Exhibit (13)
WACHOVIA CORPORATION 2001 ANNUAL REPORT
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[WACHOVIA LOGO]
WACHOVIA
WACHOVIA CORPORATION 2001 ANNUAL REPORT
ABOUT WACHOVIA
CORPORATE PROFILE
Wachovia Corporation (NYSE:WB), created through the September 1, 2001,
merger of First Union and the former Wachovia, had assets of $330 billion and
stockholders' equity of $28 billion at December 31, 2001. Wachovia is a leading
provider of financial services to 20 million retail, brokerage and corporate
customers throughout the East Coast and the nation. Wachovia is the nation's
fourth largest banking company based on assets and operates 2,800 full-service
banking offices and 4,700 automated teller machines under the First Union and
Wachovia names in 11 East Coast states and Washington, D.C. As the nation's
fifth largest full-service retail broker dealer, based on client assets, the
company offers full-service brokerage with offices in 49 states. Wachovia also
provides global services through more than 30 international offices. Online
banking and brokerage products and services are available through wachovia.com
and firstunion.com. Direct telephone banking is available at 1-800-413-7898.
CONTENTS
2 LETTER TO OUR STOCKHOLDERS
5 CORPORATE OVERVIEW
8 BUSINESS LINE OVERVIEW
16 MANAGEMENT'S ANALYSIS OF OPERATIONS
41 FINANCIAL TABLES
63 MANAGEMENT'S STATEMENT OF RESPONSIBILITY
64 INDEPENDENT AUDITORS' REPORT
65 AUDITED FINANCIAL STATEMENTS
108 BOARD OF DIRECTORS
INSIDE BACK COVER STOCKHOLDER INFORMATION
SECURITIES AND DEBT RATINGS
At December 31, 2001
Wachovia Bank and
First Union National Bank
------------------------------
Wachovia Corporation Short-Term Long-Term
--------------------------------------- Deposits, Deposits,
Short-Term Senior Subordinated Notes, Letters Notes, Letters
Debt Debt Debt of Credit of Credit
---------- ------ ------------ -------------- --------------
Moody's Investors Service P-1 A1 A2 P-1 Aa3
Standard & Poor's A-1 A -- A-1 A+
Fitch F-1 A+ A F-1+ AA-
Note: All Wachovia Corporation and bank ratings are investment grade.
WELCOME TO THE NEW WACHOVIA
We are excited to introduce our new brand. While building on the
heritage of our respective companies, the spirit of today's Wachovia embodies
something entirely unique. Our new brand is built on a rock-solid foundation:
people. The interaction between our employees, customers, shareholders and
communities will expand opportunities and enhance future growth. The brandmark
you see on the cover represents the essence of our new company: a dynamic and
evolving community. The intricate interconnection of flowing lines captures
Wachovia gaining strength from a confluence of cultures, ideas and individuals
working together as a team to support shared goals and collective success.
FINANCIAL HIGHLIGHTS
Years Ended December 31, Percent
--------------------------- Increase
(Dollars in millions, except per share data) 2001 2000 (Decrease)
- ----------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
OPERATING EARNINGS
Net interest income - tax-equivalent $ 7,934 7,536 5%
Fee and other income 6,271 6,815 (8)
- ----------------------------------------------------------------------------------------------------------------
Total revenue - tax-equivalent 14,205 14,351 (1)
Provision for loan losses 1,067 754 42
Noninterest expense 9,559 9,213 4
Income taxes - tax-equivalent 1,223 1,449 (16)
- ----------------------------------------------------------------------------------------------------------------
Income before merger-related, restructuring and
other charges and cumulative effect of a change
in accounting principle (Operating earnings) 2,356 2,935 (20)
After-tax merger-related, restructuring and other charges (737) (2,797) 74
- ----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting
principle 1,619 138 --
Cumulative effect of a change in accounting for
beneficial interests, net of taxes -- (46) --
- ----------------------------------------------------------------------------------------------------------------
Net income 1,619 92 --
Dividends on preferred stock 6 -- --
Net income available to common stockholders (As reported) $ 1,613 92 --%
================================================================================================================
DILUTED EARNINGS PER COMMON SHARE
Income before merger-related, restructuring and other charges
and cumulative effect of a change in accounting principle $ 2.12 2.97 (29)%
Income before cumulative effect of a change in
accounting principle 1.45 0.12 --
Net income $ 1.45 0.07 --%
- ----------------------------------------------------------------------------------------------------------------
CASH OPERATING EARNINGS
Net income $ 2,782 3,270 (15)%
Diluted earnings per common share $ 2.50 3.30 (24)
Return on average tangible common stockholders' equity 20.27% 26.33 --
Return on average common stockholders' equity 13.59 19.19 --
Overhead efficiency ratio 63.61% 61.68 --
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Securities $ 58,467 49,246 19%
Loans, net 163,801 123,760 32
Total assets 330,452 254,170 30
Total deposits 187,453 142,668 31
Long-term debt 41,733 35,809 17
Stockholders' equity $ 28,455 15,347 85%
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CAPITAL ADEQUACY
Tier 1 capital ratio 7.04% 7.02 --
Total capital ratio 11.08% 11.19 --
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ASSET QUALITY
Allowance as % of loans, net 1.83% 1.39 --
Allowance as % of nonperforming assets 175 135 --
Net charge-offs as % of average loans, net 0.70 0.59 --
Nonperforming assets as % of loans, net,
foreclosed properties and loans held for sale 1.13% 1.22 --
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OTHER DATA
Employees 84,046 70,639 19%
Branches and brokerage offices 3,434 2,568 34
ATMs 4,675 3,772 24
Common shares outstanding (In millions) 1,362 980 39
Common stock price $ 31.36 27.81 13
Book value per common share 20.88 15.66 33
Market capitalization 42,701 27,253 57
Dividends paid per common share $ 0.96 1.92 (50)%
================================================================================================================
THE MERGER OF FIRST UNION AND THE FORMER WACHOVIA CLOSED ON SEPTEMBER 1, 2001.
BECAUSE THIS MERGER WAS ACCOUNTED FOR AS A PURCHASE, PRIOR PERIODS HAVE NOT
BEEN RESTATED. RESULTS IN 2001 INCLUDE FOUR MONTHS OF THE FORMER WACHOVIA.
1
LETTER TO OUR STOCKHOLDERS
[PHOTO]
L.M. BAKER JR.
Chairman
[PHOTO]
G. KENNEDY THOMPSON
President and Chief Executive Officer
16% RETURN
TO STOCKHOLDERS
IN 2001
DEAR WACHOVIA STOCKHOLDER,
For your company, the year 2001 will forever be defined by two dates:
September 1, when we completed the merger of First Union Corporation and
Wachovia Corporation, and September 11, when we were shaken to our core by the
loss of so many, including five colleagues, in the terrorist attacks. At the
same time, we have been tremendously moved by the resilience of the American
people and their resolve to keep moving forward.
In this spirit, we redoubled energies toward making sure that the
collective resources and deep-rooted knowledge gained in our merger are rapidly
put to work. The merger of First Union and Wachovia produced an improved market
position, exciting growth potential and an operating strategy designed to
generate enhanced shareholder value. We are focusing the resources of two fine
companies on building a level of service, quality of product and degree of
caring for customers that we believe will set Wachovia apart.
This merger gave the new company added strength and stability in the
face of uncertain economic conditions. That being said, we believe it is
prudent to be highly disciplined particularly while managing through a
challenging economic environment. As this letter is written, there is some
optimism that an economic recovery is in sight. But the recessionary trends
experienced in 2001 were different from previous recessions and any recovery
may be different too.
The recession of 2001 was a "corporate" rather than "consumer" one.
Sharp declines in profits and capital spending stood in contrast to exceptional
resilience among customers purchasing housing and motor vehicles. There
2
WB OUTPERFORMED THROUGHOUT 2001
[GRAPH]
HORIZONTAL DATA POINTS
WB 16.12 12/00 3/01 6/01 9/01 12/01
PHILADELPHIA KBW BANK INDEX -2.32 VERTICAL DATA POINTS
S&P BANK COMPOSITE 0.5 40 30 20 10 0 -10 -20
was not a single quarter of decline in consumer spending, distinguishing this
from virtually all prior recessions. Good consumer news throughout the year was
bolstered by eleven reductions in interest rates, lower energy prices, personal
tax cuts and healthy demand in housing and auto markets.
With these trends in mind, Wachovia's budget planning incorporates a
view of restrained economic growth for year 2002. Should the economy rebound
with greater strength, so much the better. We are confident that Wachovia's
strong customer service, scale in distribution and excellent revenue growth
opportunities will enable us to enhance shareholder value even in a challenging
economic environment.
CREATED SHAREHOLDER VALUE The investment community reacted favorably to
Wachovia's strategic prospects in 2001. Our total return to shareholders (stock
price appreciation and reinvested dividends) of 16 percent outpaced the S&P
Bank Composite index of 0.5 percent and the Philadelphia KBW Bank Index of
negative 2 percent. Thirteen percent growth in the value of our shares ranked
fourth among the nation's 20 largest banking companies as the year came to a
close.
STRENGTHENED BUSINESS LINES In the opening months of 2002, solid results are
emerging that give us confidence in growth expectations:
- - We believe we are achieving our primary goal of improving customer
service. This goal has been paramount in strategic planning and merger
integration. As a result, customers are responding with approval shown
by 11 straight quarters of improved satisfaction scores.
- - We are gathering an increasing share of client assets. In 2001 we
attracted roughly $20 billion of net new money to Wachovia, including
$5 billion in new core deposits, $11 billion in sales of mutual funds
and $3 billion in sales of annuities.
- - We are winning new business - today Wachovia ranks No. 1 or No. 2 in
deposit share in all six of our regional marketplaces. We serve more
than a third of commercial and small businesses in our footprint. We
also moved up in League Table rankings - for example, Wachovia now
ranks among the Top 10 in leveraged loan syndications, asset-backed
finance, convertible bonds, high yield debt and equity underwriting.
- - We are meeting merger targets - we formed a strong, cohesive team
immediately with the top three tiers of management and all market
management leaders in place by year-end 2001. In addition more than
800 systems had been selected before year-end, and a review of branch
consolidation candidates had begun. Wachovia's board of directors
created a merger integration committee to provide direct governance
oversight as we move ahead on a deliberate, well-planned integration
path.
COMPLETED RESTRUCTURING Both companies substantially completed significant
restructuring plans in early 2001 - on time, on budget and as promised. To
recap briefly, we divested businesses that had minimal connection to our growth
strategy, those without scale or competitive strength, and those with limited
growth prospects. We exited credit card servicing, mortgage servicing and auto
leasing; closed The Money Store and sold 84 nonstrategic branch offices. As a
result of these decisions, we have little exposure to current areas of concern
in consumer lending such as credit cards and subprime consumer loans.
CREATED OUTSTANDING FRANCHISE As restructuring programs neared completion, we
realized an opportunity to accelerate the similar strategic path upon which
both companies had already embarked. We successfully presented the case for our
combination to shareholders and investors and won overwhelming approval. This
bold step created a preeminent financial service franchise in one of the
fastest growing regions of the United States. It created the leading retail
bank presence on the East Coast and the nation's fifth largest full-service
retail broker dealer. We are the nation's third largest commercial lender, and
have relationships with a third of the businesses in our East Coast footprint.
These customers provide the foundation for a strong complement of high growth
businesses offered nationwide, such as asset management, brokerage services and
corporate and investment banking. These relationships generate significant
cross-selling opportunities and create attractive opportunities to hold the
line on expense growth.
IMPROVED RISK PROFILE In 2001 we took decisive actions to prepare for the
deteriorating economy. Credit reserves were strengthened in the third quarter
to reflect the strain that the economic slowdown has placed on our commercial
and consumer clients. These steps are a continuation of our long-standing
practice of aggressively managing problem loans during weak economic cycles. As
a result, our charge-off and nonperforming asset levels in 2001 were better
than those reported by many industry peers. In addition we took steps in the
third quarter of 2001 to reduce our exposure by taking necessary write-downs
in principal investing. This business has generated strong returns since its
inception in 1988, but 2001 was not
3
LETTER TO OUR STOCKHOLDERS
a good year for this business as we and others took sizable reductions in these
portfolios. Wachovia's $707 million principal investing write-down in 2001
significantly dampened earnings, but we do not anticipate a material impact
from this business in 2002.
CONTROLLING EXPENSES We continue to focus on controlling expenses. We believe
there is room for continued streamlining and expense reduction in our company
and there is a sound expense management culture taking hold. While our asset
base grew 30 percent from year-end 2000, noninterest expense rose only 4
percent despite the September 1 merger and we achieved the lowest cash overhead
efficiency ratio since 1999. These expense efficiencies were realized while
continuing investment in improving customer service.
CAREFULLY PLANNED INTEGRATION Over the next 18 months, we will focus on
thousands of detailed tasks required to complete the integration of First Union
and Wachovia. While that important work is going on, we will also take on
longer-term strategic issues, including:
- - Defining success for each business segment to grow revenue and build
on a tradition of service excellence;
- - Creating a culture that reflects both our vision for the company and
values we share;
- - Working together across business lines to better serve customers and
clients of the entire company.
ESTABLISHED CORPORATE PRIORITIES Despite significant progress, we are not
satisfied with current results. We have identified the need to achieve top
financial performance in our industry and lines of business. With these
priorities in mind, we are establishing three-year guideposts by which to
measure success:
- - GROW EARNINGS PER SHARE BY 10 TO 12 PERCENT ANNUALLY. We are using
earnings per share and economic profit goals to motivate, evaluate and
reward performance. Management incentive compensation will be directly
tied to these goals in order to ensure managers are aligned with
shareholder interests.
- - GROW REVENUE WHILE CONSISTENTLY IMPROVING RISK-ADJUSTED RETURN ON
CAPITAL, ECONOMIC PROFIT AND PRODUCTIVITY. We intend to bring more
revenue to the bottom line through superior customer service, by
rigorously controlling expense growth and by focusing on higher growth
businesses requiring moderate capital investment.
- - Attain a AA bond rating by:
- Successfully completing our merger integration;
- Applying effective risk management practices; and
- Achieving and maintaining a Tier I capital ratio above 8
percent.
GROWTH PROSPECTS PROMISING Because of the favorable growth prospects for our
four core businesses, we have great confidence that we will achieve these
goals. Over time, we expect average annual growth of 7 to 9 percent from
General Banking due to improved market position and highly targeted customer
relationship strategies. Capital Management and Wealth Management groups should
grow over time by more than 15 percent annually due to favorable demographics,
investor acceptance of products and distribution capabilities. We expect 10
percent average annual long-term growth in the Corporate and Investment Bank
through delivery of creative ideas, capital resources and treasury management
services to a larger base of potential clients.
KEY TO OUR SUCCESS: WACHOVIA'S PEOPLE We enter 2002 intent on delivering the
promise of this new company for customers, shareholders and employees. We are
proud of the way employees pulled together in 2001. Wachovia would not be
strong today without the contribution and hard work each day by each employee.
Together we have made considerable progress in merger integration, carefully
considering decisions both large and small to ensure a smooth transition for
customers. Through it all, we have refused to become distracted from the
ultimate goal of meeting the financial needs of customers and clients in a
superior fashion.
We express sincere appreciation to directors who have retired in 2001
and the new directors who have come together to guide the company. We are
grateful for the support of customers and clients. We are dedicated to bringing
real value to them and to the communities we serve.
With total assets of $330 billion and market capitalization of $43
billion at December 31, 2001, this new company, the 16th largest banking
company in the world, symbolizes financial strength, stability and
dependability. We are confident in our vision and firmly committed to effective
and aggressive execution of strategies. We look forward to serving you, and we
thank you for your support.
Sincerely,
/s/ G. Kennedy Thompson
- --------------------------------------
G. Kennedy Thompson
President and Chief Executive Officer
/s/ L.M. Baker Jr.
- --------------------------------------
L.M. Baker Jr.
Chairman
February 19, 2002
4
CORPORATE OVERVIEW
RESILIENT, DIVERSIFIED BUSINESSES
Wachovia is the nation's fourth largest bank holding company.
- - No.1 retail banking franchise on the East Coast
- - No.3 commercial lender in the nation
- - No.5 full-service retail brokerage firm in the nation
[MAP]
Based on FDIC data as of June 30, 2001, excluding required divestitures.
+ Retail banking offices
++ Wachovia's home equity locations
+++ Wachovia Securities
New York New Jersey Virginia South Carolina
Rank: No. 14 Rank: No. 2 Rank: No. 1 Rank: No. 1
Share: 1.36% Share: 10.66% Share: 17.26% Share: 19.75%
Connecticut Delaware Washington, D.C. Georgia
Rank: No. 3 Rank: No. 10 Rank: No. 3 Rank: No. 1
Share: 7.45% Share: 1.45% Share: 17.87% Share: 17.64%
Pennsylvania Maryland North Carolina Florida
Rank: No. 2 Rank: No. 5 Rank: No. 2 Rank: No. 2
Share: 12.12% Share: 6.34% Share: 27.51% Share: 15.60%
Wachovia's balanced business model includes products and services to meet a
variety of financial needs and the scale to serve customers on their terms.
DISTRIBUTION SCALE
- - 2,800 retail banking offices
- - 600 brokerage offices
- - 4,700 automated teller machines
- - 8,000 registered representatives
- - 1,900 third-party fund distributors
- - Full online banking capability
- - Full telephone banking capability
POWERFUL FRANCHISE
- - 20 million customers
- - 4 million customers enrolled online
- - 19th largest mutual fund provider
- - 2nd largest personal trust provider
- - 3rd largest bank insurance annuity provider
- - 2nd largest treasury services provider
- - Leading middle-market mergers and acquisition adviser
- - Top 10 debt and equity underwriter
5
CORPORATE OVERVIEW
INTENSE FOCUS ON CUSTOMER SERVICE
Our No. 1 operational goal is to ensure that we continually improve
the service that our customers experience. Service quality is monitored
constantly and measured through 60,000 customer surveys quarterly. Based on
these surveys, customer satisfaction has improved for 11 straight quarters. In
addition to focusing on fast and friendly service, we also develop new products
and services with customer satisfaction in mind. For example, check imaging
capability gives customers the opportunity to instantaneously view online the
actual checks that have cleared their account. This reduces the need to
retrieve and mail photocopies of checks, providing faster service to customers
and reducing expense for your company. The former Wachovia was one of the
pioneers in this field and the service has now been rolled out for all
customers of the combined company.
- - Wachovia led its industry peer group with a score of 72 percent in the
University of Michigan Business School's 2001 American Customer
Satisfaction Index.
CONSERVATIVE MERGER INTEGRATION
PLAN FOCUSED ON EXECUTION
With detailed preplanning accomplished before the September 1, 2001,
consummation of the First Union-Wachovia merger, we hit the ground running. The
integration and conversion phase began immediately, with the primary objective
being to minimize errors, inconvenience and disruption for customers. We intend
to move thoughtfully through this phase of the merger, which will be completed
by the end of 2003. But much has already been achieved. By year-end 2001, we
had:
- - Created a merger integration oversight committee on the corporate
board of directors.
- - Announced the top three levels of leaders and all market management
leaders.
- - Selected more than 800 computer operating systems. Each conversion is
preceded by a two-month readiness assessment to determine overall
preparedness, to review preconversion test results and to assess
overall risks. At year-end 2001, nearly 25 percent of high-level
systems conversion tasks had been completed.
- - Made branch and multi-tenant facilities consolidation decisions. The
first deposit systems integration is scheduled for November 2002 in
Florida, and will move by region up the East Coast roughly every three
months until completion by the end of 2003.
ON TRACK TO MEET MERGER BENCHMARKS
To be achieved by 2004:
- - Annual expense savings $890 million
- - One-time restructuring costs $1.5 billion
- - Position reductions 7,000(*)
(*)Half through attrition.
- - Branch consolidations 250-300
- - Nearly 2 million hours of training and development will be provided to
employees throughout the merger conversion process.
IMPROVING CUSTOMER SERVICE
3Q00 4Q00 1Q01 2Q01 3Q01 4Q01
---- ---- ---- ---- ---- ----
First Union
Overall Customer 6.22 6.27 6.29 6.32 6.33 6.35
Satisfaction(*)
Scale = 1 to 7
Former Wachovia
Customer Satisfaction 86% 87% 88% 89% 90% 90%
Profile(**)
Scale = 0 to 100%
(*) As measured by the Gallup Organization.
(**) As measured by mystery shoppers.
[PHOTO]
PAUL GEORGE
Director of Human
Resources
MAC EVERETT
Head of Corporate and
Community Affairs
DAVID CARROLL
Co-Head, Merger
Integration
BOB MCCOY
Co-Head, Merger
Integration
6
EFFECTIVE RISK MANAGEMENT
Wachovia has taken aggressive action to strengthen credit reserves and
slow the growth of nonperforming assets in an era of economic downturn. Our
diversified business model and proactive portfolio management actions place us
in a better position today than during previous downturns, with stronger
reserves, increased capital and less reliance on spread income. More than 90
percent of our $57 billion consumer loan portfolio is secured by real estate,
and loan-to-value ratios average 75 percent. We exited the credit card business
and the indirect auto lending and leasing business, and ceased origination of
subprime home equity loans in 2000. Our $116 billion commercial loan portfolio
is broadly diversified by geography, product and industry concentration as well
as by loan size.
[PHOTO]
MARK TREANOR
General Counsel
DON TRUSLOW
Chief Risk
Management Officer
JEAN DAVIS
Head of Information
Technology, eCommerce
and Operations
BOB KELLY
Chief Financial Officer
POSITIONED TO MANAGE FUTURE RISK
[GRAPH]
NPAs/LOANS RESERVE/NPLs RESERVE/LOANS
1.04% 1.05% 195% 184% 1.83% 1.66%
WB TOP 20* WB TOP 20* WB TOP 20*
*THE TWENTY LARGEST DOMESTIC BANKING COMPANIES
2001 VS. 2000
[GRAPH]
RESERVES NPLs NPAs
18% 14% -9% 40% -5% 42%
WACHOVIA TOP 20 WACHOVIA TOP 20 WACHOVIA TOP 20
BANK BANK BANK
AVERAGE AVERAGE AVERAGE
REPRESENTS CHANGE FROM 2000 LEVELS OF FIRST UNION AND FORMER
WACHOVIA BALANCES.
DISCIPLINED COST CONTROL WITH
IMPROVING EFFICIENCY
We believe that the mark of a good company is its ability to provide
excellent customer service even while being very disciplined on expenses. We
are creating a strong cost control culture and we are focused continuously on
process improvements. Strong expense discipline was clear in each line of
business and staff area in 2001. While our asset base grew 30 percent from
year-end 2000, our operating noninterest expense rose only 4 percent despite
the September 1 merger.
IMPROVING CASH OVERHEAD EFFICIENCY RATIO
(Percent)
[GRAPH]
59.06 59.65 61.64 64.17 61.46 62.80 62.06 72.86 59.22
4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01
|
|
MERGER
IMPACT
LOWEST QUARTERLY CASH OVERHEAD EFFICIENCY RATIO SINCE 1999 REFLECTS STRONG
REVENUE GROWTH AND UNWAVERING FOCUS ON EXPENSES.
7
BUSINESS LINE OVERVIEW
[PHOTO]
BEN JENKINS
Head of the
General Bank
BARNES HAUPTFUHRER
Co-Head of Corporate
and Investment Bank
STEVE CUMMINGS
Co-Head of Corporate
and Investment Bank
DON MCMULLEN
Head of Capital
Management
STAN KELLY
Head of Wealth
Management
GENERAL BANK
SELECTED FINANCIAL DATA
(Dollars in millions)
2001 2000
- -------------------------------------------------------------------
Net interest income(*) $5,151 4,382
Fee and other income 1,769 1,314
Intersegment revenue 114 100
- -------------------------------------------------------------------
Total revenue(*) 7,034 5,796
Noninterest expense 4,112 3,790
Operating earnings 1,616 1,179
Economic profit $1,165 762
Risk adjusted return on capital 38.44% 33.01
===================================================================
(*) Tax equivalent.
CASH OVERHEAD
EFFICIENCY RATIO
(Percent)
[GRAPH]
64.4% 57.9%
2000 2001
Disciplined expense management has helped the General Bank improve efficiency
for five quarters.
AVERAGE LOANS, NET
(In billions)
[GRAPH]
$59.1 $75.8
2000 2001
General Bank had record retail sales and small business loan sales production.
AVERAGE CORE DEPOSITS
(In billions)
[GRAPH]
$97.6 $111.1
2000 2001
Continued focus on low-cost core deposits yielded record sales production and
improved customer retention.
THE MERGER OF FIRST UNION AND THE FORMER WACHOVIA CLOSED ON SEPTEMBER 1, 2001.
BECAUSE THIS MERGER WAS ACCOUNTED FOR AS A PURCHASE, PRIOR PERIODS HAVE NOT
BEEN RESTATED. RESULTS IN 2001 INCLUDE FOUR MONTHS OF THE FORMER WACHOVIA.
8
CAPITAL MANAGEMENT
SELECTED FINANCIAL DATA
(Dollars in millions)
2001 2000
- ----------------------------------------------------------------------
Net interest income(*) $ 131 160
Fee and other income 2,819 2,820
Intersegment revenue (48) (50)
- ----------------------------------------------------------------------
Total revenue(*) 2,902 2,930
Noninterest expense 2,399 2,342
Operating earnings 324 390
Economic profit $ 222 286
Risk adjusted return on capital 37.87% 45.16
======================================================================
(*) Tax equivalent.
TOTAL ASSETS UNDER
MANAGEMENT
(In billions)
[GRAPH]
$171 $226
2000 2001
A balanced mix of investment products and services enabled us to serve clients'
varying needs in 2001.
BROKERAGE CLIENT
ASSETS
(In billions)
[GRAPH]
$241 $274
2000 2001
Brokerage group has offices in 49 states providing financial advice by 8,000
advisers.
ANNUITIES SALES
(In billions)
[GRAPH]
$3.5 $4.7
2000 2001
Customers found annuities attractive in the uncertain markets of 2001.
WEALTH MANAGEMENT
SELECTED FINANCIAL DATA
(Dollars in millions)
2001 2000
- ---------------------------------------------------------------
Net interest income(*) $ 246 190
Fee and other income 394 319
Intersegment revenue 1 --
- ---------------------------------------------------------------
Total revenue(*) 641 509
Noninterest expense 444 317
Operating earnings 127 126
Economic profit $ 94 102
Risk adjusted return on capital 52.27% 75.54
===============================================================
(*) Tax equivalent.
ASSETS UNDER
MANAGEMENT
(In billions)
[GRAPH]
$53 $78
2000 2001
Team-based approach promotes long-term client relationships.
AVERAGE LOANS, NET
(In billions)
[GRAPH]
$4.2 $5.7
2000 2001
Wealth Management provides a comprehensive array of lending and other products
for clients.
AVERAGE CORE DEPOSITS
(In billions)
[GRAPH]
$5.7 $7.3
2000 2001
Growth in average core deposits largely was due to the merger.
CORPORATE AND INVESTMENT BANK
SELECTED FINANCIAL DATA
(Dollars in millions)
2001 2000
- ----------------------------------------------------------------------
Net interest income(*) $ 2,075 1,674
Fee and other income 730 1,708
Intersegment revenue (56) (49)
- ----------------------------------------------------------------------
Total revenue(*) 2,749 3,333
Noninterest expense 1,999 1,863
Operating earnings 265 829
Economic profit $ (320) 277
Risk adjusted return on capital 7.07% 16.73
======================================================================
(*) Tax equivalent.
CAPITAL RAISED FOR
CLIENTS
(In billions)
[GRAPH]
$114 $222
2000 2001
In difficult financial markets, our full range of products and services
provided a variety of alternatives to help clients meet financing needs.
EQUITY UNDERWRITING
Number of Transactions
[GRAPH]
32 61
2000 2001
Wachovia's equity capital markets platform grew substantially in a market where
volume was down nearly 40 percent.
INVESTMENT GRADE DEBT
Number of Transactions
[GRAPH]
88 128
2000 2001
Good markets for fixed income products for most of 2001 provided another avenue
to serve clients.
THE MERGER OF FIRST UNION AND THE FORMER WACHOVIA CLOSED ON SEPTEMBER 1, 2001.
BECAUSE THIS MERGER WAS ACCOUNTED FOR AS A PURCHASE, PRIOR PERIODS HAVE NOT
BEEN RESTATED. RESULTS IN 2001 INCLUDE FOUR MONTHS OF THE FORMER WACHOVIA.
9
GENERAL BANK
OVERVIEW Provides customized deposit and lending products, comprehensive
commercial lending and commercial real estate solutions and integrated
investment products and service in eleven states and Washington, D.C. Fully
integrated distribution network of 2,800 full-service retail financial centers
(the nation's third largest branch network), twelve customer contact centers,
4,700 ATMs (the nation's fifth largest network); and online banking (the
nation's third largest Internet bank). The General Bank improved efficiency and
customer satisfaction in 2001 while generating a record 42 percent increase in
retail and small business loan volume to $23 billion and setting a branch
record with $2.7 billion in annuity sales.
[PHOTO]
JOHN GUY
Head of Small
Business Banking
CECE SUTTON
Co-head of
Retail Banking
42% INCREASE
IN BRANCH-GENERATED RETAIL
AND SMALL BUSINESS LOAN VOLUME
$2.7 BILLION
RECORD BRANCH-GENERATED
ANNUITY SALES
PROFILE
- - Leading retail and commercial bank on the East Coast
- - Improved customer satisfaction for 11 straight quarters
- - Improved efficiency for five straight quarters
- - Served 9 million households, representing nearly one-quarter of
in-footprint market
- - Served 900,000 small relationships, representing 13 percent of
in-footprint market
- - 5th largest SBA lender in nation
- - Mortgage company generated record volume and superior customer service
ratings
[PHOTO]
DAVID POPE
Co-head of
Retail Banking
10
CORPORATE AND INVESTMENT BANK
OVERVIEW Offers a range of fixed income and equity products, asset
securitization, and strategic advisory and cash management services for large
corporate and institutional clients. Our corporate relationship coverage model
focuses on ten key industry sectors nationwide: consumer and retail, defense and
aerospace, energy, financial services, healthcare, industrial growth and
services, media, real estate, telecommunications and technology, and utilities.
The Corporate and Investment Bank includes three major business segments:
Corporate Banking, Investment Banking and Principal Investing. In 2001 market
conditions favored strong revenue growth in investment grade debt, high yield
debt and derivative products and services.
PROFILE
- - Emphasis on cost control and focused strategies held the line on
expense growth
- - Focused on improving risk-adjusted returns on capital and improved
market penetration of non-credit products across a broad corporate
relationship spectrum
- - Top 10 provider of lead-arranged leveraged loan syndications, asset-
backed finance high yield debt, convertible bonds and equity
underwriting
- - 2nd largest provider of cash and treasury management services in the
nation
- - No.1 structured products servicer
2,600
CORPORATE CLIENTS
SERVED BY FOCUSED INDUSTRY
COVERAGE TEAMS AND
PRODUCT SPECIALISTS
LEADING PROVIDER
OF MERGER AND ACQUISITIONS
ADVISORY SERVICES AND DERIVATIVES
TO MID-TIER CLIENTS
[PHOTO]
BEN WILLIAMS
Head of Real Estate and
Financial Services
Investment Banking
RANJANA CLARK
Head of Treasury
Services
MICKEY MISERA
Head of Equity
Capital Markets
11
CAPITAL MANAGEMENT
OVERVIEW Offers a balanced mix of products and services through one of the
nation's largest asset management and retail brokerage firms. The group's
complete line of investment products includes the third largest bank provider of
insurance annuities as well as corporate and institutional trust services to
institutional and retail investors. Driven by a robust multi-channel
distribution network, a diversified set of products and services and
merger-related synergy, the Capital Management Group (CMG) strengthened its
competitive position in key businesses in 2001 while setting company records
with more than $4.7 billion in annuity sales and more than $11 billion in net
mutual fund sales.
[PHOTO]
BILL TAGGART
Chief Administrative
Officer, Insurance Group
DANNY LUDEMAN
Head of Brokerage
Group
DEBRA NICHOLS
Head of Women's
Financial Services Group
$226 BILLION
IN ASSETS UNDER MANAGEMENT
$104 BILLION
IN MUTUAL FUNDS ASSETS
$274 BILLION
IN BROKERAGE CLIENT ASSETS
PROFILE
- - Complete investment product offering resulted in growth in assets under
management
- - Balance of transaction-based and recurring fee revenue generated solid
results in a difficult market
- - Record $2.5 billion in Evergreen mutual funds were sold through
third-party broker dealers
- - Evergreen Investments awarded the prestigious Dalbar Mutual Fund
Service Award for the third year in a row
- - Brokerage Group created efficiencies and better client service by
converting to one operating platform
- - The 401(k) business greatly enhanced its operating systems by
introducing Nowtrac(k), fully integrated processing that positions us
for dynamic growth
12
WEALTH MANAGEMENT
OVERVIEW Provides financial advice, planning and integrated wealth management
services to affluent and ultra-high net worth clients using a team-based
approach that promotes continuous and comprehensive solutions for client
relationships. Business lines include private banking, personal trust,
investment advisory services, charitable services, financial planning, insurance
and executive services. Partners with Capital Management, the General Bank and
the Corporate and Investment Bank to ensure that a comprehensive array of
financial solutions is available to clients across the Wachovia franchise.
Products and services delivered through 63 focused relationship teams on the
East Coast and eight ultra-high net worth offices in select locations. The
Wealth Management Group is investing for strong revenue growth and is ideally
positioned to benefit from demographic trends forecasting a rise in household
investable assets.
[PHOTO]
LINDA BOWDEN
Director of Wealth
Management-Atlantic Region
BOB KNIEJSKI
Wealth Management
Chief Operating Officer
ISAIAH TIDWELL
Director of Wealth
Management-Georgia
86,000 FAMILIES
SERVED BY
63 WEALTH
MANAGEMENT TEAMS
BLANKETING THE EAST COAST
PROFILE
- - Ended year with $78 billion in assets under management
- - Ranked as one of the largest wealth managers in the U.S.
- - Ranked 6th best private bank in Worth Magazine Reader's Choice Awards
- - 2nd largest personal trust provider
- - 13th largest insurance broker and 3rd largest among banks
- - Leading charitable service provider
- - Top 5 provider of planned giving services
13
SOLID PARTNER WITH OUR COMMUNITIES
MAKING A DIFFERENCE
Wachovia is dedicated to helping lead development and progress in the
communities it serves. We are building on the traditions of our two predecessor
companies by providing local community stewardship and decision-making, and
fostering a work environment that encourages employees to provide leadership and
service to their communities. We focus resources and employees on two main
priorities -- strengthening neighborhoods and improving education. In so doing,
we enhance the quality of life and make a positive difference where we work and
live.
Through corporate contributions, community involvement and community
development programs, Wachovia continues to be a major force in building strong
and vibrant communities.
2001 HIGHLIGHTS
- - Received "Outstanding" ratings from the Office of the Comptroller of
the Currency for both the former Wachovia and First Union community
reinvestment programs.
- - Provided $19 billion in community development activities and
investments.
- - Gave more than $80 million in charitable contributions in 2001 through
company, foundation and employee giving, including $1 million
contributed by Wachovia Corporation to the American Red Cross National
Disaster Relief Fund on September 12.
- - Established 2,715 partnerships with local classrooms in 29 states.
- - Provided more than 1,600 hours of financial education and counseling.
- - Helped an average of 400 low- to moderate-income families buy homes
each week.
- - Recommitted to America's Promise, The Alliance for Youth, pledging 3
million employee volunteer hours and $25 million to youth organizations
over the next three years.
[PHOTO]
ROSIE SAEZ, Atlantic Region community development
manager, and BOB REID, CEO of our Pennsylvania-
Delaware region, read the book THE BEST PLACE,
by Susan Meddaugh, to a group of children.
Approximately 20,000 employee volunteers
from Connecticut to Florida read to 85,000
elementary children and donated 30,000
copies of the book to classrooms during the
annual READING FIRST celebration to kick off
the ongoing early childhood literacy program.
14
DOMESTIC AND GLOBAL MARKETS
GENERAL BANKING REGIONS
ATLANTIC REGION
New Jersey
Branches: 338
ATMs: 504
New York
Branches: 55
ATMs: 96
Connecticut
Branches: 86
ATMs: 121
MID-ATLANTIC REGION
Virginia
Branches: 354
ATMs: 537
Maryland
Branches: 77
ATMs: 111
Washington, D.C.
Branches: 27
ATMs: 59
CAROLINAS REGION
North Carolina
Branches: 386
ATMs: 779
South Carolina
Branches: 171
ATMs: 331
GEORGIA REGION
Georgia
Branches: 255
ATMs: 613
PENNDEL REGION
Pennsylvania
Branches: 350
ATMs: 549
Delaware
Branches: 21
ATMs: 43
FLORIDA REGION
Florida
Branches: 691
ATMs: 919
FOREIGN BRANCHES AND REPRESENTATIVE OFFICES
INTERNATIONAL BRANCHES
Hong Kong, China
(Restricted License Branch)
London, England
Tokyo, Japan
Seoul, South Korea
Taipei, Taiwan
REPRESENTATIVE OFFICES
Buenos Aires, Argentina
Sydney, Australia
Sao Paulo, Brazil
Santiago, Chile
Beijing, China
Guangzhou, China
Hong Kong, China
Shanghai, China
Bogota, Colombia
Guayaquil, Ecuador
Cairo, Egypt
London, England
Paris, France
Frankfurt, Germany
Hamburg, Germany
Mumbai, India
Jakarta, Indonesia
Milan, Italy
Tokyo, Japan
Kuala Lumpur, Malaysia
Mexico City, Mexico
Panama City, Panama
Manila, Philippines
Singapore
Johannesburg, South
Africa
Seoul, South Korea
Madrid, Spain
Taipei, Taiwan
Bangkok, Thailand
Istanbul, Turkey
Dubai, United Arab
Emirates
San Diego, California
EMBASSY AND
GOVERNMENT BANKING
GROUP
Washington, D.C.
INTERNATIONAL
PROCESSING CENTERS
Charlotte, North Carolina
Los Angeles, California
Miami, Florida
New York, New York
Philadelphia, Pennsylvania
[MAP]
INTERNATIONAL BRANCHES
REPRESENTATIVE OFFICES
EMBASSY AND GOVERNMENT BANKING GROUP
INTERNATIONAL PROCESSING CENTERS
15
MANAGEMENT'S ANALYSIS OF OPERATIONS
The following discussion and other portions of this Annual Report contain
various forward-looking statements. Please refer to our 2001 Annual Report on
Form 10-K for a discussion of various factors that could cause our actual
results to differ materially from those expressed in such forward-looking
statements.
CONTENTS
- --------------------------------------------------------------------------------
16 MANAGEMENT'S ANALYSIS OF OPERATIONS
41 FINANCIAL TABLES
58 FIVE-YEAR NET INTEREST INCOME SUMMARIES
60 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
61 MERGER-RELATED, RESTRUCTURING AND OTHER
CHARGES/GAINS
62 CONSOLIDATED STATEMENTS OF OPERATING EARNINGS
63 MANAGEMENT'S STATEMENT OF RESPONSIBILITY
64 INDEPENDENT AUDITORS' REPORT
65 CONSOLIDATED BALANCE SHEETS
66 CONSOLIDATED STATEMENTS OF INCOME
67 CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
68 CONSOLIDATED STATEMENTS OF CASH FLOWS
69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS HIGHLIGHTS
- --------------------------------------------------------------------------------
SUMMARY OPERATING RESULTS
Years Ended December 31,
-----------------------------------------
(In millions, except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------------
OPERATING EARNINGS
Net interest income (a) $ 7,934 7,536 7,570
Fee and other income 6,271 6,815 6,933
- -------------------------------------------------------------------------------------
Total revenue (a) 14,205 14,351 14,503
Provision for loan losses 1,067 754 692
Noninterest expense 9,559 9,213 8,458
Income taxes (a) 1,223 1,449 1,867
- -------------------------------------------------------------------------------------
Operating earnings $ 2,356 2,935 3,486
- -------------------------------------------------------------------------------------
Net income available to
common stockholders $ 1,613 92 3,223
Cash operating earnings (b) 2,782 3,270 3,817
PER DILUTED COMMON SHARE
Net income 1.45 0.07 3.33
Operating earnings 2.12 2.97 3.60
Cash operating earnings (b) $ 2.50 3.30 3.94
RATIOS
Operating return on
average common equity 11.50% 17.23 21.60
Cash operating return on
average tangible common
stockholders' equity (b) 20.27% 26.33 34.67
=====================================================================================
(a) Tax-equivalent.
(b) Cash operating earnings exclude goodwill and other intangible
amortization.
SUMMARY OF OPERATING RESULTS Wachovia's results for 2001 reflect the merger of
First Union and the former Wachovia, which closed on September 1, 2001. Because
this merger was accounted for under the purchase method of accounting, prior
periods have not been restated. Results in 2001 include four months of the
former Wachovia. Wachovia reported net income available to common stockholders
of $1.6 billion in 2001, compared with $92 million in 2000. Results in each
period were diminished by after-tax net merger-related, restructuring and other
charges, which amounted to $737 million in 2001 and $2.8 billion in 2000. Also
in 2000, we recorded a $46 million after-tax charge for the cumulative effect of
a change in the accounting for beneficial interests. Operating earnings, which
exclude this amount and the net merger-related, restructuring and other charges,
were $2.4 billion, or $2.12 per share, in 2001 and $2.9 billion, or $2.97 per
share, in 2000. Cash operating earnings, which exclude goodwill and other
intangible amortization as well as the after-tax net merger-related,
restructuring and other charges, were $2.8 billion, or $2.50 per share, in 2001
and $3.3 billion, or $3.30 per share a year earlier. See Merger-Related,
Restructuring and Other Charges and Gains for further information.
16
MANAGEMENT'S ANALYSIS OF OPERATIONS
Included in operating results in 2001 are several significant actions
taken in light of a weakening economy and deterioration in the credit
environment. We proactively transferred higher risk loans to held for sale for
eventual disposition and strengthened our allowance for loan losses. In addition
we recorded significant write-downs on our principal investing portfolio to
reflect declines in equity market valuations, particularly in the
telecommunications and technology sectors. We believe that these actions better
position us for the challenging environment we anticipate in 2002.
On an operating basis, fee and other income was $6.3 billion in 2001,
down 8 percent from 2000. The decline largely reflected a $707 million net loss
in principal investing compared with principal investing net revenue of $395
million in 2000, which was partially offset by the addition of four months of
fee and other income related to the former Wachovia.
On an operating basis, noninterest expense was $9.6 billion in 2001, up
4 percent from 2000. The increase in noninterest expense from 2000 primarily
reflected the addition of four months of expenses from the former Wachovia, as
well as amortization of intangibles recorded in connection with the merger.
This was offset by expense control initiatives and lower variable compensation
expense.
On an operating basis, the provision for loan losses was $1.1 billion
in 2001, an increase of $313 million from 2000. Net charge-offs were $937
million in 2001 and $751 million in 2000. Net charge-offs were 0.70 percent of
average net loans in 2001, up 11 basis points from 2000. Nonperforming assets,
including those in loans held for sale, increased $328 million from December 31,
2000, to $1.9 billion at December 31, 2001, including former Wachovia
nonperforming assets. As a percentage of net loans, foreclosed properties and
loans held for sale, nonperforming assets were 1.13 percent at December 31,
2001, and 1.22 percent at December 31, 2000.
In the fourth quarter of 2001, reported net income available to common
stockholders was $730 million, or 54 cents per share, after net after-tax
merger-related, restructuring and other charges of $63 million, or 4 cents per
share. Operating earnings were $799 million, or 58 cents per share, and cash
operating earnings were $980 million, or 71 cents per share, in the fourth
quarter of 2001. In the fourth quarter of 2000, net income, operating earnings
and cash operating earnings were $599 million, $681 million and $753 million, or
60 cents, 69 cents and 76 cents per share, respectively.
FIRST UNION-WACHOVIA MERGER The merger of the former Wachovia and First Union
closed on September 1, 2001. The merger was accounted for under the purchase
method of accounting, and accordingly, the results in 2001 include a full year
of First Union and four months of the former Wachovia. In addition year over
year comparisons reflect the strategic repositioning of First Union, which
involved exiting the credit card and The Money Store home equity lending
businesses and the sale of the existing mortgage servicing portfolio, 84
branches and certain loans and securities between June 2000 and June 2001.
Upon the merger, the combined company adopted the name "Wachovia
Corporation." The terms of the merger called for shareholders of the former
Wachovia to receive two First Union shares for each former Wachovia common
share. In connection with the merger, shareholders of the former Wachovia were
also given the right to choose either a one-time cash payment of 48 cents per
common share of the former Wachovia or two shares of a new class of preferred
shares, which will pay dividends equal to the difference between the last
dividend paid by the former Wachovia of 30 cents per share and the common stock
dividend declared by the combined company. This dividend will cease once
Wachovia's total dividends paid to common stockholders for four consecutive
quarters equal at least $1.20 per common share.
The December 31, 2001, consolidated balance sheet includes the assets
and liabilities of the former Wachovia, which were recorded at their respective
fair values as of September 1, 2001. The fair values are preliminary and are
subject to refinement as information relative to the fair values as of September
1, 2001, becomes available and as plans relative to the disposition of certain
assets are finalized. Based on the former Wachovia ending tangible assets of $70
billion, liabilities of $64 billion and tangible equity of $5.5 billion, an
aggregate purchase price of $13.0 billion and net purchase accounting
adjustments of $2.0 billion, the merger resulted in total intangible assets of
$9.5 billion. Of the $9.5 billion, $1.9 billion was assigned to deposit base
intangibles and $340 million was assigned to other intangibles, primarily
related to the customer relationships and tradename of the former Wachovia.
Under new accounting standards that were effective on July 1, 2001, the $7.2
billion of goodwill recorded in connection with this merger is not subject to
amortization. Deposit base and customer relationship intangibles are being
amortized using accelerated methods and the tradename intangible, because of its
indefinite life, is not subject to amortization. More information is in the
Accounting and Regulatory Matters section.
We believe the merger will enhance our performance for shareholders as
our combined capabilities provide more choice, convenience, products and
services for customers; more investment opportunities for clients; and
significant capital for commercial enterprises and corporate clients. The merger
enhances our range of products and increases the distribution channels for
customers. It also strengthens scale, density and scope in our core markets and
lines of business, particularly in higher growth businesses such as asset
management. In this merger, First Union and Wachovia bring complementary
strengths. First Union has invested heavily in developing a wide range of
products and services. Wachovia has earned national acclaim for its high
standard of customer service and long-term client relationships.
17
MANAGEMENT'S ANALYSIS OF OPERATIONS
The merger integration is progressing well and much has already been achieved:
- - The top three tiers of senior management and all market management
leaders are in place;
- - Expense efficiency goals and one-time cost projections have been
validated; the goal is to achieve $890 million in annual expense
reductions by 2004;
- - More than 800 systems applications have been analyzed and all platforms
selected. By year-end 2001, nearly 25 percent of major system-related
activities had been completed, including the conversions of the
payroll, benefits, fixed income, derivatives, accounts payable and
retail sales tracking systems;
- - 1,905 positions were reduced, mostly through a hiring freeze instituted
before consummation. This reduction also included 890 positions related
to the credit card business divested by the former Wachovia in July
2001 before the merger closed;
- - We are on track to combine our two principal banking subsidiaries,
First Union National Bank and Wachovia Bank, N.A., on April 1, 2002.
The combined bank will be named Wachovia Bank, N.A. The first
consolidations and deposit system integrations of our banking branches
will begin in November 2002 in Florida and continue up our East Coast
regional banking network every three months thereafter through the end
of 2003.
OUTLOOK
We have optimism for the future due to the solid performance in our
core businesses, the General Bank, Capital Management, Wealth Management and the
Corporate and Investment Bank, despite the difficult economic environment in
2001. The foundation of our company, the General Bank, continues to show strong
loan and deposit growth. Our Corporate and Investment Bank, Capital Management
and Wealth Management businesses also per- formed well relative to trends in
their respective industries in light of the severe market downturn, as
illustrated by a 21 percent decline in the Nasdaq composite index, a 13 percent
decline in the S&P 500 index and a 7 percent decline in the Dow Jones Industrial
Average in 2001. In addition to creating a strong balance sheet, expense
control is a keystone in our company and we expect to see further evidence of
that in 2002 as we realize additional merger synergies.
In addition we are focused on increasing the efficiency and
competitiveness of our four core businesses. We will continue to evaluate our
operations and organizational structures to ensure they are closely aligned with
our goal of maximizing performance in our core businesses. When consistent with
our overall business strategy, we may consider the disposition of certain
assets, branches, subsidiaries or lines of business. We continue to routinely
explore acquisition opportunities, particularly in areas that would complement
our core businesses, and frequently conduct due diligence activities in
connection with possible acquisitions. As a result, acquisition discussions and,
in some cases, negotiations frequently take place and future acquisitions
involving cash, debt or equity securities could occur.
CORPORATE RESULTS OF OPERATIONS
Our consolidated financial statements are prepared in accordance with
generally accepted accounting principles. Application of certain of these
policies involves a significant amount of judgment and the use of estimates that
are difficult to validate by reference to outside sources. We have identified
two policies as being particularly significant in terms of the amount of
judgment involved and the extent to which estimates are used. These include
the policies for valuation of certain securities where there is little or no
liquidity such as residual interests in securitizations and certain principal
investing securities. The Securities section provides a more detailed
description of these policies. The other significant policy relates to the
allowance for loan losses and is described in detail in the Provision and
Allowance for Loan Losses section.
MERGER-RELATED, RESTRUCTURING AND OTHER CHARGES AND GAINS In 2001 we reported a
net charge of $1.1 billion pre-tax in merger-related, restructuring and other
charges and gains. This included $106 million of merger-related and
restructuring charges and $1.0 billion of other charges.
Merger-related and restructuring charges included:
- - $178 million related to the merger of First Union and the former
Wachovia of which $69 million consisted of termination benefits for
First Union employees who had been notified of their termination date
by December 31, 2001. The rest included costs associated with the
defense of our merger against a hostile bid and other merger- related
personnel costs. Employee termination benefits of $94 million related
to former Wachovia employees were recorded as purchase accounting
adjustments.
- - $97 million of net reversals of previously recorded restructuring
charges associated with First Union's 2000 strategic repositioning and
March 1999 restructuring principally related to finalization of
estimates related to employee termination, contract cancellation and
occupancy costs.
- - $25 million associated with systems integration costs related to
smaller purchase accounting acquisitions.
Other net charges included:
- - A $549 million provision for loan losses to provide for credit
deterioration in a weak economic environment.
- - A $331 million provision for loan losses representing the impact of
integrating the First Union and former Wachovia loan portfolios and of
moving $1.5 billion of higher risk and overlapping loans to held for
sale.
18
MANAGEMENT'S ANALYSIS OF OPERATIONS
- - $141 million primarily in connection with the completion of the 2000
strategic repositioning. The more significant 2001 items related to the
2000 strategic repositioning included $73 million in branch sale gains;
$71 million in market value write-downs of certain loans held for sale;
$45 million of gains related to loan sales and other recoveries from
the held for sale portfolio; $166 million of noninterest expense,
principally employee termination costs, professional fees, premises
consolidation costs and system deconversion costs.
Upon announcement of the merger of First Union and Wachovia in April
2001, we began to develop merger integration plans, including plans to reduce
the combined work force and to exit certain activities. As of December 31, 2001,
we were in the process of further refining these plans. In the fourth quarter of
2001, we incurred $76 million in certain transaction costs and termination costs
for employees of the former Wachovia that were recorded as purchase accounting
adjustments, and accordingly, increased goodwill. In addition we recorded a $51
million restructuring charge related to the merger primarily consisting of
termination benefits for former First Union employees who had been notified of
their termination by December 31, 2001. Additional purchase accounting
adjustments and restructuring charges will be recorded in the future as the
integration plans are finalized, which will involve decisions regarding
organization and personnel, premises, systems and service contracts. As we
announced in April, we believe that the number of position reductions will
amount to 7,000, half of which will come through attrition. As of December 31,
2001, 1,240 employees had been displaced or notified of their pending
termination.
The rest of this discussion of Corporate Results of Operations is on an
operating basis, and accordingly, excludes these merger-related, restructuring
and other charges and gains. For information related to merger-related,
restructuring and other charges and gains, see the Consolidated Condensed
Statements of Income and Merger-Related, Restructuring and Other Charges/Gains
tables.
NET INTEREST INCOME AND MARGIN Net interest income on a tax-equivalent basis
increased 5 percent from 2000 to $7.9 billion in 2001. This increase was due to
the lower interest rate environment, an increase in the proportion of low-cost
core deposits and the addition of earning assets from the former Wachovia. This
was offset by a number of factors in the second half of 2000 and in 2001.
Actions taken in the second half of 2000 as a result of our strategic
repositioning negatively affected net interest income, including the sale of
the credit card portfolio, securitization of home equity loans and branch
divestitures. Because these actions were taken late in the year, they had a
partial impact in 2000 but affected the full year of 2001. Additionally,
derivative positions that contributed positively to the margin matured in
December 2000. Actions taken in 2001 that negatively affected net interest
income included branch divestitures in the first quarter and home equity
securitizations.
AVERAGE BALANCE SHEET AND INTEREST RATES
Years Ended December 31,
---------------------------------------------------------------------
2001 2000
---------------------------- ------------------------------
Average Average
(In millions) Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------
Interest-bearing
bank balances $ 2,359 3.92% $ 1,095 4.93%
Federal funds sold 9.458 4.23 7,800 5.73
Trading account assets 14,106 5.54 12,011 6.90
Securities 51,681 7.02 53,428 7.40
Commercial loans 84,943 7.83 75,383 9.11
Consumer loans 48,905 8.03 51,505 8.59
- ------------------------------------------------------------------------------------------------------------
Total loans 133,848 7.91 126,888 8.89
- ------------------------------------------------------------------------------------------------------------
Other earning assets 10,683 7.28 11,125 9.56
- ------------------------------------------------------------------------------------------------------------
Total earning assets 222,135 7.32 212,347 8.30
- ------------------------------------------------------------------------------------------------------------
Interest-bearing deposits 120,729 3.93 112,275 4.69
Federal funds purchased 28,055 4.86 30,997 6.11
Commercial paper 2,912 3.84 2,882 6.00
Other short-term
borrowings 9,719 2.68 9,697 4.85
Long-term debt 38,538 4.79 34,279 6.69
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 199,953 4.16 190,130 5.31
- ------------------------------------------------------------------------------------------------------------
Net interest income
and margin $ 7,934 3.57% $ 7,536 3.55%
============================================================================================================
The net interest margin, which is the difference between the
tax-equivalent yield on earning assets and the equivalent rate paid to fund
those assets, increased to 3.57 percent in 2001. Our interest rate risk position
is such that we benefit in a declining rate environment as our liabilities
reprice more quickly than assets. The average federal funds rate declined 125
basis points year over year. The benefits from the declining rate environment,
growth in low-cost core deposits, and the positive impact from the addition of
earning assets from the former Wachovia were partially offset by the
aforementioned sale of high-yielding credit card receivables, the securitization
of home equity loans, branch divestitures and maturing derivative positions.
The contribution of hedge-related derivative income to the net interest
margin has declined from 23 basis points in 2000 to 18 basis points in 2001
largely due to derivatives that matured in December 2000. Premiums and discounts
that resulted from recording the interest-earning assets and the
interest-bearing liabilities of the former Wachovia at their respective fair
values at September 1, 2001, are amortized using a method that results in a
constant effective yield over the terms of the assets and liabilities. The
average rate earned on earning assets declined 98 basis points from 2000 to 7.32
percent in 2001 and the average rate paid on liabilities decreased 115 basis
points from 2000 to 4.16 percent in 2001. The Risk Management section provides
additional information on our methodology for interest rate risk management.
FEE AND OTHER INCOME On an operating basis, fee and other income was $6.3
billion in 2001, down 8 percent from 2000 largely due to principal investing
losses in 2001.
19
MANAGEMENT'S ANALYSIS OF OPERATIONS
Service charges and fees increased 10 percent to $2.2 billion due in
part to the addition of the former Wachovia. Commissions, which include
brokerage and insurance commissions, decreased $23 million to $1.6 billion in
2001 reflecting the weakened trading environment. Fiduciary and asset management
fees increased 9 percent to $1.6 billion primarily due to increased asset-based
fees in brokerage asset management accounts and to the addition of fee income
from the former Wachovia. Advisory, underwriting and other investment banking
fees increased 15 percent to $836 million primarily due to strength in the fixed
income businesses in the Corporate and Investment Bank.
Principal investing, which includes the results of investments in
equity and mezzanine securities, declined from $395 million in 2000 to a loss of
$707 million in 2001, as discussed in the Corporate and Investment Bank section.
FEE AND OTHER INCOME -- OPERATING BASIS
Years Ended December 31,
---------------------------------------
(In millions) 2001 2000 1999
- -------------------------------------------------------------------------------------
Service charges and fees $ 2,167 1,966 1,987
Commissions 1,568 1,591 1,014
Fiduciary and asset
management fees 1,643 1,511 1,238
Advisory, underwriting and
other investment banking fees 836 726 702
Principal investing (707) 395 592
Other income 764 626 1,400
- -------------------------------------------------------------------------------------
Total fee and other income $ 6,271 6,815 6,933
=====================================================================================
Other income, including results from portfolio securities transactions
and asset sales and securitizations, increased $138 million from 2000 to $764
million in 2001. Other income in 2001 included a $75 million gain recorded in
connection with the sale of Star Systems, Inc. Portfolio securities transactions
resulted in a net loss of $67 million in 2001, including impairment losses of
$240 million offset by realized gains. In 2000 portfolio securities transactions
resulted in a net loss of $6 million, including impairment losses of $63
million. Asset sales and securitization gains amounted to $303 million in 2001
and $263 million in 2000. Net market value write-downs on loans held for sale
were $98 million in 2001 and $109 million in 2000. In 2001 we recorded $21
million of losses on the discontinued indirect auto lending and leasing
business, compared with $73 million of such losses in 2000, principally
reserves on auto lease residuals.
Other income also included affordable housing write- downs of $99
million in 2001 compared with $111 million in 2000. Offsetting these affordable
housing write-downs were related tax credits amounting to $163 million and $187
million in 2001 and 2000, respectively, which are included in the provision for
income taxes.
NONINTEREST EXPENSE On an operating basis, noninterest expense increased 4
percent from 2000 to $9.6 billion in 2001, primarily as a result of the addition
of four months of expenses related to the former Wachovia and increased
amortization related to intangibles recorded in connection with the merger.
These increases offset a decrease in expenses relating to our expense control
initiatives, divestitures of certain businesses in late 2000 and lower variable
compensation expense. The Accounting and Regulatory Matters -- Business
Combinations section has further information related to goodwill and other
intangible assets.
NONINTEREST EXPENSE -- OPERATING BASIS
Years Ended December 31,
-------------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------
Salaries and employee benefits $5,729 5,449 4,716
Occupancy 704 619 546
Equipment 864 858 793
Advertising 56 91 234
Communications and supplies 480 487 481
Professional and consulting fees 334 337 287
Goodwill and other
intangible amortization 523 361 391
Sundry expense 869 1,011 1,010
- -----------------------------------------------------------------------------------
Total noninterest expense $9,559 9,213 8,458
===================================================================================
On a cash operating basis, the overhead efficiency ratio was 63.61
percent in 2001 and 61.68 percent in 2000. Efficiencies gained through expense
control pro- grams were more than offset by the decline in revenue, primarily
related to principal investing.
INCOME TAXES On an operating basis, income taxes were $1.1 billion in 2001 and
$1.4 billion in 2000 and the effective tax rate was 31.1 percent in 2001 and
31.5 per- cent in 2000. The primary reason for the decrease in the effective tax
rate was the reduction in operating income in 2001. Based on current
projections, we anticipate the 2002 effective tax rate will be higher than 2001
primarily due to the projected increase in operating income, which would more
than offset the beneficial impact on the effective tax rate of the treatment of
goodwill beginning in 2002 whereby goodwill will no longer be subject to
amortization.
On an as reported basis, the effective tax rate was 29.4 percent in
2001 and 80.4 percent in 2000. Net income in 2000 included a $1.8 billion
write-down for impairment of intangible assets, primarily goodwill. This charge
is not deductible for federal or state income tax purposes. Accordingly this
charge had the effect of significantly increasing the effective tax rate in
2000.
BUSINESS SEGMENTS
In connection with the merger, we realigned our segment reporting to
reflect the business mix and management reporting structure of the new company.
We report the results of our four core business segments, plus the Parent. The
business segments are the General Bank, Capital Management, Wealth Management,
the Corporate and Investment Bank, and the Parent. The most significant
20
MANAGEMENT'S ANALYSIS OF OPERATIONS
changes are the separation of Wealth Management from Capital Management and the
combination of the Consumer and Commercial segments into the General Bank. Prior
year information has been restated to reflect these changes.
Management reporting methodologies were also refined to reflect the new
company. This included refinements in funds transfer pricing as well as in the
methodologies for allocating economic capital, expected losses and cost
transfers. Prior years have not been restated to reflect these changes as
segment results do not differ materially as a result of these changes.
As previously disclosed, we implemented a new management reporting
model in the first quarter of 2001. We have continued to employ this platform
following the merger. This platform uses new methodologies and systems that we
believe better reflect the evolution of our four core businesses. Prior year
information has been restated to reflect these changes. The key differences are
a significant change in the way intersegment revenues (referral fees) are
recorded and changes in cost transfer methodologies. Under this platform,
intersegment revenues are paid by a segment to the segment that distributes or
services the product. The amount of the referral fee is based on comparable
fees paid in the market or negotiated amounts that approximate the value
provided by the selling segment. Cost transfers are made for services provided
by one segment to another. Activity-based costing studies are continually being
refined to better align expenses with products and their revenues.
Under this management reporting platform, new financial metrics have
been implemented with segments being measured on Risk Adjusted Return on Capital
(RAROC) and Economic Profit. RAROC is derived by dividing operating earnings
adjusted for certain intangible amortization and expected losses by economic
capital (capital assigned based on a statistical assessment of the credit,
market and operating risks taken to generate profits in a particular business
unit or product). Economic Profit is economic net income less a charge for the
economic capital used to support the business. The charge for economic capital
reflects the minimum after-tax return that stockholders require on their
investment, and was set at 12 percent in 2001. In 2002 the cost of capital
charge will be 11 percent, with the reduction primarily the result of lower
prevailing interest rates. A lower cost of capital will result in modestly
higher economic profit being reported by the company and its segments.
The following discussion of segment results is on an operating basis,
and accordingly, excludes merger-related, restructuring and other charges and
gains.
GENERAL BANK Our General Bank provides customized banking products and a full
line of retail investment products through two major lines of business: Retail
and Small Business, and Commercial. Our strategic focus is on providing
exceptional customer service combined with leveraging improved customer
knowledge to retain and acquire customers, and to deepen and enhance
relationships through tailored products and services. Our retail strategy is to
reduce the number of single-service customers and to increase the proportion of
our customers who not only transact, but also save, invest and borrow with us.
Our wholesale strategy is to provide a comprehensive array of financial
solutions, including traditional commercial lending and cash management
products, and to provide access to more sophisticated asset management and
capital markets products and services through our partnership with Capital
Management, Wealth Management and with the Corporate and Investment Bank. Our
multiple channels are fully integrated, which enables customers to have a
single view of their accounts and a choice on whether to use our full-service
retail financial centers, direct telephone bank, ATMs or the Internet. The
General Bank is focused on providing excellent service to customers throughout
the merger integration process, growing low-cost core deposits, and improving
both loan spreads and efficiency.
GENERAL BANK -- OPERATING BASIS
Performance Summary
Years Ended December 31,
------------------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------
Net interest income (Tax-equivalent) $ 5,151 4,382 4,270
Fee and other income 1,769 1,314 1,393
Intersegment revenue 114 100 117
- --------------------------------------------------------------------------------------------
Total revenue (Tax-equivalent) 7,034 5,796 5,780
Provision for loan losses 426 219 163
Noninterest expense 4,112 3,790 3,769
Income taxes (Tax-equivalent) 880 608 672
- --------------------------------------------------------------------------------------------
Operating earnings $ 1,616 1,179 1,176
- --------------------------------------------------------------------------------------------
Economic profit $ 1,165 762 716
Risk adjusted return on
capital (RAROC) 38.44% 33.01 32.19
Economic capital, average $ 4,407 3,629 3,547
Cash overhead efficiency ratio 57.90% 64.40 65.33
Average loans, net $ 75,768 59,100 55,377
Average core deposits $111,099 97,606 98,142
============================================================================================
General Bank financial results continued to show strong momentum in
2001, with 21 percent total revenue growth aided by balance sheet and fee income
growth, particularly in mortgage banking, and solid expense control. Growth in
low-cost core deposits was strong and sales production of prime equity lines,
direct loans and small business loans set company records.
On an operating basis, General Bank total revenue was $7.0 billion in
2001 and $5.8 billion in 2000. The increase was due to improved sales
production, increased core deposits and to four months of revenue related to the
former Wachovia. Net interest income was $5.2 billion in 2001 and $4.4 billion
in 2000, reflecting increases in average loans and average core deposits. Fee
and other income, which reflected improved service charge income, higher
mortgage-related income and strong debit card
21
MANAGEMENT'S ANALYSIS OF OPERATIONS
revenues, was $1.8 billion. The provision for loan losses was $426 million in
2001 and $219 million in 2000. The higher provision was due to increased
charge-offs related to the normal aging of the First Union Home Equity
portfolio, increased commercial provisions and provisions recorded in connection
with loan sales and transfers to loans held for sale. Noninterest expense,
excluding the addition of four months of expenses from the former Wachovia, was
essentially flat, reflecting solid expense control. The cash overhead efficiency
ratio improved to 57.90 percent in 2001 from 64.40 percent in 2000.
Loan growth was largely due to across-the-board strength in consumer
loans and the addition of loans from the former Wachovia. General Bank average
core deposits were $111 billion in 2001, an increase of $13 billion from 2000,
including core deposits from the former Wachovia. Both consumer and commercial
deposits increased, primarily in interest checking, savings and money market
accounts, reflecting our focus on acquiring low-cost core deposits.
CAPITAL MANAGEMENT Our Capital Management Group (CMG) has created a growing and
diversified business with a balanced mix of products and multiple channels of
distribution, which has helped stabilize performance in the face of the market
downturn. CMG is organized into two major lines of business: Retail Brokerage
Services, which includes the retail brokerage and insurance groups; and Asset
Management, which includes mutual funds, customized investment advisory services
and corporate and institutional trust services. CMG offers a full line of
investment products and services distributed through multiple channels,
including a national retail brokerage branch network, full-service retail
financial centers in our East Coast marketplace and online brokerage. Assets
under management were $226 billion at December 31, 2001. In 2001 organic growth
in assets of 5 percent, or $9 billion, was realized in both separate account and
mutual fund assets as strong net sales offset the effects of the declining
equity markets. On an operating basis, Capital Management total revenue remained
steady at $2.9 billion in both 2001 and 2000, as the effects of the declining
financial markets were essentially offset by strong product sales and revenue
from the former Wachovia. The continued focus on expense control was apparent,
as noninterest expense remained essentially flat with 2000 levels, despite the
higher expense base associated with the addition of the former Wachovia on
September 1, 2001.
CMG's operating performance compared favorably with industry trends in
a year in which the Dow Jones Industrial Average declined 7 percent, the S&P 500
index declined 13 percent and the Nasdaq composite index declined 21 percent.
While the unsettled market conditions reduced transaction-based brokerage
revenues in 2001, CMG achieved record annuity sales of $4.7 billion, record
gross fluctuating fund sales of $8.9 billion, and strong product sales in the
corporate and institutional trust businesses. Mutual fund assets were $104
billion at year-end 2001 compared with $85 billion at year-end 2000.
CAPITAL MANAGEMENT -- OPERATING BASIS
Performance Summary
Years Ended December 31,
----------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Net interest income (Tax-equivalent) $ 131 160 138
Fee and other income 2,819 2,820 1,957
Intersegment revenue (48) (50) (43)
- --------------------------------------------------------------------------------
Total revenue (Tax-equivalent) 2,902 2,930 2,052
Provision for loan losses -- -- --
Noninterest expense 2,399 2,342 1,489
Income taxes (Tax-equivalent) 179 198 215
- --------------------------------------------------------------------------------
Operating earnings $ 324 390 348
- --------------------------------------------------------------------------------
Economic profit $ 222 286 272
Risk adjusted return on
capital (RAROC) 37.87% 45.16 53.54
Economic capital, average $ 858 862 650
Cash overhead efficiency ratio 82.66% 79.88 72.54
Average loans, net $ 212 98 141
Average core deposits $ 1,618 2,179 1,152
================================================================================
WEALTH MANAGEMENT Our Wealth Management Group includes private banking, personal
trust, investment advisory services, charitable services, financial planning and
insurance brokerage. Our strategic focus is to provide integrated wealth
management services to affluent and ultrahigh net worth clients using a
team-based approach that promotes continuous and comprehensive client
relationships. Wealth Management's strategic partnerships with Capital
Management, the General Bank and with the Corporate and Investment Bank ensure
that a comprehensive array of financial solutions is available to clients and
that those solutions are delivered to customers across the entire Wachovia
franchise.
WEALTH MANAGEMENT -- OPERATING BASIS
Performance Summary
Years Ended December 31,
-------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------
Net interest income (Tax-equivalent) $ 246 190 197
Fee and other income 394 319 324
Intersegment revenue 1 -- (3)
- -----------------------------------------------------------------------------
Total revenue (Tax-equivalent) 641 509 518
Provision for loan losses 6 -- --
Noninterest expense 444 317 297
Income taxes (Tax-equivalent) 64 66 84
- -----------------------------------------------------------------------------
Operating earnings $ 127 126 137
- -----------------------------------------------------------------------------
Economic profit $ 94 102 114
Risk adjusted return on
capital (RAROC) 52.27% 75.54 87.59
Economic capital, average $ 233 160 151
Cash overhead efficiency ratio 68.90% 62.24 57.29
Average loans, net $5,672 4,151 3,710
Average core deposits $7,331 5,682 5,713
=============================================================================
While results in the Wealth Management segment were solid, performance
was dampened by lower equity market valuations throughout most of 2001, as
described above.
22
MANAGEMENT'S ANALYSIS OF OPERATIONS
However, lending relationships increased year over year and efforts to improve
sales momentum across all other Wealth Management businesses provided
encouraging results. Both average loans and average core deposits increased in
2001 compared with 2000, due primarily to the addition of the former Wachovia.
On an operating basis, Wealth Management total revenue was $641 million
in 2001 and $509 million in 2000 reflecting the addition of four months of
revenue from the former Wachovia. Net interest income was $246 million in 2001
and $190 million in 2000. Fee and other income amounted to $394 million in 2001
and $319 million in 2000.
Strong expense discipline was exhibited in this more difficult
operating environment. The increase in expenses year over year reflects the
addition of four months of expenses from the former Wachovia.
CORPORATE AND INVESTMENT BANK Our Corporate and Investment Bank offers a range
of fixed income and equity products, asset securitization, and strategic
advisory and cash management services for large corporate and institutional
clients. Our corporate relationship coverage model focuses on ten key industry
sectors nationwide: consumer and retail, defense and aerospace, energy,
financial services, healthcare, industrial growth and services, media, real
estate, telecommunications and technology, and utilities. The Corporate and
Investment Bank includes three major lines of business: Corporate Banking,
Investment Banking and Principal Investing.
CORPORATE AND INVESTMENT BANK -- OPERATING BASIS
Performance Summary
Years Ended December 31,
-----------------------------------
(In millions) 2001 2000 1999
- ---------------------------------------------------------------------------------
Net interest income (Tax-equivalent) $ 2,075 1,674 1,599
Fee and other income 730 1,708 1,914
Intersegment revenue (56) (49) (49)
- ---------------------------------------------------------------------------------
Total revenue (Tax-equivalent) 2,749 3,333 3,464
Provision for loan losses 543 422 225
Noninterest expense 1,999 1,863 1,952
Income taxes (Tax-equivalent) (58) 219 388
- ---------------------------------------------------------------------------------
Operating earnings $ 265 829 899
- ---------------------------------------------------------------------------------
Economic profit $ (320) 277 298
Risk adjusted return on
capital (RAROC) 7.07% 16.73 17.61
Economic capital, average $ 6,491 5,861 5,312
Cash overhead efficiency ratio 68.41% 52.59 57.91
Average loans, net $43,066 41,883 43,029
Average core deposits $10,728 9,107 9,944
=================================================================================
Corporate Banking includes large corporate lending, commercial and rail
leasing, treasury services, correspondent banking operations and trade services.
Investment Banking includes fixed income underwriting, sales, trading and
research activities; equity underwriting, sales, trading and research
activities; fixed income and equity derivatives; currency risk management; loan
syndications; merger and acquisition advisory services; various real estate
capital markets products and services; and asset securitization. Principal
Investing includes direct investments primarily in private equity and mezzanine
securities and investments in funds sponsored by selected private equity and
venture capital groups.
Overall Corporate and Investment Bank results were adversely affected
by a $1.1 billion decline in principal investing results with a $707 million net
loss in principal investing in 2001 compared with principal investing net
revenue of $395 million in 2000. The 2001 loss was composed of $889 million of
gross losses and $182 million of gross gains. Our principal investing business
was negatively affected by the significant decline in equity market valuations
(particularly in the telecommunications and technology sectors) and the related
change in debt and private equity capital availability afforded to venture
capital-backed companies in 2001. Excluding principal investing, the Corporate
and Investment Bank's 2001 revenue increased $518 million from 2000, partly due
to the addition of four months of revenue from the former Wachovia.
Noninterest expense increased $136 million from 2000 due to the
addition of four months of noninterest expense from the former Wachovia.
Excluding the expenses from the former Wachovia, noninterest expense declined
due to increased emphasis on expense management.
Corporate Banking results in 2001 benefited from widening spreads, but
were adversely affected by larger provisions for loan losses as the recession
put increased strain on corporate credit conditions.
Investment Banking benefited from a strong fixed income market while
other markets were generally depressed in 2001. Investment grade debt, high
yield debt and derivatives posted record years as favorable market conditions
for these businesses prevailed throughout the year, and our businesses gained
share across the board. Despite difficult market conditions, several of our
agency businesses (including equity capital markets and loan syndications) also
showed strong revenue growth in 2001 as they too gained share in their
respective markets.
The revenue from the Principal Investing and Investment Banking
businesses is typically more volatile than revenues from more traditional
banking businesses and can vary significantly from period to period with market
conditions. In addition Corporate Banking results may vary significantly from
period to period as the credit quality of the loan portfolio changes.
PARENT Parent includes all of our asset and liability management functions. The
Parent in 2001 also included the goodwill asset and the associated amortization
expense and funding cost; certain revenue items not recorded in
23
MANAGEMENT'S ANALYSIS OF OPERATIONS
the business segments discussed in the Fee and Other Income section; certain
expenses that are not allocated to the business segments; corporate charges; and
the results of First Union's mortgage servicing, The Money Store home equity
lending businesses and indirect auto lending and leasing businesses and the
credit card portfolios of both the former Wachovia and First Union, which have
been divested or are being wound down.
Net interest income in the Parent decreased $799 million due to the
divested businesses. The $95 million decline in fee and other income was also
primarily related to the divested businesses. Noninterest expense declined $296
million due to the divested businesses, reduced management expenses and other
reductions in corporate expenses.
The Funding Sources and Risk Governance and Administration sections
provide information about our funding sources and asset and liability management
functions.
BALANCE SHEET ANALYSIS
SECURITIES The securities portfolio, all of which is classified as available for
sale, consists primarily of U.S. Government agency and asset-backed securities.
Activity in this portfolio is undertaken primarily to manage liquidity and
interest rate risk and to take advantage of market conditions that create more
economically attractive returns on these investments. We had securities
available for sale with a market value of $58 billion at December 31, 2001,
compared with $48 billion at December 31, 2000. Investment securities were $1.6
billion at December 31, 2000.
Included in securities available for sale at December 31, 2001, were
residual interests with a market value of $904 million, which included a net
unrealized gain of $85 million. At December 31, 2000, securities available for
sale included residual interests with a market value of $298 million, which
included a net unrealized gain of $43 million.
In the fourth quarter of 2001, we securitized certain residential
mortgage loans and home equity loans to reduce funding costs, diversify funding
sources and achieve more efficient capital levels. Residential mortgage loans of
$2.9 billion were swapped for mortgage-backed securities, substantially all of
which we retained as securities available for sale. We also transferred $883
million of home equity loans to a trust and retained $766 million as securities.
Additionally we transferred a $9.1 billion beneficial interest in a residential
mortgage revolving trust, along with $877 million of new residential mortgage
loans to a new trust in which we sold an 11 percent interest and recorded a net
$14 million gain. This revolving structure is part of an on-going residential
mortgage funding strategy that we will continue to utilize in the future. In
this transaction, we retained a subordinated beneficial interest and a $303
million residual interest. This transaction, as well as other securitizations in
2001, increased our residual interests. Performance of loans securitized in
which the company retains an interest is shown in Note 5 to Notes to
Consolidated Financial Statements.
One of our significant accounting policies relates to the valuation of
investments where there is little or no liquidity, including, for example,
certain investments in the principal investing business and residual interests.
The valuation of these types of investments is a subjective process involving a
high degree of judgment and small changes in assumptions can result in
significant changes in the valuation. The types of assumptions that are
particularly subjective include credit, prepayment and loss assumptions for
residual interests and the valuation of a start-up and/or private business for
equity securities. The factors in the valuation of principal investing equity
securities that are particularly subjective include assessing the viability of
the investee's business model, their ability to market new products and their
ability to access funding sources. We believe that we have the appropriate
policies and procedures in place and that we use the appropriate technology in
terms of modeling and projections to enable us to value these investments in a
reasonable and consistent manner. Residual interests can be classified as either
trading account assets or securities available for sale. Principal investing
debt and equity securities are classified in other assets.
LOANS Net loans were $164 billion at December 31, 2001, and $124 billion at
December 31, 2000. This increase included loans from the former Wachovia with a
fair value of $50 billion at September 1, 2001, offset by consumer portfolio
loan sales and securitizations, transfers to loans held for sale, the sale of
specific commercial loans and strategic reductions in less profitable commercial
loans due to portfolio management actions in 2001. Commercial loans represented
67 percent and consumer loans 33 percent of the loan portfolio at December 31,
2001. Managed loans were $216 billion at December 31, 2001, and $168 billion at
December 31, 2000. The average rate earned on loans decreased 98 basis points
from 2000 to 7.91 percent in 2001, which was in line with reductions in interest
rates.
LOANS -- ON-BALANCE SHEET
Years Ended December 31,
----------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------
COMMERCIAL
Commercial, financial, agricultural $ 61,258 54,207 51,683
Real estate- construction and other 7,969 3,104 2,435
Real estate- mortgage 17,234 9,218 8,768
Lease financing 21,958 15,465 12,742
Foreign 7,653 5,453 4,991
- --------------------------------------------------------------------------------
Total commercial 116,072 87,447 80,619
- --------------------------------------------------------------------------------
CONSUMER
Real estate- mortgage 22,139 17,708 27,793
Installment loans 34,666 22,972 25,795
Vehicle leasing 618 2,115 4,483
- --------------------------------------------------------------------------------
Total consumer 57,423 42,795 58,071
- --------------------------------------------------------------------------------
Total loans 173,495 130,242 138,690
Unearned income 9,694 6,482 5,513
- --------------------------------------------------------------------------------
Loans, net (on-balance sheet) $163,801 123,760 133,177
================================================================================
24
MANAGEMENT'S ANALYSIS OF OPERATIONS
LOANS -- MANAGED PORTFOLIO
(Including on-balance sheet)
Years Ended December 31,
----------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------
Commercial $123,377 93,277 86,095
Real estate - mortgage 29,903 22,274 29,296
Installment loans 62,402 50,208 52,951
Vehicle leasing 618 2,115 4,483
- --------------------------------------------------------------------
Total managed portfolio $216,300 167,874 172,825
====================================================================
YEAR-END COMMERCIAL AND INDUSTRIAL LOANS (A)
Industry Classification
COMMITTED
(In millions) OUTSTANDING EXPOSURE(b)
- ----------------------------------------------------------
Manufacturing $15,179 43,572
Services 11,456 31,118
Public utilities 8,685 17,527
Financial services 7,621 46,940
Transportation 5,835 8,112
Wholesale trade 5,365 12,724
Property management 4,901 6,787
Retail trade 4,237 13,459
Individuals 2,927 4,001
Public administration 1,895 9,462
Building contractors 1,573 3,572
Telecommunications 1,518 4,594
Mining 1,156 3,308
Agriculture/forestry/fishing 1,002 1,588
Insurance 763 5,183
Other 6,993 18,169
- ----------------------------------------------------------
Total $81,106 230,116
==========================================================
- ---------------
(a) Net of unearned income.
(b) Includes amount outstanding.
YEAR-END COMMERCIAL REAL ESTATE LOANS
Project Type
COMMITTED
(In millions) OUTSTANDING EXPOSURE(a)
- -----------------------------------------------
Office buildings $ 4,633 5,947
Apartments 4,579 6,032
Retail 4,118 5,043
Industrial 1,834 2,023
Lodging 1,599 1,865
Single family 1,506 2,940
Land - unimproved 967 1,556
Land - improved 917 1,352
Condominiums 775 1,696
Other 4,275 5,801
- -----------------------------------------------
Total $25,203 34,255
===============================================
Distribution by Facility Size (Percent)
- --------------------------------------------
Less than $10 million 70% 60
$10 million to $25 million 22 25
$25 million to $50 million 7 11
All other 1 4
- --------------------------------------------
Total 100% 100
============================================
- ---------------
(a) Includes amount outstanding.
NONPERFORMING ASSETS At December 31, 2001, nonperforming assets, including
nonperforming loans classified as loans held for sale, were $1.9 billion and at
December 31, 2000, $1.6 billion. The increase in 2001 was due largely to the
addition of nonperforming assets from the former Wachovia. The increase also
included $200 million of nonperforming assets related to an energy services
company that filed for bankruptcy in the fourth quarter of 2001 and to the
transfer to nonperforming status of part of our Argentinean exposure.
Nonperforming loans classified as loans held for sale in 2001 amounted to $228
million compared with $334 million in 2000. As a percentage of net loans,
foreclosed properties and loans held for sale, nonperforming assets improved to
1.13 percent at December 31, 2001, compared with 1.22 percent at December 31,
2000.
PAST DUE LOANS Accruing loans 90 days or more past due, excluding loans that are
classified as held for sale, amounted to $288 million at December 31, 2001,
compared with $183 million at December 31, 2000.
Substantially all of the increase was the result of the addition of loans from
the former Wachovia. Of these past due loans at December 31, 2001, $82 million
were commercial loans or commercial real estate loans and $206 million were
consumer loans.
NET CHARGE-OFFS Net charge-offs were 0.70 percent of average net loans in 2001
and 0.59 percent in 2000. Net charge-offs were $937 million in 2001 and $751
million in 2000. The $186 million increase in net charge-offs year over year
reflected a $97 million charge-off related to the energy services company
referred to above and to net charge-offs related to the addition of the former
Wachovia.
PROVISION AND ALLOWANCE FOR LOAN LOSSES On an as reported basis, the provision
for loan losses was $1.9 billion in 2001 and $1.7 billion in 2000. Components of
the provision in 2001 included $937 million equal to net charge-offs, $284
million related to loans sold or transferred to held for sale and $726 million
in incremental provision. The incremental provision was recorded in response to
the deterioration in the credit environment as well as to the integration of the
loan portfolios as a result of the merger. Components of the provision in 2000
included $751 million equal to net charge-offs, $657 million related to loans
transferred to held for sale and $328 million in incremental provision. The
Merger-Related, Restructuring and Other Charges and Gains section has further
information. The provision related to the transfer of loans to held for sale was
recorded to reduce the carrying value of these loans to their respective fair
values.
As a result of these actions and the addition of $766 million in
allowance from the former Wachovia, the allowance for loan losses increased $1.3
billion to $3.0 billion at December 31, 2001. The allowance rose to 1.83 percent
of net loans at December 31, 2001, from 1.39 percent at December 31, 2000.
25
MANAGEMENT'S ANALYSIS OF OPERATIONS
ASSET QUALITY
Years Ended December 31,
-----------------------------------
(In millions) 2001 2000 1999
- ---------------------------------------------------------------------
Loans, net $163,801 123,760 133,177
Allowance for loan losses $ 2,995 1,722 1,757
Allowance as % of loans, net 1.83% 1.39 1.32
Allowance as % of nonaccrual
and restructured loans 195 146 181
Allowance as % of
nonperforming assets 175% 135 165
Net charge-offs $ 937 751 688
Net charge-offs as % of
average loans, net 0.70% 0.59 0.53
Nonperforming assets
Nonaccrual loans $ 1,534 1,176 968
Foreclosed properties 179 103 98
Loans held for sale 228 334 14
- ---------------------------------------------------------------------
Total nonperforming assets $ 1,941 1,613 1,080
=====================================================================
Nonperforming assets to loans,
net, foreclosed properties
and loans held for sale 1.13% 1.22 0.78
=====================================================================
YEAR-END NONPERFORMING
COMMERCIAL AND INDUSTRIAL LOANS
Industry Classification
(In millions)
- --------------------------------------------
Manufacturing $ 486
Services 163
Energy 119
Telecommunications 99
Financial services 98
Transportation 92
Retail trade 63
Agriculture/forestry/fishing 33
Wholesale trade 24
Individuals 10
Mining 10
Insurance 3
Building contractors 1
Other 93
- --------------------------------------------
Total $1,294
============================================
YEAR-END NONPERFORMING LOANS HELD FOR SALE
Industry Classification
(In millions)
- ---------------------------------------
Theaters $ 87
Textile 48
Healthcare 30
Mixed-use land developers 27
Manufacturing 15
Telecommunications 4
Retail 3
Lodging 2
Other (a) 12
- ---------------------------------------
Total $228
=======================================
- ---------------
(a) Includes consumer home equity loans.
Loans transferred to held for sale are carried at the lower of cost or
market value, and accordingly, they are not included in the evaluation of the
adequacy of the allowance for loan losses subsequent to the transfer.
The allowance for loan losses is maintained at a level that we believe
is adequate to absorb probable losses inherent in the loan portfolio as of the
date of the consolidated financial statements. We employ a variety of tools as
well as seasoned judgment in assessing the adequacy of the allowance.
Our methodology for assessing the adequacy of the allowance establishes
both an allocated and an unallocated component. The allocated component of the
allowance for commercial loans is based principally on current loan grades and
historical loss rates. For consumer loans, it is based on loan payment status
and historical loss rates.
The unallocated component of the allowance represents the results of
analyses that estimate probable losses inherent in the portfolio that are not
fully captured in the allocated allowance. These analyses include industry
concentrations, model imprecision and the estimated impact of current economic
conditions on historical loss rates. We continuously monitor trends in loan
portfolio qualitative and quantitative factors, including trends in the levels
of past due, criticized and nonperforming loans. The trends in these factors are
used to evaluate the reasonableness of the unallocated component.
The distribution of the allowance into an allocated and unallocated
component does not diminish the fact that the entire allowance is available to
absorb credit losses in the loan portfolio. Our principal focus is, therefore,
on the adequacy of the total allowance for loan losses. As a result, future
material shifts between the allocated and unallocated components of the
allowance are possible.
A management committee headed by our chief risk management officer and
composed of the chief risk management officers of our major business units, the
chief accounting officer, the senior officer from our independent credit risk
review unit and other experienced credit risk professionals is responsible for a
comprehensive review and formal approval of the allowance for loan losses at the
end of each quarter.
The accounting policies related to the allowance for loan losses are
significant policies that involve the use of estimates and a high degree of
subjectivity. We believe we have developed appropriate policies and procedures
for assessing the adequacy of the allowance for loan losses that reflect our
assessment of credit risk after careful consideration of known relevant facts.
In developing this assessment, we must necessarily rely on estimates and
exercise judgment regarding matters where the ultimate outcome is unknown such
as economic factors, developments affecting companies in specific industries and
specific
26
MANAGEMENT'S ANALYSIS OF OPERATIONS
issues with respect to single borrowers. Depending on changes in circumstances,
future assessments of credit risk may yield materially different results, which
may require an increase or a decrease in the allowance for loan losses.
LOANS HELD FOR SALE At December 31, 2001, loans held for sale amounted to $7.8
billion compared with $8.1 billion at December 31, 2000. In 2001 we transferred
a net $1.6 billion of loans to loans held for sale; $1.3 billion of these were
performing and $332 million were nonperforming at the time of the transfer. Of
the $335 million allowance that was associated with the loans transferred to
loans held for sale, $87 million represented existing reserves and $248 million
represented additional provision to adjust the loans to the lower of cost or
market value at the date of transfer. The above activity included the
postmerger, third quarter 2001 transfer to held for sale of $1.5 billion of
overlapping loans and loans representing areas of perceived higher risk,
primarily in the textile, technology and telecommunications, commercial real
estate and asbestos-related sectors. Of these overlapping and higher risk loans,
$1.4 billion were performing loans and $113 million were nonperforming.
In 2001 we sold $23 billion in loans out of the held for sale
portfolio. Of this total, $1.8 billion were commercial loans and $21 billion
were consumer loans, primarily mortgages sold to agencies. Substantially all of
the consumer loan sales represented normal flow business, which is originated
directly into the held for sale portfolio. A total of $369 million of the loans
sold were nonperforming.
Included in the above was the securitization of $3.2 billion of The
Money Store home equity loans that were transferred into held for sale in
connection with our June 2000 strategic repositioning. In connection with this
securitization, at December 31, 2001, we retained as securities available for
sale $772 million of investment grade securities, $52 million of non-investment
grade securities and $56 million of residual interests.
In addition to the above activity, in 2001 we sold or securitized $2.4
billion of loans directly out of the portfolio. Of these nonflow loans, $2.2
billion were performing and $241 million were nonperforming at the time of the
sale. These loans included $2.1 billion of consumer loans, of which $1.6 billion
was in securities available for sale at year-end 2001.
FUNDING SOURCES
CORE DEPOSITS Core deposits were $170 billion at December 31, 2001, and $122
billion at December 31, 2000. The majority of this increase was the result of
the addition of deposits from the former Wachovia. Our renewed focus on
gathering deposits stemmed a negative growth trend and led to deposit growth in
low-cost core deposits in 2001, more than offsetting a decline in higher cost
consumer certificate of deposit balances. We also continue to meet customer
demand for alternative investment products such as annuities and mutual funds.
In 2001 and 2000, average noninterest-bearing deposits were 23 percent
and 24 percent, respectively, of average core deposits.
The portion of core deposits in higher-rate, other consumer time
deposits was 23 percent at December 31, 2001, and 29 percent at December 31,
2000. Other consumer time and other noncore deposits usually pay higher rates
than savings and transaction accounts, but they generally are not available for
immediate withdrawal. They are also less expensive to process.
PURCHASED FUNDS Average purchased funds, which include wholesale borrowings with
maturities of 12 months or less, were $59 billion in 2001 and $66 billion in
2000. The decrease from 2000 was due to lower funding needs, primarily the
result of the sale of $13 billion in securities in connection with our 2000
strategic repositioning and an increase in low-cost core deposits. Purchased
funds were $61 billion at December 31, 2001, and $60 billion at December 31,
2000.
LONG-TERM DEBT Long-term debt was $42 billion at December 31, 2001, including
$10 billion from the former Wachovia, and $36 billion at December 31, 2000. In
2002 scheduled maturities of long-term debt amount to $8.6 billion. We
anticipate either extending the maturities of these obligations or replacing the
maturing obligations.
Long-term debt included $3 billion of trust capital securities at
December 31, 2001, including $1 billion from the former Wachovia, and $2 billion
at December 31, 2000. Subsidiary trusts issued these capital securities and used
the proceeds to purchase junior subordinated debentures from the parent company.
These capital securities are considered tier 1 capital for regulatory purposes.
First Union National Bank has available a global note program for the
issuance of up to $45 billion of senior or subordinated notes. Under prior
global bank note programs, $12 billion of long-term debt was outstanding at
December 31, 2001. The sale of any additional notes will depend on future market
conditions, funding needs and other factors.
Additionally in 2001, a subsidiary of First Union National Bank issued
$2.5 billion of collateralized notes. The notes are collateralized primarily by
investment grade securities and prime home equity loans. They are redeemable at
any time at the subsidiary's option.
Under a current shelf registration statement with the Securities and
Exchange Commission, we have $665 million of senior or subordinated debt
securities, common stock or preferred stock available for issuance. To replace
this shelf registration statement, we have filed a $10 billion shelf
registration statement. We have also filed a $4 billion
27
MANAGEMENT'S ANALYSIS OF OPERATIONS
shelf registration statement to issue senior or subordinated debt securities
under a medium-term note program. Both of these registration statements are
expected to become effective in the first quarter of 2002. The sale of debt or
equity securities will depend on future market conditions, funding needs and
other factors.
CREDIT LINES We have a $175 million committed back-up line of credit that
expires in July 2002. This credit facility contains covenants that require the
company to maintain a minimum level of tangible net worth, restrict double
leverage ratios and require capital levels at subsidiary banks to meet
regulatory standards. We have not used this line of credit. Additionally we have
a $395 million committed back-up line of credit related to the former Wachovia
that expires in March 2002.
STOCKHOLDERS' EQUITY The management of capital in a regulated banking
environment requires a balance between maximizing leverage and return on equity
while maintaining sufficient capital levels and related ratios to satisfy
regulatory requirements. Our goal is to generate attractive returns on equity to
our stockholders while maintaining sufficient regulatory capital ratios.
Stockholders' equity was $28 billion at December 31, 2001, including
$13 billion from the issuance of shares in connection with the merger with the
former Wachovia, and $15 billion at December 31, 2000. Common shares outstanding
amounted to 1.4 billion at December 31, 2001, and 980 million at December 31,
2000, with the increase attributable to the 407 million shares issued in the
Wachovia merger. In 2001 we repurchased 2 million shares of common stock in the
open market at a cost of $64 million. We also retired 16 million shares at a
cost of $568 million held by the former Wachovia. In addition we retired 12
million shares at a cost of $652 million as described in the following
paragraph. At December 31, 2001, we had authority to repurchase up to 99 million
shares of our common stock. In 2000 we repurchased in the open market 15 million
shares of common stock at a cost of $479 million.
At December 31, 2001, we had an equity forward contract outstanding
involving 3 million shares at an aggregate cost of $100 million and forward
purchase contracts outstanding involving 33 million shares at an aggregate cost
of $1.2 billion. These contracts mature at various times in 2002 and can be
extended by mutual consent of the counterparties. In 2001 we settled a forward
purchase contract and an equity forward contract by purchasing 12 million shares
at a cost of $652 million and we settled a contract for 4 million shares on a
net share basis resulting in no transfer of shares. In 2000 we settled an equity
forward contract by purchasing 4 million shares at a cost of $211 million. The
forward price of the shares subject to equity forward and forward purchase
contracts is the share price at the inception of the contract plus a premium
that accrues over the life of the contract, net of dividends paid to the
counterparty.
In calculating diluted earnings per share, the premium component of the
forward price on equity forward contracts is subtracted in calculating income
available to common stockholders. For forward purchase contracts, diluted shares
include the share equivalent of the excess of the forward price over the current
market price of the shares.
We paid $1.0 billion in dividends to common stockholders in 2001 and
$1.9 billion in 2000. The decline from 2000 reflected a 50 percent reduction in
the dividend rate to 24 cents per share, effective with the March 2001 dividend,
offset by dividends paid on the shares issued in connection with the merger.
This represented a dividend payout ratio on operating earnings of 45.28 percent
in 2001 and 64.65 percent in 2000.
In connection with the Wachovia merger, we issued 96 million shares of
Dividend Equalization Preferred Shares (DEPs), which were recorded at their fair
value as of September 1, 2001, of 24 cents per share or $23 million for shares
issued through December 31, 2001. A dividend of six cents per DEP share, or $6
million, was paid to holders of the DEPs in the fourth quarter of 2001
representing the difference between the Wachovia dividend paid to common
stockholders in the fourth quarter of 24 cents and the last dividend paid by the
former Wachovia of 30 cents per share. This DEP dividend was recorded as a
reduction in the carrying value of the DEPs.
SUBSIDIARY DIVIDENDS First Union National Bank, which is scheduled to be merged
with Wachovia Bank, N.A., and renamed "Wachovia Bank, N.A." on April 1, 2002, is
the largest source of parent company dividends. Capital requirements established
by regulators limit dividends that this subsidiary and certain other of our
subsidiaries can pay. Under these and other limitations, which include an
internal requirement to maintain all deposit-taking banks at the
well-capitalized level, at December 31, 2001, our subsidiaries had $999 million
available for dividends that could be paid without prior regulatory approval.
Our subsidiaries paid $1.6 billion in dividends to the parent company in 2001.
REGULATORY CAPITAL At December 31, 2001, our tier 1 and total capital ratios
were 7.04 percent and 11.08 percent, respectively, and 7.02 percent and 11.19
percent, respectively, at December 31, 2000. Our leverage ratio at December 31,
2001, was 6.19 percent and at December 31, 2000, 5.92 percent. At December 31,
2001, our deposit-taking bank subsidiaries met the capital and leverage ratio
requirements for well capitalized banks.
OFF-BALANCE SHEET PROFILE
In the normal course of business, we engage in a variety of financial
transactions that, under generally accepted accounting principles, either are
not recorded on the balance sheet or are recorded on the balance sheet in
amounts that differ from the full contract or notional amounts. These
transactions
28
MANAGEMENT'S ANALYSIS OF OPERATIONS
involve varying elements of market, credit and liquidity risk. These
transactions fall under two broad categories: corporate transactions and
customer transactions. Corporate transactions are designed to diversify our
funding sources; reduce our credit, market or liquidity risk; and optimize
capital. Customer transactions are executed to facilitate customers' funding
needs or risk management objectives. Within these two categories, there are many
types of transactions, which for purposes of the table below and the discussion
that follows, we have grouped into derivatives, lending commitments, liquidity
and credit facilities, asset securitization, leasing transactions and other
transactions.
SUMMARY OF OFF-BALANCE SHEET PROFILE
December 31, 2001
-----------------
AMOUNT
(In millions) AT RISK
- ---------------------------------------------------
DERIVATIVES(A) $ 11,400
LENDING COMMITMENTS 150,800
LIQUIDITY AND CREDIT FACILITIES 45,000
ASSET SECURITIZATION 10,000
OTHER TRANSACTIONS
Leasing transactions(a) 9,000
Principal investing commitments 1,200
Share repurchase agreements 1,300
- ---------------------------------------------------
Total $228,700
===================================================
- ---------------
(a) Represents on-balance sheet risk; related off-balance sheet contract or
notional amount exceeds amount at risk.
DERIVATIVES We use derivatives to manage our exposure to interest rate risk, to
generate profits from proprietary trading and to assist our customers with their
risk management objectives. All derivatives are recorded on the balance sheet at
fair value with realized and unrealized gains and losses included either in
earnings or in other comprehensive income, depending on the nature and purpose
of the derivative transaction. Derivative transactions are measured in terms of
the notional amount, but this amount is not recorded on the balance sheet and is
not, when viewed in isolation, a meaningful measure of the risk profile of the
instruments. The notional amount is not exchanged, but is used only as the basis
upon which interest or other payments are calculated.
For interest rate risk management, we use derivatives as a cost- and
capital-efficient way to hedge on-balance sheet assets, liabilities and
forecasted transactions. Derivatives used for interest rate risk management
include various interest rate swap, futures and option structures with indices
that relate to the pricing of specific on-balance sheet instruments. Trading and
customer derivatives include a wide array of interest rate, foreign currency,
credit and equity derivatives.
At December 31, 2001, the total credit risk, as represented by the fair
value of all derivatives in a gain position, amounted to $11.4 billion, which is
recorded on the balance sheet. At December 31, 2001, the total mark-to-market
related credit risk for derivative transactions in excess of counterparty
thresholds was $1.0 billion. The fair value of collateral held exceeded the
total mark-to-market related credit risk in excess of counterparty thresholds as
of that date.
We manage the credit risk of these instruments in much the same way
that we manage on-balance sheet credit risk, by establishing credit limits for
each counterparty and through collateral agreements for dealer transactions. For
nondealer transactions, the need for collateral is evaluated on an individual
transaction basis and is primarily dependent on the financial strength of the
counterparty. Credit risk is also reduced significantly by entering into master
netting agreements. The net mark-to-market is the most relevant measure of
credit risk when there is a master netting agreement. When we have more than one
transaction with a counterparty and there is a legally enforceable master
netting agreement between the parties, the exposure to a counterparty represents
the net of the gain and loss positions with that counterparty. The Credit Risk
Management section has more information on the management of on- and off-balance
sheet credit risk.
The market risk associated with interest rate risk management
derivatives is fully incorporated into our earnings simulation model in the same
manner as on-balance sheet financial instruments. The Interest Rate Risk
Management section describes the way in which we manage this risk. The market
risk associated with trading and customer derivative positions is managed using
the Value-at-Risk (VAR) methodology, as described in the Market Risk Management
section.
Refer to Table 18 through Table 20 for detailed information on our
derivatives used for interest rate risk management. Refer also to Note 16 to
Notes to Consolidated Financial Statements for additional information on
derivatives.
LENDING COMMITMENTS Lending commitments include unfunded loan commitments and
standby and commercial letters of credit. We provide loan commitments to
customers in the normal course of our commercial and retail lending businesses.
For commercial customers, loan commitments generally take the form of revolving
credit arrangements to finance customers' working capital requirements. For
retail customers, loan commitments generally are lines of credit secured by
residential property. These instruments are not recorded on the balance sheet
until we advance funds under the commitment. For lending commitments, the
contractual amount of a commitment represents the maximum potential credit risk
if the entire commitment is funded and the borrower does not perform according
to the terms of the contract. A large majority of these commitments expire
without being funded, and accordingly, total contractual amounts are not
representative of our actual future credit exposure or liquidity requirements.
The Credit Risk Management section describes how we manage on- and off-balance
sheet credit risk.
Loan commitments and letters of credit expose us to credit risk in the
event that the counterparty draws on the commitment and subsequently fails to
perform under the terms of the lending agreement. This risk is incorporated into
our overall evaluation of on- and off-balance sheet credit risk and, to the
extent necessary, we record reserves on these commitments. Uncertainties around
the timing and
29
MANAGEMENT'S ANALYSIS OF OPERATIONS
amount of funding under these commitments exposes the company to liquidity risk.
The Liquidity Risk Management section describes the way in which we manage
liquidity with respect to both on- and off-balance sheet exposures.
At December 31, 2001, we had outstanding $116 billion and $22 billion
of unfunded commercial and retail loan commitments, respectively. Undrawn
letters of credit, typically issued in connection with customers' trade and
other commercial financing requirements, amounted to $13 billion at December 31,
2001. For commercial loan commitments, we typically charge a fee equal to a
percentage of the unfunded commitment. There are generally no fees associated
with retail commitments. In 2001 we recognized fee income of approximately $74
million on unfunded commitments.
LIQUIDITY AND CREDIT FACILITIES We arrange financing for certain customer
transactions through third party entities called conduits that provide the
customers with access to the commercial paper market. These entities purchase a
variety of asset-backed loans and receivables, trade receivables and securities
from borrowers and issuers, and issue commercial paper to fund those assets.
At December 31, 2001, we administered three off-balance sheet conduits
with commercial paper outstanding of $23 billion. We guarantee the liquidity on
substantially all of the commercial paper issued by the conduits that we
administer. In addition we provide liquidity guarantees of commercial paper
issued by large corporate clients. At December 31, 2001, we provided liquidity
facilities covering $10 billion of commercial paper issued by commercial
customers. Under liquidity facilities, we are obligated to purchase commercial
paper issued by the conduits in the event that the conduits are unable to
otherwise sell the commercial paper. This risk is incorporated in the overall
assessment of our liquidity risk as described in the Liquidity Risk Management
section.
In addition to the liquidity facilities, we also provide credit
enhancement related to certain assets funded in our conduits. Under these
agreements, we may be required, under certain circumstances of credit
deterioration or default, to purchase assets from a conduit at an amount equal
to the par value of the assets, which may exceed its fair value resulting in a
loss to the company. In 2001 we recorded $122 million of losses in connection
with the purchase of assets from our conduits.
We also assist certain commercial customers in obtaining long-term
funding through industrial revenue bonds (IRBs). These IRBs are issued with a
letter of credit from us ensuring the customer's obligation under the bond.
These letters of credit were $12 billion at December 31, 2001, and expose us to
both liquidity and credit risk.
ASSET SECURITIZATION From time to time, we securitize assets originated through
our normal loan production channels. In these transactions, assets are typically
sold through a qualifying special purpose entity (QSPE), which then issues
senior and subordinated debt, including residual interests, collateralized by
the assets. Legally distinct, bankruptcy remote QSPEs are used in these
transactions as they facilitate isolating the asset's cash flows from originator
default. This legal isolation and the allocation of risk to different tranches
of securities issued by the QSPE allows securitization transactions to generally
receive cost-advantaged funding rates. These securitizations are also used to
provide an alternative funding source to reduce credit risk and to manage
capital. Certain securitization transactions result in a complete transfer of
risk to investors and in others we retain risk in the form of residual interests
and other beneficial interests in the resulting securities. Additionally, in
certain cases, we provide the buyer short-term financing alternatives should
they need it on high quality assets. As of December 31, 2001, this credit
enhancement amounted to $10 billion.
Generally we are paid fees by the QSPE for servicing the assets owned
by the QSPE. We may retain interests in our securitizations, including senior or
subordinated notes or residual interests. These retained interests are recorded
on-balance sheet in either trading or securities available for sale. Retained
interests classified as trading account assets are carried at fair value with
unrealized gains and losses included in fee and other income. Retained interests
classified as trading account assets were $359 million at December 31, 2001.
Retained interests classified as securities available for sale are carried at
their fair value with unrealized gains and losses included in other
comprehensive income, unless the securities are considered impaired, in which
case the securities are written down in fee and other income to fair value.
Retained interests within securities available for sale were $18 billion at
December 31, 2001. Impairment charges on retained interests in QSPEs amounted to
$13 million in 2001. We have varying levels of credit, interest and prepayment
rate risk associated with our investment in these debt securities and residual
interests.
We also participate in structuring collateralized loan obligations
(CLOs) and collateralized debt obligations (CDOs). In these transactions,
securities or loans are purchased in the open market or transferred to
substantive special purpose entities (SPEs). These SPEs are capitalized with
equity in both form and substance contributed by third parties in an amount
driven by market conditions but not less than 3 percent of the fair value of the
financial assets held by the SPE. In certain transactions we also may invest in
the equity issuance by an SPE, but our investment is in addition to the amount
held by the third party. Additionally we hold no more than 25 percent of the
total equity issued by an SPE and may purchase subordinated notes in the
entities. These retained interests are recorded in our securities portfolio at
an allocated carrying value subject to impairment analysis. These securities
retained on the balance sheet amounted to $46 million at December 31, 2001.
Total assets within the SPEs where we have a retained interest amounted to $3.5
billion and we did not assume any risk beyond our retained interests. Aggregate
impairment losses recognized in 2001 for CLOs and CDOs were $29 million. We also
recognize fee income on these transactions, primarily in the form of structuring
fees.
30
MANAGEMENT'S ANALYSIS OF OPERATIONS
Note 5 to Notes to Consolidated Financial Statements has more information on
securitization activities.
OTHER TRANSACTIONS
Leasing - We enter into domestic and international leveraged lease transactions
for both equipment and real property to facilitate customer financing
requirements. The assets are held in a legally distinct special purpose entity
(trust) to which we provide some or all of the equity investment. The trust then
issues non-recourse debt to unrelated third parties. Our outstanding equity
investment in leveraged leases, which is net of this non-recourse debt, was $9
billion at December 31, 2001, which is recorded on the balance sheet.
Approximately $6 billion of collateral and financial guarantees is associated
with our outstanding equity investments.
These transactions expose us to credit risk to the extent that the
lessee defaults, the value of the underlying asset declines and lessee-provided
guarantees are insufficient to repay the outstanding equity investment after the
nonrecourse debt has been paid. To manage these risks, we limit transactions to
those asset classes for which it is feasible to project future asset values and
to higher creditrated customers. Substantial amounts of our invested equity are
collateralized with high grade securities or guaranteed by a highly rated third
party. Residual asset values are reviewed and monitored annually. Additionally
we maintain the contractual right to buy out the nonrecourse debt to reduce the
risk of value destruction through a foreclosure process. Credit risk is managed
through the same credit underwriting processes used to support commercial and
corporate lending.
We also use "synthetic" leasing structures to finance certain corporate
assets, primarily real estate. Total assets within these structures were $297
million at December 31, 2001. We lease these assets under operating leases and
we have provided residual guarantees to the lessors of $253 million at December
31, 2001.
Principal Investing - Our principal investing business involves
investments primarily in private equity and mezzanine securities and investments
in funds sponsored by selected private equity and venture capital groups. These
investments are recorded on the balance sheet at a fair value of $2.6 billion at
December 31, 2001. These investments are subject to all the risks of the equity
markets and many of these investments are illiquid. Direct investments in public
and private companies typically do not involve legally binding commitments to
participate in subsequent equity or debt offerings. Fund investments do however
involve legally binding commitments to contribute capital pursuant to the terms
of limited partnership agreements. At December 31, 2001, we had unfunded
commitments to more than 100 fund sponsors amounting to $1.2 billion. We expect
that these commitments will be drawn over the next three to four years.
Transactions in Our Own Stock - Since 1999 we have entered into derivative
transactions in our own stock, principally forwards and equity forwards. The
Stockholders' Equity section has a detailed description of these transactions.
Under these transactions, a counterparty purchased shares from us or in the open
market. Simultaneously, we entered into a forward contract with the same
counterparty to repurchase the shares at the same price plus a premium that
accrues over the term of the contract. This allowed us to set the price of a
share repurchase without reducing stockholders' equity.
We have the option to settle these contracts by purchasing the shares
for cash or by settling on a net cash or net share basis. If we settle the
contracts by purchasing the shares, we will pay cash and realize a corresponding
reduction to stockholders' equity. Net cash and net share settlement would
involve a counterparty selling the shares they hold, with the remaining
obligation settled in cash or shares, respectively. Depending on the market
price of our stock relative to the forward price of the contracts at settlement,
we may either receive or issue cash or shares under net settlement.
RISK GOVERNANCE AND ADMINISTRATION
Our chief risk management officer reports directly to the chief
executive officer and is responsible for credit, market and operational risk
governance.
The chief risk management officer provides loan portfolio, market risk
and other information to appropriate management and board of directors oversight
committees on a regular basis. Such management committees include the Credit
Policy Committee and the Asset and Liability Committee, both of which meet
monthly and are headed by the chief executive officer. The Market Risk
Committee, headed by the chief risk management officer, and the Credit & Finance
Committee of the board of directors, composed of outside directors, meets
bi-monthly.
Our risk management practices include key elements such as independent
checks and balances, formal authority limits, well-defined policies and
procedures, quantitative modeling, diversification, active portfolio management
and experienced risk management personnel.
CREDIT RISK MANAGEMENT Credit risk is the risk of loss due to adverse changes in
a borrower's ability to meet its financial obligations under agreed upon terms.
We incur credit risk in our lending, trading, investing, liquidity/funding and
asset management activities. The nature and amount of credit risk depends on the
types of transactions pursued, the structure of those transactions and the
parties involved. In general credit risk is incidental to our trading,
liquidity/funding and asset management activities, while it is central to the
profit strategy in lending. As a result, the majority of our credit risk is
incurred in our lending activities.
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MANAGEMENT'S ANALYSIS OF OPERATIONS
Credit risk is managed through a combination of policies and procedures
and risk-taking or commitment authorities that are tracked and regularly updated
in a centralized database. All credit authorities are delegated through the
independent risk management organization. Most officers who are authorized to
incur credit exposure are in the risk management organization and are
independent of the officers who are responsible for generating new business.
The maximum level of credit exposure to individual commercial borrowers
is limited by policy guidelines, or "house limits". These limits are based on
the default probabilities associated with the credit facilities extended to each
borrower or related group of borrowers.
Concentration risk is managed through geographic and industry
diversification, country limits and loan quality factors.
COMMERCIAL CREDIT All commercial loans are assigned internal risk ratings
reflecting the probability of the borrower defaulting on any obligation, the
probability of a default on any particular Wachovia credit facility and the
probable loss in the event of a default.
Commercial credit extensions are also evaluated using a Risk Adjusted
Return on Capital (RAROC) model that considers pricing, internal risk ratings,
loan structure and tenor, among other variables. This produces a risk/return
analysis, enabling the efficient use of economic capital attributable to credit
risk. Economic capital is allocated to all credit commitments, whether fully
funded or not. The same credit processes and checks and balances are used for
unfunded commitments as well as for funded exposures.
Economic capital for all credit risk assets is calculated by the
portfolio management group within the risk management organization. As part of
their annual capital level review, this group analyzes factors that are used to
determine the amount of economic capital needed to support credit risk in the
loan portfolio.
Credit Risk Review is an independent unit that performs risk process
reviews and evaluates a representative sample of credit extensions after the
fact. Credit Risk Review has the authority to change internal risk ratings and
is responsible for assessing the adequacy of credit underwriting and servicing
practices. This unit reports directly to the Credit & Finance Committee of the
board of directors.
Credit approvals are based, among other things, on the financial
strength of the borrower, assessment of the borrower's management, industry
sector trends, the type of exposure, the transaction structure and the general
economic outlook. There are two processes for approving credit risk exposures.
The first involves standard approval structures (e.g., rapid approval grids) for
use in retail, certain small business lending and most trading activities. The
second, and more prevalent approach, involves individual approval of exposures
consistent with the authority delegated to officers experienced in the
industries and loan structures over which they have responsibility.
In commercial lending, servicing of credit exposure may be as often as
weekly for certain types of asset-based lending, to annually for certain term
loans. Some term loans having characteristics similar to retail loans are
monitored for delinquencies only. In general quarterly servicing is normal for
all significant exposures. The internal risk ratings are confirmed with each
major servicing event. In addition portfolio modeling is employed to verify
default probabilities and to estimate losses.
Borrower exposures may be designated as "watch list" accounts when
warranted by either environmental factors or individual company performance.
Such accounts are subjected to additional quarterly reviews by the business line
management, risk management and credit risk review staff and our chief risk
management officer in order to adequately assess the borrower's credit status
and to take appropriate action. In addition projections of both nonperforming
assets and losses for future quarters are performed monthly. This process is
considered essential to the effective management of our credit risk.
We have also established special teams composed of highly skilled and
experienced lenders to manage problem credits. These teams handle commercial
recoveries, workouts and problem loan sales.
Commercial credit checks and balances, the independence of risk
management functions and specialized processes are all designed to avoid
problems where possible and to recognize and address problems early in the cycle
when they do occur.
RETAIL CREDIT In retail lending, we manage credit risk from a portfolio view
rather than by specific borrower as in commercial lending. The risk management
division, working with the line of business, determines the appropriate
risk/return profile for each portfolio, utilizing a variety of tools including
quantitative models and scorecards tailored to meet our specific needs.
By incorporating these models and policies into computer programs or
"decisioning engines," much of the underwriting is automated. Once a line of
credit or other retail loan is extended, it is included in the overall
portfolio, which is continuously monitored for changes in delinquency trends and
other asset quality indicators. Delinquency action on individual credits is
taken monthly or as needed if collection efforts are necessary. The independent
credit risk review unit also has a retail component to ensure adequacy and
timeliness of retail credit processes.
MARKET RISK MANAGEMENT We trade a variety of debt securities, foreign exchange
instruments and derivatives in order to provide customized solutions for the
risk management needs of our customers and for proprietary trading. Risk is
controlled through the use of VAR methodology with limits approved by the Asset
and Liability Management Committee and an active, independent monitoring
process. Our 1-day VAR limit for 2001 was $30 million.
32
MANAGEMENT'S ANALYSIS OF OPERATIONS
VAR PROFILE BY RISK TYPE
(In millions) 2001 2000
- --------------------------------------------------------------------------------
Risk Category High Low Avg High Low Avg
---- --- ---- ---- --- ----
Interest rate 14.3 5.3 9.8 15.3 1.2 8.9
Foreign exchange 5.3 0.4 1.4 3.3 0.3 1.3
Equity 11.8 2.2 5.2 7.8 0.3 4.0
- --------------------------------------------------------------------------------
Aggregate 15.5 6.5 11.3 15.5 5.5 10.2
================================================================================
The VAR methodology uses recent market volatility to estimate within a
given level of confidence the maximum trading loss over a period of time that we
would expect to incur from an adverse movement in market rates and prices over
the period. We calculate 1-day and 10-day VAR at the 97.5 percent and 99 percent
confidence levels, respectively. In 2001 we changed our VAR methodology from
variancecovariance to historical simulations VAR. The VAR model uses historical
data from the most recent 252 trading days. The Daily VAR Backtesting table
shows the daily trading profit and loss, and compares this to the daily VAR. The
VAR model is supplemented by stress testing on a daily basis. The analysis
captures all financial instruments that are considered trading positions. The
total 1-day VAR was $11 million at December 31, 2001, and $15 million at
December 29, 2000, and primarily related to interest rate risk and equity risk.
The high, low and average VARs in 2001 were $16 million, $6 million and $11
million, respectively.
DAILY VAR BACKTESTING
(Dollars of revenue in millions)
[Graph]
Vertical Data Points
$25 $20 $15 $10 $5 $0 ($5) ($10) ($15) ($20)
Horizontal Data Points
01/02/01 12/31/01
ACTUAL P/L VAR
Histogram of Daily Profit and Loss in 2001
(Dollars of revenue in millions)
[Graph]
Vertical Data Points
Number of Days
45 40 35 30 25 20 15 10 5 0
Horizontal Data Points
($10) ($9) ($8) ($7) ($6) ($5) ($4) ($3) ($2) ($1) ($0) $1 $2 $3 $4 $5 $6 $7 $8
$9 $10 $11 $12 $13 $14 $15 $16 $17 $18 $19 20 $21 $22
High, low and average 1-day VARs by major risk category and on an
aggregate basis are shown in the VAR Profile by Risk Type table. The Histogram
of Daily Profit and Loss in 2001 table shows the distribution of daily trading
revenues versus 1-day VAR projections and it shows the consistency of the
trading pattern in terms of daily profitability. There were two days with losses
greater than the VAR projections, both associated with market disruptions after
the events of September 11.
OPERATIONAL RISK MANAGEMENT Operational risk is the risk of loss resulting from
inadequate or failed internal processes, people and systems or from external
events. This risk is inherent in all of our businesses.
Late in the fourth quarter of 2001 we merged the operational risk
management resources of the former Wachovia and First Union to form an
enterprise-wide capability under the leadership of the chief risk management
officer. This team is composed of approximately 25 full-time professionals who
will work with business line resources across the enterprise to deploy and
improve operational risk management competencies, processes and technologies.
Additionally this group is responsible for corporate governance and information
reporting to executive management and to our board of directors.
Merger integration represents one of our more significant sources of
operational risk over the next few years. If the operations of the former
Wachovia and First Union were not integrated successfully, we could potentially
face the risk of significant customer attrition, incur operational losses and
fail to realize anticipated cost savings. To manage this risk, we have developed
a paced, methodical and deliberate integration plan. Co-heads for the transition
and conversion teams are experienced individuals who have managed or
participated in more than 140 mergers. These four leaders possess extensive
banking experience. The head of operational risk management also serves as the
transition team co-chair, ensuring that risk management activities are
incorporated into all facets of integration planning and execution.
We have implemented an enterprise process and tool that provides a
high-level assessment and reporting of key operational risks in both legacy
companies and merger events. Additionally a disciplined process to review
critical conversion readiness elements has been put in place before every
merger-related system conversion. This process provides readiness/risk
information relative to staffing, training, customer communication, compliance,
vendors, corporate real estate, technology infrastructure, application systems,
operational support and balancing/reconcilement. In addition to the operational
risk management group, the management of merger integration risk is a top
priority for all business units.
Operational risks outside the merger context are also receiving
attention. The management of business continuity and availability risk is an
industry issue that includes con-
33
MANAGEMENT'S ANALYSIS OF OPERATIONS
sideration of the people, processes and technologies that support our day-to-day
operations, as well as specific contingency plans for catastrophic disruptions
such as natural disasters, acts of war or terrorism. Proactive management of
this risk is a significant area of focus and we continue to improve business
continuity and availability management processes to mitigate the potential
reputation, regulatory and financial risks and related impacts.
We continue to refine the operational risk framework, governance
structure and capital allocation methods, resulting in a more integrated
approach for identifying, measuring and reporting operational risk exposures.
Risk areas that will continue to receive significant attention include fraud,
technology, human capital, vendor, financial, real estate, fiduciary,
legal/compliance, business process, business continuity planning and change
management. Our long-term strategy is to link business performance measurements
to operational risk through risk profiles and capital allocation.
LIQUIDITY RISK MANAGEMENT Liquidity risk involves the risk of being unable to
fund assets with the appropriate duration and rate-based liability, as well as
the risk of not being able to meet unexpected cash needs. Liquidity planning and
management are necessary to ensure we maintain the ability to fund operations
cost-effectively and to meet current and future potential obligations such as
loan commitments, lease obligations, contingent liquidity commitments and
unexpected deposit outflows. In this process, we focus on both assets and
liabilities and on the manner in which they combine to provide adequate
liquidity to meet our needs. However, the following focuses only on future
obligations, which are summarized below:
LIQUIDITY RISK MANAGEMENT
-------------------------------------------------------------
One Over one Over
year year through three
(In millions) TOTAL or less three years years
- ---------------------------------------------------------------------------------------------------------------------------------
CONTRACTUAL
COMMITMENTS
Long-term debt $ 41,733 8,635 9,292 23,806
Operating lease
obligations 2,717 344 616 1,757
Deposit maturities 187.453 175,218 9,577 2,658
Short-term funding 44,385 44,385 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 276,288 228,582 19,485 28,221
=================================================================================================================================
In the table above all deposits with indeterminate maturities such as
demand deposits, checking accounts, savings accounts and money market accounts
are presented as having a maturity of one year or less.
Funding sources primarily include customer-based core deposits,
purchased funds, collateralized borrowings, cash flows from operations, and
asset securitizations and sales.
Cash flows from operations are a significant component of liquidity
risk management and consider both deposit maturities and the scheduled cash
flows from loan and investment maturities and payments. Deposits are our primary
source of liquidity. Wachovia is one of the nation's largest core deposit-funded
banking institutions with a deposit base that is spread across the economically
strong South Atlantic region and high per-capita income Middle Atlantic region.
We believe this geographic diversity creates considerable funding diversity and
stability. The stability of this funding source is affected by other factors
including returns available to customers on alternative investments, the quality
of customer service levels and competitive forces.
We purchase funds on an unsecured basis in the federal funds,
commercial paper, bank note, national certificate of deposit and long-term debt
markets. In addition we routinely use securities in our trading portfolios and
available for sale portfolios as collateral for secured borrowings. In the event
of severe market disruptions, we have access to secured borrowings through the
Federal Reserve Bank. Our ability to access unsecured funding markets and the
cost of funds acquired in these markets is primarily dependent upon our credit
rating, which is currently P-1/A-1 for short-term paper and A1/A for senior debt
(Moody's and Standard & Poor's, respectively). As previously communicated, our
goal is to increase our long-term credit rating to AA. We believe a long-term
credit rating of AA will provide us with many benefits including access to
additional funding sources at lower rates (assuming a static interest rate
environment). Conversely, a downgrade from our current long-term debt ratings
would have an adverse impact on the company, including higher costs of funds,
access to fewer funding sources and possibly the triggering of liquidity
agreements with the commercial paper conduits. Providing funding under liquidity
agreements may result in our forgoing more profitable lending and investing
opportunities because of funding constraints. Furthermore, our balance sheet
size would increase, as assets in conduits would be funded on balance sheet.
This would reduce certain regulatory capital ratios.
Asset securitization provides an alternative source of funding. Outside
of the customer-oriented conduit activities, we do not rely heavily on the
securitization markets as a source of funds but instead use securitizations to
diversify risk and manage regulatory capital levels. Within our Corporate and
Investment Bank, we have businesses in the asset-backed finance division that
are dependent upon securitization activity to remain viable. Widening of the
credit spreads in the securitization market may make accessing these markets
undesirable. If securitizations become undesirable, we may discontinue certain
lending activities and/or increase our reliance on alternative funding sources.
The Asset and Liability Committee is responsible for liquidity risk
management. This committee approves liquidity limits and receives thorough
periodic reports on our liquid-
34
MANAGEMENT'S ANALYSIS OF OPERATIONS
ity position. The liquidity reporting details compliance with limits and with
guidelines. It includes a review of forecasted liquidity needs based on
scheduled and discretionary asset and liability maturities. It evaluates the
adequacy of funding sources to meet these needs. In addition stress scenario
tests are evaluated to ensure adequacy of funding in an adverse environment.
These stress tests include reduced access to traditional funding sources in
addition to expected drawdowns of contingent liquidity exposures (for example,
liquidity agreements with conduits).
INTEREST RATE RISK MANAGEMENT Managing interest rate risk is fundamental to
banking. The inherent maturity and repricing characteristics of our day-to-day
lending and deposit activities create a naturally asset-sensitive structure.
By using a combination of financial instruments, we manage the sensitivity of
earnings to changes in interest rates within our established policy guidelines.
The Asset and Liability Committee oversees the interest rate risk management
process and approves policy guidelines. Balance sheet management and finance
personnel monitor the day-to-day exposure to changes in interest rates in
response to loan and deposit flows. They make adjustments within established
policy guidelines.
In analyzing interest rate sensitivity for policy measurement, we
compare our forecasted earnings per share in both a "high rate" and "low rate"
scenario to base-line scenarios. Our base-line scenario is our estimated most
likely path for future short-term interest rates over the next 24 months. The
second base-line scenario holds short-term rates flat at their current level
over our forecast horizon. The "high rate" and "low rate" scenarios assume
gradual 200 basis point increases or decreases in the federal funds rate from
the beginning point of each base-line scenario over the next 12-month period.
Our policy limit for the maximum negative impact on earnings per share resulting
from "high rate" or "low rate" scenarios is 5 percent. The policy limit applies
to the "most likely rate" and the "flat rate" base-line scenarios. The policy
measurement period is 12 months in length, beginning with the first month of the
forecast.
EARNINGS SENSITIVITY Our "flat rate" scenario holds the federal funds rate
constant at 2.00 percent through December 2002. Based on our November 2001
outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200
basis point increase in short-term rates from our "flat rate" scenario), our
earnings sensitivity model indicates earnings during the policy measurement
period would be negatively affected by 2.0 percent. Our model indicates that
earnings would benefit by 1.2 percent in our "low rate" scenario (i.e., a 50
basis point decline in short-term rates from our "flat rate" scenario).
Typically we analyze a 200 basis point decline for our "low rate" scenario.
However, because of the current federal funds rate level, we believe a 50 basis
point decline in rates is more appropriate.
For our "most likely rate" scenario, we believe the market forward
implied rate ("market rate") is the most appropriate. This scenario assumes the
federal funds rate remains flat at 1.75 percent until June 2002, and gradually
rises to 2.75 percent by December 2002. Sensitivity to the "market rate"
scenario is measured using a gradual 200 basis point increase over a 12-month
period. Our model indicates that earnings would be negatively affected by 2.2
percent in a "high rate" scenario relative to the market rate over the policy
period.
In addition to the standard scenarios used to analyze rate sensitivity
over the policy measurement period, we regularly analyze the potential impact of
other more extreme interest rate scenarios. These alternate "what if" scenarios
may include interest rate paths that are higher, lower and more volatile than
those used for policy measurement. We also perform our analysis for time periods
that reach beyond the 12-month policy period. For example, based on our November
2001 outlook, if interest rates remain consistent with our "market rate"
scenario until December 31, 2002, and then increase by 300 basis points over the
course of 2003, earnings in 2003 would decline by 2.5 percent.
While our interest rate sensitivity modeling assumes that management
takes no action, we regularly assess the viability of strategies to reduce
unacceptable risks to earnings and we implement such strategies when we believe
those actions are prudent. As new monthly outlooks become available, we
formulate strategies aimed at protecting earnings from the potential negative
effects of changes in interest rates.
ACCOUNTING AND REGULATORY MATTERS
ASSET IMPAIRMENT In August 2001 the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, which supercedes both SFAS
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale and resolves significant implementation issues
associated with SFAS 121. Unlike SFAS 121, an impairment assessment under SFAS
144 will not result in a write-down of goodwill. Rather, goodwill is evaluated
for impairment under SFAS 142, as described below.
35
MANAGEMENT'S ANALYSIS OF OPERATIONS
We adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 for
long-lived assets held for use will not have a material impact on our
consolidated financial statements. The provisions of SFAS 144 for assets held
for sale or other disposal generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities.
BUSINESS COMBINATIONS In July 2001 the FASB issued SFAS 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method. Also under SFAS 141, identified
intangible assets acquired in a purchase business combination must be separately
valued and recognized on the balance sheet if they meet certain requirements.
Under the provisions of SFAS 142, goodwill and identified intangible
assets with indefinite useful lives are not subject to amortization. Rather they
are subject to impairment testing on an annual basis, or more often if events or
circumstances indicate that there may be impairment. Identified intangible
assets that have a finite useful life are amortized over that life in a manner
that reflects the estimated decline in the economic value of the intangible
asset and reviewed for impairment when events or circumstances indicate that
there may be impairment.
We adopted the provisions of SFAS 141 for business combinations
initiated after June 30, 2001, and we adopted the provisions of SFAS 142 on
January 1, 2002. Any goodwill and any identified intangible assets determined to
have an indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001, are not subject to amortization.
Goodwill and intangible assets acquired in purchase business combinations
completed before July 1, 2001, were amortized through December 31, 2001. Upon
adoption of SFAS 142 on January 1, 2002, all amortization of goodwill and
identified intangible assets with indefinite useful lives ceased. The merger of
First Union and the former Wachovia was accounted for using the purchase method,
and in accordance with the provisions of SFAS 141, the goodwill recorded in
connection with the merger is not subject to amortization.
Under the provisions of SFAS 142, all goodwill and identified
intangible assets with an indefinite useful life must be tested for impairment
as of January 1, 2002, and annually thereafter. This test involves assigning
tangible and intangible assets, liabilities, identified intangible assets and
goodwill to reporting units and comparing the fair value of each reporting unit
to its carrying value. If the fair value is less than the carrying value, a
further test is required to measure the amount of goodwill impairment. Any
impairment resulting from the January 1, 2002, analysis will be recorded as the
cumulative effect of a change in accounting principle, and any impairment
recognized thereafter will be included in noninterest expense.
Because of the extensive analysis that is required to adopt SFAS 142,
including performing the January 1, 2002, impairment tests, we are not in a
position to estimate the impact of adopting this standard, including whether any
impairment losses will be recognized as the cumulative effect of a change in
accounting principle.
ASSET TRANSFERS In September 2000 the FASB issued SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
which revises the criteria for accounting for securitizations and other
transfers of financial assets and collateral, and introduces new disclosures.
SFAS 140 replaces SFAS 125, which was issued in June 1996. The enhanced
disclosure requirements were effective for year-end 2000. The other provisions
of SFAS 140 related to transfers of financial assets and extinguishments of
liabilities were adopted on April 1, 2001. The effect of adopting SFAS 140 was
not material.
DERIVATIVES AND HEDGING In 1998 the FASB issued SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, which was subsequently amended by
SFAS 137 and SFAS 138. These standards establish the accounting and reporting
model for derivatives and hedging activities. SFAS 133 requires that all
derivatives be recognized as assets or liabilities on the balance sheet and that
these instruments be measured at fair value through adjustments to either other
comprehensive income or to current earnings, depending on the purpose for which
the derivative is held.
On January 1, 2001, we recorded the cumulative effect of adopting SFAS
133, which consisted of two components, one included in the results of
operations and the other in other comprehensive income. This cumulative effect
also included the fair value of freestanding derivatives and certain derivatives
that are embedded in other contracts. This cumulative effect of adopting SFAS
133 that was recognized in the results of operations on January 1, 2001,
amounted to a $3 million after-tax gain. The cumulative effect of adopting SFAS
133 that was included in other comprehensive income on January 1, 2001, amounted
to a net after-tax unrealized gain of $138 million and the net after-tax
unrealized gain on the securities that were reclassified to securities available
for sale in connection with the adoption of SFAS 133 was $53 million.
REGULATORY MATTERS On October 26, 2001, the President signed the USA Patriot Act
of 2001 into law. This act contains the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001 (the IMLAFA). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers and certain other financial institutions. The IMLAFA requires
U.S. financial institutions to adopt new policies and procedures to combat money
laundering and grants the Secretary of the Treasury broad authority to establish
regulations and
36
MANAGEMENT'S ANALYSIS OF OPERATIONS
to impose requirements and restrictions on financial institutions' operations.
As of the date of this filing, we have not determined the impact the IMLAFA will
have on our operations but the impact is not expected to be material. We will
establish policies and procedures to ensure compliance with the IMLAFA.
In 1999 the Gramm-Leach-Bliley Financial Modernization Act of 1999
(Modernization Act) became law. The Modernization Act allows bank holding
companies meeting management, capital and Community Reinvestment Act standards
to engage in a substantially broader range of nonbanking activities than was
permissible before enactment, including underwriting insurance and making
merchant banking investments in commercial and financial companies. It also
allows insurers and other financial services companies to acquire banks; removes
various restrictions that applied to bank holding company ownership of
securities firms and mutual fund advisory companies; and establishes the overall
regulatory structure applicable to bank holding companies that also engage in
insurance and securities activities. This part of the Modernization Act became
effective in March 2000. In 2000 we became a financial holding company pursuant
to the Modernization Act and are thereby permitted to engage in the broader
range of activities that the Modernization Act permits.
The Modernization Act also modifies current law related to financial
privacy and community reinvestment. The new privacy provisions generally
prohibit financial institutions, including Wachovia, from disclosing nonpublic
personal financial information to non-affiliated third parties unless customers
have the opportunity to "opt out" of the disclosure.
Various legislative and regulatory proposals concerning the financial
services industry are pending in Congress, the legislatures in states in which
we conduct operations and before various regulatory agencies that supervise our
operations. Given the uncertainty of the legislative and regulatory process, we
cannot assess the impact of any such legislation or regulations on our financial
condition or results of operations.
EARNINGS AND BALANCE SHEET ANALYSIS
(2000 compared with 1999)
We reported net income of $92 million, or 7 cents per share, in 2000.
The reported results in 2000 were net of after-tax merger-related, restructuring
and other charges and gains of $2.8 billion, or $2.85 per share, and an
after-tax $46 million charge, or 5 cents per share, for the cumulative effect of
a change in accounting for beneficial interests. The net restructuring and other
charges and gains were recorded in connection with the June 2000 strategic
repositioning. Operating earnings, which exclude merger-related, restructuring
and other charges and gains and the accounting change, were $2.9 billion, or
$2.97 per share, in 2000. Net income in 1999 was $3.2 billion, or $3.33 per
share, which included after-tax merger-related and restructuring charges of $263
million, or 27 cents per share. Operating earnings in 1999 were $3.5 billion, or
$3.60 per share.
Net interest income on a tax-equivalent basis declined slightly from
1999 to $7.5 billion in 2000. The net interest margin was 3.55 percent in 2000
and 3.79 percent in 1999. The average rate on earning assets increased 66 basis
points from 1999 to 8.30 percent in 2000, while the average rate paid on
liabilities increased 89 basis points from 1999 to 5.31 percent in 2000. The
sale of the credit card portfolio in 2000 put downward pressure on the margin.
This was partially offset by the sale of $13 billion of lower-yielding
securities as part of our strategic repositioning.
On an operating basis, fee and other income, excluding portfolio
securities transactions, was $6.8 billion in 2000, down 2 percent from 1999 due
in part to lower principal investing revenue. In addition 1999 included $286
million of gains from the sale of certain assets and investments.
Commissions, which include brokerage and insurance commissions,
increased $577 million from 1999 to $1.6 billion in 2000, reflecting strong
results from retail brokerage and insurance services, including a $448 million
increase in commissions from the former EVEREN. Additionally fiduciary and asset
management fees increased $273 million from 1999 to $1.5 billion in 2000.
Advisory, underwriting and other investment banking fees increased modestly
despite the difficult financial markets.
Principal investing revenue declined $197 million from 1999 to $395
million in 2000 due largely to market value adjustments in volatile markets.
Other income declined $774 million from 1999 to $626 million in 2000.
Other income in 1999 included $286 million of gains from the sale of certain
assets and investments. Portfolio securities transactions resulted in a net loss
of $6 million in 2000, which included $27 million of impairment losses. This
compares with a net loss of $63 million in 1999, which included $79 million in
impairment losses on residual interests.
Asset sales and securitizations resulted in a net gain of $263 million
in 2000, including gains from the securitization and sale of credit card
receivables, SBA loans, student loans, home equity loans and municipal
securities. In 1999 these gains were $417 million, which included $126 million
of gains from the securitization and sale of residential mortgage loans and
higher levels of gains from the other categories. Also included in 2000 other
income was $109 million of market value write-downs on commercial loans
classified as loans held for sale and a $20 million
37
MANAGEMENT'S ANALYSIS OF OPERATIONS
gain from the sale of securities received in a demutualization. Branch sales
gains of $23 million were included in other income in 1999.
On an operating basis, noninterest expense increased 9 percent from
1999 to $9.2 billion in 2000, largely reflecting the full-year impact of EVEREN
and increased variable compensation in Capital Management. Sundry expense
includes a credit of $29 million representing fees received from the purchaser
of the credit card portfolio for subservicing. The expenses incurred in
connection with the subservicing agreement are included in other line items
within noninterest expense. In 2000 we also recorded a $69 million credit in
noninterest expense to adjust liabilities for certain incentive compensation and
benefit arrangements to reflect declines in fee income and reductions in the
work force, particularly in the Corporate and Investment Bank. We had $3.7
billion in goodwill and other intangible assets at December 31, 2000, a decline
of $2.0 billion from 1999. This decline was principally the result of the
write-down in 2000 of $1.8 billion of goodwill and other identified intangibles
that were determined to be impaired as a result of the decision to discontinue
subprime mortgage lending at The Money Store. On an operating basis, the
overhead efficiency ratio was 64.2 percent in 2000 and 58.3 percent in 1999.
On an operating basis, income taxes declined $399 million from 1999 to
$1.4 billion in 2000 and the effective tax rate was 31.5 percent in 2000 and
33.4 percent in 1999. The primary reason for the decline in the effective tax
rate was the reduction in operating income in 2000, which resulted in a
correspondingly larger decline in income tax expense due to a higher marginal
tax rate than effective tax rate. Additional benefits from tax credits generated
from growth in our affordable housing business also contributed to the decrease
in the effective tax rate. The effective tax rate reflected in the computation
of net income was 80.4 percent in 2000 and 33.3 percent in 1999.
Business segments were redefined in 2001, but in 2000 and 1999 there
were five business segments: Capital Management (now divided into Capital
Management and Wealth Management); Capital Markets (now called the Corporate and
Investment Bank); Consumer and Commercial (now subsegments of the General Bank);
and Treasury/Nonbank (now called the Parent).
On an operating basis, Capital Management net income increased $42
million from 1999 to $390 million in 2000, with increases in net interest income
and fee and other income partially offset by a rise in noninterest expense. Net
interest income increased $22 million from 1999 to $160 million in 2000, while
fee and other income increased $863 million from 1999 to $2.8 billion in 2000.
The former EVEREN operations contributed $564 million of the increase in fee and
other income. Noninterest expense increased $853 million from 1999 to $2.3
billion in 2000 primarily reflecting increased variable compensation, largely
salaries and incentives, associated with the strong growth in Retail Brokerage
and Insurance Services and the impact of the EVEREN acquisition.
On an operating basis, Wealth Management net income was $126 million in
2000 and $137 million in 1999. Net interest income was $190 million in 2000 and
$197 million in 1999, while fee and other income was $319 million in 2000 and
$324 million in 1999. Noninterest expense was $317 million in 2000 and $297
million in 1999.
On an operating basis, Corporate and Investment Bank net income
declined $70 million from 1999 to $829 million in 2000 as a result of an
increased provision for loan losses and a decline in fee and other income in
difficult financial markets. The provision for loan losses rose 88 percent
primarily due to charge-offs related to a large problem credit to a single
borrower and to deterioration in the healthcare industry. Fee and other income
declined $206 million from 1999 to $1.7 billion in 2000, primarily as a result
of a general market decline and the impact of market value write-downs in loan
syndications. Also, principal investing revenue declined in 2000 as a result of
some unusually large gains in 1999 and because market conditions in 2000 were
not as conducive to initial public offerings (IPOs) and other types of
transactions that result in gain recognition. Additionally commercial real
estate results declined and higher trading losses were incurred. Offsetting
these declines were increases in risk management fee and other income, primarily
due to higher levels of client transactions in fixed income derivatives and
equity derivatives in 2000.
Corporate Banking fee and other income increased primarily due to
increased leasing revenues and international fee and other income increased from
1999 as a result of increased trade letters of credit and wire transfer fees.
Noninterest expense decreased 5 percent from 1999 to $1.9 billion in 2000.
On an operating basis, General Bank net income remained relatively flat
at $1.2 billion in 2000. Fee and other income declined $79 million from 1999 to
$1.3 billion in 2000. Results were affected by the impact of a rising interest
rate environment and a reduction in securitizations and loan sales.
The sale of the credit card portfolio and the FUMC mortgage servicing
portfolio closed in September 2000. Noninterest expense increased $21 million
from 1999 to $3.8 billion in 2000 largely related to the right staffing
initiative in the retail financial centers and call centers. Average loans were
$59 billion in 2000 and $55 billion in 1999. The increase in average loans year
over year was the result of higher volume and lower attrition in the
38
MANAGEMENT'S ANALYSIS OF OPERATIONS
FUHEB portfolio. Average deposits declined modestly due to customer movement
into alternative investment products and higher yielding promotional products,
as well as the sale of branch locations in the fourth quarters of 1999 and 2000.
The $1.0 billion in gains on the sale of the credit card and mortgage
servicing portfolios, as well as the restructuring charge of $2.1 billion and
merger-related charges of $78 million, are reflected in fee and other income and
in noninterest expense, respectively, within the Parent segment.
At December 31, 2000, we had securities available for sale with a
market value of $48 billion, down $3.7 billion from year-end 1999. These
included residual interests with a market value of $298 million, which included
a net unrealized gain of $43 million. At December 31, 1999, securities available
for sale included residual interests with a market value of $583 million and a
net unrealized gain of $84 million. The average rate earned on securities
available for sale was 7.37 percent in 2000 and 6.83 percent in 1999. The
average maturity of the portfolio was 7.21 years at December 31, 2000.
In 2000 we converted $9.3 billion of first mortgage loans to agency
securities to facilitate funding flexibility. In connection with the strategic
repositioning, restructuring and other charges in 2000 included securities
losses of $1.1 billion, composed of $596 million of impairment losses on
securities and $524 million of losses on the sale of $13 billion of securities.
Of the total of $596 million of impairment losses in restructuring and other
charges, $438 million is described below and $158 million is impairment losses
on other residual interests.
In 1999 we transferred $744 million of mortgagerelated residual
interests and $8.7 billion of other mortgage-related securities to a trust in
exchange for a new security representing substantially all of the interest in
the assets transferred to the trust. Substantially all of the investment in
mortgage-related retained interests from the securitization of The Money Store
subprime mortgage loans was included in the transfer. As part of our strategic
repositioning to discontinue the subprime mortgage lending business at The Money
Store we revised the assumptions we used to estimate the amount and timing of
the cash flows associated with this security, particularly the assumptions
related to credit losses. Based on the revised assumptions, we concluded that
the fair value of the security had declined on an other-than-temporary basis to
an amount less than its book value at June 30, 2000. Accordingly, in connection
with the strategic repositioning, we recorded a $438 million impairment loss on
the security to reduce the book value to its fair value. There was no further
impairment of this security in 2000. The carrying value of this security was
$9.3 billion at December 31, 2000.
Net loans were $124 billion at December 31, 2000, a decline of $9
billion from December 31, 1999, and average net loans were $127 billion, a
decline of $3 billion. Commercial loans represented 67 percent and consumer
loans 33 percent of the loan portfolio at December 31, 2000. Managed loans
declined $5 billion from 1999 to $168 billion at December 31, 2000. Managed
commercial loans increased $7 billion from year-end 1999, while managed consumer
loans declined $12 billion partially as a result of the sale of our credit card
portfolio and the run-off of the portfolio associated with our discontinued
indirect auto lending and leasing business. The average rate earned on loans
increased 65 basis points from 1999 to 8.89 percent in 2000, in line with the
rising interest rate environment through much of 2000.
At December 31, 2000, nonperforming assets were $1.6 billion, an
increase of $533 million from December 31, 1999. This included $334 million in
nonperforming loans in loans held for sale. As a percentage of net assets,
foreclosed properties and loans held for sale, nonperforming assets were 1.22
percent and 0.78 percent, respectively.
Accruing loans 90 days or more past due, excluding loans that are
classified as loans held for sale, amounted to $183 million at December 31,
2000, and $144 million at December 31, 1999. Of these past due loans at December
31, 2000, $8 million were commercial loans or commercial real estate loans and
$175 million were consumer loans.
Net charge-offs increased $63 million from 1999 to $751 million in
2000. Net charge-offs were 0.59 percent of average net loans in 2000 and 0.53
percent in 1999.
The provision for loan losses increased $1.0 billion from 1999 to $1.7
billion in 2000, including a $328 million incremental provision, $751 million
equal to net charge-offs and a $657 million provision recorded in connection
with the transfer of loans to loans held for sale to reduce the carrying value
of these loans to their respective fair values.
The allowance for loan losses was $1.7 billion at December 31, 2000,
and $1.8 billion at December 31, 1999. The allowance as a percentage of net
loans was 1.39 percent at December 31, 2000, and 1.32 percent at year-end 1999.
In connection with the strategic repositioning, we decided to sell $7.9
billion of loans and as a result, these loans were transferred to loans held for
sale. The transfer included $1.7 billion of on-balance sheet credit card
receivables, $4.8 billion of The Money Store subprime mortgage loans, $1.3
billion of commercial loans and $123 million of residential real estate loans.
Core deposits were $122 billion at December 31, 2000, and at December
31, 1999. Our renewed focus on gathering deposits helped to turn around and then
stabilize the negative growth trend of the previous two
39
MANAGEMENT'S ANALYSIS OF OPERATIONS
years. Because of this emphasis, period-end deposits remained flat in 2000 from
1999 despite the sale of $2 billion of deposits in connection with the sale of
branches. Average core deposits were $118 billion in 2000, down $4 billion from
1999, largely reflecting a higher interest rate environment, which resulted in
corporate customers maintaining lower compensating balances. The decline also
reflects customer movement into investment options and into non-FDIC insured
deposit alternatives. In 2000 and in 1999, average noninterestbearing deposits
were 24 percent and 25 percent, respectively, of average core deposits. The
portion of core deposits in higher-rate, other consumer time deposits was 29
percent at December 31, 2000, and 28 percent at December 31, 1999.
Average purchased funds were $66 billion in 2000 and $55 billion in
1999. The increase from 1999 represents funding for the growth in average
earning assets early in 2000. Purchased funds at December 31, 2000, were $60
billion and at December 31, 1999, $69 billion, with the decline reflecting the
impact of balance sheet reductions associated with the strategic repositioning.
Long-term debt increased $4 billion from December 31, 1999, to $36
billion at December 31, 2000. In 2000 we issued $4 billion of notes with varying
rates and maturities. Long-term debt included $2 billion of trust capital
securities at December 31, 2000, and at December 31, 1999.
Stockholders' equity was $15 billion at December 31, 2000, and $17
billion at December 31, 1999. Common shares outstanding amounted to 980 million
at December 31, 2000, a decrease of 8 million from December 31, 1999. In 2000 we
repurchased 15 million shares at a cost of $479 million. In 1999 we repurchased
52 million shares of common stock at a cost of $2.6 billion. We paid $1.9
billion in dividends to common stockholders in 2000 and $1.8 billion in 1999.
This represented a dividend payout ratio on operating earnings of 64.75 percent
in 2000.
At December 31, 2000, our tier 1 and total capital ratios were 7.02
percent and 11.19 percent, respectively, and 7.08 percent and 10.87 percent,
respectively, at December 31, 1999. Our leverage ratio at December 31, 2000, was
5.92 percent and at December 31, 1999, 5.97 percent.
40
TABLE 1
SELECTED STATISTICAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------------
(Dollars in millions, except per share data) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
PROFITABILITY (a)
Diluted earnings per common share $ 2.12 2.97 3.60 3.77 3.01
Diluted earnings per common share - cash earnings $ 2.50 3.30 3.94 4.06 3.26
Return on average common stockholders' equity 11.50% 17.23 21.60 22.70 20.29
Return on average tangible common
stockholders' equity - cash earnings 20.27 26.33 34.67 32.62 28.06
Net interest margin (b) 3.57 3.55 3.79 3.81 4.53
Fee and other income as % of total revenue 44.15 47.49 47.80 46.53 35.38
Overhead efficiency ratio - cash earnings 63.61% 61.68 55.62 54.20 54.20
Operating leverage - cash earnings (c) $ (330) (937) 103 739 404
Effective income tax rate 31.11% 31.51 33.41 28.61 28.55
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL ADEQUACY
Tier 1 capital ratio 7.04% 7.02 7.08 6.81 8.36
Total capital ratio 11.08 11.19 10.87 10.99 12.95
Leverage 6.19% 5.92 5.97 5.91 7.03
- -------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY
Allowance as % of loans, net 1.83% 1.39 1.32 1.36 1.40
Allowance as % of nonperforming assets (d) 175 135 165 216 186
Net charge-offs as % of average loans, net 0.70 0.59 0.53 0.48 0.65
Nonperforming assets as % of loans, net,
foreclosed properties and loans held for sale 1.13% 1.22 0.78 0.63 0.75
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Employees 84,046 70,639 71,659 71,486 65,943
Branches 2,846 2,193 2,318 2,400 2,771
ATMs 4,675 3,772 3,778 3,690 3,701
Registered common stockholders 191,231 157,524 168,989 146,775 120,437
Common shares outstanding (In millions) 1,362 980 988 982 961
Common stock price $ 31.36 27.81 32.94 60.81 51.25
Market capitalization $ 42,701 27,253 32,553 59,731 49,250
===============================================================================================================================
(a) Based on operating earnings.
(b) Tax-equivalent.
(c) Incremental change on a year-to-year basis in tax-equivalent net interest
income and fee and other income, less noninterest expense, excluding goodwill
and other intangible amortization.
(d) These ratios do not include nonperforming loans included in loans held for
sale.
41
TABLE 2
SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------
(In millions, except per share data) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
SUMMARIES OF INCOME
Interest income $ 16,100 17,534 15,151 14,988 14,362
================================================================================================================================
Interest income (a) $ 16,259 17,633 15,269 15,105 14,461
Interest expense 8,325 10,097 7,699 7,711 6,568
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income (a) 7,934 7,536 7,570 7,394 7,893
Provision for loan losses 1,947 1,736 692 691 1,103
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses (a) 5,987 5,800 6,878 6,703 6,790
Securities transactions - portfolio (67) (1,125) (63) 357 55
Fee and other income 6,363 7,837 6,996 6,078 4,267
Merger-related and restructuring charges (b) 106 2,190 404 1,212 284
Other noninterest expense 9,725 9,520 8,458 7,844 6,936
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
a change in accounting principle (a) 2,452 802 4,949 4,082 3,892
Income taxes 674 565 1,608 1,074 1,084
Tax-equivalent adjustment 159 99 118 117 99
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change
in accounting principle 1,619 138 3,223 2,891 2,709
Cumulative effect of a change in the accounting for
beneficial interests, net of income taxes -- (46) -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income 1,619 92 3,223 2,891 2,709
Dividends on preferred stock 6 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 1,613 92 3,223 2,891 2,709
================================================================================================================================
PER COMMON SHARE DATA
Basic
Income before change in accounting principle $ 1.47 0.12 3.35 2.98 2.84
Net income 1.47 0.07 3.35 2.98 2.84
Diluted
Income before change in accounting principle 1.45 0.12 3.33 2.95 2.80
Net income 1.45 0.07 3.33 2.95 2.80
Cash dividends $ 0.96 1.92 1.88 1.58 1.22
Average common shares - Basic 1,096 971 959 969 955
Average common shares - Diluted 1,105 974 967 980 967
Average common stockholders' equity $ 20,218 15,541 15,932 15,878 14,327
Book value per common share 20.88 15.66 16.91 17.20 15.82
Common stock price
High 36.38 38.88 65.06 65.69 52.88
Low 27.81 24.00 32.44 44.69 36.63
Year-end $ 31.36 27.81 32.94 60.81 51.25
To earnings ratio (c) 21.63X 397.29 9.89 20.61 18.30
To book value 150% 178 195 353 324
BALANCE SHEET DATA
Assets $ 330,452 254,170 253,024 237,087 205,609
Long-term debt $ 41,733 35,809 31,975 22,949 13,487
================================================================================================================================
(a) Tax-equivalent.
(b) After-tax merger-related, restructuring and other charges amounted to $737
million in 2001; $2.8 billion in 2000; $263 million in 1999; $805 million in
1998; and $204 million in 1997.
(c) Based on diluted earnings per common share.
42
TABLE 3
FEE AND OTHER INCOME - CORPORATE AND INVESTMENT BANK (a)
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------
(In millions) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BANKING
Lending $ 308 249 208
Leasing 179 182 163
International 244 231 227
- --------------------------------------------------------------------------------------------------------------------------------
Total 731 662 598
Intersegment revenue (34) (39) (39)
- --------------------------------------------------------------------------------------------------------------------------------
Total Corporate Banking 697 623 559
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT BANKING
Agency 355 414 496
Fixed income 450 348 310
Affordable housing (99) (111) (82)
- --------------------------------------------------------------------------------------------------------------------------------
Total 706 651 724
Intersegment revenue (22) (10) (10)
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Banking 684 641 714
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL INVESTING (707) 395 592
- --------------------------------------------------------------------------------------------------------------------------------
Total fee and other income - Corporate and Investment Bank $ 674 1,659 1,865
================================================================================================================================
(a) The aggregate amounts of trading account profits included in this table in
2001, 2000 and 1999 were $302 million, $295 million and $281 million,
respectively.
TABLE 4
SELECTED RATIOS
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
PERFORMANCE RATIOS (a)
Assets to stockholders' equity 13.35X 15.93 14.46 13.99 13.68
Return on assets 0.60% 0.04 1.40 1.30 1.38
Return on total stockholders' equity 8.00% 0.59 20.23 18.21 18.91
==================================================================================================================
DIVIDEND PAYOUT RATIOS ON
Operating earnings
Common shares 45.28% 64.65 52.22 41.24 39.18
Preferred and common shares 44.06 64.65 52.22 41.24 39.18
Net income
Common shares 66.21 2,742.86 56.46 52.72 42.12
Preferred and common shares 64.13% 2,742.86 56.46 52.72 42.12
==================================================================================================================
OTHER RATIOS
Operating earnings
Return on assets 0.87% 1.18 1.51 1.66 1.49
Return on common stockholders' equity (b) 11.50 17.23 21.60 22.70 20.29
Net income
Return on common stockholders' equity 7.98% 0.59 20.23 18.21 18.91
==================================================================================================================
(a) Based on average balances and net income.
(b) The operating earnings return on common stockholders' equity excludes only
current year merger-related, restructuring and other charges and common
stockholders' equity is not adjusted for prior year charges.
43
TABLE 5
SELECTED QUARTERLY DATA
- -------------------------------------------------------------------------------------------------------------------------------
2001 2000
------------------------------------------- ----------------------------------------
(In millions, except per
share data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------------------
Interest income $ 4,311 3,944 3,820 4,025 4,264 4,465 4,492 4,313
Interest expense 1,879 2,014 2,109 2,323 2,532 2,631 2,587 2,347
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,432 1,930 1,711 1,702 1,732 1,834 1,905 1,966
Provision for loan losses 381 1,124 223 219 192 322 1,030 192
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,051 806 1,488 1,483 1,540 1,512 875 1,774
Securities transactions -
portfolio (16) (35) -- (16) (72) (456) (581) (16)
Fee and other income 2,076 1,067 1,630 1,590 1,825 2,639 1,515 1,858
Merger-related and
restructuring charges 88 85 (69) 2 33 52 2,110 (5)
Other noninterest expense 2,942 2,310 2,266 2,207 2,344 2,396 2,393 2,387
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes (benefits) and
cumulative effect of a
change in accounting
principle 1,081 (557) 921 848 916 1,247 (2,694) 1,234
Income taxes (benefits) 345 (223) 288 264 271 395 (495) 394
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before
cumulative effect of a
change in accounting
principle 736 (334) 633 584 645 852 (2,199) 840
Cumulative effect of a change
in the accounting for beneficial
interests, net of income taxes -- -- -- -- (46) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 736 (334) 633 584 599 852 (2,199) 840
Dividends on preferred stock 6 -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to
common stockholders $ 730 (334) 633 584 599 852 (2,199) 840
===============================================================================================================================
PER COMMON SHARE DATA
Basic
Income (loss) before change
in accounting principle$ 0.54 (0.31) 0.65 0.60 0.66 0.87 (2.27) 0.86
Net income (loss) 0.54 (0.31) 0.65 0.60 0.61 0.87 (2.27) 0.86
Diluted
Income (loss) before change
in accounting principle 0.54 (0.31) 0.64 0.59 0.65 0.86 (2.27) 0.85
Net income (loss) 0.54 (0.31) 0.64 0.59 0.60 0.86 (2.27) 0.85
Cash dividends 0.24 0.24 0.24 0.24 0.48 0.48 0.48 0.48
Common stock price
High 31.90 36.38 34.94 34.09 34.13 32.63 38.88 37.94
Low 27.90 27.95 29.70 27.81 24.00 25.00 25.00 28.44
Period-end $ 31.36 31.00 34.94 33.00 27.81 32.19 25.00 37.25
===============================================================================================================================
SELECTED RATIOS (a)
Return on assets 0.92% (0.50) 1.03 0.97 1.00 1.37 (3.46) 1.36
Return on total stockholders'
equity 10.22 (6.52) 15.84 14.95 16.15 23.81 (53.24) 20.38
Stockholders' equity to assets 8.95% 7.60 6.48 6.46 6.16 5.77 6.50 6.68
===============================================================================================================================
SELECTED RATIOS (a) (b)
Return on assets 0.99% 0.44 1.05 1.01 1.12 1.12 1.13 1.36
Return on common
stockholders' equity 10.77% 5.77 16.19 15.64 15.36 15.76 17.74 20.31
===============================================================================================================================
(a) Based on average balances and net income (loss).
(b) Based on average balances and net income (loss) excluding after-tax net
merger-related, restructuring and other charges and the cumulative effect of the
change in accounting for beneficial interests.
44
TABLE 6
SECURITIES (a)
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------
GROSS UNREALIZED AVERAGE
1 YEAR 1-5 5-10 AFTER 10 -------------------- AMORTIZED MATURITY
(In millions) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES COST IN YEARS
- --------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ 862 44 1 92 999 2 8 1,005 2.83
U.S. Government agencies 250 7,070 22,356 929 30,605 308 250 30,547 6.54
Asset-backed 250 11,090 5,070 886 17,296 754 175 16,717 4.10
State, county and municipal 60 274 480 1,606 2,420 142 59 2,337 17.95
Sundry 287 1,258 4,009 1,593 7,147 89 112 7,170 7.36
- --------------------------------------------------------------------------------------------------------------------
Total market value $ 1,709 19,736 31,916 5,106 58,467 1,295 604 57,776 6.31
================================================================================================================================
MARKET VALUE
Debt securities $ 1,709 19,736 31,916 3,871 57,232 1,279 590 56,543
Equity securities - -- -- 1,235 1,235 16 14 1,233
- --------------------------------------------------------------------------------------------------------------------
Total market value $ 1,709 19,736 31,916 5,106 58,467 1,295 604 57,776
====================================================================================================================
AMORTIZED COST
Debt securities $ 1,694 19,191 31,680 3,979 56,544
Equity securities -- -- -- 1,232 1,232
- ---------------------------------------------------------------------------------
Total amortized cost $ 1,694 19,191 31,680 5,211 57,776
=================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 1.06% 4.43 8.04 5.21 1.62
U.S. Government agencies 5.45 6.32 6.37 6.00 6.34
Asset-backed 7.90 6.65 7.61 6.39 6.93
State, county and municipal 6.90 7.75 9.78 7.96 8.24
Sundry 7.52 6.60 7.39 5.52 6.83
Consolidated 3.97% 6.54 6.73 6.51 6.57
=================================================================================
December 31, 2000
------------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 -------------------- Amortized Maturity
(In millions) or Less Years Years Years Total Gains Losses Cost in Years
- --------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
U.S. Treasury $ -- 1 581 407 989 30 11 970 15.23
U.S. Government agencies 3 4,233 19,222 1 23,459 58 442 23,843 7.18
Asset-backed 23 10,320 5,060 358 15,761 256 201 15,706 4.44
State, county and municipal 21 1 22 1,379 1,423 59 3 1,367 27.84
Sundry 122 537 3,727 1,585 5,971 57 130 6,044 8.83
- --------------------------------------------------------------------------------------------------------------------
Total market value $ 169 15,092 28,612 3,730 47,603 460 787 47,930 7.21
================================================================================================================================
MARKET VALUE
Debt securities $ 169 15,092 28,612 2,656 46,529 438 773 46,864
Equity securities -- -- -- 1,074 1,074 22 14 1,066
- --------------------------------------------------------------------------------------------------------------------
Total market value $ 169 15,092 28,612 3,730 47,603 460 787 47,930
====================================================================================================================
AMORTIZED COST
Debt securities $ 171 15,034 29,027 2,632 46,864
Equity securities -- -- -- 1,066 1,066
- ---------------------------------------------------------------------------------
Total amortized cost $ 171 15,034 29,027 3,698 47,930
=================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury --% 5.14 5.99 5.56 5.81
U.S. Government agencies 6.13 7.08 6.48 4.63 6.59
Asset-backed 7.33 9.56 6.82 8.11 8.64
State, county and municipal 6.90 6.38 6.48 6.75 6.75
Sundry 6.58 7.72 7.41 6.17 7.10
Consolidated 6.72% 8.79 6.65 6.50 7.31
=================================================================================
(a) At December 31, 2001, all securities were classified as available for sale.
45
Securities with an aggregate amortized cost of $33 billion at December
31, 2001, are pledged to secure U.S. Government and other public deposits and
for other purposes as required by various statutes or agreements.
Included primarily in "Sundry" at December 31, 2001, are $4.4 billion
of securities denominated in currencies other than the U.S. dollar. At December
31, 2001, these securities had a weighted average maturity of 6.85 years and a
weighted average yield of 6.13 percent.
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. Average maturity excludes equity securities and money
market funds.
Yields related to securities exempt from federal and state income taxes
are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates.
At December 31, 2001 and 2000, there were forward commitments to
purchase securities at a cost which approximates a market value of $3.3 billion
and $2.2 billion, respectively. At December 31, 2001 and 2000, there were
commitments to sell securities at a cost which approximates a market value of
$1.2 billion and $1.6 billion, respectively.
Gross gains and losses realized on the sale of debt securities in 2001
were $176 million and $160 million, respectively, and gross gains and losses
realized on equity securities were $46 million and $129 million, respectively.
Gross gains and losses realized on the sale of debt securities in 2000 were $144
million and $1.3 billion, respectively, and gross gains and losses realized on
equity securities were $24 million and $28 million, respectively. Gross gains
and losses realized on the sale of debt securities in 1999 were $69 million and
$131 million, respectively, and gross gains and losses realized on equity
securities were $147 million and $14 million, respectively.
46
TABLE 7
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
----------------------------------------------------------------------------------------------
Gross Unrealized Average
1 Year 1-5 5-10 After 10 ---------------- Market Maturity
(In millions) or Less Years Years Years Total Gains Losses Value in Years
- --------------------------------------------------------------------------------------------------------------------------------
CARRYING VALUE
U.S. Treasury $ 14 1 - - 15 - - 15 0.35
U.S. Government agencies 35 957 35 - 1,027 12 5 1,034 4.26
CMOs 21 9 - - 30 - - 30 0.97
State, county and municipal 29 145 279 93 546 78 - 624 7.08
Sundry 9 14 2 - 25 - - 25 2.24
- --------------------------------------------------------------------------------------------------------------------
Total carrying value $ 108 1,126 316 93 1,643 90 5 1,728 5.07
===============================================================================================================================
MARKET VALUE
Debt securities $ 108 1,143 366 111 1,728
====================================================================================
WEIGHTED AVERAGE
YIELD
U.S. Treasury 6.25% 4.71 - - 6.18
U.S. Government agencies 6.66 7.00 6.28 - 6.97
CMOs 8.49 6.68 - - 7.92
State, county and municipal 8.91 9.72 11.20 10.05 10.49
Sundry 7.73 6.46 6.56 - 6.91
Consolidated 7.67% 7.34 10.62 10.05 8.15
====================================================================================
Investment securities with an aggregate amortized cost of $827 million
at December 31, 2000, are pledged to secure U.S. Government and other public
deposits and for other purposes as required by various statutes or agreements.
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Yields related to securities exempt from federal and state income taxes
are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates.
Gross gains realized on repurchase agreement underdeliveries and calls
of investment securities were $355,000 and $238,000 in 2000 and 1999,
respectively. Gross losses realized on repurchase agreement underdeliveries and
calls of investment securities were $422,000 and $67,000 in 2000 and 1999,
respectively.
47
TABLE 8
LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
ON-BALANCE SHEET LOAN PORTFOLIO
COMMERCIAL
Commercial, financial and agricultural $ 61,258 54,207 51,683 53,961 46,117
Real estate - construction and other 7,969 3,104 2,435 2,628 3,037
Real estate - mortgage 17,234 9,218 8,768 8,565 13,160
Lease financing 21,958 15,465 12,742 9,730 8,610
Foreign 7,653 5,453 4,991 4,805 3,885
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial 116,072 87,447 80,619 79,689 74,809
- --------------------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 22,139 17,708 27,793 21,729 28,998
Installment loans 34,666 22,972 25,795 30,595 26,185
Vehicle leasing 618 2,115 4,483 6,162 5,331
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer 57,423 42,795 58,071 58,486 60,514
- --------------------------------------------------------------------------------------------------------------------------------
Total loans 173,495 130,242 138,690 138,175 135,323
Unearned income 9,694 6,482 5,513 4,026 3,636
- --------------------------------------------------------------------------------------------------------------------------------
Loans, net (on-balance sheet) $163,801 123,760 133,177 134,149 131,687
================================================================================================================================
MANAGED PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL
On-balance sheet loan portfolio $116,072 87,447 80,619 79,689 74,809
Securitized loans - off-balance sheet 5,827 4,877 3,011 916 --
Loans held for sale included in other assets 1,478 953 2,465 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total commercial 123,377 93,277 86,095 80,605 74,809
- --------------------------------------------------------------------------------------------------------------------------------
CONSUMER
Real estate - mortgage
On-balance sheet loan portfolio 22,139 17,708 27,793 21,729 28,998
Securitized loans included in securities 5,344 3,455 -- -- --
Loans held for sale included in other assets 2,420 1,111 1,503 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate - mortgage 29,903 22,274 29,296 21,729 28,998
- --------------------------------------------------------------------------------------------------------------------------------
Installment loans
On-balance sheet loan portfolio 34,666 22,972 25,795 30,595 26,185
Securitized loans - off-balance sheet 14,095 11,862 18,146 20,074 7,614
Securitized loans included in securities 9,776 9,292 8,112 429 --
Loans held for sale included in other assets 3,865 6,082 898 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total installment loans 62,402 50,208 52,951 51,098 33,799
- --------------------------------------------------------------------------------------------------------------------------------
Vehicle leasing - on-balance sheet loan portfolio 618 2,115 4,483 6,162 5,331
- --------------------------------------------------------------------------------------------------------------------------------
Total consumer 92,923 74,597 86,730 78,989 68,128
- --------------------------------------------------------------------------------------------------------------------------------
Total managed portfolio $216,300 167,874 172,825 159,594 142,937
================================================================================================================================
SERVICING PORTFOLIO
Commercial $ 42,210 31,028 29,193 19,646 9,774
Consumer $ 5,551 2,964 38,218 41,943 35,597
================================================================================================================================
48
TABLE 9
LOANS HELD FOR SALE
- ---------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------
(In millions) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 8,146 4,866
Former Wachovia balance, September 1, 2001 297 --
Originations 22,478 8,545
Performing loans transferred to loans held for sale, net 1,311 6,008
Nonperforming loans transferred to loans held for sale, net 332 500
Allowance for loan losses related to loans transferred to loans held for sale (335) (1,020)
Lower of cost or market value adjustments (188) (274)
Performing loans sold (22,467) (9,532)
Nonperforming loans sold (369) (109)
Other, net (a) (1,442) (838)
- ---------------------------------------------------------------------------------------------------------------------
Balance, end of year (b) $ 7,763 8,146
=====================================================================================================================
(a) Other, net represents primarily loan payments.
(b) Nonperforming loans included in loans held for sale at December 31, 2001
and 2000, were $228 million and $334 million, respectively.
TABLE 10
COMMERCIAL LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES (a)
- -----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
---------------------------------------------------------------------------
REAL
COMMERCIAL, ESTATE-
FINANCIAL CONSTRUCTION REAL
AND AND ESTATE-
(In millions) AGRICULTURAL OTHER MORTGAGE FOREIGN TOTAL
- -----------------------------------------------------------------------------------------------------------------
FIXED RATE
1 year or less $ 2,919 41 277 3,625 6,862
1-5 years 3,817 73 1,738 34 5,662
After 5 years 3,667 34 1,374 -- 5,075
- -----------------------------------------------------------------------------------------------------------------
Total fixed rate 10,403 148 3,389 3,659 17,599
- -----------------------------------------------------------------------------------------------------------------
ADJUSTABLE RATE
1 year or less 26,886 5,489 6,567 3,650 42,592
1-5 years 20,146 2,077 4,707 331 27,261
After 5 years 3,823 255 2,571 13 6,662
- -----------------------------------------------------------------------------------------------------------------
Total adjustable rate 50,855 7,821 13,845 3,994 76,515
- -----------------------------------------------------------------------------------------------------------------
Total $61,258 7,969 17,234 7,653 94,114
=================================================================================================================
(a) Excludes lease financing.
49
TABLE 11
ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
Balance, beginning of year $ 1,722 1,757 1,826 1,847 2,212
Provision for loan losses relating to loans
transferred to other assets or sold 284 657 -- -- --
Provision for loan losses 1,663 1,079 692 691 1,103
Former Wachovia balance, September 1, 2001 766 -- -- -- --
Allowance relating to loans acquired, transferred
to other assets or sold (503) (1,020) (73) (74) (596)
Loan losses, net (937) (751) (688) (638) (872)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 2,995 1,722 1,757 1,826 1,847
===================================================================================================================================
as % of loans, net 1.83% 1.39 1.32 1.36 1.40
===================================================================================================================================
as % of nonaccrual and restructured loans (a) 195% 146 181 246 211
===================================================================================================================================
as % of nonperforming assets (a) 175% 135 165 216 186
===================================================================================================================================
LOAN LOSSES
Commercial, financial and agricultural $ 768 531 355 281 172
Real estate - commercial construction and mortgage 10 13 24 15 49
Real estate - residential mortgage 4 13 20 27 54
Installment loans and vehicle leasing 297 310 429 476 799
- -----------------------------------------------------------------------------------------------------------------------------------
Total loan losses 1,079 867 828 799 1,074
- -----------------------------------------------------------------------------------------------------------------------------------
LOAN RECOVERIES
Commercial, financial and agricultural 75 53 63 65 74
Real estate - commercial construction and mortgage 8 3 9 11 23
Real estate - residential mortgage 1 2 3 1 9
Installment loans and vehicle leasing 58 58 65 84 96
- -----------------------------------------------------------------------------------------------------------------------------------
Total loan recoveries 142 116 140 161 202
- -----------------------------------------------------------------------------------------------------------------------------------
Loan losses, net $ 937 751 688 638 872
===================================================================================================================================
Commercial loan net charge-offs as % of
average commercial loans, net 0.82% 0.65 0.42 0.31 0.18
Consumer loan net charge-offs as % of
average consumer loans, net 0.49 0.51 0.67 0.69 1.12
Total net charge-offs as % of average loans, net 0.70% 0.59 0.53 0.48 0.65
===================================================================================================================================
NONPERFORMING ASSETS
Nonaccrual loans
Commercial, financial and agricultural $ 1,294 884 551 362 384
Real estate - commercial construction and mortgage 87 55 55 67 135
Real estate - residential mortgage 60 63 150 184 233
Installment loans and vehicle leasing 93 174 212 128 124
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 1,534 1,176 968 741 876
Foreclosed properties (b) 179 103 98 103 115
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,713 1,279 1,066 844 991
===================================================================================================================================
Nonperforming loans included in loans held for sale (c) $ 228 334 14 -- --
Nonperforming assets included in loans and in loans
held for sale $ 1,941 1,613 1,080 844 991
===================================================================================================================================
as % of loans, net, and foreclosed properties (a) 1.04% 1.03 0.80 0.63 0.75
===================================================================================================================================
as % of loans, net, foreclosed properties and loans in
other assets as held for sale (c) 1.13% 1.22 0.78 0.63 0.75
===================================================================================================================================
Accruing loans past due 90 days $ 288 183 144 346 326
===================================================================================================================================
(a) These ratios do not include nonperforming loans included in loans held
for sale.
(b) Restructured loans are not significant.
(c) These ratios reflect nonperforming loans included in loans held for sale.
Loans held for sale, which are included in other assets, are recorded at the
lower of cost or market value, and accordingly, the amount shown and included
in the ratios is net of the transferred allowance for loan losses and the lower
of cost or market value adjustments.
50
TABLE 12
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- --------------- --------------- ---------------- ---------------
LOANS Loans Loans Loans Loans
% OF % of % of % of % of
TOTAL Total Total Total Total
(In millions) AMT. LOANS Amt. Loans Amt. Loans Amt. Loans Amt. Loans
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural 1,114 35% $ 763 42% $ 754 37% $ 724 39% $ 480 35%
Real estate -
Construction and
other 59 5 33 2 20 2 34 2 44 2
Mortgage 122 23 83 21 83 26 103 22 149 31
Installment loans and
vehicle leasing 255 20 168 19 358 22 352 27 452 23
Lease financing 45 13 42 12 15 9 5 7 46 6
Foreign 64 4 37 4 19 4 12 3 49 3
Unallocated 1,336 -- 596 -- 508 -- 596 -- 627 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2,995 100% $1,722 100% $1,757 100% $1,826 100% $1,847 100%
==================================================================================================================================
TABLE 13
NONACCRUAL LOAN ACTIVITY (a)
- --------------------------------------------------------------------------------------------
Years Ended
December 31,
-------------------------
(In millions) 2001 2000
- --------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR $ 1,176 968
- --------------------------------------------------------------------------------------------
COMMERCIAL NONACCRUAL LOAN ACTIVITY
Commercial nonaccrual loans, beginning of year 939 606
Former Wachovia balance, September 1, 2001 209 --
- --------------------------------------------------------------------------------------------
New nonaccrual loans and advances 1,719 1,434
Charge-offs (778) (544)
Transfers to loans held for sale (20) (258)
Transfers to other real estate owned (45) --
Sales (150) (15)
Other, principally payments (493) (284)
- --------------------------------------------------------------------------------------------
Net commercial nonaccrual loan activity 233 333
- --------------------------------------------------------------------------------------------
Commercial nonaccrual loans, end of year 1,381 939
- --------------------------------------------------------------------------------------------
CONSUMER NONACCRUAL LOAN ACTIVITY
Consumer nonaccrual loans, beginning of year 237 362
Former Wachovia balance, September 1, 2001 33 --
- --------------------------------------------------------------------------------------------
Transfers to loans held for sale (288) (243)
Sales and securitizations (91) --
Other, net 262 118
- --------------------------------------------------------------------------------------------
Net consumer nonaccrual loan activity (117) (125)
- --------------------------------------------------------------------------------------------
Consumer nonaccrual loans, end of year 153 237
- --------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $ 1,534 1,176
============================================================================================
(a) Excludes nonaccrual loans included in loans held for sale and foreclosed
properties.
51
TABLE 14
GOODWILL AND OTHER INTANGIBLE ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Goodwill subject to amortization through December 31, 2001 $ 3,366 3,481 5,091 4,376 2,465
New goodwill not subject to amortization 7,250 -- -- -- --
Deposit base 1,822 174 257 360 473
Customer relationships 244 9 4 6 10
Tradename not subject to amortization 90 -- -- -- --
Network intangible -- -- 274 294 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total goodwill and other intangible assets $12,772 3,664 5,626 5,036 2,948
=================================================================================================================================
TABLE 15
DEPOSITS
- ------------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
CORE DEPOSITS
Noninterest-bearing $ 43,464 30,315 31,375 35,614 31,005
Savings and NOW accounts 47,175 36,215 37,748 38,649 37,281
Money market accounts 40,210 20,630 19,405 20,822 21,240
Other consumer time 39,649 35,223 33,812 35,809 37,324
- ------------------------------------------------------------------------------------------------------------------------
Total core deposits 170,498 122,383 122,340 130,894 126,850
OTHER DEPOSITS
Foreign 9,116 7,795 6,729 5,427 3,928
Other time 7,839 12,490 11,978 6,146 6,299
- ------------------------------------------------------------------------------------------------------------------------
Total deposits $187,453 142,668 141,047 142,467 137,077
========================================================================================================================
TABLE 16
TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
- ------------------------------------------------------------------
DECEMBER 31, 2001
-----------------
(In millions)
- ------------------------------------------------------------------
MATURITY OF
3 months or less $ 5,720
Over 3 months through 6 months 2,681
Over 6 months through 12 months 3,540
Over 12 months 3,233
- ------------------------------------------------------------------
Total $15,174
==================================================================
52
TABLE 17
CAPITAL RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------------------------------------------------------------
(In millions) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED CAPITAL RATIOS (a)
Qualifying capital
Tier 1 capital $ 18,999 13,952 14,204 13,327 13,846
Total capital 29,878 22,253 21,810 21,518 21,459
Adjusted risk-weighted assets 269,726 198,849 200,704 195,757 165,676
Adjusted leverage ratio assets $ 306,745 235,749 238,082 225,534 196,962
Ratios
Tier 1 capital 7.04% 7.02 7.08 6.81 8.36
Total capital 11.08 11.19 10.87 10.99 12.95
Leverage 6.19 5.92 5.97 5.91 7.03
STOCKHOLDERS' EQUITY TO ASSETS
Year-end 8.61 6.04 6.60 7.13 7.36
Average 7.49% 6.28 6.92 7.15 7.31
===================================================================================================================================
BANK CAPITAL RATIOS
Tier 1 capital
First Union National Bank 7.55% 6.92 7.26 7.48 6.97
Wachovia Bank, N.A. 7.84 -- -- -- --
First Union National Bank of Delaware 12.51 12.20 10.83 11.44 11.83
First National Bank of Atlanta 13.24 -- -- -- --
Total capital
First Union National Bank 11.68 10.73 10.22 10.38 10.20
Wachovia Bank, N.A. 12.14 -- -- -- --
First Union National Bank of Delaware 13.98 13.97 11.89 12.82 13.09
First National Bank of Atlanta 13.27 -- -- -- --
Leverage
First Union National Bank 6.29 6.04 6.48 6.69 6.02
Wachovia Bank, N.A. 8.56 -- -- -- --
First Union National Bank of Delaware 7.92 7.76 7.08 6.96 6.24
First National Bank of Atlanta 9.28% -- -- -- --
===================================================================================================================================
(a) Risk-based capital ratio guidelines require a minimum ratio of tier 1
capital to risk-weighted assets of 4.00 percent and a minimum ratio of total
capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of
tier 1 capital to adjusted average quarterly assets is from 3.00 percent to 4.00
percent.
53
TABLE 18
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS (a)
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
--------------------------------------------------------------------------------
GROSS UNREALIZED IN- AVERAGE
NOTIONAL -------------------- EFFECTIVE- MATURITY IN
(In millions) AMOUNT GAINS LOSSES (f) EQUITY (g) NESS (h) YEARS (i)
- --------------------------------------------------------------------------------------------------------------------------------
ASSET HEDGES
Cash flow hedges (b)
Interest rate swaps $ 32,503 799 (465) 211 (6) 6.84
Interest rate options 1,000 8 -- 5 -- 3.42
Forward purchase commitments 757 -- (4) (3) -- 0.15
Futures 10,025 1 (1) -- -- 0.25
Fair value hedges (c)
Interest rate swaps 6 -- (1) -- -- 13.34
Forward sale commitments 791 6 -- -- (1) 0.07
Futures 117 -- (7) -- -- 0.25
- ------------------------------------------------------------------------------------------------------------------
Total asset hedges $ 45,199 814 (478) 213 (7) 5.06
================================================================================================================================
LIABILITY HEDGES
Cash flow hedges (d)
Interest rate swaps $ 16,411 192 (738) (340) 2 8.65
Interest rate options 11,100 37 (6) 19 -- 3.51
Futures 32,810 2 (246) (151) -- 0.25
Put options on Eurodollar futures 5,300 -- (4) (2) -- 0.21
Fair value hedges (e)
Interest rate swaps 18,208 703 (75) -- -- 5.41
Interest rate options 300 3 -- -- -- 1.45
- ------------------------------------------------------------------------------------------------------------------
Total liability hedges $ 84,129 937 (1,069) (474) 2 3.44
================================================================================================================================
OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 2000
--------------------------------------------------------------------------------
Gross Unrealized Average
Notional Carrying -------------------- Market Maturity in
(In millions) Amount Amount Gains Losses Value Years (i)
- --------------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Interest rate swaps $ 34,377 345 968 99 1,214 6.58
Futures 142 -- -- 6 (6) 0.25
- ------------------------------------------------------------------------------------------------------------------
Total asset rate conversions $ 34,519 345 968 105 1,208 6.55
================================================================================================================================
LIABILITY RATE CONVERSIONS
Interest rate swaps $ 20,995 (177) 378 273 (72) 6.07
Options 300 -- -- -- -- 2.45
Futures 119,737 -- -- 375 (375) 0.25
- ------------------------------------------------------------------------------------------------------------------
Total liability rate conversions $ 141,032 (177) 378 648 (447) 1.12
================================================================================================================================
54
(a) Includes only derivative financial instruments related to interest rate
risk management activities. All of the Company's other derivative financial
instruments are classified as trading. On January 1, 2001, the Company adopted
SFAS 133 on a prospective basis. See Note 1 to Notes to Consolidated Financial
Statements for further information.
(b) Receive-fixed interest rate swaps with a notional amount of $30.8 billion,
of which $4.0 billion are forward-starting, and with pay rates based on
one-to-six month LIBOR are primarily designated as cash flow hedges of the
variability in cash flows related to the forecasted interest rate resets of
one-to-six month LIBOR-indexed loans. Pay-fixed interest rate swaps with a
notional amount of $1.7 billion and with receive rates based on one-month LIBOR
are designated as cash flow hedges of securities and have a loss, net of income
taxes, of $67 million in accumulated other comprehensive income. An interest
rate collar that qualifies as a net purchased option with a notional amount of
$1.0 billion is designated as a cash flow hedge of the variability in cash flows
related to the forecasted interest rate resets of one-month LIBOR-indexed loans,
when one-month LIBOR is below the purchased floor or above the sold cap. Forward
purchase commitments of $757 million are designated as a cash flow hedge of the
variability of the consideration to be paid in the forecasted purchase of
available for sale securities that will occur upon gross settlement of the
commitment in 2002. Eurodollar futures with a notional amount of $10.0 billion
are primarily designated as cash flow hedges of the variability in cash flows
related to the forecasted interest rate resets of three-month LIBOR-indexed
loans.
(c) Forward sale commitments of $791 million are designated as fair value
hedges of mortgage loans in the warehouse.
(d) Derivatives with a notional amount of $57.8 billion are designated as cash
flow hedges of the variability in cash flows attributable to the forecasted
issuance of fixed rate short-term liabilities that are part of a rollover
strategy, primarily repurchase agreements and deposit products. Of this amount,
$32.8 billion are Eurodollar futures, $5.3 billion are purchased put options on
Eurodollar futures, $12.8 billion are pay-fixed interest rate swaps with receive
rates based on one-to-three month LIBOR, of which $5.0 billion are
forward-starting, and $6.9 billion are purchased options on pay-fixed swaps with
a strike based on three-month LIBOR. Derivatives with a notional amount of $7.8
billion are primarily designated as cash flow hedges of the variability in cash
flows related to the forecasted interest rate resets of one-to-three month
LIBOR-indexed long-term debt. Of this amount, $3.6 billion are pay-fixed
interest rate swaps with receive rates based on one-to-three month LIBOR, of
which $3.3 billion are forward-starting, and $4.2 billion are purchased options
on pay-fixed swaps with a strike based on three-month LIBOR.
(e) Receive-fixed interest rate swaps with a notional amount of $18.2 billion
and with pay rates based primarily on one-to-six month LIBOR are designated as
fair value hedges of fixed rate liabilities, primarily CDs, long-term debt and
bank notes.
(f) Represents the fair value of derivative financial instruments less accrued
interest receivable or payable.
(g) At December 31, 2001, the net unrealized gain on derivatives included in
accumulated other comprehensive income, which is a component of stockholders'
equity, was $22 million, net of income taxes. Of this net of tax amount, a $261
million loss represents the effective portion of the net gains (losses) on
derivatives that qualify as cash flow hedges, and a $283 million gain relates to
terminated and/or redesignated derivatives. As of December 31, 2001, $289
million of net gains, net of income taxes, recorded in accumulated other
comprehensive income are expected to be reclassified as interest income or
expense during the next twelve months. The maximum length of time over which
cash flow hedges are hedging the variability in future cash flows associated
with the forecasted transactions is 24.97 years.
(h) In 2001, losses in the amount of $5 million were recognized in other fee
income representing the ineffective portion of the net gains (losses) on
derivatives that qualify as cash flow and fair value hedges. In addition, net
interest income in 2001, was reduced by $119 million representing
ineffectiveness of cash flow hedges caused by differences between the critical
terms of the derivative and the hedged item, primarily differences in reset
dates.
(i) Estimated maturity approximates average life.
55
TABLE 19
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS - EXPECTED MATURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2001
------------------------------------------------------------------------------------------
1 YEAR 1 -2 2 -5 5 -10 AFTER 10
(In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW ASSET HEDGES
Notional amount - swaps $ 5,283 1,644 2,282 16,648 6,646 32,503
Notional amount - other 2,782 8,000 1,000 -- -- 11,782
Weighted average receive rate (a) 7.14% 6.44 6.43 5.30 5.92 5.92
Weighted average pay rate (a) 1.80% 2.14 2.52 2.21 1.98 2.11
Unrealized gain (loss) $ 149 69 88 (85) 116 337
- -----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE ASSET HEDGES
Notional amount - swaps $ -- -- -- -- 6 6
Notional amount - other 791 30 77 10 -- 908
Weighted average receive rate (a) -% -- -- -- 2.43 2.43
Weighted average pay rate (a) -% -- -- -- 7.36 7.36
Unrealized gain (loss) $ 6 (2) (4) -- (1) (1)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOW LIABILITY HEDGES
Notional amount - swaps $ 950 644 2,518 7,979 4,320 16,411
Notional amount - other 39,810 -- 7,700 1,700 -- 49,210
Weighted average receive rate (a) 2.07% 1.96 2.07 1.97 1.95 2.01
Weighted average pay rate (a) 5.29% 4.61 4.62 6.64 6.22 5.57
Unrealized gain (loss) $ (258) (17) (56) (178) (254) (763)
- -----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE LIABILITY HEDGES
Notional amount - swaps $ 725 825 10,485 5,400 773 18,208
Notional amount - other -- 300 -- -- -- 300
Weighted average receive rate (a) 7.37% 6.50 6.22 6.83 6.64 6.48
Weighted average pay rate (a) 2.00% 2.32 2.29 2.38 2.05 2.30
Unrealized gain (loss) $ 21 23 339 218 30 631
===================================================================================================================================
OFF-BALANCE SHEET DERIVATIVES - EXPECTED MATURITIES
- -------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
--------------------------------------------------------------------------------------
1 YEAR 1 -2 2 -5 5 -10 AFTER 10
(In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
ASSET RATE CONVERSIONS
Notional amount - swaps $ 2,577 8,658 2,516 10,758 9,868 34,377
Notional amount - other -- -- 127 15 -- 142
Weighted average receive rate 6.56% 6.68 6.60 6.96 7.20 6.89
Weighted average pay rate 6.67% 7.03 6.62 6.58 6.64 6.72
Estimated fair value $ 42 103 54 361 648 1,208
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITY RATE CONVERSIONS
Notional amount - swaps $ 2,102 1,371 6,994 6,898 3,630 20,995
Notional amount - other 95,752 23,985 300 -- -- 120,037
Weighted average receive rate 6.86% 6.88 6.93 7.08 6.66 6.93
Weighted average pay rate 7.14% 7.01 6.98 6.90 7.18 7.01
Estimated fair value $ (327) (44) 158 (168) (66) (447)
===============================================================================================================================
(a) Weighted average receive and pay rates include the impact of currently
effective interest rate swaps and basis swaps only and not the impact of
forward-starting interest rate swaps. All of the interest rate swaps have
variable pay or receive rates based on one-to-six month LIBOR, and they are the
pay or receive rates in effect at December 31, 2001.
56
TABLE 20
RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS ACTIVITY
- -------------------------------------------------------------------------------------------------------------------------------
Rate
Asset Liability Sensitivity
(In millions) Hedges Hedges Hedges Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 57,551 74,158 58,571 190,280
Additions 19,131 179,595 64,940 263,666
Maturities and amortizations (33,599) (54,544) (109,356) (197,499)
Terminations (23,240) (31,114) (12,406) (66,760)
Redesignations and transfers to trading account assets 14,676 (27,063) (1,749) (14,136)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 34,519 141,032 -- 175,551
Additions 48,687 84,143 -- 132,830
Maturities and amortizations (6,953) (78,503) -- (85,456)
Terminations (2,804) (180) -- (2,984)
Redesignations and transfers to trading account assets (28,250) (62,363) -- (90,613)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 45,199 84,129 -- 129,328
===============================================================================================================================
TABLE 21
INTEREST DIFFERENTIAL
- -----------------------------------------------------------------------------------------------------------------------------------
2001 COMPARED TO 2000 2000 Compared to 1999
-------------------------------------- -------------------------------------
INTEREST VARIANCE Interest Variance
INCOME/ ATTRIBUTABLE TO (b) Income/ Attributable to (b)
EXPENSE -------------------- Expense -------------------
(In millions) VARIANCE RATE VOLUME Variance Rate Volume
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS
Interest-bearing bank balances $ 38 (18) 56 15 3 12
Federal funds sold and securities
purchased under resale agreements (47) (129) 82 (12) 79 (91)
Trading account assets (a) (46) (176) 130 219 62 157
Securities (a) (327) (201) (126) 811 254 557
Loans (a) (705) (1,290) 585 593 842 (249)
Other earning assets (287) (250) (37) 738 183 555
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets $(1,374) (2,064) 690 2,364 1,423 941
===================================================================================================================================
INTEREST-BEARING LIABILITIES
Deposits (525) (890) 365 1,215 865 350
Short-term borrowings (800) (654) (146) 517 404 113
Long-term debt (447) (691) 244 666 324 342
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $(1,772) (2,235) 463 2,398 1,593 805
===================================================================================================================================
Net interest income $ 398 171 227 (34) (170) 136
===================================================================================================================================
(a) Yields related to securities and loans exempt from federal and state income
taxes are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates. Lease financing amounts include related
deferred income taxes.
(b) Changes attributable to rate/volume are allocated to both rate and volume
on an equal basis.
57
WACHOVIA CORPORATION AND SUBSIDIARIES
NET INTEREST INCOME SUMMARIES
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 2001 YEAR ENDED 2000
--------------------------------------- -----------------------------------
AVERAGE Average
INTEREST RATES Interest Rates
AVERAGE INCOME/ EARNED/ Average Income/ Earned/
(In millions) BALANCES EXPENSE PAID Balances Expense Paid
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Interest-bearing bank balances $ 2,359 92 3.92% $ 1,095 54 4.93%
Federal funds sold and securities
purchased under resale agreements 9,458 400 4.23 7,800 447 5.73
Trading account assets (a) (c) 14,106 782 5.54 12,011 828 6.90
Securities (a) (c) 51,681 3,626 7.02 51,751 3,816 7.37
Investment securities (a) (c)
U.S. Government and other -- -- -- 1,095 76 6.93
State, county and municipal -- -- -- 582 61 10.58
- ------------------------------------------------------------------------- ------------------------
Total investment securities -- -- -- 1,677 137 8.20
- ------------------------------------------------------------------------- ------------------------
Loans (a) (b) (c)
Commercial
Commercial, financial and agricultural 56,094 4,572 8.15 53,518 4,908 9.17
Real estate - construction and other 4,726 281 5.95 2,639 224 8.49
Real estate - mortgage 11,466 776 6.77 9,176 779 8.49
Lease financing 6,548 685 10.46 5,194 611 11.75
Foreign 6,109 339 5.55 4,856 342 7.04
- ------------------------------------------------------------------------- ------------------------
Total commercial 84,943 6,653 7.83 75,383 6,864 9.11
- ------------------------------------------------------------------------- ------------------------
Consumer
Real estate - mortgage 19,741 1,416 7.17 23,804 1,762 7.40
Installment loans and vehicle leasing 29,164 2,513 8.61 27,701 2,661 9.60
- ------------------------------------------------------------------------- ------------------------
Total consumer 48,905 3,929 8.03 51,505 4,423 8.59
- ------------------------------------------------------------------------- ------------------------
Total loans 133,848 10,582 7.91 126,888 11,287 8.89
- ------------------------------------------------------------------------- ------------------------
Other earning assets 10,683 777 7.28 11,125 1,064 9.56
- ------------------------------------------------------------------------- ------------------------
Total earning assets 222,135 16,259 7.32 212,347 17,633 8.30
===================== ==================
Cash and due from banks 8,378 7,751
Other assets 39,384 27,394
- --------------------------------------------------------- --------
Total assets $269,897 $247,492
========================================================= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits
Savings and NOW accounts 41,979 1,012 2.41 38,518 1,169 3.03
Money market accounts 24,526 983 4.01 15,793 682 4.32
Other consumer time 36,055 1,941 5.38 35,536 1,966 5.53
Foreign 7,318 294 4.01 8,780 514 5.85
Other time 10,851 514 4.73 13,648 938 6.87
- ------------------------------------------------------------------------- ------------------------
Total interest-bearing deposits 120,729 4,744 3.93 112,275 5,269 4.69
Federal funds purchased and securities
sold under repurchase agreements 28,055 1,364 4.86 30,997 1,893 6.11
Commercial paper 2,912 112 3.84 2,882 173 6.00
Other short-term borrowings 9,719 260 2.68 9,697 470 4.85
Long-term debt 38,538 1,845 4.79 34,279 2,292 6.69
- ------------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities 199,953 8,325 4.16 190,130 10,097 5.31
===================== ==================
Noninterest-bearing deposits 30,372 28,491
Other liabilities 19,351 13,330
Stockholders' equity 20,221 15,541
- --------------------------------------------------------- -------
Total liabilities and
stockholders' equity $269,897 $247,492
========================================================= ========
Interest income and rate earned $16,259 7.32% $17,633 8.30%
Interest expense and equivalent rate paid 8,325 3.75 10,097 4.75
- --------------------------------------------------------------------------------------- ------------------
Net interest income and margin (d) $ 7,934 3.57% $ 7,536 3.55%
======================================================================================= ==================
(a) Yields related to securities and loans exempt from federal and state income
taxes are stated on a fully tax-equivalent basis. They are reduced by the
nondeductible portion of interest expense, assuming a federal tax rate of 35
percent and applicable state tax rates. Lease financing amounts include related
deferred income taxes. (b) The loan averages are stated net of unearned income,
and the averages include loans on which the accrual of interest has been
discontinued.
58
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED 1999 YEAR ENDED 1998 YEAR ENDED 1997
- ------------------------------------ ------------------------------------- ------------------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balances Expense Paid Balances Expense Paid Balances Expense Paid
- ------------------------------------------------------------------------------------------------------------------------------
$ 835 39 4.58% $ 2,331 134 5.76% $ 3,184 182 5.68%
9,526 459 4.82 12,381 626 5.06 7,219 399 5.51
9,638 609 6.32 8,598 555 6.46 5,174 341 6.59
43,767 2,989 6.83 35,177 2,322 6.60 20,844 1,423 6.83
1,163 78 6.73 1,727 121 6.99 2,478 179 7.22
700 75 10.62 867 88 10.12 1,085 105 9.67
- ---------------------- ---------------------- ----------------------
1,863 153 8.19 2,594 209 8.04 3,563 284 7.97
- ---------------------- ---------------------- ----------------------
52,710 4,197 7.96 50,080 3,926 7.84 43,118 3,464 8.03
2,648 202 7.63 2,912 245 8.42 3,295 293 8.89
8,468 663 7.82 9,663 821 8.50 13,619 1,180 8.67
4,967 629 12.65 4,454 502 11.28 4,199 423 10.09
4,500 273 6.08 4,297 287 6.68 3,349 215 6.43
- ---------------------- ---------------------- ----------------------
73,293 5,964 8.14 71,406 5,781 8.10 67,580 5,575 8.25
- ---------------------- ---------------------- ----------------------
23,435 1,661 7.09 26,114 1,968 7.54 31,241 2,426 7.77
33,063 3,069 9.28 34,540 3,423 9.91 35,696 3,831 10.73
- ---------------------- ---------------------- ----------------------
56,498 4,730 8.37 60,654 5,391 8.89 66,937 6,257 9.35
- ---------------------- ---------------------- ----------------------
129,791 10,694 8.24 132,060 11,172 8.46 134,517 11,832 8.80
- ---------------------- ---------------------- ----------------------
4,516 326 7.23 1,175 87 7.41 -- -- --
- ---------------------- ---------------------- ----------------------
199,936 15,269 7.64 194,316 15,105 7.77 174,501 14,461 8.29
===================== ===================== =====================
9,178 9,132 8,695
21,205 18,765 12,784
- -------- -------- --------
$230,319 $222,213 $195,980
======== ======== ========
37,448 1,035 2.77 34,917 937 2.68 33,104 898 2.71
20,031 631 3.15 22,742 755 3.32 24,033 694 2.89
33,557 1,675 4.99 37,291 1,987 5.33 39,752 2,067 5.20
5,553 259 4.66 4,429 238 5.38 3,092 164 5.29
7,528 454 6.03 6,342 399 6.29 5,377 325 6.05
- ---------------------- ---------------------- ----------------------
104,117 4,054 3.89 105,721 4,316 4.08 105,358 4,148 3.94
30,046 1,452 4.83 33,121 1,676 5.06 22,759 1,147 5.04
2,224 107 4.81 1,954 102 5.23 1,948 112 5.76
9,188 460 5.01 11,109 595 5.36 5,680 338 5.96
28,738 1,626 5.66 16,268 1,022 6.28 12,596 823 6.53
- ---------------------- ---------------------- ----------------------
174,313 7,699 4.42 168,173 7,711 4.59 148,341 6,568 4.43
===================== ===================== =====================
30,995 30,609 27,489
9,079 7,553 5,823
15,932 15,878 14,327
- -------- -------- --------
$230,319 $222,213 $195,980
======== ======== ========
$15,269 7.64% $15,105 7.77% $14,461 8.29%
7,699 3.85 7,711 3.96 6,568 3.76
--------------------- --------------------- ---------------------
$ 7,570 3.79% $ 7,394 3.81% $ 7,893 4.53%
===================== ===================== =====================
(c) Tax-equivalent adjustments included in trading account assets, securities,
investment securities, commercial, financial and agricultural loans, and lease
financing are (in millions): $22, $92, $0, $34 and $11, respectively, in 2001;
$8, $32, $18, $28 and $13, respectively, in 2000; and $9, $20, $24, $50 and $15,
respectively, in 1999. (d) The net interest margin includes (in basis points):
18, 23 and 21 for the years ended 2001, 2000 and 1999, respectively, in net
interest income from hedge-related derivative transactions.
59
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001 Year Ended December 31, 2000
------------------------------------ ---------------------------------------
MERGER- Merger-
RELATED, Related,
RESTRUCTURING Restructuring
AND Other and Other
OPERATING CHARGES/ AS Operating Charges/ As
(In millions, except per share data) EARNINGS GAINS REPORTED Earnings Gains Reported
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,775 -- 7,775 7,437 -- 7,437
Provision for loan losses 1,067 880 1,947 754 982 1,736
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 6,708 (880) 5,828 6,683 (982) 5,701
- -----------------------------------------------------------------------------------------------------------------------------------
Fee and other income
Service charges and fees 2,167 -- 2,167 1,966 (46) 1,920
Advisory, underwriting and other
investment banking fees 836 -- 836 726 (8) 718
Other income
Security transactions - portfolio (67) -- (67) (6) (1,119) (1,125)
Asset sales and securitization 303 (21) 282 263 2 265
Gain on sale of credit card portfolio -- -- -- -- 937 937
Gain on sale of mortgage servicing portfolio -- -- -- -- 71 71
Gain on sale of branches -- 73 73 -- 357 357
Other 3,032 (27) 3,005 3,866 (297) 3,569
- -----------------------------------------------------------------------------------------------------------------------------------
Total fee and other income 6,271 25 6,296 6,815 (103) 6,712
- -----------------------------------------------------------------------------------------------------------------------------------
Noninterest expense
Merger-related and restructuring charges -- 106 106 -- 2,190 2,190
Other noninterest expense 9,559 166 9,725 9,213 307 9,520
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,559 272 9,831 9,213 2,497 11,710
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits)
and cumulative effect of a change
in accounting principle 3,420 (1,127) 2,293 4,285 (3,582) 703
Income taxes (benefits) 1,064 (390) 674 1,350 (785) 565
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting principle 2,356 (737) 1,619 2,935 (2,797) 138
Cumulative effect of a change in the accounting
for beneficial interests, net of income taxes -- -- -- (46) -- (46)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 2,356 (737) 1,619 2,889 (2,797) 92
Dividends on preferred stock 6 -- 6 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to
common stockholders $ 2,350 (737) 1,613 2,889 (2,797) 92
===================================================================================================================================
Diluted earnings per common share
Income before a change in accounting
principle $ 2.12 (0.67) 1.45 2.97 (2.85) 0.12
Net income $ 2.12 (0.67) 1.45 2.92 (2.85) 0.07
===================================================================================================================================
60
WACHOVIA CORPORATION AND SUBSIDIARIES
MERGER-RELATED, RESTRUCTURING AND OTHER CHARGES/GAINS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------
(In millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
MERGER-RELATED AND RESTRUCTURING CHARGES
Merger-related charges
Personnel and employee termination benefits $ 21 --
Other 75 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total merger-related charges 96 --
Restructuring charges
Personnel and employee termination benefits 69 --
Other 13 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total restructuring charges 82 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total First Union/Wachovia merger-related and restructuring charges 178 --
Strategic repositioning restructuring charges (reversals), net (83) 2,129
March 1999 restructuring charge (reversals), net (14) (16)
Other restructuring charges (reversals), net -- (1)
Merger-related charges from previously announced mergers 25 78
- ------------------------------------------------------------------------------------------------------------------------------------
Total 106 2,190
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER CHARGES/GAINS
Provision for loan losses 880 982
Service charges and fees -- 46
Advisory, underwriting and other investment banking fees -- 8
Other income (25) 49
Other noninterest expense 166 307
- ------------------------------------------------------------------------------------------------------------------------------------
Total other charges/gains 1,021 1,392
- ------------------------------------------------------------------------------------------------------------------------------------
Total merger-related, restructuring and other charges/gains (1,127) (3,582)
Income tax benefits (390) (785)
- ------------------------------------------------------------------------------------------------------------------------------------
After-tax merger-related, restructuring and other charges/gains $ (737) (2,797)
- ------------------------------------------------------------------------------------------------------------------------------------
61
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------
(In millions, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 10,537 11,246 10,629
Interest and dividends on securities 3,534 3,903 3,098
Trading account interest 760 820 600
Other interest income 1,269 1,565 824
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 16,100 17,534 15,151
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,744 5,269 4,054
Interest on short-term borrowings 1,736 2,536 2,019
Interest on long-term debt 1,845 2,292 1,626
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,325 10,097 7,699
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,775 7,437 7,452
Provision for loan losses 1,067 754 692
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,708 6,683 6,760
- -----------------------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 2,167 1,966 1,987
Commissions 1,568 1,591 1,014
Fiduciary and asset management fees 1,643 1,511 1,238
Advisory, underwriting and other investment banking fees 836 726 702
Principal investing (707) 395 592
Other income 764 626 1,400
- -----------------------------------------------------------------------------------------------------------------------------------
Total fee and other income 6,271 6,815 6,933
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,729 5,449 4,716
Occupancy 704 619 546
Equipment 864 858 793
Advertising 56 91 234
Communications and supplies 480 487 481
Professional and consulting fees 334 337 287
Goodwill and other intangible amortization 523 361 391
Sundry expense 869 1,011 1,010
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,559 9,213 8,458
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,420 4,285 5,235
Income taxes 1,064 1,350 1,749
- -----------------------------------------------------------------------------------------------------------------------------------
Net operating earnings $ 2,356 2,935 3,486
===================================================================================================================================
Diluted earnings per common share $ 2.12 2.97 3.60
===================================================================================================================================
(a) Operating earnings exclude merger-related, restructuring and other charges
and gains and cumulative effect of a change in accounting principle.
62
WACHOVIA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
- --------------------------------------------------------------------------------
Management of Wachovia Corporation and its subsidiaries (the "Company")
is committed to the highest standards of quality customer service and the
enhancement of stockholder value. Management expects the Company's employees to
respect its customers and to assign the highest priority to customer needs.
Management of the Company is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this report. The accompanying consolidated financial statements
were prepared in conformity with accounting principles generally accepted in the
United States of America and include, as necessary, best estimates and judgments
by management. Other financial information contained in this annual report is
presented on a basis consistent with the consolidated financial statements
unless otherwise indicated.
To ensure the integrity, objectivity and fairness of the information in
these consolidated financial statements, management of the Company has
established and maintains internal controls supplemented by a program of
internal audits. The internal controls are designed to provide reasonable
assurance that assets are safeguarded and transactions are executed, recorded
and reported in accordance with management's intentions and authorizations and
to comply with applicable laws and regulations. The internal control system
includes an organizational structure that provides appropriate delegation of
authority and segregation of duties, established policies and procedures, and
comprehensive internal audit and loan review programs. To enhance the
reliability of internal controls, management recruits and trains highly
qualified personnel, and maintains sound risk management practices.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal controls may vary over
time. The Internal Audit Division of the Company reviews, evaluates, monitors
and makes recommendations on policies and procedures, which serves as an
integral, but independent, component of internal control.
The consolidated financial statements have been audited by KPMG LLP,
independent auditors, in accordance with auditing standards generally accepted
in the United States of America. In performing its audit, KPMG LLP considers the
Company's internal control structure to the extent it deems necessary in order
to issue its opinion on the consolidated financial statements. KPMG LLP reviews
the results of its audit with both management and the Audit & Compliance
Committee.
The Company's financial reporting and internal controls are under the
general oversight of the Board of Directors, acting through the Audit &
Compliance Committee. The Audit & Compliance Committee is composed entirely of
independent directors. KPMG LLP and internal auditors have direct and
unrestricted access to the Audit & Compliance Committee at all times. The Audit
& Compliance Committee meets periodically with management, internal auditors and
KPMG LLP to determine that each is fulfilling its responsibilities and to
support actions to identify, measure and control risks and augment internal
controls.
G. Kennedy Thompson Robert P. Kelly
President and Chief Executive Officer Senior Executive Vice President and
Chief Financial Officer
January 23, 2002
63
WACHOVIA CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Wachovia Corporation
We have audited the consolidated balance sheets of Wachovia Corporation
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wachovia
Corporation and subsidiaries at December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements,
effective July 1, 2001, Wachovia Corporation adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations and
certain provisions of SFAS No. 142, Goodwill and Other Intangible Assets as
required for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.
KPMG LLP
Charlotte, North Carolina
January 23, 2002
64
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
------------------------
(In millions, except per share data) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 13,917 9,906
Interest-bearing bank balances 6,875 3,239
Federal funds sold and securities purchased under resale agreements
(carrying amount of collateral held $7,207 at December 31, 2001, $2,287 repledged) 13,919 11,240
- ------------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 34,711 24,385
- ------------------------------------------------------------------------------------------------------------------------------------
Trading account assets 25,386 21,630
Securities (amortized cost $57,776 in 2001; $47,930 in 2000) 58,467 47,603
Investment securities (market value $1,728 in 2000) - 1,643
Loans, net of unearned income ($9,694 in 2001; $6,482 in 2000) 163,801 123,760
Allowance for loan losses (2,995) (1,722)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net 160,806 122,038
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 5,719 5,024
Due from customers on acceptances 745 874
Goodwill and other intangible assets 12,772 3,664
Other assets 31,846 27,309
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 330,452 254,170
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits 43,464 30,315
Interest-bearing deposits 143,989 112,353
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 187,453 142,668
Short-term borrowings 44,385 39,446
Bank acceptances outstanding 762 880
Trading account liabilities 11,437 7,475
Other liabilities 16,227 12,545
Long-term debt 41,733 35,809
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 301,997 238,823
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, Class A, 40 million shares, no par value; 10 million shares,
no par value; none issued -- --
Dividend Equalization Preferred shares, no par value, 96 million shares issued
and outstanding in 2001 17 --
Common stock, $3.33-1/3 par value; authorized 3 billion shares, outstanding
1.362 billion shares in 2001; 980 million shares in 2000 4,539 3,267
Paid-in capital 17,911 6,272
Retained earnings 5,551 6,021
Accumulated other comprehensive income, net 437 (213)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,455 15,347
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 330,452 254,170
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
65
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
---------------------------------------
(In millions, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 10,537 11,246 10,629
Interest and dividends on securities 3,534 3,903 3,098
Trading account interest 760 820 600
Other interest income 1,269 1,565 824
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 16,100 17,534 15,151
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,744 5,269 4,054
Interest on short-term borrowings 1,736 2,536 2,019
Interest on long-term debt 1,845 2,292 1,626
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 8,325 10,097 7,699
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,775 7,437 7,452
Provision for loan losses 1,947 1,736 692
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,828 5,701 6,760
- -----------------------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME
Service charges and fees 2,167 1,920 1,987
Commissions 1,568 1,591 1,014
Fiduciary and asset management fees 1,643 1,511 1,238
Advisory, underwriting and other investment banking fees 836 718 702
Principal investing (707) 395 592
Other income 789 577 1,400
- -----------------------------------------------------------------------------------------------------------------------------------
Total fee and other income 6,296 6,712 6,933
- -----------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 5,810 5,659 4,716
Occupancy 730 622 546
Equipment 879 870 793
Advertising 66 114 234
Communications and supplies 480 503 481
Professional and consulting fees 359 348 287
Goodwill and other intangible amortization 523 361 391
Merger-related and restructuring charges 106 2,190 404
Sundry expense 878 1,043 1,010
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 9,831 11,710 8,862
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of a
change in accounting principle 2,293 703 4,831
Income taxes 674 565 1,608
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 1,619 138 3,223
Cumulative effect of a change in the accounting for beneficial
interests, net of income taxes - (46) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,619 92 3,223
Dividends on preferred stock 6 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 1,613 92 3,223
===================================================================================================================================
PER COMMON SHARE DATA
Basic
Income before change in accounting principle $ 1.47 0.12 3.35
Net income 1.47 0.07 3.35
Diluted
Income before change in accounting principle 1.45 0.12 3.33
Net income 1.45 0.07 3.33
Cash dividends $ 0.96 1.92 1.88
AVERAGE SHARES
Basic 1,096 971 959
Diluted 1,105 974 967
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
66
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Shares Common Stock Other
---------------- ------------------ Paid-in Retained Comprehensive
(In millions) Shares Amount Shares Amount Capital Earnings Income, Net Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- $ -- 982 $ 3,274 4,029 9,187 407 16,897
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income -- -- -- -- 3,223 -- -- 3,223
Net unrealized loss on debt and
equity securities, net of
reclassification adjustment -- -- -- -- -- -- (1,337) (1,337)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- -- 3,223 (1,337) 1,886
Purchases of common stock -- -- (36) (118) 533 (2,228) -- (1,813)
Common stock issued for
Stock options and restricted stock -- -- 9 29 379 -- -- 408
Dividend reinvestment plan -- -- 2 6 78 -- -- 84
Acquisitions -- -- 31 103 1,148 -- -- 1,251
Deferred compensation, net -- -- -- -- (187) -- -- (187)
Cash dividends, $1.88 per share -- -- -- -- -- (1,817) -- (1,817)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- -- 988 3,294 5,980 8,365 (930) 16,709
Comprehensive income
Net income -- -- -- -- -- 92 -- 92
Net unrealized gain on debt and
equity securities, net of
reclassification adjustment -- -- -- -- -- -- 717 717
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- -- 92 717 809
Purchases of common stock -- -- (19) (63) (79) (548) -- (690)
Common stock issued for
Stock options and restricted stock -- -- 7 23 131 -- -- 154
Dividend reinvestment plan -- -- 3 9 68 -- -- 77
Acquisitions -- -- 1 4 30 -- -- 34
Deferred compensation, net -- -- -- -- 142 -- -- 142
Cash dividends, $1.92 per share -- -- -- -- -- (1,888) -- (1,888)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 980 3,267 6,272 6,021 (213) 15,347
Comprehensive income
Net income -- -- -- -- -- 1,619 -- 1,619
Net unrealized gain on debt and
equity securities, net of
reclassification adjustment -- -- -- -- -- -- 628 628
Net unrealized gain on derivative
financial instruments -- -- -- -- -- -- 22 22
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Total comprehensive income -- -- -- -- -- 1,619 650 2,269
Preferred shares issued 96 23 -- -- -- -- -- 23
Purchases of common stock -- -- (30) (103) (124) (1,057) -- (1,284)
Common stock issued for
Stock options and restricted stock -- -- 3 11 81 -- -- 92
Dividend reinvestment plan -- -- 2 6 52 -- -- 58
Acquisitions -- -- 407 1,358 11,453 -- -- 12,811
Stock options issued in acquisition -- -- -- -- 187 -- -- 187
Deferred compensation, net -- -- -- -- (10) -- -- (10)
Cash dividends
Preferred shares -- (6) -- -- -- -- -- (6)
Common at $0.96 per share -- -- -- -- -- (1,032) -- (1,032)
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Balance, December 31, 2001 96 $ 17 1,362 $ 4,539 17,911 5,551 437 28,455
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
67
WACHOVIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Years Ended December 31,
------------------------------------
(In millions) 2001 2000 1999
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OPERATING ACTIVITIES
Net income $ 1,619 92 3,223
Adjustments to reconcile net income to net cash provided (used) by operating activities
Cumulative effect of a change in accounting principle -- 46 --
Accretion and amortization of securities discounts and premiums, net 178 264 281
Provision for loan losses 1,947 1,736 692
Securitization gains (282) (265) (417)
(Gain) loss on sale of mortgage servicing rights (86) 2 (44)
Securities transactions 67 1,125 63
Depreciation, goodwill and other amortization 1,389 1,253 1,172
Goodwill impairments -- 1,754 --
Deferred income taxes 36 91 1,079
Trading account assets, net (2,822) (6,684) (6,626)
Mortgage loans held for resale (1,311) 381 1,677
(Gain) loss on sales of premises and equipment 5 (18) (16)
(Gain) on sales of credit card and mortgage servicing portfolios -- (1,008) --
Other assets, net 1,437 1,384 79
Trading account liabilities, net 3,962 3,906 2,027
Other liabilities, net 1,148 3,838 (3,535)
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Net cash provided (used) by operating activities 7,287 7,897 (345)
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INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales of securities 13,506 16,388 17,391
Maturities of securities 8,826 3,413 4,627
Purchases of securities (18,629) (8,361) (28,217)
Origination of loans, net 4,123 (9,334) (9,986)
Sales of premises and equipment 155 398 280
Purchases of premises and equipment (523) (884) (957)
Goodwill and other intangible assets, net (115) (40) (101)
Purchase of bank-owned separate account life insurance (284) (135) (576)
Cash equivalents acquired, net of purchase acquisitions 3,591 3 168
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Net cash provided (used) by investing activities 10,650 1,448 (17,371)
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FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Purchases (sales) of deposits, net 1,639 1,621 (1,420)
Securities sold under repurchase agreements and other short-term borrowings, net (3,169) (10,661) 7,637
Issuances of long-term debt 9,338 17,491 17,612
Payments of long-term debt (13,076) (13,662) (8,586)
Issuances of preferred shares 23 -- --
Issuances of common stock (44) 152 143
Purchases of common stock (1,284) (690) (1,813)
Cash dividends paid (1,038) (1,888) (1,817)
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Net cash provided (used) by financing activities (7,611) (7,637) 11,756
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Increase (decrease) in cash and cash equivalents 10,326 1,708 (5,960)
Cash and cash equivalents, beginning of year 24,385 22,677 28,637
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Cash and cash equivalents, end of year $ 34,711 24,385 22,677
===================================================================================================================================
CASH PAID FOR
Interest $ 8,752 9,759 7,568
Income taxes 672 203 30
NONCASH ITEMS
Transfer to securities from trading account assets -- -- 1,529
Transfer to securities from loans 3,025 9,342 8,259
Transfer to securities from other assets 908 -- --
Transfer to other assets from trading account assets 201 -- --
Transfer to other assets from securities -- 1,335 --
Transfer to other assets from loans, net 1,643 7,901 --
Issuance of common stock for purchase accounting merger $ 12,998 34 1,251
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
68
WACHOVIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
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NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Wachovia Corporation (the "Parent Company") is a bank holding company
whose principal wholly owned subsidiaries are First Union National Bank and
Wachovia Bank, N.A., national banking associations; First Union Securities,
Inc., a retail brokerage and investment banking company; and First Union
Mortgage Corporation, a mortgage banking company. Wachovia Corporation and
subsidiaries (together the "Company") is a diversified financial services
company whose operations are principally domestic.
The accounting and reporting policies of the Company are in accordance
with accounting principles generally accepted in the United States of America,
and they conform to general practices within the applicable industries. The
consolidated financial statements include the accounts of the Parent Company and
all its subsidiaries. In consolidation, all significant intercompany accounts
and transactions are eliminated.
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ from those estimates.
BUSINESS COMBINATIONS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method. Also under SFAS 141, identified intangible assets acquired in a
purchase business combination must be separately valued and recognized on the
balance sheet if they meet certain requirements. Under SFAS 142, goodwill and
identified intangible assets with indefinite useful lives are not subject to
amortization, but are tested for impairment on an annual basis. Goodwill and
intangible assets with indefinite useful lives acquired in purchase business
combinations completed before July 1, 2001, are subject to amortization through
December 31, 2001, at which time amortization ceases. The Company adopted SFAS
141 and the provisions of SFAS 142 relating to nonamortization and amortization
of intangible assets on July 1, 2001, and adopted the remaining provisions of
SFAS 142 on January 1, 2002.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks,
interest-bearing bank balances and federal funds sold and securities purchased
under resale agreements. Generally, cash and cash equivalents have maturities of
three months or less, and accordingly, the carrying amount of these instruments
is deemed to be a reasonable estimate of fair value.
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 amount at which the securities were
acquired or sold plus accrued interest. It is the Company's policy to take
possession of securities purchased under resale agreements, which are primarily
U. S. Government and Government agency securities. The market value of these
securities is monitored, and additional securities are obtained when deemed
appropriate. The Company also monitors its exposure with respect to securities
sold under repurchase agreements, and a request for the return of excess
securities held by the counterparty is made when deemed appropriate.
SECURITIES
Securities are classified at the date of commitment or purchase as
trading account assets, securities available for sale or investment securities,
based on management's intention. Gain or loss on the sale of securities is
recognized on a specific identification, trade date basis.
Trading account assets, primarily debt securities, trading derivatives
and securities sold not owned, are recorded at fair value. Realized and
unrealized gains and losses are included in fee and other income. Interest on
trading account assets is recorded in interest income.
Securities available for sale are used as a part of the Company's
interest rate risk management strategy, and they may be sold in response to
changes in interest rates, changes in prepayment risk and other factors.
Securities available for sale are recorded at fair value with unrealized gains
and losses recorded net of tax as a component of other comprehensive income.
Equity securities for which there are no readily determinable fair values are
recorded at cost.
The fair value of trading account assets and securities is based on
quoted market prices or, if quoted market prices are not available, then the
fair value is estimated using quoted market prices for similar securities,
pricing models or discounted cash flow analyses.
Securities available for sale and investment securities on which there
is an unrealized loss that is deemed to be other-than-temporary are written down
to fair value with the write-down recorded as a realized loss.
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SECURITIZATIONS AND BENEFICIAL INTERESTS
In an asset securitization transaction that meets the applicable
criteria to be accounted for as a sale, assets are sold to a qualifying special
purpose entity ("QSPEs") which then issues beneficial interests in the form of
senior and subordinated interests collateralized by the assets. In some cases,
the Company may retain as much as 90 percent of the beneficial interests.
Additionally, from time to time, the Company may also resecuritize certain
assets in a new securitization transaction.
The carrying amount of the assets transferred is allocated between the
assets sold and the beneficial retained interests based on their relative fair
values at the date of transfer. A gain or loss is included in other fee income
for the difference between the carrying amount and the fair value of the assets
sold. Fair values are based on quoted market prices, or if market prices are not
available, then the fair value is estimated using discounted cash flow analyses
with market assumptions for collateral prepayment, delinquency and losses, and
discount rate.
Retained beneficial interests are accounted for under EITF 99-20,
Recognition of Interest Income and Impairment on Certain Investments ("EITF
99-20"), which the Company has adopted. EITF 99-20 conforms the accounting for
income recognition and impairment on certain beneficial interests to the
accounting for securities available for sale. Under EITF 99-20, if cash flow
estimates indicate that the holder of a beneficial interest will not collect all
estimated cash flows, then the security is considered impaired and is written
down to fair value. In connection with the adoption of EITF 99-20 in 2000, the
Company recorded an aftertax charge of $46 million ($71 million before tax),
which is presented in the consolidated statements of income as the cumulative
effect of a change in accounting principle.
DERIVATIVES USED FOR RISK MANAGEMENT
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as subsequently amended by SFAS
137 and SFAS 138, which establishes accounting and reporting standards for
derivatives and hedging activities. SFAS 133 was adopted on a prospective basis.
Under SFAS 133, the Company may designate a derivative as either a
hedge of the fair value of a recognized fixed rate asset or liability or an
unrecognized firm commitment ("fair value" hedge), a hedge of a forecasted
transaction or of the variability of future cash flows of a floating rate asset
or liability ("cash flow" hedge) or a foreign-currency fair value or cash flow
hedge ("foreign currency" hedge). All derivatives are recorded as assets or
liabilities on the balance sheet at their respective fair values with unrealized
gains and losses recorded either in other comprehensive income or in the results
of operations, depending on the purpose for which the derivative is held.
Derivatives that do not meet the criteria for designation as a hedge under SFAS
133 at inception, or fail to meet the criteria thereafter, are accounted for as
trading account assets.
Changes in the fair value of a derivative that is designated and
qualifies as a fair value hedge, along with the gain or loss on the hedged asset
or liability that is attributable to the hedged risk, are recorded in the
results of operations as other fee income. To the extent of the effectiveness of
a hedge, changes in the fair value of a derivative that is designated and
qualifies as a cash flow hedge are recorded in other comprehensive income, net
of tax. For all hedge relationships, ineffectiveness resulting from differences
between the changes in fair value or cash flows of the hedged item and changes
in fair value of the derivative are recognized in the results of operations as
other fee income. The net interest settlement on derivatives designated as fair
value or cash flow hedges is treated as an adjustment to the interest income or
expense of the hedged assets or liabilities.
At inception of a hedge transaction, the Company formally documents the
hedge relationship and the risk management objective and strategy for
undertaking the hedge. This process includes identification of the hedging
instrument, hedged item, risk being hedged and the methodology for measuring
both effectiveness and ineffectiveness. In addition, the Company assesses, both
at the inception of the hedge and on an ongoing quarterly basis, whether the
derivative used in the hedging transaction has been highly effective in
offsetting changes in fair value or cash flows of the hedged item, and whether
the derivative is expected to continue to be highly effective.
The Company discontinues hedge accounting prospectively when either it
is determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item; the derivative expires
or is sold, terminated or exercised; the derivative is de-designated because it
is unlikely that a forecasted transaction will occur; or management determines
that designation of the derivative as a hedging instrument is no longer
appropriate.
When hedge accounting is discontinued, the derivative is reclassified
as a trading account asset. When a fair value hedge is discontinued, the hedged
asset or liability is no longer adjusted for changes in fair value and the
existing basis adjustment is amortized or accreted over the remaining life of
the asset or liability. When a cash flow hedge is discontinued but the hedged
cash flows or forecasted transaction are still expected to occur, gains and
losses that were accumulated in other comprehensive income are amortized or
accreted into earnings. They are recognized in earnings immediately if the cash
flow hedge was discontinued because a forecasted transaction did not occur.
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The Company may occasionally enter into a contract ("host contract")
that contains a derivative that is embedded in the financial instrument. If
applicable, an embedded derivative is separated from the host contract and can
be designated as a hedge; otherwise, the derivative is recorded as a
freestanding derivative and classified as a trading account asset.
Prior to the adoption of SFAS 133, derivatives used for interest rate
risk management were not recorded at fair value. Rather, the net interest
settlement on designated derivatives that either effectively altered the
interest rate characteristics of assets or liabilities or hedged exposures to
risk was treated as an adjustment to the interest income or interest expense of
the related assets or liabilities.
LOANS
Loans are recorded at the principal balance outstanding, net of
unearned income. Interest income is recognized on an accrual basis. Loan
origination fees and direct costs as well as unearned premiums and discounts are
amortized as an adjustment to the yield over the term of the loan. Loan
commitment fees are generally deferred and amortized on a straight-line basis
over the commitment period.
A loan is considered to be impaired when based on current information,
it is probable the Company will not receive all amounts due in accordance with
the contractual terms of a loan agreement. The fair value is measured based on
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. A loan is also considered
impaired if its terms are modified in a troubled debt restructuring.
When the ultimate collectibility of the principal balance of an
impaired loan is in doubt, all cash receipts are applied to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent any interest has been foregone, and
then they are recorded as recoveries of any amounts previously charged off.
The accrual of interest is generally discontinued on loans, except
consumer loans, that become 90 days past due as to principal or interest unless
collection of both principal and interest is assured by way of
collateralization, guarantees or other security. Generally, loans past due 180
days or more are placed on nonaccrual status regardless of security. Consumer
loans that become 120 days past due are generally charged to the allowance for
loan losses. When borrowers demonstrate over an extended period the ability to
repay a loan in accordance with the contractual terms of a loan classified as
nonaccrual, the loan is returned to accrual status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that the Company
believes is adequate to absorb probable losses inherent in the loan portfolio as
of the date of the consolidated financial statements. The Company employs a
variety of tools as well as seasoned judgment in assessing the adequacy of the
allowance.
The Company's methodology for assessing the adequacy of the allowance
establishes both an allocated and an unallocated component. The allocated
component of the allowance for commercial loans is based principally on current
loan grades and historical loss rates. For consumer loans, it is based on loan
payment status and historical loss rates.
The unallocated component of the allowance represents the results of
analyses that estimate probable losses inherent in the portfolio that are not
fully captured in the allocated allowance. These analyses include industry
concentrations, model imprecision and the estimated impact of current economic
conditions on historical loss rates. We continuously monitor trends in loan
portfolio qualitative and quantitative factors, including trends in the levels
of past due, criticized and nonperforming loans. The trends in these factors are
used to evaluate the reasonableness of the unallocated component.
The Company believes it has developed appropriate policies and
processes in the determination of an allowance for loan losses reflective of the
Company's assessment of credit risk after careful consideration of known
relevant facts. In developing this assessment, the Company must necessarily rely
on estimates and exercise judgments regarding matters where the ultimate outcome
is unknown. Depending on changes in circumstances, future assessments of credit
risk may yield materially different results, which may require increases or
decreases in the allowance for loan losses at that time.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's bank subsidiaries'
allowances for loan losses. These agencies may require such subsidiaries to
recognize changes to the allowance based on their judgments about information
available to them at the time of their examination.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill related to acquisitions prior to July 1, 2001, is amortized on
a straight-line basis generally over periods ranging from fifteen years to
twenty-five years. Goodwill and identified intangible assets with indefinite
lives related to acquisitions on or after July 1, 2001, are not subject to
amortization. Other identified intangible assets are amortized over their
estimated useful lives using methods that reflect the pattern in which the
economic benefits are consumed. Unamortized intangible assets associated with
disposed assets are included in the determination of gain or loss on sale of the
disposed assets. The Company's unamortized goodwill and other intangible assets
are periodically reviewed to determine whether there have been any events or
circumstances to indicate that the recorded amount is not recoverable from
projected undiscounted net operating cash flows. If the projected undiscounted
net operating cash flows are less than the carrying amount, a loss is recognized
to reduce the carrying amount to fair value, and when appropriate, the
amortization period is also reduced.
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OTHER
Loans Held for Sale
Loans held for sale are recorded at the lower of aggregate cost or
market value (less cost to sell), where loans are aggregated by reference to
loan type and marketing strategy. Market value for residential mortgage loans is
determined based on quoted market prices, outstanding commitments from investors
or discounted cash flow analyses using current investor yield requirements.
Market values of commercial loans are determined based on quoted market prices
for the same or similar loans, or by discounted cash flow analyses. Loans held
for sale are transferred to other assets at the lower of their aggregate cost,
which is the carrying value net of deferred fees and costs and applicable
allowance for loan losses, or market value. If at the time of transfer, the
market value is less than the cost, the difference is recorded as additional
provision for loan losses. Subsequent declines in the market value of loans held
for sale are recorded in the results of operations as other fee income. Sales of
loans are recorded when the proceeds are received.
Principal Investments
Principal investments are recorded at market value with realized and
unrealized gains and losses included in principal investing income in the
results of operations. For publicly traded securities, market value is based on
quoted market prices, net of applicable discounts for trading restrictions and
liquidity. Investments in non-public securities are recorded at management's
estimate of market value which is generally the cost or, if the investee has
raised additional debt or capital, the value implied by these financings
adjusted for differences in the terms of the securities.
Off-Balance Sheet Entities
The Company enters into transactions or has contractual relationships
with various legal entities that are commonly referred to as special purpose
entities ("SPEs"), QSPEs or conduits. Subject to meeting the requirements under
accounting principles generally accepted in the United States of America,
certain of these entities, and where applicable, the assets sold to them by the
Company, are not included in the Company's consolidated financial statements
presented herein. These non-consolidated entities have legal standing separate
from the Company, are not controlled by the Company and are typically set up for
a single purpose such as securitization of financial assets. The Company may
have certain relationships with these entities, including sponsorship,
collateral manager, servicer of the assets held by the entity, trustee, or
administrative agent. In addition, the Company may retain certain interests in
these entities, which are recognized on the consolidated balance sheet.
SPEs and QSPEs sponsored by the Company hold assets sold to them by the
Company or by third parties and issue debt collateralized by the assets held in
the trust. In order for the assets and liabilities of a QSPE to be excluded from
the Company's consolidated balance sheet, these transactions must meet the
requirements of SFAS No.140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, at the inception of the transaction
and on an ongoing basis. In addition to issuing debt, SPEs also issue equity of
which a substantive amount (an amount equal to at least three percent of the
fair value of the assets held by the SPE) is held by substantive third parties
unrelated to the Company.
Conduits hold assets sold to it by multiple third parties and issue
commercial paper backed by all of the assets in the conduit to fund those
assets. The Company generally guarantees the liquidity of the commercial paper
issued by the conduits it sponsors and may also provide credit enhancements for
certain assets in the conduits. Under the terms of the credit enhancement
agreements, the Company may be required, under certain circumstances of credit
deterioration or default, to purchase assets from a conduit at an amount equal
to the carrying value of the asset.
Servicing Assets
In connection with certain businesses where the Company securitizes and
sells originated or purchased loans with servicing retained, servicing assets or
liabilities are recorded based on the relative fair value of the servicing
rights on the date the loans are sold. Servicing assets are amortized in
proportion to and over the estimated period of net servicing income. At December
31, 2001 and 2000, servicing assets, which are included in other assets, were
$261 million and $221 million, respectively. At December 31, 2001, there were no
servicing liabilities. At December 31, 2000, servicing liabilities, which were
included in other liabilities, were $15 million. Servicing assets are
periodically evaluated for impairment based on the fair value of those assets.
If, by individual stratum, the carrying amount of servicing assets exceeds fair
value, a valuation reserve is established. The valuation reserve is adjusted as
the fair value changes. For purposes of impairment evaluation and measurement,
the Company stratifies servicing assets based on predominant risk
characteristics of the underlying loans, including loan type, amortization type,
loan coupon rate, and in certain circumstances, period of origination. The
assumptions used in evaluating servicing assets for impairment include
cumulative net loss and prepayment rates on the underlying loans, and the
discount rate.
Equity Method Investments
The Company recognizes gain or loss on transactions where a subsidiary
or an equity method investee issues common stock. Recognition of a gain is
subject to a determination that the gain is realizable and that there are no
plans to reacquire the shares.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of loans and long-term debt are presented in Note 6 and
in Note 9, respectively. The fair value of demand deposits is the amount payable
on demand. The fair value of fixed-maturity certificates of deposit is estimated
based on the discounted value of contractual cash flows using the rates
currently offered for deposits of similar remaining maturities and fair value
approximates carrying value. The fair value estimates for deposits do not
include the benefit that results from the low-cost funding provided by deposit
liabilities compared to the cost of borrowing funds in the market. Substantially
all of the other financial assets and liabilities have maturities of three
months or less, and accordingly, the carrying value is deemed to be a reasonable
estimate of fair value.
Fair value estimates are based on existing financial instruments, as
defined, without estimating the value of certain ongoing businesses, the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. In the opinion of management, these add
significant value to the Company.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Company's stock options are
typically either noncompensatory or compensatory with the exercise price equal
to the fair value of the stock on the date of grant, and accordingly, no expense
is recognized. For restricted stock, which generally vests based on continued
service with the Company, the deferred compensation is measured as the fair
value of the shares on the date of grant, and the deferred compensation is
recognized as compensation expense in accordance with the applicable vesting
schedule, which is generally straight-line.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
income available to common stockholders by the sum of the weighted average
number of shares and the number of shares that would have been outstanding if
potentially dilutive shares had been issued. In calculating earnings per share,
the premium component of the forward price on equity forward contracts is
subtracted in calculating income available to common stockholders. For forward
purchase contracts, diluted shares include the share equivalent of the excess of
the forward price over the current market price of the shares.
RECLASSIFICATIONS
Certain amounts in 2000 and 1999 were reclassified to conform with the
presentation in 2001. These reclassifications have no effect on stockholders'
equity or net income as previously reported.
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NOTE 2: BUSINESS COMBINATIONS
FIRST UNION/WACHOVIA MERGER
On September 1, 2001, First Union Corporation ("First Union") and
Wachovia Corporation ("former Wachovia") merged in a transaction accounted for
under the purchase method. Accordingly, the results for 2001 include a full year
of First Union and four months of the former Wachovia. First Union was the legal
entity surviving the merger, and following the merger, changed its name to
"Wachovia Corporation." Under the terms of the merger, each share of common
stock of the former Wachovia was exchanged for two shares of common stock of
First Union, resulting in the issuance of 407 million common shares. The common
stock issued to effect the merger was valued at $31.15 per First Union share, or
$12.7 billion in the aggregate. In addition, former Wachovia stockholders were
given the right to choose to receive either a one-time cash payment of $0.48 per
former Wachovia share to be paid after the stockholder made the election, or two
shares of a new class of preferred stock, Dividend Equalization Preferred Shares
("DEPs"), which will pay dividends equal to the difference between the last
dividend paid by the former Wachovia of $0.30 per share and the common stock
dividend paid by the Company. This dividend will cease once the Company's total
dividends paid to common stockholders for four consecutive quarters equal at
least $1.20 per common share. The aggregate value of the one-time cash payment
and the estimated fair value of the DEPs, amounted to $98 million. See Note 10
for additional information. Additionally, 17 million options held by employees
of the former Wachovia were converted into 34 million options of the Company.
They vest in accordance with their original vesting schedule. The fair value of
the options issued, based on a Black-Scholes valuation, amounted to $187
million, which is included in the computation of the purchase price. The excess
of the fair value of the underlying shares over the strike price of the unvested
options was recorded as deferred compensation and is being amortized over the
remaining vesting period.
First Union and the former Wachovia entered into this merger to enhance
stockholder value by building a financial services company able to provide more
products and services for customers, more investment opportunities for clients
and significant capital to deploy in the future. The merger enhances the
Company's range of products and services and increases the distribution channels
available to customers. In this merger, the companies bring complementary
strengths, where First Union has invested heavily in technology and in
developing a wide range of products and services and the former Wachovia has
earned national acclaim for its high standard of customer service and long-term
customer relationships.
Under the purchase method of accounting, the assets and liabilities of
the former Wachovia were recorded at their respective fair values as of the
merger date. The fair values are preliminary and are subject to refinement as
information relative to the fair values as of September 1, 2001, becomes
available. Certain plans relative to the disposition of assets and the
termination of employees are still preliminary, and when finalized, may result
in adjustments to goodwill. Based on the ending former Wachovia tangible equity
of $5.5 billion, an aggregate purchase price of $13.0 billion and purchase
accounting adjustments amounting to a net write-down of $2.0 billion, the merger
resulted in total intangible assets of $9.5 billion. Of the total intangible
assets, $1.9 billion was allocated to deposit base intangible, $250 million to
customer relationships, $90 million to tradename and $7.2 billion to goodwill.
None of the intangible assets are tax deductible; however, deferred tax
liabilities were recorded on all intangible assets except goodwill. The deferred
tax liabilities will be reflected as a tax benefit in the consolidated statement
of income in proportion to and over the amortization period of the related
intangible assets. The deposit base intangible and customer relationship
intangible are being amortized over estimated useful lives of 6 years and 16
years, respectively, or a weighted average useful life of 7 years, using
accelerated methods that reflect the estimated pattern in which the economic
benefits will be consumed. The tradename intangible has an indefinite life, and
accordingly, is not subject to amortization.
In the fourth quarter of 2001, adjustments were made to the initial
purchase price allocation resulting in a net increase to goodwill of $153
million, net of the related deferred taxes. The more significant of these
adjustments related to intangible assets, impairment of a loan and exit costs.
The valuation of the deposit base premium was finalized resulting in a reduction
of $435 million in value from the preliminary September 1, 2001, value of $2.3
billion to $1.9 billion. The process of identifying and valuing other intangible
assets was completed resulting in recording a customer relationship intangible
of $250 million and a tradename intangible of $90 million. Amortization expense
in the fourth quarter includes an adjustment to reflect the final valuations as
if these intangible assets had been amortized on this basis since September 1,
2001. In another fourth quarter adjustment, a preacquisition contingent
impairment of a loan was resolved resulting in a $81 million write-down to the
basis of the loan to its estimated fair value as of September 1, 2001. Finally,
$76 million of exit costs, principally employee termination costs for employees
of the former Wachovia, were recorded based on decisions finalized in the fourth
quarter.
In 2001, $141 million in liabilities for exit costs were recorded as
purchase accounting adjustments. Through December 31, 2001, $45 million had been
charged against the accrual.
Included in the exit costs were employee termination benefits of $94
million, which included severance payments and related benefits for 770
employees terminated or notified of their pending termination in connection with
the merger. Of the terminated employees in 2001 approximately 34 percent were
from the Corporate and Investment Bank segment, 44 percent were from the Parent
segment, 10 percent were from the Capital Management segment, 10 percent were
from the General Bank segment and 2 percent were from the Wealth Management
segment. The remaining exit costs were primarily employee relocation and
transaction costs.
74
- --------------------------------------------------------------------------------
The statement of net assets acquired at fair value as of September 1,
2001, and the computation of the purchase price and goodwill related to the
merger of First Union and the former Wachovia are presented below.
STATEMENT OF NET ASSETS ACQUIRED (AT FAIR VALUE)
(In millions) September 1, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,604
Trading account assets 1,106
Securities 8,217
Loans, net of unearned income 50,394
Allowance for loan losses (766)
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net 49,628
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill and other intangible assets 9,475
Other assets 4,976
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 77,006
===================================================================================================================================
LIABILITIES
Deposits 43,146
Short-term borrowings 8,106
Other liabilities 3,094
Long-term debt 9,662
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 64,008
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets acquired $ 12,998
===================================================================================================================================
PURCHASE PRICE AND GOODWILL
(In millions) September 1, 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Purchase price $ 12,998
Former Wachovia tangible stockholders' equity (5,532)
- -----------------------------------------------------------------------------------------------------------------------------------
Excess of purchase price over carrying value of net tangible assets acquired 7,466
Purchase accounting adjustments
Securities 75
Loans and leases 1,708
Premises and equipment 132
Other assets 202
Deposits 152
Other liabilities (95)
Long-term debt (165)
- -----------------------------------------------------------------------------------------------------------------------------------
Total intangible assets 9,475
Deposit base intangible (1,913)
Customer relationships (250)
Tradename (90)
- -----------------------------------------------------------------------------------------------------------------------------------
Goodwill $ 7,222
===================================================================================================================================
75
- --------------------------------------------------------------------------------
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
The pro forma consolidated condensed statements of income for the years
ended December 31, 2001 and 2000, are presented below. The unaudited pro forma
information presented below is not necessarily indicative of the results of
operations that would have resulted had the merger been completed at the
beginning of the applicable periods presented, nor is it necessarily indicative
of the results of operations in future periods.
The Company expects to realize significant revenue enhancements and
cost savings as a result of the merger which also are not reflected in the pro
forma consolidated condensed statements of income. No assurance can be given
with respect to the ultimate level of such revenue enhancements or cost savings.
The pro forma purchase accounting adjustments related to securities,
loans and leases, deposits and long-term debt are being accreted or amortized
into income using methods which approximate a level yield over their respective
estimated lives. Purchase accounting adjustments related to loan commitments,
letters of credit and lease commitments are being accreted or amortized to fee
and other income using primarily accelerated methods over their estimated lives,
and adjustments to owned and leased real estate are recorded to noninterest
expense using the straight-line method over their estimated lives.
Year Ended December 31, 2001
----------------------------------------------------------
The Former Pro Forma Pro Forma
(In millions, except per share data) Company (a) Wachovia (b) Adjustments Combined
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 16,100 3,034 75 19,209
Interest expense 8,325 1,552 (126) 9,751
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,775 1,482 201 9,458
Provision for loan losses 1,947 370 -- 2,317
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,828 1,112 201 7,141
Securities transactions - portfolio (67) 96 -- 29
Fee and other income 6,363 1,126 36 7,525
Merger-related and restructuring charges 106 122 -- 228
Noninterest expense 9,725 1,613 320 11,658
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 2,293 599 (83) 2,809
Income taxes 674 245 (29) 890
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,619 354 (54) 1,919
Discontinued operations, net of income taxes -- 514 -- 514
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 1,619 868 (54) 2,433
Dividends on preferred stock 6 -- -- 6
- -----------------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 1,613 868 (54) 2,427
===================================================================================================================================
PER COMMON SHARE DATA
Basic
Income from continuing operations $ 1.47 1.72 -- 1.40
Net income 1.47 4.23 -- 1.77
Diluted
Income from continuing operations 1.45 1.71 -- 1.39
Net income $ 1.45 4.19 -- 1.76
AVERAGE SHARES
Basic 1,096 205 -- 1,370
Diluted 1,105 207 -- 1,379
===================================================================================================================================
(a) Includes First Union for the year ended December 31, 2001, and the
former Wachovia for the four months ended December 31, 2001.
(b) Includes the former Wachovia for the eight months ended August 31,
2001.
76
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
----------------------------------------------------
The Former Pro Forma Pro Forma
(In millions, except per share data) Company(a) Wachovia(b) Adjustments Combined
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $17,534 4,699 121 22,354
Interest expense 10,097 2,549 (194) 12,452
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,437 2,150 315 9,902
Provision for loan losses 1,736 390 -- 2,126
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 5,701 1,760 315 7,776
Securities transactions - portfolio (1,125) -- -- (1,125)
Fee and other income 7,837 1,570 71 9,478
Merger-related and restructuring charges 2,190 136 -- 2,326
Noninterest expense 9,520 2,189 506 12,215
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes and
cumulative effect of a change in accounting principle 703 1,005 (120) 1,588
Income taxes 565 342 (42) 865
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before cumulative
effect of a change in accounting principle 138 663 (78) 723
Discontinued operations, net of income taxes -- 169 -- 169
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 138 832 (78) 892
Cumulative effect of a change in the accounting for beneficial
interests, net of income taxes (46) -- -- (46)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 92 832 (78) 846
=================================================================================================================================
PER SHARE DATA
Basic
Income from continuing operations before cumulative
effect of a change in accounting principle $ 0.12 3.27 -- 0.53
Income before cumulative effect of a change in accounting principle 0.12 3.27 -- 0.65
Net income 0.07 4.10 -- 0.61
Diluted
Income from continuing operations before cumulative
effect of a change in accounting principle 0.12 3.24 -- 0.52
Income before cumulative effect of a change in accounting principle 0.12 3.24 -- 0.65
Net income $ 0.07 4.07 -- 0.61
AVERAGE SHARES
Basic 971 203 -- 1,377
Diluted 974 204 -- 1,382
=================================================================================================================================
(a) Includes First Union for the year ended December 31, 2000.
(b) Includes the former Wachovia for the year ended December 31, 2000.
OTHER MERGERS
Additionally, in 2001, the Company acquired a brokerage business with
assets of $59 million for $103 million in cash. In 2000, the Company acquired
four entities which, at the date of the respective acquisitions, had assets of
$58 million in the aggregate. These entities were acquired for 1.2 million
shares of the Company's common stock and $90 million in cash, or an aggregate
purchase price of $124 million.
On October 1, 1999, the Company acquired EVEREN Capital Corporation
("EVEREN"), which at June 30, 1999, had assets of $2.9 billion, for 31 million
shares of the Company's common stock, 13 million of which were repurchased in
the open market at a cost of $559 million in 1999, and 15 million of which were
repurchased in the open market at a cost of $479 million in 2000. In connection
with this purchase accounting acquisition, the Company recorded $901 million of
goodwill based on a purchase price of $1.1 billion.
Information on merger-related and restructuring charges related to
certain of the acquisitions are included in Note 3.
77
- --------------------------------------------------------------------------------
NOTE 3: MERGER-RELATED AND RESTRUCTURING CHARGES
In 2001, 2000 and 1999, the Company recorded merger-related and
restructuring charges of $106 million, $2.2 billion and $404 million,
respectively. The significant components of these charges, as well as activity
related to the restructuring accrual, are presented below.
MERGER-RELATED CHARGES
Merger-related charges consist principally of transaction costs and
expenses related to combining operations such as systems conversions and
integration costs. In 2001, the Company incurred merger-related charges of $96
million related to the merger with the former Wachovia, comprised of $21 million
of merger-related personnel costs (for example, incentives) and $75 million of
other costs, primarily transaction related. Additionally, in 2001, 2000 and
1999, the Company incurred merger-related charges of $25 million, $78 million
and $95 million, respectively, related to other mergers.
Merger-related charges and restructuring charges for each of the years
in the three-year period ended December 31, 2001, are presented below.
Years Ended December 31,
-------------------------------
(In millions) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
MERGER-RELATED AND RESTRUCTURING CHARGES -
FIRST UNION/WACHOVIA
Merger-related charges
Personnel costs $ 21 -- --
Other 75 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total merger-related charges 96 -- --
Restructuring charges
Employee termination benefits 69 -- --
Other 13 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total restructuring charges 82 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total First Union/Wachovia merger-related and restructuring charges 178 -- --
- ----------------------------------------------------------------------------------------------------------------------------
OTHER MERGER-RELATED AND RESTRUCTURING CHARGES
Merger-related charges from other mergers 25 78 95
Strategic repositioning restructuring charge (reversals), net (83) 2,129 --
March 1999 restructuring charge (reversals), net (14) (16) 345
Other restructuring charges (reversals), net -- (1) (36)
- ----------------------------------------------------------------------------------------------------------------------------
Total merger-related and restructuring charges $ 106 2,190 404
============================================================================================================================
RESTRUCTURING CHARGES
As a result of restructuring plans in connection with the First
Union/Wachovia merger in 2001 and in connection with the Company's strategic
repositioning in 2000 and the March 1999 restructuring, the Company displaced
employees and recorded charges for the resulting employee termination benefits
to be paid, either in a lump sum or deferred over an extended period. In
addition, the Company recorded occupancy-related charges that included
write-downs to fair value (less cost to sell) of owned premises that were held
for disposition as a result of the plans, and cancellation payments or the
present values of the remaining lease obligations for leased premises, or
portions thereof, that were associated with lease abandonments. Other assets,
primarily computer hardware and software, the value of which was considered to
be impaired since they no longer would be used as a result of the closure of
facilities or the reduction in workforce, were also written down to fair value.
Contract cancellation costs were also recorded representing the cost to buy out
the remaining term or the present value of the remaining payments on contracts
that provided no future benefit to the Company as a result of these plans.
78
- --------------------------------------------------------------------------------
In 2001, $82 million in restructuring charges were recorded in
connection with the First Union/Wachovia merger. Through December 31, 2001, $19
million had been charged against the accrual and $63 million remained in the
accrual.
In 2000, $2.1 billion in restructuring charges were recorded in
connection with the Company's strategic repositioning plan. In 2001, a
restructuring reversal of $83 million was recorded in connection with the
completion of the strategic repositioning announced in June 2000. These
reversals principally related to employee termination, contract cancellation and
occupancy costs. At December 31, 2001, $3 million of the accrual remained,
representing amounts still to be paid in employee termination benefits.
In 1999, a $347 million restructuring charge related to the
restructuring plan announced in March 1999 was recorded. In 2001, 2000 and 1999,
reversals of $14 million, $16 million and $2 million, respectively, primarily
relating to asset write-downs, were recorded. At December 31, 2001, $10 million
of the accrual remained, representing amounts still to be paid in contract
cancellations.
At December 31, 2001, the restructuring accrual included $50 million
related primarily to the CoreStates Financial Corp ("CoreStates") acquisition,
which principally represents amounts still to be paid in employee termination
benefits.
Components of the restructuring charges in 2001, 2000 and 1999 are
discussed below.
Employee termination benefits were $69 million in 2001 and include
severance payments and related benefits for 470 employees who have been
displaced or notified of their pending termination date as of December 31, 2001.
Employee termination benefits of $172 million in 2000 and $200 million in 1999
included severance payments and related benefits for 5,683 employees in 2000 and
5,635 employees in 1999 originally expected to be terminated in connection with
these plans. As noted above, a reversal of the strategic repositioning
restructuring charge was recorded in 2001, in part to reflect the lower number
of employee terminations ultimately resulting from that plan. The reduction to
4,321 displacements was primarily caused by higher than expected attrition and
placements of employees to other positions. Of the terminated employees in 2001,
approximately 8 percent were from the General Bank segment, 25 percent were from
the Corporate and Investment Bank segment, 36 percent were from the Parent
segment, 29 percent were from the Capital Management segment and 2 percent were
from the Wealth Management segment. Of the terminated employees in 2000,
approximately 80 percent were from the General Bank segment, 8 percent were from
the Corporate and Investment Bank segment and the remaining 12 percent were
primarily from the Parent segment. Of the terminated employees in 1999,
approximately 50 percent were from the General Bank segment, 40 percent were
from the Parent segment and 10 percent were from the Capital Management and
Corporate and Investment Bank segments. Through December 31, 2001, $17 million
in employee termination benefits related to the terminations in 2001, $133
million in employee termination benefits related to the terminations in 2000 and
$186 million related to the terminations in 1999 has been paid and reversals of
$36 million and $14 million related to terminations in 2000 and 1999,
respectively, have been recorded, leaving $52 million and $3 million from the
2001 and 2000 terminations, respectively, for future payments.
Occupancy charges were $108 million in 2000 and $55 million in 1999.
These charges included $18 million in 2000 and $24 million in 1999 related to
the write-down of owned property as well as leasehold improvements and furniture
and equipment. These write-downs resulted from excess space due to exiting of
businesses, the reduction in the workforce and from branch closings. The amount
of the write-down represents the difference between the carrying value of the
property at the time that it was no longer held for use and the estimated net
proceeds expected to be received upon disposal. The fair value was estimated
using customary appraisal techniques such as evaluating the real estate market
conditions in the region and comparing market values to comparable properties.
The remainder of the occupancy charges in 2001, in 2000 and in 1999 represents
the present value of future lease obligations or lease cancellation penalties in
connection with the closure of branches and sales offices as well as certain
other corporate space.
As a result of the decision in 2000 to discontinue the subprime
mortgage lending business at The Money Store Inc. ("TMSI"), and therefore
generate no future cash flows from that business, the Company concluded that the
goodwill associated with that business and the related network intangible were
no longer recoverable. Therefore, an impairment charge for the unamortized
balance of these intangibles of $1.8 billion was included in the restructuring
charge. The unamortized balance of goodwill associated with the small business
and student lending businesses of TMSI is fully recoverable from future cash
flows, and accordingly, is not impaired.
Other asset impairments, which were the direct result of the reduction
in the workforce and certain other restructuring activities, amounted to $18
million in 2000 and $70 million in 1999. They consisted primarily of computer
hardware write-offs. Depreciation was discontinued when the assets were
determined to be held for disposal. The net book value of long-lived assets held
for sale at December 31, 2001, was not significant.
Also included in the restructuring charges were $74 million in 2000 and
$25 million in 1999 related to contract cancellations, $60 million of which
represents termination fees for contracts cancelled in connection with the sale
of the credit card portfolio in 2000, and $14 million of which related to
exiting the indirect auto lending and leasing business in 1999.
79
- --------------------------------------------------------------------------------
A reconciliation of the restructuring accruals for each of the years in
the three-year period ended December 31, 2001, is presented below.
------------------------------------------------------------------------------
First Union/ 2000
Wachovia Strategic March 1999
(In millions) Merger Repositioning Restructuring Other Total
- ------------------------------------------------------------------------------------------------------------------
ACTIVITY IN THE RESTRUCTURING
ACCRUAL
Balance, December 31, 1998 $ -- -- -- 398 398
Restructuring charges -- -- 347 6 353
Cash payments -- -- (206) (228) (434)
Reversal of prior accruals -- -- (2) (42) (44)
Noncash write-downs and
other adjustments -- -- (55) (56) (111)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 -- -- 84 78 162
Restructuring charges -- 2,129 -- -- 2,129
Cash payments -- (92) (30) (18) (140)
Reversal of prior accruals -- -- (16) (1) (17)
Noncash write-downs and
other adjustments -- (1,788) (8) 4 (1,792)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- 249 30 63 342
Restructuring charges 82 -- -- -- 82
Cash payments (19) (103) (5) (13) (140)
Reversal of prior accruals -- (83) (14) -- (97)
Noncash write-downs and
other adjustments -- (60) (1) -- (61)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 63 3 10 50 126
==================================================================================================================
NOTE 4: SECURITIES
Information related to securities available for sale for each of the
years in the two-year period ended December 31, 2001, and Investment Securities
for the year ended December 31, 2000, is disclosed in Table 6 and in Table 7,
respectively, which is incorporated herein by reference. In connection with the
adoption of SFAS 133 on January 1, 2001, all investment securities were
reclassified to securities available for sale.
80
- --------------------------------------------------------------------------------
NOTE 5: SECURITIZATIONS AND RETAINED BENEFICIAL INTERESTS
At December 31, 2001, the Company had $18 billion of retained interests
from securitization transactions. These retained interests included $5.3 billion
of retained agency securities, $11 billion of subordinated notes and $871
million of residual interests. Of the $18 billion of retained interests, $7.5
billion (including the $5.3 billion of retained agency securities) were valued
using quoted market prices. The remaining $10 billion of retained interests
consists of subordinated and residual interests for which there are no quoted
market prices. These have been valued using various modeling techniques, which
incorporate market assumptions for credit losses, prepayments and discount
rates.
The table below presents original economic assumptions and cash flow
activity for transactions completed in 2001 and credit losses and sensitivity
analysis for the $10 billion of retained interests as of December 31, 2001.
DECEMBER 31, 2001
---------------------------------------------------------------------------------------
REAL ESTATE
------------------------------------------ COLLATERALIZED
EQUITY LOAN/DEBT MUNICIPAL
(Dollars in millions) COMMERCIAL RESIDENTIAL LINES OBLIGATIONS SBA SECURITIES
- ---------------------------------------------------------------------------------------------------------------------------------
ORIGINAL ECONOMIC
ASSUMPTIONS
Prepayment speed (CPR) -- % 22.63 47.31 -- 9.11 --
Weighted average life 12.77 yrs 2.34 1.32 -- 11.33 --
Expected credit losses 3.29 % 14.58 0.31 -- 3.55 --
Residual cash flow discount rate 10.40 % 18.00 11.00 -- 15.00 --
- ---------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSSES
Actual losses to date -- % 3.58 0.01 1.96 2.89 --
- ---------------------------------------------------------------------------------------------------------------------------------
SENSITIVITY ANALYSIS (a)
Carrying value (fair value) of
retained interests $ 36 9,333 86 46 188 342
Weighted average life 10.03 yrs 1.91 1.68 5.75 6.56 10.79
Prepayment speed -- % 39.60 47.31 20.00 15.92 --
Impact of 10% adverse change $ -- (32) (8) -- (6) --
Impact of 20% adverse change $ -- (64) (15) -- (14) --
Expected credit losses 2.96 % 2.34 0.31 6.07 2.22 --
Impact of 10% adverse change $ (2) (66) (1) (3) (6) --
Impact of 20% adverse change $ (3) (132) (2) (5) (13) --
Residual cash flow
discount rate 10.40 % 15.03 11.00 18.00 15.00 12.63
Impact of 10% adverse change $ (2) (22) (1) (3) (14) (25)
Impact of 20% adverse change $ (5) (43) (2) (5) (22) (48)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW ACTIVITY (b) (c) (d)
Proceeds from
New securitizations $3,659 2,411 2,495 1,311 284 1,264
Collections used by trust to
purchase new balances in
revolving securitizations -- -- 134 -- -- --
Service fees received 7 5 6 14 -- 5
Cash flow received from
retained interests 45 16 13 -- 1 75
Servicing advances, net $ 2 -- -- -- -- --
=================================================================================================================================
(a) In addition, the Company has $81 million of retained interests in student
loan securitizations for which price sensitivity is insignificant.
(b) There were no purchases of delinquent or foreclosed assets in 2001 for all
securitization types. The Company purchased $33 million of loans from the
collateralized loan/debt obligations.
(c) From time to time, the Company resecuritizes retained interests. Since cash
flow information is presented for original securitization proceeds, the
proceeds from resecuritizations are not included in the cash flow activity
information.
(d) In addition, the Company securitized a portfolio of equity securities,
received $1.1 billion in proceeds and entered into a total return swap.
81
- --------------------------------------------------------------------------------
At December 31, 2000, the Company had $16 billion of retained interests
from securitization transactions. These retained interests included $3.5 billion
of retained agency securities, $12 billion of subordinated notes and $298
million of residual interests. Of the $16 billion of retained interests, $4.9
billion (including the $3.5 billion of retained agency securities) were valued
using quoted market prices. The remaining $11 billion of retained interests
consists of subordinated and residual interests for which there are no quoted
market prices. These have been valued using various modeling techniques, which
incorporate market assumptions for credit losses, prepayments and discount
rates.
The table below presents original economic assumptions and cash flow
activity for transactions completed in 2000 and credit losses and sensitivity
analysis for the $11 billion of retained interests as of December 31, 2000.
December 31, 2000
---------------------------------------------------------------------------------------
Real Estate Collateralized
-------------------------- Loan/Debt Municipal
(Dollars in millions) Commercial Residential Obligations SBA Student Securities (c)
- ---------------------------------------------------------------------------------------------------------------------------------
ORIGINAL ECONOMIC
ASSUMPTIONS
Prepayment speed (CPR) -- % 48.00 20.00 13.60 -- --
Weighted average life 8.85 yrs 1.72 11.08 5.72 -- 11.27
Expected credit losses 2.81 % 0.25 2.53 2.50 -- --
Residual cash flow discount rate 10.40 % 11.00 19.47 15.00 -- 15.68
- ---------------------------------------------------------------------------------------------------------------------------------
CREDIT LOSSES
Sum of actual and projected 2.81 % 0.25 2.72 2.50 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
SENSITIVITY ANALYSIS (a)
Carrying value (fair value) of
retained interests $ 103 10,150 73 182 80 188
Weighted average life 8.85 yrs 2.03 10.28 7.52 8.64 10.66
PREPAYMENT SPEED -- % 36.79 20.00 12.30 8.63 --
Impact of 10% adverse change $ -- (38) -- (5) (2) --
Impact of 20% adverse change $ -- (72) -- (10) (4) --
EXPECTED CREDIT LOSSES 2.81 % 1.91 3.64 3.20 0.21 --
Impact of 10% adverse change $ (2) (40) (1) (4) (1) --
Impact of 20% adverse change $ (3) (70) (2) (9) (1) --
RESIDUAL CASH FLOW
DISCOUNT RATE 10.40 % 13.69 15.00 15.00 15.00 16.00
Impact of 10% adverse change $ (5) (15) (4) (13) (4) (9)
Impact of 20% adverse change $ (10) (30) (7) (21) (8) (17)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOW ACTIVITY (a) (b)
Proceeds from
New securitizations $ 1,535 959 1,545 209 -- 1,610
Collections used by trust to
purchase new balances in
revolving securitizations -- 26 111 -- -- --
Service fees received 6 5 10 14 37 2
Cash flow received from
retained interests 17 24 11 36 10 21
Servicing advances, net $ 1 -- -- 2 -- --
================================================================================================================================
(a) In 2000, the Company completed the sale of credit card receivables. Credit
card cash flow activity in 2000 included new securitizations of $225 million,
collections used by trust to purchase new balances in revolving securitizations
of $3.8 billion, service fees received of $7 million and cash flow received
from retained interests of $127 million.
(b) There were no purchases of delinquent or foreclosed assets in 2000 for all
securitization types. The Company purchased $55 million of loans from the
collateralized loan/debt obligations.
(c) Price sensitivity attributable to prepayment and credit risk was
insignificant.
82
- --------------------------------------------------------------------------------
The sensitivity analysis is hypothetical and should be used with
caution. For example, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear.
Additionally, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption, when in reality, changes in any one factor may result in changes in
other factors.
Managed loans at December 31, 2001 and 2000, and related loans past due
90 days or more and net loan losses are presented below.
DECEMBER 31, 2001 December 31, 2000
--------------------------------------- -------------------------------------------
LOANS PAST LOAN Loans Past Loan
DUE 90 LOSSES, Due 90 Losses,
(In millions) BALANCE DAYS (a) NET Balance Days (a) Net
- ---------------------------------------------------------------------------------------------------------------------------------
MANAGED LOANS
Commercial
Loans held in portfolio $ 116,072 82 695 87,447 8 488
Securitized loans 5,827 131 81 4,877 68 32
Loans held for sale included
in other assets 1,478 -- -- 953 -- --
Consumer
Loans held in portfolio 57,423 206 242 42,795 175 263
Securitized loans 14,095 406 1,083 11,862 718 295
Securitized loans included
in securities 15,120 260 54 12,747 92 55
Loans held for sale included
in other assets 6,285 40 45 7,193 23 108
- ---------------------------------------------------------------------------------------------------------------------------------
Total managed loans 216,300 1,125 2,200 167,874 1,084 1,241
Less
Securitized loans (19,922) (537) (1,164) (16,739) (786) (327)
Securitized loans included
in securities (15,120) (260) (54) (12,747) (92) (55)
Loans held for sale included
in other assets (7,763) (40) (45) (8,146) (23) (108)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans held in portfolio $ 173,495 288 937 130,242 183 751
=================================================================================================================================
(a) Includes bankruptcies and foreclosures.
83
- --------------------------------------------------------------------------------
NOTE 6: LOANS
December 31,
-----------------------
(In millions) 2001 2000
- -------------------------------------------------------------------------
COMMERCIAL
Commercial, financial and agricultural $ 61,258 54,207
Real estate - construction and other 7,969 3,104
Real estate - mortgage 17,234 9,218
Lease financing 21,958 15,465
Foreign 7,653 5,453
- -------------------------------------------------------------------------
Total commercial 116,072 87,447
- -------------------------------------------------------------------------
CONSUMER
Real estate - mortgage 22,139 17,708
Installment loans 34,666 22,972
Vehicle leasing 618 2,115
- -------------------------------------------------------------------------
Total consumer 57,423 42,795
- -------------------------------------------------------------------------
Total loans $173,495 130,242
=========================================================================
Directors and executive officers of the Parent Company and their
related interests were indebted to the Company in the aggregate amounts of $2.2
billion and $1.7 billion at December 31, 2001 and 2000, respectively. From
January 1, 2001, through December 31, 2001, directors and executive officers of
the Parent Company and their related interests borrowed $527 million and repaid
$389 million. Included in the $2.2 billion at December 31, 2001, is $330 million
related to directors and officers of the former Wachovia. In the opinion of
management, these loans do not involve more than the normal risk of
collectibility, nor do they include other features unfavorable to the Company.
At December 31, 2001 and 2000, nonaccrual and restructured loans
amounted to $1.8 billion and $1.5 billion, respectively. In 2001, 2000 and 1999,
$184 million, $126 million and $81 million, respectively, in gross interest
income would have been recorded if all nonaccrual and restructured loans had
been performing in accordance with their original terms and if they had been
outstanding throughout the entire period, or since origination if held for part
of the period. Interest collected on these loans and included in interest income
in 2001, 2000 and 1999 amounted to $41 million, $31 million and $23 million,
respectively.
At December 31, 2001 and 2000, impaired loans amounted to $1.5 billion
and $923 million, respectively. Included in the allowance for loan losses was
$219 million related to $639 million of impaired loans at December 31, 2001, and
$167 million related to $642 million of impaired loans at December 31, 2000. For
the years ended December 31, 2001 and 2000, the average recorded investment in
impaired loans was $1.1 billion and $711 million, respectively; and $22 million
and $27 million, respectively, of interest income was recognized on loans while
they were impaired.
At December 31, 2001 and 2000, loans held for sale, which are
classified in other assets, amounted to $7.8 billion and $8.1 billion,
respectively. In 2001 and 2000, net write-downs to the lower of cost or market
value recorded subsequent to the transfer of the loans to held for sale were
$188 million and $274 million, respectively. There were none in 1999.
At December 31, 2001 and 2000, the fair value of portfolio loans, net
of unearned income and the allowance for loan losses, was $161 billion and $122
billion, respectively. The fair values of performing loans for all portfolios
were calculated by discounting estimated cash flows through expected maturity
dates using estimated market yields that reflect the credit and interest rate
risks inherent in each category of loans and prepayment assumptions. Estimated
fair values for the commercial loan portfolio were based on weighted average
discount rates ranging from 3.60 percent to 7.65 percent and 6.97 percent to
8.54 percent at December 31, 2001 and 2000, respectively, and for the consumer
portfolio from 5.39 percent to 10.40 percent and 7.00 percent to 9.67 percent,
respectively. For performing residential mortgage loans, fair values are
estimated using a discounted cash flow analysis utilizing yields for comparable
mortgage-backed securities. The fair value of nonperforming loans is calculated
by estimating the timing and amount of cash flows. These cash flows are
discounted using estimated market yields commensurate with the risk associated
with such cash flows.
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NOTE 7: ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
---------------------------------------
(In millions) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Balance, beginning of year $ 1,722 1,757 1,826
Provision for loan losses relating to loans
transferred to other assets or sold 284 657 --
Provision for loan losses 1,663 1,079 692
Former Wachovia balance, September 1, 2001 766 -- --
Allowance relating to loans acquired, transferred
to other assets or sold (503) (1,020) (73)
- ----------------------------------------------------------------------------------------------------
Total 3,932 2,473 2,445
- ----------------------------------------------------------------------------------------------------
Loan losses (1,079) (867) (828)
Loan recoveries 142 116 140
- ----------------------------------------------------------------------------------------------------
Loan losses, net (937) (751) (688)
- ----------------------------------------------------------------------------------------------------
Balance, end of year $ 2,995 1,722 1,757
====================================================================================================
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings of the Company at December 31, 2001, 2000 and
1999, which include securities sold under repurchase agreements and accrued
interest thereon, and the related maximum amounts outstanding at the end of any
month during such periods, are presented below.
December 31, Maximum Outstanding
--------------------------------- -------------------------------------
(In millions) 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Federal funds purchased $ 2,502 2,090 1,909 4,554 5,033 4,611
Securities sold under repurchase agreements 29,846 26,511 34,122 29,979 35,305 34,122
Fixed and variable rate bank notes -- 55 435 296 560 3,671
Interest-bearing demand deposits issued to
the U. S. Treasury 195 979 4,569 5,559 5,384 4,569
Commercial paper 3,314 2,320 2,364 3,925 3,943 2,871
Other 8,528 7,491 6,708 9,210 8,480 7,987
- --------------------------------------------------------------------------------------
Total $ 44,385 39,446 50,107
============================================================================================================================
December 31,
------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE INTEREST RATES
Federal funds purchased and securities sold
under repurchase agreements 1.69 % 6.37 5.06
Fixed and variable rate bank notes -- 7.04 5.80
Commercial paper 1.02 % 6.14 4.10
WEIGHTED AVERAGE MATURITIES (IN DAYS)
Fixed and variable rate bank notes -- 47 48
Commercial paper 4 10 7
============================================================================================================================
Maturities of federal funds purchased and securities sold under
repurchase agreements in each of the years in the three-year period ended
December 31, 2001, were not greater than 341 days.
Included in Other are securities sold short of $5.7 billion at December
31, 2001. Included in Other are Federal Home Loan Bank borrowings and securities
sold short of $400 million and $4.4 billion, respectively, at December 31, 2000;
and $600 million and $4.5 billion, respectively, at December 31, 1999.
85
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NOTE 9: LONG-TERM DEBT
December 31,
-----------------------------
(In millions) 2001 2000
- --------------------------------------------------------------------------------------------------------------
NOTES AND DEBENTURES ISSUED BY THE PARENT COMPANY
Notes
4.95% to 7.70%, due 2003 to 2006 (par value $200 to $1,750) (a) $ 6,475 3,084
Floating rate, due 2002 to 2005 (par value $50 to $400) (a) 2,217 2,367
Floating rate extendible, due 2005 (b) 10 10
Subordinated notes
5.625% to 8.15%, due 2002 to 2009 (par value $150 to $400) (a) 4,702 2,664
8.00%, due 2009 (par value $150) (c) 149 208
6.605%, due 2025 (par value $250) (a) 250 --
6.30%, Putable/Callable, due 2028 (par value $200) 200 200
Floating rate, due 2003 (par value $150) (a) 150 150
Subordinated debentures
6.55% to 7.574%, due 2026 to 2035 (par value $250 to $300) (d) 794 794
Hedge-related basis adjustments 389 --
- --------------------------------------------------------------------------------------------------------------
Total notes and debentures issued by the Parent Company 15,336 9,477
- --------------------------------------------------------------------------------------------------------------
NOTES ISSUED BY SUBSIDIARIES
Notes, primarily notes issued under global bank note programs,
varying rates and terms to 2040 11,630 16,457
Subordinated notes
5.875% to 9.375%, due 2002 to 2006 (par value $100 to $200) (a) (e) 925 1,075
Bank, 5.80% to 7.875%, due 2006 to 2036 (par value $50 to $1,000) 2,544 2,548
6.625% to 8.375%, due 2002 to 2007 (par value $25 to $150) (a) 574 570
- --------------------------------------------------------------------------------------------------------------
Total notes issued by subsidiaries 15,673 20,650
- --------------------------------------------------------------------------------------------------------------
OTHER DEBT
Trust preferred securities 2,989 2,028
Collateralized notes, 5.65%, due 2006 2,489 --
4.556% auto securitization financing, due 2008 (e) 304 861
Advances from the Federal Home Loan Bank 4,933 2,762
Capitalized leases, rates generally ranging from 4.53% to 14.51% 25 25
Mortgage notes and other debt of subsidiaries, varying rates and terms 10 6
Hedge-related basis adjustments (26) --
- --------------------------------------------------------------------------------------------------------------
Total other debt 10,724 5,682
- --------------------------------------------------------------------------------------------------------------
Total $ 41,733 35,809
==============================================================================================================
(a) Not redeemable prior to maturity.
(b) Redeemable in whole or in part at the option of the Parent Company
only on certain specified dates.
(c) Redeemable in whole and not in part at the option of the Parent
Company only on certain specified dates.
(d) Redeemable in whole or in part at the option of the holders only on
certain specified dates.
(e) Assumed by the Parent Company.
86
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At December 31, 2001, floating rate notes of $2.2 billion had rates of
interest ranging from 2.15 percent to 2.85 percent.
The interest rate on the floating rate extendible notes is 2.025
percent to March 15, 2002.
The 6.30 percent putable/callable notes are subject to mandatory
redemption on April 15, 2008, and under certain specified conditions, they may
be put to the Parent Company by the trustee on or after this date.
The interest rate on the floating rate subordinated notes is 4.125
percent to April 22, 2002.
At December 31, 2001, bank notes of $10.9 billion had floating rates
of interest ranging from 1.65 percent to 4.148 percent, and $736 million of the
notes had fixed rates of interest ranging from 5.68 percent to 8.375 percent.
At December 31, 2001 and 2000, statutory business trusts (the
"Trusts") created by the Parent Company had outstanding with the Parent Company
trust preferred securities with an aggregate par value of $2.3 billion. The
trust preferred securities have interest rates ranging generally from 7.64
percent to 8.04 percent and maturities ranging from December 1, 2026, to
November 15, 2029. The principal assets of the Trusts are $2.4 billion of the
Parent Company's subordinated debentures with identical rates of interest and
maturities as the trust preferred securities. The Trusts have issued $31
million of common securities to the Parent Company. The estimated fair value of
the trust preferred securities and the related subordinated debentures at
December 31, 2001 and 2000, was $2.5 billion and $1.4 billion, respectively.
The trust preferred securities, the assets of the Trusts and the
common securities issued by the Trusts are redeemable in whole or in part
beginning on or after December 1, 2006, or at any time in whole but not in part
from the date of issuance on the occurrence of certain events. The obligations
of the Parent Company with respect to the issuance of the trust preferred
securities constitute a full and unconditional guarantee by the Parent Company
of the Trusts' obligations with respect to the trust preferred securities.
Subject to certain exceptions and limitations, the Parent Company may elect
from time to time to defer subordinated debenture interest payments, which
would result in a deferral of distribution payments on the related trust
preferred securities.
Additionally, a bank subsidiary has outstanding trust preferred
securities with a par value of $300 million and an 8 percent rate of interest,
and a par value of $450 million and a LIBOR-indexed floating rate of interest.
The related maturities range from December 15, 2026, to February 15, 2027. The
related subordinated debentures all have terms substantially the same as the
trust preferred securities and subordinated debentures issued by the Parent
Company. The aggregate estimated fair values of these trust preferred
securities at December 31, 2001 and 2000, were $767 million and $774 million,
respectively.
At December 31, 2001 and 2000, the aggregate fair value of long-term
debt was $42 billion and $36 billion, respectively. The fair value of long-term
debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt with similar
terms.
At December 31, 2001, $665 million of senior or subordinated debt
securities or equity securities of the Company remained available for issuance
under a shelf registration statement filed with the Securities and Exchange
Commission.
At December 31, 2001, First Union National Bank has available a global
note program for issuance up to $45 billion of senior or subordinated notes.
Under prior global note programs, $12 billion of long-term debt was outstanding
at December 31, 2001.
The weighted average rate paid for long-term debt in 2001, 2000 and
1999 was 4.79 percent, 6.69 percent and 5.66 percent, respectively. See Note 16
for information on interest rate swaps entered into in connection with the
issuance of long-term debt.
Long-term debt maturing in each of the five years subsequent to
December 31, 2001, is as follows (in millions): 2002, $8,635; 2003, $5,052;
2004, $4,240; 2005, $6,378; and 2006, $6,819.
87
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NOTE 10: COMMON AND PREFERRED STOCK AND CAPITAL RATIOS
2001 2000 1999
-----------------------------------------------------------------------------------
WEIGHTED- Weighted- Weighted-
AVERAGE Average Average
(Options in thousands) NUMBER PRICE(A) Number Price(a) Number Price(a)
- -----------------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS
Options outstanding, beginning of year 47,143 $38.22 38,657 $40.17 25,549 $37.56
Granted 26,418 32.22 14,375 31.68 18,508 41.12
Former Wachovia, September 1, 2001 34,136 33.07 -- -- -- --
Exercised (2,090) 20.45 (1,796) 15.79 (4,270) 25.23
Cancelled (3,016) 44.00 (4,093) 43.46 (1,130) 51.90
- ------------------------------------------------------ ------ ------
Options outstanding, end of year 102,591 $35.18 47,143 $38.22 38,657 $40.17
===================================================================================================================================
Options exercisable, end of year 57,957 $36.76 35,491 $40.64 25,459 $23.12
===================================================================================================================================
RESTRICTED STOCK
Unvested shares, beginning of year 11,101 $41.35 11,796 $47.86 7,451 $46.30
Granted 3,296 32.11 4,566 28.55 7,133 48.19
Former Wachovia, September 1, 2001 4,044 34.42 -- -- -- --
Vested (4,415) 42.49 (3,955) 43.97 (2,664) 44.54
Cancelled (660) 37.75 (1,306) 47.50 (124) 48.40
- ------------------------------------------------------ ------ ------
Unvested shares, end of year 13,366 $37.73 11,101 $41.35 11,796 $47.86
===================================================================================================================================
EMPLOYEE STOCK OPTIONS
Options outstanding, beginning of year 26,613 $46.75 38,519 $47.32 8,170 $50.31
Granted -- -- -- -- 34,372 46.75
Exercised -- -- (2,905) 21.25 (503) 50.31
Cancelled (3,650) 46.75 (9,001) 37.38 (3,520) 48.22
- ------------------------------------------------------ ------ ------
Options outstanding, end of year 22,963 $46.75 26,613 $46.75 38,519 $47.32
===================================================================================================================================
Options exercisable, end of year 5,301 $46.75 5,839 $46.75 6,213 $50.31
===================================================================================================================================
(a) The weighted-average price for stock options is the weighted-average
exercise price of the options, and for restricted stock, the weighted-average
fair value of the stock at the date of grant.
STOCK PLANS
The Company has stock option plans under which incentive and
nonqualified stock options may be granted periodically to certain employees.
The options are granted at an exercise price equal to the fair value of the
underlying shares at the date of grant, they generally vest between one and
three years following the date of grant, and they have a term of ten years.
Restricted stock may also be granted under the stock option plans. The
restricted stock generally vests over a five-year period, during which time the
holder receives dividends and has full voting rights. Compensation cost
recognized for restricted stock was $169 million, $192 million and $141 million
in 2001, 2000 and 1999, respectively.
The range of exercise prices and the related number of options
outstanding at December 31, 2001, are as follows (shares in thousands):
$2.99-$9.88, 605 shares; $10.12-$19.98, 5,277 shares; $20.59-$29.64, 12,448
shares; $30.02-$39.72, 60,584 shares; $40.13-$49.83, 11,741 shares; and
$51.19-$62.13, 11,936 shares. The weighted average exercise prices, remaining
contractual maturities and weighted average exercise price of options currently
exercisable for each exercise price range are as follows: $4.64, 3.9 years and
$4.64; $16.34, 2.8 years and $16.34; $26.44, 5.6 years and $26.26; $32.95, 8.6
years and $33.41; $43.12, 6.4 years and $43.18; and $57.64, 6.9 years and
$57.64, respectively.
At December 31, 2001, the Company had 49.4 million additional shares
of common stock reserved for issuance under the stock option plans.
The Company also has an employee stock plan (the "1999 plan") in
place. Under the terms of the 1999 plan, substantially all employees were
granted options with an exercise price equal to the fair value of the
underlying shares on the date of grant of August 2, 1999. Twenty percent of the
options vested on August 2, 2000. The vesting schedule provides that an
additional 20 percent of the options vest annually on each March 1 from 2001
through 2004 if certain annual return on stockholders' equity goals are met. If
the annual goal is not met in any one year, the options for the applicable 20
percent portion remain unvested until an annual goal is met at which time they
vest. The annual goal for 2001 was not met. On April 30, 2004, any unvested
options will automatically vest, and if they are not exercised by September 30,
2004, they will expire. As of December 31, 2001, the Company had 16 million
additional shares of common stock reserved for issuance under the 1999 plan.
88
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The Company accounts for stock options using the intrinsic value
method, and accordingly, no expense is recognized for options where the option
price equals fair value of the shares on the date of grant. Pro forma net income
and earnings per share information for each of the years in the three-year
period ended December 31, 2001, calculated as if the Company had accounted for
stock options at their respective fair values at the date of grant, are as
follows: pro forma net income (loss), $1.561 billion, $(38) million and $3.121
billion, respectively; and pro forma diluted earnings per share, $1.40, $(.06)
and $3.23, respectively. The weighted average grant date fair values of options
under the stock option plans were $5.21, $8.76 and $10.24 in 2001, 2000 and
1999, respectively. The weighted average grant date fair value of options under
the 1999 plan was $7.90. The Black-Scholes option pricing model was used to
estimate the fair value of stock options. Option pricing models require the use
of highly subjective assumptions, including expected stock price volatility,
which when changed can materially affect fair value estimates. Accordingly, the
model does not necessarily provide a reliable single measure of the fair value
of the Company's stock options. The more significant assumptions used in
estimating the fair value of stock options in 2001, 2000 and 1999 include
risk-free interest rates of 4.45 percent to 5.88 percent, 5.71 percent to 6.73
percent and 4.63 percent to 6.12 percent, respectively; dividend yields of 2.99
percent, 6.06 percent and 4.22 percent, respectively; weighted average expected
lives of the stock options of 4.0 years, 4.0 years and 4.7 years, respectively;
and volatility of the Company's common stock of 29 percent in 2001, 45 percent
in 2000 and 19 percent in 1999.
The Company had income taxes (benefits) of $7 million, $(7) million
and $(35) million in 2001, 2000 and 1999, respectively, related to employee
exercises of stock options.
DIVIDEND REINVESTMENT PLAN
Under the terms of the Dividend Reinvestment Plan, a participating
stockholder's cash dividends and optional cash payments may be used to purchase
the Company's common stock. Common stock issued under the Dividend Reinvestment
Plan was (in thousands): 1,809 shares, 2,599 shares and 1,937 shares in 2001,
2000 and 1999, respectively. At December 31, 2001, the Company had 2.3 million
additional shares of common stock reserved for issuance under the Dividend
Reinvestment Plan.
TRANSACTIONS BY THE COMPANY IN ITS COMMON STOCK
In May 1999 and in June 2000, the Board of Directors of the Company
authorized separate 50 million share buyback programs. In addition, shares
repurchased in connection with purchase accounting acquisitions described in
Note 2 are incremental to the buyback programs. In 2001, the Company
repurchased 2 million shares of common stock at a cost of $64 million in the
open market. In connection with consummation of the merger, the Company also
retired 16 million shares at a cost of $568 million held by the former
Wachovia. At December 31, 2001, the Company had the authority to repurchase up
to 99 million shares of its common stock. In 2000, the Company repurchased 15
million shares at a cost of $479 million. In 1999, the Company repurchased 52
million shares at a cost of $2.6 billion.
In early 1999, the Board of Directors authorized the use of forward
equity sales transactions ("equity forwards") in connection with the buyback
programs. The use of equity forwards provides the Company with the ability to
purchase shares under the buyback programs in the open market and then issue
shares in private transactions to counterparties in the amounts necessary to
maintain targeted capital ratios. Under the terms of the equity forwards, the
Company issued shares of common stock to an investment banking firm at a
specified price that approximated market value. Simultaneously, the Company
entered into a forward contract with the same counterparty to repurchase the
shares at the same price plus a premium (the "forward price").
In addition to equity forwards, the Company has also entered into
forward purchase contracts with various counterparties. Under the terms of
these contracts, the Company has agreed to purchase shares on a specific future
date at the forward price. The counterparties to these contracts generally
purchase the shares to which the contract is subject in the open market and
hold the shares for the duration of the contract.
At December 31, 2001, the Company had an equity forward involving 3
million shares at a cost of $100 million and forward purchase contracts
involving 33 million shares at a cost of $1.2 billion. This aggregate cost of
$1.3 billion does not include the premium component of the forward price.
Premiums accrue over the period that the contracts are outstanding, and they
will be settled at maturity. The equity forward and forward purchase contracts
mature at various times in 2002, and they can be extended by mutual consent of
the counterparties. In 2001, the Company settled a forward purchase contract
and an equity forward contract by purchasing 12 million shares at a cost of
$652 million. Additionally, in 2001, the Company settled a contract for 4
million shares on a net share basis resulting in no net repurchases of shares.
In 2000, the Company settled an equity forward contract by purchasing 4 million
shares at a cost of $211 million.
89
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For shares under equity forwards and forward purchase contracts, the
counterparties have all of the legal rights attendant to ownership of the
underlying shares, including the right to vote the shares and the right to sell
or pledge the shares at the counterparty's discretion. The counterparty
receives all dividends to which stockholders of record during the time covered
by the term of the equity forwards are entitled. For purposes of the Company's
earnings per share calculation, the shares are considered outstanding until
repurchased.
Under the terms of these contracts, the Company has the sole option of
determining the method of settlement when the equity forwards mature from among
the following options: gross physical settlement, net share settlement and net
cash settlement. Net share settlement and net cash settlement could result in
the sale of all underlying shares (and in certain circumstances additional
shares) to third parties by the counterparty in public or private sales.
SHAREHOLDER PROTECTION RIGHTS AGREEMENT
In accordance with a Shareholder Protection Rights Agreement, the
Company issued a dividend of one right for each share of the Company's common
stock outstanding as of December 28, 2000, and they continue to attach to all
common stock issued thereafter. The rights will become exercisable if any
person or group either commences a tender or exchange offer that would result
in their becoming the beneficial owner of 10 percent or more of the Company's
common stock or acquires beneficial ownership of 10 percent or more of the
Company's common stock. Once exercisable and upon a person or group acquiring
10 percent or more of the Company's common stock, each right (other than rights
owned by such person or group) will entitle its holder to purchase, for an
exercise price of $105.00, a number of shares of the Company's common stock (or
at the option of the Board of Directors, shares of participating class A
preferred stock) having a market value of twice the exercise price, and under
certain conditions, common stock of an acquiring company having a market value
of twice the exercise price. If any person or group acquires beneficial
ownership of 10 percent or more of the Company's common stock, the Board of
Directors may, at its option, exchange for each outstanding right (other than
rights owned by such acquiring person or group) two shares of the Company's
common stock or participating Class A preferred stock having economic and
voting terms similar to two shares of common stock. The rights are subject to
adjustment if certain events occur, and they will initially expire on December
28, 2010, if not terminated sooner.
PREFERRED SHARES
In connection with the former Wachovia acquisition, the Company issued
96 million shares of a new class of preferred stock entitled Dividend
Equalization Preferred Shares ("DEPs"), which will pay dividends equal to the
difference between the last dividend paid by the former Wachovia of 30 cents
per share and the common stock dividend declared by the Company. This payment
will cease once the Company's total dividends for four consecutive quarters
equal at least $1.20 per common share. The DEPs were recorded at their fair
value as of September 1, 2001, of 24 cents per share or $23 million for shares
issued through December 31, 2001. A dividend of $6 million, which was recorded
as a reduction in the carrying value of the DEPs, was paid to holders of the
DEPs in the fourth quarter of 2001.
CAPITAL RATIOS
Risk-based capital regulations require a minimum ratio of tier 1
capital to risk-weighted assets of 4 percent and a minimum ratio of total
capital to risk-weighted assets of 8 percent. The minimum leverage ratio of
tier 1 capital to adjusted average quarterly assets is from 3 percent to 4
percent. The regulations also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. The Federal Reserve Board has
indicated it will continue to consider a tangible tier 1 leverage ratio
(deducting all intangibles) in evaluating proposals for expansion or new
activity. The Federal Reserve Board has not advised us of any specific minimum
leverage ratio applicable to us. Each subsidiary bank is subject to similar
capital requirements. None of our subsidiary banks has been advised of any
specific minimum capital ratios applicable to it.
The regulatory agencies also have adopted regulations establishing
capital tiers for banks. To be in the highest capital tier, or considered well
capitalized, banks must have a leverage ratio of 5 percent, a tier 1 capital
ratio of 6 percent and a total capital ratio of 10 percent.
At December 31, 2001, the Company's tier 1 capital ratio, total
capital ratio and leverage ratio were 7.04 percent, 11.08 percent and 6.19
percent, respectively. At December 31, 2000, the Company's tier 1 capital
ratio, total capital ratio and leverage ratio were 7.02 percent, 11.19 percent
and 5.92 percent, respectively. At December 31, 2001, our deposit-taking bank
subsidiaries met the capital and leverage ratio requirements for well
capitalized banks. The Company does not anticipate or foresee any conditions
that would reduce these ratios to levels at or below minimum or that would
cause its deposit-taking bank subsidiaries to be less than well capitalized.
90
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NOTE 11: BUSINESS SEGMENTS
In connection with the merger with the former Wachovia, the Company
realigned its segment reporting to reflect the business mix and management
reporting structure of the new company. As a result, the Company now has five
operating segments ("business segments") all of which, by virtue of exceeding
certain quantitative thresholds, are reportable segments. The business segments
are the General Bank, Capital Management, Wealth Management, the Corporate and
Investment Bank, and the Parent. The most significant changes are the
separation of Wealth Management from Capital Management and the combining of
the Consumer and Commercial segments into the General Bank. Each of these
reportable segments offers a different array of products and services. Prior
year information has been restated to reflect the changes.
Management reporting methodologies were also refined as the
organization was integrated after the merger. This includes refinements in
funds transfer pricing as well as in the methodology for allocating economic
capital, expected loss assignment and expense transfers. Prior years have not
been restated to reflect these changes as segment results do not differ
materially as a result of these changes.
The Company also implemented a new management reporting model in the
first quarter of 2001. This platform remained in effect through and subsequent
to the merger. This platform employs new methodologies and systems that the
Company believes better reflect the evolution of its four core businesses.
Prior years have not been restated to reflect these changes. Under this
platform, intersegment revenues are paid by a segment to the segment that
distributes or services the product. The amount of the referral fee is based on
comparable fees paid in the market or on negotiated amounts that approximate
the value provided by the selling segment. Cost allocations are made for
services provided by one business segment to another. Activity-based costing
studies are continually being refined to better align expenses with products
and their revenues.
Under this management reporting platform, new financial metrics have
been implemented with business segments being measured on Risk Adjusted Return
on Capital ("RAROC") and Economic Profit. RAROC is derived by dividing cash
operating earnings (earnings adjusted for certain intangible amortization and
expected losses) by economic capital (capital assigned based on a statistical
assessment of the credit, market and operating risks taken to generate profits
in a particular business unit or product). Economic Profit is economic net
income less a charge for the economic capital used to support the business.
The accounting policies of these reportable segments are the same as
those of the Company as disclosed in Note 1, except as noted below. There are
no significant reconciling items between the reportable segments and
consolidated amounts. Certain amounts are not allocated to reportable segments,
and as a result, they are included in the Parent segment as discussed below.
Substantially all of the Company's revenues are earned from customers in the
United States, and no single customer accounts for a significant amount of any
reportable segment's revenues.
The Company's management reporting model is used to measure business
segment results. Because of the complexity of the Company, various estimates
and allocation methodologies are used in preparing business segment financial
information. The management reporting model isolates the net income
contribution and measures the return on capital for each business segment by
allocating equity, funding credit and expense, and certain corporate charges to
each segment. A risk-based methodology is used to allocate equity based on the
credit, market and operational risks associated with each business segment. A
provision for loan losses is allocated to each business segment based on net
charge-offs, and any excess is included in the Parent segment. Income tax
expense or benefit is allocated to each business segment, and any difference
between the total for all business segments and the consolidated amount is
included in the Parent segment. Merger-related, restructuring and other charges
and gains are not allocated to the Company's business segments, and
accordingly, these amounts are presented separately in the tables that follow.
Exposure to market risk is managed centrally within the Parent
segment. In order to remove interest rate risk from each business segment, the
management reporting model employs a funds transfer pricing ("FTP") system. The
FTP system matches the duration of the funding used by each segment to the
duration of the assets and liabilities contained in each segment. Matching the
duration, or the effective term until an instrument can be repriced, allocates
interest income and/or interest expense to each segment so its resulting net
interest income is insulated from interest rate risk. The Parent segment
retains all interest rate risk.
The Parent segment includes the Company's securities portfolios,
allowance for loan losses in excess of net charge-offs in the other segments
and unallocated equity. The Parent segment also includes the goodwill asset and
the associated amortization expense and funding cost; certain nonrecurring
revenue items; certain expenses that are not allocated to the business
segments; corporate charges; and the results of the Company's mortgage
servicing, credit card, The Money Store home equity lending businesses and
indirect auto lending and leasing businesses, which have been divested or are
being wound down.
The results of operations for each of the Company's business segments
for each of the years in the three-year period ended December 31, 2001,
follows.
91
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------------------------------------------
MERGER-
RELATED,
CORPORATE RESTRUCTURING
AND AND OTHER
GENERAL CAPITAL WEALTH INVESTMENT CHARGES/
(In millions) BANK MANAGEMENT MANAGEMENT BANK PARENT GAINS(b) TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income(a) $ 5,151 131 246 2,075 331 (159) 7,775
Fee and other income 1,769 2,819 394 730 559 25 6,296
Intersegment revenue 114 (48) 1 (56) (11) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total revenue 7,034 2,902 641 2,749 879 (134) 14,071
Provision for loan losses 426 -- 6 543 92 880 1,947
Noninterest expense 4,112 2,399 444 1,999 605 272 9,831
Income taxes (benefits) 846 179 64 (73) 48 (390) 674
Tax-equivalent adjustment 34 -- -- 15 110 (159) --
- -------------------------------------------------------------------------------------------------------------------------------
Net income 1,616 324 127 265 24 (737) 1,619
Dividends on preferred stock -- -- -- -- 6 -- 6
- -------------------------------------------------------------------------------------------------------------------------------
Net income available to
common stockholders $ 1,616 324 127 265 18 (737) 1,613
- -------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 38.44% 37.87 52.27 7.07 27.56 -- 22.37
Cash overhead efficiency ratio 57.90% 82.66 68.90 68.41 17.27 -- 63.61
Economic profit $ 1,165 222 94 (320) 247 -- 1,408
Average loans, net 75,768 212 5,672 43,066 9,130 -- 133,848
Average core deposits 111,099 1,618 7,331 10,728 2,156 -- 132,932
Economic capital, average $ 4,407 858 233 6,491 1,584 -- 13,573
===============================================================================================================================
Year Ended December 31, 2000
---------------------------------------------------------------------------------------
Merger-
Related,
Corporate Restructuring
and and Other
General Capital Wealth Investment Charges/
(In millions) Bank Management Management Bank Parent Gains(b) Total
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income(a) $ 4,382 160 190 1,674 1,130 (99) 7,437
Fee and other income 1,314 2,820 319 1,708 654 (103) 6,712
Intersegment revenue 100 (50) -- (49) (1) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total revenue 5,796 2,930 509 3,333 1,783 (202) 14,149
Provision for loan losses 219 -- -- 422 113 982 1,736
Noninterest expense 3,790 2,342 317 1,863 901 2,497 11,710
Income taxes (benefits) 562 198 64 171 355 (785) 565
Tax-equivalent adjustment 46 -- 2 48 3 (99) --
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of a change in
accounting principle 1,179 390 126 829 411 (2,797) 138
Cumulative effect of a change
in accounting for beneficial
interests, net of income taxes -- -- -- -- (46) -- (46)
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 1,179 390 126 829 365 (2,797) 92
- -----------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 33.01% 45.16 75.54 16.73 34.00 -- 26.92
Cash overhead efficiency ratio 64.40% 79.88 62.24 52.59 38.42 -- 61.68
Economic profit $ 762 286 102 277 439 -- 1,866
Average loans, net 59,100 98 4,151 41,883 21,656 -- 126,888
Average core deposits 97,606 2,179 5,682 9,107 3,764 -- 118,338
Economic capital, average $ 3,629 862 160 5,861 1,988 -- 12,500
=============================================================================================================================
92
- -------------------------------------------------------------------------------
Year Ended December 31, 1999
--------------------------------------------------------------------------------------------
Merger-
Related,
Corporate Restructuring
and and Other
General Capital Wealth Investment Charges/
(In millions) Bank Management Management Bank Parent Gains(b) Total
- ---------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
Net interest income(a) $ 4,270 138 197 1,599 1,366 (118) 7,452
Fee and other income 1,393 1,957 324 1,914 1,345 -- 6,933
Intersegment revenue 117 (43) (3) (49) (22) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue 5,780 2,052 518 3,464 2,689 (118) 14,385
Provision for loan losses 163 -- -- 225 304 -- 692
Noninterest expense 3,769 1,489 297 1,952 951 404 8,862
Income taxes (benefits) 644 215 84 343 463 (141) 1,608
Tax-equivalent adjustment 28 -- -- 45 45 (118) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,176 348 137 899 926 (263) 3,223
- ---------------------------------------------------------------------------------------------------------------------------------
Risk adjusted return on capital 32.19% 53.54 87.59 17.61 44.48 -- 30.64
Cash overhead efficiency ratio 65.33% 72.54 57.29 57.91 34.88 -- 55.62
Economic profit $ 716 272 114 298 789 -- 2,189
Average loans, net 55,377 141 3,710 43,029 27,534 -- 129,791
Average core deposits 98,142 1,152 5,713 9,944 7,080 -- 122,031
Economic capital, average $ 3,547 650 151 5,312 2,082 -- 11,742
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Tax-equivalent.
(b) See "Merger-Related, Restructuring and Other Charges and Gains" in
Management's Analysis of Operations and the Consolidated Condensed Statements
of Income for more information on merger-related, restructuring and other
charges and gains. Additionally, the tax-equivalent amounts included in each
segment are eliminated herein in order for "Total" amounts to agree with
amounts appearing in the Consolidated Statements of Income.
93
- --------------------------------------------------------------------------------
NOTE 12: PERSONNEL EXPENSE AND RETIREMENT BENEFITS
The Company has a savings plan under which eligible employees are
permitted to make basic contributions to the plan of up to six percent of base
compensation and supplemental contributions of up to nine percent of base
compensation. Annually, on approval of the Board of Directors, employee basic
contributions may be matched up to six percent of the employee's base
compensation. A six percent matching level was in place for each of the periods
presented. The first one percent of the Company's matching contribution is made
in the Company's common stock. Each employee can immediately elect to liquidate
the Company's common stock credited to the employee's account by transferring
the value of the common stock to any of a number of investment options available
within the savings plan. Savings plan expense in 2001, 2000 and 1999 was $138
million, $125 million and $102 million, respectively.
Group insurance expense for active employees in 2001, 2000 and 1999 was
$248 million, $210 million and $201 million, respectively.
The Company has noncontributory, tax-qualified defined benefit pension
plans (the "Qualified Pension") covering substantially all employees with at
least one year of service. The Qualified Pension benefit expense is determined
by an actuarial valuation, and it is based on assumptions that are evaluated
annually. Contributions are made each year to a trust in an amount that is
determined by the actuary to meet the minimum requirements of ERISA and to fall
at or below the maximum amount that can be deducted on the Company's tax return.
Amounts related to prior years are determined using the projected unit credit
valuation method.
At December 31, 2001, Qualified Pension assets included U.S. Government
and Government agency securities, equity securities and other investments. Also
included are 4.7 million shares of the Company's common stock. All Qualified
Pension assets are held by First Union National Bank (the "Bank") in a
Bank-administered trust fund.
The Company has noncontributory, nonqualified pension plans (the
"Nonqualified Pension") covering certain employees. The Nonqualified Pension
benefit expense is determined annually by an actuarial valuation, and it is
included in noninterest expense.
The Company also provides certain health care and life insurance
benefits for retired employees (the "Other Postretirement Benefits").
Substantially all of the Company's employees may become eligible for Other
Postretirement Benefits if they reach retirement age while working for the
Company. Life insurance benefits, medical and other benefits are provided
through a tax-exempt trust formed by the Company.
The change in benefit obligation and the change in fair value of plan
assets related to each of the Qualified Pension, the Nonqualified Pension and
the Other Postretirement Benefits using a September 30 measurement date for each
of the years in the two-year period ended December 31, 2001, follows.
94
- -----------------------------------------------------------------------------------------------------------------------------------
Other Postretirement
Qualified Pension Nonqualified Pension Benefits
--------------------- -------------------- -------------------
(In millions) 2001 2000 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, October 1 $ 2,010 2,055 155 202 514 404
Service cost 103 90 1 3 9 8
Interest cost 167 153 15 15 41 30
Retiree contributions -- -- -- -- 15 14
Plan amendments 22 7 (3) -- 38 18
Benefit payments (207) (260) (13) (109) (56) (40)
Business combinations 912 -- 152 -- 137 --
Curtailment -- -- -- (20) -- --
Special and/or contractual termination benefits -- -- -- 20 -- 2
Actuarial (gains) losses 259 (35) 10 44 201 78
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation, September 30 3,266 2,010 317 155 899 514
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN FAIR VALUE OF
PLAN ASSETS
Fair value of plan assets, October 1 2,834 2,472 -- -- 76 75
Actual return on plan assets (506) 425 -- -- 2 8
Employer contributions 205 197 13 109 42 19
Retiree contributions -- -- -- -- 15 14
Business combinations 895 -- -- -- 16 --
Benefit payments (207) (260) (13) (109) (56) (40)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets, September 30 3,221 2,834 -- -- 95 76
- -----------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS
Funded status of plans (45) 824 (317) (155) (804) (438)
Unrecognized net transition obligation -- (5) -- -- 43 48
Unrecognized prior service costs 69 48 (2) -- 48 3
Unrecognized net (gains) losses 810 (245) 40 32 206 2
Employer contributions in the fourth quarter -- -- 4 -- 2 --
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit expense at
December 31, $ 834 622 (275) (123) (505) (385)
===================================================================================================================================
ASSUMPTIONS
Discount rate, September 30 7.25% 7.75 7.25 7.75 7.25 7.75
Expected return on plan assets 10.00 10.00 -- -- 6.00 6.00
Weighted average rate of increase in
future compensation levels 4.25% 4.25 4.25 4.25 4.25 4.25
===================================================================================================================================
95
- --------------------------------------------------------------------------------
As of December 31, 2000, the Company terminated one of its Nonqualified
Pension plans and settled the obligation with each participant by either making
a cash payment to the participant or by purchasing an annuity contract. This
settlement, along with the retirement of certain key officers, resulted in a
charge of $48 million to salaries and employee benefits in the consolidated
statements of income. Salaries and employee benefits in 2000 also included a $20
million charge related to a new Nonqualified Pension plan. These and other
components of the retirement benefits cost included in salaries and employee
benefits for each of the years in the three-year period ended December 31, 2001,
are presented below.
Qualified Pension Nonqualified Pension
----------------------------------- -------------------------
Years Ended December 31, Years Ended December 31,
----------------------------------- -------------------------
(In millions) 2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 103 90 108 1 3 5
Interest cost 167 153 153 15 15 16
Expected return on plan assets (289) (249) (230) -- -- --
Amortization of transition (gains) losses (5) (9) (9) -- -- 1
Amortization of prior service cost 8 7 7 -- 9 11
Amortization of actuarial losses -- -- 5 2 1 5
Curtailment loss -- -- -- -- 30 --
Settlement loss -- -- -- -- 18 --
Special and/or contractual termination benefits -- -- -- -- 20 --
- ----------------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ (16) (8) 34 18 96 38
==================================================================================================================================
Other Postretirement Benefits
----------------------------------
Years Ended December 31,
----------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS COST
Service cost $ 9 8 9
Interest cost 41 30 25
Expected return on plan assets (5) (4) (4)
Amortization of transition losses 4 4 4
Amortization of prior service cost 1 (1) (1)
Amortization of actuarial gains -- (2) (1)
Special termination benefit cost -- 1 2
- -----------------------------------------------------------------------------------------------------------------------------------
Net retirement benefits cost $ 50 36 34
- -----------------------------------------------------------------------------------------------------------------------------------
Medical trend rates assumed with respect to Other Postretirement
Benefits at the beginning of 2001 were 6.00 percent (pre-65 years of age) and
5.00 percent (post-65 years of age); and at the end of 2001 were 10.00 percent
grading to 5.5 percent (pre-65 years of age) and 13.00 percent grading to 5.50
percent (post-65 years of age). Medical trend rates assumed with respect to
Other Postretirement Benefits at the beginning and at the end of 2000 were 6.00
percent (pre-65 years of age) and 5.00 percent (post-65 years of age),
respectively.
At December 31, 2001, the effect of a one percentage point increase or
decrease in the assumed health care cost trend rate on service and interest
costs is a $2 million increase and a $1 million decrease, respectively, and on
the accumulated postretirement benefit obligation, a $42 million increase and a
$37 million decrease, respectively.
96
- --------------------------------------------------------------------------------
NOTE 13: INCOME TAXES
The aggregate amount of income taxes included in the consolidated
statements of income and in the consolidated statements of changes in
stockholders' equity for each of the years in the three-year period ended
December 31, 2001, is presented below.
Years Ended December 31,
---------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
Income taxes $ 674 565 1,608
Income tax benefit related to the cumulative effect of a change
in the accounting for beneficial interests -- (25) --
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Income taxes (benefits) related to
Unrealized gains and losses on debt and equity securities 390 387 (730)
Unrealized gain on derivative financial instruments 14 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $1,078 927 878
===================================================================================================================================
The provision for income taxes for each of the years in the three-year
period ended December 31, 2001, is presented below.
Years Ended December 31,
------------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT INCOME TAX EXPENSE
Federal $483 365 451
State 81 91 63
- -----------------------------------------------------------------------------------------------------------------------------------
Total 564 456 514
Foreign 74 18 15
- -----------------------------------------------------------------------------------------------------------------------------------
Total 638 474 529
- -----------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX EXPENSE
Federal 13 162 1,090
State 23 (71) (11)
- -----------------------------------------------------------------------------------------------------------------------------------
Total 36 91 1,079
- -----------------------------------------------------------------------------------------------------------------------------------
Total $674 565 1,608
===================================================================================================================================
The reconciliation of federal income tax rates and amounts to the
effective income tax rates and amounts for each of the years in the three-year
period ended December 31, 2001, follows.
97
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999
-------------------- ---------------------- ---------------------
PERCENT OF Percent of Percent of
PRE-TAX Pre-tax Pre-tax
(In millions) AMOUNT INCOME Amount Income Amount Income
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 2,293 $ 703 $ 4,831
======= ======= =======
Tax at federal income tax rate $ 802 35.0% $ 246 35.0% $ 1,691 35.0%
Reasons for difference in federal income
tax rate and effective tax rate
Tax-exempt interest, net of cost to carry (91) (4.0) (55) (7.8) (45) (0.9)
State income taxes, net of federal tax benefit 68 3.0 13 1.8 34 0.7
Life insurance, increase in cash
surrender value (87) (3.8) (79) (11.2) (74) (1.5)
Foreign taxes, net 18 0.8 16 2.3 13 0.3
Subsidiary stock, recognition of
deferred taxes on basis difference (60) (2.6) (80) (11.4) -- --
Goodwill amortization 77 3.3 86 12.2 86 1.8
Goodwill write-down, The Money Store, Inc. -- -- 521 74.1 -- --
Tax credits, net of related basis adjustments (108) (4.7) (114) (16.2) (85) (1.8)
Change in the beginning-of-the-year
deferred tax assets valuation allowance 14 0.6 3 0.4 (1) --
Other items, net 41 1.8 8 1.2 (11) (0.3)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 674 29.4% $ 565 80.4% $ 1,608 33.3%
===================================================================================================================================
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The sources and tax effects of
temporary differences that give rise to significant portions of deferred income
tax assets and liabilities for each of the years in the three-year period ended
December 31, 2001, are presented below.
December 31,
--------------------------------
(In millions) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX ASSETS
Provision for loan losses, net $1,176 833 674
Accrued expenses, deductible when paid 1,199 817 681
Unrealized losses on debt and equity securities -- 114 501
Net operating loss carryforwards 92 152 178
Tax credit carryforwards 477 529 392
Unrealized losses on investments 394 -- --
Other 581 366 202
- -----------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 3,919 2,811 2,628
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets valuation allowance 50 26 23
- -----------------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAX LIABILITIES
Depreciation 111 172 114
Unrealized gains on debt and equity securities 276 -- --
Unrealized gains on investments -- 38 60
Intangible assets 738 -- 112
Deferred income 175 176 168
Leasing activities 5,586 4,689 3,822
Prepaid pension assets 327 237 199
Other 128 69 280
- -----------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 7,341 5,381 4,755
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liabilities $3,472 2,596 2,150
===================================================================================================================================
98
- --------------------------------------------------------------------------------
A portion of the current year change in the net deferred tax liability
relates to unrealized gains and losses on debt and equity securities. The
related 2001, 2000 and 1999 deferred tax expense (benefit) of $390 million, $387
million and $(730) million, respectively, has been recorded directly to
stockholders' equity as a component of accumulated other comprehensive income.
Additionally, a portion of the current year change in the net deferred tax
liability relates to unrealized gains and losses on derivative financial
instruments. The related 2001 deferred tax expense of $14 million has been
recorded directly to stockholders' equity as a component of accumulated other
comprehensive income. Purchase acquisitions also increased the net deferred tax
liability by $436 million in 2001 and decreased the net deferred tax liability
by $27 million and $104 million in 2000 and 1999, respectively.
The realization of deferred tax assets may be based on the utilization
of carrybacks to prior taxable periods, the anticipation of future taxable
income in certain periods and the utilization of tax planning strategies.
Management has determined that it is more likely than not that the deferred tax
assets can be supported by carrybacks to federal taxable income in the two-year
federal carryback period and by expected future taxable income which will exceed
amounts necessary to fully realize remaining deferred tax assets resulting from
net operating loss carryforwards and from the scheduling of temporary
differences. The valuation allowance primarily relates to certain state
temporary differences and to state net operating loss carryforwards. A portion
of the current year change in the valuation allowance relates to increases in
deferred tax assets from purchase acquisitions. The related 2001 increase in the
valuation allowance is $10 million.
The operating results of the Parent Company and its eligible
subsidiaries are included in a consolidated federal income tax return. Each
subsidiary pays its allocation of federal income taxes to the Parent Company or
receives payment from the Parent Company to the extent tax benefits are
realized. Where state income tax laws do not permit consolidated or combined
income tax returns, applicable separate company state income tax returns are
filed.
Federal tax carryforwards at December 31, 2001, consisted of net
operating loss, general business credit and alternative minimum tax credit
carryforwards with related deferred tax assets of $7 million, $233 million and
$237 million, respectively. The utilization of these carryforwards is subject to
limitations under federal income tax laws. Except for the alternative minimum
tax credits which do not expire, the other federal tax carryforwards expire, if
not utilized, in varying amounts through 2021.
State tax carryforwards at December 31, 2001, consisted of net
operating loss and general business tax credit carryforwards with related
deferred tax assets of $85 million and $7 million, respectively. These state tax
carryforwards were generated by certain subsidiaries in various jurisdictions
and their utilization is subject to limitations under various state income tax
laws. The state net operating loss and general business tax credit carryforwards
expire, if not utilized, in varying amounts through 2021 and 2004, respectively.
Income tax expense (benefit) related to securities transactions was $64
million, $(400) million and $63 million in 2001, 2000 and 1999, respectively.
The Internal Revenue Service (the "IRS") is currently examining First
Union's federal income tax returns for the years 1997 through 1999. In addition,
the IRS is examining the federal income tax returns for certain acquired
subsidiaries for periods prior to acquisition, including the federal income tax
returns of the former Wachovia for the years 1996 through 2001. In November
2001, the IRS issued reports challenging deductions relating to the leasing
activities of First Union and of the former Wachovia for the years 1994 through
1996 and 1993 through 1995, respectively. Management believes the proposed IRS
adjustments are inconsistent with existing law, including several recent
decisions in federal appeals courts, and intends to vigorously defend the
claimed deductions. Resolution of these issues is not expected to have a
significant impact on the Company's financial position or results of operations.
In 1999, the IRS examination of First Union's federal income tax returns for the
years 1991 through 1993 was settled with no significant impact on the Company's
financial position or results of operations. In 2001, 2000 and 1999, tax
liabilities for certain acquired subsidiaries for periods prior to their
acquisition by the Company were settled with the IRS with no significant impact
on the Company's financial position or results of operations.
99
- --------------------------------------------------------------------------------
NOTE 14: BASIC AND DILUTED EARNINGS PER COMMON SHARE
The reconciliation between basic and diluted earnings per common share
for each of the years in the three-year period ended December 31, 2001, is
presented below.
Years Ended December 31,
-------------------------------
(In millions, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle
and dividends on preferred stock $ 1,619 138 3,223
Less imputed interest on the Company's transactions in its common stock (6) (21) (6)
- -----------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders before cumulative effect
of a change in accounting principle and dividends on preferred stock 1,613 117 3,217
Cumulative effect of a change in the accounting for beneficial
interests, net of income taxes -- (46) --
Dividends on preferred stock (6) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Income available to common stockholders $ 1,607 71 3,217
===================================================================================================================================
Basic earnings per common share
Income before change in accounting principle and dividends on preferred stock $ 1.47 0.12 3.35
Cumulative effect of a change in the accounting for beneficial interests -- (0.05) --
Dividends on preferred stock -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.47 0.07 3.35
===================================================================================================================================
Diluted earnings per common share
Income before change in accounting principle and dividends on preferred stock $ 1.46 0.12 3.33
Cumulative effect of a change in the accounting for beneficial interests -- (0.05) --
Dividends on preferred stock (0.01) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1.45 0.07 3.33
===================================================================================================================================
Average common shares - basic 1,096 971 959
Common share equivalents, unvested restricted stock, incremental
common shares from forward purchase contracts and convertible
long-term debt assumed converted 9 3 8
- -----------------------------------------------------------------------------------------------------------------------------------
Average common shares - diluted 1,105 974 967
===================================================================================================================================
100
- --------------------------------------------------------------------------------
NOTE 15: ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Comprehensive income is defined as the change in equity from all
transactions other than those with stockholders, and it includes net income and
other comprehensive income. Accumulated other comprehensive income, net, for
each of the years in the three-year period ended December 31, 2001, is presented
below.
Income Tax
Pre-tax (Expense) After-tax
(In millions) Amount Benefit Amount
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET
Accumulated other comprehensive income, net, December 31, 1998 $ 636 (229) 407
Unrealized net holding loss on securities (1,820) 644 (1,176)
Reclassification adjustment for gains and losses realized in net income (247) 86 (161)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 1999 (1,431) 501 (930)
Unrealized net holding gain on securities 490 (172) 318
Reclassification adjustment for gains and losses realized in net income 614 (215) 399
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income, net, December 31, 2000 (327) 114 (213)
Unrealized net holding gain on securities 973 (373) 600
Net gain on cash flow hedge derivatives 36 (14) 22
Reclassification adjustment for realized gains and losses 45 (17) 28
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET, DECEMBEr 31, 2001 $ 727 (290) 437
====================================================================================================================================
101
- -------------------------------------------------------------------------------
NOTE 16: OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company engages in a variety of
transactions to meet the financing needs of its customers, to reduce its
exposure to fluctuations in interest rates and to conduct lending activities.
These financial instruments include commitments to extend credit, standby and
commercial letters of credit, derivatives, and commitments to purchase and sell
securities. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of amounts recognized in the consolidated
financial statements.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and they may require payment of a fee by the counterparty. Since many of the
commitments are expected to expire without being drawn, the total commitment
amounts do not necessarily represent future cash requirements. Commitments to
extend credit also include liquidity and credit facilities in which the Company
guarantees liquidity on commercial paper issued by certain conduits and credit
enhancements related to assets funded in those conduits.
Standby and commercial letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing and similar
transactions. Except for short-term guarantees of $14 billion, guarantees
extend for more than one year, and they expire in varying amounts through 2033.
The Company's exposure to credit loss in the event of nonperformance
by the counterparty for commitments to extend credit and standby and commercial
letters of credit is represented by the contract amount of those instruments.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The Company holds
various assets as collateral to support those commitments for which collateral
is deemed necessary. The Company uses the same credit policies in entering into
commitments and conditional obligations as it does for on-balance sheet
instruments.
The fair value of commitments to extend credit and letters of credit
is estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the current
creditworthiness of the counterparties. Generally, for fixed rate loan
commitments, fair value also considers the difference between the current level
of interest rates and the committed rates.
Derivative transactions are measured in terms of the notional amount,
but this amount is not recorded on the balance sheet and is not, when viewed in
isolation, a meaningful measure of the risk profile of the instruments. The
notional amount is not exchanged, but is used only as the basis upon which
interest and other payments are calculated.
For derivatives, the Company's exposure to credit risk is represented
by the fair value of all derivatives in a gain position. At December 31, 2001,
the total credit risk in excess of thresholds was $1.0 billion. The fair value
of collateral held exceeded the total credit risk in excess of the thresholds
as of that date.
The Company uses collateral arrangements, credit approvals, limits and
monitoring procedures to manage credit risk or derivatives. Bilateral
collateral agreements are in place for substantially all dealer counterparties.
Collateral for dealer transactions is delivered by either party when the credit
risk associated with a particular transaction, or group of transactions to the
extent netting exists, exceeds defined thresholds of credit risk. Thresholds
are determined based on the strength of the individual counterparty. For
non-dealer transactions, the need for collateral is evaluated on an individual
transaction basis, and it is primarily dependent on the financial strength of
the counterparty.
Additional information related to derivatives used for the Company's
interest rate risk management purposes at December 31, 2001 and 2000, can be
found in Table 18 through Table 20, which are incorporated herein by reference.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to these underwriting commitments that were
open at December 31, 2001, and that were subsequently settled, had no material
impact on the Company's consolidated financial position or results of
operations.
In the normal course of business, the Company has entered into certain
transactions that have recourse options. These recourse options, if acted on,
would not have a material impact on the Company's financial position or results
of operations.
102
- -------------------------------------------------------------------------------
Additional information related to other off-balance sheet financial
instruments as of December 31, 2001 and 2000, is presented below. For the
commitments and letters of credit presented in the table below, no amount is
on-balance sheet until the instrument is funded. For the derivatives, the
carrying value equals the estimated fair value.
December 31,
--------------------------------------------------
2001 2000
---------------------- -----------------------
CONTRACT Contract
ESTIMATED OR Estimated or
FAIR NOTIONAL Fair Notional
(In millions) VALUE AMOUNT Value Amount
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WHERE CONTRACT
AMOUNTS REPRESENT CREDIT RISK
Commitments to extend credit $ 201 172,470 140 128,214
Standby and commercial letters of credit 25 24,717 26 13,320
FINANCIAL INSTRUMENTS WHERE CONTRACT
OR NOTIONAL AMOUNTS EXCEED THE
AMOUNT OF CREDIT RISK
Trading and dealer derivatives
Forward and futures contracts 2,519 386,391 2,249 209,312
Interest rate swap agreements (1,960) 474,733 (2,806) 226,364
Purchased options, interest rate caps, floors,
collars and swaptions 4,339 535,300 1,703 290,484
Written options, interest rate caps, floors, collars and swaptions (4,726) 522,623 (1,713) 223,056
Foreign currency and exchange rate swap commitments (57) 13,939 (25) 10,537
Commodity and equity swaps $ 13 3,044 15 2,519
===============================================================================================================================
Substantially all time drafts accepted by December 31, 2001, met the
requirements for discount with Federal Reserve Banks. Average daily Federal
Reserve Bank balance requirements for the year ended December 31, 2001,
amounted to $339 million.
Minimum operating lease payments due in each of the five years
subsequent to December 31, 2001, are as follows (in millions): 2002, $344;
2003, $322; 2004, $294; 2005, $259; 2006, $217; and subsequent years, $1.3
billion. Rental expense for all operating leases for the three years ended
December 31, 2001, was $460 million, 2001; $404 million, 2000; and $319
million, 1999.
The Company and certain of its subsidiaries have been named as
defendants in various legal actions arising from their normal business
activities in which varying amounts are claimed. Although the amount of any
ultimate liability with respect to those matters cannot be determined, in
management's opinion, based upon the opinions of counsel, any such liability
will not have a material effect on the Company's and its subsidiaries'
consolidated financial position or results of operations.
A number of purported class actions were filed in June through August
1999 against the Company in the United States District Courts for the Western
District of North Carolina and for the Eastern District of Pennsylvania. These
actions named the Company and certain of the Company's executive officers as
defendants and were purported to be on behalf of persons who purchased shares of
the Company's common stock from August 14, 1998 through May 24, 1999. These
actions were consolidated into one case in the United States District Court for
the Western District of North Carolina in October 1999. These complaints alleged
various violations of securities law, including violations of Section 10(b) of
the Securities and Exchange Act of 1934, as amended, and that the defendants
made materially misleading statements and/or material omissions which
artificially inflated prices for the Company's common stock. The complaints
alleged that the Company failed to disclose integration problems in the
CoreStates merger and misstated the value of the Company's interest in certain
mortgage-backed securities of TMSI acquired by the Company on June 30, 1998.
Plaintiffs sought judgment awarding damages and other relief. On January 10,
2001, the United States District Court for the Western District of North
Carolina granted the Company's motion to dismiss the litigation for failure to
state a claim upon which relief could be granted. Although the plaintiffs did
not appeal this ruling, they sought and received permission to file an amended
complaint. In August 2001, plaintiffs filed an amended complaint that abandoned
their previous allegations concerning the CoreStates merger and primarily raised
new allegations of irregularities at TMSI prior to its acquisition by First
Union. In October 2001, the Company filed a motion to dismiss this new complaint
on several grounds, including that the complaint is barred by the statute of
limitations. The court has not ruled on the Company's motion to dismiss. The
Company believes the allegations contained in these actions are without merit,
will vigorously defend them, and that the ultimate amount of gross damages or
other settlements, without respect to insurance coverage, if any, will not have
a material effect on its consolidated financial position or results of
operations.
103
- -------------------------------------------------------------------------------
On July 26, 2000, a jury in the Philadelphia County (PA) Court of
Common Pleas returned a verdict in the case captioned Pioneer Commercial
Funding Corporation v. American Financial Mortgage Corporation, CoreStates
Bank, N.A., et al. The verdict against CoreStates Bank, N.A. ("CoreStates"), a
predecessor of First Union National Bank, included consequential damages of
$13.5 million and punitive damages of $337.5 million. The trial court had
earlier directed a verdict against CoreStates for compensatory damages of $1.7
million. The plaintiff, who was not a CoreStates customer, alleged that the sum
of $1.7 million, which it claims it owned, was improperly setoff by CoreStates.
Upon the Company's motion, the trial court reduced the amount of the punitive
damages award to $40.5 million in December 2000. The Company believes that
numerous reversible errors occurred at the trial, and that the facts do not
support the damages awards. The Company appeared before the Pennsylvania
Superior Court in November 2001 to argue its appeal to reverse the trial
court's decision and awaits the appellate court's decision on that appeal. The
Company will vigorously pursue its pending post-trial motions and its right of
appeal. The Company believes, after consultation with external counsel, that
the ultimate outcome of this litigation will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
A number of lawsuits have been filed in 2000 and 2001 against TMSI and
certain other affiliates in various jurisdictions. Substantially all of the
plaintiffs were borrowers of TMSI prior to the Company's acquisition of TMSI in
June 1998. The borrower plaintiffs generally allege violations of federal
and/or state law in connection with TMSI lending activities. The plaintiffs in
these lawsuits are seeking compensatory and punitive damages and other relief.
The Company will vigorously defend the claims alleged in these cases. The
Company believes that the ultimate outcome of these cases, individually and in
the aggregate, will not result in judgments that would have a material adverse
effect on its consolidated financial position or results of operations.
NOTE 17: WACHOVIA CORPORATION (PARENT COMPANY)
The Parent Company serves as the primary source of funding for the
activities of its nonbank subsidiaries. The Parent Company has available a $175
million, four-year line of credit that expires in July 2002. Annual facility
fees related to the line of credit range from 7.00 basis points to 17.50 basis
points. The annual facility fee is based on both the commitment amount, and on
the senior, unsecured debt ratings of the Parent Company. Generally, interest
rates will be determined when the credit line is used, and they will vary based
on the type of loan extended to the Parent Company. Additionally, the line of
credit contains financial covenants related to tangible net worth and double
leverage ratios, and it requires that the Parent Company's banking affiliates
maintain certain capital levels. At December 31, 2001, the Parent Company was
in compliance with these covenants and requirements. Additionally, a $395
million committed back-up line of credit related to the former Wachovia will
expire in March 2002.
On December 31, 2001, the Parent Company was indebted to subsidiary
banks in the amount of $268 million that, under the terms of revolving credit
agreements, was collateralized by certain interest-bearing balances,
securities, loans, premises and equipment, and it was payable on demand. On
December 31, 2001, a subsidiary bank had loans outstanding to Parent Company
nonbank subsidiaries in the amount of $39 million that, under the terms of a
revolving credit agreement, were collateralized by securities and certain
loans, and they were payable on demand. The Parent Company has guaranteed
certain borrowings of its subsidiaries that at December 31, 2001, amounted to
$580 million.
At December 31, 2001, the Parent Company's subsidiaries, including its
bank subsidiaries, had available retained earnings of $999 million for the
payment of dividends to the Parent Company without regulatory or other
restrictions. Subsidiary net assets of $30 billion were restricted from being
transferred to the Parent Company at December 31, 2001, under regulatory or
other restrictions.
At December 31, 2001 and 2000, the estimated fair value of the Parent
Company's loans was $9.9 billion and $7.1 billion, respectively. See Note 9 for
information related to the Parent Company's junior subordinated deferrable
interest debentures.
The Parent Company's condensed balance sheets as of December 31, 2001
and 2000, and the related condensed statements of income and cash flows for
each of the years in the three-year period ended December 31, 2001, follow.
104
- -------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
December 31,
-------------------------
(In millions) 2001 2000
- -----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11 45
Interest-bearing balances with bank subsidiary 5,629 3,977
Securities purchased under resale agreements 1,698 1,729
- -----------------------------------------------------------------------------------------------
Total cash and cash equivalents 7,338 5,751
- -----------------------------------------------------------------------------------------------
Trading account assets 16 28
Securities (amortized cost $1,129 in 2001; $1,351 in 2000) 1,135 1,311
Loans, net 73 64
Loans due from subsidiaries
Banks 5,200 2,875
Nonbanks 4,656 4,166
Investments in wholly owned subsidiaries
Banks 29,665 15,414
Nonbanks 3,473 2,811
- -----------------------------------------------------------------------------------------------
Total 33,138 18,225
Investments arising from purchase acquisitions 1,012 979
- -----------------------------------------------------------------------------------------------
Total investments in wholly owned subsidiaries 34,150 19,204
- -----------------------------------------------------------------------------------------------
Other assets 1,447 578
- -----------------------------------------------------------------------------------------------
Total $54,015 33,977
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper 3,045 1,929
Other short-term borrowings with affiliates 2,491 3,092
Other liabilities 1,099 682
Long-term debt 16,565 11,596
Junior subordinated deferrable interest debentures 2,360 1,331
- -----------------------------------------------------------------------------------------------
Total liabilities 25,560 18,630
Stockholders' equity 28,455 15,347
- -----------------------------------------------------------------------------------------------
Total $54,015 33,977
===============================================================================================
105
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
(In millions) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
INCOME
Dividends from subsidiaries
Banks $ 1,245 2,836 3,150
Nonbanks 310 368 40
Interest income 708 757 470
Fee and other income 966 854 1,130
- ----------------------------------------------------------------------------------------------------------------------------
Total income 3,229 4,815 4,790
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSE
Interest on short-term borrowings 145 228 134
Interest on long-term debt 778 802 576
Noninterest expense 928 941 898
- ----------------------------------------------------------------------------------------------------------------------------
Total expense 1,851 1,971 1,608
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes (benefits), equity in undistributed net income (loss)
of subsidiaries and cumulative effect of a change in accounting principle 1,378 2,844 3,182
Income taxes (benefits) (2) (64) 2
- ----------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed net income (loss) of subsidiaries
and cumulative effect of a change in accounting principle 1,380 2,908 3,180
Equity in undistributed net income (loss) of subsidiaries 239 (2,770) 43
- ----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in accounting principle 1,619 138 3,223
Cumulative effect of a change in the accounting for beneficial
interests, net of income taxes -- (46) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income 1,619 92 3,223
Dividends on preferred stock 6 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders $ 1,613 92 3,223
============================================================================================================================
106
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------------------
(In millions) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,619 92 3,223
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Equity in undistributed net (income) loss of subsidiaries (239) 2,770 (43)
Cumulative effect of a change in accounting principle -- 46 --
Securities transactions 45 (2) (4)
Depreciation, goodwill and other amortization 251 284 202
Deferred income taxes (22) 10 13
Trading account assets, net 12 5 (24)
Other assets, net (231) (454) 284
Other liabilities, net 235 69 162
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,670 2,820 3,813
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase (decrease) in cash realized from
Sales and maturities of securities 723 794 352
Purchases of securities (476) (975) (918)
Advances to subsidiaries, net 364 (2,352) (840)
Investments in subsidiaries (189) (530) (253)
Longer-term loans originated or acquired (29) (149) (84)
Principal repaid on longer-term loans 136 143 40
Purchases of premises and equipment, net 10 2 27
Cash equivalents acquired, net of purchase acquisitions 2,112 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 2,651 (3,067) (1,676)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in cash realized from
Commercial paper (515) (99) 399
Other short-term borrowings, net (601) 546 13
Issuance of junior subordinated deferrable interest debentures -- -- 300
Issuances of long-term debt 1,903 4,024 1,378
Payments of long-term debt (1,178) (713) (1,554)
Issuances of preferred shares 23 -- --
Issuances of common stock (44) 152 143
Purchases of common stock (1,284) (690) (1,813)
Cash dividends paid (1,038) (1,888) (1,817)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (2,734) 1,332 (2,951)
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,587 1,085 (814)
Cash and cash equivalents, beginning of year 5,751 4,666 5,480
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,338 5,751 4,666
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PAID FOR
Interest $ 797 970 705
Income taxes 530 127 115
NONCASH ITEM
Increase in investments in subsidiaries as a result of acquisitions of institutions
for common stock $ 12,998 34 1,251
=================================================================================================================================
107
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
L.M. Baker Jr.
Chairman
G. Kennedy Thompson
President and Chief Executive Officer
Robert S. McCoy Jr.
Vice Chairman and Co-Head,
Merger Integration
David. M. Carroll
Senior Executive Vice President and Co-Head,
Merger Integration; Head of Specialty Finance
and Corporate Support Services
Stephen E. Cummings
Senior Executive Vice President and Co-Head,
Corporate and Investment Bank
Jean E. Davis
Senior Executive Vice President and
Head of Information Technology,
eCommerce and Operations
Malcolm E. Everett III
Senior Executive Vice President and
Head of Corporate and Community Affairs
Paul G. George
Senior Executive Vice President and
Director of Human Resources
W. Barnes Hauptfuhrer
Senior Executive Vice President and Co-Head,
Corporate and Investment Bank
Benjamin P. Jenkins III
Senior Executive Vice President and President,
General Bank
Robert P. Kelly
Senior Executive Vice President and Chief
Financial Officer
Stanhope A. Kelly
Senior Executive Vice President and President,
Wealth Management
Donald A. McMullen Jr.
Senior Executive Vice President and President,
Capital Management
Mark C. Treanor
Senior Executive Vice President, General
Counsel and Secretary
Donald K. Truslow
Senior Executive Vice President and
Chief Risk Management Officer
BOARD OF DIRECTORS
F.Duane Ackerman
Chairman, President and Chief
Executive Officer,
BellSouth Corporation
Atlanta, Georgia
John D. Baker II
President and Chief Executive Officer,
Florida Rock Industries,
Jacksonville, Florida
L.M. Baker Jr.
Chairman,
Wachovia Corporation
Charlotte, North Carolina
James S. Balloun
Chairman, President and Chief
Executive Officer,
Acuity Brands, Inc.
Atlanta, Georgia
Robert J. Brown
Chairman and Chief Executive Officer,
B&C Associates, Inc.
High Point, North Carolina
Peter C. Browning
Chairman,
Nucor Corporation
Charlotte, North Carolina
John T. Casteen III
President,
University of Virginia
Charlottesville, Virginia
William H. Goodwin Jr.
Chairman,
CCA Industries, Inc.
Richmond, Virginia
Robert A. Ingram
President and Chief Operating Officer,
Pharmaceutical Operations,
GlaxoSmithKline plc
Research Triangle Park, North Carolina
Radford D. Lovett
Chairman,
Commodores Point Terminal Corporation
Jacksonville, Florida
Mackey J. McDonald
Chairman, President and Chief
Executive Officer,
VF Corporation
Greensboro, North Carolina
Joseph Neubauer
Chairman and Chief Executive Officer,
ARAMARK Corporation
Philadelphia, Pennsylvania
Lloyd U. Noland III
Chairman, President and Chief
Executive Officer,
Noland Company
Newport News, Virginia
Ruth G. Shaw
Executive Vice President and Chief
Administrative Officer,
Duke Energy Corporation
Charlotte, North Carolina
Lanty L. Smith
Chairman,
Soles Brower Smith & Co.
Greensboro, North Carolina
G. Kennedy Thompson
President and Chief Executive Officer,
Wachovia Corporation
Charlotte, North Carolina
John C. Whitaker Jr.
Chairman and Chief Executive Officer,
Inmar Enterprises, Inc.
Winston-Salem, North Carolina
Dona Davis Young
President and Chief Operating Officer,
The Phoenix Companies, Inc.
Hartford, Connecticut
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE
Lanty L. Smith, Chairman
L.M. Baker Jr.
Peter C. Browning
William H. Goodwin Jr.
Robert A. Ingram
Joseph Neubauer
G. Kennedy Thompson
John C. Whitaker Jr.
Robert P. Kelly (Staff)
Mark C. Treanor (Staff)
AUDIT & COMPLIANCE COMMITTEE
John T. Casteen III, Chairman
F.Duane Ackerman
William H. Goodwin Jr.
Lanty L. Smith
Robert P. Kelly (Staff)
William B. Langley (Staff)
Peter J. Schild (Staff)
CREDIT & FINANCE COMMITTEE
Mackey J. McDonald, Chairman
John D. Baker II
Lloyd U. Noland III
Dona Davis Young
Donald Truslow (Staff)
Thomas J. Wurtz (Staff)
MANAGEMENT RESOURCES &
COMPENSATION COMMITTEE
Peter C. Browning, Chairman
Robert J. Brown
Robert A. Ingram
Ruth G. Shaw
Paul G. George (Staff)
MERGER INTEGRATION & TECHNOLOGY
COMMITTEE
Joseph Neubauer, Chairman
James S. Balloun
Radford D. Lovett
John C. Whitaker Jr.
David M. Carroll (Staff)
Jean E. Davis (Staff)
Robert S. McCoy Jr. (Staff)
CORPORATE GOVERNANCE & NOMINATING
COMMITTEE
John C. Whitaker Jr., Chairman
Peter C. Browning
William H. Goodwin Jr.
Robert A. Ingram
Joseph Neubauer
Lanty L. Smith
L.M. Baker Jr. (Staff)
G. Kennedy Thompson (Staff)
Mark C. Treanor (Staff)
108
STOCKHOLDER INFORMATION
HOW TO CONTACT US
INVESTOR RELATIONS CONTACT
Alice Lehman, head of Investor Relations
704-374-2137
Annual and quarterly financial information is available
online through the Investor Relations link on either
wachovia.com or firstunion.com.
SHAREHOLDER SERVICES/TRANSFER AGENT
First Union National Bank
1-800-347-1246
1525 West W.T. Harris Boulevard 3C3
Charlotte, North Carolina 28288-1153
Stockholders seeking help with a change of address, records
or information about lost certificates, dividend checks or
dividend reinvestment should contact the transfer agent.
MEDIA CONTACT
Ginny Mackin, senior vice president
Corporate Communications
704-374-6444
SNAPSHOT
Ticker, NYSE: WB
Total revenue: $14 billion
Cash operating net income: $2.8 billion
Cash operating earnings per share: $2.50
ANNUAL MEETING
Tuesday, April 16, 2002, 9:30 a.m.
Charlotte Marriott City Center
100 West Trade Street
Charlotte, North Carolina
CORPORATE HEADQUARTERS
Wachovia Corporation
301 South College Street, Suite 4000
Charlotte, North Carolina 28288-0013
704-374-6161
Wachovia Corporation is an equal opportunity employer.
WACHOVIA CORPORATION
ONE WACHOVIA CENTER
CHARLOTTE, NC 28288-0206
This publication is printed on recycled paper.
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