EXHIBIT 99 (a)
[LOGO]
December 31, 2000
Audited Financial Statements
(Restated)
TABLE OF CONTENTS
Page No.
Report of Independent Auditors........................................................ 2
Consolidated Statements of Condition at December 31, 2000 and December 31, 1999....... 3
Consolidated Statements of Income for the Years Ended December 31, 2000,
December 31, 1999 and December 31, 1998............................................. 4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000,
December 31, 1999 and December 31, 1998............................................. 5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
December 31, 1999 and December 31, 1998............................................. 6
Notes to Consolidated Financial Statements............................................ 7-27
1
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors
Wachovia Corporation
We have audited the accompanying consolidated statements of condition of
Wachovia Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wachovia
Corporation and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, the
accompanying consolidated financial statements have been restated.
/s/ ERNST + YOUNG LLP
Greensboro, North Carolina
January 17, 2001, except for Note A as to which the date is August 24, 2001
2
CONSOLIDATED STATEMENTS OF CONDITION
- --------------------------------------------------------------------------------
($ in thousands)
WACHOVIA CORPORATION AND SUBSIDIARIES
DECEMBER 31 DECEMBER 31
2000 1999
----------- -----------
ASSETS
Cash and due from banks.............................................................. $ 3,686,871 $ 3,437,082
Interest-bearing bank balances....................................................... 137,504 174,904
Federal funds sold and securities purchased under resale agreements.................. 788,618 761,962
Trading account assets............................................................... 960,838 870,304
Securities available-for-sale........................................................ 7,487,696 7,095,790
Securities held-to-maturity (fair value of $1,052,535 in 2000 and $1,061,150 in 1999) 1,023,750 1,048,724
Loans, net of unearned income........................................................ 50,567,502 44,933,990
Less allowance for loan losses....................................................... 667,654 436,680
----------- -----------
Net loans........................................................................ 49,899,848 44,497,310
Premises and equipment............................................................... 903,411 944,844
Due from customers on acceptances.................................................... 82,008 111,684
Goodwill and other intangible assets................................................. 1,024,766 903,205
Investment in discontinued operations................................................ 392,469 320,485
Other assets......................................................................... 3,223,349 2,746,612
----------- -----------
Total assets..................................................................... $ 69,611,128 $62,912,906
=========== ===========
LIABILITIES
Deposits in domestic offices:
Demand............................................................................. $ 9,180,330 $ 8,730,673
Interest-bearing demand............................................................ 5,116,571 4,527,711
Savings and money market savings................................................... 12,902,336 13,760,479
Savings certificates............................................................... 9,534,778 8,701,074
Large denomination certificates.................................................... 3,673,219 3,154,754
----------- -----------
Total deposits in domestic offices............................................... 40,407,234 38,874,691
Interest-bearing deposits in foreign offices......................................... 4,004,948 2,911,727
----------- -----------
Total deposits................................................................... 44,412,182 41,786,418
Federal funds purchased and securities sold under repurchase agreements.............. 6,753,164 5,372,493
Commercial paper..................................................................... 1,855,923 1,658,988
Other short-term borrowed funds...................................................... 1,253,058 3,071,493
Short-term borrowed funds assigned to discontinued operations........................ (3,055,119) (3,089,100)
Long-term debt....................................................................... 10,808,218 7,814,263
Long-term debt assigned to discontinued operations................................... (1,309,337) (1,323,900)
Acceptances outstanding.............................................................. 82,008 111,684
Other liabilities.................................................................... 2,526,492 1,852,110
----------- -----------
Total liabilities................................................................ 63,326,589 57,254,449
Off-balance sheet items, commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred stock, par value $5 per share:
Authorized 50,000,000 shares; none outstanding..................................... -- --
Common stock, par value $5 per share:
Authorized 1,000,000,000 shares; issued and outstanding 203,423,606 shares
in 2000 and 201,812,295 shares in 1999............................................ 1,017,118 1,009,061
Capital surplus...................................................................... 731,162 598,149
Retained earnings.................................................................... 4,505,947 4,125,524
Accumulated other comprehensive income (loss)........................................ 30,312 (74,277)
----------- -----------
Total shareholders' equity....................................................... 6,284,539 5,658,457
----------- -----------
Total liabilities and shareholders' equity....................................... $69,611,128 $62,912,906
=========== ===========
See notes to consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME
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($ in thousands, except per share)
WACHOVIA CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
---------------------------------
2000 1999 1998
---------- ---------- ----------
INTEREST INCOME
Loans, including fees.............................................. $4,084,512 $3,327,407 $3,111,276
Securities available-for-sale...................................... 460,486 504,470 597,557
Securities held-to-maturity:
State and municipal.............................................. 15,124 11,673 15,044
Other investments................................................ 60,654 79,919 95,952
Interest-bearing bank balances..................................... 4,612 6,833 11,055
Federal funds sold and securities purchased under resale agreements 30,892 30,696 25,803
Trading account assets............................................. 42,934 32,131 44,497
---------- ---------- ----------
Total interest income............................................ 4,699,214 3,993,129 3,901,184
INTEREST EXPENSE
Deposits:
Domestic offices................................................. 1,417,160 1,156,113 1,224,046
Foreign offices.................................................. 239,003 109,082 135,659
---------- ---------- ----------
Total interest on deposits..................................... 1,656,163 1,265,195 1,359,705
Short-term borrowed funds.......................................... 367,616 297,548 371,699
Long-term debt..................................................... 525,474 391,910 291,780
---------- ---------- ----------
Total interest expense......................................... 2,549,253 1,954,653 2,023,184
NET INTEREST INCOME................................................ 2,149,961 2,038,476 1,878,000
Provision for loan losses.......................................... 390,231 95,381 46,100
---------- ---------- ----------
Net interest income after provision for loan losses................ 1,759,730 1,943,095 1,831,900
OTHER INCOME
Service charges on deposit accounts................................ 418,611 369,646 334,980
Fees for trust services............................................ 219,476 216,392 199,949
Investment fees.................................................... 334,795 235,350 61,556
Capital markets income............................................. 170,007 170,771 130,083
Electronic banking................................................. 102,832 88,626 74,257
Mortgage fees...................................................... 25,377 33,213 44,929
Other operating income............................................. 299,713 213,823 201,612
---------- ---------- ----------
Total other operating revenue.................................. 1,570,811 1,327,821 1,047,366
Securities (losses) gains.......................................... (417) 10,894 20,442
---------- ---------- ----------
Total other income............................................. 1,570,394 1,338,715 1,067,808
OTHER EXPENSE
Salaries........................................................... 1,041,147 980,804 837,350
Employee benefits.................................................. 203,656 191,999 173,549
---------- ---------- ----------
Total personnel expense........................................ 1,244,803 1,172,803 1,010,899
Net occupancy expense.............................................. 155,105 146,740 134,531
Equipment expense.................................................. 183,572 193,690 148,308
Merger-related charges............................................. 28,958 19,309 85,312
Litigation settlement charge....................................... 20,000 -- --
Restructuring charge............................................... 107,487 -- --
Other operating expense............................................ 585,175 534,560 441,081
---------- ---------- ----------
Total other expense............................................ 2,325,100 2,067,102 1,820,131
Income from continuing operations before income tax expense........ 1,005,024 1,214,708 1,079,577
Income tax expense................................................. 342,001 408,464 345,464
---------- ---------- ----------
Income from continuing operations.................................. 663,023 806,244 734,113
Income from discontinued operations, net of income tax expense..... 169,285 204,977 140,057
---------- ---------- ----------
NET INCOME......................................................... $ 832,308 $1,011,221 $ 874,170
========== ========== ==========
Income from continuing operations per common share:
Basic............................................................ $ 3.27 $ 3.98 $ 3.58
Diluted.......................................................... $ 3.24 $ 3.91 $ 3.51
Net income per common share:.......................................
Basic............................................................ $ 4.10 $ 4.99 $ 4.26
Diluted.......................................................... $ 4.07 $ 4.90 $ 4.18
Average shares outstanding:
Basic............................................................ 202,989 202,795 205,058
Diluted.......................................................... 204,450 206,192 209,153
See notes to consolidated financial statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
($ in thousands, except per share)
WACHOVIA CORPORATION AND SUBSIDIARIES
ACCUMULATED
COMMON STOCK OTHER
- - ----------------------- CAPITAL RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS)
- - ----------- ---------- --------- ---------- -------------
YEAR ENDED DECEMBER 31, 1998
Balance at beginning of year................................... 205,926,632 $1,029,633 $ 974,803 $3,098,767 $ 71,098
Comprehensive income:
Net income................................................... 874,170
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of tax expense of $16,233)............................ 23,802
Less reclassification adjustment for gains realized in net
income (net of tax expense of $7,982)...................... (12,460)
---------- ---------
Comprehensive income....................................... 874,170 11,342
Cash dividends declared -- $1.86 a share....................... (381,798)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 2,211,599 11,058 102,540
Dividend reinvestment plan................................... 301,992 1,510 22,885
Acquisitions................................................. 1,127,723 5,639 77,674
Common stock acquired.......................................... (6,581,846) (32,909) (508,093)
Miscellaneous.................................................. (565) (19,522)
----------- ---------- --------- ---------- ---------
Balance at end of year......................................... 202,986,100 $1,014,931 $ 669,244 $3,571,617 $ 82,440
=========== ========== ========= ========== =========
YEAR ENDED DECEMBER 31, 1999
Balance at beginning of year................................... 202,986,100 $1,014,931 $ 669,244 $3,571,617 $ 82,440
Comprehensive income:
Net income................................................... 1,011,221
Other comprehensive loss:
Unrealized holding losses on securities available-for-sale
(net of tax benefit of $92,356)............................ (149,636)
Less reclassification adjustment for gains realized in net
income (net of tax expense of $3,813)...................... (7,081)
---------- ---------
Comprehensive income....................................... 1,011,221 (156,717)
Cash dividends declared -- $2.06 a share....................... (418,447)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 1,252,596 6,263 111,308
Dividend reinvestment plan................................... 282,947 1,414 21,692
Acquisitions................................................. 4,801,987 24,010 399,059
Note conversions............................................. 3,065 15 235
Common stock acquired.......................................... (7,514,400) (37,572) (603,357)
Miscellaneous.................................................. (32) (38,867)
----------- ---------- --------- ---------- ---------
Balance at end of year......................................... 201,812,295 $1,009,061 $ 598,149 $4,125,524 $ (74,277)
=========== ========== ========= ========== =========
YEAR ENDED DECEMBER 31, 2000
Balance at beginning of year................................... 201,812,295 $1,009,061 $ 598,149 $4,125,524 $ (74,277)
Comprehensive income:
Net income................................................... 832,308
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of tax expense of $64,352)............................ 104,318
Add reclassification adjustment for losses realized in net
income (net of tax benefit of $146)........................ 271
---------- ---------
Comprehensive income....................................... 832,308 104,589
Cash dividends declared -- $2.28 a share....................... (463,018)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 1,078,507 5,392 58,310
Dividend reinvestment plan................................... 393,346 1,967 20,864
Acquisitions................................................. 2,254,947 11,275 167,673
Common stock acquired.......................................... (2,115,489) (10,577) (113,834)
Miscellaneous.................................................. 11,133
----------- --------- -------- --------- ---------
Balance at end of year......................................... 203,423,606 $1,017,118 $ 731,162 $4,505,947 $ 30,312
=========== ========= ======== ========= =========
- -
TOTAL
- - ----------
YEAR ENDED DECEMBER 31, 1998
Balance at beginning of year................................... $5,174,301
Comprehensive income:
Net income................................................... 874,170
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of tax expense of $16,233)............................ 23,802
Less reclassification adjustment for gains realized in net
income (net of tax expense of $7,982)...................... (12,460)
----------
Comprehensive income....................................... 885,512
Cash dividends declared -- $1.86 a share....................... (381,798)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 113,598
Dividend reinvestment plan................................... 24,395
Acquisitions................................................. 83,313
Common stock acquired.......................................... (541,002)
Miscellaneous.................................................. (20,087)
----------
Balance at end of year......................................... $5,338,232
==========
YEAR ENDED DECEMBER 31, 1999
Balance at beginning of year................................... $5,338,232
Comprehensive income:
Net income................................................... 1,011,221
Other comprehensive loss:
Unrealized holding losses on securities available-for-sale
(net of tax benefit of $92,356)............................ (149,636)
Less reclassification adjustment for gains realized in net
income (net of tax expense of $3,813)...................... (7,081)
----------
Comprehensive income....................................... 854,504
Cash dividends declared -- $2.06 a share....................... (418,447)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 117,571
Dividend reinvestment plan................................... 23,106
Acquisitions................................................. 423,069
Note conversions............................................. 250
Common stock acquired.......................................... (640,929)
Miscellaneous.................................................. (38,899)
----------
Balance at end of year......................................... $5,658,457
==========
YEAR ENDED DECEMBER 31, 2000
Balance at beginning of year................................... $5,658,457
Comprehensive income:
Net income................................................... 832,308
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of tax expense of $64,352)............................ 104,318
Add reclassification adjustment for losses realized in net
income (net of tax benefit of $146)........................ 271
----------
Comprehensive income....................................... 936,897
Cash dividends declared -- $2.28 a share....................... (463,018)
Common stock issued pursuant to:
Stock option and employee benefit plans...................... 63,702
Dividend reinvestment plan................................... 22,831
Acquisitions................................................. 178,948
Common stock acquired.......................................... (124,411)
Miscellaneous.................................................. 11,133
----------
Balance at end of year......................................... $6,284,539
==========
See notes to consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
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($ in thousands)
WACHOVIA CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
- - -------------------------------------
2000 1999 1998
- - ----------- ----------- -----------
OPERATING ACTIVITIES
Net income.................................................................. $ 832,308 $ 1,011,221 $ 874,170
Income from discontinued operations......................................... 169,285 204,977 140,057
----------- ----------- -----------
Income from continuing operations........................................... 663,023 806,244 734,113
Adjustments to reconcile income from continuing operations to net cash
provided by continuing operations:
Provision for loan losses................................................. 390,231 95,381 46,100
Depreciation and amortization............................................. 255,262 236,310 149,468
Deferred income taxes..................................................... 239,947 366,514 261,781
Securities losses (gains)................................................. 417 (10,894) (20,442)
Gain on sale of noninterest-earning assets................................ (6,364) (13,485) (7,421)
Increase in accrued income taxes.......................................... 2,187 26,459 224,609
(Increase) decrease in accrued interest receivable........................ (94,083) (25,158) 40,246
Increase (decrease) in accrued interest payable........................... 134,533 11,578 (26,107)
Net change in other accrued and deferred income and expense............... 120,851 (163,073) (60,053)
Net trading account activities............................................ (90,534) (91,125) 334,310
Net loans held for resale................................................. (74,432) 250,632 (184,571)
Gain from branch sales.................................................... (41,618) (7,554) (17,155)
----------- ----------- -----------
Net cash provided by operating activities............................... 1,499,420 1,481,829 1,474,878
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing bank balances................... 39,006 (64,701) 22,208
Net (increase) decrease in federal funds sold and securities purchased under
resale agreements......................................................... (8,339) (40,361) 947,064
Purchases of securities available-for-sale.................................. (1,488,647) (2,222,574) (3,106,977)
Purchases of securities held-to-maturity.................................... (140,324) (95,531) (394,956)
Sales of securities available-for-sale...................................... 482,692 366,714 590,447
Calls, maturities and prepayments of securities available-for-sale.......... 854,051 2,525,569 3,564,575
Calls, maturities and prepayments of securities held-to-maturity............ 189,461 431,963 532,922
Net increase in loans made to customers..................................... (5,319,510) (5,186,616) (1,323,153)
Capital expenditures........................................................ (114,023) (210,085) (255,527)
Proceeds from sales of premises and equipment............................... 16,998 27,154 38,959
Net increase in other assets................................................ (317,553) (256,783) (331,936)
Business combinations....................................................... (23,748) (11,123) 16,108
Branch sales................................................................ (378,559) (114,761) (111,901)
----------- ----------- -----------
Net cash (used) provided by investing activities........................ (6,208,495) (4,851,135) 187,833
FINANCING ACTIVITIES
Net increase in demand, savings and money market accounts................... 377,471 757,675 1,584,124
Net increase (decrease) in certificates of deposit.......................... 2,173,930 163,578 (3,192,149)
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements...................................................... 1,376,791 (151,068) (2,870,049)
Net increase in commercial paper............................................ 196,935 299,606 325,358
Net (decrease) increase in other short-term borrowings...................... (1,818,435) 1,125,558 1,159,388
Proceeds from issuance of long-term debt.................................... 3,893,075 1,588,733 2,684,679
Maturities and repayments of long-term debt................................. (915,267) (1,410,819) (1,028,772)
Common stock issued......................................................... 40,465 59,478 80,375
Dividend payments........................................................... (463,018) (418,447) (381,798)
Common stock repurchased.................................................... (116,086) (634,623) (531,122)
Net increase in other liabilities........................................... 71,076 138,805 78,624
----------- ----------- -----------
Net cash provided (used) by financing activities........................ 4,816,937 1,518,476 (2,091,342)
Net cash provided (used) by discontinued operations..................... 141,927 1,532,170 (12,829)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ 249,789 (318,660) (441,460)
Cash and cash equivalents at beginning of year.............................. 3,437,082 3,755,742 4,197,202
----------- ----------- -----------
Cash and cash equivalents at end of period.................................. $ 3,686,871 $ 3,437,082 $ 3,755,742
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid............................................................... $ 2,695,100 $ 2,185,156 $ 2,340,320
Income taxes paid........................................................... 204,811 119,959 159,500
See notes to consolidated financial statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
Note A -- Restatement
On July 27, 2001, the Corporation completed the sale of its consumer credit
card business. The accompanying financial statements and footnotes have been
restated to present the
consumer credit card business as discontinued operations for all periods
presented. Additional information about the discontinued consumer credit card
business is included in Note C -- Discontinued Operations to the consolidated
financial statements.
NOTE B -- ACCOUNTING POLICIES
Nature of Operations -- The Corporation is a southeastern interstate financial
holding company maintaining dual headquarters in Atlanta, Georgia, and
Winston-Salem, North Carolina. The Corporation's principal banking subsidiary
is Wachovia Bank, N.A., which maintains operations in Florida, Georgia, North
Carolina, South Carolina and Virginia. Brokerage and investment underwriting
services are provided through Wachovia Securities, Inc. In addition to general
commercial banking, the Corporation and its subsidiaries are engaged in trust
and investment management, residential mortgage origination, leasing, foreign
exchange, corporate finance and other money market services.
Principles of Consolidation -- The consolidated financial statements include
the accounts of Wachovia Corporation and its subsidiaries after elimination of
all material intercompany balances and transactions.
Business Combinations -- In business combinations accounted for as
poolings-of-interests, the financial position and results of operations and
cash flows of the respective companies are restated as though the companies
were combined for all historical periods.
In business combinations accounted for using the purchase method of accounting,
the net assets of the companies acquired are recorded at their fair values at
the date of acquisition. Goodwill is amortized on a straight-line basis over
the estimated periods benefited. Identifiable intangibles, including deposit
base intangibles, are amortized on an accelerated or straight-line basis over
the estimated periods benefited. The results of operations of the acquired
companies are included since the date of acquisition.
Use of Estimates -- The financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Due From Banks -- The Corporation considers cash and due from banks,
all of which are maintained in financial institutions, as cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
Trading Instruments -- The Corporation maintains trading positions in both
derivative and nonderivative (or cash) financial instruments. Trading cash
instruments are held for distribution through retail sales or in anticipation
of market movements and are carried at fair value. Gains and losses, both
realized and unrealized, are included in capital markets income. Interest
revenue arising from cash financial instruments is included in interest
income-trading account assets.
Trading cash instruments are comprised primarily of securities backed by the
U.S. Treasury and various federal agencies and state and local governmental
bodies.
Trading derivative financial instruments are customer oriented, and trading
positions are established as necessary to accommodate customers' requirements.
Gains and losses from trading derivatives and foreign exchange activities are
included in capital markets income.
Securities Held-to-Maturity and Available-for-Sale -- Management determines the
appropriate classification of debt securities at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale and are stated at fair
value. Unrealized gains and losses, net of tax, on available-for-sale
securities are included in accumulated other comprehensive income -- a separate
component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from securities. The specific identification method is used to determine
realized gains and losses on sales of securities, which are reported as
securities gains and losses.
Securities Purchased and Sold Agreements -- Securities purchased under resale
agreements and securities sold under repurchase agreements are generally
accounted for as collateralized financing transactions. They are recorded at
the current fair value of the securities plus accrued interest. It is the
Corporation's policy to take possession of securities purchased under resale
agreements, which are primarily U.S. Government and Government agency
securities. The current fair value of these securities is monitored, and
additional securities are obtained when deemed appropriate. The Corporation
also monitors its exposure with respect to securities sold under repurchase
agreements and a request to the lender for additional money is made when
necessary.
Risk Management Instruments -- Interest rate swaps and options (caps and
floors) are used as part of the Corporation's overall interest rate risk
management and are designated as hedges of interest-bearing assets,
liabilities, firm commitments and anticipated transactions. These derivatives
modify the interest rate characteristics of specified financial instruments.
Amounts receivable or payable under interest rate swap and option agreements
are recognized in net interest income. Derivative instruments not qualifying as
end-user positions are treated as trading positions and marked-to-
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE B -- ACCOUNTING POLICIES -- CONTINUED
market. To qualify as a hedge, the swap or option must be designated and
documented as a hedge and be effective in reducing the market risk associated
with the existing asset, liability, firm commitment or identified anticipated
transaction which is probable to occur. Effectiveness of the hedge is evaluated
on an initial and ongoing basis using statistical calculations of correlation.
Gains and losses on risk management derivatives that are terminated early are
deferred and amortized to net interest income over the remaining period
originally covered by the instrument. If the underlying designated item is no
longer held, or if an anticipated transaction is no longer likely to occur, any
previously unrecognized gain or loss on the derivative contract is recognized
in earnings and the contract is subsequently accounted for at fair value.
Loans and Allowance for Loan Losses -- Loans are carried at their principal
amount outstanding net of unearned income, including net deferred loan fees and
costs, except for loans held for resale which are carried at the lower of cost
or market. The Corporation defers certain nonrefundable loan origination and
commitment fees and the direct costs of originating or acquiring loans.
Interest on loans is accrued and recorded as interest income based upon the
principal amount outstanding. Except for revolving credit loans, the
recognition of interest income is discontinued when a loan becomes 90 days past
due as to principal and interest or when, in management's judgment, the
principal or interest will not be collectible in the normal course of business.
When interest accruals are discontinued, the balance of accrued interest is
reversed. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to cover the
principal balance and accrued interest and the loan is in the process of
collection. Interest is accrued on revolving credit loans until payments become
180 days past due, at which time the outstanding principal balance and accrued
unpaid interest is charged off. For installment loans and other closed-end
consumer loans, the accrual of interest is discontinued when the loan becomes
120 days past due, at which time the outstanding principal and unpaid interest
is charged off. The Corporation records a charge-off for commercial loans and
commercial real estate loans when available information confirms that specific
loans, or portions thereof, are uncollectible.
The Corporation applies Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" (FASB 5), and Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FASB
114), in determining the balance of the allowance for loan losses and the
amount of impaired loans. The allowance is maintained at a level believed to be
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current domestic and
international economic conditions, volume and composition of the loan portfolio
and other risks inherent in the portfolio. The method used to determine the
amount of loss inherent in the loan portfolio and thereby assess the adequacy
of the recorded balance of the allowance for loan losses involves identifying
portfolios of loans with similar characteristics for which estimates of
inherent future probable losses can be made. The estimates are based on
historical loss factors as adjusted for current business and economic
conditions. The loss factors are applied to the respective portfolios in order
to determine the overall allowance adequacy.
Loan Securitization -- Loan securitization involves the sale, generally to a
trust, of a pool of loan receivables. The Corporation continues to own the
accounts that generate the loan receivables. In securitization transactions,
the Corporation retains interest-only strips, servicing rights, and in some
cases a cash reserve account, all of which are retained interests in the
securitized receivables. Gain or loss on sale of the receivables depends in
part on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. The fair value of retained
interests is obtained from market prices if available, or estimates of fair
value based on the present value of estimated future expected cash flows.
Premises and Equipment -- Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the life of the leasehold asset or the lease term.
Internal Use Software -- The Corporation relies on company personnel and
independent contractors to plan, develop, install, customize and enhance
computer systems applications that support corporate and administrative
operations. Software development costs, such as those related to program
coding, testing, configuration and installation, are capitalized and are
amortized on a straight-line basis over the expected useful life. All other
costs incurred related to planning and post-development phases of an internal
software project are expensed as incurred.
Impairment of Long-Lived Assets -- Impairment losses on long-lived assets to be
held and used are recognized whenever events or changes in circumstances result
in the carrying value of the assets exceeding the sum of the expected future
cash flows. The measurement of the impairment losses recognized is based on the
difference between the fair value and carrying value of the assets. Long-lived
assets to be disposed of are reported at the lower of carrying value or fair
value less cost to sell.
Income Taxes -- Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Each
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE B -- ACCOUNTING POLICIES -- CONCLUDED
subsidiary provides for income taxes based on its contribution to income taxes
(benefit) of the consolidated group. The Corporation and its subsidiaries file
a consolidated tax return.
Stock-Based Compensation -- The Corporation applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Corporation's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards and appreciation rights is recorded based on the market price at the
date of grant, or the date in which the stated performance criteria are met,
and the end of the period, respectively. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123),
encourages, but does not require, adoption of a fair value method of accounting
for employee stock-based compensation plans. The Corporation follows the pro
forma disclosure provisions of FASB 123.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FASB 133). FASB
133 establishes new accounting and reporting requirements for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The standard requires all derivatives to be
measured at fair value and recognized as either assets or liabilities in the
statements of condition. Under certain conditions, a derivative may be
specifically designated as a hedge. Accounting for the changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. The Corporation adopted the standard, as required, effective
January 1, 2001 with an immaterial financial statement impact.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" (FASB 140). FASB 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
regarding these activities. The statement is effective for transfers and
servicing of financial assets or extinguishments of liabilities that occur
after March 31, 2001. The statement is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
The impact of the disclosure and recognition provisions of this standard are
not material.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (FASB 141)
which supercedes Accounting Principles Board Opinion No. 16 "Business
Combinations" and FASB 38 "Accounting for Preacquisition Contingencies of
Purchased Enterprises". FASB 141 changes the existing accounting treatment for
business combinations to allow only the purchase method. The statement applies
to all business combinations initiated after June 30, 2001. The statement also
applies to all business combinations accounted for using the purchase method
for which the date of acquisition is July 1, 2001, or later. Adoption of this
statement is not expected to have a material impact of the Corporation's
results of operations or financial position.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(FASB 142) which supercedes Accounting Principles Board Opinion No. 17
"Intangible Assets". FASB 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. FASB 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. The most significant change from current accounting
standards is that goodwill will no longer be amortized but will instead be
tested periodically for impairment. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
FASB 142 are to be reported as resulting from a change in accounting principle.
FASB 142 is effective for the Corporation beginning in the first quarter of
2002 and is required to be applied to all goodwill and intangible assets
recognized in the financial statements at that date. Adoption is not expected
to have a material impact on the Corporation's results of operations or
financial position.
Reclassification -- Certain 1999 and 1998 amounts have been reclassified to
conform to the 2000 presentation.
- --------------------------------------------------------------------------------
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE C -- DISCONTINUED OPERATIONS
On July 27, 2001, the Corporation completed the sale of its consumer credit
card business to Bank One Corporation. The consumer credit card business
represented approximately $8.1 billion and $6.6 billion in managed receivables
at December 31, 2000 and December 31, 1999, respectively, of which $3.6 billion
at December 31, 2000 and $1.9 billion at December 31, 1999 had been
securitized. The capital made available by the transaction will be redeployed
for general corporate purposes including investing in higher growth businesses,
repurchasing shares, reducing balance sheet leverage or reducing debt. The
pre-tax gain from the sale is estimated to be approximately $1.3 billion. As a
result of the recent shareholder approval of the merger with First Union
Corporation, $450 million has been deferred in connection with certain
provisions of the agent bank arrangement. Condensed financial information for
the consumer credit card business is presented below.
YEAR ENDED DECEMBER 31
--------------------------
2000 1999 1998
- -------- -------- --------
SUMMARY INCOME
STATEMENT
Interest income.......... $646,140 $673,691 $764,061
Allocated interest
expense (2)............. 280,380 242,081 291,029
-------- -------- --------
Net interest income.... 365,760 431,610 473,032
Provision for loan losses 198,219 202,724 253,380
Noninterest income....... 360,878 282,302 180,753
Noninterest expense (3).. 257,913 183,523 176,201
-------- -------- --------
Income before income
tax expense........... 270,506 327,665 224,204
Income tax expense....... 101,221 122,688 84,147
-------- -------- --------
Net income............. $169,285 $204,977 $140,057
======== ======== ========
DECEMBER 31 DECEMBER 31
2000 1999
- ----------- -----------
SUMMARY BALANCE
SHEET
Cash..................... $ 40,570 $ 37,922
Interest bearing bank
balances................ 36,025 10,000
Securities available-for-
sale.................... 84,000 --
Loans, net of allowance.. 4,279,313 4,569,105
Intangible assets........ 231,461 34,020
Other assets............. 141,624 109,069
---------- ----------
Total assets........... $4,812,993 $4,760,116
========== ==========
Short-term borrowed
funds (2)............... $3,055,119 $3,089,100
Long-term debt (2)....... 1,309,337 1,323,900
Other liabilities........ 56,068 26,631
---------- ----------
Total liabilities...... 4,420,524 4,439,631
Equity capital (1)....... 392,469 320,485
---------- ----------
Total liabilities and
equity................ $4,812,993 $4,760,116
========== ==========
(1)Equity capital was assigned to discontinued operations based upon Wachovia's
targeted Tier I risk-based capital requirements for the underlying risk
weighted assets and off-balance sheet items.
(2)Interest-bearing liabilities were assigned to discontinued operations based
on an assumed funding mix of 70 percent short-term borrowings and 30 percent
long-term debt. Interest expense was calculated by applying Wachovia's
average funding cost for each period and funding category to the respective
assigned average balances.
(3)The amount of general overhead costs allocated to discontinued operations is
the amount estimated to be eliminated upon completion of the transaction.
On February 1, 2000, the Corporation completed the acquisition of a majority of
the credit card business of Partners First Holdings, LLC, adding 1.2 million
customers and approximately $2 billion of managed receivables. The transaction
resulted in $234,524 of purchased credit card intangibles. The results of
operations of the Partners First portfolio are included in discontinued
operations from the date of its acquisition.
In August 2000, the Corporation sold $750 million of credit card receivables in
a securitization transaction and recognized a pretax gain of $17,268 reflecting
the recognition of retained interest in the cash flows of the trust. The
Corporation retained servicing responsibilities and receives annual servicing
fees approximating 2% of the outstanding credit card balances. In addition, the
Corporation retained subordinated interests which represent the rights to
future cash flows arising after the investors have received their contractual
return. The investors and the securitization trusts have no recourse to the
Corporation's other assets for failure of debtors to pay when due. The
Corporation's retained interests are subordinate to investors' interests. Their
value is subject to credit, prepayment, and interest rate risks on the
transferred financial assets.
Key economic assumptions used in measuring the retained interest at the date of
securitization during the year were as follows: a monthly payment rate of
10.0%, a weighted average life of .81 years, expected annual credit losses of
3.91%, a discount rate of 12.0%, an expected yield of 15.24% and a variable
coupon rate to investors of 6.29%.
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows, related to the aggregate securitized
credit card receivables outstanding, to adverse changes in those assumptions
are presented in the table below:
Carrying amount/fair value of retained interests $ 177,357
Weighted-average life (in years)................ .82
Prepayment speed assumption (annual rate)....... 10.0%
Impact on fair value of 10% adverse change.... $ 13,094
Impact on fair value of 20% adverse change.... $ 24,395
Expected credit losses (annual rate)............ 6.83%
Impact on fair value of 10% adverse change.... $ 25,605
Impact on fair value of 20% adverse change.... $ 41,648
Residual cash flows discount rate (annual)...... 12.0%
Impact on fair value of 10% adverse change.... $ 1,417
Impact on fair value of 20% adverse change.... $ 2,811
Interest rates on variable and
adjustable contracts........................... LIBOR plus
contracted spread
Impact on fair value of 10% adverse change.... $ 30,842
Impact on fair value of 20% adverse change.... $ 48,221
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE C -- DISCONTINUED OPERATIONS -- CONCLUDED
The sensitivities above are hypothetical and should be used with caution.
Changes in fair value based on a 10% variation in assumptions should not be
extrapolated because the relationship of the change in assumption to the change
in fair value is not linear. The effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
The table below summarizes certain cash flows received from and paid to
securitization trusts. There were no purchases of delinquent or foreclosed
loans during the period:
YEAR ENDED
DECEMBER 31
2000
-----------
Proceeds from new securitizations........ $ 750,000
Proceeds from collections reinvested in
previous credit card securitizations.... 4,142,417
Servicing fees received.................. 68,380
Cash flows received on interests retained 61,368
Selected securitization information as of December 31, 2000 is as follows:
Average credit card loans:
Loans held in portfolio................ $4,537,404
Loans securitized...................... 3,434,903
----------
Total managed loans.................. $7,972,307
==========
Year-end credit card loans:
Loans held in portfolio................ $4,494,303
Loans securitized...................... 3,645,954
----------
Total managed loans.................. $8,140,257
==========
Net credit losses:
Loans held in portfolio................ $ 198,944
Loans securitized...................... 185,939
----------
Total managed loans.................. $ 384,883
==========
Principal amount of loans 30 days or more
past due:
Loans held in portfolio................ $ 196,423
Loans securitized...................... 146,677
----------
Total managed loans.................. $ 343,100
==========
NOTE D -- BUSINESS SEGMENT INFORMATION
The Corporation's reportable segments are strategic business units that provide
unique products and services to a variety of customer groups. Each segment has
its own management team as well as distinct marketing, production, technology
and distribution strategies. The Corporation's four reportable segments are
Asset and Wealth Management, Corporate, Consumer and Treasury & Administration.
Asset and Wealth Management earns revenues by providing estate planning
services, insurance, investment and trust products to high-wealth individuals
and corporate executives. Corporate earns its revenues primarily by providing
financing, deposit, cash management, investment and asset administration
products to corporate customers. Consumer generates its revenues primarily from
individuals and small businesses by providing credit and deposit services as
well as insurance, investment and trust products. Treasury & Administration is
comprised of balance sheet management activities that include managing the
investment portfolio, discretionary funding, utilization of off-balance sheet
financial instruments and optimizing the Corporation's equity position.
Nonoperating and other corporate expenses such as merger-related charges,
litigation settlement charges, restructuring charges and Year 2000 conversion
costs are included in the Treasury & Administration segment.
ASSET AND
YEAR ENDED WEALTH TREASURY &
DECEMBER 31, 2000 MANAGEMENT CORPORATE CONSUMER ADMINISTRATION ELIMINATIONS TOTAL
- ----------------- ---------- ----------- ----------- -------------- ------------ -----------
External net interest margin.... $ 147,443 $ 2,636,003 $ (180,777) $ (416,219) $ (36,489) $ 2,149,961
Internal funding (charge) credit (3,019) (1,653,334) 1,093,898 662,835 (100,380) --
---------- ----------- ----------- ----------- --------- -----------
Net interest margin............. 144,424 982,669 913,121 246,616 (136,869) 2,149,961
Provision for loan losses....... 1,693 383,221 19,905 (14,588) -- 390,231
Total other income.............. 605,573 426,973 464,953 72,895 -- 1,570,394
Other expense................... 543,294 587,549 809,638 446,770 (62,151) 2,325,100
---------- ----------- ----------- ----------- --------- -----------
Profit contribution........... 205,010 438,872 548,531 (112,671) (74,718) 1,005,024
Allocated expenses.............. 72,758 90,936 116,482 (241,947) (38,229) --
---------- ----------- ----------- ----------- --------- -----------
Income from continuing
operations before income tax
expense........................ 132,252 347,936 432,049 129,276 (36,489) 1,005,024
Income tax expense.............. 53,230 126,318 157,487 41,455 (36,489) 342,001
---------- ----------- ----------- ----------- --------- -----------
Income from continuing
operations..................... $ 79,022 $ 221,618 $ 274,562 $ 87,821 $ -- $ 663,023
========== =========== =========== =========== ========= ===========
Average total assets............ $3,975,097 $38,082,316 $11,003,413 $11,795,693 $ -- $64,856,519
========== =========== =========== =========== ========= ===========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE D -- BUSINESS SEGMENT INFORMATION -- CONCLUDED
ASSET AND
YEAR ENDED WEALTH TREASURY &
DECEMBER 31, 1999 MANAGEMENT CORPORATE CONSUMER ADMINISTRATION ELIMINATIONS TOTAL
- ----------------- ---------- ----------- ---------- -------------- ------------ -----------
External net interest margin.... $ 103,284 $ 2,196,757 $ (153,504) $ (67,576) $ (40,485) $ 2,038,476
Internal funding (charge) credit 23,410 (1,260,978) 1,011,011 321,448 (94,891) --
---------- ----------- ---------- ----------- --------- -----------
Net interest margin............. 126,694 935,779 857,507 253,872 (135,376) 2,038,476
Provision for loan losses....... 726 58,569 15,086 21,000 -- 95,381
Total other income.............. 474,705 403,141 403,646 57,223 -- 1,338,715
Other expense................... 421,379 561,856 780,747 366,238 (63,118) 2,067,102
---------- ----------- ---------- ----------- --------- -----------
Profit contribution........... 179,294 718,495 465,320 (76,143) (72,258) 1,214,708
Allocated expenses.............. 70,446 92,387 129,560 (260,620) (31,773) --
---------- ----------- ---------- ----------- --------- -----------
Income from continuing
operations before income tax
expense........................ 108,848 626,108 335,760 184,477 (40,485) 1,214,708
Income tax expense.............. 42,275 224,765 122,151 59,758 (40,485) 408,464
---------- ----------- ---------- ----------- --------- -----------
Income from continuing
operations..................... $ 66,573 $ 401,343 $ 213,609 $ 124,719 $ -- $ 806,244
========== =========== ========== =========== ========= ===========
Average total assets............ $2,859,920 $34,591,059 $9,787,018 $13,126,616 $ -- $60,364,613
========== =========== ========== =========== ========= ===========
ASSET AND
YEAR ENDED WEALTH TREASURY &
DECEMBER 31, 1998 MANAGEMENT CORPORATE CONSUMER ADMINISTRATION ELIMINATIONS TOTAL
- ----------------- ---------- ----------- ----------- -------------- ------------ -----------
External net interest margin.... $ 75,018 $ 1,978,805 $ (182,884) $ 53,935 $ (46,874) $ 1,878,000
Internal funding (charge) credit 21,006 (1,203,149) 1,037,393 247,691 (102,941) --
---------- ----------- ----------- ----------- --------- -----------
Net interest margin............. 96,024 775,656 854,509 301,626 (149,815) 1,878,000
Provision for loan losses....... 1,435 19,804 13,495 11,366 -- 46,100
Total other income.............. 278,630 327,806 373,412 87,960 -- 1,067,808
Other expense................... 248,267 465,239 753,573 421,171 (68,119) 1,820,131
---------- ----------- ----------- ----------- --------- -----------
Profit contribution........... 124,952 618,419 460,853 (42,951) (81,696) 1,079,577
Allocated expenses.............. 53,004 100,432 158,150 (276,764) (34,822) --
---------- ----------- ----------- ----------- --------- -----------
Income from continuing
operations before income tax
expense........................ 71,948 517,987 302,703 233,813 (46,874) 1,079,577
Income tax expense.............. 26,166 181,956 108,446 75,770 (46,874) 345,464
---------- ----------- ----------- ----------- --------- -----------
Income from continuing
operations..................... $ 45,782 $ 336,031 $ 194,257 $ 158,043 $ -- $ 734,113
========== =========== =========== =========== ========= ===========
Average total assets............ $2,335,270 $31,377,718 $10,258,913 $14,306,769 $ -- $58,278,670
========== =========== =========== =========== ========= ===========
The Corporation's management accounting policies generally follow the policies
described in Note A, except for net interest income which is reported on a
fully taxable equivalent basis. Beginning January 2000, the Corporation adopted
a marginal matched maturity funds transfer pricing system to simulate matched
funding to compensate or charge for funds provided or used with a corresponding
offset in the Treasury & Administration business segment. Formerly, the
Corporation utilized a multiple pool method for funds transfer pricing. This
change in management accounting has been reflected for all periods presented.
Provision for loan losses is charged to each segment based on the credit risk
of each segment's loan portfolio. Operating expense is recognized as incurred
and charged on a fully absorbed basis. Additionally, income tax expense is
calculated based on the business segment's fully taxable equivalent income and
the Corporation's effective tax rate.
Reconciling items between management accounting and the Corporation's
consolidated financial statements are limited to the taxable equivalent
adjustment and other income statement reclassifications shown as Eliminations.
The Corporation operates primarily in the United States; accordingly,
geographic distribution of revenue and long-lived assets in other countries is
not significant. Revenue from no individual customer exceeded 10% of
consolidated total revenue.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE E -- BUSINESS COMBINATIONS
On December 15, 1997, the Corporation merged in a pooling-of-interests
transaction, with Central Fidelity Banks, Inc., headquartered in Richmond,
Virginia. In connection with the transaction, the Corporation incurred a
restructuring charge to consolidate Central Fidelity's operations, business
line locations and administrative functions. These activities were completed
during 1998. The remaining accrual associated with this charge was $4,894 and
$21,927, respectively, at December 31, 2000 and 1999 and was comprised of
salary continuation payments. The balance remaining at December 2000 will be
paid during 2001.
During 1998, the Corporation acquired Ameribank Bancshares (Ameribank),
headquartered in Hollywood, Florida, with $280 million in assets; Hunt, DuPree,
Rhine and Associates Inc., a benefits consulting company; and Retirement Plan
Securities Inc., a registered investment advisor.
On April 1, 1999, the Corporation completed its merger with Interstate/Johnson
Lane, Inc. (IJL), headquartered in Charlotte, North Carolina. The acquisition
of IJL resulted in the issuance of approximately 2.6 million shares of common
stock valued at $215,562. The purchase price was allocated to the net assets
acquired resulting in $125,205 of goodwill. In September 1999, the Corporation
completed its merger with OFFITBANK Holdings, Inc. (OFFITBANK), headquartered
in New York. The acquisition of OFFITBANK resulted in the issuance of
approximately 2.1 million shares of common stock valued at $203,173. The
purchase price was allocated to the net assets acquired resulting in $175,568
of goodwill. Also, during 1999, the Corporation acquired Barry, Evans, Josephs
& Snipes (BEJS), a national life insurance broker specializing in wealth
transfer strategies and benefit plans for affluent families and corporate
executives.
During 2000, the Corporation acquired B C Bankshares, parent company of the
Bank of Canton, headquartered in suburban Atlanta with $400 million in assets;
Commerce National Corporation, parent company of the National Bank of Commerce
in suburban Orlando, Florida, with $180 million in assets; and DavisBaldwin,
Inc., a Tampa, Florida- based insurance agency specializing in property and
casualty insurance services for commercial customers.
On March 1, 2001, the Corporation completed its acquisition of Republic
Security Financial Corporation, parent company of Republic Security Bank. The
acquisition added 178,000 new customers and significantly expanded the
Corporation's presence in Florida. On May 1, 2001, the Corporation completed
its acquisition of Hamilton Dorsey Alston Company, an Atlanta-based insurance
broker that specializes in personal and commercial risk management and employee
benefits. Both acquisitions were accounted for as purchases. The acquisitions
of Republic Security Financial Corporation and Hamilton Dorsey Alston Company
added intangibles of approximately $265 million and $40 million, respectively.
The proforma impact of these purchase transactions was not material to the
Corporation's reported results of operations. Amounts incurred for systems
conversion and integration of business lines related to merger transactions are
included in merger-related charges in the income statement. Goodwill arising
from the purchase transactions above is being amortized over 20 to 25 years.
Deposit base intangibles resulting from the above acquisitions are being
amortized over 7 years.
On April 16, 2001, the Corporation announced an agreement for a merger of
equals with First Union Corporation. Terms of the agreement call for common
stockholders of the Corporation to receive 2.0 shares of common stock of First
Union Corporation and the option to receive either a special dividend of $.48
or 2.0 Dividend Equalization Preferred Shares (DEPS) in exchange for each share
of the Corporation's common stock. The DEPS allow the Corporation's
shareholders to continue to receive at least a $2.40 per share dividend
post-combination. Shareholder approval, subject to certification by an
independent party, and regulatory approval have been received and the
transaction is expected to close during the third quarter of 2001.
NOTE F -- RESTRUCTURING CHARGE
During 2000, the Corporation recorded charges of $107,487 in connection with
strategic actions to realign resources and eliminate approximately 1,800 staff
positions. The positions eliminated were identified through a productivity
review focused on improving work processes, introducing new technology,
broadening spans of control and eliminating levels of management across the
company. The affected positions are diversely scattered among all lines of
business and at all levels throughout the organization.
The restructuring plan includes closing the Corporation's Raleigh, North
Carolina, operations center. Functions currently performed at that location
will move to other operations centers. Several underperforming branches are
also being closed including 11 in-store branches in Atlanta and Fayetteville,
North Carolina, and the Corporation exited the municipal finance business. The
closed branches and the discontinued municipal finance business were immaterial
to financial results.
The amounts expensed and paid in 2000 are presented below.
DEC. 31,
2000 UTILIZED 2000
PROVISION IN 2000 BALANCE
--------- -------- --------
Severance and
personnel related
costs............. $ 85,666 $47,433 $38,233
Occupancy and other
costs............. 21,821 20,437 1,384
-------- ------- -------
Total......... $107,487 $67,870 $39,617
======== ======= =======
Severance and personnel related costs include severance payments and related
benefits to terminated employees. The charge recorded in 2000 included benefits
for 1,410 employees who received notice or had otherwise been identified prior
to December 31, 2000. Included in occupancy and other costs are non-cash items
of approximately $15 million for asset impairment for discontinued facilities
and equipment. Additional costs will be incurred in 2001 related to this
project.
- --------------------------------------------------------------------------------
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE G -- SECURITIES
The aggregate amortized cost, fair value and gross unrealized gains and losses
of securities as of December 31 were as follows:
2000 1999
- - ------------------------------------------- -------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- - ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Held-to-Maturity
- ----------------
U.S. Treasury and
other agencies.. $ 465,978 $ 1,358 $ 1,432 $ 465,904 $ 402,828 $ 2 $ 11,437 $ 391,393
State and
municipal....... 224,575 14,653 2 239,226 204,289 12,863 401 216,751
Mortgage-
backed.......... 325,384 14,232 36 339,580 399,803 12,142 689 411,256
Other............ 7,813 12 -- 7,825 41,804 15 69 41,750
---------- ------- ------- ---------- ---------- ------- -------- ----------
$1,023,750 $30,255 $ 1,470 $1,052,535 $1,048,724 $25,022 $ 12,596 $1,061,150
========== ======= ======= ========== ========== ======= ======== ==========
Available-for-
Sale
- ----
U.S. Treasury
and other
agencies........ $2,713,515 $26,461 $ 5,722 $2,734,254 $2,833,744 $10,881 $ 45,625 $2,799,000
State and
municipal....... 64,277 2,111 9 66,379 56,138 1,054 197 56,995
Mortgage-
backed.......... 4,192,619 38,628 7,123 4,224,124 3,781,281 7,604 85,921 3,702,964
Other............ 174,562 -- 3,937 170,625 186,228 20 2,976 183,272
Equity........... 291,781 1,520 987 292,314 356,799 -- 3,240 353,559
---------- ------- ------- ---------- ---------- ------- -------- ----------
$7,436,754 $68,720 $17,778 $7,487,696 $7,214,190 $19,559 $137,959 $7,095,790
========== ======= ======= ========== ========== ======= ======== ==========
The amortized cost and estimated fair value of securities at December 31, 2000,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
AMORTIZED FAIR
COST VALUE
- - ---------- ----------
Held-to-Maturity
- ----------------
Due in one year or less......... $ 69,956 $ 70,278
Due after one year through five
years.......................... 541,708 547,284
Due after five years through ten
years.......................... 142,772 151,381
Due after ten years............. 269,314 283,592
---------- ----------
Total....................... 1,023,750 1,052,535
---------- ----------
Available-for-Sale
- ------------------
Due in one year or less......... 472,350 472,775
Due after one year through five
years.......................... 2,307,173 2,323,259
Due after five years through ten
years.......................... 1,147,443 1,157,356
Due after ten years............. 3,218,007 3,241,992
---------- ----------
Total....................... 7,144,973 7,195,382
No contractual maturity......... 291,781 292,314
---------- ----------
Total....................... 7,436,754 7,487,696
---------- ----------
Total securities............ $8,460,504 $8,540,231
========== ==========
Proceeds, gross gains and losses realized from the sales of available-for-sale
securities for December 31 were as follows:
2000 1999
- -------- --------
Proceeds.... $482,692 $366,714
Gross gains. 396 10,996
Gross losses 813 102
Trading account assets are reported at fair value with net unrealized gains of
$17 and net unrealized losses of $526 and $554 included in earnings during
2000, 1999 and 1998, respectively.
At December 31, 2000 and 1999, securities with a carrying value of $5,667,630
and $5,811,075, respectively, were pledged as collateral to secure public
deposits and for other purposes. There were no obligations of any one issuer
exceeding 10% of consolidated shareholders' equity at December 31, 2000. There
were no transfers or sales of held-to-maturity securities during 2000 or 1999.
- --------------------------------------------------------------------------------
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE H -- LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2000 1999
----------- -----------
Commercial:
Commercial, financial and
other.................... $17,660,562 $17,042,740
Tax-exempt................ 605,165 690,053
Retail:
Direct.................... 1,338,265 1,063,619
Indirect.................. 4,219,917 3,740,683
Other revolving credit.... 894,639 716,399
Real estate:
Construction.............. 3,370,031 2,311,362
Commercial mortgages...... 9,025,271 7,754,206
Residential mortgages..... 9,234,080 7,756,983
Lease financing -- net...... 2,839,386 2,597,271
Foreign..................... 1,380,186 1,260,674
----------- -----------
Total loans -- net........ $50,567,502 $44,933,990
=========== ===========
Loans at December 31, 2000 and 1999 that had been placed on nonaccrual totaled
$498,592 and $203,821, respectively. Interest income which would have been
recorded pursuant to the original terms of nonaccrual loans was $36,536 and
$38,121 on the preceding dates. Interest income recorded on these loans was
$12,403 and $6,653, respectively.
The Corporation follows Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan." A loan is defined as
impaired when, based on current information and events, it is probable that the
creditor will be unable to collect all amounts of principal and interest due
according to the contractual terms of the loan agreement. Impairment is
measured by discounting the expected future cash flows at the loan's effective
interest rate. For real estate loans, impairment is measured based on the
estimated fair value of the underlying collateral. If the present value of the
expected future cash flows, or the fair value of collateral in the case of a
real estate loan, is less than the loan's recorded balance, the deficiency is
considered in evaluating the overall adequacy of the allowance for loan losses.
The following table summarizes impaired loans and related allowance information
at December 31.
2000 1999
-------- --------
Impaired loans with related
allowance.................... $320,107 $139,815
Impaired loans with no related
allowance.................... 121,792 9,441
-------- --------
Total impaired loans........ $441,899 $149,256
======== ========
Allowance on impaired loans... $128,153 $ 42,900
======== ========
YEAR ENDED DECEMBER 31
-------------------------
2000 1999 1998
-------- -------- -------
Average impaired loans.... $248,730 $117,548 $31,026
Interest income........... 3,641 2,012 5,942
Cash-basis interest income 3,641 851 2,600
Changes in the allowance for loan losses for the three years ended December 31
were as follows:
2000 1999 1998
--------- --------- --------
Balance at beginning of
year.................... $ 436,680 $ 417,862 $410,593
Additions from
acquisitions............ 7,017 39 2,613
Provision for loan losses 390,231 95,381 46,100
Recoveries on loans
previously charged off.. 20,754 27,179 30,619
Loans charged off........ (187,028) (103,781) (72,063)
--------- --------- --------
Balance at end of year... $ 667,654 $ 436,680 $417,862
========= ========= ========
Loans totaling $15,937, $14,583 and $15,258 were transferred to foreclosed real
estate during 2000, 1999 and 1998, respectively.
It is the policy of the Corporation to review each prospective credit in order
to determine an adequate level of security or collateral to obtain prior to
making the loan. The type of collateral will vary and ranges from liquid assets
to real estate. The Corporation's access to collateral, in the event of
borrower default, is assured through adherence to state lending laws and the
Corporation's lending standards and credit monitoring procedures. The
Corporation regularly monitors its credit concentrations on loan purpose,
industry and customer bases. At year-end, there were no material credit
concentrations within these categories.
The Corporation's subsidiaries have granted loans and extended letters of
credit to certain directors and executive officers of the Corporation and its
subsidiaries and to their associates. The aggregate amount of loans was $42,035
and $152,904 at December 31, 2000 and 1999, respectively. During 2000, $247,776
in new loans were made and repayments totaled $358,645. Outstanding standby
letters of credit to related parties totaled $945 at December 31, 2000. There
were no outstanding standby letters of credit to related parties at December
31, 1999. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility.
At December 31, 2000, loans with a carrying value of $6,134,149 were pledged as
collateral for Federal Funds purchased, long-term debt and other liabilities.
Loans held for sale at December 31 along with activity during the period are
summarized as follows:
2000 1999
----------- -----------
Balance at beginning of year $ 45,185 $ 295,817
Originations/purchases...... 2,584,416 4,258,957
Sales/transfers............. (2,509,984) (4,509,589)
----------- -----------
Balance at end of year...... $ 119,617 $ 45,185
=========== ===========
15
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE I -- PREMISES, EQUIPMENT AND LEASES
Premises and equipment at December 31 are summarized as follows:
2000 1999
- - ---------- ----------
Land............................. $ 130,468 $ 126,442
Premises......................... 700,885 685,185
Equipment........................ 877,591 873,544
Leasehold improvements........... 131,532 129,361
---------- ----------
1,840,476 1,814,532
Less accumulated depreciation and
amortization.................... 937,065 869,688
---------- ----------
Total premises and
equipment.................. $ 903,411 $ 944,844
========== ==========
The annual minimum rentals under the terms of the Corporation's noncancelable
operating leases as of December 31, 2000 are as follows:
2001................................. $ 75,536
2002................................. 62,292
2003................................. 53,808
2004................................. 47,397
2005................................. 39,940
Thereafter........................... 167,454
--------
Total minimum lease payments.... $446,427
========
The net rental expense for all operating leases amounted to $83,128 in 2000,
$79,079 in 1999 and $67,472 in 1998. Certain leases have various renewal
options and require increased rentals under cost of living escalation clauses.
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$141,308, $143,307 and $111,551, respectively.
- --------------------------------------------------------------------------------
NOTE J -- CREDIT ARRANGEMENTS, SHORT-TERM BORROWED FUNDS AND CERTIFICATES OF
DEPOSIT
At December 31, 2000 and 1999, lines of credit arrangements aggregating
$490,000 and $400,000, respectively, were available to the Corporation from
unaffiliated banks. Commitment fees were 8 basis points in 2000 and 1999;
compensating balances are not required. The unused portion of these banking
arrangements principally serves as commercial paper back-up lines. There were
no borrowings outstanding under credit arrangements during 2000 or 1999.
Federal funds purchased and securities sold under repurchase agreements
generally mature within one to four days from the transaction date. Securities
sold under repurchase agreements are delivered to either broker-dealers or to
custodian accounts for customers. The broker-dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
their operations and have agreed to resell to the Corporation identical
securities at the maturity of the agreements. Other borrowed funds consist of
term federal funds purchased, treasury tax and loan deposits and short-term
bank notes and are generally repaid within seven to 120 days from the
transaction date. The weighted average interest rate paid on other borrowed
funds was 5.79% and 3.82% at December 31, 2000, and December 31, 1999,
respectively.
The scheduled maturities of certificates of deposit subsequent to December 31,
2000 are $9,418,376 in 2001, $1,842,698 in 2002, $1,294,911 in 2003, $172,365
in 2004 and $479,647 thereafter. The remaining maturity of domestic office
certificates of deposit in denominations of $100 or more is $1,268,671, three
months or less; $613,192, over three through six months; $847,146, over six
through twelve months; and $944,210, over twelve months.
- --------------------------------------------------------------------------------
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE K -- LONG-TERM DEBT
Long-term debt at December 31 is summarized as follows:
2000 1999
- - ----------- ----------
Wachovia Corporation:
Senior debt:
Senior floating rate notes due in 2000, net of discount of $93..................................... $ -- $ 249,907
Senior floating rate notes due in 2001, net of discount of $116 and $266, respectively............. 299,884 299,734
6.925% senior notes due in 2003, net of discount of $370........................................... 299,630 --
6.70% senior notes due in 2004, net of discount of $1,522 and $1,907, respectively................. 598,478 598,093
7.45% senior notes due in 2005, net of discount of $461............................................ 549,539 --
6.625% senior notes due in 2006, net of discount of $572 and $651, respectively.................... 199,428 199,349
----------- ----------
Total senior debt................................................................................. 1,946,959 1,347,083
Subordinated debt (a):
8.15% subordinated notes due in 2002............................................................... 150,000 150,000
6.375% subordinated debt securities due in 2003, net of discount of $537 and $759, respectively.... 249,463 249,241
Floating rate subordinated debt securities due in 2005............................................. 300,000 --
6.8% subordinated notes due in 2005, net of discount of $191 and $226, respectively................ 249,809 249,774
6.25% subordinated notes due in 2008, net of discount of $1,843 and $2,031, respectively........... 348,157 347,969
5.625% subordinated notes due in 2008, net of discount of $2,179 and $2,396, respectively.......... 397,821 397,604
6.375% subordinated notes due in 2009, net of discount of $213 and $232, respectively.............. 249,787 249,768
6.15% subordinated notes due in 2009, net of discount of $2,238 and $2,445, respectively........... 397,762 397,555
6.605% subordinated notes due in 2025.............................................................. 250,000 250,000
----------- ----------
Total subordinated debt........................................................................... 2,592,799 2,291,911
Other................................................................................................ 27,027 27,024
----------- ----------
Total Wachovia Corporation........................................................................ 4,566,785 3,666,018
Subsidiaries:
Bank notes, net of discount of $4,045 and $5,641, respectively (b)................................... 2,206,821 2,353,053
Federal Home Loan Bank borrowings (c)................................................................ 2,722,989 782,989
7.70% subordinated notes due in 2010, net of discount of $129 (a).................................... 299,871 --
Other................................................................................................ 14,633 15,459
----------- ----------
Total subsidiaries................................................................................ 5,244,314 3,151,501
Capital trusts (a):
Wachovia Capital Trust I -- 7.64% Capital Securities due in 2027 (d)................................. 300,000 300,000
Wachovia Capital Trust II -- Floating Rate Capital Securities due in 2027, net of discount of $2,117
and $2,465, respectively (e)........................................................................ 297,883 297,535
Wachovia Capital Trust V -- 7.965% Capital Securities due in 2027 (f)................................ 300,000 300,000
Central Fidelity Capital Trust I -- Floating Rate Capital Securities due in 2027, net of discount of
$764 and $791, respectively (g)..................................................................... 99,236 99,209
----------- ----------
Total capital trusts.............................................................................. 997,119 996,744
----------- ----------
Total long-term debt.............................................................................. $10,808,218 $7,814,263
=========== ==========
(a)Subordinated debt qualifies for inclusion in the determination of total
capital under the risk-based capital guidelines. The capital trusts qualify
for inclusion in Tier I capital under the risk-based capital guidelines.
(b)Wachovia Bank, N.A. has an ongoing bank note program under which the bank
may offer an aggregate principal amount of up to $19.4 billion. The notes
can be issued globally as fixed or floating rate and with maturities
beginning at seven days. Bank notes with original maturities of one year or
less are included in other short-term borrowed funds. Bank notes with
original maturities greater than one year are classified as long-term debt.
Interest rates on long-term notes ranged from 5.4% to 7.0% and 4.9% to 7.0%
with maturities ranging from 2001 to 2040 and 2000 to 2039 at December 31,
2000 and 1999, respectively. The average rates were 6.58% and 6.07% with
average maturities of 4.7 years and 3.9 years at December 31, 2000 and 1999,
respectively.
(c)The Federal Home Loan Bank borrowings were issued as fixed or floating rate
with terms of 2 years to 5 years. Interest rates on the borrowings ranged
from 4.940% to 7.06% and 5.63% to 7.06% for December 31, 2000 and 1999 and
with maturities ranging from 2001 to 2009 and 2000 to 2004 at December 31,
2000 and 1999, respectively. Borrowings from the Federal Home Loan Bank are
collateralized by qualifying securities and loans.
(d)In December 1996, Wachovia Capital Trust I (WCT I), a wholly owned
subsidiary, issued $300,000 of 7.64% Capital Securities due in 2027. WCT I
invested the proceeds of the Capital Securities, together with $9,280 paid
by the Corporation for WCT I's Common Securities, in $309,280 of the
Corporation's 7.64% Junior Subordinated Deferrable Interest Debentures. WCT
I's sole asset is the Junior Subordinated Deferrable Interest Debentures
which mature in 2027. The Corporation has guaranteed all of WCT I's
obligations under the Capital Securities.
(e)In January 1997, Wachovia Capital Trust II (WCT II), a wholly owned
subsidiary, issued $300,000 Floating Rate Capital Securities due in 2027.
WCT II invested the proceeds of the Capital Securities, together with $9,280
paid by the Corporation for WCT II's Common Securities, in $305,692, net of
discount of $3,588, of the Corporation's Floating Rate Junior Subordinated
Deferrable Interest Debentures. WCT II's sole asset is the Junior
Subordinated Deferrable Interest Debentures which mature in 2027. The
Corporation has guaranteed all of WCT II's obligations under the Capital
Securities.
(f)In June 1997, Wachovia Capital Trust V (WCT V), a wholly owned subsidiary,
issued $300,000 of 7.965% Capital Securities due in 2027. WCT V invested the
proceeds of the Capital Securities, together with $9,280 paid by the
Corporation for WCT V's Common Securities, in $309,280 of the Corporation's
7.965% Junior Subordinated Deferrable Interest Debentures. WCT V's sole
asset is the Junior Subordinated Deferrable Interest Debentures which mature
in 2027. The Corporation has guaranteed all of WCT V's obligations under the
Capital Securities.
(g)In April 1997, Central Fidelity Capital Trust I (CFCT I), a wholly owned
subsidiary, issued $100,000 Floating-Rate Capital Securities due in 2027.
CFCT I invested the proceeds of the Capital Securities, together with $3,093
paid by the Corporation for CFCT I's Common Securities, in $103,093 of the
Corporation's Floating-Rate Junior Subordinated Debt Securities. CFCT I's
sole asset is the Junior Subordinated Debt Securities which mature in 2027.
The Corporation has guaranteed all of CFCT I's obligations under the Capital
Securities.
The principal maturities of long-term debt subsequent to December 31, 2000 are
$1,546,978 in 2001, $904,013 in 2002, $853,615 in 2003, $824,387 in 2004,
$2,099,864 in 2005 and $4,579,361 thereafter.
- --------------------------------------------------------------------------------
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE L -- CAPITAL STOCK
At December 31, 2000, 39,419,911 common shares were reserved for the conversion
of notes and issuance for employee benefit plans, the dividend reinvestment
plan and pending business combinations.
During 2000, the Corporation repurchased 1,999,300 shares under three separate
stock repurchase authorizations by the Board of Directors. Repurchased shares
were or will be used for various corporate purposes including the issuance of
shares for purchase business combinations, employee benefit plans and the
dividend reinvestment plan.
The Corporation has one active stock option plan, the restated 1994 Wachovia
Corporation Stock Plan. Under this Plan, up to 2.5% of the Corporation's
outstanding common stock at year-end may be granted to selected key employees
and nonemployee directors in the form of incentive and nonqualified stock
options, stock appreciation rights (SARS), restricted stock awards and
restricted units. Since the inception, a total of 16,006,299 options, 2,505,305
awards and 125,000 SARS have been granted. The Corporation also has several
predecessor plans, the 1989 Plan and plans of merged entities which were
assumed with appropriate conversion shares under option and option price. These
plans continue to have options outstanding which may be exercised.
The Corporation's stock plans provide for the granting of options or awards for
the purchase or issuance of 21,792,187 shares at 100% of the fair market value
of the stock at the date of the grant. A committee of the Board of Directors
determines such times options and awards shall be granted and exercised and the
term of the exercise period (not to exceed 10 years). The plan awards officers
shares of restricted stock earned contingent upon both a performance
requirement and a five-year period. Additionally, newly elected nonemployee
directors are granted a one-time award of 1,000 shares of restricted stock to
be earned over a three-year period and nonemployee directors are awarded 250
shares of restricted stock annually which are earned over a one-year period.
The cost relating to performance-based stock compensation was $33,132, $26,177
and $15,998 during 2000, 1999 and 1998, respectively.
The following table reflects pro forma net income and earnings per share had
the Corporation elected to adopt the fair value approach of FASB 123.
2000 1999 1998
-------- -------- --------
Income from continuing
operations:
As reported............ $663,023 $806,244 $734,113
Pro forma.............. 641,248 791,117 727,138
Basic earnings per share:
As reported............ $ 3.27 $ 3.98 $ 3.58
Pro forma.............. 3.16 3.90 3.55
The weighted average fair values of options at their grant date during 2000,
1999 and 1998 were $17.17, $18.18 and $16.46, respectively. The estimated fair
value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted-average of the
assumptions used in the model.
2000 1999 1998
---- ---- ----
Risk-free interest rate...... 6.68% 4.87% 5.73%
Expected years until exercise 7.50 6.50 6.50
Expected stock volatility.... 22% 21% 19%
Dividend yield............... 3.01% 3.04% 3.20%
Activity in the option and award plans during 2000, 1999 and 1998 is summarized
as follows:
OPTIONS AND AWARDS
OUTSTANDING
AVAILABLE --------------------- OPTION PRICE
FOR GRANT AWARDS OPTIONS PER SHARE
---------- --------- ---------- ------------
Total December 31,
1997.............. 5,148,165 659,974 8,295,661 $11.10-76.69
Granted.......... (3,209,626) 364,426 2,845,200 75.00-87.38
Exercised........ -- (69,150) (2,159,068) 15.73-75.00
Authorized....... 3,064,084 -- -- --
Forfeited........ 72,030 (1,000) (115,150) 33.88-86.50
---------- --------- ----------
Total December 31,
1998.............. 5,074,653 954,250 8,866,643 11.10-87.38
Granted.......... (4,243,285) 769,456 3,473,829 79.44-89.19
Assumed (IJL and
OFFITBANK)...... 352,646 200,662 24.35-65.29
Exercised........ -- (80,676) (1,151,761) 11.12-85.88
Authorized....... 3,984,924 -- -- --
Forfeited........ 229,015 (18,699) (226,121) 19.75-86.50
---------- --------- ----------
Total December 31,
1999.............. 5,045,307 1,976,977 11,163,252 11.10-89.19
Granted.......... (5,204,049) 712,049 4,492,000 48.69-69.13
Exercised........ -- (292,974) (793,963) 11.12-60.63
Authorized....... 4,735,350 -- -- --
Forfeited........ 508,982 (36,546) (514,198) 33.88-89.19
---------- --------- ----------
Total December 31,
2000.............. 5,085,590 2,359,506 14,347,091 11.10-89.19
========== ========= ==========
The following table summarizes information concerning currently outstanding and
exercisable options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------ --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
$11.10-30.00.. 432,898 1.50 $26.71 432,898 $26.71
30.01-50.00.. 2,456,155 4.40 38.24 2,199,709 37.51
50.01-70.00.. 5,749,156 8.40 61.16 1,133,046 58.84
70.01-89.19.. 5,708,882 7.68 81.67 2,103,782 80.78
---------- ---------
14,347,091 5,869,435
========== =========
- --------------------------------------------------------------------------------
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE M -- OFF-BALANCE SHEET TRADING AND LENDING ACTIVITIES
The Corporation maintains positions in a variety of financial instruments with
off-balance sheet risk to accommodate customers' financing objectives and
management of interest rate and foreign currency risk. The Corporation
maintains active trading positions in foreign exchange forward contracts and
manages credit risk through the establishment of offsetting sell positions, as
well as standard limit and monitoring procedures. The Corporation maintains a
trading portfolio of interest rate swap and option (caps and floors) contracts
and foreign exchange options consisting of generally matched, offsetting
contracts with customer and market counterparties.
Off-balance sheet financial instruments involve, in varying degrees, exposure
to credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The Corporation follows the same credit
policies and careful underwriting practices in making commitments and
conditional obligations as it does for on-balance sheet
instruments. In those instances where collateral is necessary to support
financial instrument credit risk, the Corporation assures its ability to access
borrower's collateral, in the event of default, through strict adherence to
corporate lending policy and applicable state lending laws.
Derivative Financial Instruments Held or Issued for Trading Purposes -- The
amounts disclosed below represent the year-end notional and fair value of
derivative financial instruments held or issued for trading purposes and the
average fair value during the year. Notional principal amounts are often used
to express the volume of these transactions but do not represent the much
smaller amounts potentially subject to credit risk. The Corporation's credit
exposure to off-balance sheet derivative financial instruments is represented
by the fair value gain of the instrument if a counterparty fails to perform.
Options written do not expose the Corporation to credit risk, except to the
extent of the underlying risk in the debt instrument that the Corporation may
be obligated to acquire under certain written put options. The present value of
purchased caps and floors in a gain position represents the Corporation's
potential credit exposure.
2000 1999
------------------------------------------ ------------------------------------------
NOTIONAL FAIR VALUE FAIR VALUE AVERAGE NOTIONAL FAIR VALUE FAIR VALUE AVERAGE
VALUE GAINS (LOSSES) FAIR VALUE VALUE GAINS (LOSSES) FAIR VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. dollar interest rate
contracts as intermediary:
Interest rate swaps-pay
fixed...................... $7,257,120 $33,148 $(62,100) $ 226 $8,240,207 $204,572 $ (16,759) $ 172
Interest rate swaps-pay
floating................... 7,363,943 85,806 (16,833) (113) 8,038,233 11,850 (136,278) (64)
Interest rate caps and
floors written............. 2,029,128 2,194 (46,658) (265) 2,009,209 6,138 (33,566) (523)
Interest rate caps and
floors purchased........... 1,265,882 47,724 (2,491) 158 1,698,451 10,089 (11,927) 319
Securities trading activities:
Commitments to purchase
securities, futures and
forward contracts.......... 3,200 -- -- (9) 38,850 2 (24) 24
Commitments to sell
securities, futures and
forward contracts.......... 86,880 -- -- (3) 74,141 654 -- 160
Foreign exchange trading
activities:
Commitments to purchase
foreign exchange........... 3,882,168 81,840 (31,114) (36,865) 2,888,413 13,708 (32,731) (5,683)
Commitments to sell
foreign exchange........... 2,477,118 34,191 (81,396) 219,137 1,571,906 37,119 (10,482) 10,940
Foreign exchange options
written.................... 33,803 388 (242) 94 34,960 416 (365) 24
Foreign exchange options
purchased.................. 25,500 299 (131) 169 35,023 576 (551) 9
The Corporation controls the credit risk of these instruments through adherence
to credit approval policies, monetary limits and monitoring procedures.
Entering into interest rate swap agreements involves not only credit risk but
also interest rate and foreign currency risk associated with unmatched
positions. The Corporation controls the interest rate and foreign currency risk
inherent in the derivative trading portfolio by entering into offsetting
positions or by using other hedging techniques. Risks are further mitigated for
those instruments that trade on organized exchanges, as the exchanges provide
oversight and determine who may buy and sell such instruments.
Interest Rate Swaps -- These transactions generally involve the exchange of
fixed- and floating-rate payments without the exchange of the underlying
principal amounts. Payments made or received under swap contracts are accrued
based on contractual terms and are reported as other operating income. The
related accrued amounts receivable or payable to customers or counterparties
are included in other assets or liabilities. Revenues from the customer
portfolio represent a small profit margin on intermediated transactions. The
difference in the fair value of the offsetting contracts is not material.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE M -- OFF-BALANCE SHEET TRADING AND LENDING ACTIVITIES -- CONCLUDED
At December 31, 2000, the weighted average maturity of pay-fixed swaps and
receive-fixed swaps held in the customer portfolio was 3.58 years. Under
pay-fixed swap agreements, the Corporation paid interest at a weighted average
fixed rate of 5.96% and received interest at a weighted average floating rate
of 6.58% (based on year-end rates). Under receive-fixed swap agreements, the
Corporation received interest at a weighted average fixed rate of 6.13% and
paid interest at a weighted average floating rate of 6.58% (based on year-end
rates).
Interest Rate Caps and Floors -- These instruments are written by the
Corporation to enable its customers to transfer, modify, or reduce their
interest rate risk exposure. In a cap or floor contract, the purchaser pays a
premium at the initiation of the contract for the right to receive payments if
market interest rates are greater than the strike price of a cap or less than
the strike price of a floor. Payments made or received under cap or floor
contracts are accrued based on contractual terms and are reported as other
operating income.
Commitments to Purchase and Sell Securities, Futures and Forward Contracts --
These instruments are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to deliver a specified instrument
at a specified price or yield at a specified date. Commitments to purchase and
sell securities, futures and forward contracts used in securities trading
operations are recognized currently at market value and are reported in capital
markets income.
Net Options Written to Purchase and Sell Foreign Exchange -- Forward
commitments involve the purchase or sale of foreign currency amounts for
delivery at a specified future date. Payments on forward commitments are
exchanged on the delivery date based on the exchange rate in the contract.
Forward commitments to purchase and sell foreign exchange are recognized at
market value and are reported as other operating income.
Foreign Exchange Options -- These agreements represent rights to purchase or
sell foreign currency at a predetermined price at a future date. The purchaser
pays a premium at the initiation of the contract for the right to exchange a
specified amount at the contract's exchange rate at the maturity of the option.
Revenues from the derivative trading portfolio are shown below.
2000 1999 1998
- ------- ------- -------
Interest rate contracts $16,533 $19,004 $19,406
Securities activities.. (1,714) 2,261 (2,304)
Foreign exchange
activities............ 22,899 19,694 20,054
------- ------- -------
Total............. $37,718 $40,959 $37,156
======= ======= =======
Off-Balance Sheet Financial Instruments Issued for Lending Activities -- The
Corporation issues off-balance sheet financial instruments as part of its
commercial and consumer lending activities. The contract amounts of these
instruments represent potential credit risk at December 31 as shown below:
2000 1999
- ----------- -----------
Commercial and consumer
lending activities:
Unfunded commitments to
extend credit............. $46,507,267 $43,172,576
Standby letters of credit.. 9,444,534 9,564,012
Commercial and similar
letters of credit......... 177,897 146,523
Participations in bankers'
acceptances............... 5,850 4,950
Commitments to Extend Credit -- These are legally binding contracts to lend to
a customer, provided there is no contract violation. These commitments have
fixed termination dates and generally require payment of a fee. As most
commitments expire prior to being drawn, the amounts shown do not necessarily
represent the future cash requirements of the contracts. Credit worthiness is
evaluated and in some instances collateral is obtained to support the
borrowing. Approximately 25% at December 31, 2000 and approximately 23% at
December 31, 1999 of unfunded commitments to extend credit were supported by
collateral. Of the total unfunded commitment amounts presented, approximately
16% in 2000 and 15% in 1999 were represented by real estate commitments.
Standby, Commercial and Similar Letters of Credit -- These instruments are
conditional commitments issued by the Corporation guaranteeing the performance
of a customer to a third party. These guarantees are issued primarily to
support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
credit to customers and is subject to the Corporation's underwriting process.
At December 31, 2000 and 1999, approximately 5% of these instruments were
supported by collateral. There were no significant concentrations of letters of
credit to any one group of borrowers at either year-end.
Participation in Bankers' Acceptances -- These instruments represent risk
participation in time drafts drawn by customers under a committed multibank
credit facility. These drafts have been accepted and remarketed by other
financial institutions. Under the terms of these arrangements, the Corporation
may be required to reimburse the accepting financial institution for the
Corporation's pro rata share of any payment default by the customer.
- --------------------------------------------------------------------------------
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE N -- OFF-BALANCE SHEET RISK MANAGEMENT ACTIVITIES
The Corporation uses a variety of off-balance sheet financial instruments as
part of its overall interest rate risk management process. The Corporation's
principal objective of asset/liability management activities is to provide
maximum levels of net interest income while maintaining acceptable levels of
interest rate and liquidity risk and facilitating the Corporation's funding
needs. Accordingly, the Corporation uses a combination of derivative financial
instruments, including interest rate swaps, futures and options with indices
that correlate to on-balance sheet instruments to modify the repricing
characteristics of interest-earning assets and interest-bearing liabilities.
The amounts disclosed in the following table represent the year-end notional
and fair value of derivative financial instruments held for risk management
purposes. The Corporation's credit exposure to off-balance sheet derivative
financial instruments is represented by the fair value gain of the instrument
if a counterparty fails to perform.
2000 1999
------------------------------- -------------------------------
NOTIONAL FAIR VALUE FAIR VALUE NOTIONAL FAIR VALUE FAIR VALUE
VALUE GAINS (LOSSES) VALUE GAINS (LOSSES)
---------- ---------- ---------- ---------- ---------- ----------
Convert floating rate liabilities to fixed:
Swaps-pay fixed/receive floating......... $ 300,000 $ 892 $ (467) $ 300,000 $ 4,997 $ --
Convert fixed rate assets to floating:
Swaps-pay fixed/receive floating......... 134,611 548 (588) 538,427 13,564 (4,515)
Convert fixed rate liabilities to floating:
Swaps-receive fixed/pay floating......... 5,396,000 141,681 (21,991) 3,100,000 842 (144,128)
Forward starting swaps-pay floating/
receive fixed........................... 72,468 -- (439) 72,468 -- (7,633)
Convert liabilities with quarterly rate
resets to monthly:
Swaps-receive floating/pay floating...... 300,000 65 -- 300,000 28 --
Convert floating rate assets to fixed:
Swaps-receive fixed/pay floating......... 202,850 1,993 -- 256,383 779 (2,641)
---------- -------- -------- ---------- ------- ---------
Total derivatives..................... $6,405,929 $145,179 $(23,485) $4,567,278 $20,210 $(158,917)
========== ======== ======== ========== ======= =========
NOTE O -- INCOME TAXES
The provision for income taxes is summarized below.
2000 1999 1998
-------- -------- --------
Current:
Federal................ $ 72,099 $ 20,220 $ 73,731
Foreign................ 2,468 1,276 686
State and local........ 27,487 20,454 9,266
-------- -------- --------
Total current....... 102,054 41,950 83,683
Deferred:
Federal................ 236,754 349,063 247,711
State.................. 3,193 17,451 14,070
-------- -------- --------
Total deferred...... 239,947 366,514 261,781
-------- -------- --------
Total income tax
expense
attributable to
continuing
operations......... $342,001 $408,464 $345,464
======== ======== ========
The reasons for the difference between consolidated income tax expense and the
amount computed by applying the statutory federal income tax rate of 35% to
income before taxes were as follows:
2000 1999 1998
---------- ---------- ----------
Income from
continuing
operations before
income taxes.......... $1,005,024 $1,214,708 $1,079,577
========== ========== ==========
Federal income taxes
at statutory rate..... $ 351,758 $ 425,148 $ 377,852
State and local income
taxes, net of federal
benefit............... 19,941 24,638 15,169
Effect of tax-exempt
securities interest
and other income...... (46,658) (47,116) (51,499)
Other items............ 16,960 5,794 3,942
---------- ---------- ----------
Total income tax
expense
attributable
to continuing
operations........ $ 342,001 $ 408,464 $ 345,464
========== ========== ==========
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE O -- INCOME TAXES -- CONCLUDED
Significant components of the Corporation's deferred tax assets and
liabilities, which are included in other liabilities, at December 31 are as
follows:
DEFERRED TAX ASSETS
-------------------
2000 1999
-------- --------
Allowance for loan losses........... $256,305 $167,131
Employee compensation and retirement
benefits........................... 125,647 103,317
Unrealized losses on securities
available-for-sale................. -- 45,450
Other............................... 18,264 22,582
-------- --------
Gross deferred tax assets...... $400,216 $338,480
======== ========
DEFERRED TAX LIABILITIES
------------------------
2000 1999
---------- --------
Unrealized gains on securities
available-for-sale................. $ 19,048 $ --
Depreciation........................ 47,793 40,209
Lease financing..................... 1,133,044 798,191
Accretion of discounts on securities 16,497 16,519
Identifiable intangibles............ 22,914 12,855
Other............................... 23,536 32,830
---------- --------
Gross deferred tax
liabilities................... $1,262,832 $900,604
========== ========
Net deferred tax liability..... $ 862,616 $562,124
========== ========
- --------------------------------------------------------------------------------
NOTE P -- CASH, DIVIDEND, LOAN RESTRICTIONS, CAPITAL RATIOS AND CONTINGENT
LIABILITIES
In the normal course of business, the Corporation and its subsidiaries enter
into agreements, or are subject to regulatory requirements, that result in
cash, debt and dividend restrictions. A summary of the most restrictive items
follows.
The Corporation's banking subsidiaries are required to maintain average reserve
balances with the Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 2000 was approximately $244,614.
Under current Federal Reserve regulations, the banking subsidiaries also are
limited in the amount they may loan to their affiliates, including the
Corporation. Loans to a single affiliate may not exceed 10% and loans to all
affiliates may not exceed 20% of the bank's capital, surplus and undivided
profits plus the allowance for loan losses. Based on these limitations,
approximately $901,172 was available for loans to the Corporation at December
31, 2000.
The approval of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds the bank's
net profits, as defined, for that year combined with its retained net profits
for the preceding two calendar years. Under this formula, the banking
subsidiaries cannot distribute as dividends to the Corporation in 2001, without
the approval of the Comptroller of the Currency, more than $652,064 plus an
additional amount equal to the banks' retained net profits for 2001 up to the
date of any dividend declaration.
As a result of the above dividend and loan restrictions, approximately
$5,081,969 of consolidated net assets of the Corporation's banking subsidiaries
at December 31, 2000 was restricted from transfer to the Corporation in the
form of cash dividends, loans or advances.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under the
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can initiate
certain mandatory, and possible discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements.
The Corporation and its banking subsidiaries are required to maintain minimum
Tier I capital, total risk-based capital and Tier I leverage ratios of 4%, 8%
and 3%, respectively. The Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
At December 31, 2000, the most recent notification from the Comptroller of the
Currency categorized the Corporation's banking subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be well
capitalized, the banking subsidiaries must maintain minimum Tier I capital,
total risk-based capital, and Tier I leverage ratios of 6%, 10% and 5%,
respectively. There are no conditions or events since that notification that
management believes have changed the banking subsidiaries' well capitalized
status.
The actual capital amounts and ratios for the Corporation at December 31, 2000
are presented in the following table:
2000 1999
- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO
- ---------- ----- ---------- -----
Wachovia Corporation
Tier I capital.... $6,179,667 7.55% $5,795,946 7.52%
Total risk-based
capital.......... 9,465,258 11.56 8,458,090 10.98
Tier I leverage... 6,179,667 8.73 5,795,946 8.77
Wachovia Bank, N.A.
Tier I capital.... 5,769,926 7.39 5,458,716 7.33
Total risk-based
capital.......... 9,124,248 11.69 8,191,453 11.00
Tier I leverage... 5,769,926 8.64 5,458,716 8.69
- --------------------------------------------------------------------------------
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE P -- CASH, DIVIDEND, LOAN RESTRICTIONS, CAPITAL RATIOS AND CONTINGENT
LIABILITIES -- CONCLUDED
The Corporation, in the normal course of business, is subject to various
pending or threatened lawsuits in which claims for monetary damages are
asserted. Although it is not possible for the Corporation to predict the
outcome of these lawsuits or the range of any possible loss, management, after
consultation with legal counsel, does not anticipate that the ultimate
aggregate liability, if any, arising from these lawsuits will have a material
adverse effect on the Corporation's financial position or operating results.
- --------------------------------------------------------------------------------
NOTE Q -- PENSION AND OTHER POSTRETIREMENT BENEFITS
The Corporation maintains several defined benefit pension plans, the first of
which covers substantially all employees (the Qualified Plan). The Qualified
Plan provides pension benefits that are based upon the employee's length of
credited service and final average compensation as defined in the plan. The
pension expense of the Qualified Plan is determined using the projected unit
credit method. The Corporation's policy is to fund amounts allowable for
federal income tax purposes. The Corporation also sponsors separate unfunded
nonqualified pension plans that provide certain officers with defined pension
benefits in excess of limits imposed on qualified plans by federal tax law and
for certain compensation not covered in the qualified plans.
The Corporation and its subsidiaries provide certain health care benefits for
retired employees. Substantially all of the employees may become eligible for
these benefits if they reach normal retirement age while working for the
Corporation or its subsidiaries. The benefits are provided through self-insured
plans administered by insurance companies whose premiums are based on the
claims paid during the year.
The following table sets forth the changes in the projected benefit obligations
and the fair value of plan assets for the Corporation's defined benefit pension
plans and health care benefits provided for retired employees and the amounts
recognized in the Consolidated Statements of Condition at December 31.
PENSION BENEFITS OTHER BENEFITS
- - --------------------- -------------------------
2000 1999 2000 1999
- - -------- ----------- --------------- --------
Change in benefit obligation
Projected benefit obligation at beginning of year. $828,236 $ 858,601 $ 70,620 $ 76,059
Service cost...................................... 34,644 37,346 1,943 1,555
Interest cost..................................... 67,563 61,407 7,648 5,488
Actuarial loss (gain)............................. 66,027 (93,420) 31,568 (6,767)
Benefits paid..................................... (38,433) (38,322) (14,168) (8,845)
Plan participants' contributions.................. -- -- 3,206 3,130
Plan amendments................................... 9,968 -- 5,233 --
Special termination benefits...................... 3,894 -- 4,355 --
Acquisitions...................................... 3,655 2,624 796 --
-------- ----------- --------------- --------
Projected benefit obligation at end of year....... $975,554 $ 828,236 $ 111,201 $ 70,620
======== =========== =============== ========
Change in plan assets
Fair value of plan assets at beginning of year.... $910,841 $ 827,310 $ 14,947 $ 13,530
Actual return on plan assets...................... (3,282) 117,556 467 1,417
Employer contributions............................ 4,581 4,297 10,962 5,715
Plan participants' contributions.................. -- -- 3,206 3,130
Benefits paid..................................... (38,433) (38,322) (14,168) (8,845)
Acquisitions...................................... 2,940 -- -- --
-------- ----------- --------------- --------
Fair value of plan assets at end of year.......... $876,647 $ 910,841 $ 15,414 $ 14,947
======== =========== =============== ========
Accrued benefit cost
Funded status..................................... $(98,907) $ 82,605 $ (95,787) $(55,673)
Unrecognized transition (asset) liability......... (11,176) (16,747) 39,078 51,736
Unrecognized prior service cost................... 25,379 16,479 4,591 (6,103)
Unrecognized net loss (gains)..................... 24,924 (125,889) 12,250 (19,893)
-------- ----------- --------------- --------
Accrued benefit cost.............................. $(59,780) $ (43,552) $ (39,868) $(29,933)
======== =========== =============== ========
Weighted-average assumptions as of December 31:
Discount rate..................................... 7.75% 8.00% 7.75% 8.00%
Expected return on plan assets.................... 9.00% 9.00% 7.00% 7.00%
Rate of compensation increase..................... 5.31% 6% through 5.31% 6.00%
2005, 5%
thereafter
Assumed rate of increase in health care costs:
Retirees under age 65........................... -- -- 12% in 2000; 8.00%
8% in 2001;
grading to
6% in 2005
Retirees over age 65............................ -- -- Same as Pre-65 6.00%
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE Q -- PENSION AND OTHER POSTRETIREMENT BENEFITS -- CONCLUDED
The rate of increase in health care costs is assumed to remain constant for
each category of retirees. Included in plan assets at December 31, 2000 were
130,626 shares of Wachovia Corporation common stock with a market value of
$7,593.
PENSION BENEFITS OTHER BENEFITS
- - ---------------------------- -----------------------
2000 1999 1998 2000 1999 1998
- - -------- -------- -------- ------- ------ ------
Components of net periodic benefit cost:
Service cost.......................... $ 34,644 $ 37,346 $ 31,933 $ 1,943 $1,555 $1,396
Interest cost......................... 67,563 61,407 54,963 7,648 5,488 5,573
Expected return on plan assets........ (81,090) (73,438) (63,050) (1,042) (947) (852)
Amortization of unrecognized amounts:
Transition obligation................. (5,587) (5,585) (5,585) 3,265 3,980 3,980
Prior service cost.................... 564 536 537 284 (509) (509)
Net actuarial (gain) loss............. (414) 3,235 2,132 -- (36) (262)
Acquisitions............................ 715 -- -- 796 -- --
Special termination benefits............ 4,414 -- -- 8,003 -- --
-------- -------- -------- ------- ------ ------
Benefit cost............................ $ 20,809 $ 23,501 $ 20,930 $20,897 $9,531 $9,326
======== ======== ======== ======= ====== ======
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest
cost components in 2001............... $ 221 $ 195
Effect on postretirement benefit
obligation as of December 31,
2000.................................. $2,992 $2,644
The Corporation also provides supplemental benefits to substantially all
employees through defined contribution plans designed to encourage participants
to save on a regular basis and to provide such participants with deferred
compensation
and additional performance incentive. Total expense relating to these plans,
which represented the Corporation's matching and discretionary contributions,
was $34,130 in 2000, $30,865 in 1999, and $23,137 in 1998. Employee
participants may elect to contribute from 1% to 15% of base salary. The
Corporation matches 100% of each participant's contribution up to the first 3%
of base salary and 50% of each participant's remaining contribution up to 6% of
base salary with a maximum employer contribution of 4.5% of base salary. The
plans provide for additional contributions of up to 1.5% of salary in
accordance with a pre-established formula based on certain earnings performance
criteria and also for special discretionary employer contributions of up to 4%
of each eligible employee's base salary as approved annually by the Board of
Directors.
- --------------------------------------------------------------------------------
NOTE R -- SELECTED INCOME STATEMENT INFORMATION
The components of other operating income and expense for the three years ended
December 31 were as follows:
2000 1999 1998
-------- -------- --------
Other operating income:
Bankers' acceptance and letter of credit fees..... $ 55,318 $ 46,037 $ 39,025
Other service charges and fees.................... 83,030 67,497 54,695
Other income...................................... 161,365 100,289 107,892
-------- -------- --------
Total other operating income................... $299,713 $213,823 $201,612
======== ======== ========
Other operating expense:
Postage and delivery.............................. $ 44,520 $ 45,458 $ 43,100
Outside data processing, programming and software. 102,363 95,702 58,318
Stationery and supplies........................... 35,901 33,634 32,527
Advertising and sales promotion................... 37,240 31,196 34,413
Professional services............................. 70,809 66,044 50,356
Travel and business promotion..................... 40,097 33,280 28,176
Telecommunications................................ 55,635 52,611 49,406
Amortization of intangible assets................. 55,814 44,529 36,682
Foreclosed property expense....................... (3,182) (853) 571
Other expense..................................... 145,978 132,959 107,532
-------- -------- --------
Total other operating expense.................. $585,175 $534,560 $441,081
======== ======== ========
- --------------------------------------------------------------------------------
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE S -- EARNINGS PER SHARE
YEAR ENDED DECEMBER 31
----------------------------
2000 1999 1998
-------- ---------- --------
Basic (thousands, except per share)
Average common shares outstanding..................... 202,989 202,795 205,058
======== ========== ========
Income from continuing operations..................... $663,023 $ 806,244 $734,113
Income from discontinued operations................... 169,285 204,977 140,057
-------- ---------- --------
Net income.......................................... $832,308 $1,011,221 $874,170
======== ========== ========
Per share amount
Continuing operations............................... $ 3.27 $ 3.98 $ 3.58
Discontinued operations............................. .83 1.01 .68
-------- ---------- --------
Net Income........................................ $ 4.10 $ 4.99 $ 4.26
======== ========== ========
Diluted (thousands, except per share)
Average common shares outstanding..................... 202,989 202,795 205,058
Dilutive common stock options at average market price. 1,311 2,976 3,778
Dilutive common stock awards at average market price.. 127 397 300
Convertible long-term debt assumed converted.......... 23 24 17
-------- ---------- --------
Average diluted shares outstanding.................. 204,450 206,192 209,153
======== ========== ========
Income from continuing operations..................... $663,023 $ 806,244 $734,113
Add interest on convertible long-term debt, net of tax 62 71 48
-------- ---------- --------
Adjusted income from continuing operations.......... 663,085 806,315 734,161
Income from discontinued operations................... 169,285 204,977 140,057
-------- ---------- --------
Adjusted net income................................. $832,370 $1,011,292 $874,218
======== ========== ========
Per share amount
Continuing operations............................... $ 3.24 $ 3.91 $ 3.51
Discontinued operations............................. .83 .99 .67
-------- ---------- --------
Net Income........................................ $ 4.07 $ 4.90 $ 4.18
======== ========== ========
- --------------------------------------------------------------------------------
NOTE T -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. Also, the fair
value estimates presented are based on pertinent information available to
management as of December 31, 2000 and 1999. Such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates and therefore, current estimates of fair value may differ significantly
from the amounts presented.
Trading Account Assets -- Fair values are based on quoted market prices as
recognized in the statements of condition.
Securities -- Fair values are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using market prices for similar
securities.
Loans -- For equity lines and other loans with short-term or variable rate
characteristics, the carrying value reduced by an estimate of credit losses
inherent in the portfolio is a reasonable estimate of fair value. The fair
value of all other loans is estimated by discounting their future cash flows
using interest rates currently being offered for loans with similar terms,
reduced by an estimate of credit losses inherent in the portfolio. The discount
rates used are commensurate with the interest rate and prepayment risks
involved for the various types of loans.
Deposits -- The fair values disclosed for demand deposits (e.g., interest- and
noninterest-bearing demand, savings and money market savings) are equal to the
amounts payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated monthly maturities.
Long-Term Debt -- Fair values are estimated using discounted cash flow
analyses, based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
Many of the Corporation's assets and liabilities are short-term financial
instruments whose carrying amounts reported
in the statements of condition approximate fair value. These
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE T -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONCLUDED
items include cash and due from banks, interest-bearing bank balances, federal
funds sold and securities purchased under resale agreements, due from customers
on acceptances, short-term borrowed funds, acceptances outstanding, and the
financial instruments included in other assets and liabilities. The following
summarizes estimated fair values of the Corporation's remaining on-balance
sheet financial instruments as of December 31.
2000
-----------------------
ESTIMATED
CARRYING FAIR
VALUE VALUE
----------- -----------
Financial assets:
Trading account assets.. $ 960,838 $ 960,838
Securities.............. 8,511,446 8,540,231
Loans, net of allowance
for loan losses........ 49,899,848 50,051,356
Financial liabilities:
Deposits................ 44,412,182 44,466,325
Long-term debt.......... 10,808,218 10,403,092
1999
- -----------------------
ESTIMATED
CARRYING FAIR
VALUE VALUE
- ----------- -----------
Financial assets:
Trading account assets.. $ 870,304 $ 870,304
Securities.............. 8,144,514 8,156,940
Loans, net of allowance
for loan losses........ 44,497,310 44,490,893
Financial liabilities:
Deposits................ 41,786,418 41,846,589
Long-term debt.......... 7,814,263 7,819,811
Off-Balance Sheet Instruments -- Fair values are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing for loan
commitments and letters of credit, and the estimated amount the Corporation
would receive or pay to terminate or replace the contract at current market
rates for the remainder of the off-balance sheet instruments. See Notes M and N
for additional information about off-balance sheet financial instruments.
The estimated fair values of the Corporation's off-balance sheet financial
instruments as of December 31 are summarized below.
The amounts for commitments and letters of credit are presented as negative in
order to represent the approximate cost the Corporation would incur to pay
third parties to assume these commitments. Interest rate contracts and other
off-balance sheet financial instruments represent the net fair value gain or
loss of the contracts.
2000 1999
ESTIMATED ESTIMATED
FAIR VALUE FAIR VALUE
- - ---------- ----------
Unfunded commitments to
extend credit................ $(73,396) $ (76,770)
Letters of credit............. (68,865) (69,921)
Interest rate contracts issued
for trading purposes......... 40,790 34,119
Interest rate contracts held
for purposes other than
trading...................... 121,694 (138,707)
Other off-balance sheet
financial instruments
issued or held for trading
or lending purposes.......... 3,835 8,322
This presentation excludes certain financial instruments and all nonfinancial
instruments. The disclosures excludes customer relationships, deposit base
intangibles and goodwill. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
- --------------------------------------------------------------------------------
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
- --------------------------------------------------------------------------------
$ in thousands
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTE U -- WACHOVIA CORPORATION (PARENT COMPANY ONLY) INFORMATION
The following is a condensed statement of financial condition of the parent
company at December 31.
2000 1999
----------- -----------
Assets
- ------
Cash on demand deposit with bank
subsidiary............................... $ -- $ 669
Interest-bearing bank balances with bank
subsidiaries............................. 2,017,855 1,269,354
Securities................................ 174,102 170,856
Demand loans to nonbank subsidiaries...... 1,244,092 1,243,252
Notes receivable from subsidiaries........ 2,766,714 2,456,455
Investments in:
Bank subsidiaries....................... 6,635,207 6,023,150
Nonbank subsidiaries.................... 821,257 731,090
Other assets.............................. 202,419 211,670
----------- -----------
Total assets.......................... $13,861,646 $12,106,496
=========== ===========
Liabilities and Shareholders' Equity
- ------------------------------------
Parent company commercial paper........... $ 1,855,923 $ 1,658,988
Subordinated notes payable to nonbank
subsidiaries............................. 1,027,987 1,027,600
Long-term debt............................ 4,566,785 3,666,018
Demand loans from bank subsidiary......... 18,015 18,015
Other liabilities......................... 108,397 77,418
Shareholders' equity...................... 6,284,539 5,658,457
----------- -----------
Total liabilities and shareholders'
equity............................... $13,861,646 $12,106,496
=========== ===========
The operating results of the parent company for the three years ended December
31 are shown below.
2000 1999 1998
-------- ---------- --------
Income
- ------
Dividends from:
Bank subsidiaries............ $462,600 $ 617,800 $562,000
Nonbank subsidiaries......... 27,393 77,000 --
Interest from subsidiaries..... 366,907 301,576 222,956
Other interest income.......... 12,391 12,840 7,997
Other income................... 9,060 33,317 57,387
-------- ---------- --------
Total income............... 878,351 1,042,533 850,340
Expense
- -------
Interest on short-term borrowed
funds......................... 103,256 69,619 64,086
Interest on long-term debt..... 352,458 297,646 197,944
Interest paid to subsidiaries.. 1,239 1,354 1,746
Other expense.................. 8,838 33,714 47,858
-------- ---------- --------
Total expense.............. 465,791 402,333 311,634
Income before income tax
benefit and equity in
undistributed net income of
subsidiaries.................. 412,560 640,200 538,706
Income tax benefit............. 28,910 19,801 14,259
-------- ---------- --------
Income before equity in
undistributed net income of
subsidiaries.................. 441,470 660,001 552,965
Equity in undistributed net
income of subsidiaries........ 390,838 351,220 321,205
-------- ---------- --------
Net income................. $832,308 $1,011,221 $874,170
======== ========== ========
The cash flows for the parent company for the three years ended December 31,
were as follows:
2000 1999 1998
----------- ---------- -----------
Operating Activities
- --------------------
Net Income.................. $ 832,308 $1,011,221 $ 874,170
Other, net.................. 51,200 21,648 52,802
Equity in undistributed net
income of subsidiaries..... (390,838) (351,220) (321,205)
----------- ---------- -----------
Net cash provided by
operations.............. 492,670 681,649 605,767
Investing Activities
- --------------------
Net increase in interest-
bearing bank balances...... (748,501) (227,883) (184,968)
Purchases of securities..... (31,198) (76,433) (105,763)
Sales, calls, prepayments
and maturities of
securities................. 27,427 38,371 38,257
Net (increase) decrease in
demand loans to nonbank
subsidiaries............... (840) (464,217) 214,038
Notes issued to subsidiaries (312,764) (213,733) (1,015,908)
Notes repaid by subsidiaries 2,536 300,103 908
Net decrease (increase) in
other assets............... 12,278 (18,810) (22,318)
Equity investment in
subsidiaries............... (25,339) (3,780) (249,001)
----------- ---------- -----------
Net cash used by
investing activities..... (1,076,401) (666,382) (1,324,755)
Financing Activities
- --------------------
Net decrease in loans and
notes from subsidiaries.... -- (3,810) (50,474)
Net increase in commercial
paper...................... 196,935 299,606 325,358
Proceeds from
long-term debt............. 1,144,966 993,359 1,288,859
Maturities and repayments
of
long-term debt............. (250,000) (318,115) --
Issuance of stock........... 40,465 59,478 80,375
Dividend payments........... (463,018) (418,447) (381,798)
Common stock repurchased.... (116,086) (634,623) (531,122)
Increase (decrease) in other
liabilities................ 29,800 7,434 (18,658)
----------- ---------- -----------
Net cash provided (used)
by financing activities.. 583,062 (15,118) 712,540
----------- ---------- -----------
(Decrease) increase
in cash.................... (669) 149 (6,448)
Cash at beginning of year... 669 520 6,968
----------- ---------- -----------
Cash at end of year......... $ -- $ 669 $ 520
=========== ========== ===========
Noncash investing and
financing activities:
Common stock issued on
conversion of long term
debt....................... $ -- $ 250 $ --
The principal maturities of the parent company's long-term debt subsequent to
December 31, 2000 are $325,483 in 2001, $151,427 in 2002, $549,093 in 2003,
$598,477 in 2004, $1,099,349 in 2005 and $2,870,943 thereafter.
27