EXHIBIT 13
RESERVED FOR 1999 ANNUAL REPORT TO SHAREHOLDERS
-108-
Annual Report
1999
(Photos of people)
WACHOVIA
- --------------------------------------------------------------------------------
1999 News Highlights
o Wachovia strengthened capabilities with a series of strategic mergers and
acquisitions during 1999.
Mergers were completed with:
Interstate/Johnson Lane, a leading Southeastern full-service broker-dealer and
investment banking firm based in Charlotte, North Carolina.
OFFITBANK, a New York-based wealth management company serving high-net-worth
individuals and institutional clients.
Barry, Evans, Josephs & Snipes, a national insurance broker based in Charlotte,
with specialty in wealth management strategies for affluent clients.
In October, Wachovia announced plans to acquire B C BANKSHARES, parent company
of the Bank of Canton, with eight branches in the Atlanta area. The transaction
was completed in February 2000.
Wachovia announced plans in December to purchase the $2 billion credit card
portfolio of PARTNERS FIRST HOLDINGS and completed the transaction in January
2000.
o Expanding its FLORIDA PRESENCE, Wachovia established a state headquarters
in Tampa, extended its corporate network and announced plans for market
expansion in the state. In January 2000, Wachovia opened an OFFITBANK
representative office in Miami to provide wealth management services to the
upper tier of the affluent market.
o Recognized for pioneering efforts in the field of image technology,
Wachovia RECEIVED A PATENT for the processes and systems that support
disbursement services for more than 1,000 corporate customers.
o Wachovia was named ONE OF THE BEST INTERNET BANKS IN THE NATION by a number
of professional journals and rating agencies, including Smart Money
magazine, CNN and Money Line. Wachovia's commitment to the Internet as a
vital customer delivery channel is reflected in the January 2000 formation
of an eBUSINESS DIVISION that will provide centralized, strategic
leadership and support for initiatives across all lines of business.
o Named to Wachovia Corporation's Board of Directors during 1999 were G.
JOSEPH PRENDERGAST, president and chief operating officer of Wachovia
Corporation; MORRIS W. OFFIT, chairman and chief executive officer of
OFFITBANK; and ELIZABETH VALK LONG, executive vice president of Time Inc.
1
- -------------------------
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
Percent
1999 1998 Change
------- ---- --------
EARNINGS AND DIVIDENDS
(thousands, except per share data)
Net income (1) ........................................... $ 1,011,221 $ 874,170 15.7
Cash dividends paid on common stock ...................... 418,447 381,798 9.6
Payout ratio (total cash dividends / net income) ......... 41.4 % 43.7 %
Net income per common share:
Basic ................................................... $ 4.99 $ 4.26 17.1
Diluted ................................................. $ 4.90 $ 4.18 17.2
Cash dividends paid per common share ..................... $ 2.06 $ 1.86 10.8
Average basic shares outstanding ......................... 202,795 205,058 ( 1.1)
Average diluted shares outstanding ....................... 206,192 209,153 ( 1.4)
Return on average assets ................................. 1.55% 1.37%
Return on average shareholders' equity ................... 18.62 16.92
BALANCE SHEET DATA AT YEAR-END
(millions, except per share data)
Total assets ............................................. $ 67,353 $ 64,123 5.0
Interest-earning assets .................................. 59,583 56,537 5.4
Loans -- net of unearned income .......................... 49,621 45,719 8.5
Deposits ................................................. 41,786 40,995 1.9
Interest-bearing liabilities ............................. 50,973 48,558 5.0
Shareholders' equity ..................................... 5,658 5,338 6.0
Shareholders' equity to total assets ..................... 8.40% 8.32%
Risk-based capital ratios:
Tier I capital .......................................... 7.52 7.99
Total capital ........................................... 10.98 11.34
Per share:
Book value .............................................. $ 28.04 $ 26.30 6.6
Common stock closing price (NYSE) ....................... 68.00 87.44 (22.2)
Price/earnings ratio (2) ................................ 13.88 x 20.92 x
EXCLUDING EFFECTS OF NONRECURRING ITEMS (1)
(thousands, except per share data)
Net income ............................................... $1,023,855 $929,847 10.1
Net income per diluted common share ...................... $ 4.97 $ 4.45 11.7
Return on average assets ................................. 1.57% 1.45%
Return on average shareholders' equity ................... 18.86 17.99
Price/earnings ratio (2) ................................. 13.68 x 19.65 x
(1) Nonrecurring items in 1999 and 1998 include merger-related charges of
$19,309 and $85,312, respectively.
(2) Price/earnings ratio is based on end-of-year stock price and net income per
diluted share.
2
- -------------------------------------------------------
Wachovia Corporation
- --------------------------------------------------------------------------------
Wachovia Corporation ("Wachovia"), with a history dating back to 1879, is a
major bank holding company with dual headquarters in Winston-Salem, North
Carolina, and Atlanta, Georgia. Its principal subsidiaries are Wachovia Bank,
N.A., which operates in Georgia, North Carolina, South Carolina, Virginia and
Florida, and The First National Bank of Atlanta, which provides credit card
services nationwide. At December 31, 1999, Wachovia's assets of $67.353 billion
and market capitalization of $13.723 billion both ranked 16th among U.S.
banking companies. Wachovia offers credit and deposit services, insurance,
investment and trust products, capital markets, wealth management and
information services to consumers, primarily in the Southeast, and to both
domestic and foreign corporations. Wachovia provides consumer products and
services through a network of retail branches, ATMs, Wachovia On-Call telephone
banking, automated Phone Access and internet-based investing and banking at
www.wachovia.com. It provides global solutions to corporate clients through
locations in Chicago, London, New York and S-o Paulo, through representative
offices in Hong Kong and Tokyo, and through worldwide strategic alliances.
- ------------------------------------------------------------
Selected Year-End Data
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- ------- -------
Trust assets (millions):
Discretionary management ..................... $ 51,922 $ 42,025 $ 33,568 $ 26,161 $22,409 $18,122
Total ........................................ $132,733 $138,130 $129,079 $108,557 $97,952 $83,973
Banking offices:
North Carolina ............................... 190 198 201 220 219 216
Virginia ..................................... 234 263 341 242 242 228
Georgia ...................................... 132 131 130 123 124 127
South Carolina ............................... 119 120 125 145 146 150
Florida ...................................... 37 40 33 ---- ---- ----
--------- -------- -------- -------- ------- -------
Total ..................................... 712 752 830 730 731 721
========= ======== ======== ======== ======= =======
Automated banking machines:
North Carolina ............................... 446 446 423 351 328 297
Virginia ..................................... 286 304 325 221 211 194
Georgia ...................................... 301 299 282 222 204 189
South Carolina ............................... 284 289 272 213 180 166
Florida ...................................... 38 34 6 ---- ---- ----
--------- -------- -------- -------- ------- -------
Total ..................................... 1,355 1,372 1,308 1,007 923 846
========= ======== ======== ======== ======= =======
Employees (full time equivalent) .............. 21,294 20,936 21,652 19,969 19,642 19,148
Common stock shareholders ..................... 52,178 53,971 55,681 47,892 42,868 43,503
Common shares outstanding (thousands) ......... 201,812 202,986 205,927 201,253 208,341 208,095
- -----------------------------------------------------------------------
Forward-Looking Statements
- --------------------------------------------------------------------------------
The Annual Report of Wachovia Corporation contains forward-looking statements
as encouraged by the Private Securities Litigation Reform Act of 1995. All
forward-looking statements involve risks and uncertainty and any number of
factors could cause actual results to differ materially from the anticipated
results or other expectations expressed in forward-looking statements. Risks
and uncertainties that may affect future results include, but are not limited
to, changes in the economy, interest rate movements, timely development by
Wachovia of technology enhancements for its products and operating systems, the
impact of competitive products, services and pricing, Congressional legislation
and similar matters. Management cautions readers not to place undue reliance on
forward-looking statements, which are subject to influence by the named risk
factors and unanticipated future events.
3
Letter To Shareholders
(Photo appears here with the following caption)
Standing:
L. M. Baker, Jr.
Chairman and
Chief Executive Officer
Seated, left to right:
G. Joseph Prendergast
President and
Chief Operating Officer
Robert S. McCoy, Jr.
Vice Chairman,
Chief Financial Officer
Dear Wachovia Shareholder,
The year 1999 was challenging for banking companies. After posting remarkable
performance in every year since 1994, the shares of many traded well below
yearly highs. This is discouraging but can be understood. The world is in
transition from the old economy to the new. Investors are thinking about the
future. They want to understand that their banks are too.
Ironically, a number of banks reported solid earnings in 1999, on track with
market expectations. And yet, in the eyes of investors banks have lost a degree
of lustre in the face of perceived bonanzas dangling from the Internet.
In truth, investors may be justified in reacting nervously to the uncertainty of
future earnings growth. They are questioning the value proposition banks offer
to customers. They are worried about risk. The real question is, "Who will
prosper in the new world?" In order to answer this question it is important to
understand what is going on.
Presently the world is playing out the last vestiges of the Industrial
Revolution, completing its phase of globalization while preparing for a new
emerging economic paradigm. The foundation of this paradigm is built upon the
diffusion of information throughout society, advances in communication
technology and free and open access to knowledge across the globe. In this new,
emerging society, material and its constructs are less important. Knowledge is
key, and its acquisition potentially offsets the stricture of traditional
regimens and the inertia caused by geographic, political or organizational
boundaries. Traditional sources of power and prestige are dissipating.
Democratic capitalism, financial
4
innovation, global integration and massive technology improvement are bedrock in
the new world.
The new economy, built on creativity and ideas, will not be measured by bulk
production but by better quality, instant availability, variety, ease of use and
less repair. As a result of technology and the application of science, products
and services will get cheaper and better.
The early benefits of the new economy can be seen:
o We continue to enjoy a nine-year economic expansion with low inflation,
record low unemployment and low interest rates. There is little in sight to
support an interruption to growth.
o In recent years the economy has absorbed internal and external shocks from
the dissolution of the Soviet Union, the Asian currency crisis, weakness in
South American markets and the debacle of unsound hedge funds. In the wake
of each, financial markets rebounded promptly.
o The American economy has become broad, diverse and global in a short period
of time. This has narrowed volatility. Not many years ago the economy moved
on cars and houses. Today these are less important. The economic structure
is now dominated by mind rather than matter. The economy is diverse and
rich with the entrepreneurial spirit. New companies are built on ideas,
creativity and efficient communication.
o Government spending as a percentage of gross domestic product is shrinking,
and surpluses are possible at state and national levels. This is a far cry
from the '80s refrain that $200 billion federal deficits loomed as far as
the eye could see. Strong economic growth, low inflation and high
employment have combined to save us from the wastrel tendencies of many
elected officials.
o Governments are being forced to adopt more benign tax, trade and social
policies relating to the economy. Smart politicians have a sense of the new
economy and see strong business and healthy commerce as enabling of the
social good.
o Inflation control is a priority of most, if not all, developed and
developing nations. Serious effort is being given to preserving currency
value and enhancing stability.
o American business has evolved from leadership by the managerial class to
leadership by the entrepreneurial class. Bloated bureaucracy and
hierarchical organization have given way to innovation and persistent
questioning of old process and procedure. Creative destruction has become a
watchword in organizational thinking. There is a new business ethic built
upon high performance.
o Notwithstanding hiring pressure, employment costs are tame and will remain
so. Requests for higher wages are met with demand for strong productivity,
thus boosting the standard of living for all. Many standard of living
increases are not captured due to new products and services that cannot be
measured by traditional indices.
o The Digital Revolution, the Genetic Revolution and the Material Science
Revolution are merging
5
within an economy increasingly propelled by synergies and complementary
capabilities. New jobs are being produced. Huge boosts to productivity are
in evidence, with more not yet properly identified and measured. The end
result will be higher standards of living and sustained wealth creation for
more people. Costs in the future economy will plummet.
o The Internet makes information available for all, and the feedback effect
ripples through the economy, stimulating creativity. Electronic commerce is
a revolutionary driving force in the transition from the old business
method to the new.
o Finally, the myth underlying American optimism has become reality for
producers, consumers and investors. Every day those who believe in the new
economy become more firmly entrenched. Every day there are more disciples
who embrace the revolution. It is good to remember that in the great sweep
of American history, pessimists have always been wrong.
While shouldering the effects of these changes, we have entered an economic
cycle that will be distinguished by a moderate rate of growth. A nominal growth
rate of 3 to 5 percent is a dramatic swing from levels achieved in the 1980s and
early '90s. In the future, inflation will not provide pricing buoyancy that has
helped many corporations sustain top-line growth. The economy will perform well
but at a subdued pace.
From time to time in the coming decade, price levels will be deflationary. In
some cases, the cost of raw materials will moderate, reflecting new processing
and extractive techniques influenced by technology. Labor costs will be subdued
by an abundance of low-wage talent from the emerging world. New capabilities
arising from technology will make manufacturing more efficient. Investment in
technology will remain high but technology itself will be a benign factor
potentially helping to retard expense growth.
Today, the world is defined by capital, ideas and energy. These do not abide by
artificial or political boundaries. New and exciting uses of information are
changing traditional alignment. Some countries are experiencing difficulty
adjusting to the new global economy. This has subdued their rate of growth and
elevated risk in the eyes of investors, but it does not alter the long-term
attractiveness of emerging markets. Around the world millions of people are
free. They will work hard to achieve a better life. Longer term, global economic
growth will be sustained.
There is revolution under way in the development and application of technology.
This adds astonishing vitality to the economy. Many benefits await. We are only
in the beginning stages of the revolution.
The most significant factors at work are the rapid diffusion of technology
through society and the ability to use information productively. Useful
technology and inexpensive information are available to everyone across the
globe.
The lower cost and greater availability of information make it a trump card for
innovators. In the future, this incredible capability will destroy artificial,
inefficient structures at all levels of society. The revolution threatens the
existence of traditional political, social and business structures.
6
These are major forces at work fueling a challenging transition in our lives:
o A lower nominal growth environment
o Price stability
o The evolution of the global construct
o The substitution of knowledge and technology for labor
These factors are stimulating change in process, procedure and business
practice. They are causing boundaries to evaporate and standards to be
rethought. The combination of lower nominal growth, the lack of pricing power
and the incredible revolution in technology is causing our lives to turn upside
down, and it will test us severely in the years ahead. This will be a
challenging world, but one where enormous opportunities abound.
In the last five years, Wachovia has undergone its own revolution to strengthen
lines of business, bring technology to customers, stimulate growth in revenue,
better manage costs and capital, develop leadership and teach our people to
grow. The results are impressive. Revenue has grown at 11 percent annually,
shifting toward fee income and reducing reliance on the net interest margin. At
the same time, strong growth in loans and core deposits contributed to excellent
margin-related revenue performance. While absorbing the investment required to
improve revenue and build a growth culture, the overhead ratio has been superb
for a bank with a large retail franchise. Low rate consumer deposits have
largely been repriced through introduction of new products. This repricing has
weighed upon the margin in the short run but avoids violent disintermediation
and loss of customers in the future.
(Photo appears here with the following caption.)
Standing, left to right:
Kenneth W. McAllister
Senior Executive Vice President,
General Counsel/Administrative
Services
Donald K. Truslow
Senior Executive Vice President,
Treasurer/Comptroller
John C. McLean, Jr.
Senior Executive Vice President,
Corporate Financial Services
Seated, left to right:
Stanhope A. Kelly Senior
Executive Vice President,
General Banking
Jean E. Davis
Senior Executive Vice President,
Operations/Technology
Mickey W. Dry
Senior Executive Vice
President, Chief Credit Officer
7
Mergers helped build a presence in Virginia, establish a new position in Florida
and add capabilities in wealth management, corporate finance and investment
banking. Recent mergers were completed with OFFITBANK, a premier company
dedicated to wealth management, and Barry, Evans, Josephs & Snipes, an insurance
broker serving risk management and investment needs of wealthy clients. In each
new alliance, valuable products, service techniques and new creative leadership
have joined Wachovia.
In recent years, line of business and support organizations have undergone
growth initiatives to impart to our people a true understanding of the necessary
ingredients for growth. Systems have been installed to provide information and
operational capability at the point of customer contact. Businesses that lack
high growth characteristics have been sold or dismantled.
Branches that could not achieve strong volume and profit growth have been closed
or sold. This is the kind of discipline necessary to ensure that time, energy
and resources are targeted to the highest opportunity for growth.
In the years ahead it will be critically important to provide greater value to
customers. High levels of service and meaningful interaction will be important.
In this demanding world Wachovia will continue to bring superior service to
customers through meaningful relationships not easily found in a crowded, hectic
financial marketplace.
Therefore, execution will be another critical hallmark of those who do well. For
example, it will not be sufficient to offer "electronic commerce" if customers
lack unfettered access to accounts, information and service. The efficient
integration of technology is a differentiating skill. The ability to use
technology effectively is a long-time strength of Wachovia and it is currently
being recognized in service excellence with consumers and corporations.
It will be necessary to practice relentless cost management. Growth demands
investment. Excellent people are required. Technology is essential. In the face
of the requirement for growth, the management of costs will help define
performance. Wachovia has an exceptional record of cost discipline over cycles.
In recent years our productivity has improved steadily while strong growth
initiatives have been pursued.
The final differentiation in performance will lie in risk management. The new
world will present new risks. The ability to assess, monitor and manage risk in
assets, investment and execution will define excellence as surely in the future
as it has in the past.
In recent quarters the levels of nonperforming loans in banks have gained
scrutiny from investors who are understandably wary in the wake of disclosures
of excessive risk in hedge funds and global markets. The reaction to problems
disclosed in the fall of 1998 was exceptionally swift. This was to be expected.
It is reassuring and healthy to note that investors still harbor a passionate
desire to be repaid.
Problem loans to corporations and consumers will rise in the future. The
intricate nature of the business environment coupled with the incredible pace of
change under way means that companies operate in a complex environment. The
uncertainty of these times demands vigilance, discipline and care in the
management of risk.
8
The exceptional discipline you have come to expect in Wachovia is still there.
Risk in the company is more professionally managed than ever before. This is not
to assert that as the economic cycle unfolds we will be free of problems. We
will have our share. But you may be assured that these will always be promptly
identified, reported and aggressively managed to protect your investment. Credit
losses in each line of business are well below industry standards. I believe
they will continue to be so. This has always been and remains a top corporate
priority.
Currently, executive officers of the company are engaged in two important,
related projects. The first is a new strategic assessment. This process includes
auditing existing lines of business for performance, but is primarily forward
thinking. The methodology employed attempts to throw off the restraints of
traditional organizational thinking. This work will shape our thinking about the
future.
The second project, an evolving component of the strategic assessment, is a
performance project. Wachovians are evaluating future performance including
growth in revenue, renewed focus on cost management and investment discipline.
The results of this work will be beneficial to shareholders in the years ahead.
It will give Wachovia additional strength in a new, evolving environment. It
will help provide flexibility as continuing investment is made in high growth
areas and in technology.
In recent years substantive work has been done to more closely align Wachovia's
capabilities with customer interests. The result is a company with major lines
of business that are poised to smartly move ahead. Later sections of this report
share line of business summaries. From this information it is possible to
discern performance improvement and a pattern of consistent growth that has a
sense of real promise. Several examples follow.
Wachovia enjoys a large, respected and profitable corporate bank with many
opportunities to expand the number of customers and the things we do with them.
Double-digit rates of growth are expected as multiple services are sold to new
and existing customers. New capabilities in capital markets and investment
banking are bolstering sales to middle market customers. Strong growth is
anticipated in small business banking.
Asset and wealth management is an exciting area with enormous potential for
growth. Our "wealth" model has been refined in recent years. New capabilities
have been added. Wachovia's wealth business methodology works. It is a success.
We anticipate double-digit growth and high profit margins. Results in this
growing market will be largely determined by the number of financial advisor
teams we choose to put into the field.
Wachovia's consumer bank provides enormous profit contribution and absorbs
substantial expense. Wachovia may well be the best bank in America in serving
the real needs of retail customers. Notwithstanding that level of achievement,
the business model is being refined to lower costs, elevate productivity and
extend services. Sales are rising and we are doing a good job with customers. We
will continue to seek a business model that exhibits "breakout" capabilities.
Wachovia's credit card operation is large, successful and highly profitable. In
performance and profitability we
9
(Photo appears here)
compare very favorably with the best performers. The flexibility exists to move
this line of business forward. In recent years we have restrained its growth to
avoid taking on low quality accounts. Currently our credit losses and operating
costs are superior to competitors.
All of this is to say that we are very good at what we do, and customers are
receiving real value. In each line of business our business models have been
refined. Suddenly, the new world has a bright look to it.
This is the transformation at Wachovia that is producing strong growth while
building for sustained long-term expansion. Wachovia is changing and moving
rapidly to the future. We remain committed to strong growth, high standards of
performance and unmatched service quality over time. The section following this
letter tells in elaborate detail of Wachovia's work in asset and wealth
management. The story is a good one. Important to remember is that similar
initiatives are under way across this great company.
In the long path of history Wachovia's performance has always been excellent.
Consistent with our superior risk management, passionate devotion to quality and
our dedication to serve is the promise of exceptional shareholder returns over
time.
Sincerely,
/s/ L. M. Baker, Jr.
L. M. Baker, Jr.
Chairman and Chief Executive Officer
February 28, 2000
10
(Photos of people appear in the background)
Special
Report
Wachovia's Strategy
For Serving The Affluent
More than five million
men and women from all
walks of life.
Nearly 240,000
businesses and corporations.
Hundreds of charitable
institutions.
Several thousand
financial institutions and
governmental agencies.
As these statistics reflect, Wachovia serves a broad and diverse customer base.
Each customer group is important. Each claims a share of the corporation's
resources and strategic focus.
12
Within this cross-section of today's society, one population segment is
experiencing extraordinary growth and presenting new opportunities and
challenges for financial service providers.
THE AFFLUENT... THE WEALTHY...
HIGH-NET-WORTH INDIVIDUALS.
AND THOSE ON THE VERGE OF JOINING THEM.
Wachovia targeted the affluent as an area of heightened focus in 1994 and has
since moved on numerous fronts to align resources, enhance delivery channels,
and strengthen and acquire key capabilities.
Results are evident in the steady upward climb in revenue and profit
contribution from Wachovia's wealth management business.
This special report looks at Wachovia's strategy for serving the affluent.
Increasingly, that strategy touches areas across the corporation.
(Photos of people appear here)
13
(Photos of people appear here)
Today's Wealthy: A BRAND NEW MIX,
A BOLD NEW CHALLENGE
Millionaire. Traditionally, the word has evoked an image of white hair and green
pastures, a polished cadre of old-monied protectors and passers-on of wealth.
The image still holds, but it no longer stands alone.
Today's "newly wealthy" are a diverse and colorful mosaic. Greater wealth has
come to people of all ages from all walks of life, thanks to long-term economic
prosperity, stock options, initial public offerings, sales of businesses, a
record number of inheritances and other wealth creation events.
Many of today's affluent are youthful, entrepreneurial, idea-driven,
future-focused individuals, keenly interested in innovative approaches to
long-term wealth management and willing to delegate that management and move on
with life.
It is an extraordinarily fast-growing group.
The growth rate for affluent households in the United States with incomes of
$100,000 or more or net worth of $500,000 or more is 10 times the growth rate
for overall households. The growth in millionaire households is 12 times the
national rate.
Within the United States, 3.3 million households now have investable assets of
$1 million or more. Pentamillionaire households have grown from 90,000 in 1994
to 590,000 in 1999 and are projected to reach 3.9 million by 2004.
For financial service providers, this high-growth, high-net-worth population is
a veritable gold mine of opportunity. In Wachovia's home states alone, the
affluent market represents revenue potential in excess of $50 billion.
- --------------------------------------------------------------------------------
Affluent households are growing at 10 times the national household growth rate.
In Wachovia's home states alone, the affluent market represents revenue
potential in excess of $50 billion.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Within the United States, 3.3 million households now have investable assets of
$1 million or more. Pentamillionaire households have grown from 90,000 in 1994
to 590,000 in 1999 and are projected to reach 3.9 million by 2004.
- --------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------
Much of today's wealth is self-made. In 1980, 60 percent of the nation's 400
wealthiest individuals had inherited the majority of their money. By 1997, the
figure had dropped to 20 percent.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Looking to the future, intergenerational wealth transfer will reach an all-time
high. One study projects $41 trillion over the next decade, to be passed through
113 million bequests.
- --------------------------------------------------------------------------------
(Graph appears here with the following plot points.)
1994 1999 2004
10.8 18.4 31.0
Growth of
U.S. Affluent Households
(Household Income > $100K or
Net Worth > $500K)
Source: Spectrem Group
Yet this is a discerning and demanding market. More than ever, today's affluent
reflect a wide variance in financial knowledge and expertise, risk and reward
tolerances, delivery channel preferences, and loyalties to sources of counsel
and advice.
Financial service providers seeking to establish positions of leadership within
the affluent market must understand the changing needs and nature of this
complex group.
Today, with many individuals acquiring substantial assets early in life, there
is greater need for long-term planning and management. In addition to investment
and tax strategy assistance, credit-based options may be needed since liquidity
often is an issue.
High-net-worth individuals typically rely on specialized sources of assistance,
from accountants to insurance planners to investment advisors. Missing among
these sources is a coordinated, integrated approach to financial management.
Today's affluent tend to use technology, looking to the Internet and other
evolving delivery channels as convenient mechanisms for information and
transactions. Yet they value personalization and customization of services.
15
- --------------------------------------------------------------------------------
Wachovia was one of the first providers of trust services in the nation. Its
reputation for product innovation and service excellence spans 121 years and
encompasses a broad range of wealth management and related financial services.
- --------------------------------------------------------------------------------
To be a provider of choice for today's wealth market, a financial institution
must deliver comprehensive financial advice and service in ways that combine the
best features of boutique providers with the missing and much-needed advantages
of integration.
Wachovia is committed to this leadership role and this value proposition - and
has been moving quietly but boldly since 1994 to put into place components for
success.
THE FOUNDATION: Relationship Heritage, Strong Market Presence
As part of a comprehensive company-wide assessment of market opportunities in
1994, Wachovia identified the affluent market as an area of emphasis. Since
then, numerous initiatives have strengthened capabilities and acquired
additional services.
Wachovia's wealth management business has achieved double-digit growth each year
since 1994. Today, Wachovia actively manages more than $50 billion in assets and
administers more than $165 billion in assets. Revenue from this segment has
grown from $205 million in 1995 to $628 million in 1999, and profit contribution
has more than tripled.
Future initiatives are designed to continue that growth and strengthen
Wachovia's market presence.
"In many ways, Wachovia is uniquely equipped to extend its leadership as a
wealth management provider," says Robert S. Kniejski, executive vice president
for Wachovia Asset and Wealth Management. He cites a combination of factors,
some as old as the company itself, others reflecting recent innovations. Among
them: Wachovia's strong relationship heritage, corporate culture, advantageous
geographic location and proven ability to serve high-wealth clients.
Wachovia already has relationships with a large percentage of affluent
households in its home states - Georgia, North Carolina, South Carolina,
Virginia and Florida. These states are among the most prosperous
(Graph appears here with the following information.)
ASSET & WEALTH MANAGEMENT
PRIVATE FINANCIAL ADVISORS
OFFITBANK
BARRY EVANS, JOSEPH & SNIPES
WACHOVIA SECURITIES
WACHOVIA FUNDS
WACHOVIA ASSET MANAGEMENT
INSTITUTIONAL CLIENT SERVICES
WACHOVIA INSURANCE SERVICES
16
(Photos of people appear here)
(Graph appears here with the following plot points.)
1995 1996 1997 1998 1999
Revenues = 32% CAGR* $205 $248 $333 $396 $628
Profit Contribution = 36% CAGR* $60 $71 $109 $143 $205
Pretax Income = 42% CAGR* $32 $37 $77 $93 $132
$Millions
Asset and
Wealth Management Growth
Note: Profit Contribution excludes
general overhead.
*CAGR = Compound Annual Growth Rate
and fastest-growing in the nation; Wachovia's markets are projected to grow more
than 50 percent faster than the national average from 1999 to 2004.
As one of the first providers of trust services in the nation, Wachovia's
reputation for product innovation and service excellence spans 121 years and
encompasses a broad range of wealth management and related financial services.
Wachovia's brand emphasizes relationships in which exceptional knowledge and
service earn customers' trust and loyalty. Key to the success of this brand
promise is the commitment to put customers' interests first. Living up to that
commitment requires an exceptional spirit of teamwork and flexibility across
product areas, business lines and support functions.
In recent years, Wachovia has embraced a concept called Continuous Relationship
Management (CRM), which supports the asset and wealth management strategy by
helping attract, serve, develop and retain high-potential customers.
Throughout Wachovia, the organization is being aligned to take high-potential
customers at any point in their financial journey and continually strengthen the
relationship with them. This enables Wachovia to create closer ties with these
individuals and to become increasingly important to them at each stage.
At the heart of the CRM strategy is a robust information system built to improve
understanding of customers' wants and needs. Based on this insight, Wachovia can
define appropriate customer segments and develop customized approaches tailored
to the needs of each.
Wachovia's use of tailored approaches to serve high-potential customers has been
successful. One important example is the Profitable Relationship Optimization
(PRO) program. Wachovia identifies individuals who, by being at a particular
point in their financial journey, may benefit from additional financial
services. Skilled PRO bankers contact customers to heighten awareness of key
product and service possibilities and to establish a consultative relationship.
- --------------------------------------------------------------------------------
Wachovia's commitment to leadership in serving the affluent market reflects a
dual focus: increasing its share of business with existing affluent customers
and substantially broadening its affluent customer base.
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
Through Wachovia's customer migration approach, Retail Financial Services (RFS)
identifies PRO customers whose needs can best be served by Asset and Wealth
Management (AWM).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRO customers typically are individuals in the asset-accumulation stage, and
many will experience one or more wealth creation events - from stock options to
sales of businesses to sizable inheritances - that will move them to the ranks
of the affluent.
- --------------------------------------------------------------------------------
(Graph appears here with the following information.)
Maximizing Lifetime Customer Value
RFS
MASS
o Targeted Acquisition
AWM
PRO
o Relationship Expansion
AFFLUENT
o Integrated Wealth Management
Customer Migration Growth
The response to PRO has been outstanding, says Beverly B. Wells, executive vice
president for Wachovia Retail Financial Services. She points to retention of PRO
households, which is approximately 8 percentage points greater than overall
household retention. Also notable is the lift in financial contribution by PRO
households. "PRO customers report a significant increase in satisfaction with
their banking relationship," says Wells. "PRO bankers report a similar increase
in job satisfaction from the opportunity to be a partner to these high-potential
customers."
PRO customers typically are in the asset-accumulation stage, and many will
experience one or more wealth creation events that will move them to the ranks
of the affluent. Wells emphasizes that when the time comes that a customer can
best be served by specialist teams in Wachovia Asset and Wealth Management, PRO
bankers are expected to make that recommendation.
Equally important, a high-net-worth business owner or corporate executive served
by the Asset and Wealth Management Division sometimes has needs that can best be
served by Wachovia Capital Markets specialists. When this occurs, the Asset and
Wealth Management staff proactively works with the Capital Markets staff to
achieve the needed coordination.
Identifying opportunities to help customers migrate to a more appropriate level
of service, and ensuring that the transition is smooth and rewarding for each
customer, is a major commitment throughout Wachovia.
This is an important way Wachovia demonstrates the brand promise of putting the
customer's best interests first and builds long-term customer loyalty. In the
process, value is created for Wachovia by seeing that customers are served in
the most effective way.
18
- --------------------------------------------------------------------------------
Wachovia's integrated approach to wealth management delivers a full spectrum of
critical financial disciplines. Extensive internal and external actions have
been taken to build Wachovia's current position of strength.
- --------------------------------------------------------------------------------
THE TRANSFORMATION:
Paving The Way For Integrated Wealth Management
Wachovia's approach to wealth management integrates critical financial
disciplines, including estate planning, tax planning, insurance and risk
management, traditional banking services, brokerage services, investment
management and capital markets products.
"While other financial service providers tout this holistic approach, few if any
deliver it well," says Kniejski. "As a marketing philosophy, financial
integration sounds logical and straightforward. In reality, it is extremely
complex because it works against traditional organizational structures that
delineate and compensate by product or business line."
For Wachovia, the commitment to integrated wealth management has involved a
comprehensive realignment of resources to achieve a team approach to client
service within the Asset and Wealth Management Division, across other business
lines, and beyond Wachovia when appropriate. This team approach has resulted in
broad-based wealth integration networks to serve clients.
Extensive internal and external actions have been taken to build Wachovia's
current position of strength.
o In 1995, Wachovia put in place the formal structure for an affluent
division and, in 1996, adopted the financial integration/team approach as
the foundation for its strategy.
(Graphic appears here)
19
- --------------------------------------------------------------------------------
Wachovia uses a team approach to provide affluent clients access to a broad base
of knowledge. Emphasis is on personalized relationships and tailored solutions.
- --------------------------------------------------------------------------------
o That same year, Wachovia created the Private Financial Advisors (PFA) group
to deliver financial integration to affluent customers. Customer analytics
were used to identify clients to be served by PFA teams and to determine
how best to serve each client based on relationship and potential.
PFA sales teams were formed, each including financial advisors and advisors
for specialties such as investments, insurance, personal trust, credit,
mortgage, estate planning, philanthropy planning and business banking.
Across Wachovia's home states, PFA teams now serve 43,000 clients, and
sales results have been extraordinary. From 1997 to 1999, deposits rose by
19 percent; loans, 62 percent; estate planning, 69 percent; investment
management, 90 percent; and insurance, 386 percent.
o With the success of the PFA strategy, a similar approach was taken to serve
Wachovia's high-net-worth clients who have greater than $10 million in
assets. Using a team approach to provide clients access to a broad base of
knowledge, Wachovia Wealth Strategy Advisors placed special emphasis on
wealth transfer and tax strategies through personalized relationships and
tailored solutions.
o In April 1999, Wachovia acquired Interstate/ Johnson Lane (IJL), one of the
largest full-service broker-dealers in the Southeast. The match with
Wachovia was considered exceptional in terms of capabilities, geographic
market, customer base and relationship orientation.
Today, IJL Wachovia provides full-service brokerage through 62 offices and 450
financial consultants in Virginia, North Carolina, South Carolina and Georgia.
(Graph appears here with the following information.)
CLIENT
Financial Advisor
INSURANCE ADVISOR
Banking/Credit o Brokerage Services o Tax Planning
INVESTMENT MANAGEMENT ADVISOR
TRUST ADVISOR
Financial Planning o Business Services o Trusts
ESTATE PLANNING ADVISOR
Retirement Planning o Mortgage o Education Funding
20
(Photos of people appear here)
In addition, its affiliate, CapTrust Financial Advisors, provides comprehensive
investment consulting and portfolio management services to institutions and
high-net-worth individuals through consulting directors. The IJL Wachovia
network complements Wachovia's 150 branch-based investment consultants and
self-directed services, Investments Direct.
IJL Wachovia clients are gaining access to a broader range of capabilities
through Wachovia's wealth management, trust, planning, credit and other banking
services. Wachovia clients have the benefit of more investment options through
IJL Wachovia.
Studies show that 24 percent of affluent individuals think of full-service
brokerage firms as their primary provider of financial services. IJL Wachovia's
brokerage capabilities prepare Wachovia to capture a significantly larger share
of affluent clients' investment business.
o Mergers with OFFITBANK and Barry, Evans, Josephs & Snipes (BEJS) in
September 1999 provided increased capabilities for serving high-net-worth
individuals.
OFFITBANK, a premier wealth management bank with offices in New York, San
Francisco and Miami, serves clients in 36 states, Latin America, Europe and
Asia. Approximately 60 percent of the company's relationships have $30 million
or more in managed assets with the firm. OFFITBANK's expertise in fixed-income
investment management complements Wachovia's capabilities in specialized
lending, philanthropy management, personal trust and equity investment
management. These four areas add immediate value to OFFITBANK's high-net-worth
client base, while that client base brings important relationships to Wachovia.
BEJS represents an ideal complement to the merger with OFFITBANK. A leading
national life insurance broker, the firm specializes in designing and
implementing wealth transfer strategies for affluent families and benefit plans
for corporate executives. BEJS serves a national client base that includes many
executives from Fortune 500 companies.
(Graph appears here with the folowing plot points.)
Deposits 19%
Loans 62%
Estate Planning 69%
Investment Management 90%
Insurance* 386%
Private Financial Advisors
Sales Performance Growth
1997-1999
*1998-1999
- --------------------------------------------------------------------------------
Mergers with Interstate/Johnson Lane, OFFITBANK and Barry, Evans, Josephs &
Snipes have significantly increased capabilities and competencies offered by
Wachovia Asset and Wealth Management.
- --------------------------------------------------------------------------------
21
(Photos of people appear here)
o In 1999, Wachovia sold the master trust, institutional custody and other
processing-intensive components of its Institutional Client Services
business. This move allows Wachovia to focus on longstanding strengths as
one of the nation's preeminent providers of employer-sponsored qualified
and nonqualified plans, consulting, investment management and trustee
services. Other specialties include innovative philanthropy management,
custody and investment management services for foundations, endowments and
affluent individuals.
o In September 1999, the Asset and Wealth Management Division was formed,
bringing under common leadership Wachovia's businesses that serve asset and
wealth management needs of individuals, businesses, charitable
organizations and other institutions.
o Wachovia's family of mutual funds, the Wachovia Funds, continued strong
performance and expan-sion, ending 1999 with more than $9.1 billion in
assets among 11 equity and fixed income funds, four municipal bond funds
and four money market funds.
The Wachovia Balanced Fund and the Wachovia Equity Fund were notable performers
for the year.
The Personal Equity Fund, a new "tax-efficient" fund, was added during the year.
The fund's goal is to seek growth of principal and income, while minimizing the
impact of taxes on shareholder returns.
Additional information about the Wachovia Funds is available at
www.wachoviafunds.com.
Wachovia has in place the skill and product capability for extended leadership
in wealth management. Future initiatives are designed to accelerate growth,
leverage strengths, refine business models and expand Wachovia's reach.
- --------------------------------------------------------------------------------
Institutional Client Services focuses on asset management, employee benefits,
executive services and charitable funds services for businesses, charitable
organizations and other institutions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Wachovia is one of the nation's preeminent providers of employer-sponsored
qualified and nonqualified plans, consulting, investment management and trustee
services.
- --------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------
Wachovia's strategy is to deliver comprehensive value not available from
competing full-service brokerage companies and private banking/trust companies.
- --------------------------------------------------------------------------------
THE DIFFERENTIATOR:
Delivering In Ways That
Work Best For The Client
Wachovia's strategy is to deliver comprehensive value not available from
competing providers, including full-service brokerage companies and private
banking/trust companies. Wachovia's integrated approach encompasses both
business models, as well as variations for niche client groups.
Wachovia's brokerage model includes IJL Wachovia financial consultants and
Wachovia investment consultants. Their clients primarily want investment-related
services, although needs may extend to other areas of wealth management.
Wachovia's private banking/trust model focuses on clients with more extensive
wealth management needs. Private Financial Advisors teams serve clients in the
$500,000 to $10 million segment; clients in the $10 million-plus segment are
served by OFFITBANK in a team approach that includes BEJS and other high-wealth
specialists. All teams are supported by the full spectrum of Wachovia resources.
Both models leverage the same comprehensive set of products. Both are supported
by Wachovia's emphasis on technology, reflected in a comprehensive customer
information base and a strong and growing array of electronic services for
clients, including Online Banking and Online Investing.
(Graph appears here with the following information.)
ORGANIZATIONAL ALIGNMENT
Individuals
Businesses
Charitable Organizations
Personal Financial Services Wachovia Securities
o Private Financial Advisors o IJL Wachovia
o OFFITBANK o Investment Consultants
o BEJS o Investments Direct
o Personal Trust o CapTrust
o Insurance Services o Private Client Investment Services
o Philanthropy Management
o Affluent Client Services
Institutional Client Services Asset Management
o Charitable Funds Management o Investment Strategy
o Employee Benefits o Portfolio Management
o Executive Services o Wachovia Funds
o Hunt, DuPree, Rhine o Alternative Investments
23
- --------------------------------------------------------------------------------
The excellent results achieved by Wachovia Private Financial Advisors teams
provide an important foundation for expansion of the wealth management business.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Among priorities for 2000, Wachovia intends to expand OFFITBANK into a national
wealth management provider by establishing offices in selected high-wealth
markets.
- --------------------------------------------------------------------------------
Distribution to institutional customers is channeled through Institutional
Client Services. This area of longstanding leadership for Wachovia encompasses
asset management, employee benefits, executive services and charitable funds
services.
Wachovia Asset Management and Wachovia Insurance develop products and portfolios
distributed through all channels.
The business models are adapted as needed to provide the optimal degree of
relationship management and the most effective service delivery.
In all cases, service is emphasized over structure.
WHAT'S NEXT: Leveraging Strengths, Accelerating Growth
With a solid framework in place, Wachovia is turning its attention to product
and process initiatives that will strengthen and broaden the reach of Asset and
Wealth Management. Special attention is being placed on integrating capabilities
acquired through recent mergers.
Wachovia plans to expand wealth management services nationally, and within home
states to deploy resources to markets of highest opportunity. Internally,
Wachovia will increase the use of wealth integration teams in which specialists
work in partnerships across business lines.
Numerous technology initiatives are under way to better use Wachovia's customer
information base to reach affluent clients in ways that work well for them.
Priorities for 2000 include:
o Wachovia intends to expand OFFITBANK into a national wealth management
provider by establishing offices in selected high-wealth markets. In
Wachovia's home states, OFFITBANK offices will be added in Atlanta,
Charlotte, Palm Beach, Winston-Salem and northern Virginia. Additional
Wachovia capabilities will be added to the list of services provided to
OFFITBANK clients.
o Capitalizing on the BEJS merger, Wachovia will offer insurance-based
solutions to many high-net-worth clients of Asset and Wealth Management and
Corporate Financial Services while enhancing products and services that
BEJS offers.
o During 2000, the 120,000 households served by IJL Wachovia will gain access
to Wachovia's full range of financial services.
24
(Photos of people appear here)
o The excellent results achieved by Wachovia's Private Financial Advisors
teams will provide an important foundation for expansion. Plans call for
increasing the number of PFA teams to reach additional affluent households
in Wachovia's home states.
o Wachovia's formation of a Delaware trust in 1999 allows trusts to be
structured in perpetuity, providing an additional tool for assisting
clients with long-range planning and wealth transfer strategies.
o Wachovia Asset Management initiatives are designed to build on current
strengths by providing additional management styles, alternative
investments and tax-efficient money management capabilities. These expanded
offerings will complement the 19 Wachovia Funds managed by Asset
Management.
o Through Wachovia's new Private Manager Advisory Program, investment
specialists on Wachovia's wealth management teams can offer a wider range
of investment solutions to clients who prefer using a single advisor to
coordinate financial assets but favor a multimanager approach for
diversification. In addition to the Wachovia Funds, clients may choose from
a group of select investment managers representing the best of class for
nine identified styles, such as global and small-cap growth investing.
o Planned enhancements in Institutional Client Services include customized
charitable fund and donor reporting, innovative wealth replacement vehicles
for charitable donors, and individually directed account investment options
for 401(k) plan participants. Continuing to build on capabilities gained in
the 1998 acquisition of Hunt, DuPree, Rhine and Associates, Wachovia will
expand investment consulting for corporate plan sponsors.
Increasingly, Institutional Client Services specialists link with other
specialists throughout the company to deliver a full array of Wachovia
capabilities to senior executives, managers and employees of corporate clients.
(Photo of globe appears here)
25
- --------------------------------------------------------------------------------
Partnerships across business lines throughout Wachovia are producing innovative
solutions to complex client needs and will remain an area of emphasis.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Wachovia was the first bank in the nation to have fully transactional banking
and investing on its web site. Wachovia has more than 250,000 Online Banking
customers and 23,000 Online Investing customers.
- --------------------------------------------------------------------------------
Further value is added as these wealth integration teams assist companies in
analyzing the structure, funding and timing of executive and employee wealth
accumulation programs as well as the creation of charitable foundations, trusts
and endowments to meet estate planning and philanthropic needs.
o Partnerships across Wachovia business lines are producing innovative
solutions to complex client needs. Examples include customized mortgages
for high-net-worth individuals and the use of equity collars in combination
with derivatives to address clients' liquidity concerns by facilitating
lending against restricted and controlled stock.
o Wachovia's heightened emphasis on eBusiness and accelerated investment in
the Internet support the goal of using technology to deliver services in
ways most convenient to the client. Wachovia has been named one of the best
Internet banks in the nation by a number of professional journals and
rating agencies, including Smart Money magazine, CNN and Money Line.
The importance of the Internet was emphasized by Wachovia's recent establishment
of an eBusiness Division under the leadership of Lawrence G. Baxter, executive
vice president. Each line of business, including Asset and Wealth Management,
(Graph appears here with the following information.)
CLIENT
Web-Enabled Technologies Web-Enabled Technologies
Sales Team Digital Touch Points Client Service Center
Web-Enabled Technologies Web-Enabled Technologies Web-Enabled Technologies
o Imaging Centers
o Customer Analysis
o Legacy Systems
- --------------------------------------------------------------------------------
Wachovia is using web-based technology to deliver services and information in
ways most convenient to the client.
- --------------------------------------------------------------------------------
26
The high-net-worth segment is the fastest-growing Internet user. Recent studies
report that 34 percent of affluent investors use the Internet, and 53 percent of
self-directed investors conduct 75 percent of their trades on the Internet.
Almost one-third of all online traders have six-figure salaries and nearly
one-fifth hold at least a half-million dollars in securities.
Information on Wachovia's comprehensive wealth management services can be
accessed through Wachovia's Internet site at www.wachovia.com/wealth.
Other Wachovia-related sites include www.offitbank.com, www.ijl.com and
MacroWorld Research (www.mworld.com), a leading provider of financial news and
economic data for investors.
(Photo of a PC screen showing Wachovia's web page appears here.)
- --------------------------------------------------------------------------------
will have additional Internet expertise. Objectives will include ensuring that
the Internet experience is tailored to the needs and preferences of affluent and
high-net-worth clients.
o A number of enhancements are planned for Wachovia's web sites during 2000.
Financial planning tools will be richer and more inter- active. Customers
will experience a more personalized, convenient and transactional
interface, supplementing and enhancing Wachovia's already popular Internet
banking and investing services.
o Other technology initiatives planned for 2000 build on Wachovia's customer
information system. Web-based technology solutions link clients with the
various delivery channels in Asset and Wealth Management and provide new
architecture and support tools for sales teams.
Wachovia has a comprehensive array of products and services to capture a larger
share of the affluent market. Performance aspirations for 2000 include revenue
and profit contribution growth in excess of 20 percent.
27
(Photos of people appear here)
Standing Tall
Among Standouts:
Why Wachovia Will Succeed
Obviously, Wachovia is not alone in recognizing the opportunity for success in
serving the affluent. What gives Wachovia an edge as it commits to expanded
leadership? The question is a popular one with interested observers who,
increasingly, are taking note of Wachovia's strategic direction and performance.
"Wachovia did its homework early on," Kniejski points out. "We had the
analytical insight to understand this market and its changing needs. From that
understanding came the vision and commitment to Wachovia's holistic approach."
Wachovia's wealth management strategy represents an ideal fit with the company
brand and culture. Wachovia relies on internal teamwork to achieve long-term
customer satisfaction and loyalty. That is not true for all organizations,
especially those whose structures inspire internal competition rather than
cooperation.
"Wachovia has demonstrated the ability to execute our wealth management strategy
and provide extraordinary results," says Kniejski. "We have the resources to
deliver on the promise. We have proven that we can and do draw from the full
array of Wachovia's resources in a team approach that goes across organizational
lines, and beyond, to meet clients' needs."
Wachovia also has the advantage of location in geographic markets that are
experiencing strong growth of affluent populations. At the same time, these
markets are not well served by other wealth management providers.
"We are truly in those markets," says Kniejski. "We are part of the life of our
communities. The people there know Wachovia and believe in us and what we stand
for. There is a base of trust that takes years to build and great effort to
maintain."
Wachovia's reputation has carried over to corporate and institutional clients in
locations far from its home states, paving the way for extended leadership as a
wealth management provider. Among individuals, businesses and institutions,
Wachovia is known for long-term relationships that provide lifetime value for
each client. People recognize and respond to this distinctive culture and to
these ideals of serving customers.
"That commitment and those characteristics differentiate Wachovia," adds
Kniejski. "They are the reasons we have been successful as a wealth management
provider and will be successful as we extend our leadership still further."
- --------------------------------------------------------------------------------
Wachovia has the commitment and resources to understand the affluent market and
to successfully deliver on its promise as a preeminent provider of wealth
management services.
- --------------------------------------------------------------------------------
28
Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL SUMMARY TABLE 1
- --------------------------------------------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Summary of Operations
(thousands, except per share data)
Interest income .............................. $ 4,666,820 $ 4,665,245 $ 4,262,385
Interest expense ............................. 2,196,734 2,314,213 2,168,818
----------- ----------- -----------
Net interest income .......................... 2,470,086 2,351,032 2,093,567
Provision for loan losses (1) ................ 298,105 299,480 264,949
----------- ----------- -----------
Net interest income after provision for
loan losses ................................. 2,171,981 2,051,552 1,828,618
Other operating revenue ...................... 1,610,123 1,228,119 1,005,768
Gain on sale of mortgage servicing
portfolio ................................... ---- ---- ----
Securities gains (losses) (2) ................ 10,894 20,442 1,454
----------- ----------- -----------
Total other income ........................... 1,621,017 1,248,561 1,007,222
Personnel expense ............................ 1,220,286 1,055,353 905,157
Nonrecurring charges (3) ..................... 19,309 85,312 287,532
Other expense ................................ 1,011,030 855,667 774,032
----------- ----------- -----------
Total other expense .......................... 2,250,625 1,996,332 1,966,721
Income before income tax expense ............. 1,542,373 1,303,781 869,119
Income tax expense ........................... 531,152 429,611 276,313
----------- ----------- -----------
Net income (4) ............................... $ 1,011,221 $ 874,170 $ 592,806
=========== =========== ===========
Net income per common share:
Basic ....................................... $ 4.99 $ 4.26 $ 2.99
Diluted (4) ................................. $ 4.90 $ 4.18 $ 2.94
Cash dividends paid per common
share (5) ................................... $ 2.06 $ 1.86 $ 1.68
Cash dividends paid on common
stock (6) ................................... $ 418,447 $ 381,798 $ 327,303
Cash dividend payout ratio (6) ............... 41.4 % 43.7 % 55.2 %
Average basic shares outstanding ............. 202,795 205,058 198,290
Average diluted shares outstanding ........... 206,192 209,153 201,901
SELECTED AVERAGE
BALANCES (millions)
Total assets ................................. $ 65,420 $ 63,949 $ 57,607
Loans -- net of unearned income .............. 47,223 44,401 39,716
Securities ................................... 9,340 10,582 10,793
Other interest-earning assets ................ 1,553 1,579 1,446
Total interest-earning assets ................ 58,116 56,562 51,955
Interest-bearing deposits .................... 32,325 32,011 29,582
Short-term borrowed funds .................... 9,401 10,895 8,987
Long-term debt ............................... 8,134 6,279 6,122
Total interest-bearing liabilities ........... 49,860 49,185 44,691
Noninterest-bearing deposits ................. 8,255 7,803 6,934
Total deposits ............................... 40,580 39,814 36,516
Shareholders' equity ......................... 5,430 5,168 4,533
RATIOS (averages)
Net loan losses to loans ..................... .62% .67% .67%
Net yield on interest-earning assets ......... 4.32 4.24 4.14
Shareholders' equity to:
Total assets ................................ 8.30 8.08 7.87
Net loans ................................... 11.63 11.78 11.57
Return on assets (7) ......................... 1.55 1.37 1.03
Return on shareholders' equity (7) ........... 18.62 16.92 13.08
Five-Year
Compound
1996 1995 1994 Growth Rate
----------- ---------- ---------- -----------
SUMMARY OF OPERATIONS
(thousands, except per share data)
Interest income .............................. $ 4,009,508 $3,790,110 $3,025,654 9.1%
Interest expense ............................. 2,085,771 2,011,155 1,369,006 9.9
----------- ---------- ----------
Net interest income .......................... 1,923,737 1,778,955 1,656,648 8.3
Provision for loan losses (1) ................ 193,776 130,504 96,122 25.4
----------- ---------- ----------
Net interest income after provision for
loan losses ................................. 1,729,961 1,648,451 1,560,526 6.8
Other operating revenue ...................... 874,732 757,115 690,099 18.5
Gain on sale of mortgage servicing
portfolio ................................... ---- 79,025 ----
Securities gains (losses) (2) ................ 4,588 (19,672) (21,972)
----------- ---------- ----------
Total other income ........................... 879,320 816,468 668,127 19.4
Personnel expense ............................ 796,932 733,790 691,512 12.0
Nonrecurring charges (3) ..................... ---- ---- ----
Other expense ................................ 712,041 707,839 651,739 9.2
----------- ---------- ----------
Total other expense .......................... 1,508,973 1,441,629 1,343,251 10.9
Income before income tax expense ............. 1,100,308 1,023,290 885,402 11.7
Income tax expense ........................... 343,049 315,377 261,480 15.2
----------- ---------- ----------
Net income (4) ............................... $ 757,259 $ 707,913 $ 623,922 10.1
=========== ========== ==========
Net income per common share:
Basic ....................................... $ 3.70 $ 3.40 $ 3.00 10.7
Diluted (4) ................................. $ 3.65 $ 3.36 $ 2.96 10.6
Cash dividends paid per common
share (5) ................................... $ 1.52 $ 1.38 $ 1.23 10.9
Cash dividends paid on common
stock (6) ................................... $ 305,740 $ 282,517 $ 254,397 10.5
Cash dividend payout ratio (6) ............... 40.4 % 39.9 % 40.8 %
Average basic shares outstanding ............. 204,889 208,230 208,117 ( .5)
Average diluted shares outstanding ........... 207,432 210,600 210,651 ( .4)
SELECTED AVERAGE
BALANCES (millions)
Total assets ................................. $ 55,584 $ 51,703 $ 46,542 7.0
Loans -- net of unearned income .............. 36,739 33,510 29,533 9.8
Securities ................................... 11,876 11,977 11,238 (3.6)
Other interest-earning assets ................ 1,629 1,257 1,025 8.7
Total interest-earning assets ................ 50,244 46,744 41,796 6.8
Interest-bearing deposits .................... 27,609 25,601 22,847 7.2
Short-term borrowed funds .................... 9,018 8,860 7,369 5.0
Long-term debt ............................... 6,693 5,695 5,154 9.6
Total interest-bearing liabilities ........... 43,320 40,156 35,370 7.1
Noninterest-bearing deposits ................. 6,491 6,234 6,292 5.6
Total deposits ............................... 34,100 31,835 29,139 6.8
Shareholders' equity ......................... 4,458 4,164 3,812 7.3
RATIOS (averages)
Net loan losses to loans ..................... .53% .38% .30%
Net yield on interest-earning assets ......... 3.98 4.04 4.23
Shareholders' equity to:
Total assets ................................ 8.02 8.05 8.19
Net loans ................................... 12.31 12.62 13.14
Return on assets (7) ......................... 1.36 1.37 1.34
Return on shareholders' equity (7) ........... 16.99 17.00 16.37
(1) Includes $10,845 in nonrecurring merger-related provision in 1997 to align
the practices of the merged entities with those of the corporation.
(2) Includes $4,639 of nonrecurring losses to restructure the
available-for-sale portfolio in 1997.
(3) Nonrecurring charges in 1999, 1998 and 1997 include merger-related items of
$19,309, $85,312 and $220,330, respectively and a personal computer
hardware and software disposal charge of $67,202 in 1997.
(4) Net income excluding the effect of nonrecurring items was $1,023,855,
$929,847 and $799,929 for 1999, 1998 and 1997, respectively. Net income
per diluted share excluding the effect of nonrecurring items was $4.97,
$4.45 and $3.96 for 1999, 1998 and 1997, respectively.
(5) Cash dividends per common share are those of Wachovia Corporation paid
prior to merger with Central Fidelity Banks, Inc.
(6) Includes amounts of pooled companies.
(7) Excluding the after-tax impact of nonrecurring charges of $12,634, $55,677
and $207,123, returns were 1.57%, 1.45% and 1.39% on assets and 18.85%,
17.99% and 17.65% on shareholders' equity for 1999, 1998 and 1997,
respectively.
29
--------------------------
Results of Operations
-----------------------------------------------------------------
1999 vs. 1998
The U.S. economy rose at a moderately strong pace in 1999,
OVERVIEW continuing its ninth successive year of Overview expansion. Gross
domestic product rose 4.0 percent, based on preliminary data.
Economic expansion continued amidst growing concerns about higher
levels of inflation, record amounts of consumer indebtedness and
tight labor markets. These concerns prompted the Federal Reserve
to raise short-term interest rates a quarter of a percentage point
in June, August and November of 1999 and again in February 2000.
Based on preliminary data, the nation's average unemployment rate
fell to 4.2 percent from 4.5 percent in 1998. Economic conditions
within Wachovia's five-state operating area remained generally
strong, with unemployment averaging approximately 3.5 percent.
Wachovia continues to broaden its competitive position by gaining
access to new customers and by enhancing products and services
through internal development and selective acquisitions and
partnerships. Management has pursued a variety of initiatives as
part of this strategy. Wachovia completed its acquisition of
OFFITBANK Holdings Inc. ("OFFITBANK"), on September 1, 1999 and
of Barry, Evans, Josephs & Snipes, Inc. ("BEJS"), on September 2.
These transactions followed the acquisition on April 1, 1999 of
Interstate/Johnson Lane Inc. ("IJL"), a major regional investment
advisor and brokerage firm that subsequently merged with, and
became part of, Wachovia Securities, Inc. All three acquisitions
strengthen Wachovia's wealth advisory and capital markets
capabilities and were accounted for as purchases. Under purchase
accounting, the excess of purchase price over the fair value of
net assets acquired is recorded as goodwill, and operating
results of the acquired companies are included beginning with the
effective date of each transaction.
The corporation announced on October 7, 1999 an agreement to
acquire B C Bankshares, Inc., parent company of the Bank of
Canton, a community bank with approximately $400 million in
assets based in Cherokee County, Georgia, one of the
fastest-growing counties in the metropolitan Atlanta area. In
addition, on December 22, 1999, Wachovia announced its agreement
to purchase a majority of the credit card business of Partners
First Holdings LLC ("Partners First"). The Partners First credit
card business will bring an additional 1.2 million customers and
managed receivables of approximately $2 billion to Wachovia. Both
transactions were consummated early during the first quarter of
2000 and will be accounted for as purchase business combinations.
The transactions will result in goodwill and purchased credit
card intangibles of approximately $97 million and $230 million,
respectively.
Wachovia's growth strategy may include the use of strategic
acquisitions, and it regularly evaluates opportunities and
conducts due diligence activities in connection with possible
transactions. As a result, discussions and, in some cases,
negotiations may take place and future acquisitions involving
cash, debt or equity securities may occur. These typically
involve the payment of a premium over book value, and, therefore,
some dilution of book value and net income per share may occur in
connection with any future transactions.
Wachovia's net income for 1999 totaled $1.011 billion or $4.90
per diluted share compared with $874 million or $4.18 per diluted
share in 1998. Results for both years included nonrecurring
charges, which totaled $19 million pretax in 1999 and $85 million
pretax in 1998 for merger-related expenses. Excluding the
after-tax impact of nonrecurring charges, net income on an
operating basis was $1.024 billion or $4.97 per diluted share in
1999 versus $930 million or $4.45 per diluted share in 1998.
30
(Graph appears here with the following plot points.)
NET INCOME PER SHARE (DILUTED)
1994 1995 1996 1997 1998 1999
2.96 3.36 3.65 2.94* 4.18* 4.90*
*EXCLUDING NONRECURRING ITEMS, NET INCOME PER DILUTED SHARE WAS $3.96 IN 1997,
$4.45 IN 1998 AND $4.97 IN 1999.
(Graph appears here with the following plot points.)
NET INCOME (MILLIONS)
1994 1995 1996 1997 1998 1999
623.9 707.9 757.3 592.8* 874.2* 1,011.2*
*EXCLUDING NONRECURRING ITEMS, NET INCOME WAS $799.9 MILLION IN 1997, $929.8
MILLION IN 1998 AND $1,023.9 MILLION IN 1999.
The corporation's operating results for the year reflected strong
revenue growth, with total revenues rising $495 million or 13.6
percent to $4.121 billion. Increases occurred in both net interest
income and fee-generating businesses as Wachovia's strategies and
growth initiatives continued to generate strong revenue momentum.
Credit losses abated slightly for the year due to favorable
conditions in the credit card portfolio and as a result of the
credit card securitization transactions. Wachovia continues to
initiate technology enhancements that are expected to moderate
expense growth going forward.
Expanded discussion of Wachovia's operating results and financial
condition is presented in the following narrative with
accompanying tables and charts. Interest income is stated on a
taxable equivalent basis, which is adjusted for the tax-favored
status of earnings from certain loans and securities. References
to changes in assets and liabilities represent daily averages
unless otherwise noted. Forward-looking statements exclude the
effects of business combination transactions that have occurred
or may take place in 2000. The narrative should be read in
conjunction with the Consolidated Financial Statements and Notes
on pages 73 through 93. Expanded six-year financial data appears
on pages 94 through 99.
Business Segments
Wachovia has five reportable business segments: Asset and Wealth
Management, Corporate, Credit Card, Consumer and Treasury &
Administration.
Business segment results are reported on a management accounting
basis. Management accounting practices are driven internally.
They reflect evolving information needs specific to a company's
business managers and may differ by company due to wide
discretion in application. As a consequence, Wachovia's business
segment results are not necessarily comparable with those of
other financial institutions with similar segments or with those
of other companies that compete directly in one or more of its
lines of business. In addition, business segment results may be
restated in the future as Wachovia's management structure,
information needs or reporting systems evolve.
Several changes were made in the management accounting structure
in 1999 that have been reflected for all periods. As a result of
management reorganizations and strategic investments made during
the year, a new reportable segment focusing on Asset and Wealth
Management has been formed. Asset and Wealth Management financial
information has been reclassified from that previously reported
in Consumer and Corporate. In addition, the Credit Card segment
is reflected on a managed basis, with the funding impact and the
gain on the sale of the securitized portfolio reflected in
Treasury & Administration.
The provision for loan losses is charged to each business segment
based on the credit risk of each segment's loan portfolio.
Overhead expense is allocated based on the proportion of each
segment's direct
31
expenses to total direct expenses of the combined segments.
Income tax expense is calculated for each business segment with a
blended corporate-wide tax rate. This rate is adjusted as
applicable for the assumed tax effect of tax-exempt income and
nondeductible intangible amortization expense.
Footnote C of the Consolidated Financial Statements provides
additional information on business segment accounting policies
and on items reconciling segment results to consolidated results.
Financial results by business segment are discussed below.
ASSET AND WEALTH MANAGEMENT
Asset and Wealth Management focuses on providing integrated
financial services to the affluent marketManagement place. During
1999, Wachovia made three acquisitions to advance this strategy.
In April, Wachovia acquired IJL, a full-service brokerage firm
with 62 offices throughout Virginia, North Carolina, South
Carolina and Georgia. In September, Wachovia completed its
acquisition of OFFITBANK, a New York-based wealth management
company, and BEJS, a leading Charlotte, North Carolina-based life
insurance broker specializing in wealth transfer and benefit plan
programs. Also in the third quarter, Wachovia sold its master
trust and institutional custody business in order to focus on
other business areas. Including securities held in brokerage
accounts with Wachovia Securities and Wachovia Investments, and
trust assets held in custody, Asset and Wealth Management
administers more than $165 billion in customer assets with the
amount under discretionary management exceeding $50 billion.
PRODUCTS AND SERVICES. Asset and Wealth Management serves
clients' wealth creation objectives by delivering innovative,
tailored products and services through a variety of channels. The
Private Financial Advisors group provides fully integrated
financial solutions individually designed for affluent consumers.
A full range of products is offered, including banking and credit
services, tax planning and consulting, trust services, portfolio
management, estate planning, investment counseling and insurance.
OFFITBANK and BEJS provide wealth management and specialized
investment and insurance products for the high-end of the
affluent market.
Wachovia's brokerage business offers customers a wide variety of
services. IJL Wachovia's (a division of Wachovia Securities) 450
financial consultants are full-service brokers, and Wachovia's
150 branch-based investment consultants offer individuals and
businesses access to a complete array of investment products,
including the Wachovia Funds. Customers making their own
investment decisions can trade through Wachovia Investments
Direct using a broker, a touch-tone service or the Internet.
In addition to managing the Wachovia Funds, the Asset Management
Group provides investment strategies and portfolio management for
both individuals and institutions. Institutional Client Services
provides asset management, employee benefit services and
philanthropy management services to businesses, individuals and
foundations. Institutional Client Services also offers retirement
services for both plan sponsors and their participants and
charitable fund products that enable both individuals and
organizations to accomplish their donation objectives. Executive
Services is a nationally recognized leader in providing
retirement and wealth accumulation products for high-net-worth
individuals. It also provides change-of-control and employee
benefit protection services to client management teams.
INDUSTRY DYNAMICS AND STRATEGY. Wachovia believes the current
marketplace is underserved with few national brands and
fragmented competition. Within Wachovia's five-state footprint,
households are growing 50 percent faster than the national
average, and over the next five years, the subset of affluent
households is expected to grow substantially. These factors
combine to create an attractive market opportunity. Market
volatility and the projected need for intergenerational wealth
transfer capabilities also will drive demand.
32
Asset and Wealth Management's market presence, brand names and
strategic focus, position it to take unique advantage of this
environment. In addition to an enviable position in a
fast-growing market, Wachovia enjoys a reputation as a trusted
and solutions-oriented financial partner. The three strategic
acquisitions completed in 1999 allow this business segment to
increase its product offerings, leverage existing services and
expand distribution channels. In addition, close coordination
with Wachovia's Consumer and Corporate business segments creates
a continuous pipeline of customers. As retail customers migrate
over time to fit the affluent profile, they are offered wealth
management products that better serve their changing needs.
Corporate identifies potential customers for asset management,
retirement plans and executive or charitable funds services.
ASSET AND WEALTH MANAGEMENT Table 2
- --------------------------------------------------------------------------------
(Thousands)
Variance Variance
1999 1998 Amount Percent
----------- ----------- --------- ----------
Net interest margin ............... $ 143,357 $ 112,255 $ 31,102 27.7
Provision for loan losses ......... 790 1,544 (754) (48.8)
Total other income ................ 485,554 285,493 200,061 70.1
Total expenses .................... 495,634 302,760 192,874 63.7
----------- ----------- ---------
Pretax income ..................... $ 132,487 $ 93,444 $ 39,043 41.8
=========== =========== =========
Average total assets .............. $2,928,541 $2,471,775 $ 456,766 18.5
FINANCIAL RESULTS. Compared with 1998, pretax profit contribution
rose 42 percent. The net interest margin was up 28 percent from
strong loan and deposit growth in the Private Banking and Trust
areas. A substantial portion of other income growth resulted from
the 1999 acquisitions. Investment and trading income topped $223
million, up 268 percent, reflecting the addition of IJL and
OFFITBANK. Nine months of IJL revenue contributed 62 percent of
the year's total investment-related income, while four months of
OFFITBANK revenue accounted for 6 percent. Insurance revenue at
$24 million grew 68 percent, with BEJS accounting for more than a
third of the increase. Staff expense, again impacted by the
acquisitions, was the major factor in the 64 percent increase in
total noninterest expense. Excluding the impact of the
acquisitions, the business produced solid profit growth. Net
interest margin increased 23 percent, and other income grew 14
percent, while expense growth held at 3 percent. Private Banking
loan initiatives and strong growth in trust balances contributed
to the higher margin. The Wachovia investment and insurance areas
led other income growth at 17 percent and 30 percent,
respectively.
CORPORATE
Corporate aims to be the preferred provider of services to
targeted corporate clients through comprehen sive relationship
management. To achieve this goal, it works to know its customers
better than the competition; anticipate customer needs and provide
innovative solutions; invest in what matters most to customers;
align products, services and delivery channels with customer
needs; and serve customers through insightful, trusted
professionals.
PRODUCTS AND SERVICES. Through this integrated relationship
approach, Corporate provides a comprehensive array of capital
solutions, strategic consulting, and risk management services to
public and private companies of all sizes across the Southeast,
the nation and the world. Wachovia has long been a leading
provider of credit services, skillfully helping companies assess
and solve their credit-related needs. While remaining a trusted
lender, Corporate has expanded its product set beyond senior debt
to become a distinctive provider of capital and financial
advisory services. These capabilities were further strengthened
in 1999 by the acquisition of IJL which doubled the number of
investment banking professionals; added equity research, sales
and trading; expanded its fixed-income distribution capacity; and
resulted in the formation of Wachovia Securities, Inc. (WSI).
This Section 20 securities subsidiary has full Tier I and Tier II
powers to underwrite and deal in all types of corporate debt and
equities. WSI is a member of the
33
NYSE, regional exchanges and the NASD, publishes equity research
on an expanding list of approximately 150 companies, and makes a
market in more than 180 stocks. In addition, Corporate remains a
leading provider of treasury consulting and cash management
solutions for companies of all sizes. The Treasury Services group
consistently is cited for superior quality of service, technology
and operations performance. In the 1999 Large Corporate Cash
Management Consortium Study, Wachovia Treasury Services placed
first in overall customer satisfaction and first or second in
thirteen of the fifteen categories measured.
Industry Dynamics and Strategy. In an intensely competitive
environment, Corporate has maintained an enviable market
position, with a strong share in the Southeast and a top ten
share in the U.S. large corporate market. Looking ahead,
convergence in the financial services industry will entail a
wholesale transformation of the competitive landscape, driven by
dramatic change in client attitudes and behaviors. The pace of
this transformation is quickening, in part because of rapid
developments in technology and communications. To succeed in this
environment, Corporate will segment the market to best align its
sales approach, service model and product development priorities
with customer requirements, and segment profitability and growth
potential. As a result, Corporate increasingly is complementing
its traditional market-based segmentation with needs-based
segmentation where more specialization is appropriate. Examples
of segment specialization include Commercial Real Estate, the
Emerging Growth and Technology Group, the Communications Group,
Leveraged Finance, Sales Finance, Aircraft Finance, Government
Contract Finance and Financial Institutions. Based on the
attractiveness of Wachovia's Southeastern U.S. home markets, its
strong national presence, targeted emphasis on global growth
markets and focused alignment with the customer through market-
or needs-based segmentation, Wachovia believes the market
opportunity is significant.
CORPORATE Table 3
- --------------------------------------------------------------------------------
(Thousands)
Variance Variance
1999 1998 Amount Percent
------------ ------------ ---------- ---------
Net interest margin ............... $ 1,018,320 $ 840,719 $ 177,601 21.1
Provision for loan losses ......... 58,511 19,698 38,813 197.0
Total other income ................ 404,680 325,693 78,987 24.3
Total expenses .................... 639,462 547,704 91,758 16.8
------------ ------------ ----------
Pretax income ..................... $ 725,027 $ 599,010 $ 126,017 21.0
============ ============ ==========
Average total assets .............. $34,482,234 $31,319,697 $3,162,537 10.1
FINANCIAL RESULTS. Corporate recorded excellent results in 1999,
lifting pretax profit by 21 percent. Net interest margin
increased $178 million or 21.1 percent. Approximately two-thirds
of this margin growth was attributable to a 15 percent ($4
billion) increase in loan balances, driven by significant
activity in the large corporate, commercial real estate and
leasing areas. The loan loss provision increased $39 million,
primarily because of a few isolated credits in the large
corporate portfolio. These problem credits were identified early
and are being managed appropriately. Other income was up 24.3
percent, reflecting increased service charges and strong
performance in the core Capital Markets businesses, including
loan syndications and asset-backed finance, as well as the
inclusion of IJL for nine months. While the net interest margin
will remain a key component of overall performance, Corporate
will continue to emphasize the development and delivery of a full
range of higher-margin, fee-based products consistent with its
expanded capabilities. Noninterest expense increased 16.8
percent, largely due to the added expense base of IJL.
CREDIT CARD
Credit Card's mission is to be the preferred credit card issuer
for creditworthy consumers, offering the best value on a combined
rate and fee package and providing excellent customer service.
Credit Card manages a $6.6 billion credit card portfolio,
including securitized assets of $1.9 billion. In December 1999,
Credit
34
Card announced the acquisition of an approximately $2 billion
portfolio from Partners First. This transaction was consummated
in the first quarter of 2000, making Credit Card the tenth
largest Visa/MasterCard issuer in the U.S.
PRODUCTS AND SERVICES. The Credit Card business segment is a
full-service provider of consumer and business credit cards and
merchant acquirer services. Products include VISA Classic, Gold
and Platinum; MasterCard Classic, Gold and Platinum; and Merchant
Acquirer Services. Credit Card manages all components of consumer
credit card processing in-house, including credit underwriting,
marketing, account management, transaction processing, card
production, statement rendering, payment processing, customer
service and collections. For business card products, an outside
vendor supplies transaction processing, card production and
statement rendering.
INDUSTRY DYNAMICS AND STRATEGY. The Credit Card business operates
in a highly competitive, concentrated environment. The top ten
issuers of general purpose credit cards hold approximately 75
percent of the industry's outstandings. As a result, the tight
competition mandates emphasis on scale to maintain profitability.
Scalability and integrated business processes driven around an
information-based optimization model have been the keys to Credit
Card's success.
In this environment, Credit Card's strategy focuses on serving
the above-average credit quality customers who carry
higher-than-average loan balances. To facilitate constant
adjustment to changes in the marketplace, teams combining the
disciplines of credit, marketing, analytics and operations drive
the key processes of acquisitions, delinquency management and
portfolio maximization. To optimize the lifetime value of each
cardholder, Credit Card manages all aspects of cardholder
behavior, including credit lines, usage stimulation, retention,
charge-offs and fraud. Credit Card invests heavily in
cross-selling to the Consumer customer base. As cardholders,
these franchise customers prove to be highly profitable,
primarily the result of low attrition and low credit losses.
Credit Card also seeks attractively priced opportunities to
acquire entire card portfolios in order to leverage its
investment in technology, credit management, modeling and
cardholder usage management. Approximately 800,000 or 38 percent
of active credit card accounts reside in Wachovia's five-state
Southeastern footprint.
CREDIT CARD Table 4
- --------------------------------------------------------------------------------
(Thousands)
Variance Variance
1999 1998 Amount Percent
---------- ---------- ------ ---------
Net interest margin ............... $ 536,253 $ 498,028 $ 38,225 7.7
Provision for loan losses ......... 256,598 276,765 (20,167) (7.3)
Total other income ................ 168,782 148,442 20,340 13.7
Total expenses .................... 212,222 207,528 4,694 2.3
----------- ----------- ---------
Pretax income ..................... $ 236,215 $ 162,177 $ 74,038 45.7
=========== =========== =========
Average total assets .............. $6,283,549 $6,095,313 $ 188,236 3.1
FINANCIAL RESULTS. Pretax profit rose sharply in 1999, up 45.7
percent as a result of lower loan losses and higher fee revenue.
Net interest margin grew 7.7 percent due to loan growth,
partially offset by tighter spreads in the rising rate
environment during the last half of 1999. Average total managed
loans grew 2.9 percent, largely due to the acquisition of a $269
million portfolio in September 1998. The loan loss provision
declined 7.3 percent as a result of reduced bankruptcies and
contractual charge-offs. Noninterest income increased 13.7
percent. The continued U.S. economic expansion spurred healthy
consumer spending, resulting in strong interchange income from
higher purchase volume, as well as higher overlimit fees and
merchant income. Total expense grew a modest 2.3 percent,
reflecting decreased fraud losses, minimal increase in staff
expense due to scale and technological efficiencies, and internal
cost control initiatives.
35
CONSUMER
Consumer seeks to develop customer relationships for the greatest
lifetime value, rigorously manage the cost of the sales and
service network and capitalize on the digital economy. It targets
consumers, worksite groups and small businesses throughout the
Southeast, offering a broad array of attractively priced products
and a superior customer experience. Consumer's contribution to the
entire Wachovia enterprise cannot be measured entirely by its
profit contribution since its customer base and the impact of its
branch network are fundamental to the success of all Wachovia
business segments.
PRODUCTS AND SERVICES. Consumer provides the more traditional
retail banking services, including mortgage lending, deposit
products and consumer loans, as well as services for the small
business market. It also offers access to investment and
insurance products. Delivery channels include 712 traditional
in-store branches and worksite centers, 1,355 ATMs and 33 kiosks,
supported by four automated phone centers. Wachovia is the ninth
largest debit card issuer, indicative of growing consumer
acceptance of this electronic capability. Campus card programs
provide card-based banking access to more than 120,000 students
and faculty, and Wachovia At Work serves consumers in more than
3,000 companies.
The Internet is growing in importance as a delivery channel with
14 percent of Wachovia's demand deposit customers connected via
Internet banking. Wachovia's Internet site, www.wachovia.com,
serves as a financial portal with full transaction capability
enriched with relevant financial news. During 1999, the site was
enhanced to support all consumer credit transaction activities
and insurance services.
INDUSTRY DYNAMICS AND STRATEGY. Consumer's marketplace covers
Wachovia's fast-growing home states. Currently, Consumer serves
more than 3.5 million consumers and approximately 200,000 small
business customers. Sixty-two percent of Wachovia's deposits are
in large, high-growth metropolitan areas. Today's banking
customers demand a wide range of products, superior service and
low cost.
Consumer's strategy is to target profitable customers and utilize
sophisticated modeling techniques to identify the customers'
needs in order to achieve alignment between their financial
needs, service expectations and price. Specific initiatives to
implement this strategy include: PROFITABLE RELATIONSHIP
OPTIMIZATION (PRO). Desktop technology connects to robust data
warehouses that analyze customer information and anticipate the
next likely desired service. This technology is combined with
solution-selling skills by 125 Personal Financial Advisors to
serve more than 400,000 high-potential households. Experience
with customers served utilizing PRO, results in enhanced
financial performance and customer retention. Wachovia At Work
and Campus Banking Programs. These strategies involve deploying
Wachovia products and services through employers and universities
to provide valuable access to employees and students. MARKET
NETWORK STRATEGY. Network optimization models provide an
analytical framework to reduce branch network expenses, while at
the same time maximizing customer points of presence. In the
midst of branch consolidation, customer migration programs and
sales productivity focus, executed through regional market
management, have lifted financial performance.
The new eBusiness Division provides corporate-wide eBusiness
strategic planning, leadership and operational management.
Advances in technology are rapidly transforming the financial
services industry. The eBusiness Division is responsible for
exploring and driving new eBusiness endeavors for consumer,
business-to-business and corporate markets. Current initiatives
include major platform enhancements, smart cards, wireless
access, secure electronic commerce, electronic bill payment and
presentment, and the development of online financial tools and
portfolio management products and services.
36
Consumer Table 5
- --------------------------------------------------------------------------------
(Thousands)
Variance Variance
1999 1998 Amount Percent
----------- ------------ --------- ---------
Net interest margin ............... $ 931,776 $ 938,569 $ (6,793) ( .7)
Provision for loan losses ......... 15,079 13,916 1,163 8.4
Total other income ................ 424,577 389,339 35,238 9.1
Total expenses .................... 895,946 901,706 (5,760) ( .6)
----------- ------------ ---------
Pretax income ..................... $ 445,328 $ 412,286 $ 33,042 8.0
=========== ============ =========
Average total assets .............. $9,779,241 $10,254,873 ($ 475,632) (4.6)
FINANCIAL RESULTS. Consumer's pretax profit contribution
increased 8 percent from the prior year. The net interest margin
was .7 percent lower caused by a 4.2 percent decrease in loans.
Deposit volumes held well through the 1999 year-end. Marketing
campaigns assured customers that "We are ready" for the Year 2000
event, and new CD products were offered at advantageous spreads
that attracted approximately $600 million of deposit funding for
7 and 29 months. Total other income increased 9.1 percent to $425
million. Deposit account fee revenue was up 7.9 percent as a
result of new pricing strategies. Electronic banking revenues
grew 24.4 percent, driven by ATM and debit card revenues. The
number of debit cards outstanding increased 8 percent, and volume
usage was up 20 percent as consumers continue to recognize the
card's convenience. Offsetting these increases were lower gains
on the sale of branches, totaling $8 million in 1999 compared
with $17 million in 1998. In addition, mortgage fee income
decreased $9 million, due to a decline in mortgage loan
origination activity caused by higher interest rates. Rising
interest rates slowed refinancing activity and resulted in the
consumer's shift to adjustable-rate mortgages, which are
generally retained on the balance sheet. Although this shift
results in reduced fee income, it adds to interest-earning assets
and, therefore, to future revenue. Total expenses held level with
the prior year. Improvement in staff expense, advertising and
marketing, and net operating losses were offset by higher
occupancy, equipment, systems and operating costs.
Treasury &
Administration
The Treasury & Administration segment principally reflects asset
and liability management for interest rate risk, management of the
securities portfolio, internal compensation for funding sources
and charges for funds used. It also includes other corporate costs
such as Year 2000 costs and nonrecurring expenses.
TREASURY & ADMINISTRATION Table 6
- --------------------------------------------------------------------------------
(Thousands)
Variance Variance
1999 1998 Amount Percent
------------- ------------- ----------- --------
Net interest margin ............... $ (56,029) $ 76,438 $ (132,467) (173.3)
Provision for loan losses ......... (32,873) (12,443) (20,430) 164.2
Total other income ................ 137,424 99,594 37,830 38.0
Total expenses .................... 70,466 104,737 (34,271) ( 32.7)
------------- ------------- -----------
Pretax income ..................... $ 43,802 $ 83,738 $ (39,936) ( 47.7)
============= ============= ===========
Average total assets .............. $11,946,693 $13,806,877 ($ 1,860,184) ( 13.5)
FINANCIAL RESULTS. Pretax income for 1999 declined from 1998 by
$40 million, to a level of $44 million. The net interest margin
dropped $132 million, indicative of a decrease in
interest-earning assets of $1.769 billion, largely in the
securities portfolio, which saw a reduction in balances of $1.242
billion. Also over the year, short-term borrowed funds fell
$1.494 billion, while long-term debt rose $1.855 billion.
Noninterest income for the year grew $38 million or 38 percent,
driven principally by gains on two credit card securitization
transactions during 1999, offset by reductions in securities
gains of $10 million. Noninterest expense decreased $34 million,
due to a decline in merger-related expenses of $66 million offset
by increases in professional services, equipment expense, and
outside data processing, programming and software charges.
37
Taxable Equivalent Rate/Volume Analysis -- Year* Table 7
- --------------------------------------------------------------------------------
Average Volume Average Rate
-------------------- --------------------
1999 1998 1999 1998
-------- ---- -------- ----
(Millions)
INTEREST INCOME
Loans:
Commercial .................................... $15,751 $14,023 7.25 7.21
Tax-exempt .................................... 808 1,219 9.79 9.24
-------- -------
Total commercial ............................ 16,559 15,242 7.37 7.37
Direct retail .................................... 1,064 1,143 8.63 9.39
Indirect retail .................................. 3,482 3,091 7.89 8.27
Credit card ...................................... 5,040 5,680 13.44 13.46
Other revolving credit ........................... 589 498 10.93 11.18
-------- -------
Total retail ................................ 10,175 10,412 10.89 11.36
Construction ..................................... 2,193 1,893 8.54 9.00
Commercial mortgages ............................. 7,324 6,813 8.11 8.58
Residential mortgages ............................ 7,421 7,808 7.77 7.92
-------- -------
Total real estate ........................... 16,938 16,514 8.02 8.31
Lease financing .................................. 2,266 1,429 11.07 11.63
Foreign .......................................... 1,285 804 6.56 6.85
-------- -------
Total loans ................................. 47,223 44,401 8.52 8.79
Securities:
Held-to-maturity:
U.S. Government and agency ................... 604 381 6.12 6.10
Mortgage-backed .............................. 489 800 8.22 8.30
State and municipal .......................... 168 194 9.93 10.92
Other ........................................ 58 101 6.76 6.67
-------- -------
Total held-to-maturity ...................... 1,319 1,476 7.41 7.97
Available-for-sale:**
U.S. Government and agency ................... 3,410 4,010 6.40 6.68
Mortgage-backed .............................. 4,044 4,424 6.36 6.65
Other ........................................ 567 672 7.42 7.04
-------- -------
Total available-for-sale .................... 8,021 9,106 6.45 6.69
-------- -------
Total securities ............................ 9,340 10,582 6.58 6.87
Interest-bearing bank balances ................... 118 157 6.25 8.26
Federal funds sold and securities purchased
under resale agreements ........................ 606 467 5.07 5.52
Trading account assets ........................... 829 955 3.88 4.76
-------- -------
Total interest-earning assets ............... $58,116 $56,562 8.10 8.33
======== =======
INTEREST EXPENSE
Interest-bearing demand .......................... $ 4,657 $ 4,984 1.25 1.29
Savings and money market savings ................. 13,339 11,604 3.58 3.89
Savings certificates ............................. 8,765 9,943 5.11 5.46
Large denomination certificates .................. 3,318 3,051 5.20 5.42
-------- -------
Total interest-bearing deposits in
domestic offices ........................... 30,079 29,582 3.84 4.14
Interest-bearing deposits in foreign offices ..... 2,246 2,429 4.86 5.59
-------- -------
Total interest-bearing deposits ............. 32,325 32,011 3.91 4.25
Federal funds purchased and securities sold
under repurchase agreements ..................... 6,150 7,498 4.71 5.18
Commercial paper ................................. 1,485 1,277 4.69 5.02
Other short-term borrowed funds .................. 1,766 2,120 5.53 5.25
-------- -------
Total short-term borrowed funds ............. 9,401 10,895 4.86 5.18
Bank notes ....................................... 2,569 2,620 5.61 6.10
Other long-term debt ............................. 5,565 3,659 5.93 6.31
-------- -------
Total long-term debt ........................ 8,134 6,279 5.83 6.22
-------- -------
Total interest-bearing liabilities .......... $49,860 $49,185 4.41 4.71
======== ======= --------- -----
Interest rate spread 3.69 3.62
Net yield on interest-earning assets and net ========= =====
interest income .................................. 4.32 4.24
========= =====
Variance
Interest Attributable to
------------------------- -----------------------
1999 1998 Variance Rate Volume
----------- ----------- -------------- ----------- ----------
INTEREST INCOME (Thousands)
Loans:
Commercial .................................... $1,141,309 $1,011,401 $ 129,908 $ 4,749 $ 125,159
Tax-exempt .................................... 79,075 112,672 (33,597) 6,290 (39,887)
---------- ---------- -------------
Total commercial ............................ 1,220,384 1,124,073 96,311 (725) 97,036
Direct retail .................................... 91,882 107,405 (15,523) (8,363) (7,160)
Indirect retail .................................. 274,843 255,512 19,331 (11,886) 31,217
Credit card ...................................... 677,232 764,426 (87,194) (1,214) (85,980)
Other revolving credit ........................... 64,405 55,644 8,761 (1,265) 10,026
---------- ---------- -------------
Total retail ................................ 1,108,362 1,182,987 (74,625) (48,095) (26,530)
Construction ..................................... 187,396 170,403 16,993 (9,019) 26,012
Commercial mortgages ............................. 594,166 584,266 9,900 (32,520) 42,420
Residential mortgages ............................ 576,624 618,118 (41,494) (11,257) (30,237)
---------- ---------- -------------
Total real estate ........................... 1,358,186 1,372,787 (14,601) (49,324) 34,723
Lease financing .................................. 250,868 166,128 84,740 (8,274) 93,014
Foreign .......................................... 84,262 55,067 29,195 (2,458) 31,653
---------- ---------- -------------
Total loans ................................. 4,022,062 3,901,042 121,020 (121,785) 242,805
Securities:
Held-to-maturity:
U.S. Government and agency ................... 36,957 23,268 13,689 62 13,627
Mortgage-backed .............................. 40,212 66,416 (26,204) (663) (25,541)
State and municipal .......................... 16,689 21,179 (4,490) (1,827) (2,663)
Other ........................................ 3,899 6,746 (2,847) 88 (2,935)
---------- ---------- -------------
Total held-to-maturity ...................... 97,757 117,609 (19,852) (7,856) (11,996)
Available-for-sale:**
U.S. Government and agency ................... 218,132 267,969 (49,837) (11,103) (38,734)
Mortgage-backed .............................. 257,069 294,020 (36,951) (12,426) (24,525)
Other ........................................ 42,041 47,256 (5,215) 2,468 (7,683)
---------- ---------- -------------
Total available-for-sale .................... 517,242 609,245 (92,003) (21,452) (70,551)
---------- ---------- -------------
Total securities ............................ 614,999 726,854 (111,855) (29,170) (82,685)
Interest-bearing bank balances ................... 7,390 12,987 (5,597) (2,778) (2,819)
Federal funds sold and securities purchased
under resale agreements ........................ 30,696 25,803 4,893 (2,265) 7,158
Trading account assets ........................... 32,159 45,433 (13,274) (7,764) (5,510)
---------- ---------- -------------
Total interest-earning assets ............... 4,707,306 4,712,119 (4,813) (132,506) 127,693
INTEREST EXPENSE
Interest-bearing demand .......................... 58,434 64,530 (6,096) (1,941) (4,155)
Savings and money market savings ................. 477,557 451,655 25,902 (38,134) 64,036
Savings certificates ............................. 447,583 542,477 (94,894) (33,271) (61,623)
Large denomination certificates .................. 172,539 165,384 7,155 (6,897) 14,052
---------- ---------- -------------
Total interest-bearing deposits in
domestic offices ........................... 1,156,113 1,224,046 (67,933) (88,181) 20,248
Interest-bearing deposits in foreign offices ..... 109,082 135,659 (26,577) (16,880) (9,697)
---------- ---------- -------------
Total interest-bearing deposits ............. 1,265,195 1,359,705 (94,510) (107,722) 13,212
Federal funds purchased and securities sold
under repurchase agreements ..................... 289,912 388,390 (98,478) (32,846) (65,632)
Commercial paper ................................. 69,619 64,088 5,531 (4,415) 9,946
Other short-term borrowed funds .................. 97,630 111,368 (13,738) 5,608 (19,346)
---------- ---------- -------------
Total short-term borrowed funds ............. 457,161 563,846 (106,685) (32,595) (74,090)
Bank notes ....................................... 144,166 159,896 (15,730) (12,713) (3,017)
Other long-term debt ............................. 330,212 230,766 99,446 (14,366) 113,812
---------- ---------- -------------
Total long-term debt ........................ 474,378 390,662 83,716 (25,763) 109,479
---------- ---------- -------------
Total interest-bearing liabilities .......... 2,196,734 2,314,213 (117,479) (148,884) 31,405
---------- ---------- -------------
Interest rate spread
Net yield on interest-earning assets and net
interest income .................................. $2,510,572 $2,397,906 $ 112,666 46,036 66,630
========== ========== =============
* Interest income and yields are presented on a fully taxable equivalent basis
using the federal income tax rate and state tax rates, as applicable, reduced
by the nondeductible portion of interest expense. Any variance attributable
jointly to volume and rate changes is allocated to the volume and rate in
proportion to the relationship of the absolute dollar amount of the change in
each.
** Volume amounts are reported at amortized cost; excludes pretax unrealized
gains of $18 million in 1999 and $132 million in 1998.
38
CONSOLIDATED FINANCIAL RESULTS
NET INTEREST
INCOME
Wachovia's taxable equivalent net interest income rose $113
million or 4.7 percent in 1999 to $2.511 billion. Strong demand,
particularly in commercial lending and commercial real estate loan
categories, drove the increase, resulting in a net yield on
interest-earning assets of 4.32 percent -- 8 basis points higher
than in 1998. Most of the new loan growth was funded with the
proceeds from maturing securities, securitized credit card
receivables and core deposit growth.
(Graph appears here with the following plot points.)
NET INCOME INCOME (MILLIONS)
1994 1995 1996 1997 1998 1999
INTEREST INCOME* 3135 3898 4087 4320 4712 4707
INTEREST EXPENSE 1369 2011 2086 2169 2314 2197
NET INTEREST INCOME* 1766 1887 2001 2151 2398 2511
*TAXABLE EQUIVALENT
Average yields on both sides of the balance sheet declined from
1998 as reflected in Wachovia's average prime lending rate and
the average federal funds rate which declined 37 basis points and
38 basis points, respectively. The decline in rates had a greater
effect on interest-bearing liabilities, due to a favorable mix of
wholesale funding that added to the positive impact of loan
growth. Commercial loan yields held firm year over year,
partially the result of improved pricing and a year-end spike in
the short-term LIBOR. Real estate and retail loan yields,
however, declined considerably in response to 1999's lower
average rate environment compared with 1998. Approximately 20
basis points of the 47 basis point decline in retail loan yields
was due to the effect of the credit card securitization
transactions completed during the year. Both direct and indirect
retail loans experienced declining yields, reflecting the
competitive landscape in retail automobile lending.
Although securities yields declined, the impact on the margin was
minimized, due to shrinking volumes and its smaller proportion to
total interest-earning assets. During 1998 and 1999, the
securities portfolio was allowed to decline to fund part of the
loan growth. At December 31, 1999, there were more than
sufficient securities to meet the collateral needs for public
funds deposits and other financial arrangements requiring the
pledging of securities. Over the next year, the securities
portfolio is expected to remain near its present level.
39
Wachovia funds its balance sheet with a balanced mix of retail
core deposits and wholesale funding products, including senior
and subordinated debt, trust capital securities and a global bank
note program. During 1999, the average cost of funds declined 30
basis points due to lower rates on most funding sources. In
addition to a more favorable average rate environment for funding
during 1999, Wachovia's net interest margin also benefited from a
more favorable mix in core deposit funding. Most of the savings
and money market deposits increase was in Wachovia's Premiere and
Business Premiere money market products. The combined effect of
the change in mix and lower deposit rates resulted in a 34 basis
point decline in the average cost of deposits.
Noninterest-bearing funds also had a positive effect on net
interest income. The average balances of both shareholders'
equity and noninterest-bearing liabilities increased a total of
$797 million or 5.4 percent, while the average balance of
noninterest-earning assets declined $82 million or just more than
1 percent. The net effect was an additional $879 million in
noninterest-bearing funds available to fund interest-earning
assets. Noninterest-bearing demand deposits contributed $452
million of the increase in available noninterest-bearing funds.
Short-term borrowed funds declined $1.494 billion or 13.7 percent
as Wachovia sought to increase liquidity and manage capital by
issuing senior and subordinated debt securities. As a result,
total long-term debt increased by $1.855 billion. The proceeds
from the debt issues were used to reduce Wachovia's dependence on
short-term borrowings and to fund loan growth. Wachovia's average
rate paid on long-term debt declined 39 basis points to 5.83
percent for 1999. The average cost of short-term borrowed funds
dropped 32 basis points.
Throughout 1999, Wachovia prepared for potential market
disruptions caused by concerns over the Year 2000 date change by
extending maturities of short-term borrowings into 2000. The
anticipation of Year 2000 disruptions drove the 30-day LIBOR up
more than 80 basis points as it spanned year-end. The combined
effect of the surge in loan demand and the LIBOR increase had a
positive impact on net interest income. The positive impact of
the funding preparations, the growth in short-term LIBOR
sensitive assets and the increase in the short-term LIBOR helped
offset the cost of maintaining excess cash for the anticipated
Year 2000 demand.
Management expects taxable equivalent net interest income to
continue to advance at a steady pace in 2000, reflecting
well-balanced asset/liability management and stable loan growth
across a diverse and growing economy.
40
RELATED BALANCE
SHEET ANALYSIS
Average loans expanded $2.822 billion or 6.4 percent for the year,
fueled by a strong national economy and a strong economy in
Wachovia's five-state primary lending area. Given management's
outlook for steady overall economic expansion, management
anticipates loan growth of approximately 10 percent in 2000.
Managed credit cards are expected to remain level with 1999 as new
outstandings replace runoff in the portfolio.
In response to 1999's strong economy, commercial loans, including
related real estate categories, rose $3.446 billion or 13.2
percent with solid gains occurring in all categories except
tax-exempt loans. Taxable commercial loans advanced $1.728
billion or 12.3 percent, and commercial mortgages increased $511
million or 7.5 percent. Lease financing grew $837 million or 58.6
percent. Construction loans rose $300 million or 15.8 percent,
while foreign loans were higher by $481 million or 59.8 percent.
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY Table 8
- --------------------------------------------------------------------------------
December 31, 1999 (thousands)
One Year One to Over
Total or Less Five Years Five Years
----------- ----------- ---------- ----------
Commercial, financial and other ................. $17,042,740 $15,717,027 $ 904,457 $ 421,256
Industrial revenue and other tax-exempt ......... 690,053 222,988 211,038 256,027
Construction and land development ............... 2,311,362 2,189,688 121,674 ----
Commercial mortgages ............................ 7,754,206 3,923,649 1,158,298 2,672,259
Loans to foreign borrowers ...................... 1,260,674 1,234,060 26,614 ----
----------- ----------- ---------- ----------
Selected loans, net ......................... $29,059,035 $23,287,412 $2,422,081 $3,349,542
=========== =========== ========== ==========
Loans with predetermined interest rates ......... $ 5,138,599 $ 1,420,556 $1,763,519 $1,954,524
Loans with floating interest rates .............. 23,920,436 21,866,856 658,562 1,395,018
----------- ----------- ---------- ----------
Total ...................................... $29,059,035 $23,287,412 $2,422,081 $3,349,542
=========== =========== ========== ==========
Wachovia has foreign credit outstandings consisting of loans and
lease financing. Foreign loans at December 31, 1999 were $1.261
billion, representing 2.5 percent of total loans compared with
$1.093 billion or 2.4 percent of total loans at year-end 1998.
Because foreign loans are reported based on the address of the
borrower and not on the country where security for the credit
resides, foreign loans as reported do not necessarily indicate
country risk exposure. Of the $1.261 billion of foreign loans
outstanding at December 31, 1999, the distribution by geographic
region was 54.6 percent in Western Europe; 31.1 percent in Latin
America, including $219 million in Brazil; 10.1 percent in the
United States; and 4.3 percent elsewhere. Wachovia's lease
financing total of $2.597 billion at year-end 1999 included
$1.240 billion of foreign leveraged leases, all with countries of
risk in Western Europe.
41
Consumer loans, including residential mortgages, decreased $624
million or 3.4 percent, primarily as a result of the two credit
card securitization transactions in 1999. Increases were recorded
in indirect retail loans, which were higher by $391 million or
12.6 percent and primarily consists of automobile sales
financing, and other revolving credit, which grew $91 million or
18.3 percent. Residential mortgages declined $387 million or 5
percent year over year, as the refinancing boom through 1998 and
the first few months of 1999 resulted in prepayments. The
refinancing activity was cut short by the three rate increases
initiated by the Federal Reserve that raised the overall cost of
home borrowing. Credit card outstandings declined $640 million or
11.3 percent, the result of the securitization transactions that
reduced average loan balances by approximately $833 million.
Wachovia's managed credit card loans at December 31, 1999 were
$6.632 billion, representing 12.9 percent of total managed loans,
versus $6.549 billion or 14.2 percent of total managed loans one
year earlier. Managed totals included $1.896 billion of
securitized credit cards at year-end 1999 and $500 million at
year-end 1998.
MANAGED CREDIT CARD DATA Table 9
-----------------------------------------------------------------
(thousands)
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Average credit card loans ................ $ 6,374,676 $ 6,181,109 $ 6,179,456 $ 5,573,626 $ 4,767,657
Period-end loans ......................... 6,632,439 6,549,350 6,419,098 6,221,334 5,234,629
Net loan losses .......................... 257,176 276,705 240,388 183,082 114,014
Net loan losses to average loans ......... 4.03% 4.48% 3.89% 3.28% 2.39%
Delinquencies (30 days or more) to
year-end loans ........................ 3.22 3.30 2.75 2.35 2.31
Wachovia's credit card securitization transactions were
undertaken primarily to diversify funding sources and for overall
balance sheet management. Asset securitization involves the sale
of a pool of loan receivables to investors through either a
public or private issuance of asset-backed securities. The loans
are transferred to a trust which then sells certificates
representing undivided interests in the trust. Wachovia retains
the remaining undivided interests, provides the servicing for the
accounts securitized and receives a servicing fee. Asset
securitization converts interest income, cash advance fees, late
fees and other fees in excess of interest paid to the
certificateholders (collectively, the amount that would have been
included in the net interest margin); credit losses; and other
trust expenses into excess servicing income, a component of
credit card income. The transaction reduces on-balance sheet
assets as well as their associated sources of funding.
Wachovia uses assumptions and estimates in determining the
securitization gain recognized at the time of initial sale and
each subsequent sale in accordance with Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." These assumptions include projections concerning
the annual percentage rates charged to customers, charge-off
experience, loan repayment rates, the cost of funds and discount
rates commensurate with the risks involved. Changes in these
assumptions could impact the realization of the related
receivable, the contractual right to receive interest and other
cash flows from the trust recorded at sale date.
42
SECURITIES Table 10
- --------------------------------------------------------------------------------
December 31 (thousands)
1999
---------------------------------------------------------------------
Amortized Unrealized Unrealized Fair Average
Cost Gain Loss Value Maturity
------------- ----------- ----------- ---------- -----------
(Yrs./Mos.)
HELD-TO-MATURITY
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. $ 11,005 $ 1 $ 9 $ 10,997
One to five years ............... 391,823 1 11,428 380,396
Five to ten years ............... ---- ---- ---- ----
Over ten years .................. ---- ---- ---- ----
------------- ----------- ----------- ----------
Total ......................... 402,828 2 11,437 391,393 3/6
State and municipal:
Within one year ................. 11,625 178 ---- 11,803
One to five years ............... 90,613 5,368 183 95,798
Five to ten years ............... 61,324 5,758 85 66,997
Over ten years .................. 40,727 1,559 133 42,153
------------- ----------- ----------- ----------
Total ......................... 204,289 12,863 401 216,751 6/3
Mortgage-backed:
Within one year ................. 1,318 ---- 3 1,315
One to five years ............... 47,715 304 19 48,000
Five to ten years ............... 36,865 145 50 36,960
Over ten years .................. 313,905 11,693 617 324,981
------------- ----------- ----------- ----------
Total ......................... 399,803 12,142 689 411,256 16/7
Other:
Within one year ................. 37,183 5 35 37,153
One to five years ............... 4,121 10 34 4,097
Five to ten years ............... 500 ---- ---- 500
Over ten years .................. ---- ---- ---- ----
------------- ----------- ----------- ----------
Total ......................... 41,804 15 69 41,750 0/8
------------- ----------- ----------- ----------
Total held-to-maturity ........ 1,048,724 25,022 12,596 1,061,150 8/11
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. 249,632 1,828 16 251,444
One to five years ............... 2,207,069 2,018 35,041 2,174,046
Five to ten years ............... 368,950 3,950 10,568 362,332
Over ten years .................. 8,093 3,085 ---- 11,178
------------- ----------- ----------- ----------
Total ......................... 2,833,744 10,881 45,625 2,799,000 3/3
State and municipal:
Within one year ................. 950 5 ---- 955
One to five years ............... 35,347 416 64 35,699
Five to ten years ............... 13,831 509 100 14,240
Over ten years .................. 6,010 124 33 6,101
------------- ----------- ----------- ----------
Total ......................... 56,138 1,054 197 56,995 4/11
Mortgage-backed:
Within one year ................. 30,101 1 147 29,955
One to five years ............... 243,089 3,393 1,850 244,632
Five to ten years ............... 931,325 1,087 21,661 910,751
Over ten years .................. 2,576,766 3,123 62,263 2,517,626
------------- ----------- ----------- ----------
Total ......................... 3,781,281 7,604 85,921 3,702,964 15/6
Other:
Within one year ................. 2,971 ---- 1 2,970
One to five years ............... 79,896 20 282 79,634
Five to ten years ............... ---- ---- ---- ----
Over ten years .................. 103,361 ---- 2,693 100,668
------------- ----------- ----------- ----------
Total ......................... 186,228 20 2,976 183,272 15/4
------------- ----------- ----------- ----------
Total interest earning
available-for-sale ........... 6,857,391 19,559 134,719 6,742,231 10/4
Federal Reserve Bank stock and
other ........................... 356,799 ---- 3,240 353,559
------------- ----------- ----------- ----------
Total available-for-sale ...... 7,214,190 19,559 137,959 7,095,790
------------- ----------- ----------- ----------
Total portfolio ............... $8,262,914 $ 44,581 $ 150,555 $8,156,940
============= =========== =========== ==========
1999 1998 1997
----------- ------------------------ ---------------------------
Taxable
Equivalent Amortized Fair Amortized Fair
Yield* Cost Value Cost Value
----------- ----------- --------- ----------- -----------
Held-to-Maturity
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. 5.92% $ 262,934 $ 265,377 $ 97,213 $ 97,229
One to five years ............... 5.53 255,129 259,345 105,700 106,314
Five to ten years ............... ---- ---- ---- ----
Over ten years .................. ---- ---- ---- ----
----------- ---------- ------------ -----------
Total ......................... 5.54 518,063 524,722 202,913 203,543
State and municipal:
Within one year ................. 11.19 12,735 12,887 16,033 16,207
One to five years ............... 12.26 58,864 64,614 59,950 64,287
Five to ten years ............... 11.67 71,232 80,931 94,835 107,903
Over ten years .................. 10.17 33,937 37,857 52,085 57,400
----------- ---------- ------------ -----------
Total ......................... 11.61 176,768 196,289 222,903 245,797
Mortgage-backed:
Within one year ................. 6.19 146 147 553 550
One to five years ............... 7.23 78,227 80,102 103,233 105,106
Five to ten years ............... 6.51 69,450 70,402 129,809 132,484
Over ten years .................. 7.94 462,505 491,341 728,566 768,940
----------- ---------- ------------ -----------
Total ......................... 7.72 610,328 641,992 962,161 1,007,080
Other:
Within one year ................. 6.29 40,670 40,852 37,793 38,069
One to five years ............... 6.78 37,178 37,650 83,219 83,614
Five to ten years ............... 6.60 600 621 350 361
Over ten years .................. ---- ---- ---- ----
----------- ---------- ------------ -----------
Total ......................... 6.34 78,448 79,123 121,362 122,044
----------- ---------- ------------ -----------
Total held-to-maturity ........ 7.58 1,383,607 1,442,126 1,509,339 1,578,464
Available-for-Sale
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. 7.23 884,334 894,030 1,428,265 1,436,174
One to five years ............... 6.02 2,091,953 2,153,152 2,966,942 3,010,078
Five to ten years ............... 3.84 139,227 145,666 98,262 99,626
Over ten years .................. 11.96 8,149 12,719 8,078 12,231
----------- ---------- ------------ -----------
Total ......................... 5.87 3,123,663 3,205,567 4,501,547 4,558,109
State and municipal:
Within one year ................. 9.25 5,211 5,253 10,033 10,091
One to five years ............... 8.04 33,565 34,575 36,592 37,433
Five to ten years ............... 9.19 15,276 16,728 17,015 17,592
Over ten years .................. 9.89 6,912 7,605 16,155 17,822
----------- ---------- ------------ -----------
Total ......................... 8.67 60,964 64,161 79,795 82,938
Mortgage-backed:
Within one year ................. 6.03 14,606 14,649 25,113 25,145
One to five years ............... 6.85 280,390 284,579 772,458 778,099
Five to ten years ............... 6.30 796,036 808,650 557,712 562,110
Over ten years .................. 6.46 3,068,432 3,098,876 2,188,428 2,215,829
----------- ---------- ------------ -----------
Total ......................... 6.44 4,159,464 4,206,754 3,543,711 3,581,183
Other:
Within one year ................. 5.92 97 98 52,435 52,676
One to five years ............... 6.43 148,278 149,954 350,400 352,950
Five to ten years ............... 10,084 10,240 6,524 6,917
Over ten years .................. 6.73 174,983 173,417 99,616 98,825
----------- ---------- ------------ -----------
Total ......................... 6.58 333,442 333,709 508,975 511,368
----------- ---------- ------------ -----------
Total interest earning
available-for-sale ........... 6.23 7,677,533 7,810,191 8,634,028 8,733,598
Federal Reserve Bank stock and
other ........................... 171,632 173,457 160,649 175,939
----------- ---------- ------------ -----------
Total available-for-sale ...... 7,849,165 7,983,648 8,794,677 8,909,537
----------- ---------- ------------ -----------
Total portfolio ............... $9,232,772 $9,425,774 $10,304,016 $10,488,001
=========== ========== ============ ===========
* Yields are presented on a fully taxable equivalent basis using the federal
income tax rate and state tax rates, as applicable. Yields on securities
available-for-sale are based on amortized cost.
43
Securities, the second largest category of interest-earning
assets, decreased $1.242 billion or 11.7 percent, with reductions
in both the available-for-sale portfolio and in securities
held-to-maturity as management allowed portfolio attrition to
fund a portion of the increase in loans. At year-end 1999,
securities available-for-sale totaled $7.096 billion and
securities held-to-maturity were $1.049 billion.
Total interest-bearing liabilities expanded $675 million or 1.4
percent, led primarily by long-term debt and by domestic
deposits. Interest-bearing deposits increased $314 million or
less than 1 percent. Savings and money market savings led the
growth, expanding $1.735 billion or 15 percent, with the increase
occurring primarily in Premiere and Business Premiere accounts,
reflecting consumer preference for the flexibility of money
market savings accounts. Gross deposits in 1999 averaged $40.580
billion, up $766 million or 1.9 percent from $39.814 billion in
1998. Collected deposits, net of float, averaged $38.450 billion
for the year, a rise of $898 million or 2.4 percent from $37.551
billion in 1998.
SHORT-TERM BORROWED FUNDS Table 11
- --------------------------------------------------------------------------------
(thousands)
1999 1998 1997
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
----------- ----- ----------- ----- ----------- -----
At year-end:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 5,372,493 3.64% $ 5,463,418 4.14% $ 8,322,716 5.48%
Commercial paper ................................ 1,658,988 4.13 1,359,382 4.21 1,034,024 4.66
Other borrowed funds ............................ 3,071,493 3.97 1,912,262 5.16 752,874 5.39
------------ ------------ ------------
Total .......................................... $10,102,974 3.82 $ 8,735,062 4.38 $10,109,614 5.39
============ ============ ============
Average for the year:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 6,150,372 4.71 $ 7,498,280 5.18 $ 6,743,997 5.30
Commercial paper* ............................... 1,484,483 4.69 1,276,623 5.02 781,345 5.06
Other borrowed funds ............................ 1,766,069 5.53 2,120,257 5.25 1,461,781 5.57
------------ ------------ ------------
Total .......................................... $ 9,400,924 4.86 $10,895,160 5.18 $ 8,987,123 5.32
============ ============ ============
Maximum month-end balance:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 7,968,932 $ 8,796,505 $ 8,322,716
Commercial paper ................................ 1,658,988 1,487,187 1,034,024
Other borrowed funds ............................ 3,071,493 2,677,503 1,953,440
* Average interest rate for each year includes effect of fees paid on back-up
lines of credit.
Long-term debt was up $1.855 billion or 29.5 percent for the
year, as Wachovia replaced short-term funds with long-term debt
for capital management and liquidity purposes. Medium-term bank
notes declined $51 million or 1.9 percent as more issues were
allowed to mature without immediate replacement. Offsetting the
decrease in medium-term bank notes were higher levels of other
long-term debt. Long-term debt consists of senior and
subordinated debt and trust capital securities. In late June,
Wachovia issued $600 million of 5-year senior fixed-rate notes.
This followed the issuance of $400 million of 10-year
subordinated fixed-rate notes in March 1999 and December 1998.
With each of these debt instruments, Wachovia entered into
separate contracts with third parties that qualify for hedge
accounting to swap the fixed rate to variable. In December of
1999, $300 million of 7 percent subordinated debt securities
matured.
LIQUIDITY
MANAGEMENT
The goal of liquidity management is to ensure Wachovia's ability
to meet current and future obligations, including loan
commitments, deposit withdrawals, liability maturities and other
commitments, and to ensure that Wachovia is well positioned to
take advantage of business and investment opportunities in a
timely and cost-efficient manner. Wachovia manages liquidity at
both the parent and subsidiary levels through active management of
the balance sheet.
44
Parent company liquidity comes from short-term investments that
can be sold immediately, the ability to issue debt and equity
securities, and from dividends and interest income from
subsidiaries. At December 31, 1999, Wachovia Corporation had
$1.269 billion in interest-bearing balances with Wachovia Bank,
N.A. ("Wachovia Bank"), and $1.9 billion available for issuance
as senior or subordinate debt securities under existing shelf
registrations filed with the Securities and Exchange Commission.
At January 1, 2000, $581 million was available from Wachovia Bank
to pay dividends to Wachovia Corporation without prior regulatory
approval. The amount available at January 1 will increase by the
amount of retained net profits Wachovia Bank generates in 2000.
During 1999, Wachovia Bank paid $618 million in dividends to the
parent company. As a back-up liquidity facility for commercial
paper, Wachovia has $400 million in lines of credit from
unaffiliated banks. No borrowings have occurred under these
lines.
Wachovia Corporation's senior notes are rated Aa3 by Moody's and
AA- by Standard & Poor's, and the subordinated notes are rated A1
by Moody's and A+ by Standard & Poor's. The subordinated debt
securities qualify for inclusion in Tier II capital under
risk-based capital guidelines. Capital securities, also
classified as part of other long-term debt, totaled $997 million
at December 31, 1999. The capital securities are rated aa3 by
Moody's and A by Standard & Poor's and qualify as Tier I capital
under risk-based capital guidelines.
Liquidity at Wachovia Bank is derived from its ability to
generate core deposits from a large, diversified customer base
spread across its five-state operating area and its ability to
purchase noncore money market funds in the U.S. and abroad.
Wachovia Bank's ability to attract funds in the wholesale markets
rests on its strength of capital, earnings, reputation, credit
ratings and high-quality assets. Wachovia Bank draws on a diverse
base of wholesale funding sources, including large certificates
of deposit, federal funds purchased, securities sold under
agreement to repurchase, foreign branch deposits and its global
bank note program. Wachovia Bank also has extensive access to
funds from its membership in the Federal Home Loan Bank of
Atlanta.
Through its global bank note program, Wachovia Bank is authorized
to issue up to $21.557 billion of bank notes. The global bank
note program consists of issuances with original maturities
beginning at seven days. Bank notes with original maturities of
one year or less are included in other short-term borrowed funds,
and bank notes with original maturities greater than one year are
considered medium-term in nature and are classified as long-term
debt. Under the existing offering circular, Wachovia Bank can
have outstanding up to $10 billion of notes at any one time with
original maturities from 7 to 270 days. Wachovia Bank may issue
up to an aggregate of $8 billion of notes with maturities of more
than 270 days. At December 31, 1999, Wachovia Bank had more than
$7 billion of the notes with maturities of more than 270 days
available under the existing authorization. Short-term bank notes
outstanding as of December 31, 1999 were $160 million, with an
average cost of 5.57 percent and an average maturity of 1.4
months. Medium-term bank notes were $2.351 billion on the same
date, with an average cost of 6.07 percent and an average
maturity of 3.9 years. Short-term issues under the global bank
note program are rated P-1 by Moody's and A-1+ by Standard &
Poor's, while medium-term issues are rated Aa2 by Moody's and AA
by Standard & Poor's.
Asset liquidity is maintained through temporary investments,
maturity management and the ability to liquidate securities in
the available-for-sale investment portfolio. Additional asset
liquidity is available from Wachovia's ability to securitize
assets such as credit card receivables and other loans.
45
In addition to seeking to maintain liquidity through a strong
balance sheet and operating performance that assures market
acceptance of its debt obligations, Wachovia limits the level,
maturity and concentrations of noncore funding through policy and
internal guidelines. Management regularly reviews liquidity
positions under normal business conditions and under stress
scenario conditions. Liquidity management and contingency
planning are reviewed quarterly with the Board Finance Committee.
MARKET RISK AND
ASSET/LIABILITY
MANAGEMENT
Market risk is the risk of loss due to adverse changes in
instrument values or earnings fluctuation resulting from changes
in market factors. This includes, but may not be limited to,
changes in interest rates, foreign exchange rates, commodity
prices and other market variables including equity price risk.
Wachovia has potential exposure to interest rates, no risk in
commodity prices (since Wachovia does not directly hold
commodities or trade in commodity contracts) and immaterial risk
in foreign exchange and changing equity prices. Market risks
reside in both the trading and nontrading portfolios. Trading
portfolios represent assets and off-balance sheet instruments that
are held for short periods of time and are marked-to-market
through the income statement. Nontrading portfolios represent
assets, liabilities and off-balance sheet instruments that are not
marked-to-market through the income statement but are accounted
for on an accrual basis or are marked-to-market through equity.
The primary risk in both the trading and nontrading portfolios is
to changes in interest rates. Exposures to movements in foreign
exchange rates exist predominantly in the trading portfolio and
are immaterial to consolidated net income. Exposure to equity
price movement exists through limited market making activities,
parent company investments and capital markets private equity
investments. The volatility of values in the equity portfolios is
immaterial to net income.
Estimating the amount of risk in either the trading or nontrading
portfolios requires assumptions about the future. The nature of
the assumptions causes all representations of risk to be
estimates. These estimates will be different from actual results
for many reasons, including but not limited to, changes in the
growth of the overall economy which will impact volume growth in
the company, changing credit spreads, market interest rates
moving in patterns other than the patterns chosen for analysis,
changes in customer preferences, changes in tactical and
strategic plans and initiatives, and changes in Federal Reserve
policy. Stress testing is performed on all market risk
measurement analyses to help understand the relative sensitivity
of key assumptions and thereby better understand Wachovia's risk
profile.
TRADING
MARKET RISK
Trading market risk is the risk to net income from changes in the
fair value of assets and liabilities and off-balance sheet
instruments that are marked-to-market through the income
statement. Trading portfolios are maintained to service customer
needs for investment and risk management products and reflect
underwriting activities. The key trading portfolios by product are
U. S. Treasury and government agencies, municipal bonds,
mortgage-backed securities, corporate bonds and money market
instruments. Wachovia enters into derivatives contracts and
foreign currency exchange contracts to service customer needs and
does not take material trading positions in either. Minor equity
positions are maintained to support market making activities. The
earnings risk due to changes in fair value in the trading
portfolios is limited by the short-term holding periods of some of
the portfolios, entering into offsetting trades with market
counterparties, establishing and monitoring market risk limits by
portfolio, and utilizing various hedging techniques. Risk limits,
policies, practices and procedures are established in the business
units and approved by the relevant risk committees and the Board
of Directors to ensure that business objectives are met within a
framework of prudent and sound risk management.
46
A value-at-risk (VAR) methodology is used to gauge potential
losses in various trading portfolios due to changes in interest
rates. The VAR model is a statistical variance/covariance model
that calculates an estimate of exposure to interest rate
movements within a predetermined confidence level over a defined
forward-looking time period. The VAR estimate represents the
maximum expected loss in fair value of a trading portfolio over a
one day time horizon, given a 99 percent confidence level. In
other words, there is about a 1 percent chance, given historical
volatility of interest rates, that a loss greater than the VAR
estimate will occur by the end of the next day. The VAR estimate
takes into account several variables that affect the value of the
trading portfolio, including interest rates, security prices and
their volatilities, and statistical correlations. The potential
expected volatility of interest rates is calculated using a
one-year history of market movements. These historical
volatilities are exponentially weighted to give more weight to
recent market movements.
At December 31, 1999, the combined VAR exposure, given the above
calculation parameters, was $328 thousand which represented .11
percent of the combined trading portfolio value of $307 million.
The combined average VAR exposure for 1999 was $474 thousand,
which represented .09 percent of the combined average trading
portfolio value of $513 million. These VAR numbers are for the
combined U. S. Treasury and government agency, municipal bond,
residential mortgage-backed securities, corporate bond, equity
and money market instrument trading portfolios.
NONTRADING
MARKET RISK
Nontrading market risk is the risk to net income from changes in
interest rates on asset, liability and off-balance sheet
portfolios other than trading portfolios. The risk is driven by
potential mismatches resulting from timing differences in the
repricing of assets, liabilities and off-balance sheet
instruments, and potential exercise of explicit and embedded
options. There also is net income risk from changes in market rate
relationships known as basis risk. Treasury is responsible for
managing nontrading market risk. Treasury
47
includes asset/liability management and the management of
discretionary securities and funding portfolios. The goal of
Treasury is to maintain high-quality and consistent growth in net
income, while maintaining acceptable levels of risk to changes in
interest rates, and acceptable levels of capital and liquidity.
This goal is achieved by influencing the maturity and repricing
characteristics of the various lending and deposit taking lines
of business, by managing discretionary portfolios, and by
utilizing off-balance sheet financial instruments.
Treasury operates under the policies established by the Finance
Committee of the Board of Directors and the guidance of the
Management Finance Committee. Nontrading interest rate risk,
liquidity, capital positions and discretionary on- and
off-balance sheet activity are reviewed quarterly by the Finance
Committee of the Board of Directors. Interim oversight of the
function is provided through regular meetings of Treasury
managers, the Treasurer and the Chief Financial Officer. Treasury
personnel carry out day-to-day activity within approved risk
management guidelines and strategies. Wachovia uses a number of
tools to measure nontrading interest rate risk, including
simulating net income, monitoring the sensitivity of the net
present value of the balance sheet, and monitoring the difference
or gap between maturing or rate-sensitive assets and liabilities
over various time periods.
Management believes that nontrading interest rate risk is best
measured by simulation modeling which calculates expected net
income based on projected interest-earning assets,
interest-bearing liabilities, off-balance sheet financial
instruments, other income and other expense. The model
projections are based upon historical trends and management's
expectations of balance sheet growth patterns, spreads to market
rates, historical market rate relationships, prepayment behavior,
current and expected product offerings, sales activity, and
expected exercise of explicit and embedded options. The
Management Finance Committee regularly reviews the assumptions
used in the model.
Wachovia monitors interest rate risk by measuring the potential
change in 12 months of net income under eight standard interest
rate scenarios. The scenarios are rolled forward by quarter up to
four quarters in the future to view income sensitivity over any
given 12-month period within the next 24 months. All of the
scenarios are compared with a scenario where current market rates
are held constant for the forecast period (i.e., the flat rate
scenario). The scenarios are immediate shocks of the yield curve
up and down 100 and 200 basis points and ramp scenarios for up
and down 100 and 200 basis points occurring evenly across the
next 12 months. Policy guidelines are approved by the Management
Finance Committee and the Finance Committee of the Board of
Directors. For simulation, which is a dynamic forward-looking
analysis, the guidelines are focused on the 200 basis point ramp
scenarios across 12 months. The policy guideline limit for net
income simulation is a negative impact to net income of 7.5
percent for the up or down 200 basis point ramp scenarios when
compared with the flat rate scenario. Management has generally
maintained a risk position well within the policy guideline
level. The model indicated the
48
impact of a 200 basis point gradual rise in rates over the next
12 months would cause approximately a 2.1 percent increase in net
income at December 31, 1999 versus a .7 percent decrease one year
earlier. A gradual decrease in rates over the next 12 months
would cause approximately a 2.4 percent decrease in net income as
of December 31, 1999 compared with a .01 percent decrease at
December 31, 1998. Wachovia runs additional scenarios beyond the
standard shock and ramp scenarios, including yield curve
steepening, flattening and inversion scenarios. Various
sensitivity analyses are performed on a regular basis to
segregate interest rate risk into separate components and
understand the risk attributable to prepayments, caps and floors,
and other options. Extensive assumptions testing is performed to
understand the degree of impact from changing key assumptions
such as the speed of prepayments, the interest rate elasticity of
core deposit rates and faster- or slower-growing balance sheets.
Wachovia also utilizes a present value methodology to discern
risk levels present in the balance sheet beyond the 24-month time
horizon used in simulation analysis. The net present value
methodology is a point in time analysis of the balance sheet not
including new business volumes or management initiatives. All
cash flows from interest-earning assets, interest-bearing
liabilities, noninterest-bearing deposits and off-balance sheet
instruments are discounted to a present value. Assumptions are
made to estimate the expected lives of indeterminate maturity
assets and liabilities such as line of credit products and
savings and checking accounts. Discount rates used in the
analysis are based upon forward rates implied by the current
yield curve with credit spreads added to discount current new
business back to par value. As in simulation analysis, extensive
assumptions testing is performed to understand the degree of
impact from changing key assumptions.
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. Wachovia incurs credit risk in its 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, the
parties involved and their roles, the correlation between those
parties, and the relevant mitigating factors (e.g., covenants,
collateral, netting arrangements and credit hedges). In general,
credit risk is incidental to Wachovia's trading, liquidity/funding
and asset management activities, while it is central to the profit
strategy in lending. As a result, the majority of Wachovia's
credit risk is incurred in lending activities.
Credit risk is managed through individual exposure limits for
each material borrower with whom Wachovia conducts business.
Credit approvals are based, among other things, on the financial
strength of the borrower, assessment of the borrower's
management, 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 and certain small business lending activities. The
second, and more prevalent approach in commercial lending,
involves individual approval of exposures in conjunction with
Risk Management. Commercial loan approvals are reviewed at
inception, and at least annually thereafter, by the appropriate
management credit committee. In retail lending, loans/lines are
reviewed and monitored monthly on a portfolio basis.
49
In commercial lending, the loan officers are responsible for
preparing, initially and at least annually thereafter, an
appropriate written review of all assigned credit risk exposures.
Risk Management also conducts an independent risk analysis at
least annually. For certain exposures, quarterly or semiannual
reviews occur. The extent of analysis is based on the amount and
degree of risk involved, as well as the overall complexity of the
relationship. Projections, including stress tests, are generally
included for term exposures. Internal risk ratings are assigned
as a part of the day-to-day management of the loan portfolio and
are adjusted or confirmed with each review. These reviews are
submitted to Line of Business senior management and Risk
Management for their concurrence.
Borrower exposures may be designated as either "Watch List" or
"Closely Followed" accounts when warranted by either
environmental factors or individual company performance. Such
accounts are submitted to additional quarterly review by the Line
of Business management, associated Risk Management and Wachovia's
Chief Credit Officer in order to accurately assess their
situation and identify timely, appropriate corrective actions.
This process is considered essential to both the transparency and
effective management of Wachovia's credit risk.
In retail lending, Wachovia manages credit risk from a portfolio
view rather than by specific borrower as is done in commercial
lending. Determining the appropriate risk/return profile for each
portfolio is done in conjunction with Risk Management utilizing a
variety of tools, including quantitative models and scorecards
which have been tailored to meet Wachovia's specific needs and
are overlaid with judgmental policy. 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. For
open-end loans such as credit card lines and other revolving
banklines, Risk Management utilizes bankruptcy scores, behavior
scores, credit bureau scores and internal analysis of predictive
characteristics to create matrices that will assist in
determining whether a borrower's line of credit should be
adjusted or discontinued. Risk Management, with the oversight of
the Senior Management Credit Committee and the Board Credit
Committee, establishes and monitors the risk perfomance to ensure
that the portfolio credit risk remains within an appropriate
level.
Risk Management is responsible for preparing an independent,
semiannual narrative of overall credit risks and trends for each
major business unit. This report includes a confirmation of
internal risk ratings, assessment of aggregate risk, review of
Line of Business management, assessment of policy compliance and
recommended corrective actions, if necessary. This report is
submitted to Wachovia's Chief Credit Officer, with copies to
other corporate officers and the appropriate Line of Business
management.
The Senior Management Credit Committee, chaired by Wachovia's
Chief Executive Officer, meets quarterly to review customer and
industry credit concentrations, specific credits or portfolios
with a higher degree of risk, and any other relevant issues.
Wachovia's Chief Credit Officer then presents a report to the
Credit Committee of the Board of Directors.
50
ALLOWANCE FOR LOAN LOSSES Table 12
- --------------------------------------------------------------------------------
(thousands)
1999 1998
--------- --------
SUMMARY OF ACTIVITY
Balance at beginning of year ...................... $ 547,992 $544,723
Additions from acquisitions ....................... 39 2,613
Provision for loan losses ......................... 298,105 299,480
Deduct net loan losses:
Loans charged off:
Commercial ...................................... 46,768 17,880
Credit card ..................................... 248,116 286,520
Other revolving credit .......................... 9,652 10,802
Other retail .................................... 34,264 35,378
Real estate ..................................... 9,522 4,514
Lease financing ................................. 2,940 3,095
Foreign ......................................... ---- ----
--------- --------
Total .......................................... 351,262 358,189
Recoveries:
Commercial ...................................... 7,041 6,667
Credit card ..................................... 32,782 28,804
Other revolving credit .......................... 2,919 2,571
Other retail .................................... 11,091 11,494
Real estate ..................................... 5,436 9,339
Lease financing ................................. 667 490
Foreign ......................................... ---- ----
--------- --------
Total .......................................... 59,936 59,365
--------- --------
Net loan losses .................................. 291,326 298,824
--------- --------
Balance at end of year ............................ $ 554,810 $547,992
========= ========
NET LOAN LOSSES (RECOVERIES) BY CATEGORY
Commercial ........................................ $ 39,727 $ 11,213
Credit card ....................................... 215,334 257,716
Other revolving credit ............................ 6,733 8,231
Other retail ...................................... 23,173 23,884
Real estate ....................................... 4,086 (4,825)
Lease financing ................................... 2,273 2,605
Foreign ........................................... ---- ----
--------- --------
Total .......................................... $ 291,326 $298,824
========= ========
Net loan losses -- excluding credit cards ......... $ 75,992 $ 41,108
NET LOAN LOSSES (RECOVERIES) TO AVERAGE
LOANS BY CATEGORY
Commercial ........................................ .24% .07%
Credit card ....................................... 4.27 4.54
Other revolving credit ............................ 1.14 1.65
Other retail ...................................... .51 .56
Real estate ....................................... .02 (.03)
Lease financing ................................... .10 .18
Foreign ........................................... ---- ----
Total loans ....................................... .62 .67
Total loans -- excluding credit cards ............. .18 .11
Year-end allowance to outstanding loans ........... 1.12 1.20
Earnings coverage of net loan losses* ............. 6.35x 5.58x
ALLOCATION OF THE ALLOWANCE FOR LOAN
LOSSES**
Commercial ........................................ $ 166,690 $129,520
Credit card ....................................... 209,807 228,232
Other revolving credit ............................ 11,402 8,465
Other retail ...................................... 29,410 37,308
Real estate ....................................... 64,305 92,523
Lease financing ................................... 6,413 6,304
Foreign ........................................... 6,881 6,342
Unallocated ....................................... 59,902 39,298
--------- --------
Total ........................................... $ 554,810 $547,992
========= ========
1997 1996 1995 1994
-------- -------- -------- --------
SUMMARY OF ACTIVITY
Balance at beginning of year ...................... $519,297 $518,808 $516,132 $509,798
Additions from acquisitions ....................... 24,641 200 ---- ----
Provision for loan losses ......................... 264,949 193,776 130,504 96,122
Deduct net loan losses:
Loans charged off:
Commercial ...................................... 9,254 6,375 6,364 14,319
Credit card ..................................... 246,008 184,387 125,301 83,597
Other revolving credit .......................... 10,564 8,834 5,966 4,933
Other retail .................................... 39,801 41,581 26,958 15,696
Real estate ..................................... 11,564 7,915 15,299 18,292
Lease financing ................................. 4,488 1,635 892 226
Foreign ......................................... ---- ---- ---- ----
-------- -------- -------- --------
Total .......................................... 321,679 250,727 180,780 137,063
Recoveries:
Commercial ...................................... 4,171 5,905 9,078 6,848
Credit card ..................................... 26,674 21,445 15,644 13,913
Other revolving credit .......................... 2,361 1,695 1,369 1,278
Other retail .................................... 11,837 11,524 7,472 6,505
Real estate ..................................... 12,133 16,488 19,239 18,495
Lease financing ................................. 339 183 142 204
Foreign ......................................... ---- ---- 8 32
-------- -------- -------- --------
Total .......................................... 57,515 57,240 52,952 47,275
-------- -------- -------- --------
Net loan losses .................................. 264,164 193,487 127,828 89,788
-------- -------- -------- --------
Balance at end of year ............................ $544,723 $519,297 $518,808 $516,132
======== ======== ======== ========
NET LOAN LOSSES (RECOVERIES) BY CATEGORY
Commercial ........................................ $ 5,083 $ 470 $(2,714) $ 7,471
Credit card ....................................... 219,334 162,942 109,657 69,684
Other revolving credit ............................ 8,203 7,139 4,597 3,655
Other retail ...................................... 27,964 30,057 19,486 9,191
Real estate ....................................... (569) (8,573) (3,940) (203)
Lease financing ................................... 4,149 1,452 750 22
Foreign ........................................... ---- ---- (8) (32)
-------- -------- ---------- --------
Total .......................................... $264,164 $193,487 $127,828 $ 89,788
======== ======== ========= ========
Net loan losses -- excluding credit cards ......... $ 44,830 $ 30,545 $18,171 $ 20,104
NET LOAN LOSSES (RECOVERIES) TO AVERAGE
LOANS BY CATEGORY
Commercial ........................................ .04% ----% (.02%) .07%
Credit card ....................................... 3.90 3.29 2.41 1.74
Other revolving credit ............................ 1.93 1.71 1.15 .96
Other retail ...................................... .67 .69 .47 .23
Real estate ....................................... ---- (.06) (.03) ----
Lease financing ................................... .43 .22 .27 .01
Foreign ........................................... ---- ---- ---- (.03)
Total loans ....................................... .67 .53 .38 .30
Total loans -- excluding credit cards ............. .13 .10 .06 .08
Year-end allowance to outstanding loans ........... 1.23 1.37 1.46 1.63
Earnings coverage of net loan losses* ............. 5.38x 6.66x 8.56x 11.18x
ALLOCATION OF THE ALLOWANCE FOR LOAN
LOSSES**
Commercial ........................................ $120,195 $117,883 $123,161 $135,725
Credit card ....................................... 221,142 191,606 141,763 130,111
Other revolving credit ............................ 10,682 8,268 7,174 6,433
Other retail ...................................... 36,669 48,011 42,999 38,175
Real estate ....................................... 93,821 94,167 127,763 143,659
Lease financing ................................... 6,537 3,685 1,666 2,211
Foreign ........................................... 3,702 3,702 3,697 3,830
Unallocated ....................................... 51,975 51,975 70,585 55,988
-------- -------- --------- --------
Total ........................................... $544,723 $519,297 $518,808 $516,132
======== ======== ========= ========
* Earnings before income taxes and provision for loan losses excluding
securities transactions and nonrecurring charges.
** The allocation of the allowance for loan losses above represents an estimate
based on historical loss experience, individual credits, economic
conditions and other judgmental factors. Since any allocation is judgmental
and involves consideration of many factors, the allocation may be more or
less than the charge-offs that may ultimately occur. The entire allowance
is available for charge-offs in any category of loans. See page 99 for
percentage of loan categories to total loans.
51
ALLOWANCE FOR
LOAN LOSSES
The allowance for loan losses is maintained at a level believed by
management to be adequate to absorb probable losses inherent in
the portfolio as of the date of the financial statements. Wachovia
employs a number of tools in assessing the adequacy of the
allowance. No one tool is sufficient to accurately measure losses
that exist at the balance sheet date and no group of tools can
completely replace seasoned judgment. For the retail portfolios,
which include credit cards, residential mortgages and consumer
installment loans, the required allowance is established to absorb
approximately twelve months of expected net losses which is
consistent with the requirements indicated by Wachovia's loss
migration model. For the commercial portfolios, Wachovia uses a
loss migration analysis as the starting point for determining
allowance for loan loss adequacy. Loss migration models are widely
used throughout the industry and are generally favored by the
regulatory agencies in assessing the adequacy of the allowance for
loan losses. Currently, Wachovia's loss migration analysis tracks
eight quarters of loan losses to determine historical loss
experience for pools of loans with similar characteristics and
credit quality ratings. A relatively short period of history, such
as eight to twelve quarters, permits the development of meaningful
loss patterns without using information that is stale or
irrelevant.
The loss factors resulting from the migration analysis are
tempered for known changes in delinquency trends and economic
conditions from the time period used in the analysis. Loss
factors resulting from the migration analysis are applied to the
balances of each respective segment of the portfolio. The
resulting reserves are added to the specific reserves established
for impaired loans and the unallocated allowance determined by
management in order to develop the total allowance for loan loss
requirement.
A loan is impaired when all amounts due (including both interest
and principal) are not expected to be collected according to the
contractual terms of the loan agreement. Generally, a loan is
impaired if it exhibits the same level of weakness and
probability of loss as loans, or portions of loans, classified as
doubtful or loss. An impairment assessment is applied to all
loans except large groups of smaller-balance homogeneous consumer
loans that are collectively evaluated for impairment.
Impaired loans totaled $149 million at December 31, 1999 compared
with the $57 million at the prior year-end. The associated
allowance for loan losses for these loans was $43 million
compared with $7 million a year ago. Total nonaccrual commercial
and commercial real estate loans increased over 1998, up 67.9
percent to $158 million from $94 million due to specific problem
credits that deteriorated during 1999. Management believes these
credits were identified and addressed early in the loss cycle. In
total, $38 million in charge-offs was taken on those loans during
1999, and additional reserves were established for anticipated
probable losses that have not yet been confirmed.
Although the entire allowance for loan losses is available for
charge-offs in any category of loans, the unallocated portion
represents management's best estimate of the inherent loss
present in the loan portfolio as of the financial statement date
not specifically identified by historical loss analysis and
impairment review. While the total allowance for loan losses was
up slightly from year-end 1998, the distribution of the allowance
shifted over the year resulting in a higher unallocated balance.
At December 31, 1999, the unallocated allowance for loan losses
was $60 million or 10.8 percent of the total allowance compared
with $39 million, 7.2 percent, at year-end 1998. Expressed in
terms of total loans outstanding, the unallocated allowance
represents .12 percent and .09 percent at December 31, 1999 and
1998, respectively.
52
The allowance for loan losses at December 31, 1999 represented
1.12 percent of outstanding loans and 2.72 times coverage of
nonperforming loans compared with 1.20 percent and 3.49 times,
respectively, for 1998. The drop in both ratios was reflective of
a change in the mix and relative risk of the overall loan
portfolio. At December 31, 1999, credit card loans, which carry a
much higher-than-average degree of risk due to their unsecured
nature, accounted for 10 percent of total loans outstanding
compared with 13 percent at the end of 1998.
(Graph appears here with the following plot points.)
ALLOWANCE FOR LOAN LOSSES (MILLIONS)
1994 1995 1996 1997 1998 1999
YEAR-END LOAN LOSS ALLOWANCE 516.1 518.8 519.3 544.7 548.0 554.8
X ALLOWANCE TIMES NONPERFORMING LOANS 3.53X 5.07X 5.26X 5.38X 3.49X 2.72X
(Graph appears here with the following plot points.)
EARNINGS COVERAGE OF NET LOAN LOSSES* (MILLIONS)
1994 1995 1996 1997 1998 1999
EARNINGS BEFORE INCOME TAXES AND
PROVISION FOR LOAN LOSSES 1003.5 1094.4 1289.5 1420.1 1668.1 1848.9
X NUMBER OF TIMES EARNINGS COVERED
NET LOAN LOSSES 11.18X 8.56X 6.66X 5.38X 5.58X 6.35X
*EXCLUDING NONRECURRING ITEMS AND SECURITIES TRANSACTIONS.
(Graph appears here with the following plot points.)
LOAN LOSS EXPERIENCE (MILLIONS)
1994 1995 1996 1997 1998 1999
CREDIT CARD 69.70 109.70 162.90 219.30 257.70 215.30
COMMERCIAL 7.50 (2.70) 0.50 5.10 11.20 39.70
REAL ESTATE (.20) (3.90) (8.60) (.60) (4.80) 4.10
OTHER 12.80 24.70 38.70 40.40 34.70 32.20
% NET LOAN LOSSES TO AVERAGE LOANS
Although Wachovia experienced growth in most loan categories
during 1999, the largest volume gains were in the commercial and
real estate categories which have historically experienced the
most favorable loss experience relative to the rest of the
portfolio. Additionally, Wachovia experienced growth in
short-term lending at the end of the year with most of the
increase consisting of large corporate borrowers carrying little
credit risk. Loans originated closest to the balance sheet date
generally carry a lesser degree of
53
risk than the rest of their respective portfolio since they just
completed the underwriting and credit decision process. Although
nonperforming loans have increased considerably during the year,
they still represented an acceptable level at .41 percent of
outstanding loans at December 31, 1999 compared with .34 percent
at December 31, 1998. At September 30, 1999, Wachovia ranked
tenth among the top 25 largest U. S. banking companies in terms
of nonperforming assets to loans and foreclosed property with a
ratio of .50 percent. At December 31, 1999, this ratio improved
to .45 percent.
There were no significant credit concentrations in any one
industry at year-end 1999 or 1998.
The provision for loan losses charged to earnings is an amount
necessary to maintain the allowance at the level determined to be
appropriate by management. The provision for loan losses in 1999
was $298 million, just slightly below the amount recorded for
1998. Net loan losses also fell below the amount recorded in the
prior year due to favorable conditions in the credit card
portfolio and a reduction in the on-balance sheet portfolio
resulting from the 1999 securitization transactions.
Asset Quality
Nonperforming assets increased 23 percent from December 31, 1998,
although the balance remained at an acceptable level representing
.45 percent of outstanding loans and foreclosed property. In
terms of total dollars, nonperforming loans represent only $204
million in a loan portfolio of $49.621 billion. The increase in
nonperforming loans occurred during the second and third quarters
with the balance declining in the fourth quarter. During those
quarters, management noted deterioration in specific commercial
credits, suspended the accrual of interest on those loans and
charged off amounts deemed uncollectible. Management has provided
for anticipated losses on those loans considered impaired.
Additional reserves may be necessary as new information is
received changing the estimated amount of the loss.
The balance of foreclosed property declined as Wachovia
successfully disposed of various foreclosed assets at favorable
prices. The favorable trend resulted in gains from sales of
foreclosed properties that exceeded foreclosed property expense
for the year.
Nonperforming Assets and Contractually Past Due Loans Table 13
- --------------------------------------------------------------------------------
December 31 (thousands)
1999 1998
--------- ---------
Nonperforming Assets
Nonaccrual loans .................................. $ 204,098 $ 157,118
Restructured loans ................................ ---- ----
--------- ---------
Total nonperforming loans ..................... 204,098 157,118
Foreclosed property:
Foreclosed real estate ........................... 19,759 33,443
Less valuation allowance ......................... 5,941 12,678
Other foreclosed assets .......................... 5,874 3,420
--------- ---------
Total foreclosed property ..................... 19,692 24,185
--------- ---------
Total nonperforming assets .................... $ 223,790 $ 181,303
========= =========
Nonperforming loans to year-end loans ............. .41% .34%
Nonperforming assets to year-end loans and
foreclosed property .............................. .45 .40
Year-end allowance for loan losses times
nonperforming loans .............................. 2.72x 3.49x
Year-end allowance for loan losses times
nonperforming assets ............................. 2.48 3.02
Contractually Past Due Loans
(accruing loans past due 90 days or more) ......... $ 97,642 $ 136,807
========= =========
1997 1996 1995 1994
--------- --------- --------- ---------
Nonperforming Assets
Nonaccrual loans .................................. $ 101,156 $ 98,638 $ 102,310 $ 146,246
Restructured loans ................................ ---- ---- ---- ----
--------- --------- --------- ---------
Total nonperforming loans ..................... 101,156 98,638 102,310 146,246
Foreclosed property:
Foreclosed real estate ........................... 38,071 35,472 39,877 53,746
Less valuation allowance ......................... 16,625 10,805 11,136 12,112
Other foreclosed assets .......................... 6,893 8,213 4,212 2,931
--------- --------- --------- ---------
Total foreclosed property ..................... 28,339 32,880 32,953 44,565
--------- --------- --------- ---------
Total nonperforming assets .................... $ 129,495 $ 131,518 $ 135,263 $ 190,811
========= ========= ========= =========
Nonperforming loans to year-end loans ............. .23% .26% .29% .46%
Nonperforming assets to year-end loans and
foreclosed property .............................. .29 .35 .38 .60
Year-end allowance for loan losses times
nonperforming loans .............................. 5.38x 5.26x 5.07x 3.53x
Year-end allowance for loan losses times
nonperforming assets ............................. 4.21 3.95 3.84 2.70
Contractually Past Due Loans
(accruing loans past due 90 days or more) ......... $ 114,343 $ 84,788 $ 69,953 $ 48,050
========= ========= ========= =========
54
With the exception of certain retail loans as described in the
following paragraph, loans are classified as nonaccrual and the
recognition of interest is discontinued when a loan becomes 90
days past due as to principal and interest or when, in
management's judgment, the interest and/or principal will not be
collectible in the normal course of business. When interest
accruals are discontinued, the balance of accrued interest is
reversed. Interest accrual may be continued when the net
realizable value of the collateral is sufficient to cover the
principal balance and accrued interest (well secured) and the
loan is in the process of collection. A loan is considered to be
in the process of collection if collection of the asset is
proceeding in due course either through legal action, including
judgment enforcement procedures or, in appropriate circumstances,
through collection efforts not involving legal action which are
reasonably expected to result in repayment of the debt or in its
restoration to a current status in the near future.
For commercial loans and commercial real estate loans, Wachovia
records a charge-off when available information confirms that
specific loans, or portions thereof, are uncollectible. All loan
charge-offs are charged directly to the allowance for loan losses
and any recoveries of loans previously charged off are credited
to the allowance. The recovery of previously charged off interest
is credited directly to interest income. For retail loans,
Wachovia follows the guidelines established by the Federal
Financial Institution Examinations Council (FFIEC) in recognizing
charge-offs. Open-end revolving loans, such as credit cards, are
charged off when payments become 180 days past due (defined as a
"contractual charge-off"). Closed-end loans, such as installment
loans, are charged off when they become 120 days delinquent. In
cases of bankruptcy and customer fraud, Wachovia applies the more
restrictive charge-off time frames prescribed by the FFIEC.
Net loan losses for 1999 declined from the level recorded in
1998. The year-over-year overall decline was due to a change in
portfolio mix which shifted away from credit card loans that
carry a proportionately higher charge-off rate to commercial and
real estate loans that have more favorable charge-off rates.
Commercial losses, although still well within acceptable levels,
increased sharply from 1998. The increase was due to the
recognition of losses on those loans transferred to nonaccrual
status during the second and third quarters of 1999. For the year
ended December 31, 1999, net commercial loan losses represented
.24 percent of average outstandings compared with .07 percent for
1998.
Credit card net loan losses showed improvement from 1998 both in
terms of total dollars charged off and as a percentage of average
loans outstanding. In March and September of 1999, Wachovia
securitized $896 million and $500 million, respectively, in
credit card receivables which accounted for most of the reduction
in charge-offs. In addition, bankruptcy and contractual
charge-offs improved considerably, resulting in lower net
charge-offs as a percentage of outstanding loans.
Noninterest Income
Total other operating revenue, which excludes securities gains
and losses, rose $382 million or 31.1 percent to $1.610 billion
for the year. Growth occurred in all major categories except
mortgage fees and other income, with increases highest in
investment fees, credit card income, capital markets income,
deposit account service charges and trust services fees. The
higher income reflected business expansion in addition to the
impact of purchase acquisitions completed in the second and third
quarters of 1999. Total other operating revenue included gains of
$8 million in 1999 and $17 million in 1998 from branch sales. The
1999 other operating revenue also included securitization gains
of $27 million from the sale of credit card receivables in two
securitization transactions. Excluding additions from purchase
acquisitions, total
55
other operating revenue rose approximately 13 percent for the
year. Management expects total other operating revenue to
continue to increase at roughly the same rate in 2000, based on a
stable but slower economic growth outlook and on anticipated
increases largely in capital markets, deposit account services,
technology-based banking, investment and financial advisory
areas.
Investment fee income grew $174 million or 282.3 percent,
principally due to additions from the purchase acquisitions. IJL
added significantly to equity commissions and mutual fund income,
and OFFITBANK generated higher portfolio management fees.
Included in investment fee income are commissions from sales of
the Wachovia Funds by Wachovia's branch-based investor
consultants.
Credit card income was higher by $84 million or 49.2 percent for
the year, which included $27 million in gains from the sale of
receivables in two securitization transactions. In addition,
excess servicing income, along with growth in merchant discount
and card issuers reimbursement, principally accounted for the
increase. Excluding the gains from the sale of loans, credit card
income was up 31.6 percent for the year. Active managed accounts
averaged 2.3 million in 1999 and in 1998.
Noninterest Income Table 14
- --------------------------------------------------------------------------------
(thousands)
1999 1998 1997
---------- ---------- ----------
Service charges on deposit
accounts ............................. $ 369,646 $ 334,980 $ 306,231
Fees for trust services ............... 216,392 199,949 175,549
Credit card income -- net of
interchange payments ................. 255,243 171,127 162,234
Investment fees ....................... 235,350 61,556 53,290
Capital markets income ................ 170,771 130,083 49,522
Electronic banking .................... 88,626 74,257 64,640
Mortgage fees ......................... 33,213 44,929 23,544
Bankers' acceptance and letter of
credit fees .......................... 46,037 39,025 34,526
Other service charges and fees ........ 79,893 54,726 51,916
Other income .......................... 114,952 117,487 84,316
----------- ----------- -----------
Total other operating
revenue .......................... 1,610,123 1,228,119 1,005,768
Gain on sale of mortgage servicing
portfolio ............................ ---- ---- ----
Securities gains (losses) ............. 10,894 20,442 1,454
----------- ----------- -----------
Total ............................. $1,621,017 $1,248,561 $1,007,222
=========== =========== ===========
Five-Year
Compound
1996 1995 1994 Growth Rate
-------- -------- -------- ---------------
Service charges on deposit
accounts ............................. $280,670 $ 244,671 $ 231,646 9.8%
Fees for trust services ............... 154,621 145,464 142,026 8.8
Credit card income -- net of
interchange payments ................. 143,382 127,153 126,886 15.0
Investment fees ....................... 40,522 27,037 15,955 71.3
Capital markets income ................ 44,212 29,832 12,131 69.7
Electronic banking .................... 56,226 39,722 28,347 25.6
Mortgage fees ......................... 21,371 26,139 33,997 ( .5)
Bankers' acceptance and letter of
credit fees .......................... 28,243 25,953 25,801 12.3
Other service charges and fees ........ 49,450 42,748 35,124 17.9
Other income .......................... 56,035 48,396 38,186 24.7
--------- ---------- ----------
Total other operating
revenue .......................... 874,732 757,115 690,099 18.5
Gain on sale of mortgage servicing
portfolio ............................ ---- 79,025 ----
Securities gains (losses) ............. 4,588 (19,672) (21,972)
--------- ---------- ----------
Total ............................. $879,320 $ 816,468 $ 668,127 19.4
========= ========== ==========
Capital markets income expanded $41 million or 31.3 percent for
the year. Higher trading account profits and trading sales
commissions principally accounted for the increase. These
categories grew approximately $37 million from activity generated
through IJL.
Revenues from service charges on deposit accounts rose $35
million or 10.3 percent. Higher levels of overdraft and
insufficient funds charges, up $12 million or 9.6 percent, and
commercial analysis fees, up $20 million or 14.2 percent,
primarily drove the increase. The increase in overdraft and
insufficient funds fees is partially due to higher pricing and
fewer waived fees during 1999, as well as strong fourth quarter
consumer spending.
Fees for trust services grew $16 million or 8.2 percent.
Increases occurred largely in Personal Financial Services,
defined contribution plans, charitable funds and management fees
associated with the Wachovia Funds. Assets of the Wachovia Funds
totaled $9.191 billion at December 31, 1999 compared with $6.423
billion at year-end 1998.
56
At December 31, 1999, trust assets in custody totaled $132.733
billion, including $51.922 billion under management. This
compared with total trust assets in custody of $138.130 billion,
including $42.025 billion under management at year-end 1998. In
September 1999, Wachovia completed its sale of the master trust
and institutional custody business to State Street Bank, enabling
it to focus on other business areas. The sale of the
institutional trust business reduced total trust assets in
custody.
Electronic banking revenue rose $14 million or 19.4 percent for
the year, with debit card interchange income up $13 million or
42.4 percent, as a result of increased consumer acceptance of the
service and higher consumer spending.
Mortgage fees decreased $12 million or 26.1 percent for the year,
primarily reflecting reduced sales of servicing rights on
fixed-rate mortgages due to lower origination volumes. Rising
interest rates resulted in a shift in consumer demand toward
adjustable-rate mortgages, which are generally held in the loan
portfolio. Gains on sales of servicing rights declined $9 million
or 34 percent due to the shift. Rising interest rates also slowed
refinancing activity, resulting in lower origination fees, down
$2 million or 14.1 percent.
Other major sources of increases in noninterest income were
insurance premiums and commissions up $9 million or 60.9 percent,
with BEJS adding $5 million, and securitization service fee
income up $17 million or 165.7 percent as a result of the 1999
securitization transactions.
Securities gains of $11 million in 1999 and $20 million in 1998
resulted primarily from the sale of equity securities.
Noninterest
Expense
Total noninterest expense rose $254 million or 12.7 percent, with
growth for the year affected by nonrecurring charges taken both in
1999 and 1998. In 1999, Wachovia incurred merger expenses of $19
million, primarily related to the acquisition of IJL. Nonrecurring
charges totaling $85 million were taken in 1998 for systems
conversions and signage changes related to its Virginia and
Florida acquisitions. Excluding these merger charges, noninterest
expense on an operating basis totaled $2.231 billion in 1999 and
grew $320 million or 16.8 percent from 1998's expense level of
$1.911 billion. In 2000, noninterest expense, including the effect
of 1999 acquisitions, is expected to rise approximately 10 percent
from 1999's level of $2.231 billion. Excluding the impact of 1999
acquisitions, noninterest expense is expected to grow by
approximately 6 percent.
Excluding expenses added by the purchase acquisitions completed
during 1999, noninterest expense rose approximately 5 percent for
the year, concentrated in equipment, outside data processing,
programming, and software costs reflecting continued technology
investments.
Total personnel expense grew $165 million or 15.6 percent.
Salaries expense rose $146 million or 16.6 percent, primarily due
to expanded incentive pay for revenue-generating businesses and
to a higher employee base from acquisitions. Also impacted by the
acquisitions, employee benefits expense increased $19 million or
10.7 percent, with growth occurring largely in medical costs,
retirement plan expenses and payroll taxes.
57
Net occupancy expense rose $13 million or 9.1 percent, reflecting
increased operating premise lease costs, up $9 million and
depreciation costs for expanded physical facilities up $3
million. Most of the increase in facilities and related expenses
was due to purchase acquisitions completed during 1999. Equipment
expense increased $45 million or 29.4 percent, led by higher
depreciation of furniture and fixtures, computers, and peripheral
devices, together up $30 million, and amortization of technology
investments up $12 million. The increase reflected the effect of
the 1999 purchase acquisitions and the increasing use of
technology to enhance customer service and improve operating
efficiency.
Noninterest Expense Table 15
- --------------------------------------------------------------------------------
(thousands)
1999 1998 1997
---------- ----------- -----------
Salaries ............................. $1,020,384 $ 874,750 $ 742,106
Employee benefits .................... 199,902 180,603 163,051
---------- ----------- -----------
Total personnel expense........... 1,220,286 1,055,353 905,157
Net occupancy expense ................ 151,282 138,636 116,654
Equipment expense .................... 198,062 153,007 139,792
Postage and delivery ................. 55,410 52,981 48,657
Outside data processing,
programming and software ............ 102,773 64,450 83,418
Stationery and supplies .............. 35,939 34,767 30,960
Advertising and sales promotion....... 66,468 71,257 73,193
Professional services ................ 75,002 56,066 54,113
Travel and business promotion ........ 33,944 29,254 25,215
Telecommunications ................... 58,088 54,467 43,420
Amortization of intangible assets..... 50,879 39,091 13,308
Foreclosed property
expense -- net of income ............ (853) 571 1,875
Personal computer impairment
charge* ............................. ---- ---- 67,202
Merger-related charges* .............. 19,309 85,312 220,330
Other expense ........................ 184,036 161,120 143,427
---------- ----------- -----------
Total ............................ $2,250,625 $ 1,996,332 $ 1,966,721
========== =========== ===========
Overhead ratio** ..................... 54.6% 55.1% 62.3%
Overhead ratio without
nonrecurring charges ................ 54.2 52.7 53.2
Five-Year
Compound
1996 1995 1994 Growth Rate
----------- ----------- ----------- ---------------
Salaries ............................. $ 655,065 $ 604,041 $ 566,368 12.5%
Employee benefits .................... 141,867 129,749 125,144 9.8
----------- ----------- -----------
Total personnel expense........... 796,932 733,790 691,512 12.0
Net occupancy expense ................ 114,001 109,543 102,131 8.2
Equipment expense .................... 130,384 124,833 121,701 10.2
Postage and delivery ................. 47,195 44,553 41,169 6.1
Outside data processing,
programming and software ............ 48,049 44,935 37,613 22.3
Stationery and supplies .............. 30,043 30,238 27,327 5.6
Advertising and sales promotion....... 69,363 58,804 43,046 9.1
Professional services ................ 41,223 41,152 23,326 26.3
Travel and business promotion ........ 21,096 20,267 16,743 15.2
Telecommunications ................... 40,570 30,557 26,153 17.3
Amortization of intangible assets..... 9,163 12,296 21,042 19.3
Foreclosed property
expense -- net of income ............ 1,930 2,420 7,508
Personal computer impairment
charge* ............................. ---- ---- ----
Merger-related charges* .............. ---- ---- ----
Other expense ........................ 159,024 188,241 183,980
----------- ----------- -----------
Total ............................ $ 1,508,973 $ 1,441,629 $ 1,343,251 10.9
=========== =========== ===========
Overhead ratio** ..................... 52.5% 54.5% 54.7%
Overhead ratio without
nonrecurring charges ................ 52.5 54.5 54.7
* Nonrecurring charges
** Noninterest expense as a percentage of taxable equivalent net interest
income and total other operating revenue.
Outside data processing, programming and software costs rose $38
million or 59.5 percent. The increases were centered in
amortization of externally purchased software up $10 million and
software maintenance expense up $14 million. These reflected
continuing growth in technology investments, as well as the
opening of a new data center.
Remaining combined categories of noninterest expense rose $59
million or 11.9 percent. Increases were largely in the categories
of professional services, reflecting continued investment in
strategic initiatives, and amortization of intangible assets,
including goodwill and credit card premiums.
Income Taxes
Applicable income taxes in 1999 increased $102 million or 23.6
percent. The effective rate increased over the prior year as a
result of additional nondeductible amortization expense and a
decline in the proportion of tax-exempt income to total income.
Income taxes computed at the statutory rate were reduced
primarily by the assumed tax effect of interest income earned on
state and municipal loans, debt securities and increased value of
life insurance. The interest earned on certain state and
municipal debt instruments is exempt from federal taxes and in
some cases state taxes. The tax-exempt nature of these assets
provides both an attractive return and substantial interest
savings for local governments and their constituents.
58
Year 2000
Wachovia began its third century of providing financial services
with the date change to the year 2000. The internal readiness
plan, encompassing both information technology systems and
computer chip embedded functions, was successfully implemented.
While the date change event passed without significant or
material impact to the company, contingency plans remain in place
to ensure that core business systems and processes continue to
function without incident. Management continues to evaluate and
monitor Year 2000 readiness on the part of external parties,
particularly critical vendors and significant credit customers,
to ensure that unanticipated risk is not assumed by Wachovia.
Total project costs for the Year 2000 conversion are estimated at
$88 million, with $85 million having been spent through December
31, 1999, including $19 million in 1999 and $28 million in 1998.
Remaining costs, to be incurred for ongoing monitoring, support
activities and wrap-up of the project, are not expected to have a
material impact on results of operations, liquidity or capital
resources.
Euro Conversion
On January 1, 1999, eleven member countries of the European Union
established the Euro as their common legal currency and
established a fixed conversion rate between their current
sovereign currencies and the Euro. From January 1, 1999 through
the end of 2001, corporations and individuals may transact
business in either the Euro or the functional currency of each
member nation. Management has a risk assessment committee that
has been examining the risks associated with the Euro conversion
such as the adequacy of information technology systems, currency
risk and the competitive impact of cross-border price
transparency. During this interim period, Wachovia is operating
parallel accounts in both the Euro and the respective national
currency in order to more effectively process transactions.
Management does not expect the impact of the Euro conversion to
have a material adverse impact on Wachovia's financial condition
or results of operations.
New Accounting
Standards
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which
provides guidance as to when it is or is not appropriate to
capitalize the cost of software developed or obtained for internal
use. Wachovia adopted SOP 98-1 effective January 1, 1998; the
effect was not material.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (FASB 133).
FASB 133 establishes new accounting and reporting requirements
for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities.
The standard requires all derivatives to be measured at fair
value and recognized as either assets or liabilities in the
statement of condition. Under certain conditions, a derivative
may be specifically designated as a hedge. Accounting for the
changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. Adoption of
the standard is required for Wachovia's December 31, 2001
financial statements with early adoption allowed as of the
beginning of any quarter after June 30, 1998. Management is in
the process of assessing the impact and plans to adopt the
standard effective January 1, 2001. Adoption is not expected to
result in a material financial impact.
59
-----------------------------------------------
Shareholders' Equity and Capital Ratios
-----------------------------------------------------------------
Shareholders' equity at December 31, 1999 totaled $5.658 billion,
rising $320 million or 6 percent from $5.338 billion at year-end
1998. Included in shareholders' equity at December 31, 1999 was
$74 million, net of tax, of unrealized losses in securities
available-for-sale, marked to fair value, compared with $82
million, net of tax, of unrealized gains one year earlier. The
rising rate environment during 1999 drove down the value of
Wachovia's mostly fixed-rate securities portfolio. Wachovia's book
value at year-end 1999 was $28.04 per share, higher by 6.6 percent
from $26.30 per share at the close of 1998. Wachovia's internal
capital generation rate (defined as net income less dividends as a
percentage of average equity) was 10.9 percent for the year.
During 1999, Wachovia repurchased a total of 7,224,000 shares of
its common stock under several author-izations by the Board of
Directors. The shares were repurchased at an average price of
$85.263 per share, for a total cost of $616 million. In 1998,
Wachovia repurchased 6,417,200 shares of its common stock at an
average price of $82.22 per share, for a total cost of $528
million. On June 23, 1998, the Board of Directors authorized the
repurchase of up to 12 million shares of Wachovia's common stock
effective through January 28, 2000. As of December 31, 1999, a
total of 6,014,213 shares had been repurchased under the June 23,
1998 authorization. On January 28, 2000, the Board of Directors
authorized the repurchase of up to 8 million shares of Wachovia's
common stock, effective through January 25, 2002. Included in the
1999 purchases were 5,851,987 shares under separate
authorizations to accomplish the purchase accounting acquisitions
of IJL, OFFITBANK, BEJS and B C Bankshares, Inc. In connection
with the purchase acquisitions of IJL, OFFITBANK and BEJS,
Wachovia issued 4,801,987 shares of common stock, resulting in an
increase in shareholders' equity of $423 million.
Intangible assets at December 31, 1999 totaled $940 million,
consisting of $823 million of goodwill, $80 million of deposit
base intangibles, $34 million of purchased credit card premiums,
$3 million of mortgage servicing rights and $412 thousand of
other intangibles. Intangible assets one year earlier were $688
million, with $543 million of goodwill, $94 million of deposit
base intangibles, $40 million of purchased credit card
receivables, $10 million of mortgage servicing rights and $305
thousand of other intangibles. An increase in goodwill of $303
million, net of amortization, resulted from purchase acquisitions
consummated in 1999.
Capital Components and Ratios Table 16
- --------------------------------------------------------------------------------
December 31 (thousands)
1999 1998 1997
------------ ----------- -----------
Tier I capital:
Common shareholders' equity ............................................. $ 5,658,457 $ 5,338,232 $ 5,174,301
Capital securities ...................................................... 996,744 996,368 995,993
Less ineligible intangible assets ....................................... 931,257 666,672 634,052
Unrealized (gains) losses on securities available-for-sale -- net of tax 72,002 (82,440) (71,098)
------------ ----------- -----------
Total Tier I capital .................................................. 5,795,946 5,585,488 5,465,144
Tier II capital:
Allowable allowance for loan losses ..................................... 554,810 547,992 544,723
Allowable long-term debt ................................................ 2,107,334 1,794,148 1,193,451
------------ ----------- -----------
Tier II capital additions ............................................. 2,662,144 2,342,140 1,738,174
------------ ----------- -----------
Total capital ......................................................... $ 8,458,090 $ 7,927,628 $ 7,203,318
============ =========== ===========
Risk-adjusted assets ..................................................... $ 77,060,603 $69,928,737 $64,844,037
Quarterly average assets* ................................................ $ 66,113,697 $64,454,538 $59,139,712
Risk-based capital ratios:
Tier I capital .......................................................... 7.52% 7.99% 8.43%
Total capital ........................................................... 10.98 11.34 11.11
Tier I leverage ratio .................................................... 8.77 8.67 9.24
* Excludes ineligible intangible assets and average unrealized gains (losses)
on securities available-for-sale, net of tax.
60
Regulatory agencies divide capital into Tier I (consisting of
shareholders' equity and certain cumulative preferred stock
instruments less ineligible intangible assets) and Tier II
(consisting of the allowable portion of the allowance for loan
losses and certain long-term debt) and measure capital adequacy
by applying both capital levels to a banking company's
risk-adjusted assets and off-balance sheet items. Regulatory
requirements presently specify that Tier I capital should exclude
the market appreciation or depreciation of securities
available-for-sale arising from marking the portfolio to fair
value. In addition to these capital ratios, regulatory agencies
have established a Tier I leverage ratio which measures Tier I
capital to average assets less ineligible intangible assets.
Regulatory guidelines require a minimum of total capital to
risk-adjusted assets ratio of 8 percent with at least one-half
consisting of tangible common shareholders' equity and a minimum
Tier I leverage ratio of 3 percent. Banks which meet or exceed a
Tier I ratio of 6 percent, a total capital ratio of 10 percent
and a Tier I leverage ratio of 5 percent are considered well
capitalized by regulatory standards. It is Wachovia's policy that
it and its banking subsidiaries be well capitalized at all times.
Dividends
Cash dividends paid in 1999 totaled $418 million, rising $37
million or 9.6 percent from $382 million paid in 1998. The payout
ratio of cash dividends paid to net income was 41.4 percent for
the year.
On January 28, 2000, Wachovia's Board of Directors declared a
first quarter 2000 dividend of $.54 per common share, payable
March 1, 2000 to shareholders of record on February 10. The
dividend is higher by 10.2 percent from $.49 per common share
paid in the same period of 1999.
(Graph appears here with the following plot points.)
YEAR-END SHAREHOLDERS' EQUITY PER SHARE
FIVE-YEAR COMPOUND GROWTH RATE=8.3%
1994 1995 1996 1997 1998 1999
18.79 22.08 22.90 25.13 26.30 28.04
61
Financial Summary Table 17
- --------------------------------------------------------------------------------
1999
-----------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ----------- ----------- -----------
Summary of Operations
(thousands, except per share data)
Interest income ................................. $ 1,224,486 $ 1,165,343 $ 1,146,605 $ 1,130,386
Interest expense ................................ 596,583 548,238 529,603 522,310
------------- ----------- ----------- -----------
Net interest income ............................. 627,903 617,105 617,002 608,076
Provision for loan losses ....................... 66,174 76,770 74,525 80,636
------------- ----------- ----------- -----------
Net interest income after provision for loan
losses ......................................... 561,729 540,335 542,477 527,440
Other operating revenue ......................... 439,469 432,841 404,544 333,269
Securities gains ................................ 60 147 10,453 234
------------- ----------- ----------- -----------
Total other income .............................. 439,529 432,988 414,997 333,503
Personnel expense ............................... 324,288 317,060 307,752 271,186
Nonrecurring merger-related charges ............. 5,669 5,293 8,347 ----
Other expense ................................... 270,661 254,839 264,518 221,012
------------- ----------- ----------- -----------
Total other expense ............................. 600,618 577,192 580,617 492,198
Income before income tax expense ................ 400,640 396,131 376,857 368,745
Income tax expense .............................. 137,704 138,632 129,307 125,509
------------- ----------- ----------- -----------
Net income ...................................... $ 262,936 $ 257,499 $ 247,550 $ 243,236
============= =========== =========== ===========
Net income per common share:
Basic .......................................... $ 1.30 $ 1.27 $ 1.21 $ 1.20
Diluted ........................................ $ 1.28 $ 1.25 $ 1.19 $ 1.18
Cash dividends paid per common share ............ $ .54 $ .54 $ .49 $ .49
Cash dividends paid on common stock ............. $ 109,273 $ 109,220 $ 100,292 $ 99,662
Cash dividend payout ratio ...................... 41.56% 42.42% 40.51% 40.97%
Average basic shares outstanding ................ 202,168 202,167 203,746 203,119
Average diluted shares outstanding .............. 205,096 205,345 207,400 206,959
Selected Average Balances
(millions)
Total assets .................................... $ 66,982 $ 64,815 $ 65,454 $ 64,408
Loans -- net of unearned income ................. 48,593 47,003 47,012 46,261
Securities ...................................... 9,016 9,461 9,664 9,221
Other interest-earning assets ................... 1,844 1,464 1,588 1,313
Total interest-earning assets ................... 59,453 57,928 58,264 56,795
Interest-bearing deposits ....................... 33,107 31,996 32,343 31,846
Short-term borrowed funds ....................... 9,836 8,848 9,629 9,292
Long-term debt .................................. 8,327 8,571 7,998 7,627
Total interest-bearing liabilities .............. 51,270 49,415 49,970 48,765
Noninterest-bearing deposits .................... 8,326 8,368 8,261 8,062
Total deposits .................................. 41,433 40,364 40,604 39,908
Shareholders' equity ............................ 5,555 5,391 5,459 5,314
Ratios (averages)
Annualized net loan losses to loans ............. .54% .61% .63% .69%
Annualized net yield on interest-earning
assets ......................................... 4.26 4.29 4.31 4.41
Shareholders' equity to:
Total assets ................................... 8.29 8.32 8.34 8.25
Net loans ...................................... 11.56 11.60 11.75 11.62
Annualized return on assets ..................... 1.57 1.59 1.51 1.51
Annualized return on shareholders' equity ....... 18.93 19.11 18.14 18.31
Operating Performance Excluding
Nonrecurring Items
(thousands, except per share data)
Net income ...................................... $ 266,620 $ 260,939 $ 253,060 $ 243,236
Net income per diluted share .................... $ 1.30 $ 1.27 $ 1.22 $ 1.18
Annualized return on assets ..................... 1.59% 1.61% 1.55% 1.51%
Annualized return on shareholders' equity ....... 19.20 19.36 18.54 18.31
Cash dividend payout ratio ...................... 40.98 41.86 39.63 40.97
1998
-------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ----------- ----------- -----------
Summary of Operations
(thousands, except per share data)
Interest income ................................. $ 1,176,192 $ 1,171,466 $ 1,169,758 $ 1,147,829
Interest expense ................................ 566,443 582,030 587,054 578,686
------------- ----------- ----------- -----------
Net interest income ............................. 609,749 589,436 582,704 569,143
Provision for loan losses ....................... 84,104 72,809 68,441 74,126
------------- ----------- ----------- -----------
Net interest income after provision for loan
losses ......................................... 525,645 516,627 514,263 495,017
Other operating revenue ......................... 318,812 310,541 315,043 283,723
Securities gains ................................ 7,407 6,886 2,992 3,157
------------- ----------- ----------- -----------
Total other income .............................. 326,219 317,427 318,035 286,880
Personnel expense ............................... 269,941 263,282 262,406 259,724
Nonrecurring merger-related charges ............. 6,961 11,934 30,849 35,568
Other expense ................................... 215,784 217,187 223,739 198,957
------------- ----------- ----------- -----------
Total other expense ............................. 492,686 492,403 516,994 494,249
Income before income tax expense ................ 359,178 341,651 315,304 287,648
Income tax expense .............................. 117,612 114,284 105,388 92,327
------------- ----------- ----------- -----------
Net income ...................................... $ 241,566 $ 227,367 $ 209,916 $ 195,321
============= =========== =========== ===========
Net income per common share:
Basic .......................................... $ 1.19 $ 1.11 $ 1.02 $ .95
Diluted ........................................ $ 1.17 $ 1.09 $ 1.00 $ .93
Cash dividends paid per common share ............ $ .49 $ .49 $ .44 $ .44
Cash dividends paid on common stock ............. $ 99,452 $ 100,784 $ 90,973 $ 90,589
Cash dividend payout ratio ...................... 41.17% 44.33% 43.34% 46.38%
Average basic shares outstanding ................ 202,824 204,832 206,718 205,894
Average diluted shares outstanding .............. 206,991 208,837 210,662 210,158
Selected Average Balances
(millions)
Total assets .................................... $ 65,298 $ 63,429 $ 63,916 $ 63,133
Loans -- net of unearned income ................. 45,966 43,894 43,974 43,749
Securities ...................................... 9,952 10,664 11,102 10,623
Other interest-earning assets ................... 1,622 1,508 1,558 1,630
Total interest-earning assets ................... 57,540 56,066 56,634 56,002
Interest-bearing deposits ....................... 31,766 31,654 32,182 32,455
Short-term borrowed funds ....................... 11,135 10,858 10,947 10,635
Long-term debt .................................. 6,830 6,080 6,092 6,107
Total interest-bearing liabilities .............. 49,731 48,592 49,221 49,197
Noninterest-bearing deposits .................... 8,148 7,874 7,939 7,240
Total deposits .................................. 39,914 39,528 40,121 39,695
Shareholders' equity ............................ 5,178 5,173 5,211 5,109
Ratios (averages)
Annualized net loan losses to loans ............. .73% .66% .62% .68%
Annualized net yield on interest-earning
assets ......................................... 4.28 4.26 4.21 4.21
Shareholders' equity to:
Total assets ................................... 7.93 8.16 8.15 8.09
Net loans ...................................... 11.40 11.93 12.00 11.82
Annualized return on assets ..................... 1.48 1.43 1.31 1.24
Annualized return on shareholders' equity ....... 18.66 17.58 16.11 15.29
Operating Performance Excluding
Nonrecurring Items
(thousands, except per share data)
Net income ...................................... $ 246,160 $ 235,243 $ 230,276 $ 218,168
Net income per diluted share .................... $ 1.19 $ 1.13 $ 1.09 $ 1.04
Annualized return on assets ..................... 1.51% 1.48% 1.44% 1.38%
Annualized return on shareholders' equity ....... 19.02 18.19 17.68 17.08
Cash dividend payout ratio ...................... 40.40 42.84 39.51 41.52
62
-----------------------------
Fourth Quarter Analysis
-----------------------------------------------------------------
Business Segments
Asset and Wealth Management. Pretax income grew $12 million or
39.4 percent to $41 million, due in large part to business
acquisitions completed during 1999. Net interest income grew $9
million or 30 percent with an increase in interest-earning assets
of $217 million or 9.3 percent. Noninterest income rose $71
million or 93.4 percent, with significant increases of $19
million in portfolio management fees, $19 million in brokerage
commission income and $12 million in mutual fund income.
Noninterest expense rose $68 million or 89.5 percent, led by the
added expense base from the acquisitions.
Corporate. Pretax income totaled $200 million, an increase of $22
million or 12.2 percent from 1998. Net interest income rose $47
million or 19.6 percent, primarily fueled by strong loan and
lease growth in corporate services. Noninterest income, led by
gains in capital markets income and brokerage commission income,
expanded $25 million or 28.8 percent. The provision for loan
losses increased $21 million to $26 million, while noninterest
expense was up $29 million or 20.7 percent, primarily reflecting
a higher salary base in the capital markets and Corporate
Services areas.
Credit Card. Pretax income was $67 million, an increase of $15
million or 31.2 percent from 1998. Net interest income declined
$4 million or 2.3 percent, driven by a lower net yield and stable
loan balances. Noninterest income advanced $8 million or 18.3
percent, with increases in interchange income, overlimit fees and
merchant fees largely accounting for the rise. The provision for
loan losses declined $16 million or 21.2 percent, while
noninterest expense was up $5 million or 6.6 percent, largely due
to growth in advertising and professional services costs.
Consumer. Pretax income grew $22 million or 21.5 percent to $124
million. Revenue gains were paced by the margin, with net
interest income up $12 million or 5 percent and fee income
increasing $6 million or 6.3 percent. Growth in net interest
income reflected both greater loan volume and improvement in the
net yield, while higher levels of deposit fees, up $6 million,
and electronic banking revenue, up $5 million, helped pace the
increase in noninterest income, offsetting declines in mortgage
fee income. The provision for loan losses declined $1 million or
31.6 percent, and noninterest expense declined $3 million or 1.4
percent, with increases primarily in net occupancy and equipment
expense.
Treasury & Administration. Pretax income declined $29 million to
a loss of $20 million in the fourth quarter of 1999 from the
comparable period one year earlier. The net interest margin was
lower by $45 million, reflecting a $1.574 billion or 18 percent
decrease in interest-earning assets, primarily securities.
Short-term borrowed funds declined by $1.299 billion, as
management utilized long-term discretionary funding sources to
support the overall margin. Noninterest income grew $4 million
for the quarter, as increases in credit card income of $10
million offset lower securities gains of $7 million. Noninterest
expense rose $10 million, lead by increases in equipment expense,
outside data processing, programming and software costs, other
tax expense, and professional services. Merger-related charges
declined $1 million from the 1998 fourth quarter.
63
Business Segments Table 18
- --------------------------------------------------------------------------------
Asset and
Wealth
Management Corporate Credit Card
-------------------- ----------------- -------------------
Operations Summary 1999 1998 1999 1998 1999 1998
--------- -------- ------- ------- -------- -------
(millions)
External net interest
margin ...................... $ 31 $ 22 $ 604 $ 509 $ 218 $ 216
Internal funding (charge)
credit ...................... 8 8 (320) (272) (85) (79)
--------- -------- ------- ------- -------- -------
Net interest income* ......... 39 30 284 237 133 137
Total other income ........... 147 76 111 86 48 40
--------- -------- ------- ------- -------- -------
Total revenues ............... 186 106 395 323 181 177
Provision for loan losses..... -- -- 26 5 57 73
Total other expense .......... 145 77 169 140 57 52
--------- -------- ------- ------- -------- -------
Pretax profit ................ 41 29 200 178 67 52
Income taxes (benefit) ....... 16 10 71 62 24 18
--------- -------- ------- ------- -------- -------
Net income (loss) ............ $ 25 $ 19 $ 129 $ 116 $ 43 $ 34
========= ======== ======= ======= ======== =======
Percentage contribution
to total revenues** ......... 17.0% 11.0% 36.1% 33.6% 16.5% 18.4%
Percentage contribution
to net income ............... 9.5% 7.9% 49.1% 47.9% 16.3% 14.0%
Average Balances
(billions)
Total assets ................. $ 3 $ 3 $ 36 $ 34 $ 6 $ 6
Treasury & Total
Consumer Administration Eliminations Corporation
---------------- -------------------- ---------------- ---------------
Operations Summary 1999 1998 1999 1998 1999 1998 1999 1998
------ ------ --------- ---- ------- ------- ------- ------
(millions)
External net interest
margin ...................... $ (41) $ (44) ($ 173) ($ 82) $ (11) $ (11) $ 628 $ 610
Internal funding (charge)
credit ...................... 282 273 131 85 (16) (15) -- --
------ ------ --------- ---- ------- ------- ------- ------
Net interest income* ......... 241 229 (42) 3 (27) (26) 628 610
Total other income ........... 108 102 26 22 -- -- 440 326
------ ------ --------- ---- ------- ------- ------- ------
Total revenues ............... 349 331 (16) 25 (27) (26) 1,068 936
Provision for loan losses..... 2 3 (19) 3 -- -- 66 84
Total other expense .......... 223 226 23 13 (16) (15) 601 493
------ ------ --------- ---- ------- ------- ------- ------
Pretax profit ................ 124 102 (20) 9 (11) (11) 401 359
Income taxes (benefit) ....... 45 35 (7) 3 (11) (11) 138 117
------ ------ --------- ---- ------- ------- ------- ------
Net income (loss) ............ $ 79 $ 67 $ (13) $ 6 $ -- $ -- $ 263 $ 242
====== ====== --------- ==== ======= ======= ======= ======
Percentage contribution
to total revenues** ......... 31.9% 34.4% (1.5%) 2.6%
Percentage contribution
to net income ............... 30.0% 27.7% (4.9%) 2.5%
Average Balances
(billions)
Total assets ................. $ 11 $ 9 $ 11 $ 13 $ 67 $ 65
* Net interest income is reported on a taxable equivalent basis by segment and
on a nontaxable equivalent basis for the corporation, reflecting segment
eliminations.
** Percentage contribution to total revenues is based on the proportion of each
segment's revenues to the combined revenues of all segments. Revenues for
the total corporation are presented based on nontaxable equivalent net
interest income and total other income, including securities transactions.
Consolidated Financial Results
Net income for the fourth quarter of 1999 was $263 million or
$1.28 per diluted share compared with $242 million or $1.17 per
diluted share a year earlier. Included in the results for both
quarters were nonrecurring charges that totaled $6 million,
pretax, in the 1999 period and $7 million, pretax, in the 1998
period for merger-related charges. Excluding the after-tax effect
of merger-related charges, operating net income for the fourth
quarter of 1999 was $267 million or $1.30 per diluted share
versus $246 million or $1.19 per diluted share a year earlier.
Total comprehensive income, which includes unrealized gains or
losses on securities available-for-sale that are recorded
directly to shareholders' equity, was $218 million for the fourth
quarter of 1999 compared with $193 million for the same period of
1998.
64
(Graph appears here with the following plot points.)
QUARTERLY NET INCOME PER SHARE, 1999 (DILUTED)
1ST Q 2ND Q 3RD Q 4TH Q
1.18 1.19 1.25 1.28
(Graph appears here with the following plot points.)
QUARTERLY NET INCOME PER SHARE, 1998 (DILUTED)
1ST Q 2ND Q 3RD Q 4TH Q
.93 1.00 1.09 1.17
Revenue growth for the quarter was strong. Total revenues
advanced $139 million or 14.8 percent year over year to $1.078
billion, with three-fourths of the revenue expansion from fee
income sources.
Taxable equivalent net interest income expanded $18 million or
2.9 percent. The rise was driven primarily by strong loan demand,
with average loans growing $2.627 billion or 5.7 percent, led
largely by taxable commercial loans, commercial real estate loans
and lease financing. Two 1999 credit card securitizations reduced
average loan balances by approximately $1.396 billion. The
average rate earned on loans increased 4 basis points, while the
rate on total earning assets rose 6 basis points. Over the same
period, Wachovia's average prime lending rate rose 44 basis
points and the average federal funds rate rose 45 basis points.
Total interest-bearing liabilities rose $1.539 billion or 3.1
percent, while the average rate paid rose 10 basis points. The
faster pace at which rates on the liability side of the balance
sheet increased compared with interest-earning assets reflects
the effect of the 1999 securitizations on the earning asset mix
which reduced the fourth quarter yield on interest-earning assets
by approximately 12 basis points. The net yield on
interest-earning assets declined 2 basis points to 4.26 percent.
The fourth quarter 1999 net yield on interest-earning assets was
also influenced by the year-end spike in the short-term LIBOR and
the effect of maintaining excess cash in anticipation of year
2000 date change demand.
65
Taxable Equivalent Rate/Volume Analysis -- Fourth Quarter* Table 19
- --------------------------------------------------------------------------------
Average Volume Average Rate
- -------------------- --------------------
1999 1998 1999 1998
- -------- ------- -------- -------
Interest Income
(Millions)
Loans:
$16,714 $15,045 7.81 6.97 Commercial .......................................
720 1,033 12.09 9.72 Tax-exempt .......................................
- -------- -------
17,434 16,078 7.99 7.14 Total commercial .................................
1,050 1,112 8.49 8.86 Direct retail ....................................
3,690 3,212 7.85 7.92 Indirect retail ..................................
4,501 5,829 13.69 13.62 Credit card ......................................
639 523 11.15 11.36 Other revolving credit ...........................
- -------- -------
9,880 10,676 10.79 11.30 Total retail .....................................
2,272 1,971 8.94 8.78 Construction .....................................
7,630 6,875 8.30 8.35 Commercial mortgages .............................
7,604 7,543 7.67 7.72 Residential mortgages ............................
- -------- -------
17,506 16,389 8.11 8.11 Total real estate ................................
2,491 1,736 9.97 12.16 Lease financing ..................................
1,282 1,087 6.91 6.85 Foreign ..........................................
- -------- -------
48,593 45,966 8.68 8.64 Total loans ......................................
Securities:
Held-to-maturity:
605 526 6.03 6.08 U.S. Government and agency .......................
417 664 8.13 8.28 Mortgage-backed ..................................
185 181 9.74 11.50 State and municipal ..............................
45 83 6.92 6.53 Other ............................................
- -------- -------
1,252 1,454 7.31 7.79 Total held-to-maturity ...........................
Available-for-sale:**
3,319 3,478 6.40 6.52 U.S. Government and agency .......................
3,881 4,425 6.34 6.44 Mortgage-backed ..................................
564 595 8.20 6.82 Other ............................................
- -------- -------
7,764 8,498 6.50 6.50 Total available-for-sale .........................
- -------- -------
9,016 9,952 6.61 6.68 Total securities .................................
136 163 6.36 7.73 Interest-bearing bank balances ...................
Federal funds sold and securities purchased
681 641 5.48 5.33 under resale agreements ..........................
1,027 818 4.28 3.48 Trading account assets ...........................
- -------- -------
$59,453 $57,540 8.25 8.19 Total interest-earning assets ....................
======== ======= Interest Expense
$ 4,653 $ 4,639 1.40 1.30 Interest-bearing demand ..........................
13,470 12,481 3.72 3.67 Savings and money market savings .................
8,774 9,128 5.09 5.35 Savings certificates .............................
3,428 3,387 5.31 5.31 Large denomination certificates ..................
- -------- -------
Total interest-bearing deposits in
30,325 29,635 3.94 4.00 domestic offices .................................
2,782 2,131 5.19 5.23 Interest-bearing deposits in foreign offices .....
- -------- -------
33,107 31,766 4.05 4.09 Total interest-bearing deposits ..................
Federal funds purchased and securities
6,744 7,404 5.10 4.68 sold under repurchase agreements .................
1,565 1,439 4.97 4.62 Commercial paper .................................
1,527 2,292 5.97 5.23 Other short-term borrowed funds ..................
- -------- -------
9,836 11,135 5.22 4.78 Total short-term borrowed funds ..................
2,436 2,459 5.80 6.06 Bank notes .......................................
5,891 4,371 6.32 6.12 Other long-term debt .............................
- -------- -------
8,327 6,830 6.17 6.10 Total long-term debt .............................
- -------- -------
$51,270 $49,731 4.62 4.52 Total interest-bearing liabilities ...............
======== ======= --------- -----
3.63 3.67 Interest rate spread
========= =====
Net yield on interest-earning assets
4.26 4.28 and net interest income ..........................
========= =====
Variance
Interest Attributable to
-----------------------
1999 1998 Variance Rate Volume
----- ---- ------- ------- ----
Interest Income (Thousands)
Loans:
Commercial ....................................... $ 329,115 $ 264,170 $ 64,945 $ 33,962 $ 30,983
Tax-exempt ....................................... 21,951 25,293 (3,342) 5,344 (8,686)
----------- ----------- -------------
Total commercial ................................. 351,066 289,463 61,603 35,997 25,606
Direct retail .................................... 22,484 24,851 (2,367) (1,011) (1,356)
Indirect retail .................................. 73,039 64,128 8,911 (555) 9,466
Credit card ...................................... 155,328 200,086 (44,758) 1,044 (45,802)
Other revolving credit ........................... 17,945 14,980 2,965 (282) 3,247
----------- ----------- -------------
Total retail ..................................... 268,796 304,045 (35,249) (13,206) (22,043)
Construction ..................................... 51,218 43,617 7,601 832 6,769
Commercial mortgages ............................. 159,619 144,741 14,878 (934) 15,812
Residential mortgages ............................ 147,041 146,794 247 (927) 1,174
----------- ----------- -------------
Total real estate ................................ 357,878 335,152 22,726 (108) 22,834
Lease financing .................................. 62,585 53,221 9,364 (10,843) 20,207
Foreign .......................................... 22,337 18,782 3,555 159 3,396
----------- ----------- -------------
Total loans ...................................... 1,062,662 1,000,663 61,999 4,577 57,422
Securities:
Held-to-maturity:
U.S. Government and agency ....................... 9,199 8,056 1,143 (67) 1,210
Mortgage-backed .................................. 8,543 13,861 (5,318) (246) (5,072)
State and municipal .............................. 4,535 5,237 (702) (817) 115
Other ............................................ 784 1,364 (580) 77 (657)
----------- ----------- -------------
Total held-to-maturity ........................... 23,061 28,518 (5,457) (1,669) (3,788)
Available-for-sale:**
U.S. Government and agency ....................... 53,563 57,126 (3,563) (971) (2,592)
Mortgage-backed .................................. 62,001 71,798 (9,797) (1,093) (8,704)
Other ............................................ 11,680 10,238 1,442 1,990 (548)
----------- ----------- -------------
Total available-for-sale ......................... 127,244 139,162 (11,918) 116 (12,034)
----------- ----------- -------------
Total securities ................................. 150,305 167,680 (17,375) (1,756) (15,619)
Interest-bearing bank balances ................... 2,175 3,166 (991) (512) (479)
Federal funds sold and securities purchased
under resale agreements .......................... 9,403 8,615 788 246 542
Trading account assets ........................... 11,064 7,173 3,891 1,835 2,056
----------- ----------- -------------
Total interest-earning assets .................... 1,235,609 1,187,297 48,312 8,614 39,698
Interest Expense
Interest-bearing demand .......................... 16,439 15,206 1,233 1,185 48
Savings and money market savings ................. 126,428 115,367 11,061 1,801 9,260
Savings certificates ............................. 112,639 123,203 (10,564) (5,880) (4,684)
Large denomination certificates .................. 45,867 45,359 508 (39) 547
----------- ----------- -------------
Total interest-bearing deposits in
domestic offices ................................. 301,373 299,135 2,238 (4,659) 6,897
Interest-bearing deposits in foreign offices ..... 36,393 28,112 8,281 (236) 8,517
----------- ----------- -------------
Total interest-bearing deposits .................. 337,766 327,247 10,519 (3,183) 13,702
Federal funds purchased and securities
sold under repurchase agreements ................. 86,765 87,291 (526) 7,604 (8,130)
Commercial paper ................................. 19,622 16,746 2,876 1,350 1,526
Other short-term borrowed funds .................. 22,967 30,209 (7,242) 3,830 (11,072)
----------- ----------- -------------
Total short-term borrowed funds .................. 129,354 134,246 (4,892) 11,557 (16,449)
Bank notes ....................................... 35,644 37,576 (1,932) (1,583) (349)
Other long-term debt ............................. 93,819 67,374 26,445 2,312 24,133
----------- ----------- -------------
Total long-term debt ............................. 129,463 104,950 24,513 1,260 23,253
----------- ----------- -------------
Total interest-bearing liabilities ............... 596,583 566,443 30,140 12,388 17,752
----------- ----------- -------------
Interest rate spread
Net yield on interest-earning assets
and net interest income .......................... $ 639,026 $ 620,854 $ 18,172 (2,393) 20,565
=========== =========== =============
* Interest income and yields are presented on a fully taxable equivalent basis
using the federal income tax rate and state tax rates, as applicable,
reduced by the nondeductible portion of interest expense. Any variance
attributable jointly to volume and rate changes is allocated to the volume
and rate in proportion to the relationship of the absolute dollar amount of
the change in each.
** Volume amounts are reported at amortized cost; excludes pretax unrealized
losses of $65 million in 1999 and unrealized gains of $177 million in 1998.
66
Allowance for Loan Losses Table 20
- --------------------------------------------------------------------------------
(thousands)
1999
---------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- -------- -------- --------
Summary of Activity
Balance at beginning of period ............ $ 553,894 $ 548,540 $548,302 $ 547,992
Additions from acquisitions ............... ---- ---- 39 ----
Provision for loan losses ................. 66,174 76,770 74,525 80,636
Deduct net loan losses:
Loans charged off:
Commercial .............................. 17,805 15,509 7,592 5,862
Credit card ............................. 49,478 54,925 69,619 74,094
Other revolving credit .................. 1,332 2,305 3,126 2,889
Other retail ............................ 8,905 8,561 7,888 8,910
Real estate ............................. 2,632 4,005 1,397 1,488
Lease financing ......................... 908 855 585 592
Foreign ................................. ---- ---- ---- ----
----------- --------- -------- ---------
Total ................................. 81,060 86,160 90,207 93,835
Recoveries:
Commercial .............................. 2,400 1,018 1,667 1,956
Credit card ............................. 8,152 8,967 8,618 7,045
Other revolving credit .................. 610 774 828 707
Other retail ............................ 2,886 2,674 2,718 2,813
Real estate ............................. 1,627 1,124 1,836 849
Lease financing ......................... 127 187 214 139
Foreign ................................. ---- ---- ---- ----
----------- --------- -------- ---------
Total ................................. 15,802 14,744 15,881 13,509
----------- --------- -------- ---------
Net loan losses .......................... 65,258 71,416 74,326 80,326
----------- --------- -------- ---------
Balance at end of period .................. $ 554,810 $ 553,894 $548,540 $ 548,302
=========== ========= ======== =========
Net Loan Losses (Recoveries)
by Category
Commercial ................................ $ 15,405 $ 14,491 $ 5,925 $ 3,906
Credit card ............................... 41,326 45,958 61,001 67,049
Other revolving credit .................... 722 1,531 2,298 2,182
Other retail .............................. 6,019 5,887 5,170 6,097
Real estate ............................... 1,005 2,881 (439) 639
Lease financing ........................... 781 668 371 453
Foreign ................................... ---- ---- ---- ----
----------- --------- -------- ---------
Total ................................. $ 65,258 $ 71,416 $ 74,326 $ 80,326
=========== ========= ======== =========
Net loan losses -- excluding credit
cards .................................... $ 23,932 $ 25,458 $ 13,325 $ 13,277
Annualized Net Loan Losses
(Recoveries) to Average
Loans by Category
Commercial ................................ .35% .36% .14% .10%
Credit card ............................... 3.67 3.76 4.95 4.58
Other revolving credit .................... .45 1.02 1.61 1.60
Other retail .............................. .51 .51 .47 .56
Real estate ............................... .02 .07 (.01) .02
Lease financing ........................... .13 .11 .07 .09
Foreign ................................... ---- ---- ---- ----
Total loans ............................... .54 .61 .63 .69
Total loans -- excluding credit cards ..... .22 .24 .13 .13
Period-end allowance to outstanding
loans .................................... 1.12 1.16 1.13 1.18
1998
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ------ ------ ------
Summary of Activity
Balance at beginning of period ............ $ 547,686 $547,572 $544,741 $544,723
Additions from acquisitions ............... ---- ---- 2,613 ----
Provision for loan losses ................. 84,104 72,809 68,441 74,126
Deduct net loan losses:
Loans charged off:
Commercial .............................. 7,365 4,601 3,252 2,662
Credit card ............................. 75,401 69,043 70,015 72,061
Other revolving credit .................. 3,050 2,736 2,927 2,089
Other retail ............................ 9,851 8,515 6,624 10,388
Real estate ............................. 2,407 264 634 1,209
Lease financing ......................... 701 782 726 886
Foreign ................................. ---- ---- ---- ----
----------- -------- -------- --------
Total ................................. 98,775 85,941 84,178 89,295
Recoveries:
Commercial .............................. 1,979 1,517 1,271 1,900
Credit card ............................. 7,073 7,522 7,270 6,939
Other revolving credit .................. 641 610 630 690
Other retail ............................ 3,167 2,242 3,070 3,015
Real estate ............................. 2,001 1,223 3,578 2,537
Lease financing ......................... 116 132 136 106
Foreign ................................. ---- ---- ---- ----
----------- -------- -------- --------
Total ................................. 14,977 13,246 15,955 15,187
----------- -------- -------- --------
Net loan losses .......................... 83,798 72,695 68,223 74,108
----------- -------- -------- --------
Balance at end of period .................. $ 547,992 $547,686 $547,572 $544,741
=========== ======== ======== ========
Net Loan Losses (Recoveries)
by Category
Commercial ................................ $ 5,386 $ 3,084 $ 1,981 $ 762
Credit card ............................... 68,328 61,521 62,745 65,122
Other revolving credit .................... 2,409 2,126 2,297 1,399
Other retail .............................. 6,684 6,273 3,554 7,373
Real estate ............................... 406 (959) (2,944) (1,328)
Lease financing ........................... 585 650 590 780
Foreign ................................... ---- ---- ---- ----
----------- -------- -------- --------
Total ................................. $ 83,798 $ 72,695 $ 68,223 $ 74,108
=========== ======== ======== ========
Net loan losses -- excluding credit
cards .................................... $ 15,470 $ 11,174 $ 5,478 $ 8,986
Annualized Net Loan Losses
(Recoveries) to Average
Loans by Category
Commercial ................................ .13% .08% .05% .02%
Credit card ............................... 4.69 4.40 4.52 4.54
Other revolving credit .................... 1.84 1.67 1.86 1.20
Other retail .............................. .62 .60 .34 .70
Real estate ............................... .01 (.02) (.07) (.03)
Lease financing ........................... .13 .16 .19 .29
Foreign ................................... ---- ---- ---- ----
Total loans ............................... .73 .66 .62 .68
Total loans -- excluding credit cards ..... .15 .12 .06 .09
Period-end allowance to outstanding
loans .................................... 1.20 1.20 1.23 1.22
The provision for loan losses was $66 million, lower by $18
million or 21.3 percent from the year-earlier period. Net loan
losses totaled $65 million or .54 percent of average loans,
decreasing $19 million or 22.1 percent from a year earlier. The
decrease in overall net loan losses reflected reductions in
consumer losses, due in part to the effect of the securitization
transactions and the continuation of a favorable trend in
consumer bankruptcies and delinquencies. The favorable conditions
in the retail portfolio offset higher loss
67
levels in the commercial portfolio. On a managed basis, including
securitized loans, credit card net charge-offs totaled $58
million or 3.61 percent of average receivables versus $73 million
or 4.61 percent in the same period of 1998. Excluding credit
cards, net loan losses were $24 million or .22 percent of loans,
an increase of $8 million or 54.7 percent from $15 million or .15
percent of loans in the same three months of 1998.
Total other operating revenue rose $121 million or 37.8 percent,
with most major categories expanding for the period. Investment
fees grew $64 million, principally due to additions from purchase
acquisitions involving IJL and OFFITBANK in the second and third
quarters of 1999. Major areas of increase included annuity
premiums, mutual fund trading and fees, portfolio management
fees, equity commissions, and option commissions. Capital markets
income rose $13 million or 35.8 percent over the fourth quarter
of 1998, due in large part to IJL activity focused in sales
commissions on municipal securities, agencies and corporate debt.
Also contributing to the increase were derivatives income and
loan syndication fees. Credit card income advanced $19 million or
40.8 percent, primarily due to increases in securitization income
and overlimit charges. Fees for trust services declined quarter
to quarter by $2 million, reflecting the sale of the master trust
and institutional custody business in the third quarter of 1999.
Mortgage fees declined $8 million or 62.8 percent, largely
influenced by reduced sales of servicing rights on fixed-rate
mortgages and by lower origination fees as interest rates
advanced.
Noninterest Income Table 21
- --------------------------------------------------------------------------------
(thousands)
1999
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ------ ------ ------
Service charges on deposit accounts ........ $ 96,642 $ 94,595 $ 91,454 $ 86,955
Fees for trust services .................... 52,283 60,066 54,907 49,136
Credit card income -- net of
interchange payments ...................... 65,046 70,786 58,110 61,301
Investment fees ............................ 78,747 69,364 69,877 17,362
Capital markets income ..................... 48,965 41,914 41,780 38,112
Electronic banking ......................... 24,303 23,310 22,558 18,455
Mortgage fees .............................. 5,006 7,378 9,863 10,966
Bankers' acceptance and letter of credit
fees ...................................... 12,444 11,688 11,563 10,342
Other service charges and fees ............. 26,720 19,494 18,153 15,526
Other income ............................... 29,313 34,246 26,279 25,114
----------- -------- -------- --------
Total other operating revenue .......... 439,469 432,841 404,544 333,269
Securities gains ........................... 60 147 10,453 234
----------- -------- -------- --------
Total .................................. $ 439,529 $432,988 $414,997 $333,503
=========== ======== ======== ========
1998
---------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ------ ------ ------
Service charges on deposit accounts ........ $ 86,967 $ 84,674 $ 82,465 $ 80,874
Fees for trust services .................... 53,909 51,185 48,802 46,053
Credit card income -- net of
interchange payments ...................... 46,194 43,312 43,077 38,544
Investment fees ............................ 15,170 14,997 16,389 15,000
Capital markets income ..................... 36,044 37,625 40,304 16,110
Electronic banking ......................... 19,746 19,449 18,667 16,395
Mortgage fees .............................. 13,472 12,251 11,502 7,704
Bankers' acceptance and letter of credit
fees ...................................... 9,909 9,745 9,802 9,569
Other service charges and fees ............. 13,473 13,608 13,536 14,109
Other income ............................... 23,928 23,695 30,499 39,365
--------- -------- -------- --------
Total other operating revenue .......... 318,812 310,541 315,043 283,723
Securities gains ........................... 7,407 6,886 2,992 3,157
--------- -------- -------- --------
Total .................................. $326,219 $317,427 $318,035 $286,880
========= ======== ======== ========
Service charges on deposit accounts rose $10 million or 11.1
percent for the quarter, concentrated in commercial analysis
fees, up $4 million, and overdraft charges, up $4 million. The
increase in overdraft fees reflects the combined effect of a
price increase early in the year and fewer waived charges.
Including securities sales, total noninterest income was up $113
million or 34.7 percent.
Noninterest expense increased $109 million or 22.5 percent for
the quarter, excluding merger-related charges of $6 million in
1999 and $7 million in 1998. Excluding expense added by the
purchase acquisitions completed during 1999, noninterest expense
rose approximately 6 percent for the quarter. Salaries expense
grew $55 million or 24.9 percent quarter to quarter, fueled by
incentive compensation for increased production volume and by
higher staffing levels from the purchase acquisitions. Overall
employee benefit costs declined slightly for the quarter. Absent
the impact of the purchase acquisitions, total personnel costs
would have been flat for the period. Equipment expense increased
$12 million or
68
28.5 percent from 1998, due to depreciation charges and other
expenses relating to technology investments. Included in these
increases was the impact of Wachovia's new data center, which
came fully online during 1999.
Noninterest Expense Table 22
- --------------------------------------------------------------------------------
(thousands)
1999
--------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ------- ----- -------
Salaries ................................ $ 276,048 $266,488 $ 259,733 $218,115
Employee benefits ....................... 48,240 50,572 48,019 53,071
----------- -------- --------- --------
Total personnel expense ............. 324,288 317,060 307,752 271,186
Net occupancy expense ................... 38,486 38,955 38,908 34,933
Equipment expense ....................... 52,425 49,081 49,714 46,842
Postage and delivery .................... 13,912 13,700 13,670 14,128
Outside data processing, programming
and software ........................... 27,370 26,385 25,561 23,457
Stationery and supplies ................. 9,270 9,262 8,598 8,809
Advertising and sales promotion ......... 21,090 16,086 17,173 12,119
Professional services ................... 23,008 18,619 19,351 14,024
Travel and business promotion ........... 10,106 9,138 8,749 5,951
Telecommunications ...................... 14,801 13,915 15,978 13,394
Amortization of intangible assets ....... 14,540 13,156 12,230 10,953
Foreclosed property expense -- net of
income ................................. (602) (470) 301 (82)
Merger-related charges .................. 5,669 5,293 8,347 ----
Other expense ........................... 46,255 47,012 54,285 36,484
----------- -------- --------- --------
Total ............................... $ 600,618 $577,192 $ 580,617 $492,198
=========== ======== ========= ========
Overhead ratio* ......................... 55.7% 54.5% 56.3% 51.7%
Overhead ratio without merger-related
charges ................................ 55.2 54.0 55.5 51.7
1998
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- -------- --------- ---------
Salaries ................................ $ 221,019 $221,242 $ 219,731 $ 212,758
Employee benefits ....................... 48,922 42,040 42,675 46,966
----------- -------- --------- ---------
Total personnel expense ............. 269,941 263,282 262,406 259,724
Net occupancy expense ................... 35,838 34,896 34,119 33,783
Equipment expense ....................... 40,790 37,917 40,101 34,199
Postage and delivery .................... 12,962 13,373 13,368 13,278
Outside data processing, programming
and software ........................... 18,863 17,777 15,611 12,199
Stationery and supplies ................. 9,339 10,689 7,233 7,506
Advertising and sales promotion ......... 13,066 17,256 22,893 18,042
Professional services ................... 15,311 14,929 14,522 11,304
Travel and business promotion ........... 7,521 7,656 7,638 6,439
Telecommunications ...................... 12,644 14,570 14,662 12,591
Amortization of intangible assets ....... 10,908 9,840 9,226 9,117
Foreclosed property expense -- net of
income ................................. 517 (164) 88 130
Merger-related charges .................. 6,961 11,934 30,849 35,568
Other expense ........................... 38,025 38,448 44,278 40,369
----------- -------- --------- ---------
Total ............................... $ 492,686 $492,403 $ 516,994 $ 494,249
=========== ======== ========= =========
Overhead ratio* ......................... 52.4% 54.0% 56.8% 57.2%
Overhead ratio without merger-related
charges ................................ 51.7 52.7 53.4 53.1
* Noninterest expense as a percentage of taxable equivalent net interest income
and total other operating revenue.
--------------------------
Results of Operations
-----------------------------------------------------------------
1998 vs. 1997
Business Segments
Asset and Wealth Management. Pretax income rose $16 million or
21.2 percent to $93 million. Net interest margin grew $17 million
or 17.4 percent, driven by a gain in interest-earning assets of
$427 million. Other income grew $46 million or 19.4 percent, led
by a $25 million increase in trust fees, a $4 million increase in
capital markets income, and a $10 million rise in annuity and
mutual fund fee income. Noninterest expense rose $47 million or
18.4 percent, largely due to higher staff expense.
Corporate. Pretax income totaled $599 million, an increase of
$162 million or 37 percent from 1997. Net interest income rose
$175 million or 26.4 percent, primarily fueled by loan and lease
growth. Noninterest income, led by higher consulting fees,
derivatives income, deposit account fees and foreign exchange
income, expanded $86 million or 36.1 percent. The provision for
loan losses decreased $1 million or 6.4 percent, while
noninterest expense was up $101 million or 22.7 percent,
primarily reflecting higher staff and other expenses.
Credit Card. Pretax income of $162 million was up $2 million or
1.5 percent from $160 million in 1997. Net interest income rose
$47 million or 10.3 percent, driven by a higher external rate
earned on credit cards and modest growth in loan balances.
Noninterest income advanced $14 million or 10.6 percent,
primarily due to increases in cardholder income. The provision
for loan losses expanded $37 million or 15.6 percent, while
noninterest expense was up $21 million or 11.4 percent, partly
due to increased advertising and marketing costs.
69
Consumer. Pretax income grew $14 million or 3.6 percent to $412
million. Revenue increases were broadly spread, with net interest
income up $60 million or 6.9 percent and fee income increasing
$54 million or 15.9 percent. Growth in net interest income
primarily reflected greater loan volume, with noninterest income
increasing largely due to higher levels of fees in mortgage,
deposit accounts and capital markets, as well as to increases in
debit card and ATM income. The provision for loan losses declined
$8 million or 37.9 percent, while noninterest expense grew $108
million or 13.6 percent, largely driven by higher compensation
and occupancy costs.
Treasury & Administration. Pretax income rose to $84 million in
1998 from a loss of $145 million in 1997. Improvement in 1998 was
primarily the result of a $230 million reduction in operating
expenses, resulting from substantially lower merger-related
expenses, Year 2000 expense, and other systems development and
nonrecurring expenses. The $35 million reduction in net interest
margin was primarily attributable to changes in
noninterest-earning assets held in the unit, such as goodwill,
changes to the securities portfolio and discretionary funding
which includes the optimization of the capital position. The
increase in other income is primarily driven by corporate owned
life insurance income.
Consolidated Financial Results
Consolidated net income for 1998 totaled $874 million or $4.18
per diluted share compared with $593 million or $2.94 per diluted
share in 1997. Results were impacted by nonrecurring charges
totaling $85 million and $303 million, pretax, in 1998 and 1997,
respectively. Excluding the after-tax effect of the nonrecurring
charges, net income on an operating basis was $930 million or
$4.45 per diluted share and $800 million or $3.96 per diluted
share in 1998 and 1997, respectively.
Taxable equivalent net interest income increased $246 million or
11.5 percent, fueled by good loan demand and a lower average cost
of funds. The net yield on interest-earning assets improved 10
basis points to 4.24 percent.
Average loans expanded $4.685 billion or 11.8 percent, with the
average yield unchanged at 8.79 percent. Taxable commercial
loans, the real estate portfolio, and lease financing led the
loan growth. Interest-bearing deposits rose $2.428 billion or 8.2
percent, while short-term borrowed funds and long-term debt also
increased by $1.908 billion and $158 million, respectively.
Comparability between the two periods is effected by purchase
accounting transactions completed in late 1997.
The following table summarizes the variances in taxable
equivalent interest income and interest expense due to changes in
rates and volumes between 1998 and 1997. Changes that are not due
solely to rate or volume are allocated in proportion to the
relationship of the absolute dollar amount of change in each.
70
Taxable Equivalent Interest Income and Expense Variance Table 23
- --------------------------------------------------------------------------------
(thousands)
1998 over 1997
-------------------------------------------
Attributable To
--------------------------
Rate Volume Total
------- ------ -----
Increase (decrease) in interest income:
Loans -- including fees ................................................. $ (2,561) $ 411,612 $ 409,051
Securities:
Held-to-maturity:
State and municipal .................................................. (1,997) (3,083) (5,080)
Other ................................................................ 2,716 6,083 8,799
Available-for-sale ..................................................... (1,585) (24,365) (25,950)
Interest-bearing bank balances .......................................... 2,663 5,094 7,757
Federal funds sold and securities purchased under resale agreements ..... (381) 3,865 3,484
Trading account assets .................................................. (5,931) (290) (6,221)
---------
Total interest-earning assets ........................................ 8,064 383,776 391,840
Increase (decrease) in interest expense:
Interest-bearing deposits in domestic offices ........................... (59,269) 67,086 7,817
Interest-bearing deposits in foreign offices ............................ 1,237 47,102 48,339
Short-term borrowed funds ............................................... (13,377) 99,061 85,684
Long-term debt .......................................................... (6,274) 9,829 3,555
---------
Total interest-bearing liabilities ................................... (67,588) 212,983 145,395
---------
Increase in net interest income .......................................... $ 246,445
=========
Nonperforming assets at December 31, 1998 were $181 million or
.40 percent of loans and foreclosed property. The total was up
from year-end 1997 by $52 million or 40 percent related
principally to three multibank credits with an aggregate exposure
of $48 million.
The provision for loan losses was $299 million, increasing $35
million or 13 percent from $265 million in 1997. Included in the
provision for 1997 was a special charge of $11 million to conform
the credit policies of acquired companies to those of Wachovia.
Net loan losses were $299 million or .67 percent of average loans
compared with $264 million or .67 percent of loans in 1997. The
increase in net loan losses primarily reflected higher net
charge-offs in credit cards that included $5 million in losses
from the $269 million of receivables purchased in the third
quarter.
Total other operating revenue increased $222 million or 22.1
percent, with the increase occurring in all categories. Growth
was led by service charges on deposit accounts, fees for trust
services, mortgage fees, electronic banking and capital markets
income. The growth in capital markets income was driven by gains
primarily in consulting services, private placement fees, foreign
exchange trading and derivatives income. A portion of the growth
was due to purchase accounting transactions completed in late
1997.
Noninterest expense for 1998 was higher by $30 million or 1.5
percent, with growth for the year affected by nonrecurring
charges taken both in 1998 and 1997. In 1998 and 1997, Wachovia
incurred merger expenses of $85 million and $220 million,
respectively, primarily for systems conversions and signage
changes related to its Virginia and Florida banking acquisitions.
Noninterest expense for 1997 also included a charge of $67
million for equipment impairment. Excluding the merger expenses
and special charge, noninterest expense on an operating basis
totaled $1.911 billion in 1998 and grew $232 million or 13.8
percent from 1997, partially as a result of the inclusion of the
expense base of acquisitions completed in late 1997 that were
accounted for as purchases. Total Year 2000 spending costs in
1998 were $28 million.
71
Management's Responsibility for
Financial Reporting
The management of Wachovia Corporation is responsible for the preparation of
the financial statements, related financial data and other information in this
annual report. The financial statements are prepared in accordance with
generally accepted accounting principles and include amounts based on
management's estimates and judgment where appropriate. Financial information
appearing throughout this annual report is consistent with the financial
statements.
In meeting its responsibility both for the integrity and fairness of these
statements and information, management depends on the accounting system and
related internal controls that are designed to provide reasonable assurances
that transactions are authorized and recorded in accordance with established
procedures and that assets are safeguarded and proper and reliable records are
maintained.
The concept of reasonable assurance is based on the recognition that the cost
of internal controls should not exceed the related benefits. As an integral
part of internal controls, the Corporation maintains a professional staff of
internal auditors who monitor compliance with and assess the effectiveness of
internal controls and coordinate audit coverage with the independent auditors.
The Audit Committee of Wachovia's Board of Directors, composed solely of
outside directors, meets regularly with the Corporation's management, internal
auditors, independent auditors and regulatory examiners to review matters
relating to financial reporting, internal controls and the nature, extent and
results of the audit effort. The independent auditors, internal auditors and
banking regulators have direct access to the Audit Committee with or without
management present.
The financial statements have been audited by Ernst & Young LLP, independent
auditors, who render an independent professional opinion on management's
financial statements. Their appointment was recommended by the Audit Committee,
approved by the Board of Directors and ratified by the shareholders. Their
examination provides an objective assessment of the degree to which the
Corporation's management meets its responsibility for financial reporting.
Their opinion on the financial statements is based on auditing procedures which
include reviewing the internal controls and performing selected tests of
transactions and records as they deem appropriate. These auditing procedures
are designed to provide a reasonable level of assurance that the financial
statements are presented fairly in all material respects.
Report of Independent Auditors
The Board of Directors
Wachovia Corporation
We have audited the accompanying consolidated statements of condition of
Wachovia Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wachovia
Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ERNST & YOUNG LLP
Winston-Salem, North Carolina
January 19, 2000
72
- ---------------------------------------
Consolidated Statements of Condition
- --------------------------------------------------------------------------------------------------------------------------
$ IN THOUSANDS Wachovia Corporation and Subsidiaries
December 31 December 31
1999 1998
Assets
Cash and due from banks .................................................................. $ 3,475,004 $ 3,800,265
Interest-bearing bank balances ........................................................... 184,904 109,983
Federal funds sold and securities purchased under resale agreements ...................... 761,962 675,470
Trading account assets ................................................................... 870,304 664,812
Securities available-for-sale ............................................................ 7,095,790 7,983,648
Securities held-to-maturity (fair value of $1,061,150 in 1999 and $1,442,126 in 1998)..... 1,048,724 1,383,607
Loans, net of unearned income ............................................................ 49,621,225 45,719,222
Less allowance for loan losses ........................................................... 554,810 547,992
----------- -----------
Net loans .............................................................................. 49,066,415 45,171,230
Premises and equipment ................................................................... 953,832 901,681
Due from customers on acceptances ........................................................ 111,684 348,955
Other assets ............................................................................. 3,783,918 3,083,191
----------- -----------
Total assets ........................................................................... $67,352,537 $64,122,842
=========== ===========
Liabilities
Deposits in domestic offices:
Demand .................................................................................. $ 8,730,673 $ 8,768,271
Interest-bearing demand ................................................................. 4,527,711 4,980,715
Savings and money market savings ........................................................ 13,760,479 12,641,766
Savings certificates .................................................................... 8,701,074 8,982,396
Large denomination certificates ......................................................... 3,154,754 3,344,553
----------- -----------
Total deposits in domestic offices ..................................................... 38,874,691 38,717,701
Interest-bearing deposits in foreign offices ............................................. 2,911,727 2,277,028
----------- -----------
Total deposits ......................................................................... 41,786,418 40,994,729
Federal funds purchased and securities sold under repurchase agreements .................. 5,372,493 5,463,418
Commercial paper ......................................................................... 1,658,988 1,359,382
Other short-term borrowed funds .......................................................... 3,071,493 1,912,262
Long-term debt ........................................................................... 7,814,263 7,596,727
Acceptances outstanding .................................................................. 111,684 348,955
Other liabilities ........................................................................ 1,878,741 1,109,137
----------- -----------
Total liabilities ...................................................................... 61,694,080 58,784,610
Off-balance sheet items, commitments and contingent liabilities
Shareholders' Equity
Preferred stock, par value $5 per share:
Authorized 50,000,000 shares; none outstanding .......................................... ---- ----
Common stock, par value $5 per share:
Authorized 1,000,000,000 shares; issued and outstanding 201,812,295 shares in 1999 and
202,986,100 shares in 1998 ............................................................. 1,009,061 1,014,931
Capital surplus .......................................................................... 598,149 669,244
Retained earnings ........................................................................ 4,125,524 3,571,617
Accumulated other comprehensive (loss) income ............................................ (74,277) 82,440
----------- -----------
Total shareholders' equity ............................................................. 5,658,457 5,338,232
----------- -----------
Total liabilities and shareholders' equity ............................................. $67,352,537 $64,122,842
=========== ===========
See notes to consolidated financial statements
73
- ------------------------------------
Consolidated Statements of Income
- ------------------------------------------------------------------------------------------------------------------------------
THOUSANDS, EXCEPT PER SHARE Wachovia Corporation and Subsidiaries
Year Ended December 31
1999 1998 1997
Interest Income
Loans, including fees .................................................... $ 4,000,541 $ 3,873,404 $ 3,455,296
Securities available-for-sale ............................................ 504,470 597,557 625,139
Securities held-to-maturity:
State and municipal ..................................................... 11,673 15,044 16,452
Other investments ....................................................... 79,919 95,952 87,632
Interest-bearing bank balances ........................................... 7,390 12,988 5,230
Federal funds sold and securities purchased under resale agreements ...... 30,696 25,803 22,319
Trading account assets ................................................... 32,131 44,497 50,317
------------- ----------- -----------
Total interest income .................................................. 4,666,820 4,665,245 4,262,385
Interest Expense
Deposits:
Domestic offices ........................................................ 1,156,113 1,224,046 1,216,229
Foreign offices ......................................................... 109,082 135,659 87,320
------------- ----------- -----------
Total interest on deposits ............................................. 1,265,195 1,359,705 1,303,549
Short-term borrowed funds ................................................ 457,161 563,846 478,162
Long-term debt ........................................................... 474,378 390,662 387,107
------------- ----------- -----------
Total interest expense ................................................. 2,196,734 2,314,213 2,168,818
Net Interest Income ...................................................... 2,470,086 2,351,032 2,093,567
Provision for loan losses ................................................ 298,105 299,480 264,949
------------- ----------- -----------
Net interest income after provision for loan losses ...................... 2,171,981 2,051,552 1,828,618
Other Income
Service charges on deposit accounts ...................................... 369,646 334,980 306,231
Fees for trust services .................................................. 216,392 199,949 175,549
Credit card income ....................................................... 255,243 171,127 162,234
Investment fees .......................................................... 235,350 61,556 53,290
Capital markets income ................................................... 170,771 130,083 49,522
Electronic banking ....................................................... 88,626 74,257 64,640
Mortgage fees ............................................................ 33,213 44,929 23,544
Other operating income ................................................... 240,882 211,238 170,758
------------- ----------- -----------
Total other operating revenue .......................................... 1,610,123 1,228,119 1,005,768
Securities gains ......................................................... 10,894 20,442 1,454
------------- ----------- -----------
Total other income ..................................................... 1,621,017 1,248,561 1,007,222
Other Expense
Salaries ................................................................. 1,020,384 874,750 742,106
Employee benefits ........................................................ 199,902 180,603 163,051
------------- ----------- -----------
Total personnel expense ................................................ 1,220,286 1,055,353 905,157
Net occupancy expense .................................................... 151,282 138,636 116,654
Equipment expense ........................................................ 198,062 153,007 139,792
Personal computer disposal charge ........................................ ---- ---- 67,202
Merger-related charges ................................................... 19,309 85,312 220,330
Other operating expense .................................................. 661,686 564,024 517,586
------------- ----------- -----------
Total other expense .................................................... 2,250,625 1,996,332 1,966,721
Income before income tax expense ......................................... 1,542,373 1,303,781 869,119
Income tax expense ....................................................... 531,152 429,611 276,313
------------- ----------- -----------
Net Income ............................................................... $ 1,011,221 $ 874,170 $ 592,806
============= =========== ===========
Net income per common share:
Basic ................................................................... $ 4.99 $ 4.26 $ 2.99
Diluted ................................................................. $ 4.90 $ 4.18 $ 2.94
Average shares outstanding:
Basic ................................................................... 202,795 205,058 198,290
Diluted ................................................................. 206,192 209,153 201,901
See notes to consolidated financial statements
74
- --------------------------------------------------
Consolidated Statements of Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------
$ IN THOUSANDS, EXCEPT PER SHARE Wachovia Corporation and Subsidiaries
Common Stock
Capital
Shares Amount Surplus
Year Ended December 31, 1997
Balance at beginning of year ............................... 201,252,539 $ 1,006,263 $ 706,649
Comprehensive income:
Net income ................................................
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of deferred tax expense of $11,298).................
Less reclassification adjustment for gains realized in net
income (net of tax expense of $648)......................
Comprehensive income ....................................
Cash dividends declared by pooled companies:
Wachovia Corporation -- $1.68 a share......................
Central Fidelity Banks, Inc. -- $.94 a share...............
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 1,547,645 7,737 55,689
Dividend reinvestment plan ................................ 298,553 1,493 18,030
Conversion of debentures .................................. 3,628 18 52
Acquisitions .............................................. 11,742,782 58,715 689,029
Common stock acquired ...................................... (8,918,515) (44,593) (500,343)
Miscellaneous .............................................. 5,697
-------------- ----------- ----------
Balance at end of year ..................................... 205,926,632 $ 1,029,633 $ 974,803
============== =========== ==========
Year Ended December 31, 1998
Balance at beginning of year ............................... 205,926,632 $ 1,029,633 $ 974,803
Comprehensive income:
Net income ................................................
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of deferred tax expense of $16,233).................
Less reclassification adjustment for gains realized in net
income (net of tax expense of $7,982)....................
Comprehensive income ....................................
Cash dividends declared -- $1.86 a share....................
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 2,211,599 11,058 102,540
Dividend reinvestment plan ................................ 301,992 1,510 22,885
Acquisitions .............................................. 1,127,723 5,639 77,674
Common stock acquired ...................................... (6,581,846) (32,909) (508,093)
Miscellaneous .............................................. (565)
-------------- ----------- ----------
Balance at end of year ..................................... 202,986,100 $ 1,014,931 $ 669,244
============== =========== ==========
Year Ended December 31, 1999
Balance at beginning of year ............................... 202,986,100 $ 1,014,931 $ 669,244
Comprehensive income:
Net income ................................................
Other comprehensive income:
Unrealized holding losses on securities available-for-sale
(net of deferred tax benefit of $92,356).................
Less reclassification adjustment for gains realized in net
income (net of tax expense of $3,813)....................
Comprehensive income ....................................
Cash dividends declared -- $2.06 a share....................
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 1,252,596 6,263 111,308
Dividend reinvestment plan ................................ 282,947 1,414 21,692
Acquisitions .............................................. 4,801,987 24,010 399,059
Note conversions .......................................... 3,065 15 235
Common stock acquired ...................................... (7,514,400) (37,572) (603,357)
Miscellaneous .............................................. (32)
-------------- ----------- ----------
Balance at end of year ..................................... 201,812,295 $ 1,009,061 $ 598,149
============== =========== ==========
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss) Total
Year Ended December 31, 1997
Balance at beginning of year ............................... $ 2,843,803 $ 51,686 $ 4,608,401
Comprehensive income:
Net income ................................................ 592,806 592,806
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of deferred tax expense of $11,298)................. 20,218 20,218
Less reclassification adjustment for gains realized in net
income (net of tax expense of $648)...................... (806) (806)
----------- -------- -----------
Comprehensive income .................................... 592,806 19,412 612,218
Cash dividends declared by pooled companies:
Wachovia Corporation -- $1.68 a share...................... (273,301) (273,301)
Central Fidelity Banks, Inc. -- $.94 a share............... (54,002) (54,002)
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 63,426
Dividend reinvestment plan ................................ 19,523
Conversion of debentures .................................. 70
Acquisitions .............................................. 747,744
Common stock acquired ...................................... (544,936)
Miscellaneous .............................................. (10,539) (4,842)
----------- -------- -----------
Balance at end of year ..................................... $ 3,098,767 $ 71,098 $ 5,174,301
=========== ======== ===========
Year Ended December 31, 1998
Balance at beginning of year ............................... $ 3,098,767 $ 71,098 $ 5,174,301
Comprehensive income:
Net income ................................................ 874,170 874,170
Other comprehensive income:
Unrealized holding gains on securities available-for-sale
(net of deferred tax expense of $16,233)................. 23,802 23,802
Less reclassification adjustment for gains realized in net
income (net of tax expense of $7,982).................... (12,460) (12,460)
---------- -------- -----------
Comprehensive income .................................... 874,170 11,342 885,512
Cash dividends declared -- $1.86 a share.................... (381,798) (381,798)
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 113,598
Dividend reinvestment plan ................................ 24,395
Acquisitions .............................................. 83,313
Common stock acquired ...................................... (541,002)
Miscellaneous .............................................. (19,522) (20,087)
----------- -------- -----------
Balance at end of year ..................................... $ 3,571,617 $ 82,440 $ 5,338,232
=========== ======== ===========
Year Ended December 31, 1999
Balance at beginning of year ............................... $ 3,571,617 $ 82,440 $ 5,338,232
Comprehensive income:
Net income ................................................ 1,011,221 1,011,221
Other comprehensive income:
Unrealized holding losses on securities available-for-sale
(net of deferred tax benefit of $92,356)................. (149,636) (149,636)
Less reclassification adjustment for gains realized in net
income (net of tax expense of $3,813).................... (7,081) (7,081)
---------- -------- -----------
Comprehensive income .................................... 1,011,221 (156,717) 854,504
Cash dividends declared -- $2.06 a share.................... (418,447) (418,447)
Common stock issued pursuant to:
Stock option and employee benefit plans ................... 117,571
Dividend reinvestment plan ................................ 23,106
Acquisitions .............................................. 423,069
Note conversions .......................................... 250
Common stock acquired ...................................... (640,929)
Miscellaneous .............................................. (38,867) (38,899)
----------- -------- -----------
Balance at end of year ..................................... $ 4,125,524 $(74,277) $ 5,658,457
=========== ======== ===========
See notes to consolidated financial statements
75
- -----------------------------------------
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------
THOUSANDS Wachovia Corporation and Subsidiaries
Year Ended
December 31
1999
Operating Activities
Net income ............................................................................ $ 1,011,221
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses ............................................................ 298,105
Depreciation and amortization ........................................................ 245,803
Deferred income taxes ................................................................ 383,302
Securities gains ..................................................................... (10,894)
Gain on sale of noninterest-earning assets ........................................... (13,485)
Increase (decrease) in accrued income taxes .......................................... 26,459
(Increase) decrease in accrued interest receivable ................................... (25,158)
Increase (decrease) in accrued interest payable ...................................... 11,578
Net change in other accrued and deferred income and expense .......................... (163,073)
Net trading account activities ....................................................... (91,125)
Net loans held for sale .............................................................. 250,632
--------------
Net cash provided by operating activities ........................................... 1,923,365
Investing Activities
Net (increase) decrease in interest-bearing bank balances ............................. (73,826)
Net (increase) decrease in federal funds sold and securities purchased under resale
agreements ........................................................................... (40,361)
Purchases of securities available-for-sale ............................................ (2,222,574)
Purchases of securities held-to-maturity .............................................. (95,531)
Sales of securities available-for-sale ................................................ 366,714
Calls, maturities and prepayments of securities available-for-sale .................... 2,525,569
Calls, maturities and prepayments of securities held-to-maturity ...................... 431,963
Net increase in loans made to customers ............................................... (5,466,279)
Credit card receivables securitized ................................................... 1,395,954
Capital expenditures .................................................................. (213,229)
Proceeds from sales of premises and equipment ......................................... 29,067
Net increase in other assets .......................................................... (279,931)
Business combinations ................................................................. (11,123)
--------------
Net cash (used) provided by investing activities .................................... (3,653,587)
Financing Activities
Net increase in demand, savings and money market accounts ............................. 628,111
Net increase (decrease) in certificates of deposit .................................... 163,578
Net (decrease) increase in federal funds purchased and securities sold under
repurchase agreements ................................................................ (151,068)
Net increase in commercial paper ...................................................... 299,606
Net increase (decrease) in other short-term borrowings ................................ 1,125,558
Proceeds from issuance of long-term debt .............................................. 1,588,733
Maturities and repayments of long-term debt ........................................... (1,410,819)
Common stock issued ................................................................... 59,478
Dividend payments ..................................................................... (418,447)
Common stock repurchased .............................................................. (634,623)
Net increase (decrease) in other liabilities .......................................... 154,854
--------------
Net cash provided (used) by financing activities .................................... 1,404,961
(Decrease) Increase in Cash and Cash Equivalents ...................................... (325,261)
Cash and cash equivalents at beginning of year ........................................ 3,800,265
--------------
Cash and cash equivalents at end of year .............................................. $ 3,475,004
==============
Supplemental Disclosures
Interest paid ......................................................................... $ 2,185,156
Income taxes paid ..................................................................... 119,959
1998 1997
Operating Activities
Net income ............................................................................ $ 874,170 $ 592,806
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses ............................................................ 299,480 264,949
Depreciation and amortization ........................................................ 155,069 165,692
Deferred income taxes ................................................................ 266,451 35,169
Securities gains ..................................................................... (20,442) (1,454)
Gain on sale of noninterest-earning assets ........................................... (7,421) (4,775)
Increase (decrease) in accrued income taxes .......................................... 224,609 (6,416)
(Increase) decrease in accrued interest receivable ................................... 40,246 9,173
Increase (decrease) in accrued interest payable ...................................... (26,107) 36,764
Net change in other accrued and deferred income and expense .......................... (60,053) 196,902
Net trading account activities ....................................................... 334,310 190,704
Net loans held for sale .............................................................. (184,571) 144,849
-------------- --------------
Net cash provided by operating activities ........................................... 1,895,741 1,624,363
Investing Activities
Net (increase) decrease in interest-bearing bank balances ............................. 23,208 393
Net (increase) decrease in federal funds sold and securities purchased under resale
agreements ........................................................................... 947,064 (1,258,355)
Purchases of securities available-for-sale ............................................ (3,106,977) (3,418,951)
Purchases of securities held-to-maturity .............................................. (394,956) (36,340)
Sales of securities available-for-sale ................................................ 590,447 2,211,721
Calls, maturities and prepayments of securities available-for-sale .................... 3,564,575 2,341,747
Calls, maturities and prepayments of securities held-to-maturity ...................... 532,922 273,696
Net increase in loans made to customers ............................................... (1,514,208) (4,639,373)
Credit card receivables securitized ................................................... ---- ----
Capital expenditures .................................................................. (258,719) (162,286)
Proceeds from sales of premises and equipment ......................................... 44,860 46,164
Net increase in other assets .......................................................... (347,349) (476,129)
Business combinations ................................................................. 16,108 133,081
-------------- --------------
Net cash (used) provided by investing activities .................................... 96,975 (4,984,632)
Financing Activities
Net increase in demand, savings and money market accounts ............................. 1,301,117 1,719,641
Net increase (decrease) in certificates of deposit .................................... (3,192,149) 3,076,795
Net (decrease) increase in federal funds purchased and securities sold under
repurchase agreements ................................................................ (2,870,049) 1,041,778
Net increase in commercial paper ...................................................... 325,358 327,648
Net increase (decrease) in other short-term borrowings ................................ 1,159,388 (286,347)
Proceeds from issuance of long-term debt .............................................. 2,684,679 1,636,312
Maturities and repayments of long-term debt ........................................... (1,028,772) (2,734,349)
Common stock issued ................................................................... 80,375 59,281
Dividend payments ..................................................................... (381,798) (327,303)
Common stock repurchased .............................................................. (531,122) (532,836)
Net increase (decrease) in other liabilities .......................................... 38,704 (72,725)
-------------- --------------
Net cash provided (used) by financing activities .................................... (2,414,269) 3,907,895
(Decrease) Increase in Cash and Cash Equivalents ...................................... (421,553) 547,626
Cash and cash equivalents at beginning of year ........................................ 4,221,818 3,674,192
-------------- --------------
Cash and cash equivalents at end of year .............................................. $ 3,800,265 $ 4,221,818
============== ==============
Supplemental Disclosures
Interest paid ......................................................................... $ 2,340,320 $ 2,132,054
Income taxes paid ..................................................................... 159,500 249,715
See notes to consolidated financial statements
76
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note A -- Accounting Policies
Nature of Operations -- The Corporation is a southeastern interstate bank
holding company maintaining dual headquarters in Atlanta, Georgia, and
Winston-Salem, North Carolina. The Corporation's principal banking subsidiary
is Wachovia Bank, N.A., which maintains operations in Florida, Georgia, North
Carolina, South Carolina and Virginia. Credit Card services are provided
through The First National Bank of Atlanta, and full-service brokerage and
investment underwriting services are provided through Wachovia Securities, Inc.
In addition to general commercial banking, the Corporation and its subsidiaries
are engaged in trust and investment management, residential mortgage
origination, leasing, foreign exchange, corporate finance and other money
market services.
The Corporation completed three business combinations during 1998 and three
during 1999. Disclosure of material business combination transactions is
included in Note B -- Business Combinations. In October 1999, Wachovia
announced a definitive agreement to acquire Canton, Georgia-based B C
Bankshares, Inc., the parent company of the Bank of Canton. The Bank of Canton
has eight branches and approximately $400 million in assets in Cherokee County,
Georgia, north of Atlanta. The transaction will result in goodwill of
approximately $97 million. In December 1999, Wachovia announced an agreement to
purchase the credit card business comprising substantially all of the
operations of Partners First Holdings LLC. Wachovia will pay a purchase premium
of approximately $230 million for the $2 billion portfolio which includes
$1.416 billion in securitized loans. Both transactions will be accounted for as
purchase business combinations and were completed early during the first
quarter of 2000.
Principles of Consolidation -- The consolidated financial statements include
the accounts of Wachovia Corporation and its subsidiaries after elimination of
all material intercompany balances and transactions.
Business Combinations -- In business combinations accounted for as
poolings-of-interests, the financial position and results of operations and
cash flows of the respective companies are restated as though the companies
were combined for all historical periods.
In business combinations accounted for using the purchase method of accounting,
the net assets of the companies acquired are recorded at their fair values at
the date of acquisition. Goodwill is amortized on a straight-line basis over
the estimated periods benefited. Identifiable intangibles, including deposit
base intangibles, are amortized on an accelerated or straight-line basis over
the estimated periods benefited. The results of operations of the acquired
companies are included since the date of acquisition.
Use of Estimates -- The financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Due From Banks -- The Corporation considers cash and due from banks,
all of which are maintained in financial institutions, as cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
Trading Instruments -- The Corporation maintains trading positions in both
derivative and nonderivative (or cash) financial instruments. Trading cash
instruments are held for distribution through retail sales or in anticipation
of market movements and are carried at fair value. Gains and losses, both
realized and unrealized, are included in capital markets income. Interest
revenue arising from cash financial instruments is included in interest
income-trading account assets. Trading cash instruments are comprised primarily
of securities backed by the U.S. Treasury and various federal agencies and
state and local governmental bodies.
Trading derivative financial instruments are customer oriented, and trading
positions are established as necessary to accommodate customers' requirements.
Gains and losses from securities trading derivatives and foreign exchange
activities are included in capital markets income.
Securities Held-to-Maturity and Available-for-Sale -- Management determines the
appropriate classification of debt securities at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale and are stated at fair
value. Unrealized gains and losses, net of tax, on available-for-sale
securities are included in accumulated other comprehensive income --
a separate component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from securities. The specific identification method is used to determine
realized gains and losses on sales of securities, which are reported as
securities gains and losses.
Securities Purchased and Sold Agreements -- Securities purchased under resale
agreements and securities sold under repurchase agreements are generally
accounted for as collateralized financing transactions. They are recorded at
the current fair value of the securities plus accrued interest. It is the
Corporation's policy to take possession of securities purchased under resale
agreements, which are primarily U.S. Government and Government agency
securities. The current fair value of these securities is monitored, and
additional securities are obtained when deemed appropriate. The Corporation
also monitors its exposure with respect to securities sold under repurchase
agreements, and a request to the lender for additional money is made when
necessary.
Risk Management Instruments -- Interest rate swaps and options (caps and
floors) are used as part of the Corporation's overall interest rate risk
management and are designated as hedges of interest-bearing assets,
liabilities, firm commitments and anticipated transactions. These derivatives
modify the interest rate characteristics of specified financial instruments.
Amounts receivable or payable under interest rate swap and option agreements
are recognized in net interest income. Derivative instruments not qualifying as
end-user positions are treated as trading positions and marked-to-market. To
qualify as a hedge, the swap or option must be designated and documented as a
hedge and be effective in reducing the market risk associated with the existing
asset, liability, firm commitment or identified anticipated transaction which
is probable to occur. Effectiveness of the hedge is evaluated on an initial and
ongoing basis using statistical calculations of correlation. Gains and losses
on risk management derivatives that are terminated early are deferred and
amortized to net interest income over the remaining period
77
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ IN THOUSANDS Wachovia Corporation and Subsidiaries
Note A -- Accounting Policies -- Concluded
originally covered by the instrument. If the underlying designated item is no
longer held, or if an anticipated transaction is no longer likely to occur, any
previously unrecognized gain or loss on the derivative contract is recognized
in earnings and the contract is subsequently accounted for at fair value.
Loans and Allowance for Loan Losses -- Loans are carried at their principal
amount outstanding, except for loans held for sale which are carried at the
lower of cost or market. Interest on loans is accrued and recorded as interest
income based upon the principal amount outstanding. Loan origination fees, net
of certain direct origination costs, are deferred and recognized as an
adjustment to the related loan yield using the interest method. Except for
certain consumer loans as discussed below, the recognition of interest income
is discontinued when a loan becomes 90 days past due as to principal or
interest or when, in management's judgment, the principal or interest will not
be collectible in the normal course of business. When interest accruals are
discontinued, the balance of accrued interest is reversed. Management may elect
to continue the accrual of interest when the estimated net realizable value of
collateral is sufficient to cover the principal balance and accrued interest
and the loan is in the process of collection. Interest is accrued on revolving
credit loans until payments become 180 days past due, at which time the
outstanding principal balance and accrued unpaid interest is charged off. For
installment loans and other closed-end consumer loans, the accrual of interest
is discontinued when the loan becomes 120 days past due, at which time the
outstanding principal and unpaid interest is charged off. The Corporation
records a charge-off for commercial loans and commercial real estate loans when
available information confirms that specific loans, or portions thereof, are
uncollectible.
The Corporation applies Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" (FASB 5), and Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FASB
114), in determining the balance of the allowance for loan losses and the
amount of impaired loans. The allowance is maintained at a level believed to be
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current domestic and
international economic conditions, volume and composition of the loan portfolio
and other risks inherent in the portfolio. The method used to determine the
amount of loss inherent in the loan portfolio and thereby assess the adequacy
of the recorded balance of the allowance for loan losses involves identifying
portfolios of loans with similar characteristics for which estimates of
inherent future probable losses can be made. The estimates are based on
historical loss factors as adjusted for current business and economic
conditions. The loss factors are applied to the respective portfolios in order
to determine the overall allowance adequacy.
Premises and Equipment -- Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the life of the leasehold asset or the lease term.
Impairment of Long-Lived Assets -- Impairment losses on long-lived assets to be
held and used are recognized whenever events or changes in circumstances result
in the carrying value of the assets exceeding the sum of the expected future
cash flows. The measurement of the impairment losses recognized is based on the
difference between the fair value and carrying value of the assets. Long-lived
assets to be disposed of are reported at the lower of carrying value or fair
value less cost to sell.
Income Taxes -- Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Each
subsidiary provides for income taxes based on its contribution to income taxes
(benefit) of the consolidated group. The Corporation and its subsidiaries file
a consolidated tax return.
Stock-Based Compensation -- The Corporation applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Corporation's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards and appreciation rights is recorded based on the market price at the
date of grant or the date on which the stated performance criteria are met and
the end of the period, respectively. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123),
encourages, but does not require, adoption of a fair value method of accounting
for employee stock-based compensation plans. The Corporation follows the pro
forma disclosure provisions of FASB 123.
Internal Use Software -- In March 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
as to when it is or is not appropriate to capitalize the cost of software
developed or obtained for internal use. The Corporation adopted SOP 98-1
effective January 1, 1998; the effect was not material.
Derivative Instruments and Hedging Activity -- In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FASB
133). FASB 133 establishes new accounting and reporting requirements for
derivative instruments, including certain derivative instruments imbedded in
other contracts and hedging activities. The standard requires all derivatives
to be measured at fair value and recognized as either assets or liabilities in
the statement of condition. Under certain conditions, a derivative may be
specifically designated as a hedge. Accounting for the changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. Adoption of the standard is required for the Corporation's
December 31, 2001 financial statements with early adoption allowed as of the
beginning of any quarter after June 30, 1998. Management is in the process of
assessing the impact and plans to adopt the standard effective January 1, 2001.
Adoption is not expected to result in a material financial impact.
Reclassification -- Certain 1998 and 1997 amounts have been reclassified to
conform to the 1999 presentation.
- --------------------------------------------------------------------------------
78
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note B -- Business Combinations
On December 15, 1997, the Corporation merged with Central Fidelity Banks, Inc.
(Central Fidelity), headquartered in Richmond, Virginia. The acquisition of
Central Fidelity resulted in the issuance of approximately 36.3 million shares.
The acquisition was accounted for as a pooling-of-interests, and accordingly,
all historical financial information for the Corporation has been restated to
include Central Fidelity historical information for all periods presented
herein. Intercompany transactions prior to the merger have been eliminated, and
certain reclassifications were made to the Central Fidelity financial
statements to conform to the Corporation's presentations. No material
adjustments were recorded to conform Central Fidelity's accounting policies.
During 1997, the Corporation recorded charges of $220,330 for direct and other
costs in connection with the merger including restructuring activities to
consolidate the operations, business line locations and administrative
functions. Included in systems and operations conversion costs and business
line and integration costs are activities such as contract termination,
write-down of unutilized assets and other business and systems conversion
costs. These activities were completed during 1998. The remaining liability at
December 31, 1999 represents contractual compensation continuance for
terminated employees.
Details of the merger-related costs follow.
Dec. 31, Dec. 31, Dec. 31,
1997 Utilized 1997 Utilized 1998 Utilized 1999
Provision In 1997 Balance In 1998 Balance In 1999 Balance
--------- --------- -------- ---------- -------- ---------- -------
Severance and personnel related
costs ................................ $114,079 $ ---- $114,079 $59,199 $54,880 $32,953 $21,927
Systems and operations
conversion costs ..................... 66,953 51,530 15,423 15,356 67 67 ----
Business line and integration
expenses ............................. 16,316 9,660 6,656 3,923 2,733 2,733 ----
Deal costs and other expenses ......... 22,982 20,031 2,951 2,951 ---- ---- ----
-------- ------- -------- ------- ------- ------- -------
Total ................................. $220,330 $81,221 $139,109 $81,429 $57,680 $35,753 $21,927
======== ======= ======== ======= ======= ======= =======
In 1999 and 1998, the Corporation incurred additional expenses of $19,309 and
$85,312, respectively, for systems conversion and integration of business lines
related to merger transactions.
On October 31, 1997, the Corporation completed its merger with Jefferson
Bankshares, Inc. (Jefferson), headquartered in Charlottesville, Virginia. The
acquisition of Jefferson resulted in the issuance of approximately 8.7 million
shares of common stock valued at $554,337. The purchase price was allocated to
the net assets acquired resulting in $337,452 of goodwill and $41,512 of
deposit base intangibles.
On November 11, 1997, the Corporation completed its merger with 1st United
Bancorp (1st United), headquartered in Boca Raton, Florida. The acquisition of
1st United resulted in the issuance of approximately 3.0 million shares of
common stock valued at $193,407. The purchase price was allocated to the net
assets acquired resulting in $141,154 of goodwill and $22,718 of deposit base
intangibles.
During 1998, the Corporation acquired Ameribank Bancshares (Ameribank),
headquartered in Hollywood, Florida, with $280 million in assets; Hunt, DuPree,
Rhine and Associates Inc., a benefits consulting company; and Retirement Plan
Securities Inc., a registered investment advisor.
On April 1, 1999, the Corporation completed its merger with Interstate/
Johnson Lane Inc. (IJL), headquartered in Charlotte, North Carolina. The
acquisition of IJL resulted in the issuance of approximately 2.6 million shares
of common stock valued at $215,562. The purchase price was allocated to the net
assets acquired resulting in $125,205 of goodwill.
On September 1, 1999, the Corporation completed its merger with OFFITBANK
Holdings Inc. (OFFITBANK), headquartered in New York. The acquisition of
OFFITBANK resulted in the issuance of approximately 2.1 million shares of
common stock valued at $203,173. The purchase price was allocated to the net
assets acquired resulting in $175,568 of goodwill. Also, during 1999, the
Corporation acquired Barry, Evans, Josephs & Snipes, a national life insurance
broker specializing in wealth transfer strategies and benefit plans for
affluent families and corporate executives.
The pro forma results, giving effect to the purchase transactions as though
they occurred as of the beginning of the reporting periods, do not vary
significantly from actual results. Goodwill and deposit base intangibles,
arising from the purchase transactions above, are being amortized over 20 to 25
and 7 years, respectively.
- --------------------------------------------------------------------------------
Note C -- Business Segment Information
The Corporation's reportable segments are strategic business units that provide
unique products and services to a variety of customer groups. Each segment has
its own management team as well as distinct marketing, production, technology
and distribution strategies. The Corporation's five reportable segments are
Asset and Wealth Management, Corporate, Credit Card, Consumer and Treasury &
Administration. Asset and Wealth Management earns revenues by providing estate
planning services, insurance, investment and trust products to high-wealth
individuals and corporate executives. Corporate earns its revenues primarily by
providing financing, deposit, cash management, investment and asset
administration products to corporate customers. Credit Card, which is presented
on a managed basis, derives revenues from the marketing, issuing and servicing
of credit card products to individuals and corporations. Consumer generates its
revenues primarily from individuals and small businesses by providing credit
and deposit services as well as insurance, investment and trust products.
Treasury & Administration is comprised of balance sheet management activities
that include
79
- ---------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ IN THOUSANDS Wachovia Corporation and Subsidiaries
Note C -- Business Segment Information -- Concluded
managing the investment portfolio, discretionary funding, utilization of
off-balance sheet financial instruments, optimizing the Corpora tion's equity
position and corporate expenses such as merger-related charges, Year 2000
conversion costs and other corporate costs.
Asset and
Wealth
Year Ended December 31, 1999 Management Corporate Credit Card
- -------------------------------------- ---------- ------------ ----------
External net interest margin ......... $ 109,806 $ 2,162,749 $ 852,792
Internal funding (charge) credit ..... 33,551 (1,144,429) (316,539)
---------- ------------ ----------
Net interest margin .................. 143,357 1,018,320 536,253
Provision for loan losses ............ 790 58,511 256,598
Total other income ................... 485,554 404,680 168,782
Total expenses ....................... 495,634 639,462 212,222
---------- ------------ ----------
Income before income tax expense ..... 132,487 725,027 236,215
Income tax expense ................... 50,277 258,018 86,142
---------- ------------ ----------
Net income ........................... $ 82,210 $ 467,009 $ 150,073
========== ============ ==========
Average total assets ................. $2,928,541 $ 34,482,234 $6,283,549
========== ============ ==========
Treasury &
Year Ended December 31, 1999 Consumer Administration Eliminations Total
- --------------------------------------- -------- ------------- ------------- -----------
External net interest margin ......... $ (153,647) $ (461,128) $ (40,486) $ 2,470,086
Internal funding (charge) credit ..... 1,085,423 405,099 (63,105) ----
---------- ----------- ------------- -----------
Net interest margin .................. 931,776 (56,029) (103,591) 2,470,086
Provision for loan losses ............ 15,079 (32,873) ---- 298,105
Total other income ................... 424,577 137,424 ---- 1,621,017
Total expenses ....................... 895,946 70,466 (63,105) 2,250,625
---------- ----------- ------------- -----------
Income before income tax expense ..... 445,328 43,802 (40,486) 1,542,373
Income tax expense ................... 161,785 15,416 (40,486) 531,152
---------- ----------- ------------- -----------
Net income ........................... $ 283,543 $ 28,386 $ ---- $ 1,011,221
========== =========== ============= ===========
Average total assets ................. $9,779,241 $11,946,693 $ ---- $65,420,258
========== =========== ============= ===========
Asset and
Wealth
Year Ended December 31, 1998 Management Corporate Credit Card
- -------------------------------------- ---------- -------- -------------
External net interest margin ......... $ 79,922 $ 1,973,231 $ 829,965
Internal funding (charge) credit ..... 32,333 (1,132,512) (331,937)
---------- ------------ ----------
Net interest margin .................. 112,255 840,719 498,028
Provision for loan losses ............ 1,544 19,698 276,765
Total other income ................... 285,493 325,693 148,442
Total expenses ....................... 302,760 547,704 207,528
---------- ------------ ----------
Income before income tax expense ..... 93,444 599,010 162,177
Income tax expense ................... 33,984 209,002 57,642
---------- ------------ ----------
Net income ........................... $ 59,460 $ 390,008 $ 104,535
========== ============ ==========
Average total assets ................. $2,471,775 $ 31,319,697 $6,095,313
========== ============ ==========
Treasury &
Year Ended December 31, 1998 Consumer Administration Eliminations Total
- --------------------------------------- -------- ----------- ------- -------
External net interest margin ......... $ (183,189) $ (302,023) $ (46,874) $ 2,351,032
Internal funding (charge) credit ..... 1,121,758 378,461 (68,103) ----
----------- ----------- ------------ -----------
Net interest margin .................. 938,569 76,438 (114,977) 2,351,032
Provision for loan losses ............ 13,916 (12,443) ---- 299,480
Total other income ................... 389,339 99,594 ---- 1,248,561
Total expenses ....................... 901,706 104,737 (68,103) 1,996,332
----------- ----------- ------------ -----------
Income before income tax expense ..... 412,286 83,738 (46,874) 1,303,781
Income tax expense ................... 147,062 28,795 (46,874) 429,611
----------- ----------- ------------ -----------
Net income ........................... $ 265,224 $ 54,943 $ ---- $ 874,170
=========== =========== ============ ===========
Average total assets ................. $10,254,873 $13,806,877 $ ---- $63,948,535
=========== =========== ============ ===========
Asset and
Wealth
Year Ended December 31, 1997 Management Corporate Credit Card
- -------------------------------------- ---------- -------- -------------
External net interest margin ......... $ 60,947 $ 1,832,586 $ 791,799
Internal funding (charge) credit ..... 34,710 (1,167,219) (340,450)
---------- ------------ ----------
Net interest margin .................. 95,657 665,367 451,349
Provision for loan losses ............ 1,969 21,045 239,461
Total other income ................... 239,070 239,351 134,173
Total expenses ....................... 255,640 446,478 186,258
---------- ------------ ----------
Income before income tax expense ..... 77,118 437,195 159,803
Income tax expense (benefit) ......... 27,922 156,512 57,495
---------- ------------ ----------
Net income (loss) .................... $ 49,196 $ 280,683 $ 102,308
========== ============ ==========
Average total assets ................. $1,954,747 $ 27,887,413 $6,045,783
========== ============ ==========
Treasury &
Year Ended December 31, 1997 Consumer Administration Eliminations Total
- --------------------------------------- ------- ----------- ------- -------
External net interest margin ......... $ (252,537) $ (281,334) $ (57,894) $ 2,093,567
Internal funding (charge) credit ..... 1,130,836 392,520 (50,397) ----
---------- ----------- ------------ -----------
Net interest margin .................. 878,299 111,186 (108,291) 2,093,567
Provision for loan losses ............ 22,402 (19,928) ---- 264,949
Total other income ................... 335,811 58,817 ---- 1,007,222
Total expenses ....................... 793,616 335,126 (50,397) 1,966,721
---------- ----------- ------------ -----------
Income before income tax expense ..... 398,092 (145,195) (57,894) 869,119
Income tax expense (benefit) ......... 143,586 (51,308) (57,894) 276,313
---------- ----------- ------------ -----------
Net income (loss) .................... $ 254,506 $ (93,887) $ ---- $ 592,806
========== =========== ============ ===========
Average total assets ................. $9,035,267 $12,683,865 $ ---- $57,607,075
========== =========== ============ ===========
The Corporation's management accounting policies generally follow the policies
described in Note A, except for net interest income which is reported on a
fully taxable equivalent basis. The Corporation's funds transfer pricing system
utilizes a multiple pool method to simulate matched funding to compensate or
charge for funds provided or used with a corresponding offset in the Treasury &
Administration business segment. Provision for loan losses is charged to each
segment based on the credit risk of each segment's loan portfolio. Operating
expense is recognized as incurred and charged on a fully absorbed basis.
Additionally, income tax expense is calculated based on the business segments
fully taxable equivalent income and the Corporation's effective tax rate.
Reconciling items between management accounting and the Corporation's
consolidated financial statements are limited to the taxable equivalent
adjustment and other income statement reclassifications shown as Eliminations.
The Corporation operates primarily in the United States; accordingly,
geographic distribution of revenue and long-lived assets in other countries is
not significant. Revenues from no individual customer exceeded 10% of
consolidated total revenues.
- --------------------------------------------------------------------------------
80
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousandsWachovia Corporation and Subsidiaries
Note D -- Securities
The aggregate amortized cost, fair value and gross unrealized gains and losses
of securities as of December 31 were as follows:
1999
--------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ----------- ---------- --------
Held-to-Maturity
- ----------------
U.S. Treasury and other agencies ......... $ 402,828 $ 2 $ 11,437 $ 391,393
State and municipal ...................... 204,289 12,863 401 216,751
Mortgage-backed .......................... 399,803 12,142 689 411,256
Other .................................... 41,804 15 69 41,750
------------- ------- -------- ----------
$1,048,724 $25,022 $ 12,596 $1,061,150
============= ======= ======== ==========
Available-for-Sale
- ------------------
U.S. Treasury and other agencies ......... $2,833,744 $10,881 $ 45,625 $2,799,000
State and municipal ...................... 56,138 1,054 197 56,995
Mortgage-backed .......................... 3,781,281 7,604 85,921 3,702,964
Other .................................... 186,228 20 2,976 183,272
Equity ................................... 356,799 ---- 3,240 353,559
------------- ------- -------- ----------
$7,214,190 $19,559 $137,959 $7,095,790
============= ======= ======== ==========
1998
---------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- -------- ---------- ----------
Held-to-Maturity
- -------------------------------------------
U.S. Treasury and other agencies ......... $ 518,063 $ 6,662 $ 3 $ 524,722
State and municipal ...................... 176,768 19,521 ---- 196,289
Mortgage-backed .......................... 610,328 31,669 5 641,992
Other .................................... 78,448 677 2 79,123
---------- -------- ---------- ----------
$1,383,607 $ 58,529 $ 10 $1,442,126
========== ======== ========== ==========
Available-for-Sale
- -------------------------------------------
U.S. Treasury and other agencies ......... $3,123,663 $ 83,895 $ 1,991 $3,205,567
State and municipal ...................... 60,964 3,199 2 64,161
Mortgage-backed .......................... 4,159,464 50,641 3,351 4,206,754
Other .................................... 333,442 2,250 1,983 333,709
Equity ................................... 171,632 1,825 ---- 173,457
---------- -------- ---------- ----------
$7,849,165 $141,810 $ 7,327 $7,983,648
========== ======== ========== ==========
The amortized cost and estimated fair value of securities at December 31, 1999,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
Amortized Fair
Cost Value
-------- ------
Held-to-Maturity
- ----------------
Due in one year or less ........................ $ 61,131 $ 61,268
Due after one year through five years .......... 534,272 528,291
Due after five years through ten years ......... 98,689 104,457
Due after ten years ............................ 354,632 367,134
---------- ----------
Total ................................... 1,048,724 1,061,150
Available-for-Sale
- ------------------
Due in one year or less ........................ 283,654 285,324
Due after one year through five years .......... 2,565,401 2,534,011
Due after five years through ten years ......... 1,314,106 1,287,323
Due after ten years ............................ 2,694,230 2,635,573
---------- ----------
Total ................................... 6,857,391 6,742,231
No contractual maturity ........................ 356,799 353,559
---------- ----------
Total ................................... 7,214,190 7,095,790
---------- ----------
Total securities ........................ $8,262,914 $8,156,940
========== ==========
Proceeds, gross gains and losses realized from the sales of securities
available-for-sale for December 31 were as follows:
1999 1998
-------- --------
Proceeds ............. $366,714 $590,447
Gross gains .......... 10,996 20,553
Gross losses ......... 102 111
Trading account assets are reported at fair value with net unrealized losses of
$526, $554 and $1,736 included in earnings during 1999, 1998 and 1997,
respectively.
At December 31, 1999 and 1998, securities with a carrying value of $5,811,075
and $5,759,164, respectively, were pledged as collateral to secure public
deposits and for other purposes. There were no obligations of any one issuer
exceeding 10% of consolidated shareholders' equity at December 31, 1999. There
were no transfers or sales of held-to-maturity securities during 1999 or 1998.
- --------------------------------------------------------------------------------
81
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note E -- Loans and Allowance for Loan Losses
Loans at December 31 are summarized as follows:
1999 1998
----------- ------------
Commercial:
Commercial, financial and other ......... $17,042,740 $ 14,328,152
Tax-exempt .............................. 690,053 972,603
Retail:
Direct .................................. 1,063,619 1,097,574
Indirect ................................ 3,740,683 3,239,532
Credit card ............................. 4,736,485 6,049,350
Other revolving credit .................. 667,149 536,887
Real estate:
Construction ............................ 2,311,362 2,044,437
Commercial mortgages .................... 7,754,206 6,988,050
Residential mortgages ................... 7,756,983 7,490,086
Lease financing -- net ..................... 2,597,271 1,879,123
Foreign .................................... 1,260,674 1,093,428
----------- ------------
Total loans -- net ...................... $49,621,225 $ 45,719,222
=========== ============
Loans at December 31, 1999 and 1998 that had been placed on nonaccrual were
$204, 098 and $157,118, respectively. Interest income which would have been
recorded pursuant to the original terms of these loans was $38,121 and $16,906
on the preceding dates. Interest income recorded on these loans was $6,653 and
$9,608, respectively.
The Corporation follows Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan." A loan is defined as
impaired when, based on current information and events, it is probable that the
creditor will be unable to collect all amounts of principal and interest due
according to the contractual terms of the loan agreement. Impairment is
measured either by discounting the expected future cash flows at the loan's
effective interest rate, based on the net realizable value of the collateral or
based upon an observable market price where applicable. The following table
summarizes impaired loans and related allowance information at December 31.
1999 1998
-------- --------
Impaired loans with related allowance ............ $139,815 $ 27,366
Impaired loans with no related allowance ......... 9,441 29,249
-------- --------
Total impaired loans ...................... $149,256 $ 56,615
======== ========
Allowance on impaired loans ...................... $ 42,900 $ 7,110
======== ========
The carrying value of impaired loans at December 31, 1999 is net of aggregate
charge-offs of $48,306, of which $38,241 was recorded during 1999.
Year Ended December 31
----------------------------------
1999 1998 1997
-------- ------- -------
Average impaired loans ............. $117,548 $31,026 $47,862
Interest income .................... 2,012 5,942 1,957
Cash-basis interest income ......... 851 2,600 614
At December 31, 1999, the Corporation had no significant outstanding
commitments to lend additional funds to borrowers whose loans have been placed
on nonaccrual.
Changes in the allowance for loan losses for the three years ended December 31
were as follows:
1999 1998 1997
-------- -------- --------
Balance at beginning of year ......... $547,992 $544,723 $519,297
Additions from acquisitions .......... 39 2,613 24,641
Provision for loan losses ............ 298,105 299,480 264,949
Recoveries on loans previously
charged off ........................ 59,936 59,365 57,515
Loans charged off .................... (351,262) (358,189) (321,679)
-------- -------- --------
Balance at end of year ............... $554,810 $547,992 $544,723
======== ======== ========
Loans totaling $14,583, $15,258 and $17,413 were transferred to foreclosed real
estate during 1999, 1998 and 1997, respectively.
It is the policy of the Corporation to review each prospective credit in order
to determine an adequate level of security or collateral to obtain prior to
making the loan. The type of collateral will vary and ranges from liquid assets
to real estate. The Corporation's access to collateral, in the event of
borrower default, is assured through adherence to state lending laws and the
Corporation's lending standards and credit monitoring procedures. The
Corporation regularly monitors its credit concentrations on loan purpose,
industry and customer bases. At year-end, there were no material credit
concentrations within these categories.
The Corporation's subsidiaries have granted loans and extended letters of
credit to certain directors and executive officers of the Corporation and its
subsidiaries and to their associates. The aggregate amount of loans was
$152,904 and $207,462 at December 31, 1999 and 1998, respectively. During 1999,
$178,694 in new loans was made and repayments totaled $223,262. Outstanding
standby letters of credit to related parties totaled $13,536 at December 31,
1998. There were no outstanding standby letters of credit to related parties at
December 31, 1999. Related party loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated persons and do not involve more than
the normal risk of collectibility.
Loans held for sale at December 31 along with activity during the period are
summarized as follows:
1999 1998
---------- ----------
Balance at beginning of year ......... $ 295,817 $ 111,246
Originations/purchases ............... 4,258,957 6,972,491
Sales/transfers ...................... (4,509,589) (6,787,920)
---------- ----------
Balance at end of year ............... $ 45,185 $ 295,817
========== ==========
- --------------------------------------------------------------------------------
82
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note F -- Premises, Equipment and Leases
Premises and equipment at December 31 are summarized as follows:
1999 1998
--------- ---------
Land ........................................ $ 126,442 $ 130,439
Premises .................................... 685,185 651,199
Equipment ................................... 892,165 904,139
Leasehold improvements ...................... 135,765 123,410
--------- ---------
1,839,557 1,809,187
Less accumulated depreciation and
amortization .............................. 885,725 907,506
--------- ---------
Total premises and equipment ......... $ 953,832 $ 901,681
========= =========
The annual minimum rentals under the terms of the Corporation's noncancelable
operating leases as of December 31, 1999 are as follows:
2000 ........................................ $ 64,994
2001 ........................................ 56,699
2002 ........................................ 42,545
2003 ........................................ 35,435
2004 ........................................ 31,031
Thereafter .................................. 129,506
--------
Total minimum lease payments ......... $360,210
========
The net rental expense for all operating leases amounted to $82,377 in 1999,
$70,416 in 1998 and $63,701 in 1997. Certain leases have various renewal
options and require increased rentals under cost of living escalation clauses.
Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was
$146,451, $114,742 and $154,223, respectively.
During 1997, an impairment charge of $67,202, which approximated the carrying
value of certain personal computer hardware and software, was recorded as a
result of the Corporation's plan to implement a company-wide distributed
technology platform for improved employee communication capabilities. The plan
involved the write-down and disposal of these assets.
- --------------------------------------------------------------------------------
Note G -- Credit Arrangements, Short-Term Borrowed Funds and Certificates of
Deposit
At December 31, 1999 and 1998, lines of credit arrangements aggregating
$400,000 were available to the Corporation from unaffiliated banks. Commitment
fees were 8 basis points in 1999 and 1998; compensating balances are not
required. The unused portion of these banking arrangements principally serves
as commercial paper back-up lines. There were no borrowings outstanding under
credit arrangements during 1999 or 1998.
Federal funds purchased and securities sold under repurchase agreements
generally mature within one to four days from the transaction date. Securities
sold under repurchase agreements are delivered to either broker-dealers or to
custodian accounts for customers. The broker-dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
their operations and have agreed to resell to the Corporation identical
securities at the maturity of the agreements. Other borrowed funds consists of
term federal funds purchased, treasury tax and loan deposits and short-term
bank notes and are generally repaid within seven to 120 days from the
transaction date. Information concerning short-term borrowed funds is included
in Table 11 of Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The scheduled maturities of certificates of deposit subsequent to December 31,
1999 are $8,612,888 in 2000, $1,882,092 in 2001, $685,957 in 2002, $253,390 in
2003 and $421,501 thereafter. The remaining maturity of domestic office
certificates of deposit in denominations of $100 or more is $1,221,078, three
months or less; $599,041, over three through six months, $643,985, over six
through twelve months; and $690,650, over twelve months.
- --------------------------------------------------------------------------------
83
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note H -- Long-Term Debt
Long-term debt at December 31 is summarized as follows:
1999 1998
---------- ----------
Wachovia Corporation:
Senior debt:
Senior floating-rate notes due in 2000, net of discount of $93 and $218, respectively .. $ 249,907 $ 249,782
Senior floating-rate notes due in 2001, net of discount of $266 and $416, respectively . 299,734 299,584
6.70% senior notes due in 2004, net of discount of $1,907 .............................. 598,093 ----
6.625% senior notes due in 2006, net of discount of $651 and $725, respectively ........ 199,349 199,275
---------- ----------
Total senior debt ..................................................................... 1,347,083 748,641
Subordinated debt (qualifies for inclusion in the determination of total capital under
the Risk-Based Capital guidelines):
7.0% subordinated debt securities due in 1999, net of discount of $456 ................. ---- 299,544
8.15% subordinated notes due in 2002 ................................................... 150,000 150,000
6.375% subordinated debt securities due in 2003, net of discount of $759 and $968,
respectively ........................................................................... 249,241 249,032
6.8% subordinated notes due in 2005, net of discount of $226 and $260, respectively .... 249,774 249,740
6.25% subordinated notes due in 2008, net of discount of $2,031 and $2,206,
respectively ........................................................................... 347,969 347,793
5.625% subordinated notes due in 2008, net of discount of $2,396 and $2,600,
respectively ........................................................................... 397,604 397,400
6.375% subordinated notes due in 2009, net of discount of $232 and $250, respectively .. 249,768 249,750
6.15% subordinated notes due in 2009, net of discount of $2,445 ........................ 397,555 ----
6.605% subordinated notes due in 2025 .................................................. 250,000 250,000
---------- ----------
Total subordinated debt ............................................................... 2,291,911 2,193,259
Other ................................................................................... 27,024 27,273
---------- ----------
Total Wachovia Corporation ............................................................ 3,666,018 2,969,173
Subsidiaries:
Bank notes, net of discount of $5,641 and $4,970, respectively (a) ...................... 2,353,053 2,856,230
Federal Home Loan Bank borrowings (b) ................................................... 782,989 762,950
Other ................................................................................... 15,459 12,006
---------- ----------
Total subsidiaries .................................................................... 3,151,501 3,631,186
Capital Trusts (qualifies for inclusion in Tier I capital under the Risk-Based Capital
guidelines):
Wachovia Capital Trust I -- 7.64% Capital Securities due in 2027 (c) .................... 300,000 300,000
Wachovia Capital Trust II -- Floating-Rate Capital Securities due in 2027, net of
discount of $2,465 and $2,813, respectively (d) ........................................ 297,535 297,187
Wachovia Capital Trust V -- 7.965% Capital Securities due in 2027 (e) ................... 300,000 300,000
Central Fidelity Capital Trust I -- Floating-Rate Capital Securities due in 2027, net of
discount of $791 and $819, respectively (f) ............................................ 99,209 99,181
---------- ----------
Total Capital Trusts .................................................................. 996,744 996,368
---------- ----------
Total long-term debt .................................................................. $7,814,263 $7,596,727
========== ==========
(a) Wachovia Bank, N.A., has an ongoing bank note program under which the bank
may offer an aggregate principal amount of up to $21.6 billion. The notes
can be issued globally as fixed or floating rate and with maturities
beginning at seven days. Bank notes with original maturities of one year
or less are included in other short-term borrowed funds. Bank notes with
original maturities greater than one year are classified as long-term
debt. Interest rates on long-term notes ranged from 4.9% to 7.0% and 4.9%
to 7.50% with maturities ranging from 2000 to 2039 and 1999 to 2038 at
December 31, 1999 and 1998, respectively. The average rates were 6.07% and
5.64% with average maturities of 3.9 years and 3.5 years at December 31,
1999 and 1998, respectively.
(b) The Federal Home Loan borrowings were issued as fixed or floating rate with
terms of 2 years to 5 years. Interest rates on the borrowings ranged from
5.63% to 7.06% and 5.16% to 7.06% for December 31, 1999 and 1998 and with
maturities ranging from 2000 to 2004 and 1999 to 2003 at December 31, 1999
and 1998, respectively. Borrowings from the Federal Home Loan Bank are
collateralized by qualifying securities and loans.
(c) In December 1996, Wachovia Capital Trust I (WCT I), a wholly owned
subsidiary, issued $300,000 of 7.64% Capital Securities due in 2027. WCT I
invested the proceeds of the Capital Securities, together with $9,280 paid
by the Corporation for WCT I's Common Securities, in $309,280 of the
Corporation's 7.64% Junior Subordinated Deferrable Interest Debentures.
WCT I's sole asset is the Junior Subordinated Deferrable Interest
Debentures which mature in 2027. The Corporation has guaranteed all of WCT
I's obligations under the Capital Securities.
(d) In January 1997, Wachovia Capital Trust II (WCT II), a wholly owned
subsidiary, issued $300,000 Floating-Rate Capital Securities due in 2027.
WCT II invested the proceeds of the Capital Securities, together with
$9,280 paid by the Corporation for WCT II's Common Securities, in
$305,692, net of discount of $3,588, of the Corporation's Floating-Rate
Junior Subordinated Deferrable Interest Debentures. WCT II's sole asset is
the Junior Subordinated Deferrable Interest Debentures which mature in
2027. The Corporation has guaranteed all of WCT II's obligations under the
Capital Securities.
(e) In June 1997, Wachovia Capital Trust V (WCT V), a wholly owned subsidiary,
issued $300,000 of 7.965% Capital Securities due in 2027. WCT V invested
the proceeds of the Capital Securities, together with $9,280 paid by the
Corporation for WCT V's Common Securities, in $309,280 of the
Corporation's 7.965% Junior Subordinated Deferrable Interest Debentures.
WCT V's sole asset is the Junior Subordinated Deferrable Interest
Debentures which mature in 2027. The Corporation has guaranteed all of WCT
V's obligations under the Capital Securities.
(f) In April 1997, Central Fidelity Capital Trust I (CFCT I), a wholly owned
subsidiary, issued $100,000 Floating-Rate Capital Securities due in 2027.
CFCT I invested the proceeds of the Capital Securities, together with
$3,093 paid by the Corporation for CFCT I's Common Securities, in $103,093
of the Corporation's Floating-Rate Junior Subordinated Debt Securities.
CFCT I's sole asset is the Junior Subordinated Debt Securities which
mature in 2027. The Corporation has guaranteed all of CFCT I's obligations
under the Capital Securities.
The principal maturities of long-term debt subsequent to December 31, 1999 are
$912,653 in 2000, $1,385,949 in 2001, $704,272 in 2002, $533,851 in 2003,
$824,036 in 2004 and $3,453,502 thereafter.
- --------------------------------------------------------------------------------
84
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note I -- Capital Stock
At December 31, 1999, 31,844,078 common shares were reserved for the conversion
of notes, issuance for employee benefit plans and the dividend reinvestment
plan, and issuance for pending business combinations.
During 1999, the Corporation repurchased 7,224,000 shares under five separate
stock repurchase authorizations by the Board of Directors. Repurchased shares
were or will be used for various corporate purposes, including the issuance of
shares for purchase business combinations, employee benefit plans and the
dividend reinvestment plan.
The Corporation has one active stock option plan, the restated 1994 Wachovia
Corporation Stock Plan. Under this Plan, up to 2.5% of the Corporation's
outstanding common stock at year-end may be granted to selected key employees
and nonemployee directors in the form of incentive and nonqualified stock
options, stock appreciation rights (SARS), restricted stock awards and
restricted units. Since the inception, a total of 11,514,299 options, 1,793,256
awards and 125,000 SARS have been granted. The Corporation also has several
predecessor plans, the 1989 Plan and plans of merged entities which were
assumed with appropriate conversion of shares under option and option price.
These plans continue to have options outstanding which may be exercised.
The Corporation's stock plans provide for the granting of options or awards for
the purchase or issuance of 18,185,536 shares at 100% of the fair market value
of the stock at the date of the grant. A committee of the Board of Directors
determines such times options and awards shall be granted and exercised and the
term of the exercise period (not to exceed 10 years). The plan awards officers
shares of restricted stock earned contingent upon both a performance
requirement and a five- year period. Additionally, newly elected nonemployee
directors are granted a one-time award of 1,000 shares of restricted stock to
be earned over a three-year period and nonemployee directors are awarded 250
shares of restricted stock annually which are earned over a one-year period.
The cost relating to performance-based stock compensation was $26,177, $15,998
and $9,131 during 1999, 1998 and 1997, respectively.
The following table reflects pro forma net income and earnings per share had
the Company elected to adopt the fair value approach of FASB 123.
1999 1998 1997
----- ----- -----
Net income:
As reported ........... $1,011,221 $874,170 $592,806
Pro forma ............. 995,484 866,883 585,442
Basic earnings per share:
As reported ........... $ 4.99 $ 4.26 $ 2.99
Pro forma ............. 4.91 4.23 2.95
The weighted average fair values of options at their grant date during 1999,
1998 and 1997 were $18.18, $16.46 and $13.29, respectively. The estimated fair
value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted-average of the
assumptions used in the model.
1999 1998 1997
----- ---- ----
Risk-free interest rate ............... 4.87% 5.73% 6.50%
Expected years until exercise ......... 6.50 6.50 6.30
Expected stock volatility ............. 21% 19% 22%
Dividend yield ........................ 3.04% 3.20% 3.31%
Activity in the option and award plans during 1999, 1998 and 1997 is summarized
as follows:
Options and Awards
Outstanding
---------------------------
Available Option Price
for Grant Awards Options Per Share
--------------- ------ ------ -----------------
Balance at December 31,
1996 ..................... 4,556,522 444,007 7,159,156 $ 15.42-47.13
Granted .................. (2,732,191) 243,517 2,488,674 43.56-76.69
Assumed (Jefferson
and 1st United) ........ ---- ---- 217,355 11.10-45.30
Exercised ................ ---- (26,000) (1,477,080) 15.42-45.30
Cancelled ................ (552,633) ---- ---- ----
Authorized ............... 3,794,392 ---- ---- ----
Forfeited ................ 82,075 (1,550) (92,444) 21.69-57.25
------------ ------- ----------
Total December 31,
1997 ..................... 5,148,165 659,974 8,295,661 11.10-76.69
Granted .................. (3,209,626) 364,426 2,845,200 75.00-87.38
Exercised ................ ---- (69,150) (2,159,068) 15.73-75.00
Authorized ............... 3,064,084 ---- ---- ----
Forfeited ................ 72,030 (1,000) (115,150) 33.88-86.50
------------ ------- ----------
Total December 31,
1998 ..................... 5,074,653 954,250 8,866,643 11.10-87.38
Granted .................. (4,243,285) 769,456 3,473,829 79.44-89.19
Assumed (IJL and
OFFITBANK) ............. ---- 352,646 200,662 24.35-65.29
Exercised ................ ---- (80,676) (1,151,761) 11.12-85.88
Authorized ............... 3,984,924 ---- ---- ----
Forfeited ................ 229,015 (18,699) (226,121) 19.75-86.50
------------ ------- ----------
Total December 31,
1999 ..................... 5,045,307 1,976,977 11,163,252 11.10-89.19
============ ========= ==========
The following table summarizes information concerning currently outstanding and
exercisable options.
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------- ------------- ----------- -------- ----------- --------
$ 11.10-30.00 773,551 1.83 $ 24.82 773,551 $ 24.82
30.01-50.00 2,828,368 5.17 37.73 2,198,523 36.75
50.01-70.00 1,535,364 8.08 57.24 598,959 57.15
70.01-89.19 6,025,969 6.66 81.73 782,190 79.42
--------- ---------
11,163,252 4,353,223
========== =========
- --------------------------------------------------------------------------------
85
- ---------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note J -- Off-Balance Sheet Trading and Lending Activities
The Corporation maintains positions in a variety of financial instruments with
off-balance sheet risk to accommodate customers' financing objectives and
management of interest rate and foreign currency risk. The Corporation
maintains active trading positions in foreign exchange forward contracts and
manages credit risk through the establishment of offsetting sell positions, as
well as standard limit and monitoring procedures. The Corporation maintains a
trading portfolio of interest rate swap and option (caps and floors) contracts
and foreign exchange options consisting of generally matched, offsetting
contracts with customer and market counterparties.
Off-balance sheet financial instruments involve, in varying degrees, exposure
to credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The Corporation follows the same credit
policies and careful underwriting practices in making commitments and
conditional obligations as it does for on-balance sheet instruments. In those
instances where collateral is necessary to support financial instrument credit
risk, the Corporation assures its ability to access borrower's collateral, in
the event of default, through strict adherence to corporate lending policy and
applicable state lending laws.
Derivative Financial Instruments Held or Issued for Trading Purposes -- The
amounts disclosed below represent the year-end notional and fair value of
derivative financial instruments held or issued for trading purposes and the
average fair value during the year. Notional principal amounts are often used
to express the volume of these transactions but do not represent the much
smaller amounts potentially subject to credit risk. The Corporation's credit
exposure to off-balance sheet derivative financial instruments is represented
by the fair value gain of the instrument if a counterparty fails to perform.
Options written do not expose the Corporation to credit risk, except to the
extent of the underlying risk in the debt instrument that the Corporation may
be obligated to acquire under certain written put options. The present value of
purchased caps and floors in a gain position represents the Corporation's
potential credit exposure.
The Corporation controls the credit risk of these instruments through adherence
to credit approval policies, monetary limits and monitoring procedures.
Entering into interest rate swap agreements involves not only credit risk but
also interest rate and foreign currency risk associated with unmatched
positions. The Corporation controls the interest rate and foreign currency risk
inherent in the derivative trading portfolio by entering into offsetting
positions or by using other hedging techniques. Risks are further mitigated for
those instruments that trade on organized exchanges, as the exchanges provide
oversight and determine who may buy and sell such instruments.
Interest Rate Swaps -- These transactions generally involve the exchange of
fixed- and floating-rate payments without the exchange of the underlying
principal amounts. Payments made or received under swap contracts are accrued
based on contractual terms and are reported as other operating income. The
related accrued amounts receivable or payable to customers or counterparties
are included in other assets or liabilities. Revenues from the customer
portfolio represent a small profit margin on intermediated transactions. The
difference in the fair value of the offsetting contracts is not material.
At December 31, 1999, the weighted average maturity of pay-fixed swaps and
receive-fixed swaps held in the customer portfolio was 3.72 years. Under
pay-fixed swap agreements, the Corporation paid interest at a weighted average
fixed rate of 5.74% and received interest at a weighted average floating rate
of 6.18% (based on year-end rates). Under receive-fixed swap agreements, the
Corporation received interest at a weighted average fixed rate of 6.16% and
paid interest at a weighted average floating rate of 6.52% (based on year-end
rates).
Interest Rate Caps and Floors -- These instruments are written by the
Corporation to enable its customers to transfer, modify or reduce their
interest rate risk exposure. In a cap or floor contract, the purchaser pays a
premium at the initiation of the contract for the right to receive payments if
market interest rates are greater than the strike price of a cap or less than
the strike price of a floor. Payments made or received under cap or floor
contracts are accrued based on contractual terms and are reported as other
operating income.
1999
-----------------------------------------------------
Notional Fair Value Fair Value Average Fair
Value Gains (Losses) Value
----------- ----------- ---------- ------------
U.S. dollar interest rate contracts as
intermediary:
Interest rate swaps-pay fixed ............... $8,240,207 $204,572 $(16,759) $ 172
Interest rate swaps-pay floating ............ 8,038,233 11,850 (136,278) (64)
Interest rate caps and floors written ....... 2,009,209 6,138 (33,566) (523)
Interest rate caps and floors purchased ..... 1,698,451 10,089 (11,927) 319
Securities trading activities:
Commitments to purchase securities,
futures and forward contracts .............. 38,850 2 (24) 24
Commitments to sell securities, futures
and forward contracts ...................... 74,141 654 ---- 160
Foreign exchange trading activities:
Commitments to purchase foreign
exchange ................................... 2,888,413 13,708 (32,731) (5,683)
Commitments to sell foreign exchange ........ 1,571,906 37,119 (10,482) 10,940
Foreign exchange options written ............ 34,960 416 (365) 24
Foreign exchange options purchased .......... 35,023 576 (551) 9
1998
----------------------------------------------------
Notional Fair Value Fair Value Average Fair
Value Gains (Losses) Value
----------- ---------- ---------- ------------
U.S. dollar interest rate contracts as
intermediary:
Interest rate swaps-pay fixed ............... $6,101,212 $40,948 ($104,107) $(109)
Interest rate swaps-pay floating ............ 6,769,599 120,699 (30,715) 155
Interest rate caps and floors written ....... 2,551,837 2,374 ---- 44
Interest rate caps and floors purchased ..... 2,606,271 ---- (2,372) (44)
Securities trading activities:
Commitments to purchase securities,
futures and forward contracts .............. 55,769 47 (128) 859
Commitments to sell securities, futures
and forward contracts ...................... 98,957 346 (16) (718)
Foreign exchange trading activities:
Commitments to purchase foreign
exchange ................................... 1,689,837 36,656 (1,185) 3,676
Commitments to sell foreign exchange ........ 1,336,800 5,542 (37,906) 2,383
Foreign exchange options written ............ 28,972 527 (497) 21
Foreign exchange options purchased .......... 28,972 ---- ---- 2
86
- ---------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note J -- Off-Balance Sheet Trading and Lending Activities -- Concluded
Commitments to Purchase and Sell Securities, Futures and Forward Contracts --
These instruments are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to deliver a specified instrument
at a specified price or yield at a specified date. Commitments to purchase and
sell securities, futures and forward contracts used in securities trading
operations are recognized currently at market value and are reported as trading
account profits (losses).
Net Options Written to Purchase and Sell Foreign Exchange -- Forward
commitments involve the purchase or sale of foreign currency amounts for
delivery at a specified future date. Payments on forward commitments are
exchanged on the delivery date based on the exchange rate in the contract.
Forward commitments to purchase and sell foreign exchange are recognized at
market value and are reported as other operating income.
Foreign Exchange Options -- These agreements represent rights to purchase or
sell foreign currency at a predetermined price at a future date. The purchaser
pays a premium at the initiation of the contract for the right to exchange a
specified amount at the contract's exchange rate at the maturity of the option.
Revenues from the derivative trading portfolio are shown below.
1999 1998 1997
------- ------- -------
Interest rate contracts .... $19,004 $ 19,406 $ 8,020
Securities activities ...... 2,261 (2,304) (3,035)
Foreign exchange activities 19,694 20,054 11,283
-------- --------- ---------
Total ................. $40,959 $ 37,156 $ 16,268
======== ========= =========
Off-Balance Sheet Financial Instruments Issued for Lending Activities -- The
Corporation issues off-balance sheet financial instruments as part of its
commercial and consumer lending activities. The contract amounts of these
instruments represent potential credit risk at December 31 as shown below:
1999 1998
----------- -----------
Commercial and consumer lending
activities:
Unfunded commitments to extend
credit ............................ $56,408,734 $53,178,254
Standby letters of credit ........... 9,564,012 9,062,050
Commercial and similar letters of
credit ............................ 146,523 214,086
Participations in bankers'
acceptances ....................... 4,950 5,240
Commitments to Extend Credit -- These are legally binding contracts to lend to
a customer, provided there is no contract violation. These commitments have
fixed termination dates and generally require payment of a fee. As most
commitments expire prior to being drawn, the amounts shown do not necessarily
represent the future cash requirements of the contracts. Creditworthiness is
evaluated and in some instances collateral is obtained to support the
borrowing. At December 31, 1999 and 1998, approximately 18% and 16%,
respectively, of unfunded commitments to extend credit were supported by
collateral. Of the total unfunded commitment amounts presented, approximately
23% in 1999 and 1998 were comprised of cancelable credit card commitments, and
approximately 11% in 1999 and 10% in 1998 were represented by real estate
commitments.
Standby, Commercial and Similar Letters of Credit -- These instruments are
conditional commitments issued by the Corporation guaranteeing the performance
of a customer to a third party. These guarantees are issued primarily to
support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
credit to customers and is subject to the Corporation's underwriting process.
At December 31, 1999 and 1998, approximately 5% and 3%, respectively, of these
instruments were supported by collateral. There were no significant
concentrations of letters of credit to any one group of borrowers at either
year-end.
Participation in Bankers' Acceptances -- These instruments represent risk
participation in time drafts drawn by customers under a committed multibank
credit facility. These drafts have been accepted and remarketed by other
financial institutions. Under the terms of these arrangements, the Corporation
may be required to reimburse the accepting financial institution for the
Corporation's pro rata share of any payment default by the customer.
- --------------------------------------------------------------------------------
Note K -- Off-Balance Sheet Risk Management Activities The Corporation uses a
variety of off-balance sheet financial instruments as part of its overall
interest rate risk management process. The Corporation's principal objective of
asset/liability management activities is to provide maximum levels of net
interest income while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the Corporation's funding needs. Accordingly,
the Corporation uses a combination of derivative financial instruments,
including interest rate swaps, futures and options with indices that correlate
to on-balance sheet instruments to modify the repricing characteristics of
interest-earning assets and interest-bearing liabilities.
The amounts disclosed in the following table represent the year-end notional
and fair value of derivative financial instruments held for risk management
purposes. The Corporation's credit exposure to off-balance sheet derivative
financial instruments is represented by the fair value gain of the instrument
if a counterparty fails to perform. There were no deferred gains or losses
resulting from terminated swap contracts at December 31, 1999 and 1998.
87
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note K -- Off-Balance Sheet Risk Management Activities -- Concluded
1999
-----------------------------------
Notional Fair Value Fair Value
Value Gains (Losses)
---------- --------- ------------
Convert floating-rate liabilities to fixed:
Swaps-pay fixed/receive floating .......................... $ 300,000 $ 4,997 $ ----
Convert fixed-rate assets to floating:
Swaps-pay fixed/receive floating .......................... 538,427 13,564 (4,515)
Forward starting swaps-pay fixed/receive floating ......... ---- ---- ----
Forward starting swaps-pay floating/receive fixed ......... 72,468 ---- (7,633)
Convert fixed-rate liabilities to floating:
Swaps-receive fixed/pay floating .......................... 3,100,000 842 (144,128)
Convert liabilities with quarterly rate resets to monthly:
Swaps-receive floating/pay floating ....................... 300,000 28 ----
Convert floating-rate assets to fixed:
Swaps-receive fixed/pay floating .......................... 256,383 779 (2,641)
------------ ------- ----------
Total interest rate swaps and options ................... 4,567,278 20,210 (158,917)
Credit derivatives ......................................... ---- ---- ----
------------ ------- ----------
Total derivatives ....................................... $4,567,278 $20,210 ($ 158,917)
============ ======= ----------
1998
------------------------------------
Notional Fair Value Fair Value
Value Gains (Losses)
---------- -------- ---------
Convert floating-rate liabilities to fixed:
Swaps-pay fixed/receive floating .......................... $ 665,592 $ 1,049 $(7,341)
Convert fixed-rate assets to floating:
Swaps-pay fixed/receive floating .......................... 329,825 ---- (14,437)
Forward starting swaps-pay fixed/receive floating ......... 200,000 ---- (257)
Forward starting swaps-pay floating/receive fixed ......... ---- ---- ----
Convert fixed-rate liabilities to floating:
Swaps-receive fixed/pay floating .......................... 2,100,000 134,960 (2,220)
Convert liabilities with quarterly rate resets to monthly:
Swaps-receive floating/pay floating ....................... 300,000 ---- (208)
Convert floating-rate assets to fixed:
Swaps-receive fixed/pay floating .......................... 456,896 8,768 (87)
---------- -------- ---------
Total interest rate swaps and options ................... 4,052,313 144,777 (24,550)
Credit derivatives ......................................... 1,500,000 387 ----
---------- -------- ---------
Total derivatives ....................................... $5,552,313 $145,164 ($ 24,550)
========== ======== =========
- --------------------------------------------------------------------------------
Note L -- Income Taxes
The provision for income taxes is summarized below.
1999 1998 1997
-------- -------- --------
Current:
Federal ........................... $115,593 $145,058 $233,618
Foreign ........................... 1,275 686 594
State and local ................... 30,982 17,416 6,932
-------- -------- --------
Total current ................ 147,850 163,160 241,144
Deferred:
Federal ........................... 364,181 251,902 23,453
State ............................. 19,121 14,549 11,716
-------- -------- --------
Total deferred ............... 383,302 266,451 35,169
-------- -------- --------
Total income tax expense ..... $531,152 $429,611 $276,313
======== ======== ========
The reasons for the difference between consolidated income tax expense and the
amount computed by applying the statutory federal income tax rate of 35% to
income before taxes were as follows:
1999 1998 1997
---------- ---------- --------
Income before income taxes .......... $1,542,373 $1,303,781 $ 869,119
=========== =========== ==========
Federal income taxes at statutory
rate .............................. $ 539,830 $ 456,324 $ 304,192
State and local income taxes, net
of federal benefit ................ 32,567 20,778 12,121
Effect of tax-exempt securities
interest and other income ......... (47,116) (51,499) (42,031)
Other items ......................... 5,871 4,008 2,031
----------- ----------- ----------
Total income tax expense ..... $ 531,152 $ 429,611 $ 276,313
=========== =========== ==========
Significant components of the Corporation's deferred tax assets and
liabilities, which are included in other liabilities, at December 31 are as
follows:
Deferred Tax Assets
----------------------
1999 1998
-------- --------
Allowance for loan losses ................ $211,363 $200,546
Employee compensation and retirement
benefits .............................. 103,361 76,702
Unrealized losses on securities available-
for-sale .............................. 45,450 ----
Other .................................... 23,217 37,867
-------- --------
Gross deferred tax assets ......... $383,391 $315,115
======== ========
Deferred Tax Liabilities
--------------------------
1999 1998
--------- ---------
Unrealized gains on securities available-
for-sale ................................... $ ---- $50,719
Depreciation ................................. 40,248 29,279
Lease financing .............................. 798,191 433,753
Accretion of discounts on securities ......... 16,519 19,928
Identifiable intangibles ..................... 12,855 17,459
Other ........................................ 47,159 34,372
--------- ---------
Gross deferred tax liabilities ......... $914,972 $585,510
========= =========
Net deferred tax liability ............. ($531,581) ($270,395)
========= =========
- --------------------------------------------------------------------------------
88
- ---------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ IN THOUSANDS Wachovia Corporation and Subsidiaries
Note M -- Cash, Dividend, Loan Restrictions, Capital Ratios and Contingent
Liabilities
In the normal course of business, the Corporation and its subsidiaries enter
into agreements, or are subject to regulatory requirements, that result in
cash, debt and dividend restrictions. A summary of the most restrictive items
follows.
The Corporation's banking subsidiaries are required to maintain average reserve
balances with the Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1999 was approximately $207,692.
Under current Federal Reserve regulations, the banking subsidiaries also are
limited in the amount they may loan to their affiliates, including the
Corporation. Loans to a single affiliate may not exceed 10% and loans to all
affiliates may not exceed 20% of the bank's capital, surplus and undivided
profits plus the allowance for loan losses. Based on these limitations,
approximately $807,631 was available for loans to the Corporation at December
31, 1999.
The approval of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds the bank's
net profits, as defined, for that year combined with its retained net profits
for the preceding two calendar years. Under this formula, the banking
subsidiaries cannot distribute as dividends to the Corporation in 2000, without
the approval of the Comptroller of the Currency, more than $581,060 plus an
additional amount equal to the banks' retained net profits for 2000 up to the
date of any dividend declaration.
As a result of the above dividend and loan restrictions, approximately
$4,634,461 of consolidated net assets of the Corporation's banking subsidiaries
at December 31, 1999 was restricted from transfer to the Corporation in the
form of cash dividends, loans or advances.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under the
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can initiate
certain mandatory, and possible discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements.
The Corporation and its banking subsidiaries are required to maintain minimum
Tier I capital, total risk-based capital and Tier I leverage ratios of 4%, 8%
and 3%, respectively. The Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
At December 31, 1999, the most recent notification from the Comptroller of the
Currency categorized the Corporation's banking subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be well
capitalized, the banking subsidiaries must maintain minimum Tier I capital,
total risk-based capital, and Tier I leverage ratios of 6%, 10% and 5%,
respectively. There are no conditions or events since that notification that
management believes have changed the banking subsidiaries' well capitalized
status.
The actual capital amounts and ratios for the Corporation at December 31, 1999
are presented in the following table:
1999 1998
----------------------- ---------------------
Amount Ratio Amount Ratio
---------- ------- ---------- -----
Wachovia
Corporation
Tier I capital ....... $5,795,946 7.52% $5,585,488 7.99%
Total risk-based
capital ............ 8,458,090 10.98 7,927,628 11.34
Tier I leverage ...... 5,795,946 8.77 5,585,488 8.67
Wachovia Bank, N.A.
Tier I capital ....... 5,458,716 7.33 5,097,196 7.46
Total risk-based
capital ............ 8,191,453 11.00 7,749,905 11.34
Tier I leverage ...... 5,458,716 8.69 5,097,196 8.28
The Corporation, in the normal course of business, is subject to various
pending or threatened lawsuits in which claims for monetary damages are
asserted. Although it is not possible for the Corporation to predict the
outcome of these lawsuits or the range of any possible loss, management, after
consultation with legal counsel, does not anticipate that the ultimate
aggregate liability, if any, arising from these lawsuits will have a material
adverse effect on the Corporation's financial position or operating results.
- --------------------------------------------------------------------------------
Note N -- Pension and Other Postretirement Benefits The Corporation maintains
several defined benefit pension plans, the first of which covers substantially
all employees (the Qualified Plan). The Qualified Plan provides pension
benefits that are based upon the employee's length of credited service and
final average compensation as defined in the plan. The pension expense of the
Qualified Plan is determined using the projected unit credit method. The
Corporation's policy is to fund amounts allowable for federal income tax
purposes. The Corporation also sponsors separate unfunded nonqualified pension
plans that provide certain officers with defined pension benefits in excess of
limits imposed on qualified plans by federal tax law and for certain
compensation not covered in the qualified plans.
The Corporation and its subsidiaries provide certain health care benefits for
retired employees. Substantially all of the employees may become eligible for
these benefits if they reach normal retirement age while working for the
Corporation or its subsidiaries. The benefits are provided through self-insured
plans administered by insurance companies whose premiums are based on the
claims paid during the year.
The following table sets forth the changes in the projected benefit obligations
and the fair value of plan assets for the Corporation's defined benefit pension
plans and health care benefits provided for retired employees and the amounts
recognized in the Consolidated Statements of Condition at December 31.
89
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note N -- Pension and Other Postretirement Benefits -- Continued
Pension Benefits Other Benefits
------------------------------ ------------------------
1999 1998 1999 1998
------------ ----- ---------- ------
Change in benefit obligation:
Projected benefit obligation at beginning of year ......... $858,601 $754,739 $ 76,059 $ 85,652
Service cost .............................................. 37,346 31,933 1,555 1,396
Interest cost ............................................. 61,407 54,963 5,488 5,573
Actuarial gain ............................................ (91,717) 34,414 (6,767) (2,769)
Benefits paid ............................................. (38,322) (31,928) (5,715) (6,046)
Plan change ............................................... 921 14,480 ---- (7,747)
------------ --------- ---------- ---------
Projected benefit obligation at end of year ............... $828,236 $858,601 $ 70,620 $ 76,059
============ ========= ========== =========
Change in plan assets:
Fair value of plan assets at beginning of year ............ $827,310 $742,203 $ 13,530 $ 12,170
Actual return on plan assets .............................. 117,556 113,372 1,417 1,361
Employer contributions .................................... 4,297 3,663 5,715 ----
Benefits paid ............................................. (38,322) (31,928) (5,715) ----
------------ --------- ---------- ---------
Fair value of plan assets at end of year .................. $910,841 $827,310 $ 14,947 $ 13,531
============ ========= ========== =========
Accrued benefit cost:
Funded status ............................................. $ 82,605 $(31,291) ($55,673) ($ 62,528)
Unrecognized transition (asset) liability ................. (16,747) (22,332) 51,736 55,716
Unrecognized prior service cost ........................... 16,479 16,094 (6,103) (6,612)
Unrecognized net (gain) loss .............................. (125,889) 13,805 (19,893) (11,185)
------------ --------- ---------- ---------
Accrued benefit cost ...................................... $(43,552) $(23,724) ($29,933) ($ 24,609)
============ ========= ========== =========
Weighted-average assumptions as of December 31:
Discount rate ............................................. 8.00% 7.00% 8.00% 7.00%
Expected return on plan assets ............................ 9.00% 9.00% 7.00% 7.00%
6% through 2005, 6% through 2001,
Rate of compensation increase ............................. 5% thereafter 5% thereafter 6.00% 6.00%
Assumed rate of increase in health care costs:
Retirees under age 65 .................................... ---- ---- 8.00% 8.00%
Retirees over age 65 ..................................... ---- ---- 6.00% 6.00%
The rate of increase in health care costs is assumed to remain constant for
each category of retirees. Included in plan assets at December 31, 1999 were
130,626 shares of Wachovia Corporation common stock with a market value of
$8,883. Dividends of $269 were paid on those shares in 1999.
Pension Benefits Other Benefits
------------------------------------------ ---------------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- --------
Components of net periodic benefit cost:
Service cost ........................... $37,346 $31,933 $24,660 $ 1,556 $ 1,396 $ 2,407
Interest cost .......................... 61,407 54,963 46,626 5,488 5,573 5,718
Expected return on plan assets ......... (73,438) (63,050) (50,821) (947) (852) (895)
Amortization of unrecognized amounts:
Transition (asset) liability ........... (5,585) (5,585) (5,297) 3,980 3,980 3,980
Prior service cost ..................... 536 537 (1,532) (509) (509) 57
Net actuarial loss (gain) .............. 3,235 2,132 1,360 (36) (262) (484)
------- ------- ------- ------- -------- ---------
Benefit cost ............................ $23,501 $20,930 $14,996 $ 9,532 $ 9,326 $ 10,783
======= ======= ======= ======= ======== =========
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
1 Percentage 1 Percentage
Point Point
Increase Decrease
------------ ------------
Effect on total of service and interest
cost components in 2000 ............. $ 159 $ 141
Effect on post retirement benefit
obligation as of December 31,
1999 ................................ $2,275 $2,014
The projected benefit obligation and accumulated benefit obligation for
pension plans with accumulated benefit obligations in excess of plan assets
were $126,423 and $101,049, respectively, at December 31, 1999 and $114,577
and $89,857, respectively, at December 31, 1998. Those plans were unfunded at
December 31, 1999 and 1998.
The Corporation also provides supplemental benefits to substantially all
employees through defined contribution plans designed to encourage
participants to save on a regular basis and to provide such
90
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ IN THOUSANDS Wachovia Corporation and Subsidiaries
Note N -- Pension and Other Postretirement Benefits -- Concluded
participants with deferred compensation and additional performance incentive.
Total expense relating to these plans, which represented the Corporation's
matching and discretionary contributions, was $31,585 in 1999, $23,473 in 1998
and $25,969 in 1997. Employee participants may elect to contribute from 1% to
15% of base salary. The Corporation matches 100% of each participant's
contribution up to the first 3% of base salary and 50% of each participant's
remaining contribution up to 6% of base salary with a maximum employer
contribution of 4.5% of base salary. The plans provide for additional
contributions of up to 1.5% of salary in accordance with a pre-established
formula based on certain earnings performance criteria and also for special
discretionary employer contributions of up to 4% of each eligible employee's
base salary as approved annually by the Board of Directors.
- --------------------------------------------------------------------------------
Note O -- Selected Income Statement Information
The components of other operating income and expense for the three years ended
December 31 were as follows:
1999 1998 1997
-------- -------- --------
Other operating income:
Bankers' acceptance and letter of credit fees ............. $ 46,037 $ 39,025 $ 34,526
Other service charges and fees ............................ 79,893 54,726 51,916
Other income .............................................. 114,952 117,487 84,316
-------- -------- --------
Total other operating income ............................ $240,882 $211,238 $170,758
======== ======== ========
Other operating expense:
Postage and delivery ...................................... $ 55,410 $ 52,981 $ 48,657
Outside data processing, programming and software ......... 102,773 64,450 83,418
Stationery and supplies ................................... 35,939 34,767 30,960
Advertising and sales promotion ........................... 66,468 71,257 73,193
Professional services ..................................... 75,002 56,066 54,113
Travel and business promotion ............................. 33,944 29,254 25,215
Telecommunications ........................................ 58,088 54,467 43,420
Amortization of intangible assets ......................... 50,879 39,091 13,308
Foreclosed property expense ............................... (853) 571 1,875
Other expense ............................................. 184,036 161,120 143,427
-------- -------- --------
Total other operating expense ........................... $661,686 $564,024 $517,586
======== ======== ========
- --------------------------------------------------------------------------------
Note P -- Earnings Per Share
Year Ended December 31
------------------------------------------
1999 1998 1997
---------- ---- ----
Basic (thousands, except per share)
Average common shares outstanding .............................. 202,795 205,058 198,290
========== ======= =======
Net income ..................................................... $1,011,221 $874,170 $592,806
========== ======== ========
Per share amount ............................................... $ 4.99 $ 4.26 $ 2.99
Diluted (thousands, except per share)
Average common shares outstanding .............................. 202,795 205,058 198,290
Dilutive common stock options at average market price .......... 2,976 3,778 3,394
Dilutive common stock awards at average market price ........... 397 300 210
Convertible long-term debt assumed converted ................... 24 17 7
---------- -------- --------
Average diluted shares outstanding ............................. 206,192 209,153 201,901
========== ======== ========
Net income ..................................................... $1,011,221 $874,170 $592,806
Add interest on convertible long-term debt, net of tax ......... 71 48 6
---------- -------- --------
Adjusted net income ............................................ $1,011,292 $874,218 $592,812
========== ======== ========
Per share amount ............................................... $ 4.90 $ 4.18 $ 2.94
- --------------------------------------------------------------------------------
91
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note Q -- Fair Value of Financial Instruments
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rates
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. Also, the fair
value estimates presented are based on pertinent information available to
management as of December 31, 1999 and 1998. Such amounts have not been
comprehensively revalued for purposes of these financial statements since those
dates and therefore, current estimates of fair value may differ significantly
from the amounts presented.
Trading Account Assets -- Fair values are based on quoted market prices as
recognized in the statements of condition.
Securities -- Fair values are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using market prices for similar
securities.
Loans -- For credit card, equity lines and other loans with short-term or
variable rate characteristics, the carrying value reduced by an estimate of
credit losses inherent in the portfolio is a reasonable estimate of fair value.
The fair value of all other loans is estimated by discounting their future cash
flows using interest rates currently being offered for loans with similar
terms, reduced by an estimate of credit losses inherent in the portfolio. The
discount rates used are commensurate with the interest rate and prepayment
risks involved for the various types of loans.
Deposits -- The fair values disclosed for demand deposits (e.g., interest- and
noninterest-bearing demand, savings and money market savings) are equal to the
amounts payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated monthly maturities.
Long-Term Debt -- Fair values are estimated using discounted cash flow
analyses, based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
Many of the Corporation's assets and liabilities are short-term financial
instruments whose carrying amounts reported in the statements of condition
approximate fair value. These items include cash and due from banks,
interest-bearing bank balances, federal funds sold and securities purchased
under resale agreements, due from customers on acceptances, short-term borrowed
funds, acceptances outstanding, and the financial instruments included in other
assets and liabilities. The following summarizes estimated fair values of the
Corporation's remaining on-balance sheet financial instruments as of December
31.
1999
-----------------------------
Carrying Estimated
Value Fair Value
------------ -------------
Financial assets:
Trading account assets ......... $ 870,304 $ 870,304
Securities ..................... 8,144,514 8,156,940
Loans, net of allowance for loan
losses ....................... 49,066,415 49,085,271
Financial liabilities:
Deposits ....................... 41,786,418 41,846,589
Long-term debt ................. 7,814,263 7,819,811
1998
-----------------------------
Carrying Estimated
Value Fair Value
---------- -------------
Financial assets:
Trading account assets ......... $ 664,812 $ 664,812
Securities ..................... 9,367,255 9,425,774
Loans, net of allowance for loan
losses ....................... 45,171,230 45,465,075
Financial liabilities:
Deposits ....................... 40,994,729 41,156,155
Long-term debt ................. 7,596,727 7,895,996
Off-Balance Sheet Instruments -- Fair values are based on fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' credit standing for loan
commitments and letters of credit, and the estimated amount the Corporation
would receive or pay to terminate or replace the contract at current market
rates for the remainder of the off-balance sheet instruments. See Notes J and K
for additional information about off-balance sheet financial instruments.
The estimated fair values of the Corporation's off-balance sheet financial
instruments as of December 31 are summarized below. The amounts for commitments
and letters of credit are presented as negative in order to represent the
approximate cost the Corporation would incur to pay third parties to assume
these commitments. Interest rate contracts and other off-balance sheet
financial instruments represent the net fair value gain or loss of the
contracts.
1999 1998
Estimated Estimated
Fair Value Fair Value
------------ -------------
Unfunded commitments to extend credit ......... $(76,770) $(76,894)
Letters of credit ............................. (69,921) (66,434)
Interest rate contracts issued for trading
purposes ................................... 34,119 26,827
Interest rate contracts held for purposes
other than trading ......................... (138,707) 120,614
Other off-balance sheet financial
instruments issued or held for trading or
lending purposes ........................... 8,322 3,386
This presentation excludes certain financial instruments and all nonfinancial
instruments. The disclosures exclude all nonfinancial instruments such as
customer relationships, deposit base intangibles and goodwill. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Corporation.
- --------------------------------------------------------------------------------
92
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements -- Concluded
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note R -- Wachovia Corporation (Parent Company Only) Information
The following is a condensed statement of financial condition of the parent
company at December 31.
1999 1998
----------- ------------
Assets
- ------------------------------------------
Cash on demand deposit with bank
subsidiary ............................. $ 669 $ 520
Interest-bearing bank balances with
bank subsidiaries ...................... 1,269,354 1,041,471
Securities ............................... 170,856 130,829
Demand loans to nonbank subsidiaries ..... 1,243,252 779,035
Notes receivable from subsidiaries ....... 2,456,455 2,521,540
Investments in:
Bank subsidiaries ...................... 6,023,150 5,827,743
Nonbank subsidiaries ................... 731,090 293,923
Other assets ............................. 211,670 191,817
----------- ------------
Total assets ...................... $12,106,496 $ 10,786,878
=========== ============
Liabilities and Shareholders' Equity
- -------------------------------------------
Parent company commercial paper .......... $ 1,658,988 $ 1,359,382
Subordinated notes payable to nonbank
subsidiaries ........................... 1,027,600 1,031,023
Long-term debt ........................... 3,666,018 2,969,173
Demand loans from bank subsidiary ........ 18,015 18,015
Other liabilities ........................ 77,418 71,053
Shareholders' equity ..................... 5,658,457 5,338,232
----------- ------------
Total liabilities and shareholders'
equity .......................... $12,106,496 $ 10,786,878
=========== ============
The operating results of the parent company for the three years ended December
31 are shown below.
1999 1998 1997
---------- -------- --------
Income
- ---------------------------------------
Dividends from:
Bank subsidiaries ................... $ 617,800 $562,000 $658,800
Nonbank subsidiaries ................ 77,000 ---- 11,060
Interest from subsidiaries ............ 301,576 222,956 184,476
Other interest income ................. 12,840 7,997 15,320
Other income .......................... 33,317 57,387 34,012
----------- -------- --------
Total income ................... 1,042,533 850,340 903,668
Expense
- ----------------------------------------
Interest on short-term borrowed
funds ............................... 69,619 64,086 39,566
Interest on long-term debt ............ 297,646 197,944 169,192
Interest paid to subsidiaries ......... 1,354 1,746 22,354
Other expense ......................... 33,714 47,858 50,655
----------- -------- --------
Total expense .................. 402,333 311,634 281,767
Income before income tax
benefit and equity in
undistributed net income
(excess dividends) of
subsidiaries ........................ 640,200 538,706 621,901
Income tax benefit .................... (19,801) (14,259) (16,519)
----------- -------- --------
Income before equity in
undistributed net income
(excess dividends) of
subsidiaries ........................ 660,001 552,965 638,420
Equity in undistributed net
income (excess dividends) of
subsidiaries ........................ 351,220 321,205 (45,614)
----------- -------- --------
Net income ..................... $1,011,221 $874,170 $592,806
=========== ======== ========
The cash flows of the parent company for the three years ended December 31,
were as follows:
1999 1998 1997
---------- ---------- --------
Operating Activities
- ----------------------------------
Net income ....................... $1,011,221 $ 874,170 $592,806
Other, net ....................... 21,648 52,802 23,830
Equity in excess dividends
(undistributed net income)
of subsidiaries ................ (351,220) (321,205) 45,614
---------- ---------- --------
Net cash provided by
operations .................. 681,649 605,767 662,250
Investing Activities
- -----------------------------------
Net (increase) decrease in
interest-bearing bank
balances ....................... (227,883) (184,968) 315,194
Purchases of securities .......... (76,433) (105,763) (17,097)
Sales, calls, prepayments and
maturities of securities ....... 38,371 38,257 349,052
Net (increase) decrease in
demand loans to nonbank
subsidiaries ................... (464,217) 214,038 (559,130)
Notes issued to subsidiaries ..... (213,733) (1,015,908) (550,000)
Notes repaid by subsidiaries ..... 300,103 908 ----
Net (increase) decrease in
other assets ................... (18,810) (22,318) (5,154)
Equity investment in
subsidiaries ................... (3,780) (249,001) (45,956)
---------- ---------- --------
Net cash used by investing
activities .................. (666,382) (1,324,755) (513,091)
Financing Activities
- -----------------------------------
Net (decrease) increase in
loans and notes from
subsidiaries ................... (3,810) (50,474) 355,340
Net increase in commercial
paper .......................... 299,606 325,358 327,648
Proceeds from long-term
debt ........................... 993,359 1,288,859 ----
Maturities and repayments of
long-term debt ................. (318,115) ---- ----
Issuance of stock ................ 59,478 80,375 59,281
Dividend payments ................ (418,447) (381,798) (327,303)
Common stock repurchased ......... (634,623) (531,122) (537,855)
Increase (decrease) in other
liabilities .................... 7,434 (18,658) (19,346)
---------- ---------- --------
Net cash (used) provided
by financing activities ..... (15,118) 712,540 (142,235)
---------- ---------- --------
Increase (decrease) in cash ...... 149 (6,448) 6,924
Cash at beginning of year ........ 520 6,968 44
---------- ---------- --------
Cash at end of year .............. $ 669 $ 520 $ 6,968
========== ========== ========
Noncash investing and
financing activities:
Common stock issued on
conversion of long-term
debt ........................... $ 250 $ ---- $ 70
The principal maturities of the parent company's long-term debt subsequent to
December 31, 1999 are $249,907 in 2000, $325,331 in 2001, $151,427 in 2002,
$249,240 in 2003, $598,093 in 2004 and $3,119,620 thereafter.
93
- --------------------------------
Consolidated Average Balances
- --------------------------------------------------------------------------------
thousands Wachovia Corporation and Subsidiaries
1999 1998
Amount % Amount %
Assets
Loans -- net of unearned income:
Commercial ................................................................. $15,750,629 24.1 $14,023,069 21.9
Tax-exempt ................................................................. 807,957 1.2 1,218,909 1.9
------------ ----- ------------ -----
Total commercial ........................................................ 16,558,586 25.3 15,241,978 23.8
Direct retail .............................................................. 1,064,215 1.6 1,143,392 1.8
Indirect retail ............................................................ 3,481,534 5.3 3,090,938 4.8
Credit card ................................................................ 5,040,279 7.7 5,680,171 8.9
Other revolving credit ..................................................... 589,173 .9 497,681 .8
------------ ----- ------------ -----
Total retail ............................................................ 10,175,201 15.5 10,412,182 16.3
Construction ............................................................... 2,193,339 3.4 1,892,817 3.0
Commercial mortgages ....................................................... 7,323,451 11.2 6,812,786 10.6
Residential mortgages ...................................................... 7,421,270 11.3 7,808,436 12.2
------------ ----- ------------ -----
Total real estate ....................................................... 16,938,060 25.9 16,514,039 25.8
Lease financing ............................................................ 2,265,797 3.5 1,428,872 2.2
Foreign .................................................................... 1,284,883 2.0 803,644 1.3
------------ ----- ------------ -----
Total loans ............................................................. 47,222,527 72.2 44,400,715 69.4
Securities:
Held-to-maturity:
State and municipal ....................................................... 168,132 .3 193,911 .3
Other ..................................................................... 1,150,742 1.7 1,282,160 2.0
------------ ----- ------------ -----
Total held-to-maturity .................................................. 1,318,874 2.0 1,476,071 2.3
Available-for-sale ......................................................... 8,021,432 12.3 9,106,015 14.2
------------ ----- ------------ -----
Total securities ........................................................ 9,340,306 14.3 10,582,086 16.5
Interest-bearing bank balances .............................................. 118,303 .2 157,219 .3
Federal funds sold and securities purchased under resale agreements ......... 605,585 .9 467,079 .7
Trading account assets ...................................................... 829,399 1.2 954,809 1.5
------------ ----- ------------ -----
Total interest-earning assets ........................................... 58,116,120 88.8 56,561,908 88.4
Cash and due from banks ..................................................... 3,117,224 4.8 3,210,746 5.1
Premises and equipment ...................................................... 949,640 1.4 856,737 1.3
Other assets (1) ............................................................ 3,778,418 5.8 3,854,897 6.0
Allowance for loan losses ................................................... (541,144) ( .8) (535,753) ( .8)
------------ ------ ------------ ------
Total assets ............................................................ $65,420,258 100.0 $63,948,535 100.0
============ ====== ============ ======
Liabilities and Shareholders' Equity
Interest-bearing deposits in domestic offices:
Demand ..................................................................... $ 4,656,515 7.1 $ 4,984,421 7.8
Savings and money market savings ........................................... 13,339,354 20.4 11,603,522 18.2
Savings certificates ....................................................... 8,764,880 13.4 9,943,373 15.5
Large denomination certificates ............................................ 3,317,934 5.1 3,051,290 4.8
------------ ------ ------------ ------
Total interest-bearing deposits in domestic offices ..................... 30,078,683 46.0 29,582,606 46.3
Interest-bearing deposits in foreign offices ................................ 2,246,413 3.4 2,428,713 3.8
------------ ------ ------------ ------
Total interest-bearing deposits ......................................... 32,325,096 49.4 32,011,319 50.1
Federal funds purchased and securities sold under repurchase agreements ..... 6,150,371 9.4 7,498,279 11.7
Commercial paper ............................................................ 1,484,484 2.3 1,276,624 2.0
Other short-term borrowed funds ............................................. 1,766,070 2.7 2,120,256 3.3
------------ ------ ------------ ------
Total short-term borrowed funds ......................................... 9,400,925 14.4 10,895,159 17.0
Long-term debt .............................................................. 8,134,358 12.4 6,278,807 9.8
------------ ------ ------------ ------
Total interest-bearing liabilities ...................................... 49,860,379 76.2 49,185,285 76.9
Other deposits:
Demand in domestic offices ................................................. 8,250,407 12.6 7,797,454 12.2
Demand in foreign offices .................................................. 653 .0 309 .0
Noninterest-bearing time in domestic offices ............................... 4,240 .0 5,203 .0
Other liabilities ........................................................... 1,874,402 2.9 1,792,333 2.8
Shareholders' equity ........................................................ 5,430,177 8.3 5,167,951 8.1
------------ ------ ------------ ------
Total liabilities and shareholders' equity .............................. $65,420,258 100.0 $63,948,535 100.0
============ ====== ============ ======
Total deposits .............................................................. $40,580,396 $39,814,285
(1) Includes unrealized gains (losses) of $17,991 in 1999, $131,761 in 1998,
$65,846 in 1997, $93,556 in 1996, $34,248 in 1995 and ($12,405) in 1994 on
securities available-for-sale.
94
1997 1996
Amount % Amount %
Assets
Loans -- net of unearned income:
Commercial ................................................................. $11,326,589 19.7 $10,480,829 18.9
Tax-exempt ................................................................. 1,743,227 3.0 2,126,486 3.8
------------ ----- ------------ -----
Total commercial ........................................................ 13,069,816 22.7 12,607,315 22.7
Direct retail .............................................................. 1,193,557 2.1 1,194,349 2.1
Indirect retail ............................................................ 2,966,521 5.1 3,138,707 5.6
Credit card ................................................................ 5,626,062 9.8 4,948,626 8.9
Other revolving credit ..................................................... 423,900 .7 417,953 .8
------------ ----- ------------ -----
Total retail ............................................................ 10,210,040 17.7 9,699,635 17.4
Construction ............................................................... 1,498,438 2.6 1,069,576 1.9
Commercial mortgages ....................................................... 6,067,194 10.5 5,452,795 9.8
Residential mortgages ...................................................... 7,422,225 12.9 6,796,978 12.2
------------ ----- ------------ -----
Total real estate ....................................................... 14,987,857 26.0 13,319,349 23.9
Lease financing ............................................................ 955,055 1.7 655,485 1.2
Foreign .................................................................... 493,110 .9 457,500 .8
------------ ----- ------------ -----
Total loans ............................................................. 39,715,878 69.0 36,739,284 66.0
Securities:
Held-to-maturity:
State and municipal ....................................................... 221,196 .4 273,529 .5
Other ..................................................................... 1,101,603 1.8 1,199,467 2.1
------------ ----- ------------ -----
Total held-to-maturity .................................................. 1,322,799 2.2 1,472,996 2.6
Available-for-sale ......................................................... 9,470,064 16.4 10,402,219 18.7
------------ ----- ------------ -----
Total securities ........................................................ 10,792,863 18.6 11,875,215 21.3
Interest-bearing bank balances .............................................. 88,801 .2 420,838 .8
Federal funds sold and securities purchased under resale agreements ......... 397,213 .7 286,478 .5
Trading account assets ...................................................... 960,244 1.7 921,764 1.7
------------ ----- ------------ -----
Total interest-earning assets ........................................... 51,954,999 90.2 50,243,579 90.3
Cash and due from banks ..................................................... 2,904,160 5.0 2,789,738 5.1
Premises and equipment ...................................................... 803,362 1.4 785,438 1.4
Other assets (1) ............................................................ 2,465,276 4.3 2,278,391 4.1
Allowance for loan losses ................................................... (520,722) ( .9) (512,943) ( .9)
------------ ------ ------------ ------
Total assets ............................................................ $57,607,075 100.0 $55,584,203 100.0
============ ====== ============ ======
Liabilities and Shareholders' Equity
Interest-bearing deposits in domestic offices:
Demand ..................................................................... $ 4,108,606 7.1 $ 3,993,079 7.2
Savings and money market savings ........................................... 10,594,764 18.4 9,440,738 17.0
Savings certificates ....................................................... 10,364,936 18.0 10,521,925 18.9
Large denomination certificates ............................................ 2,929,042 5.1 2,612,410 4.7
------------ ------ ------------ ------
Total interest-bearing deposits in domestic offices ..................... 27,997,348 48.6 26,568,152 47.8
Interest-bearing deposits in foreign offices ................................ 1,585,149 2.8 1,040,585 1.9
------------ ------ ------------ ------
Total interest-bearing deposits ......................................... 29,582,497 51.4 27,608,737 49.7
Federal funds purchased and securities sold under repurchase agreements ..... 6,743,997 11.7 7,136,064 12.8
Commercial paper ............................................................ 781,345 1.4 595,806 1.1
Other short-term borrowed funds ............................................. 1,461,781 2.5 1,286,160 2.3
------------ ------ ------------ ------
Total short-term borrowed funds ......................................... 8,987,123 15.6 9,018,030 16.2
Long-term debt .............................................................. 6,121,823 10.6 6,692,772 12.0
------------ ------ ------------ ------
Total interest-bearing liabilities ...................................... 44,691,443 77.6 43,319,539 77.9
Other deposits:
Demand in domestic offices ................................................. 6,921,083 12.0 6,476,977 11.7
Demand in foreign offices .................................................. 169 .0 1,563 .0
Noninterest-bearing time in domestic offices ............................... 13,192 .0 12,362 .0
Other liabilities ........................................................... 1,447,863 2.5 1,315,939 2.4
Shareholders' equity ........................................................ 4,533,325 7.9 4,457,823 8.0
------------ ------ ------------ ------
Total liabilities and shareholders' equity .............................. $57,607,075 100.0 $55,584,203 100.0
============ ====== ============ ======
Total deposits .............................................................. $36,516,941 $34,099,639
1995 1994 Compound
Amount % Amount % Growth Rate
Assets
Loans -- net of unearned income:
Commercial ............................................................ $ 9,727,718 18.8 $ 7,923,773 17.1 14.7%
Tax-exempt ............................................................ 2,067,016 4.0 2,066,908 4.4 (17.1)
------------- ----- ------------- -----
Total commercial ................................................... 11,794,734 22.8 9,990,681 21.5 10.6
Direct retail ......................................................... 1,177,466 2.3 1,087,952 2.3 ( .4)
Indirect retail ....................................................... 2,973,026 5.8 2,862,342 6.2 4.0
Credit card ........................................................... 4,551,448 8.8 4,014,135 8.6 4.7
Other revolving credit ................................................ 398,693 .8 382,216 .8 9.0
------------- ----- ------------- -----
Total retail ....................................................... 9,100,633 17.7 8,346,645 17.9 4.0
Construction .......................................................... 948,248 1.8 791,154 1.7 22.6
Commercial mortgages .................................................. 4,902,241 9.5 4,529,213 9.7 10.1
Residential mortgages ................................................. 6,182,282 12.0 5,587,543 12.0 5.8
------------- ----- ------------- -----
Total real estate .................................................. 12,032,771 23.3 10,907,910 23.4 9.2
Lease financing ....................................................... 278,038 .5 180,022 .4 66.0
Foreign ............................................................... 304,277 .6 108,028 .2 64.1
------------- ----- ------------- -----
Total loans ........................................................ 33,510,453 64.9 29,533,286 63.4 9.8
Securities:
Held-to-maturity:
State and municipal .................................................. 423,747 .8 599,206 1.3 (22.4)
Other ................................................................ 3,735,893 7.1 3,371,132 7.1 (19.3)
------------- ----- ------------- -----
Total held-to-maturity ............................................. 4,159,640 7.9 3,970,338 8.4 (19.8)
Available-for-sale .................................................... 7,817,579 15.2 7,267,408 15.6 2.0
------------- ----- ------------- -----
Total securities ................................................... 11,977,219 23.1 11,237,746 24.0 ( 3.6)
Interest-bearing bank balances ......................................... 119,277 .2 31,941 .1 29.9
Federal funds sold and securities purchased under resale agreements .... 221,359 .4 303,177 .7 14.8
Trading account assets ................................................. 916,140 1.8 689,417 1.5 3.8
------------- ----- ------------- -----
Total interest-earning assets ...................................... 46,744,448 90.4 41,795,567 89.7 6.8
Cash and due from banks ................................................ 2,801,993 5.5 2,688,765 5.9 3.0
Premises and equipment ................................................. 722,418 1.4 663,773 1.4 7.4
Other assets (1) ....................................................... 1,951,842 3.7 1,910,228 4.1 14.6
Allowance for loan losses .............................................. (517,430) ( 1.0) (516,702) ( 1.1) .9
------------- ------ ------------- ------
Total assets ....................................................... $51,703,271 100.0 $46,541,631 100.0 7.0
============= ====== ============= ======
Liabilities and Shareholders' Equity
Interest-bearing deposits in domestic offices:
Demand ................................................................ $ 3,923,942 7.6 $ 4,047,307 8.7 2.8
Savings and money market savings ...................................... 8,318,312 16.1 7,973,997 17.1 10.8
Savings certificates .................................................. 10,435,857 20.3 8,419,653 18.0 .8
Large denomination certificates ....................................... 2,173,624 4.2 1,889,807 4.1 11.9
------------- ------ ------------- ------
Total interest-bearing deposits in domestic offices ................ 24,851,735 48.2 22,330,764 47.9 6.1
Interest-bearing deposits in foreign offices ........................... 749,511 1.4 516,157 1.1 34.2
------------- ------ ------------- ------
Total interest-bearing deposits .................................... 25,601,246 49.6 22,846,921 49.0 7.2
Federal funds purchased and securities sold under repurchase agreements. 6,263,319 12.1 6,146,656 13.2 .0
Commercial paper ....................................................... 535,210 1.0 524,715 1.1 23.1
Other short-term borrowed funds ........................................ 2,061,418 4.0 697,743 1.5 20.4
------------- ------ ------------- ------
Total short-term borrowed funds .................................... 8,859,947 17.1 7,369,114 15.8 5.0
Long-term debt ......................................................... 5,694,683 11.0 5,153,784 11.1 9.6
------------- ------ ------------- ------
Total interest-bearing liabilities ................................. 40,155,876 77.7 35,369,819 75.9 7.1
Other deposits:
Demand in domestic offices ............................................ 6,214,100 12.0 6,215,419 13.4 5.8
Demand in foreign offices ............................................. 6,823 .0 5,380 .0 (34.4)
Noninterest-bearing time in domestic offices .......................... 12,537 .0 70,997 .2 (43.1)
Other liabilities ...................................................... 1,150,355 2.2 1,067,818 2.3 11.9
Shareholders' equity ................................................... 4,163,580 8.1 3,812,198 8.2 7.3
------------- ------ ------------- ------
Total liabilities and shareholders' equity ......................... $51,703,271 100.0 $46,541,631 100.0 7.0
============= ====== ============= ======
Total deposits ......................................................... $31,834,706 $29,138,717 6.8
95
- ------------------------------------------
Net Interest Income -- Taxable Equivalent
- --------------------------------------------------------------------------------
thousands Wachovia Corporation and Subsidiaries
1999 1998
Amount % Amount %
Interest Income
Loans, including fees:
Commercial ................................................................. $ 1,141,309 24.2 $ 1,011,401 21.5
Tax-exempt ................................................................. 79,075 1.7 112,672 2.4
------------- ----- ------------- -----
Total commercial ........................................................ 1,220,384 25.9 1,124,073 23.9
Direct retail .............................................................. 91,882 2.0 107,405 2.3
Indirect retail ............................................................ 274,843 5.8 255,512 5.4
Credit card ................................................................ 677,232 14.4 764,426 16.2
Other revolving credit ..................................................... 64,405 1.4 55,644 1.2
------------- ----- ------------- -----
Total retail ............................................................ 1,108,362 23.6 1,182,987 25.1
Construction ............................................................... 187,396 4.0 170,403 3.6
Commercial mortgages ....................................................... 594,166 12.6 584,266 12.4
Residential mortgages ...................................................... 576,624 12.2 618,118 13.1
------------- ----- ------------- -----
Total real estate ....................................................... 1,358,186 28.8 1,372,787 29.1
Lease financing ............................................................ 250,868 5.3 166,128 3.5
Foreign .................................................................... 84,262 1.8 55,067 1.2
------------- ----- ------------- -----
Total loans ............................................................. 4,022,062 85.4 3,901,042 82.8
Securities:
Held-to-maturity:
State and municipal ...................................................... 16,689 .4 21,179 .5
Other investments ........................................................ 81,068 1.7 96,430 2.0
------------- ----- ------------- -----
Total held-to-maturity .................................................. 97,757 2.1 117,609 2.5
Available-for-sale ......................................................... 517,242 11.0 609,245 12.9
------------- ----- ------------- -----
Total securities ........................................................ 614,999 13.1 726,854 15.4
Interest-bearing bank balances .............................................. 7,390 .2 12,988 .3
Federal funds sold and securities purchased under resale agreements ......... 30,696 .6 25,803 .5
Trading account assets ...................................................... 32,159 .7 45,432 1.0
------------- ----- ------------- -----
Total interest income .................................................... 4,707,306 100.0 4,712,119 100.0
Interest Expense
Interest-bearing demand ..................................................... 58,434 1.2 64,530 1.4
Savings and money market savings ............................................ 477,557 10.2 451,655 9.6
Savings certificates ........................................................ 447,583 9.5 542,477 11.5
Large denomination certificates ............................................. 172,539 3.7 165,384 3.5
------------- ----- ------------- -----
Total interest-bearing deposits in domestic offices ..................... 1,156,113 24.6 1,224,046 26.0
Interest-bearing deposits in foreign offices ................................ 109,082 2.3 135,659 2.9
------------- ----- ------------- -----
Total interest-bearing deposits ......................................... 1,265,195 26.9 1,359,705 28.9
Federal funds purchased and securities sold under repurchase agreements ..... 289,912 6.1 388,390 8.2
Commercial paper ............................................................ 69,619 1.5 64,088 1.3
Other short-term borrowed funds ............................................. 97,630 2.1 111,368 2.4
------------- ----- ------------- -----
Total short-term borrowed funds ......................................... 457,161 9.7 563,846 11.9
Long-term debt .............................................................. 474,378 10.1 390,662 8.3
------------- ----- ------------- -----
Total interest expense .................................................. 2,196,734 46.7 2,314,213 49.1
------------- ----- ------------- -----
Net Interest Income ......................................................... $ 2,510,572 53.3 $ 2,397,906 50.9
============= ===== ============= =====
Percentage of interest-earning assets:
Interest income ............................................................ 8.10% 8.33%
Interest expense ........................................................... 3.78 4.09
------------- -------------
Net interest income ..................................................... 4.32% 4.24%
============= =============
Taxable equivalent adjustment included in interest income:
Loans ...................................................................... $ 21,521 $ 27,638
Securities ................................................................. 18,937 18,301
Trading account assets ..................................................... 28 935
------------- -------------
Total (2) ............................................................... $ 40,486 $ 46,874
============= =============
(1) Percentages reflected above are based on total interest income.
(2) The taxable equivalent adjustment reflects the federal income tax rate of
35% and state tax rates, as applicable.
96
1997 1996
Amount % Amount %
Interest Income
Loans, including fees:
Commercial ................................................................. $ 829,406 19.2 $ 747,463 18.3
Tax-exempt ................................................................. 155,689 3.6 190,285 4.7
------------- ----- ------------- -----
Total commercial ........................................................ 985,095 22.8 937,748 23.0
Direct retail .............................................................. 107,326 2.5 106,634 2.6
Indirect retail ............................................................ 254,001 5.9 266,435 6.5
Credit card ................................................................ 727,114 16.8 595,208 14.6
Other revolving credit ..................................................... 52,007 1.2 51,026 1.2
------------- ----- ------------- -----
Total retail ............................................................ 1,140,448 26.4 1,019,303 24.9
Construction ............................................................... 140,780 3.3 99,470 2.4
Commercial mortgages ....................................................... 505,876 11.7 452,576 11.1
Residential mortgages ...................................................... 592,907 13.7 552,944 13.5
------------- ----- ------------- -----
Total real estate ....................................................... 1,239,563 28.7 1,104,990 27.0
Lease financing ............................................................ 92,721 2.1 61,717 1.5
Foreign .................................................................... 34,164 .8 32,098 .8
------------- ----- ------------- -----
Total loans ............................................................. 3,491,991 80.8 3,155,856 77.2
Securities:
Held-to-maturity:
State and municipal ...................................................... 26,259 .6 33,547 .8
Other investments ........................................................ 87,631 2.0 96,509 2.4
------------- ----- ------------- -----
Total held-to-maturity .................................................. 113,890 2.6 130,056 3.2
Available-for-sale ......................................................... 635,195 14.7 700,202 17.1
------------- ----- ------------- -----
Total securities ........................................................ 749,085 17.3 830,258 20.3
Interest-bearing bank balances .............................................. 5,230 .1 33,284 .8
Federal funds sold and securities purchased under resale agreements ......... 22,319 .5 15,411 .4
Trading account assets ...................................................... 51,654 1.3 51,740 1.3
------------- ----- ------------- -----
Total interest income .................................................... 4,320,279 100.0 4,086,549 100.0
Interest Expense
Interest-bearing demand ..................................................... 64,249 1.5 59,761 1.5
Savings and money market savings ............................................ 405,444 9.4 336,596 8.2
Savings certificates ........................................................ 582,145 13.4 598,869 14.6
Large denomination certificates ............................................. 164,391 3.8 153,571 3.8
------------- ----- ------------- -----
Total interest-bearing deposits in domestic offices ..................... 1,216,229 28.1 1,148,797 28.1
Interest-bearing deposits in foreign offices ................................ 87,320 2.0 54,942 1.3
------------- ----- ------------- -----
Total interest-bearing deposits ......................................... 1,303,549 30.1 1,203,739 29.4
Federal funds purchased and securities sold under repurchase agreements ..... 357,190 8.3 382,976 9.4
Commercial paper ............................................................ 39,566 .9 29,054 .7
Other short-term borrowed funds ............................................. 81,406 1.9 70,206 1.7
------------- ----- ------------- -----
Total short-term borrowed funds ......................................... 478,162 11.1 482,236 11.8
Long-term debt .............................................................. 387,107 9.0 399,796 9.8
------------- ----- ------------- -----
Total interest expense .................................................. 2,168,818 50.2 2,085,771 51.0
------------- ----- ------------- -----
Net Interest Income ......................................................... $ 2,151,461 49.8 $ 2,000,778 49.0
============= ===== ============= =====
Percentage of interest-earning assets:
Interest income ............................................................ 8.32% 8.13%
Interest expense ........................................................... 4.18 4.15
------------- -------------
Net interest income ..................................................... 4.14% 3.98%
============= =============
Taxable equivalent adjustment included in interest income:
Loans ...................................................................... $ 36,695 $ 46,158
Securities ................................................................. 19,862 28,577
Trading account assets ..................................................... 1,337 2,306
------------- -------------
Total (2) ............................................................... $ 57,894 $ 77,041
============= =============
Five-Year
1995 1994 Compound
Amount % Amount % Growth Rate
Interest Income
Loans, including fees:
Commercial ............................................................. $ 728,263 18.7 $ 486,566 15.6 18.6%
Tax-exempt ............................................................. 203,551 5.2 186,360 5.9 (15.8)
------------- ----- ------------- -----
Total commercial .................................................... 931,814 23.9 672,926 21.5 12.6
Direct retail .......................................................... 103,522 2.7 86,093 2.7 1.3
Indirect retail ........................................................ 245,936 6.3 223,830 7.1 4.2
Credit card ............................................................ 566,391 14.5 453,117 14.6 8.4
Other revolving credit ................................................. 50,544 1.3 44,904 1.4 7.5
------------- ----- ------------- -----
Total retail ........................................................ 966,393 24.8 807,944 25.8 6.5
Construction ........................................................... 93,152 2.4 70,261 2.2 21.7
Commercial mortgages ................................................... 423,149 10.9 352,563 11.2 11.0
Residential mortgages .................................................. 505,995 13.0 434,177 13.9 5.8
------------- ----- ------------- -----
Total real estate ................................................... 1,022,296 26.3 857,001 27.3 9.6
Lease financing ........................................................ 24,173 .6 14,090 .4 77.9
Foreign ................................................................ 22,610 .6 6,162 .2 68.7
------------- ----- ------------- -----
Total loans ......................................................... 2,967,286 76.2 2,358,123 75.2 11.3
Securities:
Held-to-maturity:
State and municipal .................................................. 50,192 1.3 75,069 2.4 (26.0)
Other investments .................................................... 271,292 7.0 234,557 7.5 (19.1)
------------- ----- ------------- -----
Total held-to-maturity .............................................. 321,484 8.3 309,626 9.9 (20.6)
Available-for-sale ..................................................... 526,287 13.5 416,408 13.3 4.4
------------- ----- ------------- -----
Total securities .................................................... 847,771 21.8 726,034 23.2 ( 3.3)
Interest-bearing bank balances .......................................... 9,377 .2 1,322 .0 41.1
Federal funds sold and securities purchased under resale agreements ..... 13,279 .3 13,262 .4 18.3
Trading account assets .................................................. 60,416 1.5 36,407 1.2 ( 2.5)
------------- ----- ------------- -----
Total interest income ................................................ 3,898,129 100.0 3,135,148 100.0 8.5
Interest Expense
Interest-bearing demand ................................................. 74,179 1.9 70,890 2.3 ( 3.8)
Savings and money market savings ........................................ 304,294 7.8 221,317 7.1 16.6
Savings certificates .................................................... 596,122 15.2 383,670 12.2 3.1
Large denomination certificates ......................................... 126,708 3.3 84,669 2.7 15.3
------------- ----- ------------- -----
Total interest-bearing deposits in domestic offices ................. 1,101,303 28.2 760,546 24.3 8.7
Interest-bearing deposits in foreign offices ............................ 41,876 1.1 22,318 .7 37.3
------------- ----- ------------- -----
Total interest-bearing deposits ..................................... 1,143,179 29.3 782,864 25.0 10.1
Federal funds purchased and securities sold under repurchase agreements . 374,158 9.6 268,155 8.6 1.6
Commercial paper ........................................................ 29,324 .8 20,587 .7 27.6
Other short-term borrowed funds ......................................... 124,283 3.2 29,559 .9 27.0
------------- ----- ------------- -----
Total short-term borrowed funds ..................................... 527,765 13.6 318,301 10.2 7.5
Long-term debt .......................................................... 340,211 8.7 267,841 8.5 12.1
------------- ----- ------------- -----
Total interest expense .............................................. 2,011,155 51.6 1,369,006 43.7 9.9
------------- ----- ------------- -----
Net Interest Income ..................................................... $ 1,886,974 48.4 $ 1,766,142 56.3 7.3
============= ===== ============= =====
Percentage of interest-earning assets:
Interest income ........................................................ 8.35% 7.50%
Interest expense ....................................................... 4.31 3.27
------------- -------------
Net interest income ................................................. 4.04% 4.23%
============= =============
Taxable equivalent adjustment included in interest income:
Loans .................................................................. $ 55,068 $ 52,918
Securities ............................................................. 46,817 52,268
Trading account assets ................................................. 4,594 2,871
------------- -------------
Total (2) ........................................................... $ 106,479 $ 108,057
============= =============
97
- ----------------------
Statistical Summary
- -------------------------------------------------------------------------------------------------------------------------------
Wachovia Corporation and Subsidiaries
1999 1998 1997 1996 1995 1994
Average Yields Earned (taxable equivalent)
Loans:
Commercial .................................................... 7.25% 7.21% 7.32% 7.13% 7.49% 6.14%
Tax-exempt .................................................... 9.79 9.24 8.93 8.95 9.85 9.02
Total commercial ............................................ 7.37 7.37 7.54 7.44 7.90 6.74
Direct retail ................................................. 8.63 9.39 8.99 8.93 8.79 7.91
Indirect retail ............................................... 7.89 8.27 8.56 8.49 8.27 7.82
Credit card ................................................... 13.44 13.46 12.92 12.03 12.44 11.29
Other revolving credit ........................................ 10.93 11.18 12.27 12.21 12.68 11.75
Total retail ................................................ 10.89 11.36 11.17 10.51 10.62 9.68
Construction .................................................. 8.54 9.00 9.40 9.30 9.82 8.88
Commercial mortgages .......................................... 8.11 8.58 8.34 8.30 8.63 7.78
Residential mortgages ......................................... 7.77 7.92 7.99 8.14 8.18 7.77
Total real estate ........................................... 8.02 8.31 8.27 8.30 8.50 7.86
Lease financing ............................................... 11.07 11.63 9.71 9.42 8.69 7.83
Foreign ....................................................... 6.56 6.85 6.93 7.02 7.43 5.70
Total loans ................................................. 8.52 8.79 8.79 8.59 8.85 7.98
Securities:
Held-to-maturity:
State and municipal ......................................... 9.93 10.92 11.87 12.26 11.84 12.53
Other ....................................................... 7.04 7.52 7.95 8.05 7.26 6.96
Total held-to-maturity ..................................... 7.41 7.97 8.61 8.83 7.73 7.80
Available-for-sale ............................................ 6.45 6.69 6.71 6.73 6.73 5.73
Total securities ........................................... 6.58 6.87 6.94 6.99 7.08 6.46
Interest-bearing bank balances ................................. 6.25 8.26 5.89 7.91 7.86 4.14
Federal funds sold and securities purchased under resale
agreements .................................................... 5.07 5.52 5.62 5.38 6.00 4.37
Trading account assets ......................................... 3.88 4.76 5.38 5.61 6.59 5.28
Total interest-earning assets ............................... 8.10 8.33 8.32 8.13 8.34 7.50
Average Rates Paid
Interest-bearing demand ........................................ 1.25% 1.29% 1.56% 1.50% 1.89% 1.75%
Savings and money market savings ............................... 3.58 3.89 3.83 3.57 3.66 2.78
Savings certificates ........................................... 5.11 5.46 5.62 5.69 5.71 4.56
Large denomination certificates ................................ 5.20 5.42 5.61 5.88 5.83 4.48
Total interest-bearing deposits in domestic offices ......... 3.84 4.14 4.34 4.32 4.43 3.41
Interest-bearing deposits in foreign offices ................... 4.86 5.59 5.51 5.28 5.59 4.32
Total interest-bearing deposits ............................. 3.91 4.25 4.41 4.36 4.47 3.43
Federal funds purchased and securities sold under repurchase
agreements .................................................... 4.71 5.18 5.30 5.37 5.97 4.36
Commercial paper ............................................... 4.69 5.02 5.06 4.88 5.48 3.92
Other short-term borrowed funds ................................ 5.53 5.25 5.57 5.46 6.03 4.24
Total short-term borrowed funds ............................. 4.86 5.18 5.32 5.35 5.96 4.32
Long-term debt ................................................. 5.83 6.22 6.32 5.97 5.97 5.20
Total interest-bearing liabilities .......................... 4.41 4.71 4.85 4.81 5.01 3.87
Interest rate spread ........................................... 3.69 3.62 3.47 3.32 3.33 3.63
Net yield on interest-earning assets ........................... 4.32 4.24 4.14 3.98 4.04 4.23
Ratios (averages)
Shareholders' equity to:
Total assets .................................................. 8.30% 8.08% 7.87% 8.02% 8.05% 8.19%
Net loans ..................................................... 11.63 11.78 11.57 12.31 12.62 13.14
Deposits ...................................................... 13.38 12.98 12.41 13.07 13.08 13.08
Equity and long-term debt ..................................... 40.03 45.15 42.54 39.98 42.24 42.52
Return on deposits ............................................. 2.49 2.20 1.62 2.22 2.22 2.14
98
- ----------------------
Year-End Information
- ----------------------------------------------------------------------------------------------------------------------------------
Wachovia Corporation and Subsidiaries
1999 1998 1997 1996 1995 1994
Condensed Balance Sheet (millions)
Cash and due from banks .............................. $ 3,475 $ 3,800 $ 4,222 $ 3,674 $ 3,033 $ 2,953
Interest-bearing bank balances ....................... 185 110 133 78 526 7
Federal funds sold and securities
purchased under resale agreements ................... 762 675 1,589 276 302 399
Trading account assets ............................... 870 665 999 1,190 1,115 891
Securities:
Available-for-sale .................................. 7,096 7,984 8,909 9,825 11,034 7,018
Held-to-maturity .................................... 1,049 1,384 1,509 1,352 1,620 4,185
Loans, net of unearned income ........................ 49,621 45,719 44,194 38,007 35,585 31,664
Less allowance for loan losses ....................... 555 548 544 519 519 516
-------- -------- -------- -------- -------- --------
Net loans .......................................... 49,066 45,171 43,650 37,488 35,066 31,148
Premises and equipment ............................... 954 902 810 794 781 690
Other assets ......................................... 3,896 3,432 3,576 2,552 2,315 1,951
-------- -------- -------- -------- -------- --------
Total assets ....................................... $ 67,353 $ 64,123 $ 65,397 $ 57,229 $ 55,792 $ 49,242
======== ======== ======== ======== ======== ========
Deposits in domestic offices ......................... $ 38,874 $ 38,718 $ 38,151 $ 34,137 $ 33,594 $ 29,380
Deposits in foreign offices .......................... 2,912 2,277 4,503 1,185 761 916
-------- -------- -------- -------- -------- --------
Total deposits ..................................... 41,786 40,995 42,654 35,322 34,355 30,296
Federal funds purchased and securities
sold under repurchase agreements .................... 5,373 5,463 8,323 7,206 6,892 6,939
Commercial paper ..................................... 1,659 1,359 1,034 707 535 432
Other short-term borrowed funds ...................... 3,072 1,912 753 1,039 1,776 1,044
Long-term debt ....................................... 7,814 7,597 5,934 7,025 6,184 5,748
Other liabilities .................................... 1,991 1,459 1,525 1,322 1,449 873
Shareholders' equity ................................. 5,658 5,338 5,174 4,608 4,601 3,910
-------- -------- -------- -------- -------- --------
Total liabilities and shareholders' equity ......... $ 67,353 $ 64,123 $ 65,397 $ 57,229 $ 55,792 $ 49,242
======== ======== ======== ======== ======== ========
Loan Portfolio (millions)
Domestic borrowers:
Commercial .......................................... $ 17,043 $ 14,328 $ 13,528 $ 10,341 $ 10,365 $ 8,915
Tax-exempt .......................................... 690 973 1,607 2,016 2,328 1,907
Direct retail ....................................... 1,064 1,098 1,250 1,218 1,197 1,128
Indirect retail ..................................... 3,741 3,240 3,028 3,082 3,118 2,813
Credit card ......................................... 4,736 6,049 5,919 5,596 4,610 4,522
Other revolving credit .............................. 667 537 460 424 417 398
Construction ........................................ 2,311 2,044 1,780 1,247 1,008 829
Commercial mortgages ................................ 7,754 6,988 6,790 5,684 5,113 4,673
Residential mortgages ............................... 7,757 7,490 8,099 7,132 6,537 6,028
Lease financing, net ................................ 2,597 1,879 1,094 831 502 197
-------- -------- -------- -------- -------- --------
Total .............................................. 48,360 44,626 43,555 37,571 35,195 31,410
Foreign ............................................. 1,261 1,093 639 436 390 254
-------- -------- -------- -------- -------- --------
Total loans ........................................ $ 49,621 $ 45,719 $ 44,194 $ 38,007 $ 35,585 $ 31,664
======== ======== ======== ======== ======== ========
Loan Portfolio (percentages)
Commercial ........................................... 35.7 33.5 34.2 32.5 35.7 34.2
Credit card .......................................... 9.6 13.2 13.4 14.7 12.9 14.3
Other revolving credit ............................... 1.3 1.2 1.0 1.1 1.2 1.3
Other retail ......................................... 9.7 9.5 9.7 11.3 12.1 12.4
Real estate .......................................... 35.9 36.1 37.7 37.0 35.6 36.4
Lease financing ...................................... 5.2 4.1 2.5 2.2 1.4 .6
Foreign .............................................. 2.6 2.4 1.5 1.2 1.1 .8
--------- --------- --------- --------- --------- ---------
Total .............................................. 100.0 100.0 100.0 100.0 100.0 100.0
========= ========= ========= ========= ========= =========
99
STOCK DATA
The following charts present high and low trading ranges for the corporation's
common stock, price to earnings ratios and data on cash dividends per share and
cash dividend payouts for the most recent six years. Stock price trading ranges
and price to earnings ratios for the most recent eight quarters also are
provided.
The Five-Year Total Return chart compares Wachovia, the S&P 500 Index and the
Keefe, Bruyette & Woods (KBW) 50 Total Return Index in stock price appreciation
and dividends, assuming quarterly reinvestment, from the base period December
31, 1994 through year-end 1999. The KBW 50 Index is a market capitalization
weighted measure of total return for 50 of the largest U. S. banking companies
including all money center and most regional banks.
Wachovia's common stock is listed on the New York Stock Exchange under the
trading symbol WB. The corporation is a member of the Standard & Poor's 500
Index of stocks and the S&P 500 Major Regional Banks Industry Group.
(Graph appears here with the following plot points.)
COMMON STOCK PRICE RANGE* NYSE SMBOL: WB
1994 1995 1996 1997 1998 1999
HIGH 35.38 48.25 60.25 83.94 96.81 92.31
LOW 30.13 32.00 39.63 53.50 72.75 65.44
*PRICES REPRESENT THOSE OF WACHOVIA CORPORATION PRIOR TO MERGER WITH CENTRAL
FIDELITY BANKS, INC.
(Graph appears here with the following plot points.)
COMMON STOCK PRICE/EARNINGS RATIOS*
1994 1995 1996 1997 1998 1999
HIGH 11.3 13.8 15.8 28.6 23.2 18.8
LOW 9.7 9.1 10.4 18.2 17.4 13.4
*AMOUNTS BASED ON HIGH AND LOW COMMON STOCK PRICES FOR EACH YEAR AND ANNUAL
NET INCOME PER DILUTED SHARE AS ORIGINALLY REPORTED BY WACHOVIA CORPORATION.
(Graph appears here with the following plot points.)
CASH DIVIDENDS PER SHARE*
FIVE-YEAR COMPOUND GROWTH RATE=10.9%
1994 1995 1996 1997 1998 1999
1.23 1.38 1.52 1.68 1.86 2.06
*DIVIDENDS PER SHARE REPRESENT THOSE PAID BY WACHOVIA CORPORATION PRIOR TO
MERGER WITH CENTRAL FIDELITY BANKS, INC.
(Graph appears here with the following plot points.)
CASH DIVIDEND PAYOUT*
(MILLIONS)
1994 1995 1996 1997 1998 1999
40.8% 39.9% 40.4% 55.2% 43.7% 41.4%
*DIVIDENDS INCLUDE AMOUNTS PAID BY POOLED COMPANIES.
% PAYOUT RATIO (TOTAL DIVIDENDS AS A PERCENTAGE OF NET INCOME)
Common Stock Data -- Per Share Table 24
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------ ---- ---- ---- ---- ----
Market value: *
End of year ..................... $ 68.00 $ 87.44 $ 81.13 $ 56.50 $ 45.75 $ 32.25
High ............................ 92.31 96.81 83.94 60.25 48.25 35.38
Low ............................. 65.44 72.75 53.50 39.63 32.00 30.13
Book value ** .................... 28.04 26.30 25.13 22.90 22.08 18.79
Dividend * ....................... 2.06 1.86 1.68 1.52 1.38 1.23
Price/earnings ratio *** ......... 13.9 x 20.9 x 27.6 x 14.8 x 13.1 x 10.3 x
* Information for years before 1997 represents that of Wachovia
Corporation prior to merger with Central Fidelity Banks, Inc.
** Book value per share has been restated to reflect the merger with Central
Fidelity Banks, Inc., as a pooling-of-interests.
*** Price/earnings ratio is based on end-of-year stock price and net income per
diluted share. Information for years before 1997 represents that of
Wachovia Corporation prior to merger with Central Fidelity Banks, Inc.
Excluding the after-tax impact of nonrecurring charges, the 1999, 1998 and
1997 price/earnings ratios were 13.7x, 19.6x and 20.5x, respectively.
100
(Graph appears here with the following plot points.)
QUARTERLY COMMON STOCK PRICE RANGE*
1998 1999
-------------------------------------- ------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q
HIGH 85.75 90.19 90.94 96.81 91.00 92.31 85.25 88.88
LOW 72.75 77.38 72.88 80.88 79.00 80.56 75.31 65.44
*PRICES REPRESENT THOSE OF WACHOVIA CORPORATION PRIOR TO MERGER WITH CENTRAL
FIDELITY BANKS, INC.
(Graph appears here with the following plot points.)
QUARTERLY COMMON STOCK PRICE/EARNING RATIOS*
1998 1999
-------------------------------------- ------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q 2ND Q 3RD Q 4TH Q
HIGH 28.6 30.3 29.9 23.2 20.5 19.9 17.8 18.1
LOW 24.3 26.0 24.0 19.3 17.8 17.4 15.7 13.4
*AMOUNTS BASED ON HIGH AND LOW COMMON STOCK PRICES FOR EACH PERIOD AND NET
INCOME PER DILUTED SHARE FOR THE 12 MONTHS ENDED ON THE LAST DAY OF EACH
PERIOD AS ORIGINALLY REPORTED BY WACHOVIA CORPORATION.
(Graph appears here with the following plot points.)
FIVE-YEAR TOTAL RETURN*
1994 1995 1996 1997 1998 1999
WACHOVIA 100.00 147.12 187.74 276.71 307.85 245.98
S&P 500 INDEX 100.00 137.58 169.17 225.61 290.08 351.12
KBW 50 INDEX 100.00 160.16 226.56 331.21 358.63 346.18
*BASE PERIOD 12/31/94 = 100. DIVIDENDS REINVESTED. DATA FOR THE S&P 500 INDEX
AND KBW 50 INDEX IS WEIGHTED BY MARKET CAPITALIZATION.
101
Historical Comparative Data
The following charts present six-year comparative data for Wachovia Corporation
and the median of the 25 largest U. S. bank holding companies based on assets
as of each year-end. The median is representative of the typical bank holding
company within the comparison group.
All historical data is as originally reported, not restated for
pooling-of-interests mergers or acquisitions. Wachovia's results were impacted
by nonrecurring charges taken in 1999, 1998 and the 1997 fourth quarter.
Results for 1999, 1998 and 1997 on an operating basis are footnoted in the
relevant charts below.
(Graph appears here with the following plot points.)
RETURN ON ASSETS (AVERAGE)
1994 1995 1996 1997 1998 1999
WACHOVIA 1.46 1.45 1.43 1.03* 1.37* 1.55*
25 LARGEST U.S. BANKS
(MEDIAN) 1.21 1.21 1.29 1.26 1.18 1.42
*EXCLUDING NONRECURRING ITEMS, THE RETURN WAS 1.39% IN 1997, 1.45% IN 1998 AND
1.57% IN 1999.
(Graph appears here with the following plot points.)
RETURN ON COMMON EQUITY (AVERAGE)
1994 1995 1996 1997 1998 1999
WACHOVIA 17.41 17.67 17.62 13.08* 16.92* 18.62*
25 LARGEST U.S. BANKS
(MEDIAN) 16.10 16.77 17.02 18.53 15.86 17.68
*EXCLUDING NONRECURRING ITEMS, THE RETURN WAS 17.65% IN 1997, 17.99% IN 1998
AND 18.85% IN 1999.
(Graph appears here with the following plot points.)
COMMON EQUITY TO ASSETS (AVERAGE)
1994 1995 1996 1997 1998 1999
WACHOVIA 8.36 8.22 8.09 7.87 8.08 8.30
25 LARGEST U.S. BANKS
(MEDIAN) 6.86 7.00 7.47 7.36 7.61 7.46
(Graph appears here with the following plot points.)
NET INTEREST INCOME* AS A PERCENTAGE OF AVERAGE EARNING ASSETS
1994 1995 1996 1997 1998 1999
WACHOVIA 4.34 4.16 4.02 4.14 4.24 4.32
25 LARGEST U.S. BANKS
(MEDIAN) 4.34 4.45 4.36 4.24 3.97 3.99
*TAXABLE EQUIVALENT
(Graph appears here with the following plot points.)
NONINTEREST EXPENSE AS A PERCENTAGE OF TOTAL ADJUSTED REVENUES*
1994 1995 1996 1997 1998 1999
WACHOVIA 54.15 54.23 52.21 62.29** 55.06** 54.62**
25 LARGEST U.S. BANKS
(MEDIAN) 61.88 61.72 60.91 60.88 64.20 56.92
*EXCLUDING SALES OF SECURITIES TRANSACTIONS, MORTGAGE SERVICING PORTFOLIO AND
SUBDIAIARY.
**EXCLUDING NONRECURRING ITEMS, THE RATIO WAS 53.19% IN 1997, 52.70% IN 1998 AND
54.15% IN 1999.
(Graph appears here with the following plot points.)
NET LOAN LOSSES TO AVERAGE LOANS
1994 1995 1996 1997 1998 1999
WACHOVIA .29 .37 .49 .67 .67 .62
25 LARGEST U.S. BANKS
(MEDIAN) .39 .44 .53 .63 .49 .37
(Graph appears here with the following plot points.)
NONPERFORMING ASSETS TO YEAR-END LOANS AND FORECLOSED PROPERTY
1994 1995 1996 1997 1998 1999
WACHOVIA .39 .24 .25 .29 .40 .45
25 LARGEST U.S. BANKS
(MEDIAN) 1.03 .80 .76 .62 .60 .55
102
Directors and Officers
Directors of Wachovia Corporation and Wachovia Bank, N.A.
- ---------------------------------------------------------------------------------------------------------------------
L.M. Baker, Jr. George W. Henderson, III John G. Medlin, Jr.
Chairman and Chairman and Chairman Emeritus
Chief Executive Officer Chief Executive Officer
Burlington Industries, Inc.
Lloyd U. Noland, III
James S. Balloun Chairman, President and
Chairman, President and W. Hayne Hipp Chief Executive Officer
Chief Executive Officer Chairman, President and Noland Company
National Service Industries, Inc. Chief Executive Officer
The Liberty Corporation
Morris W. Offit
Peter C. Browning Chairman and
President and Robert A. Ingram Chief Executive Officer
Chief Executive Officer Chief Executive Officer OFFITBANK
Sonoco Products Company Glaxo Wellcome plc
Chairman of the Board
Glaxo Wellcome Inc. G. Joseph Prendergast
John T. Casteen III President and
President Chief Operating Officer
University of Virginia George R. Lewis
President and
Chief Executive Officer Sherwood H. Smith, Jr.
John L. Clendenin Philip Morris Capital Corporation Chairman Emeritus
Chairman Emeritus Carolina Power & Light Company
BellSouth Corporation
Elizabeth Valk Long
Executive Vice President John C. Whitaker, Jr.
Thomas K. Hearn, Jr. Time Inc. Chairman and
President Chief Executive Officer
Wake Forest University Inmar Enterprises, Inc.
Principal Corporate Officers of Wachovia Corporation
- ---------------------------------------------------------------------------------------------------------------------
L.M. Baker, Jr. Mickey W. Dry Robert S. McCoy, Jr.
Chairman and Senior Executive Vice President Vice Chairman
Chief Executive Officer Chief Credit Officer Chief Financial Officer
Stanhope A. Kelly John C. McLean, Jr.
G. Joseph Prendergast Senior Executive Vice President Senior Executive Vice President
President and General Banking Corporate Financial Services
Chief Operating Officer
Kenneth W. McAllister Donald K. Truslow
Jean E. Davis Senior Executive Vice President Senior Executive Vice President
Senior Executive Vice President General Counsel/Administrative Services Treasurer/Comptroller
Operations/Technology
103
Shareholder Information
Corporate Headquarters
Wachovia Corporation
100 North Main Street 191 Peachtree Street, NE
Winston-Salem, NC 27150 Atlanta, GA 30303
Corporate Mailing Addresses and
Telephone Numbers
Wachovia Corporation
P.O. Box 3099 P.O. Box 4148
Winston-Salem, NC 27150 Atlanta, GA 30302
336-770-5000 404-332-5000
Notice of Annual Meeting
The Annual Meeting of Shareholders of Wachovia Corporation will be held Friday,
April 28, 2000 at 10:30 a.m. EDT, in the Wachovia Park Building, 101 North
Cherry Street, Winston-Salem, North Carolina. All shareholders are invited to
attend.
Common Stock
Wachovia common stock trades on the New York Stock Exchange under the ticker
symbol WB.
Transfer Agent
EquiServe
P.O. Box 8218
Boston, MA 02266-8218
1-800-633-4236
Shareholder Account Assistance
Shareholders who wish to change the address or ownership of stock, report lost
certificates, eliminate duplicate mailings or for other account reregistration
procedures and assistance should contact the Transfer Agent at the address or
phone number above.
Dividend Services
Through the Dividend Reinvestment and Common Stock Purchase Plan, record
shareholders can invest dividends as well as optional cash payments in
additional shares without payment of brokerage commissions or service charges.
Direct Deposit of Cash Dividends is a timesaving method of receiving
cash dividends through automatic deposit to an account at any
financial institution that participates in an Automated Clearing House.
Independent Auditors
Ernst & Young LLP
Wachovia Shareholder Direct
Shareholders and other interested individuals can access timely
corporate information on Wachovia, such as earnings and dividend announcements,
by calling 1-888-4WB-NEWS (1-888-492-6397). The toll-free service is available
24-hours-a-day, 7-days-a-week.
Internet Address
The corporation's Internet address is -- www.wachovia.com
The Investor Relations page can be accessed directly through the address --
www.wachovia.com/investor
Investor Contact
Robert S. McCoy, Jr.
Chief Financial Officer
336-732-5926
Marsha L. Smunt
Senior Vice President
Investor Relations
336-732-5788
Winston-Salem, NC 27150
Shareholder Relations Contact
H. Jo Barlow
Vice President
336-732-5787
Winston-Salem, NC 27150
Annual Report on Form 10-K
The Annual Report on Form 10-K of Wachovia Corporation as filed with the
Securities and Exchange Commission is available via the Internet at www.sec.gov
or at www.wachovia.com or will be provided upon written request to the
Corporate Secretary at the corporate mailing address in Winston-Salem.
Credit Ratings
December 31, 1999
Moody's Standard & Poor's
--------- ------------------
Wachovia Corporation
Senior debt Aa3 AA-
Subordinated debt A1 A+
Commercial paper P-1 A-1+
Wachovia Bank, N.A.
Long-term deposits Aa2 AA
Short-term deposits P-1 A-1+
Wachovia Bank's global bank notes are rated the same as short- and long-term
deposits.
104