-term forward contracts, which are contracts for delayed delivery of mortgages in which the Company agrees to make delivery at a specified future date of a specified instrument at a specified price or yield. Risks arise from the possible inability of the counterparties to meet the terms of their contracts and from market movements in securities values and interest rates. Since derivative financial instruments that hedge other derivative financial instruments do not qualify for hedge accounting treatment under SFAS No. 133, IRLCs and associated derivative financial instruments are effectively accounted for as marked-to-market through earnings. Derivative financial instruments associated with closed loans pending review and sale are designated as fair value hedges, and both the derivative financial instruments and the related loans held for resale are maintained at fair value with changes in value recorded in current earnings.

The fair value of derivative financial instruments held to mitigate interest rate risk associated with mortgage activities was ($10.7) million at June 30, 2003, compared to ($48.8) million at December 31, 2002. The fair value of IRLCs was $8.1 million at June 30, 2003, compared to $18.7 million at December 31, 2002. The fair value adjustment to loans held for resale was $29.1 million at June 30, 2003, compared to $46.3 million at December 31, 2002.

Gains/losses on IRLCs, related derivative contracts and ineffectiveness of fair value mortgage hedge instruments totaled a net amount of $5.6 million for the second quarter of 2003, compared to ($.9) million for the second quarter of 2002. For the six months ended June 30, 2003 and 2002, these gains/losses totaled $10.4 million and ($3.7) million, respectively. The gains/losses are included in mortgage banking revenue.

The Company commits to buy certain loans under best efforts commitments, which are agreements whereby a correspondent lender or broker has the option to sell a loan to the Company at a stated price. If the correspondent lender or broker does not exercise the option, no transaction takes place. Under the provisions of SFAS No. 133, the best efforts commitments are defined as derivative financial instruments and therefore are marked-to-market. The impact on the consolidated financial statements of best efforts commitments was immaterial.

To mitigate interest rate risk associated with certain deposits and debt, Union Planters has entered into interest rate swaps that qualify as fair value hedges. The swaps and the related debt are reported on the balance sheet at current fair value at the end of each period. The changes in fair value of both the hedged item and the swap along with the net interest income or expense on the swap are netted against the interest expense related to the hedged item on the statement of earnings. During the first quarter of 2003, Union Planters entered into two interest rate swaps with a notional value of $1.0 billion to hedge the fair value of certain debt.

At June 30, 2003, Union Planters had interest rate swap agreements with notional values totaling $1.44 billion and fair values of $52.4 million, which are included in other assets. The ineffective portion of the hedges had an immaterial impact on interest expense during the three and six months ended June 30, 2003. No swaps were outstanding during the quarter ended June 30, 2002.

During the first quarter of 2003, Union Planters discontinued the hedging relationship between an interest rate swap agreement and the associated deposits. As a result, the fair value adjustment of the original pool of deposits at the date the hedge was discontinued, $4.3 million, is being amortized over 47 months, which was the average remaining life of the pool. Subsequently, this interest rate swap agreement was redesignated as a fair value hedge against a different pool of deposits. Amortization related to this discontinued hedge and a similar hedge terminated during 2002 had an immaterial impact on interest expense for all periods affected.

Note 13. Lines of Business Reporting

       Three Months Ended June 30, 2003            

Other

Mortgage

Operating

Parent

Consolidated

   Banking  

   Banking     

   Units   

 Company 

   Total   

Net interest income (expense)

$      264,443 

$       38,067 

$       13,077 

$     (7,507)

$      308,080 

Provision for losses on loans

(16,929)

(7,171)

(21,900)

(46,000)

Noninterest income (1)

168,829 

 

3,203 

41,309 

282 

213,623 

Noninterest expense

      (199,990)

       (42,188)

       (36,493)

         (3,543)

      (282,214)

Earnings (loss) before taxes (1)

$      216,353 

$       (8,089)

$       (4,007)

$      (10,768)

$      193,489 

Average assets

$ 28,059,819 

$ 4,054,486 

$  1,301,145 

$     867,470 

$ 34,282,920 

                      Three Months Ended June 30, 2002                    

Other

Mortgage

Operating

Parent

Consolidated

   Banking  

Banking

   Units   

 Company 

   Total   

Net interest income (expense)

$      294,410 

$      24,560 

$      12,761 

$   (12,467)

$     319,264 

Provision for losses on loans

(34,215)

(8,069)

(2,627)

(44,911)

Noninterest income (1)

105,113 

24,059 

40,986 

150 

170,308 

Noninterest expense

      (194,738)

      (24,465)

       (36,603)

       (1,844)

       (257,650)

Earnings (loss) before taxes (1)

$      170,570 

$      16,085 

$      14,517 

$   (14,161)

$      187,011 

Average assets

$ 27,897,435 

$ 2,847,400 

$ 1,252,887 

$  224,416 

$ 32,222,138 

                      Six Months Ended June 30, 2003                    

Other

Mortgage

Operating

Parent

Consolidated

   Banking  

   Banking     

   Units   

 Company 

   Total   

Net interest income (expense)

$      537,289 

$       72,729 

$       26,017 

$     (16,649)

$      619,386 

Provision for losses on loans

(48,329)

(13,470)

(32,850)

(94,649)

Noninterest income (1)

316,070 

 

(16,867)

63,666 

298 

363,167 

Noninterest expense

      (395,677)

       (78,511)

       (71,400)

         (6,287)

       (551,875)

Earnings (loss) before taxes (1)

$      409,353 

$     (36,119)

$     (14,567)

$      (22,638)

$      336,029 

Average assets

$ 27,629,285 

$ 3,967,167 

$  1,298,162 

$     865,748 

$ 33,760,362 

                      Six Months Ended June 30, 2002                    

Other

Mortgage

Operating

Parent

Consolidated

   Banking  

Banking

   Units   

 Company 

   Total   

Net interest income (expense)

$      587,944 

$       51,791 

$      24,460 

$   (24,837)

$     639,358 

Provision for losses on loans

(70,683)

(14,370)

(4,848)

(89,901)

Noninterest income (1)

206,573 

57,472 

77,007 

297 

341,349 

Noninterest expense

       (388,468)

       (55,797)

      (71,047)

       (3,859)

       (519,171)

Earnings (loss) before taxes (1)

$      335,366 

$      39,096 

$      25,572 

$   (28,399)

$      371,635 

Average assets

$ 27,934,147 

$ 2,997,637 

$ 1,189,937 

$  202,127 

$ 32,323,848 

  1. Parent company noninterest income and earnings before income taxes are net of the intercompany dividend eliminations of $65.2 million and $170.7 million for the three months ended June 30, 2003 and 2002, respectively, and $526.7 million and $241.2 million, respectively, for the six months ended June 30, 2003 and 2002.

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 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 Union Planters' financial position, results of operations nor liquidity will be materially adversely affected by the ultimate resolution of pending or threatened legal proceedings. Activity affecting the Company's litigation reserve (i.e., provision for losses and settlement of claims) was not material to the Company's operations for the three and six months ended June 30, 2003 or 2002. Refer to Part II Item 1 for a discussion of legal proceedings.

Note 15. Subsequent Event

From July 1, 2003 through August 11, 2003, Union Planters repurchased and retired 1.5 million shares of its common stock. Through August 11, 2003, Union Planters has repurchased and retired 13.5 million of the total 25.7 million shares that have been authorized for repurchase under repurchase plans previously approved by the Board of Directors.

 

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 F of Union Planters Corporation's Definitive Proxy Statement for the Annual Shareholders' Meeting held April 17, 2003 (the Definitive Proxy Statement including the 2002 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 six months ended June 30, 2003 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). Certain sections that follow contain forward-looking statements regarding: net interest income, income taxes, provision for losses on loans, noninterest income, noninterest expense, insurance expense, loans, potential problem loans, interest rate risk, as well as market risk and asset/liability management in Item 3 and 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 and the impact in the United States of America of hostilities abroad; 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, the level of the provision for losses on loans and the receipt of information subsequent to the reporting date impacting the collectability of loans; and changes in enacted tax laws and regulations and 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.

Selected Financial Data

The following table presents selected financial data for the three- and six-month periods ended June 30, 2003 and 2002:

Three Months Ended

Six Months Ended

       June 30,       

Percentage

       June 30,       

Percentage

   2003   

   2002   

   Change   

   2003   

   2002   

   Change   

(Dollars in thousands, except per share data)

Net earnings

$     133,507

$     129,149

3.4

%

$    267,219

$     256,651

4.1%

  Per share

    Basic

.68

.63

7.9

1.35

1.24

8.9   

    Diluted

.67

.63

6.3

1.34

1.24

8.1   

  Return on average assets

1.56

%

1.61

%

1.60

%

1.60

%

  Return on average common equity

16.47

16.25

16.77

16.18

Dividends per common share

$             .33

$             .33

$            .67

$            .67

Net interest margin (FTE)

4.01

%

4.45

%

4.12

%

4.49

%

Net interest spread (FTE)

3.63

3.96

3.75

3.99

Expense ratio

.53

.89

.89

.92

Efficiency ratio

50.79

49.78

52.97

50.05

Book value per common share at period-end

$        16.67

$        15.96

   

Leverage ratio

7.75

%

7.80

%

Tier 1 capital to risk weighted assets

9.80

9.75

Common share prices

  High closing price

$         32.95

$         33.63

$        32.95

$        33.63

  Low closing price

26.07

31.39

26.07

29.33

  Closing price at period-end

31.03

32.37

____________________

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 (excluding amortization of intangibles) minus noninterest income (excluding amortization of mortgage servicing rights) divided by average assets)

Efficiency ratio = Noninterest expense (excluding amortization of intangibles) divided by net interest income (FTE) plus noninterest income (excluding amortization of mortgage servicing rights)

SECOND QUARTER EARNINGS OVERVIEW

For the second quarter of 2003, Union Planters reported net earnings of $133.5 million, or $.67 per diluted common share, an increase from $129.1 million, or $.63 per diluted common share, for the same period in 2002. These earnings represented annualized returns on average assets and average common equity of 1.56% and 16.47%, respectively, compared to 1.61% and 16.25%, respectively, for the same period in 2002.

EARNINGS ANALYSIS

Net Interest Income

Fully taxable-equivalent net interest income for the second quarter of 2003 was $313.5 million, a decrease of $12.4 million from the same quarter last year. The net interest margin for the second quarter of 2003 was 4.01%, which compares to 4.45% for the second quarter of 2002. The net interest rate spread was 3.63% for the second quarter of 2003, which compares to 3.96% for the second quarter of 2002. Changes in net interest income and the net interest margin since the second quarter of 2002 are the result of declining yield on earning assets due to lower interest rates and customer-driven refinancing of loans exceeding the favorable impact of lower rates on deposit liabilities and borrowings. Refer to Union Planters' average balance sheets and Market Risk and Asset/Liability Management section in Item 3, which follow this discussion, for additional information regarding the changes in net interest income and balance sheet management initiatives.

Interest Income

The following table presents a breakdown of average earning assets:

     Three Months Ended     

Six Months Ended

June 30,

March 31,

June 30,

   2003   

   2002   

   2003   

   2003   

   2002   

(Dollars in billions)

Average earning assets

$31.4 

$29.4 

$30.3 

$30.9 

$29.4 

  Comprised of:

    Loans

72

%

79

%

75

%

74

%

79

%

    Available for sale securities

19

16

17

18

16

    Loans held for resale 

7

3

7

7

4

    Other earning assets 

2

2

1

1

1

Fully taxable-equivalent yield on average earning assets

5.55

%

6.61

%

5.87

%

5.71

%

6.73

%

Fully taxable-equivalent interest income decreased $49.9 million for the second quarter of 2003 compared to the same period in 2002. For the first half of 2003, fully taxable-equivalent interest income decreased $106.9 million compared to the same period last year. These declines were attributable primarily to a decrease in the average yield on earning assets from 6.61% to 5.55% from the second quarter of 2002 to the second quarter of 2003 and from 6.73% to 5.71% from the first half of 2002 to the first half of 2003. The declines in yield are attributable primarily to declines in market interest rates and the continued run-off of selected loan products that do not generate the risk-adjusted returns targeted by management. The impact of lower rates was partly offset by $2.0 billion and $1.5 billion increases in average earning assets, primarily home equity loans, available for sale securities and loans held for resale during the second quarter of 2003 and the six-month period ended June 30, 2003, respectively, when compared with the same periods during 2002. Refer to the Market Risk and Asset/Liability Management discussion in Item 3 for additional information regarding balance sheet management initiatives, changes in interest rates and how the Company is positioned to respond to the changes.

 

Interest Expense

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

      Three Months Ended    

Six Months Ended

     June 30,     

March 31,

     June 30,     

   2003   

   2002   

   2003   

   2003   

   2002   

(Dollars in billions)

Average interest-bearing liabilities

$ 25.3   

$ 24.0   

$ 24.7   

$25.0   

$24.0   

  Comprised of:

    Deposits

77%

80%

75%

76%

80%

    Short-term borrowings

12   

9   

13   

13   

9   

    FHLB advances and long-term debt

11   

11   

12   

11   

11   

Rate paid on average interest-bearing liabilities

1.92%

2.65%

2.01%

1.96%

2.74%

Interest expense decreased $37.5 million in the second quarter of 2003 compared to the same quarter last year. For the first half of 2003, interest expense decreased $83.1 million compared to the first half of 2002. These decreases were driven by a decline in the average rate paid for interest-bearing liabilities from 2.65% to 1.92% from the second quarter of 2002 to the second quarter of 2003 and from 2.74% to 1.96% from the first half of 2002 to the first half of 2003. The decreases in the average rate paid primarily resulted from the decline in market interest rates. Average interest-bearing liabilities also increased $1.3 billion from the second quarter of 2002 to the second quarter of 2003 and $.9 billion from the first half of 2002 to the first half of 2003.

Provision for Losses on Loans

The provision for losses on loans for the second quarter of 2003 was $46.0 million, or .82% of average loans on an annualized basis. This compares to $44.9 million, or .78% of average loans, for the second quarter of 2002. For the first half of 2003, the provision for losses on loans was $94.6 million, or .84% of average loans on an annualized basis. This compares to $89.9 million, or .79% of average loans, for the first half of 2002. The higher provisions for losses on loans in 2003 are attributable to current economic conditions and the resulting increase in net charge-offs. Refer 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 second quarter of 2003 was $213.6 million, an increase of $43.3 million, or 25.4%, from the second quarter of 2002. For the first half of 2003, noninterest income increased 6.4% to $363.2 million compared to the first half of 2002. 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 $57.4 million for the second quarter of 2003, an increase of $.8 million compared to the same period in 2002. The increase is primarily attributable to increased volume of insufficient funds items. For the first half of 2003, these fees increased 5.7% to $115.1 million due to the implementation of UPExcel pricing initiatives and increased volume of insufficient funds items.

Mortgage banking revenues. These revenues include origination, servicing and miscellaneous fees, the impact of derivative financial instruments, and gains on sale of mortgages and servicing rights. They are also net of mortgage servicing rights amortization and impairment. Mortgage banking revenues for the three and six months ended June 30, 2003 and 2002 are summarized as follows:

Three Months Ended

Six Months Ended

             June 30,             

             June 30,             

   2003   

   2002   

   2003   

   2002   

(Dollars in thousands)

Gain on sale of residential mortgages

$    56,767 

$    14,107 

$    99,123 

$  32,880 

Impact of derivative financial instruments

5,577 

(933)

10,356 

(3,697)

Origination, servicing and miscellaneous fees

47,248 

32,497 

86,588 

66,149 

Amortization of mortgage servicing rights

    (18,314)

    (10,347)

  (28,581)

  (19,915)

Mortgage servicing rights (impairment)/recovery

    (48,714)

      (1,971)

  (120,248)

     3,266 

Total mortgage banking revenues

$    42,564 

$    33,353 

$    47,238 

$  78,683 

Changes in the components of mortgage banking revenues resulted from the sale during the second quarter of 2003 of $444.5 million in mortgage loans from the loan portfolio, which increased gain on sale of residential mortgages by $22.7 million, and an environment of lower interest rates during the three and six months ended June 30, 2003 compared to the same periods in 2002. The lower interest rate environment resulted in increased mortgage loan origination volume, which gave rise to larger gains on sale of residential mortgages, together with related derivative financial instrument transactions, and origination, servicing and miscellaneous fees. The lower interest rate environment also increased the amortization of mortgage servicing rights and caused impairment in the mortgage servicing rights.

Factoring commissions and fees. Commissions and fees earned were $10.2 million for the second quarter of 2003, a slight decrease from $10.5 million for the second quarter of last year. These decreases are primarily related to a decreased volume of factored receivables. Factoring volume was approximately $925.0 million for the second quarter of 2003 compared to $1.0 billion for the same period last year. Factoring volume was $1.9 billion for both the first six months of 2003 and the same period during 2002. For the first half of 2003, factoring commissions and fees rose $.5 million, or 2.6%, to $20.1 million compared to the first half of 2002.

Professional employment organization, net revenues. Net revenues were $7.5 million for the second quarter of 2003, a 3.9% increase compared to the same period in 2002. For the first half of 2003, net revenues increased 9.6% to $13.9 million compared to the first half of 2002. The growth in net revenues is principally related to an improvement in the pricing structure for these services.

Bankcard transaction fees. These fees totaled $10.6 million for the current quarter, compared to $10.1 million for the same quarter last year. For the first half of 2003, bankcard transaction fees rose 12.2% to $20.3 million compared to the first half of 2002. These increases were due to an increase in debit card fees and transaction volume.

Available for sale securities gains. Securities gains for the second quarter were $46.4 million, up $43.6 million, compared to the same period last year. For the first half of 2003, these gains increased $53.3 million compared to the first half of 2002 to $65.3 million. From time-to-time, the Company may sell available for sale securities with gains to offset the impact of mortgage servicing rights impairment.

Financial services. This category of noninterest income is comprised of trust services fees and commissions, insurance commissions, annuity sales commissions and brokerage fee income. For the second quarter of 2003, these revenues were $20.0 million, a $1.8 million decrease from the second quarter of 2002. For the first half of 2003, these revenues were $37.7 million, a decrease of $3.5 million from the first half of 2002. The decreases were driven by a decline in the volume of insurance products and, to a lesser extent, a decrease in trust accounts and the average market value of assets under administration, and a decrease in the volume of trades generating brokerage fee income.

Other noninterest income. The components of other noninterest income are presented in Note 9 to the unaudited interim consolidated financial statements. Changes in other components include:

  • Revenues from merchant services were $9.1 million lower than the second quarter of 2002, principally due to the expiration of obligations related to the sale of this business causing the recognition of $8.9 million of income during the second quarter of last year. For the first half of 2003, these revenues were $8.5 million less than for the first half of 2002, principally due to the aforementioned expiration of obligations, which was slightly offset by increased revenues from a marketing and sales agreement with a third party.
  • Revenues associated with other real estate, principally gain on sale, were $.9 million for the second quarter of 2003, a decrease of $1.2 million compared to the same period last year. For the first half of 2003, these revenues were $2.2 million, a $2.6 million decrease from the first half of 2002. The decreases are attributable to a large gain on sale of other real estate recognized in 2002.

Noninterest Expense

Noninterest expense for the second quarter of 2003 was $282.2 million, which compares to $257.7 million for the second quarter of 2002. The Company's efficiency ratio, which excludes the amortization of mortgage servicing rights and all intangibles, for the second quarter of 2003 was 50.79%, compared to 49.78% for the second quarter of 2002. Noninterest expense for the first half of 2003 was $551.9 million, which compares to $519.2 million for the first half of 2002. The efficiency ratio for the first half of 2003 was 52.97%, compared to 50.05% for the first half of 2002.

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 $137.3 million for the second quarter of 2003, an increase of $8.4 million compared to the second quarter of 2002. For the first half of 2003, salaries and employee benefits were $274.2 million, an increase of $12.5 million from the first half of 2002. The increases are primarily due to commissions on increased mortgage origination volume slightly offset by a decrease in employees. At June 30, 2003, Union Planters had 10,985 full-time equivalent employees, compared to 11,313 at June 30, 2002.

Occupancy and equipment expense. Net occupancy and equipment expense was $46.3 million for the second quarter of 2003, a slight increase from the second quarter of 2002. For the first half of 2003, these expenses were $92.3 million, substantially unchanged from the $92.4 million for the first half of 2002.

Other intangibles amortization. These expenses were $5.2 million for the second quarter of 2003 and $10.5 million for the six months ended June 30, 2003, both of which represent slight decreases compared with the comparable prior year periods. Refer to Note 5 to the unaudited interim consolidated financial statements for more information.

Other noninterest expenses. The components of other noninterest expense are presented in Note 9 to the unaudited interim consolidated financial statements. Changes in other components include:

  • Miscellaneous charge-offs increased by $1.9 million and $4.5 million in the three- and six-month periods ended June 30, 2003, respectively, when compared to the same periods in 2002. These increases were primarily driven by an increase in charge-offs related to overdrawn deposit accounts.
  • Other contracted services increased $2.7 million for the second quarter of 2003 compared to the second quarter of 2002, and $4.7 million for the six-month period ended June 30, 2003 compared to the same period in 2002. These increases were the result of a fee to terminate a contract with the Company's former provider of its Internet banking tool in addition to expenses associated with the restructuring of certain wholly- and majority-owned subsidiaries.
  • Expense associated with the payment of compensating interest to mortgage loan investors in excess of the amount collected from borrowers when the loans are paid off increased $4.9 million and $7.9 million in the current quarter and first six months of 2003, respectively, when compared with the year-earlier periods. The overall increases were primarily due to high payoffs in the mortgage servicing portfolio.
  • Credit related expenses increased by $2.4 million and $3.2 million for the three- and six-month periods ended June 30, 2003, respectively, when compared to the same periods in 2002. The increases were largely the result of increased mortgage loan production.
  • Insurance expense increased $1.1 million during the second quarter of 2003 compared to the prior year period due to increased renewal costs associated with the Company's professional liability insurance. The increase in professional liability and casualty insurance resulted in a $2.1 million increase for the six months ended June 30, 2003 when compared with the same period in 2002. The Company anticipates the insurance expense will continue to rise for the remainder of the year. 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 Cautionary Statement Regarding Forward-Looking Information.
  • Dividends on preferred stock of consolidated subsidiaries increased $2.4 million for the three- and six-month periods ended June 30, 2003 when compared to the same periods in 2002. This was due to the sale of 1,000 shares of Series B preferred stock of UPPFC to unrelated third parties during March 2003.

Income Taxes

Applicable income taxes for the three months ended June 30, 2003 were $60.0 million, resulting in an effective tax rate of 31.00%, compared to $57.9 million and 30.94%, respectively, for the second quarter of 2002. Applicable income taxes for the six months ended June 30, 2003 were $68.8 million, resulting in an effective tax rate of 20.48%, compared to $115.0 million and 30.94%, respectively, for the six months ended June 30, 2002. During the first quarter of 2003, the Company recorded current federal tax benefits of $25.0 million related to the completion of a transaction designed to raise Tier 1 capital and $11.0 million related to a reversal of previously established tax liability, which was no longer needed. These two transactions drove the lower effective tax rate. For the remainder of 2003, the Company anticipates its effective tax rate will be between 30% and 32%. 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 Cautionary Statement Regarding Forward-Looking Information.

Business Segment Review

Union Planters is managed along traditional and nontraditional banking lines and has two reportable business segments, Banking and Mortgage Banking. For the second quarter of 2003 and 2002, Banking accounted for 83% and 82%, respectively, of total revenues (the sum of net interest income and noninterest income.) For the same periods, Mortgage Banking accounted for 8% and 10% of total revenues, respectively. Refer to Note 13 to the unaudited consolidated financial statements for additional information regarding Union Planters' segments.

Banking. The Banking segment consists of traditional deposit taking and lending functions, including consumer, commercial and corporate lending, as well as the origination of mortgage loans both to be retained in the loan portfolio and to be sold into the secondary market; retail banking; online banking and trade-finance activities.

Earnings before income taxes were $216.4 million for the second quarter of 2003, an increase of $45.8 million over the second quarter of 2002. This increase is primarily the result of noninterest income, which increased 60.6% or $63.7 million over the same period last year. The provision for losses on loans also decreased to $16.9 million in the second quarter of 2003, compared to $34.2 million in the second quarter of 2002, due to a decrease in the level of nonperforming loans. Offsetting these improvements were diminished net interest income and increased noninterest expense.

Noninterest income increased due primarily to increases in available for sale securities gains of $43.6 million; gains on sale into the secondary market of mortgage loans originated by bank branches of $27.7 million, including $22.7 million on sales of mortgage loans totaling $444.5 million from the loan portfolio; and service charges and bankcard transaction fees of $1.4 million. The increased security gains resulted from the Company's decision to sell available for sale securities with gains to offset the impact of impairment of mortgage servicing rights in the Mortgage Banking segment. The increased gains on sale of mortgage loans resulted from the historically low interest rate environment, while higher service charges and bankcard transaction fees resulted from UPExcel pricing initiatives and higher volume. Offsetting these increases was a decrease in merchant services income of $9.1 million, principally due to the expiration of obligations related to the sale of this business causing the recognition of $8.9 million of income during the second quarter of last year. Revenues associated with other real estate, principally gain on sale, were $.9 million for the second quarter of 2003, a decrease of $1.2 million compared to the same period last year. The decreases are attributable to a large gain on sale of other real estate recognized in 2002.

Continued pressure on the net interest margin from historically low interest rates caused net interest income to decrease $30.0 million for the second quarter of 2003 compared to the second quarter of 2002.

The increase in noninterest expense is attributable to increases in consulting fees surrounding credit improvement initiatives, insurance expense and several smaller categories, and was slightly offset by savings from fewer branch locations during the second quarter of 2003.

For the six months ended June 30, 2003, earnings before income taxes were $409.4 million, compared to $335.4 million for the six months ended June 30, 2002. This increase is primarily the result of noninterest income, which increased 53.0%, or $109.5 million, over the same period last year. The provision for losses on loans decreased to $48.3 million in 2003, compared to $70.7 million in 2002, due to a decrease in the level of nonperforming loans. Offsetting these improvements were diminished net interest income and increased noninterest expense.

Noninterest income increased due primarily to increases in available for sale securities gains of $53.3 million; gains on sale into the secondary market of mortgage loans originated by bank branches of $41.4 million, including $22.7 million on sales of mortgage loans totaling $444.5 million from the loan portfolio; and service charges and bankcard transaction fees of $8.5 million. Additionally, smaller increases were realized in a number of categories, including letter of credit fees and earnings of an equity-method investee. Offsetting these increases was a decrease in merchant services income of $8.5 million, principally due to the aforementioned expiration of obligations related to the sale of this business, and slightly offset by increased revenues from a marketing and sales agreement with a third party. For the first half of 2003, revenue associated with other real estate, principally gain on sale, decreased by $3.0 million compared to the same period last year. The decrease is attributable to a large gain on sale of other real estate recognized in 2002.

Continued pressure on the net interest margin from historically low interest rates caused net interest income to decrease $50.7 million for the first half of 2003 compared to the first half of 2002.

The increase in noninterest expense is attributable to increases in consulting fees surrounding credit improvement initiatives, insurance expense, miscellaneous charge-offs related to overdrawn deposit accounts, fees to terminate a contract with the Company's former provider of its Internet banking tool, advertising expense and several smaller categories, and was slightly offset by savings in stationery and supplies, taxes other than income and from fewer branch locations during the first half of 2003.

Mortgage Banking. Mortgage Banking includes the origination, sale and servicing of both fixed- and adjustable-rate single-family first mortgage loans. While certain mortgage loans are retained in the loan portfolio, mortgage loans originated in the Mortgage Banking segment are principally sold into the secondary market, with servicing rights typically retained by Union Planters.

During the second quarter of 2003, the Mortgage Banking segment generated a pre-tax loss of $8.1 million, compared to a pre-tax profit of $16.1 million for the second quarter of 2002. The decrease is primarily related to lower noninterest income, which was partially offset by increased net interest income.

Noninterest income decreased $20.9 million primarily due to $48.7 million in impairment of mortgage servicing rights during the second quarter of 2003, compared to $2.0 million in impairment recorded for the second quarter of 2002. Amortization expense related to mortgage servicing rights also increased to $18.3 million in the second quarter of 2003, compared to $10.3 million in the second quarter of 2002. Increasing noninterest income were gains on sales of mortgage loans, which totaled $28.2 million in the second quarter of 2003, compared to $6.8 million in the second quarter of 2002, and origination, servicing and miscellaneous fees, which totaled $39.3 million in the second quarter of 2003, compared to $26.7 million in the second quarter of 2002.

Net interest income increased due to the increased volume of loans held for resale.

Noninterest expense increased $17.7 million for the second quarter of 2003 compared to the second quarter of 2002, primarily due to credit related costs associated with record mortgage loan origination during the quarter and expense associated with the payment of compensating interest to mortgage loan investors in excess of the amount collected from borrowers when the loans are paid off.

For the six months ended June 30, 2003, the Mortgage Banking segment generated a pre-tax loss of $36.1 million, compared to a pre-tax profit of $39.1 million for the six months ended June 30, 2002. The decrease is primarily related to lower noninterest income and higher noninterest expense and was partially offset by increased net interest income.

Noninterest income decreased $74.3 million primarily due to $120.2 million in impairment of mortgage servicing rights during 2003, compared to a recovery of impairment of $3.3 million in 2002. Amortization expense related to mortgage servicing rights also increased to $28.6 million in 2003, compared to $19.9 million in 2002. Increasing noninterest income were gains on sales of mortgage loans, which totaled $54.5 million in 2003, compared to $15.6 million in 2002, and origination, servicing and miscellaneous fees, which totaled $72.8 million in 2003, compared to $53.1 million in 2002.

Net interest income increased due to the increased volume of loans held for resale.

Noninterest expense increased $22.7 million in 2003 compared to 2002, primarily due to credit related costs associated with record mortgage loan origination during the quarter and expense associated with the payment of compensating interest to mortgage loan investors in excess of the amount collected from borrowers when the loans are paid off.

.

UNION PLANTERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES

                          Three Months Ended June 30,                     

                  2003                

                  2002                

Average
 Balance 

Interest
Income/
 Expense 

FTE
Yield/
  Rate  

Average
 Balance 

Interest
Income/
 Expense 

FTE
Yield/
  Rate  

(Dollars in thousands)

ASSETS

 

Interest-bearing deposits at financial institutions 

$      141,852 

$         482

1.36

%

$       91,947 

$        397

1.73

%

Federal funds sold and securities purchased under
  agreements to resell 

75,070 

235

1.26

77,553 

351

1.82

Trading account assets 

269,875 

2,470

3.67

243,785 

2,343

3.85

Loans held for resale

     2,309,271 

      30,122

5.23

    1,063,694 

     17,040

6.43

Available for sale securities (1), (2)

  Taxable securities 

5,298,855 

53,236

4.03

4,014,309 

61,360

6.13

  Tax-exempt securities 

        662,958 

      12,641

7.65

     788,324 

     15,513

7.89

  Total available for sale securities

5,961,813 

65,877

4.43

4,802,633 

76,873

6.42

Commercial, financial and agricultural loans

5,199,073 

60,556

4.67

5,198,935 

68,470

5.28

Foreign loans

213,098 

1,383

2.60

324,023 

3,007

3.72

Accounts receivable - factoring

674,143 

13,002

7.74

685,991 

13,628

7.97

Real estate - construction loans

2,353,743 

31,408

5.35

2,235,609 

34,308

6.16

Real estate - mortgage loans

   Secured by 1-4 family residential

4,150,148 

74,919

7.24

5,065,988 

99,967

7.91

   Non-farm, non-residential properties

5,060,587 

76,729

6.08

4,889,592 

83,078

6.81

   Multifamily (5 or more) residential

816,821 

12,244

6.01

832,666 

14,245

6.86

   Secured by farmland

487,407 

7,474

6.15

474,957 

8,147

6.88

   Home equity

1,746,967 

20,146

4.63

1,122,395 

14,993

5.36

Consumer loans

1,865,629 

36,425

7.83

2,185,485 

45,988

8.44

Direct lease financing

          63,380 

          993

6.29

          95,511 

       1,550

6.51

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

   22,630,996 

   335,279

5.94

   23,111,152 

   387,381

6.72

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

31,388,877 

434,465

5.55

29,390,764 

   484,385

6.61

Cash and due from banks 

727,056 

708,327 

Premises and equipment, net 

529,654 

552,848 

Allowance for losses on loans 

(343,115)

(343,656)

Goodwill and other intangibles, net 

866,133 

917,723 

Other assets 

     1,114,315 

        996,132 

  Total assets

$ 34,282,920 

$ 32,222,138 

LIABILITIES AND SHAREHOLDERS' EQUITY

Money market accounts 

$   6,874,641 

22,966

1.34

$   5,796,259 

23,215

1.61

Interest-bearing checking 

3,437,818 

4,395

0.51

3,392,033 

8,800

1.04

Savings deposits 

1,443,070 

1,326

0.37

1,398,395 

3,668

1.05

Time deposits of $100,000 and over 

1,642,979 

12,250

2.99

1,673,541 

15,024

3.60

Other time deposits 

     6,143,751 

     43,135

2.82

     6,924,934 

     61,787

3.58

  Total interest-bearing deposits 

   19,542,259 

     84,072

1.73

   19,185,162 

   112,494

2.35

Short-term borrowings

     Federal funds purchased and securities sold under 
       agreements to repurchase 

2,314,378 

5,872

1.02


2,033,491 


7,465

1.47

  Other 

        785,466 

       2,394

1.22

          35,302 

          167

1.90

  Total short-term debt 

     3,099,844 

       8,266

1.07

     2,068,793 

       7,632

1.48

Long-term debt

  Federal Home Loan Bank advances 

822,142 

6,433

3.14

1,323,910 

13,415

4.06

  Subordinated capital notes 

982,114 

14,445

5.90

974,041 

17,556

7.23

  Medium-term senior notes 

606,547 

5,427

3.59

158,242 

2,143

5.43

  Trust Preferred Securities 

213,454 

1,999

3.76

199,129 

4,128

8.31

  Other 

           5,971 

          328

22.03

          99,205 

       1,133

4.58

  Total long-term debt 

     2,630,228 

     28,632

4.37

     2,754,527 

     38,375

5.59

  Total interest-bearing liabilities 

25,272,331 

120,970

1.92

24,008,482 

158,501

2.65

Noninterest-bearing demand deposits 

     5,034,142 

              - 

     4,336,433 

              - 

  Total sources of funds 

   30,306,473 

   120,970

   28,344,915 

   158,501

Other liabilities 

720,428 

683,033 

Shareholders' equity

  Preferred stock 

10,060 

13,278 

  Common equity 

     3,245,959 

     3,180,912 

  Total shareholders' equity 

     3,256,019 

     3,194,190 

  Total liabilities and shareholders' equity 

$ 34,282,920 

$ 32,222,138 

Net interest income (1) 

$ 313,495

$ 325,884

Net interest rate spread (1) 

3.63

%

3.96

%

Net interest margin (1) 

4.01

%

4.45

%

 

Taxable-equivalent adjustments

          Loans 

$    1,113

$    1,229

          Available for sale securities 

      4,302

      5,392

                 Total 

$    5,415

$    6,621

(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
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES

                          Six Months Ended June 30,                     

                  2003                

                  2002                

Average
 Balance 

Interest
Income/
 Expense 

FTE
Yield/
  Rate  

Average
 Balance 

Interest
Income/
 Expense 

FTE
Yield/
  Rate  

(Dollars in thousands)

ASSETS

 

Interest-bearing deposits at financial institutions 

$      164,258 

$         934

1.15

%

$       76,155 

$        973

2.58

%

Federal funds sold and securities purchased under
  agreements to resell 

62,525 

390

1.26

120,408 

1,049

1.76

Trading account assets 

260,109 

4,758

3.69

236,485 

4,621

3.94

Loans held for resale

     2,170,513 

      58,131

5.40

    1,239,520 

     39,566

6.44

Available for sale securities (1), (2)

  Taxable securities 

4,849,059 

104,993

4.37

3,776,583 

116,401

6.22

  Tax-exempt securities 

        676,418 

       25,747

7.68

       900,383 

     35,579

7.97

  Total available for sale securities

5,525,477 

130,740

4.77

4,676,966 

151,980

6.55

Commercial, financial and agricultural loans

5,189,943 

121,549

4.72

5,128,998 

139,244

5.47

Foreign loans

211,248 

2,746

2.62

332,509 

6,483

3.93

Accounts receivable - factoring

676,964 

25,877

7.71

655,499 

25,957

7.99

Real estate - construction loans

2,312,080 

61,489

5.36

2,217,650 

68,808

6.26

Real estate - mortgage loans

   Secured by 1-4 family residential

4,267,485 

156,180

7.38

5,150,586 

204,550

8.01

   Non-farm, non-residential properties

5,060,367 

154,476

6.16

4,866,785 

168,364

6.98

   Multifamily (5 or more) residential

825,594 

25,124

6.14

836,901 

27,650

6.66

   Secured by farmland

487,095 

15,224

6.30

470,418 

16,098

6.90

   Home equity

1,674,097 

38,597

4.65

1,051,906 

28,184

5.40

Consumer loans

1,910,223 

75,260

7.95

2,228,877 

93,787

8.49

Direct lease financing

          66,540 

        2,107

6.39

          98,884 

       3,200

6.52

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

   22,681,636 

    678,629

6.03

   23,039,013 

   782,325

6.85

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

30,864,518 

873,582

5.71

29,388,547 

   980,514

6.73

Cash and due from banks 

696,099 

793,382 

Premises and equipment, net 

534,519 

554,558 

Allowance for losses on loans 

(336,487)

(342,593)

Goodwill and other intangibles, net 

868,074 

920,729 

Other assets 

     1,133,639 

     1,009,225 

  Total assets

$ 33,760,362 

$ 32,323,848 

LIABILITIES AND SHAREHOLDERS' EQUITY

Money market accounts 

$   6,301,661 

38,641

1.24

$   5,793,496 

49,549

1.72

Interest-bearing checking 

3,449,889 

9,124

0.53

3,365,422 

17,911

1.07

Savings deposits 

1,426,092 

3,081

0.44

1,373,507 

7,554

1.11

Time deposits of $100,000 and over 

1,643,000 

25,018

3.07

1,700,403 

28,952

3.43

Other time deposits 

     6,243,912 

       88,620

2.86

     6,958,743 

   130,177

3.77

  Total interest-bearing deposits 

   19,064,554 

     164,484

1.74

   19,191,571 

   234,143

2.46

Short-term borrowings

     Federal funds purchased and securities sold under 
       agreements to repurchase 

2,430,215 

12,730

1.06


2,047,800 


14,996

1.48

  Other 

        784,806 

         4,808

1.24

          61,504 

          539

1.77

  Total short-term debt 

     3,215,021 

       17,538

1.10

     2,109,304 

     15,535

1.49

Long-term debt

  Federal Home Loan Bank advances 

890,619 

13,297

3.01

1,392,106 

28,837

4.18

  Subordinated capital notes 

978,592 

31,021

6.39

974,039 

35,112

7.27

  Medium-term senior notes 

603,278 

12,271

4.10

79,558 

2,143

5.43

  Trust Preferred Securities 

211,594 

3,818

3.64

199,124 

8,255

8.36

  Other 

          17,696 

          838

9.55

        100,203 

       2,305

4.64

  Total long-term debt 

     2,701,779 

     61,245

4.57

     2,745,030 

     76,652

5.63

  Total interest-bearing liabilities 

24,981,354 

243,267

1.96

24,045,905 

326,330

2.74

Noninterest-bearing demand deposits 

     4,854,504 

              - 

     4,376,654 

              - 

  Total sources of funds 

   29,835,858 

   243,267

   28,422,559 

   326,330

Other liabilities 

706,214 

694,585 

Shareholders' equity

  Preferred stock 

10,108 

13,812 

  Common equity 

     3,208,182 

     3,192,892 

  Total shareholders' equity 

     3,218,290 

     3,206,704 

  Total liabilities and shareholders' equity 

$ 33,760,362 

$ 32,323,848 

Net interest income (1) 

$ 630,315

$ 654,184

Net interest rate spread (1) 

3.75

%

3.99

%

Net interest margin (1) 

4.12

%

4.49

%

 

Taxable-equivalent adjustments

          Loans 

$     2,154

$    2,513

          Available for sale securities 

       8,775

    12,313

                 Total 

$   10,929

$  14,826

(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.

   

 

FINANCIAL CONDITION

Union Planters' total assets were $35.0 billion at June 30, 2003, compared to $34.1 billion at December 31, 2002 and $32.4 billion at June 30, 2002. Average assets were $34.3 billion for the second quarter of 2003, compared to $32.2 billion for the second quarter of 2002.

Earning assets at June 30, 2003 were $32.0 billion, compared to $31.1 billion at December 31, 2002 and $29.6 billion at June 30, 2002. Average earning assets were $31.4 billion for the second quarter of 2003, compared to $29.4 billion for the same period last year and $30.3 billion for the fourth quarter of 2002.

Loans held for resale were $2.6 billion at June 30, 2003, compared to $2.4 billion at December 31, 2002 and $1.1 billion at June 30, 2002.

Available for Sale Securities

Union Planters' available for securities portfolio of $6.6 billion at June 30, 2003 is carried on the balance sheet at fair value. This compares to available for sale securities of $5.5 billion and $4.9 billion at December 31, 2002 and June 30, 2002, respectively. Average available for sale securities were $6.0 billion for the second quarter of 2003, compared with $4.6 billion and $4.8 billion for the fourth and second quarters of 2002, respectively. The purchase and sale transactions in the portfolio were designed to adjust the Company's interest rate risk profile. Additionally, from time-to-time, the Company may sell available for sale securities with gains to offset the impact of mortgage servicing rights impairment. Gains of $65.3 million during the first half of 2003 were recognized on sales of $3.1 billion of available for sale securities.

At June 30, 2003, Union Planters' available for sale securities had net unrealized gains of $96.4 million (before income taxes), which compares to net unrealized gains of $106.2 million at December 31, 2002. Refer to Note 2 to the unaudited consolidated financial statements for the composition of the available for sale portfolio at June 30, 2003 and December 31, 2002.

U.S. Treasury and U.S. Government agency obligations represented approximately 72% of the available for sale securities portfolio at June 30, 2003, 54% of which were government collateralized mortgage obligations (CMOs) and mortgage-backed securities issues. Union Planters has some credit risk in the available for sale securities portfolio; however, management does not consider that risk to be significant and does not believe cash flows will be significantly impacted. At June 30, 2003, the limited credit risk in the available for sale portfolio consisted of 10% Private Label CMOs, 88% of which are rated A or greater, 11% municipal obligations, 90% of which were rated A or better, and 7% other stocks and securities, primarily Federal Reserve Bank and FHLB stock. Refer to the Net Interest Income and Market Risk and Asset/Liability Management discussions for information regarding the market risk in the available for sale securities portfolio.

Loans

Loans, net of unearned income, at June 30, 2003 were $22.3 billion, compared to $22.8 billion and $23.3 billion at December 31, 2002 and June 30, 2002, respectively. Decreases due to refinancing of residential mortgage loans, the sale of $444.5 million in mortgage loans and planned run-off of indirect consumer loans and brokered home equity loans were partly offset by increases in home equity lines of credit and real estate construction loans.

Allowance for Losses on Loans

The allowance for losses on loans (the Allowance) at June 30, 2003 was $344.8 million, compared to $350.9 million at December 31, 2002 and $353.6 million at June 30, 2002. The decrease in the Allowance from December 31, 2002 related to net charge-offs exceeding provision for losses on loans. Annualized net charge-offs as a percentage of average loans were .92% for the second quarter of 2003, an increase from .74% in the second quarter of 2002. Union Planters' loan portfolio has no significant concentration in terms of industry, geography, product type or size of individual borrowing relationship. As detailed in the following tables, the Allowance as a percentage of nonperforming loans improved to 146% at June 30, 2003, up from 133% at December 31, 2002, due primarily to a $29.1 million decrease in nonperforming loans. Over the remainder of 2003, management expects that the level of nonperforming loans will continue to gradually improve assuming the economy begins to recover. This does not necessarily mean that nonperforming loans are expected to decrease from each quarter to the next. Management does not believe there will be any significant change in the level of net charge-offs over the next several quarters. While the timing of the 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. These are forward-looking statements, and actual results could differ because of several factors, including those identified in this discussion and in the discussion of Cautionary Statement 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 determining 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 six-month periods ended June 30, 2003 and 2002 and for the year ended December 31, 2002:

Six Months Ended

Year Ended

        June 30,      

December 31,

   2003   

   2002   

   2002 

(Dollars in thousands)

Beginning balance

$     350,931 

$     341,930 

$     341,930 

Loans charged off

Commercial, financial and agricultural

(34,745)

(37,753)

(92,584)

Foreign

(2,179)

(7,695)

Accounts receivable - factoring

(27,380)

(5,156)

(16,182)

Real estate - construction

(5,220)

(2,175)

(3,785)

Real estate - mortgage 

  Secured by 1-4 family residential

(18,220)

(21,257)

(38,970)

  Non-farm, nonresidential properties

(5,869)

(3,746)

(13,994)

  Multifamily (5 or more) residential

(2,058)

(1,866)

(3,459)

  Secured by farmland

(608)

(156)

(1,033)

Home equity

(2,616)

(1,735)

(3,009)

Consumer

(21,832)

(22,303)

(44,583)

Direct lease financing

              (476)

                (67)

              (102)

    Total charge-offs

       (121,203)

        (96,214)

       (225,396)

Recoveries on loans previously charged off

Commercial, financial and agricultural

4,098 

3,918 

9,954 

Foreign

2,408 

122 

249 

Accounts receivable - factoring

1,112 

587 

1,345 

Real estate - construction

394 

299 

575 

Real estate - mortgage

  Secured by 1-4 family residential

540 

2,104 

3,625 

  Non-farm, nonresidential properties

2,927 

350 

1,352 

  Multifamily (5 or more) residential

60 

71 

147 

  Secured by farmland

95 

56 

141 

Home equity

232 

194 

423 

Consumer

8,507 

10,241 

18,645 

Direct lease financing

                    6 

                   7 

                 40 

    Total recoveries

           20,379 

            17,949 

          36,496 

Net charge-offs

(100,824)

(78,265)

(188,900)

Provision charged to expense

          94,649 

         89,901 

        197,901 

Balance at end of period

$      344,756 

$       353,566

$      350,931 

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

$ 22,325,582 

$ 23,289,521 

$ 22,774,732 

Average total loans, net of unearned income, during period

$ 22,681,636 

$  23,039,013 

$ 23,114,646 

Credit Quality Ratios 

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

1.54%

1.52%

1.54%

  Net charge-offs/average loans, net of unearned income (1)

.90   

.68   

.82   

  Provision for losses on loans/average loans, net of unearned income (1)

.84   

.79   

.86   

____________________

(1) Amounts annualized for the six-month periods ended June 30, 2003 and 2002.

The increase in charge-offs of accounts receivable - factoring over prior last year is primarily related to:

  • Receivables Union Planters purchased from multiple factoring clients that are due from one customer that the factoring clients have in common, a multi-national retailer of consumer goods that has recently emerged from bankruptcy proceedings. Union Planters established a specific reserve for this customer during 2002.
  • Receivables from a diamond merchant.

Nonperforming Assets

Nonaccrual, Restructured and Past Due Loans and Foreclosed Properties

 

      June 30,      

 

December 31,

 

   2003   

 

   2002   

 

   2002   

 

(Dollars in thousands)

Nonaccrual loans

$ 235,065 

$ 271,164 

$ 264,099 

Restructured loans

          446 

 

          562 

 

          511 

     Total nonperforming loans

 235,511 

 

 271,726 

 

 264,610 

           

Foreclosed properties

         

  Other real estate owned, net

   69,466 

 

   72,287 

 

  78,339 

  Other foreclosed property

        1,479 

 

          794 

 

         797 

          Total foreclosed properties

      70,945 

 

     73,081 

 

    79,136 

           

          Total nonperforming assets

$ 306,456 

 

$ 344,807 

 

$ 343,746 

           

Loans past due 90 days or more and still accruing interest

$ 265,606 

 

$ 236,733 

 

$ 258,183 

Less: FHA/VA government-insured/guaranteed loans past due 90 days or more and
             still accruing interest


   (60,040
)

 


   (35,086
)

 


   (62,836
)

Loans past due 90 days or more and still accruing interest, net of FHA/VA
   government-insured/guaranteed loans


$ 205,566
 

 


$ 201,647
 

 


$ 195,347
 

           

Ratios

         

  Nonperforming loans/loans, net of unearned income

1.05%

 

1.17%

 

1.16%

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

1.37   

 

1.48   

 

1.50   

  Allowance for losses on loans/nonperforming loans

146   

 

130   

 

133   

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

1.19   

 

1.02   

 

1.13   

Excluding FHA/VA government-insured/guaranteed loans:(1)

         

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

.93   

 

.87   

 

.87   

           

(1) Ratio calculation excludes FHA/VA government-insured/guaranteed loans, which represent minimal credit risk to Union Planters.

The breakdown of nonaccrual loans and loans past due 90 days or more and still accruing interest is as follows:

     Nonaccrual Loans      

    Loans Past Due 90 Days or More     

       June 30,       

December 31,

       June 30,       

December 31,

   2003   

   2002   

   2002   

   2003   

   2002   

   2002   

(Dollars in thousands)

Loan Type

  Commercial, financial and agricultural

$  123,989

$ 117,941

$ 105,707

$   25,688

$   22,680

$   24,357

  Foreign

167

30

2,933

712

-

-

  Real estate - construction

25,153

22,976

36,960

4,436

11,201

2,395

  Real estate - mortgage

     Secured by 1-4 family residential, excluding        FHA/VA government-insured/guaranteed

21,408

40,758

37,594

144,240

142,181

147,062

     FHA/VA government-insured/guaranteed

529

1,668

1,490

60,040

35,086

62,836

     Non-farm, nonresidential properties

46,193

64,268

61,249

7,607

9,968

8,215

     Multifamily (5 or more) residential

9,514

14,688

9,962

7,566

8,288

4,254

     Secured by farmland

5,465

4,483

4,025

3,435

1,220

1,565

  Home equity

1,962

2,864

2,940

5,508

1,594

3,333

  Consumer

685

1,450

1,239

5,319

4,272

4,025

  Direct lease financing

               -

            38

               -

       1,055

          243

           141

          Total

$ 235,065

$ 271,164

$ 264,099

$ 265,606

$ 236,733

$ 258,183

Nonperforming assets and past due loans. Nonperforming assets decreased $37.3 million compared to the fourth quarter of 2002. Decreases in nonaccrual loans and foreclosed properties drove nonperforming assets to its lowest level since December 2001. Management anticipates further reductions in nonperforming assets this year, subject to favorable economic and business conditions. These are forward-looking statements, and actual results could differ because of several factors, including those mentioned in the Cautionary Statement Regarding Forward-Looking Information at the beginning of this discussion.

Loans past due 90 days or more and still accruing interest increased $7.4 million, to 1.19% of loans, at June 30, 2003 compared to 1.13% at December 31, 2002 and 1.02% at June 30, 2002, respectively. The preceding table details the composition of these loans.

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 June 30, 2003, Union Planters had potential problem assets (all loans) aggregating $29.9 million, comprised of six loans, the largest of which was $17.5 million. This compares to potential problem assets (all loans) aggregating $42.8 million, comprised of eight loans at December 31, 2002. The June 30, 2003 data is based on information available as of that date. The receipt of information subsequent to this date could result in changes in the actual amounts and numbers of problem assets. These are forward-looking statements, and actual results could differ because of several factors, including those identified in this discussion and in the discussion of Cautionary Statement Regarding Forward-Looking Information.

Deposits

Union Planters' deposit base is its primary source of liquidity and consists of deposits from the communities served in Union Planters' twelve-state market area. The composition of average deposits was as follows:

    Average Deposits     

      Three Months Ended    

Six Months Ended

     June 30,     

March 31,

     June 30,     

   2003   

   2002   

   2003   

   2003   

   2002   

(Dollars in thousands)

Noninterest-bearing deposits

$   5,034,142

$   4,336,433

$   4,672,871

$   4,854,504

$  4,376,654

Money  market deposits

6,874,641

5,796,259

5,722,316

6,301,661

5,793,496

Interest-bearing checking

3,437,818

3,392,033

3,462,093

3,449,889

3,365,422

Savings deposits

    1,443,070

    1,398,395

    1,408,927

     1,426,092

    1,373,507

  Total transaction and saving accounts

  16,789,671

  14,923,120

  15,266,207

   16,032,146

  14,909,079

Other time deposits

6,143,751

6,924,934

6,345,182

     6,243,912

   6,958,743

Time deposits of $100,000 and over

    1,642,979

    1,673,541

    1,643,022

     1,643,000

     1,700,403

  Total time deposits

     7,786,730

    8,598,475

    7,988,204

     7,886,912

     8,659,146

            Total average deposits

$ 24,576,401

$ 23,521,595

$ 23,254,411

$ 23,919,058

$ 23,568,225

Average deposits increased $1.32 billion for the second quarter of 2003, compared to the first quarter of 2003, and $1.05 billion, compared to the second quarter of 2002. This growth is primarily attributable to the initiation, during the second quarter of 2003, of sales and product promotions designed to increase transaction and money market savings account balances. The six months increases in average transaction and savings accounts were partly offset by the elimination of higher cost time deposits.

Borrowings

Total borrowings at June 30, 2003 were $5.3 billion, compared to $6.4 billion at December 31, 2002 and $5.3 billion at June 30, 2002. The decrease from December 31, 2002 is primarily related to the increase in funding available from deposits. The Consolidated Average Balance Sheet and Interest Rates and Note 6 to the unaudited consolidated financial statements provide additional information regarding Union Planters' borrowings.

Shareholders' Equity

Union Planters' total shareholders' equity increased $55.9 million from December 31, 2002 to $3.3 billion at June 30, 2003. The major items affecting shareholders' equity are as follows:

  • $ 134.4 million increase due to retained net earnings (net earnings less dividends paid)
  • $ 15.2 million increase due to common stock issued for employee benefit plans
  • $ 87.1 million decrease due to the repurchase of common stock
  • $ 6.6 million decrease due to the net change in the unrealized gain or loss on available for sale investment securities

During the second quarter of 2003, Union Planters repurchased and retired 3.0 million shares of common stock under prior authorizations by the Union Planters Board of Directors to repurchase up to 25.7 million shares. From July 1, 2003 through August 11, 2003, Union Planters purchased and retired 1.5 million shares of common stock under the aforementioned authorizations.

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 Union Planters Bank, National Association for the "well-capitalized" regulatory classification.

Union Planters Corporation

Risk-Based Capital

 

     June 30,     

December 31,

 

   2003   

   2002   

   2002   

 

(Dollars in millions)

Tier 1 capital

$  2,580

 

$  2,436

 

$  2,409

 

Total risk-based capital

3,753

 

3,614

 

3,560

 

Risk-weighted assets

26,315

 

24,977

 

25,624

 

Ratios

           

  Leverage (1)

7.75%

 

7.80%

 

7.47%

 

  Tier 1 risk-based capital

9.80   

 

9.75   

 

9.40   

 

  Total risk-based capital

14.26   

 

14.47   

 

13.89   

 

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

9.38   

 

10.03   

 

9.45   

 

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

As more fully discussed in Note 8 to the unaudited consolidated financial statements, during the first quarter of 2003, preferred stock of Union Planters Preferred Funding Corporation was sold to non-affiliated third parties resulting in an increase in Tier 1 capital of approximately $87 million.

Union Planters Bank, National Association

Risk-Based Capital

 

    June 30,

December 31,

 

   2003   

   2002   

   2002   

 

(Dollars in millions)

Tier 1 capital

$    2,458

 

$   2,448

 

$   2,310

 

Total capital

3,069

 

3,048

 

2,919

 

Risk-weighted assets

25,738

 

24,755

 

25,447

 

Ratios

           

  Leverage (1)

7.34%

 

7.93%

 

7.25%

 

  Tier 1 risk-based capital

9.56   

 

9.89   

 

9.08   

 

  Total risk-based capital

11.94   

 

12.31   

 

11.47   

 

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

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.

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.

At July 1, 2003, the parent company could have received dividends from subsidiaries of $137.0 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 59% of Union Planters' revenues for the three months ended June 30, 2003. 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

The Company's primary market risk is interest rate risk, which is the risk that earnings and shareholder value will be reduced by adverse changes in the interest rate environment. Effectively managing interest rate risk is an integral factor in maximizing the long-term earnings capacity and value of the Company. Responsibility for managing interest rate risk within the limits established by the Company's Board of Directors rests with the Asset/Liability Management Committee (ALCO), which is comprised of the Chief Executive Officer, Chief Financial Officer, members of the executive management committee and senior financial executives. To accomplish that objective, the ALCO monitors appropriate policies, reviews and approves balance sheet management strategies, and ensures compliance with interest rate risk policy limits. Refer to the Available for Sale Securities and Loans discussions for additional information regarding the risks related to these items.

 

The ALCO employs simulation analysis as the primary tool for quantifying interest rate risk. Simulation analysis utilizes cash flow, maturity and repricing information from the Company's existing balance sheet and combines that with assumptions about future market environments with respect to rates, spread and volatilities, expected customer behavior and management pricing actions. Key assumptions that drive simulation results include the following:

  • Prepayment speeds on mortgage-related assets and fixed-rate loans
  • Cash flows and repricings of all financial instruments
  • Changes in loan and deposit volumes and pricing
  • Future shapes of the yield curve
  • Relationship of market interest rates to each other (basis risk)
  • Credit spreads
  • Deposit rate sensitivity
  • Management's financial plan

These assumptions are inherently uncertain, and, as a result, simulations cannot precisely predict net interest income nor the exact 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.

Simulations are prepared using a variety of potential interest rate environments to estimate the Company's earnings sensitivity to changing interest rates. These potential interest rate environments include interest rate shocks, gradual rate changes and changes in the shape of the yield curve. As previously mentioned, the Company's Board of Directors has established policies that limit the allowable earnings exposure to changing interest rates. The Board's policy is based on a standard set of interest rate scenarios including those listed below:

Interest rate

12 months

shock scenario

% change from stable

+200

-10.0%

+100

-7.5%

-100

-7.5%

-200

-10.0%

  • Stable rates (base) - current market interest rates remain unchanged.
  • Shocks of +100 and +200 basis points where market interest rates receive an immediate, parallel and sustained increase along the stable rate curve, and administered interest rates are adjusted based on management's assumptions.
  • Shocks of -200 and -100 basis points where market interest rates receive an immediate, parallel and sustained decrease along the stable rate curve, and administered interest rates are adjusted based on management's assumptions.

As of June 30, 2003, simulation analysis indicated that the Company's earnings would tend to decrease under scenarios of dramatically lower rates as compared to scenarios of stable rates. The following table depicts how sensitive Union Planters' earnings are to immediate parallel shifts in rates.

June 30, 2003

  March 31, 2003

  December 31, 2002

(Dollars in millions)

Immediate 200 basis point rise in rates+200 basis point rate shock

$   14.4 

$   21.8 

$   32.4 

Immediate 100 basis point rise in rates+100 basis point rate shock

6.3 

12.8 

18.3 

Immediate 100 basis point decline in rates-100 basis point rate shock

(26.7)

(13.7)

(17.9)

Given the current level of short-term market interest rates, a 200 basis point decline in rates is not possible without allowing rates to drop below 0%. Therefore, management does not consider a -200 basis point rate shock scenario meaningful.

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' management has evaluated, with the participation of Union Planters' Chief Executive Officer and Chief Financial Officer, the effectiveness of these disclosure controls and procedures as of the end of the period covered by 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 was no changes in Union Planters' internal control over financial reporting identified in connection with that evaluation that occurred during the quarter ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, Union Planters' internal controls over financial reporting.

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 Note 20 to Union Planters' consolidated financial statements, in the Proxy and Annual Financial Disclosures, and Item 3, Part I of Union Planters' Form 10-K for the year ended December 31, 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 Union Planters' financial position, results of operations nor liquidity will be materially adversely affected by the ultimate resolution of pending or threatened legal proceedings. There were no material developments during the second quarter of 2003 in any of the pending or threatened actions that affected such opinion.

Item 2 - Changes in Securities and Use of Proceeds

None

Item 3 - Defaults Upon Senior Securities

None

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

Union Planters Corporation Annual Meeting

The Company's Annual Meeting of Shareholders was held on April 17, 2003. Matters submitted to, and approved by, shareholders are listed below, as is a tabulation of voting. There were no broker nonvotes as all proposals were deemed to be discretionary.

(1) The following persons nominated as Directors were elected:

For

Withhold Authority

Class I

   James E. Harwood

160,171,156

8,514,359

   Lou Ann Poynter

165,525,797

3,159,718

   Michael S. Starnes

161,457,889

7,227,626

   Richard A. Trippeer, Jr.

165,530,946

3,154,369

Directors continuing in office are as follows: Albert M. Austin, Samuel W. Bartholomew, Jr.; George W. Bryan; Parnell S. Lewis, Jr.; Jackson W. Moore; Jorge M. Perez; John R. Roberts; Robert R. Waller, M.D.; and Spence L. Wilson.

(2) The selection by the Board of Directors of PricewaterhouseCoopers LLP as the Company's independent auditors for the year ending December 31, 2003 was ratified by the following vote:

For

Against

Abstain

157,757,588

9,430,573

1,497,354

 

Item 5 - Other Information

On June 30, 2003, Union Planters reached a tentative agreement with another financial institution whereby Magna Insurance, Inc. (Magna), an indirect wholly-owned insurance subsidiary of Union Planters would be sold to the other financial institution. At June 30, 2003, Magna had total assets of $30.4 million and total stockholder's equity of $19.7 million. The transaction is subject to the approval of the Mississippi state insurance commissioner and is not expected to close any earlier than September 2003. Union Planters does not expect to recognize a significant gain or loss as a result of this transaction.

Item 6 - Exhibits and Reports on Form 8-K

Exhibits:

31

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Additional exhibits furnished with this report:

32(a)

 

906 Certification of Chief Executive Officer

32(b)

 

906 Certification of Chief Financial Officer

Reports on Form 8-K:

 

Date of Current Report

              Subject                

1.

April 17, 2003

Press release announcing first quarter 2003 earnings, furnished under Item 12, and supplemental financial information reported under Item 5.

2.

April 24, 2003

Slides and transcript from the annual shareholders meeting, furnished under Item 12.

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:  August 13, 2003

 

By:  /s/ Jackson W. Moore                          

   

Jackson W. Moore, Chairman,

   

President and Chief Executive Officer

     

Date:  August 13, 2003

 

By:  /s/ Bobby L. Doxey                             

   

Bobby L. Doxey,

   

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

 

Exhibit Index

Exhibit 
 number 

 


                      Description                     

31

 

Section 302 Certifications of Chief Executive Officer and Chief Financial Officer

32(a)

 

Section 906 Certification of Chief Executive Officer

32(b)

 

Section 906 Certification of Chief Financial Officer

     

 

EXHIBIT-31

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-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 13, 2003

 

 /s/ Jackson W. Moore                                 

Jackson W. Moore,

Chairman, President and Chief Executive Officer

EXHIBIT-31

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-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 13, 2003

 /s/ Bobby L. Doxey                                                              

Bobby L. Doxey,

Senior Executive Vice President, Chief Financial Officer and

Chief Accounting Officer