As many banks cut back on their derivatives activities in the wake of large trading losses and the threat of customer lawsuits, Fast Union Corp, is one of the few that are actively expanding their business.
The Charlotte, N .C .-based bank, which has been using derivatives for its own risk management for about seven years, began selling the hedging instruments to its coustomers less than two years ago.
The $72.6 billionasset bank offers its derivatives products primarily to small and middle-market companies in the Southeast and Middle Atlantic states. It also sells to some of the smaller banks in the region.
"The business is thriving," said Steve Kohlhagen, co-managing director of First Union's derivatives group, with Terry Turner. "We're gearing up."
Mr. Kohlhagen said the bank, which used to offer just interest rate products, is now adding currency, commodity, and tax-exempt interest rate products to its arsenal. To help handle all the new products, First Union has expanded its sales staff to 28 people.
Derivatives are often volatile financial instruments whose value is tied to currencies, interest rates, and other benchmarks.
Mr. Kohlhagen said that unlike some of the Fortune 500 companies that use derivatives, First Union's customers are not interested in the more exotic derivative products. They simply want instruments they can use as a hedge.
"They have financial risks that up till now they couldn't hedge," Mr. Kohlhagen explained. "They are not looking for an edge. There is no demand for speculation. It's all for hedging."
He said that while his people have done some complex deals for customers, First Union is not known as -- and does not care to be known as a home for exotic derivatives.
Mr. Kohlhagen pointed out that First Union's customers increasingly demand a means to hedge the risk of dealing in foreign currencies---mostly European, Japanese, and Canadian.
This, he said, is the result of a weaker dollar overseas and a corresponding pickup in overseas business by U.S.-based companies, which now have to insulate themselves from the fluctuations in the value of foreign currencies as their businesses grow.
One reason the bank offers plain-vanilla instruments, he said, is that less can go wrong with the simple transactions.
"On very simple hedging transactions, the only thing that can go wrong is that you regret that interest rates don't go higher. You can regret buying an interest rate cap," he said.
For its own asset-liability management, First Union uses mainly interest rate swaps particularly index-amortizing swaps. It has a swaps portfolio with a notional amount of about $15 billion. The company's policy is to expose no more than 5% of net income to changes in interest rates.
During the first half of 1994, First Union's trading account showed only modest gains. Profits in its trading account rose to $17.5 million at June 30, up from $15.7 in 1993. Even as its derivatives business expands, Mr. Kohlhagen admits there is more that can be done at First Union.
He said he would like to beef up his sales to other banks, which currently constitute only about 5% of First Union's business.
Although he acknowledges that First Union can't compete with the derivatives giants in product mix-or-resources, he said the bank can offer customers something the large New York outfits can't: the opportunity to do business with a local bank.
"Sometimes people are more comfortable with their neighborhood bank," he explained. "We know their credit better and we are willing to work with them more closely."
Mr. Kohlhagen also said that if customers want to do a complex, exotic deal in a foreign currency, they should probably look elsewhere. "We probably can't add any value for them," he said. "We won't do Latin American .currencies, for instance. There's just no market for Latin American currency hedging."
