EXHIBIT 13
2000 FINANCIAL ANNUAL REPORT
[GRAPHICS]
WACHOVIA
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TABLE OF CONTENTS
Management's Discussion and Analysis of Financial Condition and Results of Operations
Wachovia Corporation ............................................................. 2
Results of Operations -- 2000 vs. 1999 Overview .................................. 4
Business Segments ................................................................ 6
Consolidated Financial Results ................................................... 14
Shareholders' Equity and Capital Ratios .......................................... 32
Fourth Quarter Analysis .......................................................... 35
Results of Operations -- 1999 vs. 1998 ........................................... 42
Supervision and Regulation ....................................................... 46
Management's Responsibility for Financial Reporting ................................. 51
Report of Independent Auditors ...................................................... 51
Financial Statements ................................................................ 52
FORWARD-LOOKING STATEMENTS
This Financial Annual Report contains forward-looking statements regarding
Wachovia Corporation ("Wachovia"), including, without limitation, statements
relating to Wachovia's expectations with respect to revenue, credit losses,
levels of nonperforming assets, expenses, earnings and other measures of
financial performance. Words such as "may," "could," "would," "should,"
"believes," "expects," "anticipates," "estimates," "intends," "plans," "targets"
or similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not guarantees of future performance and
involve certain risks and uncertainties that are subject to change based on
various factors (many of which are beyond Wachovia's control). The following
factors, among others, could cause Wachovia's financial performance to differ
materially from the expectations expressed in such forward-looking statements:
(1) business increases, productivity gains and other investments are lower than
expected or do not occur as quickly as anticipated; (2) competitive pressures
among financial services companies increase significantly; (3) the strength of
the United States economy in general and/or the strength of the local economies
of the states in which Wachovia conducts operations changes; (4) trade, monetary
and fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System, change; (5) inflation, interest rates
and/or market conditions fluctuate; (6) conditions in the stock market, the
public debt market and other capital markets deteriorate; (7) Wachovia fails to
develop competitive new products and services and/or new and existing customers
do not accept these products and services; (8) financial services laws and
regulations change; (9) technology changes and Wachovia fails to adapt to those
changes; (10) consumer spending and saving habits change; (11) unanticipated
regulatory or judicial proceedings occur; and (12) Wachovia is unsuccessful at
managing the risks involved in the foregoing. Additional information with
respect to factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements may also be included in other
reports that Wachovia files with the Securities and Exchange Commission.
Wachovia cautions that the foregoing list of factors is not exclusive and not to
place undue reliance on forward-looking statements. Wachovia does not intend to
update any forward-looking statement, whether written or oral, relating to the
matters discussed in this Financial Annual Report.
1
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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WACHOVIA CORPORATION
Wachovia is a leading interstate financial holding company with dual
headquarters in Atlanta, Georgia, and Winston-Salem, North Carolina, serving
regional, national and international markets. Wachovia had total assets of $74
billion and deposits of $44 billion as of December 31, 2000 and is ranked 14th
and 15th, respectively, among U.S. banking companies in those categories. At
December 31, 2000, Wachovia had 20,325 employees. Wachovia's common shares are
traded on the New York Stock Exchange under the symbol WB, and Wachovia is
included in the Standard & Poor's 500 index. Options in Wachovia's common stock
are traded on the Chicago Board Options Exchange. At December 31, 2000,
Wachovia's market capitalization was $12 billion, ranking it 20th among U.S.
banking companies.
Wachovia has a heritage of more than 100 years of providing innovative and
quality personal, corporate and institutional financial services, backed by
in-depth expertise and resources and a commitment to client trust. Throughout
its history, Wachovia has produced long-term profitable growth while adapting to
change and maintaining its core philosophy of operating in a sound and prudent
manner. L.M. Baker, Jr., chairman, president and chief executive officer of
Wachovia Corporation and Wachovia Bank, N.A., is only the fifth chief executive
of Wachovia, strong evidence of Wachovia's exceptional continuity in leadership.
The principal banking subsidiary is Wachovia Bank, N.A., which has 668 branches
and 1,356 ATMs in Florida, Georgia, North Carolina, South Carolina and Virginia.
Wachovia serves 3.8 million consumers and 180,000 small business customers in
the five states. Wachovia is a leading corporate bank with more than 28,000
business relationships and global activities in 40 countries. An emphasis on
building long-term customer relationships, highlighted by the introduction of
the Personal Banker(sm) program in the early 1970s, is a hallmark of Wachovia.
Wachovia's other principal subsidiaries are Wachovia Securities, Inc., The First
National Bank of Atlanta and OFFITBANK. Wachovia Securities, Inc. is a
registered broker dealer and investment banking firm that provides a full range
of corporate and retail financial services. Retail brokerage services are
provided under the name IJL Wachovia. The First National Bank of Atlanta
provides credit card services nationwide. OFFITBANK, a New York-based wealth
management company, serves high-net-worth individuals and institutional clients.
Wachovia, through its many subsidiaries, offers a wide array of 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. In addition to the
traditional network of retail branches and ATMs, products and services are
available through Wachovia On-Call(R) telephone banking, automated Phone Access
and Internet-based investing and banking at wachovia.com.
Common Stock Data -- Per Share Table 1
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2000
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ----------- ----------- -----------
Market value:
Period-end ...................... $ 58.13 $ 56.69 $ 54.25 $ 67.56
High ............................ 58.56 60.38 75.25 68.94
Low ............................. 47.44 53.38 53.56 53.63
Book value at period-end ......... 30.89 29.93 29.20 28.88
Dividend ......................... .60 .60 .54 .54
Price/earnings ratio (1) ......... 14.3x 13.7x 12.3x 13.7x
Operating price/earnings
ratio (1), (2) .................. 12.7 12.3 11.9 13.3
1999
-----------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Market value:
Period-end ...................... $ 68.00 $ 78.63 $ 85.56 $ 81.19
High ............................ 88.88 85.25 92.31 91.00
Low ............................. 65.44 75.31 80.56 79.00
Book value at period-end ......... 28.04 27.76 26.83 26.77
Dividend ......................... .54 .54 .49 .49
Price/earnings ratio (1) ......... 13.9x 16.4x 18.5x 18.3x
Operating price/earnings
ratio (1), (2) .................. 13.7 16.2 18.1 17.7
(1) Based on the most recent four quarters of net income per diluted share and
end of period stock price.
(2) Excludes the after-tax impact of merger-related, restructuring and
litigation settlement charges.
2
Financial Summary Table 2
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2000 1999 1998
---------------- --------------- ---------------
Summary of Operations
(thousands, except per share data)
Interest income ........................... $ 5,345,354 $ 4,666,820 $ 4,665,245
Interest expense .......................... 2,829,633 2,196,734 2,314,213
----------- ----------- -----------
Net interest income ....................... 2,515,721 2,470,086 2,351,032
Provision for loan losses ................. 588,450 298,105 299,480
----------- ----------- -----------
Net interest income after provision for
loan losses .............................. 1,927,271 2,171,981 2,051,552
Other operating revenue ................... 1,931,689 1,610,123 1,228,119
Gain on sale of mortgage servicing
portfolio ................................ -- -- --
Securities (losses) gains ................. (417) 10,894 20,442
----------- ----------- -----------
Total other income ........................ 1,931,272 1,621,017 1,248,561
Personnel expense ......................... 1,299,343 1,220,286 1,055,353
Personal computer impairment charge ....... -- -- --
Merger-related charges .................... 28,958 19,309 85,312
Litigation settlement charge .............. 20,000 -- --
Restructuring charge ...................... 107,487 -- --
Other expense ............................. 1,127,225 1,011,030 855,667
----------- ----------- -----------
Total other expense ....................... 2,583,013 2,250,625 1,996,332
Income before income tax expense .......... 1,275,530 1,542,373 1,303,781
Income tax expense ........................ 443,222 531,152 429,611
----------- ----------- -----------
Net income ................................ $ 832,308 $ 1,011,221 $ 874,170
=========== =========== ===========
Net income per common share:
Basic .................................... $ 4.10 $ 4.99 $ 4.26
Diluted .................................. $ 4.07 $ 4.90 $ 4.18
Cash dividends paid per
common share (1) ......................... $ 2.28 $ 2.06 $ 1.86
Cash dividends paid on
common stock (2) ......................... $ 463,018 $ 418,447 $ 381,798
Cash dividend payout ratio (2) ............ 55.6% 41.4% 43.7%
Average basic shares outstanding .......... 202,989 202,795 205,058
Average diluted shares outstanding ........ 204,450 206,192 209,153
Selected Average Balances (millions)
Total assets .............................. $ 69,699 $ 65,420 $ 63,949
Loans -- net of unearned income ........... 52,436 47,223 44,401
Securities ................................ 8,365 9,340 10,582
Other interest-earning assets ............. 1,261 1,553 1,579
Total interest-earning assets ............. 62,062 58,116 56,562
Interest-bearing deposits ................. 35,213 32,325 32,011
Short-term borrowed funds ................. 8,988 9,401 10,895
Long-term debt ............................ 9,144 8,134 6,279
Total interest-bearing liabilities ........ 53,345 49,860 49,185
Noninterest-bearing deposits .............. 8,399 8,255 7,803
Total deposits ............................ 43,612 40,580 39,814
Shareholders' equity ...................... 5,886 5,430 5,168
Ratios (averages)
Net loan losses to loans .................. .70% .62% .67%
Net yield on interest-earning assets ...... 4.11 4.32 4.24
Shareholders' equity to:
Total assets ............................. 8.44 8.30 8.08
Net loans ................................ 11.37 11.63 11.78
Return on assets .......................... 1.19 1.55 1.37
Return on shareholders' equity ............ 14.14 18.62 16.92
Operating Performance (3)
(thousands, except per share data)
Net income ................................ $ 935,497 $1,023,855 $ 929,847
Net income per diluted share .............. $ 4.58 $ 4.97 $ 4.45
Annualized return on assets ............... 1.34% 1.57% 1.45%
Annualized return on shareholders'
equity ................................... 15.89 18.85 17.99
Cash dividend payout ratio ................ 49.5 40.9 41.1
Five-Year
Compound
1997 1996 1995 Growth Rate
--------------- --------------- ------------- ------------
Summary of Operations
(thousands, except per share data)
Interest income ........................... $ 4,262,385 $ 4,009,508 $3,790,110 7.1%
Interest expense .......................... 2,168,818 2,085,771 2,011,155 7.1
----------- ----------- ----------
Net interest income ....................... 2,093,567 1,923,737 1,778,955 7.2
Provision for loan losses ................. 264,949 193,776 130,504 35.2
----------- ----------- ----------
Net interest income after provision for
loan losses .............................. 1,828,618 1,729,961 1,648,451 3.2
Other operating revenue ................... 1,005,768 874,732 757,115 20.6
Gain on sale of mortgage servicing
portfolio ................................ -- -- 79,025
Securities (losses) gains ................. 1,454 4,588 (19,672)
----------- ----------- ----------
Total other income ........................ 1,007,222 879,320 816,468 18.8
Personnel expense ......................... 905,157 796,932 733,790 12.1
Personal computer impairment charge ....... 67,202 -- --
Merger-related charges .................... 220,330 -- --
Litigation settlement charge .............. -- -- --
Restructuring charge ...................... -- -- --
Other expense ............................. 774,032 712,041 707,839 9.8
----------- ----------- ----------
Total other expense ....................... 1,966,721 1,508,973 1,441,629 12.4
Income before income tax expense .......... 869,119 1,100,308 1,023,290 4.5
Income tax expense ........................ 276,313 343,049 315,377 7.0
----------- ----------- ----------
Net income ................................ $ 592,806 $ 757,259 $ 707,913 3.3
=========== =========== ==========
Net income per common share:
Basic .................................... $ 2.99 $ 3.70 $ 3.40 3.8
Diluted .................................. $ 2.94 $ 3.65 $ 3.36 3.9
Cash dividends paid per
common share (1) ......................... $ 1.68 $ 1.52 $ 1.38 10.6
Cash dividends paid on
common stock (2) ......................... $ 327,303 $ 305,740 $ 282,517 10.4
Cash dividend payout ratio (2) ............ 55.2% 40.4% 39.9%
Average basic shares outstanding .......... 198,290 204,889 208,230 (0.5)
Average diluted shares outstanding ........ 201,901 207,432 210,600 (0.6)
Selected Average Balances (millions)
Total assets .............................. $ 57,607 $ 55,584 $ 51,703 6.2
Loans -- net of unearned income ........... 39,716 36,739 33,510 9.4
Securities ................................ 10,793 11,876 11,977 (6.9)
Other interest-earning assets ............. 1,446 1,629 1,257 0.1
Total interest-earning assets ............. 51,955 50,244 46,744 5.8
Interest-bearing deposits ................. 29,582 27,609 25,601 6.6
Short-term borrowed funds ................. 8,987 9,018 8,860 0.3
Long-term debt ............................ 6,122 6,693 5,695 9.9
Total interest-bearing liabilities ........ 44,691 43,320 40,156 5.8
Noninterest-bearing deposits .............. 6,934 6,491 6,234 6.1
Total deposits ............................ 36,516 34,100 31,835 6.5
Shareholders' equity ...................... 4,533 4,458 4,164 7.2
Ratios (averages)
Net loan losses to loans .................. .67% .53% .38%
Net yield on interest-earning assets ...... 4.14 3.98 4.04
Shareholders' equity to:
Total assets ............................. 7.87 8.02 8.05
Net loans ................................ 11.57 12.31 12.62
Return on assets .......................... 1.03 1.36 1.37
Return on shareholders' equity ............ 13.08 16.99 17.00
Operating Performance (3)
(thousands, except per share data)
Net income ................................ $ 799,929 $ 757,259 $ 707,913 5.7
Net income per diluted share .............. $ 3.96 $ 3.65 $ 3.36 6.4
Annualized return on assets ............... 1.39% 1.36% 1.37%
Annualized return on shareholders'
equity ................................... 17.65 16.99 17.00
Cash dividend payout ratio ................ 40.9 40.4 39.9
(1) Cash dividends per common share in years 1997, 1996 and 1995 are those of
Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc.
(2) Includes amounts of pooled companies in years 1997, 1996 and 1995.
(3) Excludes the effects of personal computer impairment, merger-related,
litigation settlement and restructuring charges. Amounts for 1997 also
exclude $10,845 in provision for loan losses that aligned the practices of
the merged entities with those of Wachovia and $4,639 in losses incurred to
restructure the available-for-sale portfolio of acquired entities.
3
RESULTS OF OPERATIONS
2000 vs. 1999 Overview
The year 2000 marked the U.S. economy's tenth successive year of expansion --
the longest continuous growth period in U.S. history -- with gross domestic
product ("GDP") rising 5 percent for the year although slowing to 1.4 percent in
the fourth quarter, based on preliminary data. The fourth quarter deceleration
in GDP growth reflects decreases in business investment in equipment and
software and personal consumption expenditures that were partially offset by
increased government spending. Unemployment remained low with the nation's
average unemployment rate falling to an estimated 4.0 percent from 4.1 percent
in 1999. Within Wachovia's five-state geographic footprint, unemployment
averaged approximately 3.4 percent, based on preliminary data.
However, the year was also marked by intense volatility. The period began with
great promise as concerns were laid to rest about the Year 2000 date change on
information systems, and equity markets reached record highs in the first
quarter, particularly in the technology sector. The Federal Reserve moved to
counter the threat inflation posed to continued economic expansion by continuing
to increase short-term interest rates. In all, the Federal Reserve raised rates
six times from mid-1999 to mid-2000 in an effort to slow growth to a sustainable
rate. Trading activity did slow considerably in the second quarter as investors
became concerned about inflated equity valuations, mostly among Internet and
technology companies. At the same time the banking industry, led by Wachovia,
began to identify problem assets in corporate loan portfolios, reflecting an
increasing default trend in high-yield debt markets that began in late 1999.
During the latter part of 2000, investors' fears were partially confirmed as the
number of companies reporting earnings shortfalls markedly increased.
In late 2000, the Federal Reserve's view began to change as evidence mounted
that the economy was slowing much faster than expected, indicating that the
threat of recession was beginning to outweigh the threat of inflation.
By January 2001, further signs surfaced that the U.S. economy was slowing. The
National Association of Purchasing Management reported that U.S. manufacturing
activity fell for the fifth straight month in December 2000, dipping to its
lowest level since April 1991. The corporate bond market also suffered during
2000 as the ratio of downgrades to upgrades in the investment-grade sector
became 1.3 to 1, the worst year since 1993 according to Moody's. On January 3,
2001, the Federal Reserve moved to lower rates by 50 basis points, four weeks
ahead of the first scheduled meeting of the rate-setting Federal Open Market
Committee ("FOMC"). This was the first rate cut between regular FOMC meetings
since Fall 1998 when a global economic crisis threatened world financial
markets. It was the first 50 basis point reduction since mid-1992. This move was
followed by an additional 50 basis point rate reduction on January 31, 2001.
Although Wachovia's balance sheet is managed to remain neutral to changes in
interest rates, the slowing U.S. economy affected other components of Wachovia's
revenue mix. Revenue growth continued through 2000, with the pace receding after
the first quarter, primarily in response to weakening conditions in certain
market-sensitive business lines. Wachovia's operating results for the year 2000
reflected increased provision for loan losses to ensure the allowance for loan
losses was adequate to absorb the higher level of credit losses in the loan
portfolio given the current economic environment.
Wachovia's net income for 2000 was $832 million or $4.07 per diluted share
compared with $1.011 billion or $4.90 per diluted share in 1999. Results
included pretax nonoperating charges totaling $156 million in 2000 and $19
million in 1999. Nonoperating charges included amounts incurred to integrate the
operations of recently acquired business partners, to settle certain litigation
brought against a company acquired by Wachovia and to
4
implement a plan to realign resources to increase revenue and improve operating
efficiency. Excluding the after-tax impact of nonoperating charges, operating
net income was $935 million or $4.58 per diluted share in 2000 versus $1.024
billion or $4.97 per diluted share in 1999.
During the third quarter of 2000, Wachovia announced plans to eliminate 1,800
positions as part of a continuing performance improvement project expected to
lift pretax earnings by $425 million by the end of 2002. The performance
project, which began in 1999, seeks to improve earnings through revenue
enhancement, productivity gains, sharper capital deployment and expense
management.
Wachovia continued 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. On February 1, 2000, Wachovia completed
its purchase of a majority of the credit card business of Partners First
Holdings LLC, adding 1.2 million customers and approximately $2 billion of
managed receivables. The acquisition of B C Bankshares, Inc., parent company of
the Bank of Canton in suburban Atlanta, also was completed in early February. On
June 1, Wachovia completed the acquisition of Commerce National Corporation in
suburban Orlando, parent company of the National Bank of Commerce. On November
1, Wachovia completed the acquisition of DavisBaldwin, Inc., a Tampa-based
insurance agency specializing in property and casualty insurance services for
commercial customers. These transactions followed the 1999 acquisitions of
Interstate/Johnson Lane, Inc., OFFITBANK Holdings, Inc., and Barry, Evans,
Josephs & Snipes, Inc. that strengthened Wachovia's wealth advisory and capital
markets capabilities. All acquisitions completed in 1999 and 2000 were accounted
for as purchases with results of operations of the acquired companies included
in Wachovia's consolidated results from the date each acquisition was completed.
On October 30, Wachovia announced an agreement to acquire Republic Security
Financial Corporation ("Republic Security"), headquartered in West Palm Beach,
Florida, and parent company of Republic Security Bank. Republic Security, which
operates 94 full-service banking facilities in 12 Florida counties, had assets
of $3.1 billion and deposits of $2 billion at December 31, 2000. The transaction
will be accounted for as a purchase and should be completed in the first quarter
of 2001. Both regulatory and shareholder approval have been received for this
transaction. Republic Security's common shares are traded on NASDAQ under the
symbol RSFC.
Wachovia's growth strategy includes 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 transactions typically involve the payment
of a premium over book value and may therefore result in some dilution of book
value and net income per share. Wachovia's strategy also includes ongoing
evaluation of the growth prospects for existing businesses. Such strategic
evaluation could result in Wachovia's exiting businesses with diminished growth
prospects so that capital and other resources can be redirected toward
higher-growth businesses.
Expanded discussion of Wachovia's operating results and financial condition is
presented in the following narrative with accompanying tables. 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 or
disposition transactions that have occurred or may take place in 2001. The
narrative should be read in conjunction with the Consolidated Financial
Statements and Notes on pages 52 through 75.
5
BUSINESS SEGMENTS
Wachovia has five reportable business segments: Asset and Wealth Management,
Corporate, Consumer, Credit Card and Treasury & Administration.
Business segment results are reported on a management accounting basis. 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 result,
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.
The provision for loan losses is charged to each business segment based on the
credit risk of each segment's loan portfolio. Operating expenses to support
business unit revenues are either charged directly as incurred or allocated from
support areas based on usage. In addition, general overhead expense that cannot
be specifically identified with business activity is allocated based on the
proportion of each segment's direct expenses to total direct expenses of the
combined segments. General overhead includes expenses incurred for brand
advertising, amortization of certain purchase accounting intangibles and their
associated funding cost and various administrative functions such as human
resources, finance, executive management and other support areas. Income tax
expense is calculated for each business segment with a blended tax rate. This
rate is adjusted as applicable for the assumed tax effect of tax-exempt income
and nondeductible intangible amortization expense.
Beginning January 2000, Wachovia adopted a marginal matched maturity funds
transfer pricing methodology for management reporting. Formerly, Wachovia
utilized a multiple pool method to simulate matched funding. This change in
management accounting has been reflected for all reported periods. Given the
complexity of products and services and their impact on cash and balance sheet
management, the marginal matched maturity method provides an improved method of
measuring the economics of products, services and business unit results. The new
approach evaluates the cash flows and repricing characteristics of all balance
sheet transactions at an instrument level by benchmarking pricing decisions
against Wachovia's wholesale cost of funds. This approach removes most forms of
interest-rate risk, prepayment risk and liquidity risk from the balance sheets
of the business units and isolates them in Treasury & Administration for
centralized evaluation and management. Under marginal matched maturity funds
transfer pricing, business unit results more closely represent the economic
impact of growth and pricing decisions. Other minor changes in management
accounting were implemented during the year with all prior periods restated to
reflect the changes.
Footnote B of the Consolidated Financial Statements provides additional
information on business segment accounting policies and on items reconciling
segment results to consolidated results.
6
Financial results by business segment are discussed below.
Business Segments Table 3
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(millions)
Asset and
Wealth
Management Corporate Consumer
---------------------- ---------------------- -------------------
2000 1999 2000 1999 2000 1999
-------- ---- ----- ---- ----- ----
Operations
Summary
External net interest
margin ................. $ 147 $ 103 $ 2,636 $ 2,197 $ (181) $ (154)
Internal funding
(charge) credit ........ (3) 24 (1,653) (1,261) 1,094 1,011
----------- ------ -------- -------- ------- ------
Net interest income*..... 144 127 983 936 913 857
Total other income ...... 619 485 427 403 485 420
---------- ------ -------- -------- ------- ------
Total revenue ........... 763 612 1,410 1,339 1,398 1,277
Provision for loan
losses ................. 2 -- 384 59 20 15
Other expense ........... 556 433 587 562 810 780
---------- ------ -------- -------- ------- ------
Profit contribution ..... 205 179 439 718 568 482
Allocated expenses ...... 73 70 91 92 116 130
---------- ------ -------- -------- ------- ------
Pretax income ........... 132 109 348 626 452 352
Income tax expense....... 53 42 126 225 165 128
---------- ------ -------- -------- ------- ------
Net income .............. $ 79 $ 67 $ 222 $ 401 $ 287 $ 224
========== ====== ======== ======== ======= ======
Percentage
contribution to
total revenue** ........ 16.6% 14.5% 30.8% 31.7% 30.5% 30.2%
Percentage
contribution to net
income ................. 9.5% 6.6% 26.7% 39.7% 34.5% 22.2%
Average Balances
Total assets ............ $3,975 $2,860 $ 38,082 $ 34,591 $11,004 $9,787
Treasury & Total
Credit Card Administration Eliminations Corporation
------------------- -------------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------ --------- ------ ------- ------ ------- -------
Operations
Summary
External net interest
margin ................. $1,167 $ 853 $ (1,217) $ (489) $ (36) $ (40) $ 2,516 $ 2,470
Internal funding
(charge) credit ........ (503) (328) 1,165 649 (100) (95) -- --
------- ------ ---------- ------- ------- ------- -------- --------
Net interest income*..... 664 525 (52) 160 (136) (135) 2,516 2,470
Total other income ...... 220 169 180 144 -- -- 1,931 1,621
------- ------ ---------- ------- ------- ------- -------- --------
Total revenue ........... 884 694 128 304 (136) (135) 4,447 4,091
Provision for loan
losses ................. 384 257 (201) (33) -- -- 589 298
Other expense ........... 257 185 435 354 (62) (63) 2,583 2,251
------- ------ ---------- ------- ------- ------- -------- --------
Profit contribution ..... 243 252 (106) (17) (74) (72) 1,275 1,542
Allocated expenses ...... 31 31 (273) (291) (38) (32) -- --
------- ------ ---------- ------- ------- ------- -------- --------
Pretax income ........... 212 221 167 274 (36) (40) 1,275 1,542
Income tax expense....... 76 79 59 97 (36) (40) 443 531
------- ------ ---------- ------- ------- ------- -------- --------
Net income .............. $ 136 $ 142 $ 108 $ 177 $ -- $ -- $ 832 $ 1,011
======= ====== ========== ======= ======= ======= ======== ========
Percentage
contribution to
total revenue** ........ 19.3% 16.4% 2.8% 7.2%
Percentage
contribution to net
income ................. 16.3% 14.0% 13.0% 17.5%
Average Balances
Total assets ............ $7,913 $6,283 $ 8,725 $11,899 $69,699 $65,420
* Net interest income is reported on a taxable equivalent basis by segment and
on a nontaxable equivalent basis for the Corporation. The difference is
included in the eliminations column.
** Percentage contribution to total revenue is based on the proportion of each
segment's revenue to the combined revenue of all segments.
Asset and Wealth Management
Asset and Wealth Management aspires to be the preferred provider of integrated
investment and wealth management services in the Southeast and selected national
markets. During 1999, Wachovia made three acquisitions to advance its
capabilities. In April 1999, Wachovia acquired Interstate/Johnson Lane, Inc.
("IJL") and in September 1999, Wachovia completed the acquisitions of OFFITBANK
Holdings, Inc. ("OFFITBANK") and Barry, Evans, Josephs & Snipes, Inc. ("BEJS").
Also in the third quarter of 1999, Wachovia sold its master trust and
institutional custody business in order to focus on more relationship-oriented
businesses. In November 2000, Wachovia acquired Tampa-based DavisBaldwin, Inc.
("DavisBaldwin"), a leading insurance agency specializing in property and
casualty insurance services for commercial customers.
Products and Services. Asset and Wealth Management delivers innovative tailored
products and services through a variety of distribution channels. The Private
Financial Advisors group provides a full range of products and services to
affluent customers, 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 a wide variety of services and investment
products including the Wachovia Funds through full-service brokers and
branch-based investment consultants. Customers making their own investment
decisions can trade through Wachovia Investments Direct using a broker, a
touch-tone telephone service or the Internet.
7
Wachovia Asset Management provides investment strategies and portfolio
management for individuals and institutions, in addition to managing the
Wachovia Funds. Institutional Client Services provides asset management,
employee benefit, retirement services and philanthropy management services to
businesses, endowments, foundations and other institutions, as well as
specialized insurance and risk management services for commercial clients.
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. Additionally,
research shows that the public continues to trust banks more than other
financial service providers. Within Wachovia's five-state geographic footprint,
households are growing much faster than the national average, and over the next
five years, the subset of affluent households is expected to grow substantially.
Market volatility and the projected need for intergenerational wealth transfer
capabilities also will drive demand. These factors combine to create an
attractive market opportunity. Asset and Wealth Management's market presence,
brand names and strategic focus position it to take unique advantage of this
environment.
The competition in the wealth management business is increasing. Many financial
service providers pursue a product-based or silo approach to serving the
affluent. Asset and Wealth Management's strategy is to provide a "relationship
approach" such as the Private Financial Advisor model that coordinates and
manages the full range of investment management, estate planning, tax,
brokerage, insurance, debt-management and banking services through a trusted
financial advisor. This involves a comprehensive alignment of resources to
achieve a team approach to client service within the Asset and Wealth Management
business and across Wachovia's other business segments. The integration of
recent acquisitions has allowed this business segment to increase its product
offerings, leverage existing services and expand distribution channels. In
September 2000, Wachovia launched the Market Acceleration Project that expands
the penetration of the successful Private Financial Advisor model in new and
existing markets. The goal of the project is to increase profit by generating
more successful client leads and improving linkages among Wachovia's other lines
of business.
Financial Results. Asset and Wealth Management's profit contribution increased
$26 million or 14 percent from 1999. Net income increased $12 million or 19
percent over the same period. Much of the growth in earnings resulted from the
$17 million increase in net interest income. Strong loan growth within the
Private Financial Advisors group more than offset the effect of the additional
cost of funding the intangible assets resulting from recent acquisitions. The
increases in both other income and other expense are significantly impacted by
the acquisitions of IJL, OFFITBANK, BEJS and DavisBaldwin. In addition to the
acquisitions of IJL and OFFITBANK, record market trading activity in the first
quarter contributed to the strong increase in investment fees despite some
moderation later in the year. The $123 million increase in expenses reflects the
added expense base and goodwill amortization of the acquired entities, as well
as additional salary and other costs for business expansion, particularly within
the Private Financial Advisors group.
Corporate
Corporate aspires to be the preferred provider of financial services to
commercial clients in the Southeast and to selected client segments nationally
and overseas. To achieve this goal, Corporate works to know its customers better
than the competition; anticipate customer needs and provide innovative
solutions; align products, services and delivery channels with customer needs;
and serve customers through insightful, trusted professionals.
8
Products and Services. Corporate provides a comprehensive array of corporate
banking, investment banking, capital markets and industry-leading cash
management services through a variety of client-focused subsegments. Global
Corporate Finance serves the needs of domestic and multinational companies with
annual sales above $200 million. The group also serves selected industry sectors
including communications/technology and diversified financial services. The
group operates through offices in the Southeast, Boston, Chicago, London, New
York, Sao Paulo and Hong Kong.
Regional Corporate Finance serves 2,200 Southeastern companies with sales of $25
million to $200 million. A new Emerging Companies group targets smaller growth
companies. Business Banking serves 18,000 regional clients with sales from $2
million to $25 million. Real Estate Finance serves 4,000 commercial real estate
developers, investors and REITs, primarily in the Southeast. Dealer Finance
serves 2,500 automobile dealers and other specialty finance customers throughout
the Southeast.
Capital Markets offers a variety of services including investment banking,
mergers and acquisitions advisory, loan syndication finance, asset-backed
finance, commercial paper, corporate bonds, interest rate and foreign exchange
risk management, leasing, public equity research, sales and trading, private
equity investments, third-party research and option trading execution. Capital
Markets closely aligns its products and services to meet the needs of each
targeted client subsegment.
Corporate also provides industry-leading treasury consulting and cash management
solutions through its Treasury Services group. This area has been consistently
cited for its superior quality of service, technology and operations
performance. The Treasury Services group achieved top honors in the
Phoenix-Hecht Quality Index 2000. In addition to treasury consulting, the group
provides an array of cash management products and has become a leading provider
of Internet-based and wireless access.
Industry Dynamics and Strategy. While general demand for corporate services
remains solid, an emerging credit cycle poses risk of weakness in certain
domestic activities. Softening general economic conditions, rising bond default
rates, the significant increase in credit rating downgrades versus upgrades,
widening credit spreads, greater incidence of public company bankruptcies, and
the velocity of borrower deterioration all signal rising risk in the large
corporate lending environment. Despite these challenging market conditions and a
fiercely competitive industry climate, Corporate maintains a strong market
position in each of its client segments.
Corporate's strategy to remain competitive is to build strong and long-lasting
relationships with targeted clients through deep knowledge of their business and
understanding of unmet needs combined with superior execution. Dynamic and
focused customer segmentation and sales model development will enhance customer
service, productivity and performance. Key to this strategy is a sharp focus on
Capital Markets products and improved investment banking expertise. In addition,
Treasury Services is accelerating the development of innovative new products,
eBusiness applications and outsourcing services.
Financial Results. Corporate's profit contribution in 2000 declined $279 million
or 39 percent from 1999 due to a higher loan loss provision in 2000. The higher
loan loss provision also reduced net income $179 million or 45 percent versus
1999. Net interest income increased $47 million or 5 percent over 1999,
reflecting 12 percent growth in average loans and improved pricing, offset
partially by higher funding costs. Carrying costs on the higher level of
nonperforming loans also contributed to the spread compression. The loan loss
provision increased $325 million, reflecting credit deterioration in the large
corporate and leveraged portfolios. Other income grew $24 million or 6 percent
over 1999, reflecting the inclusion of the IJL Capital Markets businesses for
the full year as well
9
as stronger letter of credit fees and improved Treasury Services results. Other
expense rose $25 million or 5 percent, with the addition of the former IJL
business units.
Consumer
Consumer aspires to be the preferred provider of financial services to consumers
and small businesses in Wachovia's regional markets. To achieve this goal,
Consumer develops customer relationships for the greatest lifetime value,
manages the cost of the sales and service network and pursues opportunities to
attract and serve customers through traditional and digital channels. It targets
consumers, worksite groups and small businesses throughout the Southeast,
offering a broad array of competitively priced products and services. Consumer
is also important to the entire Wachovia franchise because of the value provided
to Wachovia's other business segments by its branch network, brand identity and
customer base.
Products and Services. Consumer provides traditional retail banking services,
including mortgage lending, deposit products and consumer loans, to 3.8 million
customers, as well as services to 180,000 small businesses. It also offers
access to investment and insurance products to these customer segments. Delivery
channels include 668 traditional and in-store branches and worksite centers,
1,356 ATMs and 22 kiosks, supported by four automated phone centers and the
Internet. With 1.3 million active cards issued, Wachovia ranks among the top ten
nationally in Visa(R) Check Card sales volume, according to a study conducted by
Visa(R). Campus card programs provide card-based banking access to students and
faculty at nine university campuses, and Wachovia At Work serves employees of
more than 5,000 companies.
The Internet is growing in importance as a forum for financial services.
Approximately 500,000 of Wachovia's demand deposit customers are enrolled in
Internet banking, up from 226,000 at the end of 1999. Wachovia's Internet site,
wachovia.com, serves as a financial portal with extensive account information
and transaction capability supported by relevant financial news.
Industry Dynamics and Strategy. Consumer operates in some of the country's most
attractive retail growth markets, including Florida, Georgia, South Carolina,
North Carolina and Virginia. The majority of Wachovia's deposits are in large,
high-growth metropolitan areas within this region. Consumer's strategy is to
assess customer relationship potential, identify financial needs and achieve
alignment between needs, service expectations and price, thereby delivering
optimal value to each customer. Specific initiatives to implement this strategy
include:
o Information-Based Relationship Management(sm). Wachovia has developed strong
proprietary data and analytical tools around its customers' buying behaviors
that are used to proactively identify customer needs for targeted product
development and sales activities. The Profitable Relationship Optimization
(PRO) desktop technology connects to data warehouses that analyze customer
information and anticipate the next likely desired service. Personal Financial
Advisors, small business and branch bankers are trained to use solution-based
selling skills supported by this technology to better serve more than 400,000
high-potential customers.
o Wachovia at Work and Campus Banking Programs. These strategies involve
deploying Wachovia products and services through employers and universities to
provide access to employees and students.
o Market Network Strategy. Network optimization models provide an analytical
framework to optimize customer points of presence while reducing branch
network expenses. These models led to the sale of 15 branches in
Virginia and four in North Carolina in 2000, plus a number of branch openings,
closings and consolidations.
10
o Selective Geographic Expansion. Wachovia continues to evaluate merger and
branching opportunities in high-growth areas. During the first quarter of
2000, Wachovia completed the acquisition of Bank of Canton in the Atlanta
area. Wachovia completed the acquisition of the National Bank of Commerce in
suburban Orlando in early June. During the third quarter, Wachovia announced a
branch swap transaction that allows entry into the Tennessee market during the
first quarter of 2001. During the fourth quarter, Wachovia announced the
acquisition of Republic Security Financial Corporation, which serves 178,000
customers, giving Wachovia the 10th largest deposit share in Florida and a
top-three position in the Palm Beach MSA. This transaction is expected to
close during the first quarter of 2001.
eBusiness activities at Wachovia are enterprise-wide. Advances in technology are
rapidly transforming the financial services industry. The eBusiness Division
provides eBusiness strategic planning, leadership and operational management for
the entire corporation. Business units sponsor specific Internet initiatives to
meet the dynamic demands of their customer groups. This collaborative structure
maximizes the leverage from technology and research with the necessary
responsiveness to customer requirements and deliverables. Wachovia's eBusiness
strategy is to develop a personalized and seamlessly delivered customer
experience when using wachovia.com and Wachovia's other Web sites,
macroworld.net, ijlwachovia.com and offitbank.com. eBusiness activities create
value by aligning customer acquisition, retention, cross-selling and cost
reduction throughout all customer segment and delivery channels.
Financial Results. Consumer's profit contribution increased $86 million or 18
percent over 1999. Net income increased $63 million or 28 percent over 1999.
Results for 2000 and 1999 include gains from branch sales of $42 million and $8
million, respectively. Excluding the impact of the branch divestitures in both
years (operating results and divestiture premium), consumer's profit
contribution increased $53 million or 11 percent. Strong results for the
branch-based consumer business offset a difficult mortgage lending environment
and the cost of further investment in Wachovia's retail delivery through the
Internet. Results for 2000 included eleven months of Bank of Canton and seven
months of National Bank of Commerce. Net interest income increased $56 million
or 6 percent from good loan and deposit growth. Loan growth was good in the
Bankline and Equity Bankline categories, and certificates of deposit were the
highest deposit growth category as a result of the product mix of acquired
banks, special marketing promotions and a shift in customer preference. Other
income was up $65 million or 15 percent, driven by the divestiture premiums, an
increase in returned check charges and electronic banking fee growth. Excluding
the divestiture premium from both years, other income increased 8 percent.
Electronic banking revenue grew 17 percent mostly due to higher interchange
fees, and deposit-related fees increased 9 percent. Mortgage fees declined 12
percent on lower volume and a shift from fixed-rate to adjustable-rate
mortgages. Expenses grew $30 million or less than 4 percent as a result of the
addition of the acquired banks and investment in the Internet site.
Credit Card
Credit Card's mission is to be the preferred credit card issuer, recognized for
value, fairness and long-term customer and employee relationships.
Products and Services. The Credit Card business segment is a full-service
provider of consumer credit cards and merchant acquirer services. Credit Card
manages most components of credit card processing in-house, with the exception
of servicing business card products and the Partners First portfolio that are
processed through outside vendors. Currently 92 percent of Wachovia's credit
card portfolio accrues interest at a variable rate, and 34 percent of the
accounts are within Wachovia's five-state geographic footprint.
11
Industry Dynamics and Strategy. The credit card industry is in a period of
intense competition and consolidation. Response rates to direct mail
solicitations are below those of prior years; however, Wachovia's response rates
remain higher than the industry average. These pressures have prompted issuers
to pursue new card-based products in an attempt to capture market share. Credit
Card's strategy focuses on serving above-average credit quality customers who
carry higher-than-average loan balances while maintaining an efficient and
cost-effective process.
On February 6, 2001, Wachovia announced that it was investigating strategic
alternatives for the credit card business, including maintaining the business,
developing a joint venture or selling the business.
Financial Results. Credit Card's profit contribution decreased $9 million or 3
percent from 1999 primarily due to spread compression and a higher charge-off
provision. Net income was also down for the year for the same reasons. Both net
interest income and the provision for loan losses increased due to the higher
level of average balances outstanding. Offsetting the increase in net interest
income from higher balances were reduced late fees and lower spreads resulting
from rising interest rates and the lag effect of repricing accounts. Higher loss
experience in 2000 also contributed to the rise in the provision for loan
losses. In 2000, net loan losses were 4.83 percent of average loans outstanding
compared with 4.03 percent in 1999. Noninterest income grew $51 million or 31
percent mainly due to the acquisition of the Partners First portfolio, strong
interchange income from increased purchase volume and higher overlimit fees.
Other expense rose 39 percent primarily due to purchased credit card premium
amortization and third-party portfolio servicing fees resulting from the
Partners First acquisition.
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. Also
reflected is the financial statement impact of credit card securitization
transactions, since the Credit Card business segment is reported on a managed
basis. Asset securitizations are explained further on page 16. Other unallocated
corporate costs and certain nonoperating expenses are also included.
Financial Results. Credit card securitization transactions and the securitized
portion of the acquired Partners First credit card portfolio had a large impact
on comparability with prior-year results. In March 1999, September 1999 and
August 2000, Wachovia completed the securitization of $896 million, $500 million
and $750 million, respectively, in credit card receivables. In comparing 2000 to
1999, the securitization transactions had the combined net effect of reducing
average loans outstanding by $728 million from 1999. The securitized portion of
the acquired Partners First portfolio reduced average balances by an additional
$1.371 billion from 1999. The remaining reduction in average assets in both
period comparisons was largely caused by attrition in the securities portfolio.
Treasury & Administration's profit contribution declined $89 million principally
as a result of the restructuring charges recorded in the last two quarters of
2000. Net income was down $69 million or 39 percent. The increase in the amount
of securitized credit card loan balances accounted for $201 million of the $212
million decrease in net interest income. Securitizations and the securitized
portion of the acquired Partners First portfolio are also the primary cause of
the decrease in loan loss provision. The $36 million increase in other income
primarily results from a $42 million increase in fees received for servicing the
larger volume of securitized cards, offset by an $18 million decrease in gains
from securitization transactions. Other expense increased $81 million due to a
higher level of nonoperating expenses including $107 million in restructuring
charges, $10 million in merger integration expenses and $20 million in
litigation settlement charges. The increase in nonoperating expenses was offset
by $19 million in expenses incurred in 1999 for Year 2000 systems preparations.
12
Taxable Equivalent Rate/Volume Analysis Table 4
- --------------------------------------------------------------------------------
Variance
Average Volume Average Rate Interest Attributable to
- ------------------- --------------- ---------------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
- --------- -------- ------ ------ ---------- ---------- ---------- --------- ---------
(millions) Interest Income (thousands)
Loans:
$ 17,360 $ 15,751 8.52 7.25 Commercial ................... $1,479,070 $1,141,309 $337,761 $213,591 $124,170
662 808 9.30 9.79 Tax-exempt ................... 61,553 79,075 (17,522) (3,749) (13,773)
- --------- -------- ---------- ---------- --------
18,022 16,559 8.55 7.37 Total commercial ........... 1,540,623 1,220,384 320,239 206,263 113,976
1,237 1,064 8.86 8.63 Direct retail ................ 109,549 91,882 17,667 2,438 15,229
3,996 3,482 8.29 7.89 Indirect retail .............. 331,133 274,843 56,290 14,188 42,102
4,537 5,040 14.32 13.44 Credit card .................. 649,584 677,232 (27,648) 42,591 (70,239)
752 589 11.73 10.93 Other revolving credit ....... 88,255 64,405 23,850 4,979 18,871
- --------- -------- ---------- ---------- --------
10,522 10,175 11.20 10.89 Total retail ............... 1,178,521 1,108,362 70,159 31,774 38,385
2,921 2,193 9.50 8.54 Construction ................. 277,498 187,396 90,102 22,684 67,418
8,451 7,324 8.60 8.11 Commercial mortgages ......... 726,446 594,166 132,280 36,901 95,379
8,511 7,421 8.04 7.77 Residential mortgages ........ 684,157 576,624 107,533 20,512 87,021
- --------- -------- ---------- ---------- --------
19,883 16,938 8.49 8.02 Total real estate .......... 1,688,101 1,358,186 329,915 83,400 46,515
2,698 2,266 8.76 11.07 Lease financing .............. 236,487 250,868 (14,381) (57,479) 43,098
1,311 1,285 7.86 6.56 Foreign ...................... 103,056 84,262 18,794 17,059 1,735
- --------- -------- ---------- ---------- --------
52,436 47,223 9.05 8.52 Total loans ................ 4,746,788 4,022,062 724,726 262,905 461,821
Securities:
1,076 1,319 7.59 7.41 Held-to-maturity ............. 81,656 97,757 (16,101) 2,300 (18,401)
7,289 8,021 6.49 6.45 Available-for-sale ........... 473,023 517,242 (44,219) 3,295 (47,514)
- --------- -------- ---------- ---------- --------
8,365 9,340 6.63 6.58 Total securities ........... 554,679 614,999 (60,320) 4,341 (64,661)
1,261 1,553 6.37 4.52 Other earning assets ........... 80,375 70,245 10,130 25,010 (14,880)
- --------- -------- ---------- ---------- --------
Total interest-
62,062 58,116 8.67 8.10 earning assets ........... 5,381,842 4,707,306 674,536 343,828 330,708
2,992 3,117 Cash and due from banks ........
5,332 4,728 Other assets ...................
(687) (541) Allowance for loan losses ......
- --------- --------
$ 69,699 $ 65,420 Total assets ...............
========= ========
Interest Expense
$ 4,855 $ 4,657 1.45 1.25 Interest-bearing demand ........ 70,537 58,434 12,103 9,532 2,571
Savings and money market
12,990 $ 13,339 4.36 3.58 savings....................... 566,471 477,557 88,914 101,727 (12,813)
9,313 8,765 5.70 5.11 Savings certificates ........... 530,895 447,583 83,312 54,196 29,116
Large denomination
4,141 3,318 6.02 5.20 certificates.................. 249,257 172,539 76,718 29,760 46,958
- --------- -------- ---------- ---------- --------
Total interest-
bearing deposits
31,299 30,079 4.53 3.84 in domestic offices ...... 1,417,160 1,156,113 261,047 212,602 48,445
Interest-bearing deposits in
3,914 2,246 6.11 4.86 foreign offices .............. 239,003 109,082 129,921 33,446 96,475
- --------- -------- ---------- ---------- --------
Total interest-
35,213 32,325 4.70 3.91 bearing deposits.......... 1,656,163 1,265,195 390,968 270,932 120,036
8,988 9,401 6.22 4.86 Short-term borrowed funds ...... 559,336 457,161 102,175 123,018 (20,843)
9,144 8,134 6.72 5.83 Long-term debt ................. 614,134 474,378 139,756 76,845 62,911
- --------- -------- ---------- ---------- --------
Total interest-bearing
53,345 49,860 5.30 4.41 liabilities .............. 2,829,633 2,196,734 632,899 471,367 161,532
---------- ---------- --------
8,399 8,255 Noninterest-bearing deposits ...
2,069 1,875 Other liabilities ..............
5,886 5,430 Shareholders' equity ...........
- --------- --------
Total liabilities and
$ 69,699 $ 65,420 shareholders' equity .....
========= ======== ----- -----
3.37 3.69 Interest rate spread
----- -----
Net yield on interest-
earning assets and
4.11 4.32 net interest income .......... $2,552,209 $2,510,572 $ 41,637 (124,043) 165,680
===== ===== ========== ========== ========
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 variance in
proportion to the relationship of the absolute dollar amount of the change in
each.
Securities available-for-sale are reported at amortized cost. Pretax unrealized
losses of $111 million in 2000 and gains of $18 million in 1999 are included in
other assets for purposes of this presentation.
13
CONSOLIDATED FINANCIAL RESULTS
Net Interest Income
Wachovia's taxable equivalent net interest income rose $42 million or 1.7
percent from 1999 to $2.552 billion for the full year 2000. Through the first
half of the year, the Federal Reserve continued to take action to slow the
economy ending with a 50 basis point rate increase on May 16 that followed five
successive 25 basis point increases since July 1999. The Federal Reserve took no
further action on rates in 2000 after the May 16 Federal Open Markets Committee
meeting, although signs that the economy was slowing caused the market to
anticipate a change in monetary policy. The market's anticipation was noted in
the 5-year swap rate that declined approximately 80 basis points during the
fourth quarter. Market expectation was confirmed on January 3, 2001, when the
Federal Reserve lowered short-term rates by 50 basis points followed by another
50 basis point reduction on January 31, 2001. Upon each Federal Reserve action,
Wachovia adjusted its prime lending rate accordingly to keep pace with the
change in funding costs. Wachovia's average prime lending rate and the average
federal funds rate in 2000 were 9.23 percent and 6.24 percent, respectively,
compared with 7.99 percent and 4.97 percent, respectively, in 1999.
The net yield on interest-earning assets was 4.11 percent compared with 4.32
percent reported in 1999. Several factors contributed to the lower net yield
including credit card securitization transactions, greater competition for
funding, carrying costs of nonperforming loans, and liability mix. Although loan
spreads began to widen in the latter half of the year, deposit pricing remained
competitive. Loan growth continued to outpace growth in core deposits leading to
greater use of wholesale sources to fund loan demand. Although this contributed
positively to net interest income, it had a dilutive effect on the net yield on
interest-earning assets. Within deposit categories, product mix contributed to
the rise in funding costs. Within the savings and money market savings category,
demand remained strong for Wachovia's Premiere money market account. This offset
some of the volume decline in lower-rate traditional savings deposits but
contributed to the higher average rate for that category of deposits.
The average yield on interest-earning assets increased 57 basis points from
1999. The rise in rates resulted in higher yields in all major loan categories
except lease financing. Changes in portfolio mix resulting from credit card
securitization transactions completed during 1999 and 2000 subdued overall
retail loan yields in 2000. The Series 1999-1 transaction, representing $896
million in receivables, occurred late in the first quarter of 1999. The Series
1999-2 transaction, representing $500 million in receivables, occurred in late
third quarter 1999. In early August 2000, Wachovia completed the 2000-1 series
securitization representing $750 million in receivables. Also during the third
quarter of 2000, the 1995-1 series securitization transaction began to mature,
resulting in the loans returning to the balance sheet. The net effect of these
securitization transactions reduced average credit card balances by $728 million
from 1999. Asset securitizations are explained further on page 16. Offsetting
the decline in average balances caused by securitization activity was an
increase resulting from the acquisition of Partners First, which added
approximately $170 million to the 2000 average credit card balance.
The average rate paid on interest-bearing liabilities increased 89 basis points
from 1999. Comparisons with the prior year reflect the rising rate environment
that began with the Federal Reserve's actions to slow the economy in mid-1999.
Liability mix also contributed to the increase in the rate on interest-bearing
liabilities, as much of the growth in the balance sheet was funded from
wholesale sources. Deposit product mix further contributed to the increase in
funding costs as customer preference shifted toward certificates of deposit and
Premiere accounts from lower-rate money market savings accounts. Several
certificate of deposit promotions during the year also contributed to the change
in mix. Interest-bearing core deposit funding increased $397 million, compared
with 1999
14
despite the loss of $438 million in deposits with the sale of branches in the
third quarter of 2000. The acquisitions of Bank of Canton and National Bank of
Commerce and the sale of branches in the third quarter of 1999 also affected
comparability of core deposit balances between periods.
Net interest income is expected to grow in the mid-single-digit range in 2001.
The increase is expected to result from mid-single-digit loan growth and a
steady net yield on interest-earning assets.
Related Balance Sheet Analysis
Loan growth remained healthy throughout 2000, rising $5.213 billion or 11
percent to $52.436 billion. Although growth occurred in all categories, except
tax-exempt commercial and credit card, most of the growth was in the real estate
categories, particularly during the latter part of the year. The decline in
average credit card balances was caused by securitization transactions completed
during 1999 and 2000. Loan demand remained strong, although Management's view of
rising risk in the large corporate lending environment led to selectivity in
taking on new business, particularly during the second half of the year.
Notably, the commercial loan portfolio increased approximately 9 percent for the
full year but less than 4 percent in the fourth quarter. Most of the slowing in
commercial lending occurred in the large corporate portfolio.
The effect of acquisitions was more than offset by credit card securitization
transactions that removed $728 million in receivables from the balance sheet,
leaving core loan growth the same as the 11 percent reported above.
Period-End Loans Table 5
- --------------------------------------------------------------------------------
(millions)
2000 1999 1998 1997 1996
----------- ---------- ---------- ---------- ----------
Loan Portfolio
Domestic borrowers:
Commercial ..................... $ 17,661 $17,043 $14,328 $13,528 $10,341
Tax-exempt ..................... 605 690 973 1,607 2,016
Direct retail .................. 1,338 1,064 1,098 1,250 1,218
Indirect retail ................ 4,220 3,741 3,240 3,028 3,082
Credit card .................... 4,494 4,736 6,049 5,919 5,596
Other revolving credit ......... 835 667 537 460 424
Construction ................... 3,370 2,311 2,044 1,780 1,247
Commercial mortgages ........... 9,025 7,754 6,988 6,790 5,684
Residential mortgages .......... 9,234 7,757 7,490 8,099 7,132
Lease financing, net ........... 2,840 2,597 1,879 1,094 831
-------- ------- ------- ------- -------
Total ......................... 53,622 48,360 44,626 43,555 37,571
Foreign ......................... 1,380 1,261 1,093 639 436
-------- ------- ------- ------- -------
Total loans ................... $ 55,002 $49,621 $45,719 $44,194 $38,007
======== ======= ======= ======= =======
Wachovia has foreign credit outstandings consisting of loans and lease
financing. Foreign loans at December 31, 2000 were $1.380 billion, compared with
$1.261 billion at year-end 1999. In addition, Wachovia's lease financing
outstandings included foreign leases of $1.381 billion and $1.240 billion at
December 31, 2000 and 1999, respectively. Because foreign loans and leases 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. The distribution of foreign loans and leases by
geographic region varied but was predominantly in western Europe and Latin
America. The Netherlands represented the country with the greatest
concentration, with outstandings of $907 million and $801 million at December
31, 2000 and 1999, respectively, and was the only country where outstandings
exceeded one percent of total assets.
15
Demand for retail credit remained strong throughout the year. Direct and
indirect retail loans grew 16 percent and 15 percent, respectively. Indirect
retail loans consist of automobile sales finance loans originated by automobile
dealers. Adjusted for the 1999 and 2000 securitization activity and the
acquisition of the Partners First portfolio, credit card balances were flat with
1999.
Managed Credit Card Data Table 6
- --------------------------------------------------------------------------------
(thousands)
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -----------
Average credit card loans ............................ $ 7,972,307 $ 6,374,676 $ 6,181,109 $ 6,179,456 $ 5,573,626
Period-end loans ..................................... 8,140,257 6,632,439 6,549,350 6,419,098 6,221,334
Net loan losses ...................................... 384,883 257,176 276,705 240,388 183,082
Net loan losses to average loans ..................... 4.83% 4.03% 4.48% 3.89% 3.28%
Delinquencies (30 days or more) to year-end loans..... 4.21 3.22 3.30 2.75 2.35
Wachovia's credit card securitization transactions were undertaken primarily to
broaden funding sources as well as 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 that sells undivided interests in the form of
certificates of ownership. 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 certificate holders
(collectively, the amount that would have been included in the net interest
margin); credit losses; and other trust expenses into securitization 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 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.
Selected Loan Maturities and Interest Sensitivity Table 7
- --------------------------------------------------------------------------------
December 31, 2000 (thousands)
One year One to Over
Total or less Five Years Five Years
------------- ------------ ----------- -----------
Commercial, financial and other ................. $ 17,660,562 $ 16,353,452 $ 999,497 $ 307,613
Industrial revenue and other tax-exempt ......... 605,165 161,537 219,281 224,347
Construction and land development ............... 3,370,031 3,272,708 97,323 --
Commercial mortgages ............................ 9,025,271 5,149,332 1,320,046 2,555,893
Loans to foreign borrowers ...................... 1,380,186 1,356,459 23,727 --
------------ ------------ ----------- -----------
Selected loans, net ......................... $ 32,041,215 $ 26,293,488 $ 2,659,874 $ 3,087,853
============ ============ =========== ===========
Loans with predetermined interest rates ......... $ 4,522,184 $ 1,207,789 $ 1,749,968 $ 1,564,427
Loans with floating interest rates .............. 27,519,031 25,085,699 909,906 1,523,426
------------ ------------ ----------- -----------
Total ....................................... $ 32,041,215 $ 26,293,488 $ 2,659,874 $ 3,087,853
============ ============ =========== ===========
Average balances of securities declined $975 million or 10 percent from 1999.
During 1999, Wachovia allowed portfolio attrition to fund a portion of the loan
growth. In 2000, the securities portfolio was maintained at a fairly constant
level.
16
Securities Table 8
- --------------------------------------------------------------------------------
December 31 (thousands)
2000
----------------------------------------------------------------------------------
Taxable
Amortized Unrealized Unrealized Fair Average Equivalent
Cost Gain Loss Value Maturity Yield*
------------- ---------- ---------- -------- --------- ----------
(Yrs./Mos.)
Held-to-Maturity
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. $ 28,896 $ 38 $ 8 $ 28,926 6.41%
One to five years ............... 437,082 1,320 1,424 436,978 6.51
Five to ten years ............... -- -- -- --
Over ten years .................. -- -- -- --
------------- ---------- ---------- ----------
Total ......................... 465,978 1,358 1,432 465,904 2/8 6.50
State and municipal:
Within one year ................. 14,634 256 -- 14,890 9.90
One to five years ............... 97,968 5,602 2 103,568 8.95
Five to ten years ............... 52,517 5,718 -- 58,235 8.42
Over ten years .................. 59,456 3,077 -- 62,533 8.02
------------- ---------- ---------- ----------
Total ......................... 224,575 14,653 2 239,226 8/2 8.64
Mortgage-backed:
Within one year ................. 19,763 38 12 19,789 7.01
One to five years ............... 6,008 80 -- 6,088 7.16
Five to ten years ............... 89,755 2,910 21 92,644 6.97
Over ten years .................. 209,858 11,204 3 221,059 8.22
------------- ---------- ---------- ----------
Total ......................... 325,384 14,232 36 339,580 16/1 7.78
Other:
Within one year ................. 6,663 10 -- 6,673 6.62
One to five years ............... 650 -- -- 650 8.04
Five to ten years ............... 500 2 -- 502 7.48
Over ten years .................. -- -- -- --
------------- ---------- ---------- ----------
Total ......................... 7,813 12 -- 7,825 0/8 6.79
------------- ---------- ---------- ----------
Total held-to-maturity ........ 1,023,750 30,255 1,470 1,052,535 8/1 7.38
Available-for-Sale
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. 415,873 1,380 1,005 416,248 6.42
One to five years ............... 1,901,469 15,008 2,397 1,914,080 6.37
Five to ten years ............... 388,041 6,373 2,320 392,094 6.87
Over ten years .................. 8,132 3,700 -- 11,832 13.02
------------- ---------- ---------- ----------
Total ......................... 2,713,515 26,461 5,722 2,734,254 2/9 6.47
State and municipal:
Within one year ................. 10,948 51 -- 10,999 7.10
One to five years ............... 25,881 448 5 26,324 7.33
Five to ten years ............... 14,234 1,211 4 15,441 9.44
Over ten years .................. 13,214 401 -- 13,615 7.27
------------- ---------- ---------- ----------
Total ......................... 64,277 2,111 9 66,379 1/2 7.75
Mortgage-backed:
Within one year ................. 2,588 4 5 2,587 6.68
One to five years ............... 335,712 3,406 373 338,745 6.54
Five to ten years ............... 745,168 5,176 523 749,821 6.29
Over ten years .................. 3,109,151 30,042 6,222 3,132,971 6.62
------------- ---------- ---------- ----------
Total ......................... 4,192,619 38,628 7,123 4,224,124 15/11 6.55
Other:
Within one year ................. 42,941 -- -- 42,941 --
One to five years ............... 44,111 -- 1 44,110 .31
Five to ten years ............... -- -- -- -- --
Over ten years .................. 87,510 -- 3,936 83,574 7.57
------------- ---------- ---------- ----------
Total ......................... 174,562 -- 3,937 170,625 13/7 3.87
------------- ---------- ---------- ----------
Total interest earning
available-for-sale ........... 7,144,973 67,200 16,791 7,195,382 10/9 6.46
Federal Reserve Bank stock and
other ........................... 375,781 1,520 987 376,314
------------- ---------- ---------- ----------
Total available-for-sale ...... 7,520,754 68,720 17,778 7,571,696
------------- ---------- ---------- ----------
Total portfolio ............... $ 8,544,504 $ 98,975 $ 19,248 $8,624,231
============= ========== ========== ==========
December 31 (thousands)
1999 1998
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ----------
1
Held-to-Maturity
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. $ 11,005 $ 10,997 $ 262,934 $ 265,377
One to five years ............... 391,823 380,396 255,129 259,345
Five to ten years ............... -- -- -- --
Over ten years .................. -- -- -- --
----------- ---------- ---------- ----------
Total ......................... 402,828 391,393 518,063 524,722
State and municipal:
Within one year ................. 11,625 11,803 12,735 12,887
One to five years ............... 90,613 95,798 58,864 64,614
Five to ten years ............... 61,324 66,997 71,232 80,931
Over ten years .................. 40,727 42,153 33,937 37,857
----------- ---------- ----------- ----------
Total ......................... 204,289 216,751 176,768 196,289
Mortgage-backed:
Within one year ................. 1,318 1,315 146 147
One to five years ............... 47,715 48,000 78,227 80,102
Five to ten years ............... 36,865 36,960 69,450 70,402
Over ten years .................. 313,905 324,981 462,505 491,341
----------- ---------- ----------- ----------
Total ......................... 399,803 411,256 610,328 641,992
Other:
Within one year ................. 37,183 37,153 40,670 40,852
One to five years ............... 4,121 4,097 37,178 37,650
Five to ten years ............... 500 500 600 621
Over ten years .................. -- -- 0 0
----------- ---------- ----------- ----------
Total ......................... 41,804 41,750 78,448 79,123
----------- ---------- ----------- ----------
Total held-to-maturity ........ 1,048,724 1,061,150 1,383,607 1,442,126
Available-for-Sale
U.S. Treasury and other U.S.
Government agencies:
Within one year ................. 249,632 251,444 884,334 894,030
One to five years ............... 2,207,069 2,174,046 2,091,953 2,153,152
Five to ten years ............... 368,950 362,332 139,227 145,666
Over ten years .................. 8,093 11,178 8,149 12,719
----------- ---------- ----------- ----------
Total ......................... 2,833,744 2,799,000 3,123,663 3,205,567
State and municipal:
Within one year ................. 950 955 5,211 5,253
One to five years ............... 35,347 35,699 33,565 34,575
Five to ten years ............... 13,831 14,240 15,276 16,728
Over ten years .................. 6,010 6,101 6,912 7,605
----------- ---------- ----------- ----------
Total ......................... 56,138 56,995 60,964 64,161
Mortgage-backed:
Within one year ................. 30,101 29,955 14,606 14,649
One to five years ............... 243,089 244,632 280,390 284,579
Five to ten years ............... 931,325 910,751 796,036 808,650
Over ten years .................. 2,576,766 2,517,626 3,068,432 3,098,876
----------- ---------- ----------- ----------
Total ......................... 3,781,281 3,702,964 4,159,464 4,206,754
Other:
Within one year ................. 2,971 2,970 97 98
One to five years ............... 79,896 79,634 148,278 149,954
Five to ten years ............... -- -- 10,084 10,240
Over ten years .................. 103,361 100,668 174,983 173,417
----------- ---------- ----------- ----------
Total ......................... 186,228 183,272 333,442 333,709
----------- ---------- ----------- ----------
Total interest earning
available-for-sale ........... 6,857,391 6,742,231 7,677,533 7,810,191
Federal Reserve Bank stock and
other ........................... 356,799 353,559 171,632 173,457
----------- ---------- ----------- ----------
Total available-for-sale ...... 7,214,190 7,095,790 7,849,165 7,983,648
----------- ---------- ----------- ----------
Total portfolio ............... $8,262,914 $8,156,940 $9,232,772 $9,425,774
=========== ========== =========== ==========
* Yields are presented on a fully taxable equivalent basis using the federal
income tax rate and state tax rates, as applicable. Yields on AFS securities are
based on amortized cost.
17
The increase in other assets from 1999 is primarily the result of increased
intangible assets resulting from acquisitions. During 1999 and 2000, Wachovia
completed several acquisitions, the largest of which were IJL, OFFITBANK and
Partners First. All acquisitions were accounted for as purchase transactions.
Excluding the effects of acquisitions and branch sales in the third quarters of
2000 and 1999, average interest-bearing core deposits were up slightly compared
with 1999. Bank of Canton and National Bank of Commerce added approximately $250
million and approximately $50 million, respectively, to 2000 average balances.
The sale of 19 branches in 2000 reduced average total interest-bearing deposits
by over $100 million. The mix of interest-bearing core deposits shifted toward
savings certificates in 2000 due to successful certificate of deposit promotions
and a shift in customer preference.
Short-Term Borrowed Funds Table 9
- --------------------------------------------------------------------------------
(thousands)
2000 1999 1998
-------------------------- ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
-------------- ----------- ------------- ---------- ------------- ----------
At year-end:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 6,753,164 5.63% $ 5,372,493 3.64% $ 5,463,418 4.14%
Commercial paper ................................ 1,855,923 6.25 1,658,988 4.13 1,359,382 4.21
Other borrowed funds ............................ 1,253,058 5.97 3,071,493 3.97 1,912,262 5.16
----------- ----------- -----------
Total .......................................... $ 9,862,145 5.79 $10,102,974 3.82 $ 8,735,062 4.38
=========== =========== ===========
Average for the year:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 5,945,753 5.95 $ 6,150,372 4.71 $ 7,498,280 5.18
Commercial paper* ............................... 1,741,585 5.92 1,484,483 4.69 1,276,623 5.02
Other borrowed funds ............................ 1,300,653 7.89 1,766,069 5.53 2,120,257 5.25
----------- ----------- -----------
Total .......................................... $ 8,987,991 6.22 $ 9,400,924 4.86 $10,895,160 5.18
=========== =========== ===========
Maximum month-end balance:
Federal funds purchased and securities sold under
repurchase agreements .......................... $ 7,638,638 $ 7,968,932 $ 8,796,505
Commercial paper ................................ 2,147,771 1,658,988 1,487,187
Other borrowed funds ............................ 2,435,588 3,071,493 2,677,503
* Average interest rate for each year includes effect of fees paid on back-up
lines of credit.
Wachovia utilizes a wide variety of wholesale funding sources including large
denomination certificates of deposit, foreign deposits, repurchase agreements,
federal funds, Federal Home Loan Bank advances, trust preferred securities, bank
notes and senior and subordinated debt. The mix and characteristics of wholesale
funding are determined based on interest-rate risk management, liquidity needs
and available pricing. Subordinated debt and trust preferred securities are used
for capital management purposes since they qualify for inclusion in Tier II and
Tier I capital, respectively, for risk-based capital purposes. Several large
debt transactions affected comparability of both period-end and average balances
between reported periods. During 1999, Wachovia issued $1 billion in senior and
subordinated debt. On March 31, 2000, Wachovia issued $300 million in
subordinated debt that replaced $300 million in subordinated debt that matured
on December 15, 1999. On July 6, 2000, Wachovia issued $550 million in senior
debt securities followed by $300 million in subordinated securities issued by
Wachovia Bank on July 24, 2000. On October 4, 2000, Wachovia issued $300 million
in fixed-rate senior securities. During 2000 Wachovia increased its borrowings
from the Federal Home Loan Bank ("FHLB"), by $1.940 billion from the end of
1999. The FHLB borrowings in 2000 had maturities between five and seven years
and provided some longer-term liquidity.
18
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.
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, 2000, Wachovia
Corporation had $2.018 billion in interest-bearing balances with Wachovia Bank,
N.A. ("Wachovia Bank"), and $750 million available for issuance as senior or
subordinate debt securities under existing shelf registrations filed with the
Securities and Exchange Commission. At January 1, 2001, $652 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 2001. During 2000,
Wachovia Bank paid $463 million in dividends to Wachovia Corporation. As a
back-up liquidity facility for commercial paper, Wachovia has $490 million in
lines of credit from unaffiliated banks. No borrowings have occurred under these
lines.
Wachovia Corporation's senior notes are rated AA- by Fitch, A1 by Moody's and A+
by Standard & Poor's, and its subordinated notes are rated A+ by Fitch, A2 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 long-term debt, totaled $997 million at
December 31, 2000. The capital securities are rated A+ by Fitch, a1 by Moody's
and A by Standard & Poor's and qualify as Tier I capital under risk-based
capital guidelines.
During the last half of 2000, Fitch, Moody's and Standard & Poor's downgraded
Wachovia Corporation's and Wachovia Bank's ratings in most categories. The lower
ratings, which are reflected in this report, had a minimal impact on 2000
funding costs and are expected to have only a minor effect on funding costs
going forward.
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 non-core 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 asset
quality. Wachovia Bank draws on a diverse base of wholesale funding sources,
including large denomination certificates of deposit, federal funds purchased,
securities sold under agreements to repurchase, foreign branch deposits and its
global bank note program. Wachovia Bank also has extensive access to funds
through its membership in the Federal Home Loan Bank of Atlanta.
Through its global bank note program, Wachovia Bank is authorized to issue up to
$19.4 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 seven 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, 2000, Wachovia Bank had approximately $6.4 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, 2000 were
$352 million, with an average cost of 6.55 percent and an average
19
maturity of less than one month. Medium-term bank notes were $2.203 billion on
the same date, with an average cost of 6.58 percent and an average maturity of
4.7 years. Short-term issues under the global bank note program are rated F1+ by
Fitch, P-1 by Moody's and A-1+ by Standard & Poor's, while medium-term issues
are rated AA- by Fitch, Aa3 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 portfolio.
Additional asset liquidity is available from Wachovia's ability to securitize
assets such as credit card receivables and other loans.
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 scenarios. 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 are
predominantly in the trading portfolio and are immaterial to consolidated net
income. Exposure to equity price movement exists through 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 as discussed in the forward-looking statements
section on page 1. 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, liabilities and off-balance sheet instruments that are classified as
trading and are marked-to-market through the income statement. Trading
portfolios are maintained to service customer needs for investment and risk
management products at competitive prices. The key trading portfolios by purpose
are U.S. Treasury and U.S. Government agencies, money market instruments,
residential mortgage-backed securities and corporate bonds and commercial paper.
Wachovia enters into derivative contracts and foreign currency exchange
contracts to service customer needs and does not take material trading positions
in either. The earnings risk due to changes in fair value in the trading
portfolios is limited by the
20
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 Board of Directors to ensure that
business objectives are met within a framework of prudent and sound risk
management.
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, 2000, the combined VAR exposure, given the above calculation
parameters, was $17 thousand which represented .01 percent of the combined
trading portfolio value of $284 million. The combined average VAR exposure for
2000 was $299 thousand, which represented .05 percent of the combined average
trading portfolio value of $574 million. These VAR numbers are for the combined
fixed income and equity 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. This
risk is driven by potential mismatches resulting from timing differences in the
repricing of assets, liabilities and off-balance sheet instruments, and the
potential exercise of explicit and embedded options. Treasury is responsible for
managing nontrading market risk. Treasury 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 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
21
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 (the after-tax effect of changes in net interest 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 employed by
Wachovia 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. The Management Finance Committee and the
Finance Committee of the Board of Directors approve policy guidelines. 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 impact of a 200 basis
point gradual rise in rates over the next 12 months would cause approximately a
.03 percent decrease in net income at December 31, 2000 versus a 2.1 percent
increase one year earlier. A gradual decrease in rates over the next 12 months
would cause approximately a .01 percent increase in net income as of December
31, 2000 compared with a 2.4 percent decrease at December 31, 1999. 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 commonly referred to as the
Economic Value of Equity ("EVE") 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
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 its lending activities.
22
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, certain small business lending
and most trading activities. The second, and more prevalent approach in
commercial lending, involves individual approval of exposures in conjunction
with Risk Management. The appropriate management credit committee reviews
commercial loan approvals at inception, and at least annually thereafter. In
retail lending, loans and lines of credit are reviewed and monitored monthly on
a portfolio basis.
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 and for material exposures, at least
semiannually. For certain exposures, quarterly or monthly reviews are performed.
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. Credit
risk is also monitored at certain business-line levels using portfolio
management models that employ expected default rates and estimate losses upon
default. This includes models employed in certain segments of Corporate that
incorporate daily signals gathered from the public debt and equity markets.
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 Risk 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
addition, Wachovia periodically establishes special teams comprised of highly
skilled and experienced lenders to address problem credits. Such a group was
formed in January 2001 to work with select corporate exposures. This team
reviews credits on a weekly basis with Risk Management, Wachovia's Chief Risk
Officer and other corporate officers.
In retail lending, Wachovia manages credit risk from a portfolio view rather
than by specific borrower as in commercial lending. Determining the appropriate
risk/return profile for each portfolio is performed 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 that 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 performance 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
23
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 Risk 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 monthly to review recent transactions and market trends. This
includes a quarterly review of customer and industry credit concentrations,
specific credits or portfolios with a higher degree of risk and any other
relevant issues. Wachovia's Chief Risk Officer then presents a report to the
Credit Committee of the Board of Directors.
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
allowance adequacy. 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 judgement. For the retail portfolios, 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 twelve 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.
Loss factors based solely on historical data will lag changes in the business
cycle; therefore computed historical loss factors are adjusted for known changes
in delinquency trends and economic conditions that the historical data cannot
capture. 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 quality-coded loans
in excess of $1 million that are graded substandard or doubtful. Large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
such as credit card, residential mortgage, and consumer installment loans are
excluded from this impairment review.
During the first half of 2000, the credit cycle began to show signs of
deterioration as confirmed by several high profile bankruptcy filings among
large, well-known companies. Rising interest rates and the resulting slowdown of
the U.S. economy contributed to the pressure upon large corporate borrowers.
Further signs that the economy was slowing surfaced in the latter part of the
year as the number of downgrades of investment grade credits continued to exceed
upgrades by a wide margin. Management responded to the warning signs and
adjusted the allowance for loan losses accordingly. At December 31, 2000, the
allowance for loan losses was $823 million, up $268 million or 48.3 percent from
the end of 1999. The allowance for loan losses at December 31, 2000 represented
1.50 percent of outstanding loans and 1.65 times coverage of nonperforming loans
compared with 1.12 percent and 2.72 times, respectively, at December 31, 1999.
24
Allowance for Loan Losses Table 10
- --------------------------------------------------------------------------------
(thousands)
2000 1999 1998 1997 1996
-------------- ------------- ------------ ------------ -----------
Summary of Transactions
Balance at beginning of year ...................... $ 554,810 $ 547,992 $544,723 $519,297 $518,808
Additions from acquisitions ....................... 43,793 39 2,613 24,641 200
Provision for loan losses ......................... 588,450 298,105 299,480 264,949 193,776
Deduct net loan losses:
Loans charged off:
Commercial ...................................... 132,715 46,768 17,880 9,254 6,375
Credit card ..................................... 242,421 248,116 286,520 246,008 184,387
Other revolving credit .......................... 10,044 9,652 10,802 10,564 8,834
Other retail .................................... 35,761 34,264 35,378 39,801 41,581
Real estate ..................................... 6,232 9,522 4,514 11,564 7,915
Lease financing ................................. 1,460 2,940 3,095 4,488 1,635
Foreign ......................................... -- -- -- -- --
---------- --------- -------- -------- --------
Total ......................................... 428,633 351,262 358,189 321,679 250,727
Recoveries:
Commercial ...................................... 4,924 7,041 6,667 4,171 5,905
Credit card ..................................... 43,477 32,782 28,804 26,674 21,445
Other revolving credit .......................... 2,179 2,919 2,571 2,361 1,695
Other retail .................................... 10,097 11,091 11,494 11,837 11,524
Real estate ..................................... 3,015 5,436 9,339 12,133 16,488
Lease financing ................................. 448 667 490 339 183
Foreign ......................................... -- -- -- -- --
---------- --------- -------- -------- --------
Total ......................................... 64,140 59,936 59,365 57,515 57,240
---------- --------- -------- -------- --------
Net loan losses .................................. 364,493 291,326 298,824 264,164 193,487
---------- --------- -------- -------- --------
Balance at end of year ............................ $ 822,560 $ 554,810 $547,992 $544,723 $519,297
========== ========= ======== ======== ========
Net Loan Losses (Recoveries) by Category
Commercial ........................................ $ 127,791 $ 39,727 $ 11,213 $ 5,083 $ 470
Credit card ....................................... 198,944 215,334 257,716 219,334 162,942
Other revolving credit ............................ 7,865 6,733 8,231 8,203 7,139
Other retail ...................................... 25,664 23,173 23,884 27,964 30,057
Real estate ....................................... 3,217 4,086 (4,825) (569) (8,573)
Lease financing ................................... 1,012 2,273 2,605 4,149 1,452
Foreign ........................................... -- -- -- -- --
---------- --------- -------- -------- --------
Total ......................................... $ 364,493 $ 291,326 $298,824 $264,164 $193,487
========== ========= ======== ======== ========
Net loan losses -- excluding credit cards ......... $ 165,549 $ 75,992 $ 41,108 $ 44,830 $ 30,545
Net Loan Losses (Recoveries) to Average Loans by
Category
Commercial ........................................ .71% .24% .07% .04% --%
Credit card ....................................... 4.38 4.27 4.54 3.90 3.29
Other revolving credit ............................ 1.05 1.14 1.65 1.93 1.71
Other retail ...................................... .49 .51 .56 .67 .69
Real estate ....................................... .02 .02 (.03) -- (.06)
Lease financing ................................... .04 .10 .18 .43 .22
Foreign ........................................... -- -- -- -- --
Total loans ....................................... .70 .62 .67 .67 .53
Total loans -- excluding credit cards ............. .35 .18 .11 .13 .10
Year-end allowance to outstanding loans ........... 1.50 1.12 1.20 1.23 1.37
Earnings coverage of net loan losses* ............. 5.54x 6.35x 5.58x 5.38x 6.66x
* Earnings before income taxes and provision for loan losses excluding
securities transactions and nonrecurring charges.
25
The following table presents the allocation of the allowance by loan categories.
Allocation of the Allowance for Loan Losses Table 11
- --------------------------------------------------------------------------------
(thousands)
2000 1999
-------------------------- --------------------------
Percent Percent
Loan Loss of Gross Loan Loss of Gross
Allowance Loans Allowance Loans
Allocation Outstanding Allocation Outstanding
------------ ------------- ------------ -------------
Commercial .............. $ 437,043 33.2% $166,690 35.7%
Credit card ............. 191,217 8.2 209,807 9.6
Other revolving
credit ................. 10,116 1.5 11,402 1.3
Other retail ............ 29,335 10.1 29,410 9.7
Real estate ............. 94,749 39.3 64,305 35.9
Lease financing ......... 8,315 5.2 6,413 5.2
Foreign ................. 9,700 2.5 6,881 2.6
Unallocated ............. 42,085 -- 59,902 --
--------- ----- -------- -----
Total ................. $ 822,560 100.0% $554,810 100.0%
========= ===== ======== =====
1998 1997 1996
-------------------------- -------------------------- -------------------------
Percent Percent Percent
Loan Loss of Gross Loan Loss of Gross Loan Loss of Gross
Allowance Loans Allowance Loans Allowance Loans
Allocation Outstanding Allocation Outstanding Allocation Outstanding
------------ ------------- ------------ ------------- ------------ ------------
Commercial .............. $129,520 33.5% $120,195 34.2% $117,883 32.5%
Credit card ............. 228,232 13.2 221,142 13.4 191,606 14.7
Other revolving
credit ................. 8,465 1.2 10,682 1.0 8,268 1.1
Other retail ............ 37,308 9.5 36,669 9.7 48,011 11.3
Real estate ............. 92,523 36.1 93,821 37.7 94,167 37.0
Lease financing ......... 6,304 4.1 6,537 2.5 3,685 2.2
Foreign ................. 6,342 2.4 3,702 1.5 3,702 1.2
Unallocated ............. 39,298 -- 51,975 -- 51,975 --
-------- ----- -------- ----- -------- -----
Total ................. $547,992 100.0% $544,723 100.0% $519,297 100.0%
======== ===== ======== ===== ======== =====
The allocation of the allowance for loan losses above represents an estimate
based on historical loss experience, individual credits, economic conditions and
other judgemental factors. Since any allocation is judgemental 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.
Although the entire allowance for loan losses is available for charge-offs in
any category of loans, allocations by loan type are based upon estimated losses
by category using the various modeling techniques. In 2000, the amount of
allowance allocated to the commercial portfolio increased considerably in
response to the higher level of losses inherent in that portfolio. The increase
in the commercial portfolio allocation is also consistent with the rise in
impaired loans among large corporate borrowers. The allowance associated with
impaired loans, which increased $85 million from the end of 1999, is included in
this category. The allowance allocated to retail categories represented
approximately 12 months of expected losses. Allocations to the other loan
categories are generally consistent with prior-year allocations. 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. At December 31,
2000, the unallocated allowance for loan losses was $42 million or 5.1 percent
of the total allowance compared with $60 million or 10.8 percent at year-end
1999. Expressed in terms of total loans outstanding, the unallocated allowance
represents .08 percent and .12 percent at December 31, 2000 and 1999,
respectively.
The provision for loan losses is an amount necessary to maintain the allowance
at the level determined to be appropriate by management. The $588 million
provision charged to earnings in 2000 was considerably higher than the $298
million charged in 1999 so that the allowance could provide for the higher level
of losses inherent in the loan portfolio. Net loan losses were $364 million or
.70 percent of average loans in 2000 compared with $291 million or .62 percent
of loans in 1999, with the rise in losses entirely attributable to the
commercial portfolio. Certain other loan categories experienced increases over
the prior year, but the amounts were not significant and were in proportion with
the increase in balances outstanding. Although credit card charge-offs were down
as a result of securitization activity, the ratio of credit card charge-offs to
average loans was up 11 basis points. Excluding credit card loans, net loan
losses were .35 percent of average loans in 2000 compared with .18 percent in
1999.
26
Asset Quality
At $521 million, nonperforming assets were up $297 million or 133 percent from
December 31, 1999. At December 31, 2000, nonperforming assets represented .95
percent of period-end loans and foreclosed property compared with .45 percent at
December 31, 1999. The increase in nonperforming loans is due to deterioration
in credit performance of several large corporate borrowers. Although adequate
reserves have been established to cover the identified exposure, adjustments may
be necessary as new information is received in the future. Charge-offs may occur
as losses are confirmed. Impaired loans totaled $442 million at December 31,
2000, compared with the $149 million at the prior year-end. The associated
allowance for loan losses for these loans was $128 million compared with $43
million a year ago.
Nonperforming Assets and Contractually Past Due Loans Table 12
- --------------------------------------------------------------------------------
December 31 (thousands)
2000 1999
-------------- -------------
Nonperforming Assets
Nonaccrual loans .............................................. $ 499,899 $ 204,098
Restructured loans ............................................ -- --
---------- ---------
Total nonperforming loans ................................... 499,899 204,098
Foreclosed property:
Foreclosed real estate ....................................... 13,855 19,759
Less valuation allowance ..................................... 2,210 5,941
Other foreclosed assets ...................................... 9,733 5,874
---------- ---------
Total foreclosed property ................................... 21,378 19,692
---------- ---------
Total nonperforming assets .................................. $ 521,277 $ 223,790
========== =========
Nonperforming loans to loans .................................. .91% .41%
Nonperforming assets to loans and foreclosed property ......... .95 .45
Allowance for loan losses times nonperforming loans ........... 1.65x 2.72x
Allowance for loan losses times nonperforming assets .......... 1.58 2.48
Contractually Past Due Loans
(accruing loans past due 90 days or more) .................... $ 155,008 $ 97,642
========== =========
1998 1997 1996
------------- ------------- -------------
Nonperforming Assets
Nonaccrual loans .............................................. $ 157,118 $ 101,156 $ 98,638
Restructured loans ............................................ -- -- --
--------- --------- ---------
Total nonperforming loans ................................... 157,118 101,156 98,638
Foreclosed property:
Foreclosed real estate ....................................... 33,443 38,071 35,472
Less valuation allowance ..................................... 12,678 16,625 10,805
Other foreclosed assets ...................................... 3,420 6,893 8,213
--------- --------- ---------
Total foreclosed property ................................... 24,185 28,339 32,880
--------- --------- ---------
Total nonperforming assets .................................. $ 181,303 $ 129,495 $ 131,518
========= ========= =========
Nonperforming loans to loans .................................. .34% .23% .26%
Nonperforming assets to loans and foreclosed property ......... .40 .29 .35
Allowance for loan losses times nonperforming loans ........... 3.49x 5.38x 5.26x
Allowance for loan losses times nonperforming assets .......... 3.02 4.21 3.95
Contractually Past Due Loans
(accruing loans past due 90 days or more) .................... $ 136,807 $ 114,343 $ 84,788
========= ========= =========
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. 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. 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
27
charged off when they become 120 days delinquent. In cases of bankruptcy and
customer fraud, Wachovia applies the more restrictive charge-off timeframes
prescribed by the FFIEC.
Noninterest Income
Total other operating revenue, which excludes securities gains and losses, rose
$322 million or 20 percent to $1.932 billion for the year. Growth occurred in
all major categories except mortgage fees and capital markets income, with
increases highest in investment fees, credit card income, deposit account
service charges, other service charges and other income. The higher income
reflected business expansion in addition to the impact of purchase acquisitions
completed in 1999 and 2000. Total other operating revenue included gains of $42
million in 2000 and $8 million in 1999 from branch sales. Both 2000 and 1999
included net gains of $9 million and $27 million, respectively, from credit card
securitization activity. Excluding additions from purchase acquisitions and the
effect of securitization activity, total other operating revenue rose
approximately 9 percent for the year. Management expects total other operating
revenue to continue to increase in the high single-digit range in 2001. Growth
is expected to be strongest in the Asset and Wealth Management area, Treasury
Services and residential mortgage fees. Slowing economic conditions are expected
to mute growth in other areas.
Noninterest Income Table 13
- --------------------------------------------------------------------------------
(thousands)
2000 1999 1998
-------------- ------------- -------------
Service charges on deposit
accounts ........................... $ 418,611 $ 369,646 $ 334,980
Fees for trust services ............. 219,476 216,392 199,949
Credit card income -- net of
interchange payments ............... 297,833 255,243 171,127
Investment fees ..................... 334,795 235,350 61,556
Capital markets income .............. 170,007 170,771 130,083
Electronic banking .................. 102,832 88,626 74,257
Mortgage fees ....................... 25,377 33,213 44,929
Bankers' acceptance and letter of
credit fees ........................ 55,318 46,037 39,025
Other service charges and fees ...... 132,186 79,893 54,726
Other income ........................ 175,254 114,952 117,487
---------- ---------- ----------
Total other operating
revenue ......................... 1,931,689 1,610,123 1,228,119
Gain on sale of mortgage
servicing portfolio ................ -- -- --
Securities (losses) gains ........... (417) 10,894 20,442
---------- ---------- ----------
Total ............................. $1,931,272 $1,621,017 $1,248,561
========== ========== ==========
(thousands)
Five-Year
Compound
1997 1996 1995 Growth Rate
------------- ----------- ----------- ------------
Service charges on deposit
accounts ........................... $ 306,231 $280,670 $ 244,671 11.3%
Fees for trust services ............. 175,549 154,621 145,464 8.6
Credit card income -- net of
interchange payments ............... 162,234 143,382 127,153 18.6
Investment fees ..................... 53,290 40,522 27,037 65.4
Capital markets income .............. 49,522 44,212 29,832 41.6
Electronic banking .................. 64,640 56,226 39,722 21.0
Mortgage fees ....................... 23,544 21,371 26,139 (0.6)
Bankers' acceptance and letter of
credit fees ........................ 34,526 28,243 25,953 16.3
Other service charges and fees ...... 51,916 49,450 42,748 25.3
Other income ........................ 84,316 56,035 48,396 29.4
---------- -------- ---------
Total other operating
revenue ......................... 1,005,768 874,732 757,115 20.6
Gain on sale of mortgage
servicing portfolio ................ -- -- 79,025
Securities (losses) gains ........... 1,454 4,588 (19,672)
---------- -------- ---------
Total ............................. $1,007,222 $879,320 $ 816,468 18.8
========== ======== =========
Service charges on deposit accounts grew $49 million or 13.2 percent over 1999,
exceeding the compound growth rate for the last five years of 11.3 percent.
Corporate service charges, in particular analysis fees, accounted for $29
million of the annual growth. Returned check charges accounted for most of the
remaining growth in deposit service charges due primarily to a higher occurrence
rate although increased fees and improvement in the collection rate also
contributed.
Credit card income increased $43 million or 17 percent over 1999. Both years
include net gains from securitization transactions and 2000 includes the
Partners First portfolio that was acquired in early February 2000. Adjusting for
the effect of those items, credit card income grew approximately 7 percent from
1999 reflecting higher overlimit charges and interchange fees.
28
Investment fees were up $99 million or 42 percent from 1999 reflecting the
inclusion of a full year of IJL and OFFITBANK's results. Adjusting for
acquisitions, the growth rate for investment fees was closer to 7 percent for
the year with most of the year-over-year increase earned in the first quarter.
During the first quarter, the equity markets and trading activity reached record
levels and increased equity commissions.
Electronic banking fees continued to show strong growth momentum, increasing $14
million or 16 percent for the year with debit card interchange income accounting
for most of the increase. Although less significant in terms of dollars, fees
for Wachovia's online bill pay service grew 64 percent from 1999 reflecting
increasing demand for internet-based banking services.
The $52 million increase in other service charges and fees primarily reflected a
$42 million increase in fees earned for servicing the securitized credit card
receivables. Servicing fees are earned based on the average balance of
securitized credit card receivables outstanding during the period. During 2000,
the average balance of securitized receivables was $3.4 billion compared with
$1.3 billion in 1999. An increase in insurance premiums and commissions,
primarily resulting from the acquisitions of BEJS in late 1999 and DavisBaldwin
in late 2000, accounted for the remaining increase.
Other income increased $60 million or 52.5 percent from 1999 with branch
divestiture gains during both years accounting for the largest portion of the
change.
Noninterest Expense
Total noninterest expense rose $332 million or 14.8 percent, with the increase
for the year affected by nonoperating charges recorded in both 2000 and 1999.
Both years included charges to integrate the operations of recently acquired
merger partners. In 2000, the amount was $29 million compared with $19 million
in 1999 primarily for the integration of IJL and OFFITBANK in both periods and
Partners First in 2000. In 2000, Wachovia incurred a $20 million charge to
settle a 1991 lawsuit brought by the U.S. Department of Labor against South
Carolina National Bank. The lawsuit stemmed from the purchase of stock by an
Employee Stock Ownership Plan ("ESOP") to fund retirement benefits. South
Carolina National Bank, which was acquired by Wachovia in December 1991, served
as trustee to the ESOP. During 2000, Wachovia incurred $107 million in
restructuring charges relating to a performance improvement project begun in
1999. The restructuring charge is explained further on page 31.
Excluding the nonoperating charges, noninterest expense totaled $2.427 billion
in 2000, an increase of $195 million or 8.8 percent from 1999. The expense base
of recently acquired merger partners was responsible for most of the increase
over 1999. Adjusting for purchase acquisitions completed during 2000 and 1999,
the increase in operating expenses was less than 1 percent. Expense growth is
expected to hold below 3 percent in 2001. Most of the increase will be in staff
expense due to further investment in higher growth businesses.
Total personnel expense grew $79 million or 6.5 percent with salaries and
benefits each increasing at approximately the same rate. Adjusting for the
additional personnel expenses of recently acquired merger partners, personnel
expenses were level with 1999. The impact of normal compensation increases in
2000 was offset by lower incentive compensation that was adjusted for business
performance. Despite the number of personnel added by the 2000 acquisitions,
full-time equivalent headcount was 20,325 at December 31, 2000 compared with
21,294 at December 31, 1999, reflecting Management's continuing efforts to
streamline operations to improve operating efficiency and control expenses. Much
of the reduction in headcount occurred late in the year as a result of the
resource realignment announced in August 2000.
29
Noninterest Expense Table 14
- --------------------------------------------------------------------------------
(thousands)
2000 1999 1998
-------------- -------------- ---------------
Salaries ............................. $ 1,086,694 $1,020,384 $ 874,750
Employee benefits .................... 212,649 199,902 180,603
----------- ---------- -----------
Total personnel expense ............ 1,299,343 1,220,286 1,055,353
Net occupancy expense ................ 160,350 151,282 138,636
Equipment expense .................... 188,061 198,062 153,007
Postage and delivery ................. 53,697 55,410 52,981
Outside data processing,
programming and software ............ 111,640 102,773 64,450
Stationery and supplies .............. 37,820 35,939 34,767
Advertising and sales promotion....... 66,983 66,468 71,257
Professional services ................ 79,911 75,002 56,066
Travel and business promotion ........ 40,783 33,944 29,254
Telecommunications ................... 61,131 58,088 54,467
Amortization of intangible assets..... 92,897 50,879 39,091
Foreclosed property expense --
net of income ....................... (3,182) (853) 571
Other expense ........................ 237,134 184,036 161,120
----------- ---------- -----------
Total operating expense ............ 2,426,568 2,231,316 1,911,020
Personal computer impairment
charge .............................. -- -- --
Merger-related charges ............... 28,958 19,309 85,312
Litigation settlement charge ......... 20,000 -- --
Restructuring charge ................. 107,487 -- --
----------- ---------- -----------
Total .............................. $ 2,583,013 $2,250,625 $ 1,996,332
=========== ========== ===========
Overhead ratio* ...................... 57.6% 54.6% 55.1%
Operating overhead ratio ............. 54.1 54.2 52.7
(thousands)
Five-Year
Compound
1997 1996 1995 Growth Rate
--------------- --------------- --------------- ------------
Salaries ............................. $ 742,106 $ 655,065 $ 604,041 12.5%
Employee benefits .................... 163,051 141,867 129,749 10.4
----------- ----------- -----------
Total personnel expense ............ 905,157 796,932 733,790 12.1
Net occupancy expense ................ 116,654 114,001 109,543 7.9
Equipment expense .................... 139,792 130,384 124,833 8.5
Postage and delivery ................. 48,657 47,195 44,553 3.8
Outside data processing,
programming and software ............ 83,418 48,049 44,935 20.0
Stationery and supplies .............. 30,960 30,043 30,238 4.6
Advertising and sales promotion....... 73,193 69,363 58,804 2.6
Professional services ................ 54,113 41,223 41,152 14.2
Travel and business promotion ........ 25,215 21,096 20,267 15.0
Telecommunications ................... 43,420 40,570 30,557 14.9
Amortization of intangible assets..... 13,308 9,163 12,296 49.8
Foreclosed property expense --
net of income ....................... 1,875 1,930 2,420
Other expense ........................ 143,427 159,024 188,241 4.7
----------- ----------- -----------
Total operating expense ............ 1,679,189 1,508,973 1,441,629 11.0
Personal computer impairment
charge .............................. 67,202 -- --
Merger-related charges ............... 220,330 -- --
Litigation settlement charge ......... -- -- --
Restructuring charge ................. -- -- --
----------- ----------- -----------
Total .............................. $ 1,966,721 $ 1,508,973 $ 1,441,629 12.4
=========== =========== ===========
Overhead ratio* ...................... 62.3% 52.5% 54.5%
Operating overhead ratio ............. 53.2 52.5 54.5
* Noninterest expense as a percentage of taxable equivalent net interest income
and total other operating revenue.
Net occupancy expense rose $9 million or 6 percent, reflecting increased
operating premise lease costs, up $10 million, primarily the result of
acquisitions. Offsetting the increase in operating lease expense was additional
premise rental income received on properties owned by Wachovia. The increase in
net occupancy expense was more than offset by a $10 million or 5 percent
decrease in equipment expense resulting from temporary leases of equipment
during the relocation to the new data center in 1999.
Outside data processing, programming and software costs rose $9 million or 8.6
percent. The increases were centered in amortization of externally purchased
software, up $4 million, and software maintenance expense, up $2 million. These
increases reflect a continuing growth in technology investments, as well as the
opening of the new data center in 1999.
Professional services expense increased $5 million or 6.5 percent, reflecting
continued investment in several ongoing projects such as eBusiness, Asset and
Wealth Management and Treasury Services, as well as for the Performance Project.
The increase from 1999 also reflects additional amounts paid for market
research.
Expenses for travel and business promotion increased $7 million or 20.1 percent
from 1999. The increase occurred across all lines of business and was partially
due to broader geographic dispersion resulting from recent acquisitions.
Expenses for travel associated with business promotion accounted for most of the
increase.
30
The increase in intangible amortization expense of $42 million or 82.6 percent
reflects the acquisitions consummated in 2000, including a relatively short life
(7 years) over which the premium is being amortized for Partners First, and a
full year of IJL and OFFITBANK.
Other expense increased $53 million or 28.9 percent, almost half of which is due
to fees paid to a third party to service the acquired credit card portfolio.
Restructuring Charge
On August 28, 2000, Wachovia announced a realignment of resources that called
for the elimination of approximately 1,800 staff positions. The positions
eliminated were identified through a productivity review focused on improving
work processes, introducing new technology, broadening spans of control and
eliminating levels of management across the company. The affected positions were
diversely scattered among all lines of business and at all levels throughout the
organization. The staff reductions are expected to reduce annual expenses by
more than $100 million, mostly in salaries and employee benefits. Much of the
savings will be reinvested in high-growth businesses such as Asset and Wealth
Management and Corporate Financial Services.
As part of the restructuring plan, Wachovia will close its Raleigh, North
Carolina, operations center. Functions currently performed at that location will
move to other operations centers within the Wachovia system. Wachovia is in the
process of closing several underperforming branches over the next few quarters
and 11 in-store branches in Atlanta, Georgia, and Fayetteville, North Carolina,
as announced in September 2000. The branches to be closed had a marginal
contribution to financial results, and the customers will continue to be served
by other nearby Wachovia branches. The resource realignment also included
exiting the municipal finance business.
Wachovia incurred pretax charges of $107 million in 2000, mostly in severance
costs for the positions eliminated. The amounts expensed and paid during 2000
are reported below.
Restructuring Charge Table 15
- --------------------------------------------------------------------------------
(thousands)
2000 Utilized Dec. 31, 2000
Provision In 2000 Balance
----------- ---------- --------------
Severance and personnel-related costs ......... $ 85,666 $ 47,433 $ 38,233
Occupancy and other costs ..................... 21,821 20,437 1,384
--------- -------- --------
Total ......................................... $ 107,487 $ 67,870 $ 39,617
========= ======== ========
Severance and personnel-related costs include severance and other benefits paid
to terminated employees. The amount charged to earnings in 2000 included
benefits for 1,410 employees who received notice or had otherwise been
identified prior to December 31. Severance benefits will not be paid for all
1,800 eliminated positions since many of the positions will vacate through
normal attrition.
Occupancy and other costs represent asset impairment charges and other facility
exit costs associated with the project. Included in occupancy and other costs
are noncash items of approximately $15 million. Additional expenses of
approximately $10 to $15 million will be incurred in the first quarter of 2001.
Income Taxes
Applicable income taxes in 2000 decreased $88 million or 16.6 percent reflecting
the lower level of pretax earnings. The effective rate increased slightly over
the prior year as a result of additional nondeductible amortization
31
expense partially offset by an increase in the proportion of tax exempt income
to total income. Income taxes computed at the statutory rate are 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 income taxes and, in some cases, state income taxes. The tax-exempt
nature of these assets provides both an attractive return and substantial
interest savings for local governments and their constituents.
New Accounting Standards
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 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. The standard will be adopted effective January 1, 2001 with an immaterial
financial statement impact expected.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" (FASB 140), which
supercedes FASB Statement No. 125. FASB 140 revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures regarding these activities. The
statement is effective for transfers and servicing of financial assets or
extinguishments of liabilities that occur after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The provisions relating to recognition and
reclassification of collateral and disclosures for securitization transactions
and collateral have been adopted in the accompanying financial statements
without a material impact.
SHAREHOLDERS' EQUITY AND CAPITAL RATIOS
Shareholders' equity at December 31, 2000 totaled $6.285 billion, rising $626
million or 11 percent from $5.658 billion at year-end 1999. Included in
shareholders' equity at December 31, 2000 was $30 million, net of tax, of
unrealized gains on securities available-for-sale, marked to fair value,
compared with $74 million, net of tax, of unrealized losses one year earlier.
The change in the net fair value adjustment from 1999 reflects the bond market's
anticipation of lower interest rates. This was particularly notable in the
fourth quarter of 2000 when the 5-year swap rate declined approximately 80 basis
points. At the same time Wachovia's net fair value adjustment moved from a $32
million loss at September 30, 2000 to a $30 million gain at December 31, 2000.
Wachovia's book value at year-end 2000 was $30.89 per share, higher by 10.2
percent from $28.04 per share at the close of 1999. Wachovia's internal capital
generation rate (defined as net income less dividends as a percentage of average
equity) was 6.3 percent for the year.
During 2000, Wachovia repurchased a total of 1,999,300 shares of its common
stock under several authorizations by the Board of Directors. The shares were
repurchased at an average price of $58.56 per share, for a total cost of $117
million. In 1999, Wachovia repurchased 7,224,000 shares of its common stock at
an average price of $85.26 per share, for a total cost of $616 million. On
January 28, 2000, the Board of Directors authorized the repurchase
32
of up to 8 million shares of Wachovia's common stock effective through January
25, 2002. As of December 31, 2000, a total of 792,530 shares had been
repurchased under the January 28, 2000 authorization. Included in 2000 purchases
were 1,206,770 shares under separate authorizations to accomplish the purchase
accounting acquisitions of B C Bankshares, Inc. and Commerce National
Corporation. 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 B C Bankshares, Inc. and Commerce National Corporation, Wachovia
issued 2,256,770 shares of common stock resulting in an increase in
shareholders' equity of $179 million in 2000.
Intangible assets at December 31, 2000 totaled $1.256 billion, consisting of
$960 million of goodwill, $65 million of deposit base intangibles, $231 million
of purchased credit card premiums and $308 thousand of other intangibles.
Intangible assets one year earlier were $937 million, with $823 million of
goodwill, $80 million of deposit base intangibles, $34 million of purchased
credit card premiums and $412 thousand of other intangibles. The increase during
the year resulted from purchase acquisitions consummated in 2000.
Capital Components and Ratios Table 16
- --------------------------------------------------------------------------------
December 31 (thousands)
2000 1999 1998
--------------- ---------------- ---------------
Tier I capital:
Common shareholders' equity ............................................. $ 6,284,539 $ 5,658,457 $ 5,338,232
Capital securities ...................................................... 997,119 996,744 996,368
Less ineligible intangible assets ....................................... 1,071,679 931,257 666,672
Unrealized (gains) losses on securities available-for-sale -- net of tax (30,312) 72,002 (82,440)
----------- ------------ -----------
Total Tier I capital ................................................. 6,179,667 5,795,946 5,585,488
Tier II capital:
Allowable allowance for loan losses ..................................... 822,560 554,810 547,992
Allowable long-term debt ................................................ 2,463,031 2,107,334 1,794,148
----------- ------------ -----------
Tier II capital additions ............................................ 3,285,591 2,662,144 2,342,140
----------- ------------ -----------
Total capital ........................................................ $ 9,465,258 $ 8,458,090 $ 7,927,628
=========== ============ ===========
Risk-adjusted assets ..................................................... $81,856,272 $ 77,060,603 $69,928,737
Quarterly average assets* ................................................ $70,803,380 $ 66,113,697 $64,454,538
Risk-based capital ratios:
Tier I capital .......................................................... 7.55% 7.52% 7.99%
Total capital ........................................................... 11.56 10.98 11.34
Tier I leverage ratio .................................................... 8.73 8.77 8.67
* Excludes ineligible intangible assets and average unrealized gains (losses) on
securities available-for-sale, net of tax.
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
that meet or exceed a Tier I ratio of 6 percent, a total capital ratio of 10
percent and a Tier I leverage ratio of
33
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 2000 totaled $463 million, rising $45 million or 10.7
percent from $418 million paid in 1999. The ratio of cash dividends paid to net
income was 55.6 percent for the year.
On January 26, 2001, Wachovia's Board of Directors declared a first quarter 2001
dividend of $.60 per common share, payable March 1, 2001 to shareholders of
record on February 8. The dividend is higher by 11.1 percent from $.54 per
common share paid in the same period of 2000.
Properties
Wachovia maintains dual headquarters at 100 North Main Street, Winston-Salem,
North Carolina, and 191 Peachtree Street, N.E., Atlanta, Georgia. The
Winston-Salem headquarters is a 28-story office tower owned and occupied by
Wachovia. Wachovia occupies the Atlanta headquarters under a lease expiring in
2008. In addition to the 100 North Main Street building, Wachovia owns other
buildings and leases office space in the downtown Winston-Salem area. Wachovia
owns and operates operations centers in Atlanta, Georgia; Columbia, South
Carolina; Charlotte, North Carolina; Raleigh, North Carolina; Charlottesville,
Virginia; and two in Winston-Salem. The Raleigh operations center will be closed
in 2001. A leased operations center is also maintained in Chesapeake, Virginia.
Wachovia owns or leases branch and automated teller facilities in numerous
locations within the states of Florida, Georgia, North Carolina, South Carolina
and Virginia.
Selected Year-End Data Table 17
- --------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- ---------- ---------- ----------
Trust assets (millions):
Discretionary management ..................... $ 50,804 $ 51,922 $ 42,025 $ 33,568 $ 26,161
Total ........................................ 76,011 132,733 138,130 129,079 108,557
Banking offices:
North Carolina ............................... 188 190 198 201 220
Virginia ..................................... 194 234 263 341 242
Georgia ...................................... 131 132 131 130 123
South Carolina ............................... 115 119 120 125 145
Florida ...................................... 40 37 40 33 --
-------- -------- -------- -------- --------
Total ....................................... 668 712 752 830 730
======== ======== ======== ======== ========
Automated banking machines:
North Carolina ............................... 447 446 446 423 351
Virginia ..................................... 269 286 304 325 221
Georgia ...................................... 311 301 299 282 222
South Carolina ............................... 286 284 289 272 213
Florida ...................................... 43 38 34 6 --
-------- -------- -------- -------- --------
Total ....................................... 1,356 1,355 1,372 1,308 1,007
======== ======== ======== ======== ========
Employees (full-time equivalent) .............. 20,325 21,294 20,936 21,652 19,969
Common stock shareholders ..................... 50,581 52,178 53,971 55,681 47,892
Common shares outstanding (thousands) ......... 203,424 201,812 202,986 205,927 201,253
34
FOURTH QUARTER ANALYSIS
Financial Summary Table 18
- --------------------------------------------------------------------------------
2000
------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------- ------------- --------------- ---------------
Summary of Operations
(thousands, except per share data)
Interest income ......................... $ 1,404,393 $1,370,493 $ 1,325,111 $ 1,245,357
Interest expense ........................ 778,287 739,756 685,729 625,861
----------- ---------- ----------- -----------
Net interest income ..................... 626,106 630,737 639,382 619,496
Provision for loan losses ............... 117,463 123,956 273,365 73,666
----------- ---------- ----------- -----------
Net interest income after provision
for loan losses ........................ 508,643 506,781 366,017 545,830
Other operating revenue ................. 470,601 519,990 470,299 470,799
Securities (losses) gains ............... (480) (163) 59 167
----------- ---------- ----------- -----------
Total other income ...................... 470,121 519,827 470,358 470,966
Personnel expense ....................... 294,228 325,743 335,491 343,881
Merger-related charges .................. -- 11,928 8,872 8,158
Litigation settlement charge ............ -- -- -- 20,000
Restructuring charge .................... 19,543 87,944 -- --
Other expense ........................... 291,276 283,082 286,928 265,939
----------- ---------- ----------- -----------
Total other expense ..................... 605,047 708,697 631,291 637,978
Income before income tax expense......... 373,717 317,911 205,084 378,818
Income tax expense ...................... 129,011 112,587 67,513 134,111
----------- ---------- ----------- -----------
Net income .............................. $ 244,706 $ 205,324 $ 137,571 $ 244,707
=========== ========== =========== ===========
Net income per common share:
Basic .................................. $ 1.20 $ 1.01 $ .68 $ 1.21
Diluted ................................ $ 1.20 $ 1.00 $ .67 $ 1.20
Cash dividends paid per common
share .................................. $ .60 $ .60 $ .54 $ .54
Cash dividends paid on common
stock .................................. $ 121,429 $ 121,990 $ 109,505 $ 110,094
Cash dividend payout ratio .............. 49.62% 59.41% 79.60% 44.99%
Average basic shares outstanding ........ 203,407 203,347 202,728 202,464
Average diluted shares outstanding....... 204,393 204,621 204,572 204,213
Selected Average Balances
(millions)
Total assets ............................ $ 71,844 $ 69,709 $ 69,466 $ 67,755
Loans -- net of unearned income.......... 54,279 52,758 52,133 50,550
Securities .............................. 8,434 8,224 8,407 8,395
Other interest-earning assets ........... 1,363 1,197 1,241 1,245
Total interest-earning assets ........... 64,076 62,179 61,781 60,190
Interest-bearing deposits ............... 35,518 34,800 35,663 34,873
Short-term borrowed funds ............... 9,386 9,019 8,621 8,920
Long-term debt .......................... 10,133 9,498 8,851 8,081
Total interest-bearing liabilities ...... 55,037 53,317 53,135 51,874
Noninterest-bearing deposits ............ 8,428 8,474 8,373 8,319
Total deposits .......................... 43,946 43,274 44,036 43,192
Shareholders' equity .................... 6,069 5,952 5,833 5,688
Ratios (averages)
Annualized net loan losses to
loans .................................. .70% .94% .56% .58%
Annualized net yield on interest-
earning assets ......................... 3.94 4.09 4.22 4.20
Annualized return on assets ............. 1.36 1.18 .79 1.44
Annualized return on shareholders'
equity ................................. 16.13 13.80 9.43 17.21
Operating Performance (1)
(thousands, except per share data)
Net income .............................. $ 257,409 $ 270,241 $ 143,337 $ 264,510
Net income per diluted share ............ $ 1.26 $ 1.32 $ .70 $ 1.30
Annualized return on assets ............. 1.43% 1.55% .83% 1.56%
Annualized return on shareholders'
equity ................................. 16.96 18.16 9.83 18.60
Cash dividend payout ratio .............. 47.17 45.14 76.40 41.62
Cash Basis Financial
Information (1), (2)
Net income .............................. $ 276,647 $ 289,882 $ 162,566 $ 281,589
Net income per diluted share ............ $ 1.35 $ 1.42 $ .79 $ 1.38
Annualized return on assets ............. 1.57% 1.69% .95% 1.69%
Annualized return on shareholders'
equity ................................. 22.49 24.08 13.84 24.27
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 (losses) 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
Merger-related charges .................. 5,669 5,293 8,347 --
Litigation settlement charge ............ -- -- -- --
Restructuring charge .................... -- -- -- --
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
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 (1)
(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
Cash Basis Financial
Information (1), (2)
Net income .............................. $ 279,401 $ 272,265 $ 263,529 $ 252,424
Net income per diluted share ............ $ 1.36 $ 1.33 $ 1.27 $ 1.22
Annualized return on assets ............. 1.69% 1.70% 1.63% 1.58%
Annualized return on shareholders'
equity ................................. 24.02 23.40 22.36 21.54
(1) Excludes the effects of merger-related, litigation settlement and
restructuring charges.
(2) Excludes the effects of purchase accounting related intangibles.
35
Business Segments
Asset and Wealth Management. Although Asset and Wealth Management's profit
contribution declined $8 million or 15 percent from the fourth quarter of 1999,
net income was down $2 million as lower allocated expenses reflected reduced
incentive pay. Strong loan growth in Private Financial Advisors was offset by a
reduction in trust balance earnings as a result of the sale of the master trust
and custody business. Soft market conditions in the latter part of 2000 resulted
in the slowing of trading activity and some suppression of the value of managed
assets. This is in contrast to the strong market conditions that existed in the
fourth quarter of 1999. Other income rose $1 million or 1 percent with Private
Financial Advisors posting solid other income growth of 11 percent. However, the
volatility and uncertainty of the market during the fourth quarter 2000
negatively impacted investment revenues. Other expense increased $10 million or
8 percent from the fourth quarter of 1999, driven by higher compensation in key
business areas and further investments in business expansion.
Corporate. Profit contribution decreased by $31 million or 16 percent compared
with the fourth quarter of 1999. Over the same period, net income decreased $16
million. Net interest margin declined by $7 million or almost 3 percent on a
prior-period basis. While average loans outstanding increased $3.3 billion or 10
percent over the prior year's fourth quarter, loan spreads tightened due to
higher funding costs and increased carrying cost of nonperforming loans. Loan
fees also declined 10 percent, as a result of lower loan origination activity in
the large corporate portfolio. The loan loss provision increased by $40 million
to $66 million, as specific reserves were adjusted to reflect some downward
migration of Watch List credits and the rise in nonperforming loans,
particularly in the large corporate portfolio. Other income decreased 3 percent,
as declines in capital markets fees more than offset increases in letter of
credit fees and treasury services revenue. Other expense decreased $19 million
or more than 13 percent, due primarily to performance-related reductions in
incentive compensation expense, as well as the initial impact of Wachovia's
strategic realignment effort.
Consumer. Profit contribution was level with the fourth quarter of 1999,
although net income grew $7 million or 11 percent over the same period. Net
interest income was up $7 million or 3 percent reflecting good loan and deposit
growth. Deposit volume increased 4 percent to $27.5 billion and loans increased
22 percent to $11 billion. Twenty-two percent of the loan volume increase was
attributable to the acquisitions. Deposit volume increased approximately 5
percent, excluding the impact of the divested branches. Approximately 30 percent
of this increase was attributable to the acquisitions. The volume increases were
offset by margin pressure on the deposit portfolio as rates began to decline.
Other income increased $8 million or 7 percent to $115 million. Service charges
on deposit accounts increased 7 percent primarily in returned check charges.
Electronic banking revenues grew 12 percent, driven by interchange fees. Other
expense increased $12 million or 6 percent, due to investment in Wachovia's
Internet site to support retail delivery and the additions of Bank of Canton and
National Bank of Commerce.
Credit Card. Profit contribution decreased $3 million or 4 percent from the
fourth quarter of 1999, mostly due to the favorable charge-off environment a
year ago. Net interest income grew $41 million or 32 percent, primarily
resulting from the Partners First acquisition, partially offset by lower late
fees. The loan loss provision increased 72 percent, primarily as a result of the
acquisition and less favorable loss and bankruptcy experience compared with a
year ago. For the fourth quarter of 2000 annualized net loan losses to average
loans were 4.95 percent compared with 3.61 percent for the fourth quarter of
1999. Other income increased $11 million or 23 percent mostly due to the
acquisition of the Partners First portfolio. The 2000 holiday shopping season
did not reach the level achieved in 1999, leaving interchange and overlimit fees
down slightly from a year ago, excluding the acquisition. Other expense was up
$14 million reflecting intangible amortization and third-party servicing fees.
36
Treasury & Administration. Profit contribution increased $14 million and net
income decreased $6 million from the fourth quarter of 1999. The net interest
margin was lower by $45 million due to securitization transactions and the
securitized portion of the acquired Partners First portfolio which reduced
average loan balances by a combined $1.781 billion. The loan loss provision was
lower by $33 million with the increase in securitized credit card receivables
accounting for the entire change. Other income grew $13 million or 46 percent
for the quarter with the servicing fee on securitized receivables accounting for
most of the increase. Other expense, including allocated expenses rose $10
million or 48 percent due to $20 million in restructuring charges recorded in
the fourth quarter of 2000. The fourth quarter of 1999 included $6 million in
merger integration charges and $3 million in preparation expenses for the Year
2000 date change.
Business Segments -- Fourth Quarter Table 19
- --------------------------------------------------------------------------------
(millions)
Asset and
Wealth
Management Corporate Consumer
-------------------- ----------------- -----------------
2000 1999 2000 1999 2000 1999
-------- ---- ----- ---- ----- ----
Operations
Summary
External net interest
margin ................. $ 40 $ 29 $ 697 $ 611 $ (48) $ (42)
Internal funding
(charge) credit ........ (5) 5 (447) (354) 275 262
---------- ------ ------- ------- ------- -------
Net interest
income* ................ 35 34 250 257 227 220
Total other income ...... 149 148 107 110 115 107
--------- ------ ------- ------- ------- -------
Total revenue ........... 184 182 357 367 342 327
Provision for loan
losses ................. -- -- 66 26 5 2
Other expense ........... 138 128 132 151 206 194
--------- ------ ------- ------- ------- -------
Profit contribution ..... 46 54 159 190 131 131
Allocated expenses ...... 14 19 17 23 22 32
--------- ------ ------- ------- ------- -------
Pretax income ........... 32 35 142 167 109 99
Income tax expense....... 13 14 51 60 39 36
--------- ------ ------- ------- ------- -------
Net income .............. $ 19 $ 21 $ 91 $ 107 $ 70 $ 63
========= ====== ======= ======= ======= =======
Percentage
contribution to
total revenue** ........ 16.3% 16.5% 31.6% 33.3% 30.2% 29.6%
Percentage
contribution to
net income ............. 7.8% 8.0% 37.1% 40.7% 28.6% 23.9%
Average Balances
Total assets ............ $4,246 $3,242 $39,353 $36,240 $11,532 $10,321
Treasury & Total
Credit Card Administration Eliminations Corporation
------------------ ------------------- ---------------- ----------------
2000 1999 2000 1999 2000 1999 2000 1999
-------- ---- -------- ---- ----- ---- ----- ----
Operations
Summary
External net interest
margin ................. $ 301 $ 219 $ (355) $ (178) $ (9) $(11) $ 626 $ 628
Internal funding
(charge) credit ........ (131) (90) 333 201 (25) (24) -- --
-------- ------ -------- ------- ------ ---- ------- -------
Net interest
income* ................ 170 129 (22) 23 (34) (35) 626 628
Total other income ...... 58 47 41 28 -- -- 470 440
-------- ------ -------- ------- ------ ---- ------- -------
Total revenue ........... 228 176 19 51 (34) (35) 1,096 1,068
Provision for loan
losses ................. 98 57 (52) (19) -- -- 117 66
Other expense ........... 64 50 81 94 (16) (16) 605 601
-------- ------ -------- ------- ------ ---- ------- -------
Profit contribution ..... 66 69 (10) (24) (18) (19) 374 401
Allocated expenses ...... 6 7 (50) (73) (9) (8) -- --
-------- ------ -------- ------- ------ ---- ------- -------
Pretax income ........... 60 62 40 49 (9) (11) 374 401
Income tax expense....... 21 22 14 17 (9) (11) 129 138
-------- ------ -------- ------- ------ ----- ------- -------
Net income .............. $ 39 $ 40 $ 26 $ 32 $ -- $ -- $ 245 $ 263
======== ====== ======== ======= ====== ===== ======= =======
Percentage
contribution to
total revenue** ........ 20.2% 16.0% 1.7% 4.6%
Percentage
contribution to
net income ............. 15.9% 15.2% 10.6% 12.2%
Average Balances
Total assets ............ $7,905 $6,297 $8,808 $10,882 $71,844 $66,982
* 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 revenue is based on the proportion of each
segment's revenue to the combined revenue of all segments. Revenue for the
total corporation is 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 2000 was $245 million or $1.20 per diluted
share compared with $263 million or $1.28 per diluted share a year earlier.
Included in results for both quarters were pretax nonoperating charges that
totaled $20 million in fourth quarter 2000 and $6 million in fourth quarter
1999. The 2000 charges were related to the resource realignment announced in
late August 2000. The 1999 charges were for merger integration. Excluding the
after-tax effect of the nonoperating charges, operating net income for the
fourth quarter of 2000 was $257 million or $1.26 per diluted share versus $267
million or $1.30 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 $307 million for the fourth
quarter of 2000 compared with $218 million for the same period of 1999.
37
Taxable Equivalent Rate/Volume Analysis -- Fourth Quarter Table 20
- --------------------------------------------------------------------------------
Variance
Average Volume Average Rate Interest Attributable to
- ------------------- ------------------ ------------------- --------------------
2000 1999 2000 1999 2000 1999 Variance Rate Volume
- -------- -------- -------- -------- -------- --------- ---------- -------- ---------
(millions) Interest Income (thousands)
Loans:
$17,466 $16,714 8.78 7.81 Commercial ....................... $ 385,363 $ 329,115 $ 56,248 $ 41,221 $ 15,027
638 720 9.14 12.09 Tax-exempt ....................... 14,641 21,951 (7,310) (4,971) (2,339)
- ------- ------- --------- -------- --------
18,104 17,434 8.79 7.99 Total commercial ............... 400,004 351,066 48,938 35,378 13,560
1,326 1,050 8.93 8.49 Direct retail .................... 29,737 22,484 7,253 1,175 6,078
4,199 3,690 8.62 7.85 Indirect retail .................. 90,945 73,039 17,906 7,397 10,509
4,292 4,501 14.59 13.69 Credit card ...................... 157,388 155,328 2,060 9,663 (7,603)
805 639 12.04 11.15 Other revolving credit ........... 24,364 17,945 6,419 1,513 4,906
- ------- ------- --------- -------- --------
10,622 9,880 11.33 10.79 Total retail ................... 302,434 268,796 33,638 13,366 20,272
3,360 2,272 9.55 8.94 Construction ..................... 80,654 51,218 29,436 3,652 25,784
8,934 7,630 8.78 8.30 Commercial mortgages ............. 197,249 159,619 37,630 9,555 28,075
9,117 7,604 8.13 7.67 Residential mortgages ............ 186,415 147,041 39,374 9,155 30,219
- ------- ------- -------- -------- --------
21,411 17,506 8.63 8.11 Total real estate .............. 464,318 357,878 106,440 23,637 82,803
2,751 2,491 8.05 9.97 Lease financing .................. 55,647 62,585 (6,938) (12,979) 6,041
1,391 1,282 8.10 6.91 Foreign .......................... 28,335 22,337 5,998 4,021 1,977
- ------- ------- --------- -------- --------
54,279 48,593 9.17 8.68 Total loans .................... 1,250,738 1,062,662 188,076 61,309 126,767
Securities:
1,039 1,252 7.57 7.31 Held-to-maturity ................. 19,765 23,061 (3,296) 787 (4,083)
7,395 7,764 6.47 6.50 Available-for-sale ............... 120,287 127,244 (6,957) (632) (6,325)
- ------- ------- --------- --------- --------
8,434 9,016 6.61 6.61 Total securities ............... 140,052 150,305 (10,253) (182) (10,071)
1,363 1,844 6.47 4.87 Other earning assets ............... 22,159 22,642 (483) 6,297 (6,780)
- ------- ------- --------- --------- --------
Total interest-earning
64,076 59,453 8.77 8.25 assets ....................... 1,412,949 1,235,609 177,340 80,010 97,330
3,019 3,532 Cash and due from banks ............
5,538 4,543 Other assets .......................
(789) (546) Allowance for loan losses ..........
- ------- -------
$71,844 $66,982 Total assets ...................
======= =======
Interest Expense
$ 4,753 $ 4,653 1.53 1.40 Interest-bearing demand ............ 18,273 16,439 1,834 1,489 345
12,925 13,470 4.64 3.72 Savings and money market savings.... 150,782 126,428 24,354 29,700 (5,346)
9,494 8,774 6.02 5.09 Savings certificates ............... 143,733 112,639 31,094 21,439 9,655
4,511 3,428 6.33 5.31 Large denomination certificates .... 71,821 45,867 25,954 9,838 16,116
- ------- ------- --------- --------- --------
Total interest-bearing
deposits in domestic
31,683 30,325 4.83 3.94 offices ...................... 384,609 301,373 83,236 69,404 13,832
Interest-bearing deposits in foreign
3,835 2,782 6.38 5.19 offices .......................... 61,486 36,393 25,093 9,467 15,626
- ------- ------- --------- --------- --------
Total interest-bearing
35,518 33,107 5.00 4.05 deposits ..................... 446,095 337,766 108,329 82,653 25,676
9,386 9,836 6.58 5.22 Short-term borrowed funds .......... 155,339 129,354 25,985 32,199 (6,214)
10,133 8,327 6.94 6.17 Long-term debt ..................... 176,853 129,463 47,390 17,390 30,000
- ------- ------- --------- --------- --------
Total interest-bearing
55,037 51,270 5.63 4.62 liabilities .................. 778,287 596,583 181,704 136,004 45,700
8,428 8,326 Noninterest-bearing deposits .......
2,310 1,831 Other liabilities ..................
6,069 5,555 Shareholders' equity ...............
- ------- -------
Total liabilities and
$71,844 $66,982 shareholders' equity .........
======= ======= ----- -----
3.14 3.63 Interest rate spread
----- -----
Net yield on interest-earning assets
3.94 4.26 and net interest income .......... $ 634,662 $ 639,026 $ (4,364) (51,267) 46,903
===== ===== ========= ========= ========
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 variance in
proportion to the relationship of the absolute dollar amount of the change in
each.
Securities available-for-sale are reported at amortized cost. Pretax unrealized
losses of $30 million in 2000 and $65 million in 1999 are included in other
assets for purposes of this presentation.
38
Allowance for Loan Losses Table 21
- --------------------------------------------------------------------------------
(thousands)
2000
-------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------- ------------ ------------- -------------
Summary of Transactions
Balance at beginning of period ........ $ 799,461 $799,351 $ 595,655 $ 554,810
Additions from acquisitions ........... -- -- 3,289 40,504
Provision for loan losses ............. 117,463 123,956 273,365 73,666
Deduct net loan losses:
Loans charged off:
Commercial .......................... 35,871 70,573 14,991 11,280
Credit card ......................... 59,970 57,099 62,469 62,883
Other revolving credit .............. 2,627 2,819 2,219 2,379
Other retail ........................ 9,325 8,437 8,124 9,875
Real estate ......................... 2,513 887 1,612 1,220
Lease financing ..................... 262 226 404 568
Foreign ............................. -- -- -- --
---------- -------- --------- ---------
Total ............................. 110,568 140,041 89,819 88,205
Recoveries:
Commercial .......................... 2,047 1,673 583 621
Credit card ......................... 10,806 10,446 12,096 10,129
Other revolving credit .............. 411 480 641 647
Other retail ........................ 2,072 2,441 3,018 2,566
Real estate ......................... 794 1,033 402 786
Lease financing ..................... 74 122 121 131
Foreign ............................. -- -- -- --
---------- -------- --------- ---------
Total ............................. 16,204 16,195 16,861 14,880
---------- -------- --------- ---------
Net loan losses ...................... 94,364 123,846 72,958 73,325
---------- -------- --------- ---------
Balance at end of period .............. $ 822,560 $799,461 $ 799,351 $ 595,655
========== ======== ========= =========
Net Loan Losses (Recoveries) By
Category
Commercial ............................ $ 33,824 $ 68,900 $ 14,408 $ 10,659
Credit card ........................... 49,164 46,653 50,373 52,754
Other revolving credit ................ 2,216 2,339 1,578 1,732
Other retail .......................... 7,253 5,996 5,106 7,309
Real estate ........................... 1,719 (146) 1,210 434
Lease financing ....................... 188 104 283 437
Foreign ............................... -- -- -- --
---------- -------- --------- ---------
Total ............................. $ 94,364 $123,846 $ 72,958 $ 73,325
========== ======== ========= =========
Net loan losses -- excluding credit
cards ................................ $ 45,200 $ 77,193 $ 22,585 $ 20,571
Annualized Net Loan Losses
(Recoveries) To Average
Loans By Category
Commercial ............................ .75% 1.54% .32% .24%
Credit card ........................... 4.58 4.40 4.25 4.32
Other revolving credit ................ 1.10 1.21 .85 1.00
Other retail .......................... .53 .45 .40 .60
Real estate ........................... .03 -- .03 .01
Lease financing ....................... .03 .02 .04 .07
Foreign ............................... -- -- -- --
Total loans ........................... .70 .94 .56 .58
Total loans -- excluding credit
cards ................................ .36 .64 .19 .18
Period-end allowance to
outstanding loans .................... 1.50 1.47 1.50 1.17
1999
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ------------- ----------- -------------
Summary of Transactions
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
39
Taxable equivalent net interest income was down $4 million from the fourth
quarter of 1999. The net yield on interest earning assets of 3.94 percent for
the fourth quarter of 2000 was also below the 4.26 percent reported for the same
period of 1999. Several factors contributed to the decline in net interest
income and the net yield on interest earning assets including credit card
securitization transactions, competitive pressures on deposit pricing, liability
mix and the funding cost associated with purchase acquisitions. Also
contributing to the decline were events that occurred at the end of 1999 related
to the Year 2000 date change event that lifted fourth quarter 1999 net interest
income. Those events offset the cost of maintaining excess cash in anticipation
of the date change. Loan fees were $4 million higher in the fourth quarter of
1999 reflecting customers' concerns about liquidity prior to the Year 2000 date
change event. The fourth quarter 1999 net yield on interest-earning assets and
net interest income were also positively influenced by the 1999 year-end spike
in the short-term LIBOR. Loan growth of $5.686 billion from the fourth quarter
of 1999 softened the impact on net interest income of the events described
above.
The provision for loan losses was $117 million, an increase of $51 million or
77.5 percent from fourth quarter 1999. Net loan losses totaled $94 million or
.70 percent of average loans, increasing $29 million or 44.6 percent from a year
earlier. The increase reflects greater losses in the commercial loan portfolio,
primarily among large corporate borrowers. Rising interest rates and the slowing
economy contributed to the higher level of losses. Credit card losses are up
from the fourth quarter of 1999 as a result of a higher charge-off rate. Losses
in other loan categories did not materially change from the fourth quarter of
1999.
Noninterest Income Table 22
- --------------------------------------------------------------------------------
(thousands)
2000
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ----------- ----------- -----------
Service charges on deposit
accounts ........................... $ 106,655 $106,765 $104,380 $100,811
Fees for trust services ............. 57,417 56,636 54,189 51,234
Credit card income -- net of
interchange payments ............... 72,851 82,337 71,463 71,182
Investment fees ..................... 76,521 80,065 81,439 96,770
Capital markets income .............. 40,115 40,092 45,014 44,786
Electronic banking .................. 27,029 26,254 26,153 23,396
Mortgage fees ....................... 7,082 7,373 5,921 5,001
Bankers' acceptance and letter of
credit fees ........................ 14,948 15,102 13,671 11,597
Other service charges and fees ...... 38,606 34,038 30,361 29,181
Other income ........................ 29,377 71,328 37,708 36,841
--------- -------- -------- --------
Total other operating
revenue .......................... 470,601 519,990 470,299 470,799
Securities (losses) gains ........... (480) (163) 59 167
--------- -------- -------- --------
Total ............................. $ 470,121 $519,827 $470,358 $470,966
========= ======== ======== ========
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 (losses) gains ........... 60 147 10,453 234
-------- -------- -------- --------
Total ............................. $439,529 $432,988 $414,997 $333,503
======== ======== ======== ========
Total other operating revenue rose $31 million or 7.1 percent from the fourth
quarter of 1999 with most of the growth occurring in deposit account service
charges, credit card income and other service charges and fees. The $10 million
or 10.4 percent increase in deposit account service charges reflects higher
corporate service fees, particularly analysis fees, up $6 million or 15.5
percent. An increase in returned check charges accounts for the rest of the
increase in deposit service charges. Credit card income increased $8 million or
12 percent reflecting the effect of securitization transactions and the addition
of the Partners First portfolio, partially offset by lower transaction volumes
late in the year. The $12 million or 44.5 percent increase in other service
charges and fees reflects servicing income on the higher volume of securitized
credit card receivables and an increase in insurance premiums and
40
commissions partially resulting from the acquisition of DavisBaldwin. Capital
markets income was down from the fourth quarter of 1999 due to soft market
conditions in the latter part of 2000.
Noninterest Expense Table 23
- --------------------------------------------------------------------------------
(thousands)
2000
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------- ------------ ------------ ------------
Salaries ........................... $ 241,206 $275,249 $282,610 $287,629
Employee benefits .................. 53,022 50,494 52,881 56,252
---------- -------- -------- --------
Total personnel expense .......... 294,228 325,743 335,491 343,881
Net occupancy expense .............. 39,911 40,229 40,684 39,526
Equipment expense .................. 47,684 45,274 45,908 49,195
Postage and delivery ............... 13,023 13,196 13,661 13,817
Outside data processing,
programming and software .......... 31,429 27,419 25,918 26,874
Stationery and supplies ............ 9,227 9,484 10,037 9,072
Advertising and sales promotion..... 16,644 16,752 16,938 16,649
Professional services .............. 26,495 21,245 18,639 13,532
Travel and business promotion ...... 10,526 9,483 11,202 9,572
Telecommunications ................. 15,561 15,373 15,471 14,726
Amortization of intangible assets... 23,864 24,330 23,906 20,797
Foreclosed property
expense -- net of income .......... 109 (349) (220) (2,722)
Other expense ...................... 56,803 60,646 64,784 54,901
---------- -------- -------- --------
Total operating expense .......... 585,504 608,825 622,419 609,820
Merger-related charges ............. -- 11,928 8,872 8,158
Litigation settlement charge ....... -- -- -- 20,000
Restructuring charge ............... 19,543 87,944 -- --
---------- -------- -------- --------
Total ............................ $ 605,047 $708,697 $631,291 $637,978
========== ======== ======== ========
Overhead ratio* .................... 54.7% 61.1% 56.4% 58.0%
Operating overhead ratio ........... 53.0 52.5 55.6 55.5
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)
Other expense ...................... 46,255 47,012 54,285 36,484
-------- -------- --------- --------
Total operating expense .......... 594,949 571,899 572,270 492,198
Merger-related charges ............. 5,669 5,293 8,347 --
Litigation settlement charge ....... -- -- -- --
Restructuring charge ............... -- -- -- --
-------- -------- --------- --------
Total ............................ $600,618 $577,192 $ 580,617 $492,198
======== ======== ========= ========
Overhead ratio* .................... 55.7% 54.5% 56.3% 51.7%
Operating overhead ratio ........... 55.2 54.0 55.5 51.7
* Noninterest expense as a percentage of taxable equivalent net interest income
and total other operating revenue.
Operating expense, which excludes nonoperating charges, decreased $9 million or
approximately 2 percent from the fourth quarter of 1999. Personnel expenses were
down $30 million mostly due to a lower level of incentive compensation
reflecting the change in business performance. The reduction in personnel
expense also reflects management's ongoing efforts to control costs. At December
31, 2000, Wachovia had 20,325 full-time equivalent employees compared with
21,294 a year ago despite the positions added through acquisitions during the
year. The $5 million reduction in equipment expense reflects the expiration of
temporary leases for equipment used during the relocation to Wachovia's new data
center in 1999 which is partially offset by an increase in outside data
processing, programming and software also related to the new data center. The $9
million increase in intangible amortization is caused by intangibles added by
acquisitions completed during 1999 and 2000. The acquisition of the Partners
First credit card portfolio had the largest impact due to the relatively short
life over which the balance is being amortized. The acquisition of the Partners
First credit card portfolio also accounts for most of the $11 million increase
in other expense due to servicing fees paid to a third party for transaction
processing and servicing the accounts.
41
RESULTS OF OPERATIONS -- 1999 VS. 1998
Business Segments
Asset and Wealth Management. Profit contribution rose $54 million or 43 percent
from 1998. Net income increased $21 million or 46 percent over the same period.
Net interest income was up $31 million or 32 percent from strong loan and
deposit growth in the Private Financial Advisors group and Trust area. A
substantial portion of the increase in other income resulted from the 1999
acquisitions of IJL, OFFITBANK and BEJS. Investment fees exceeded $209 million
reflecting the addition of IJL and OFFITBANK. Nine months of IJL revenue
contributed 60 percent of the year's total investment-related income, while four
months of OFFITBANK revenue accounted for 6 percent. Insurance revenue at $24
million was up significantly with BEJS accounting for most of the increase.
Staff expense, again impacted by the acquisitions, was the major factor in the
71 percent increase in other expense. Excluding the impact of the acquisitions,
the Asset and Wealth Management business produced solid profit growth.
Corporate. Profit contribution increased $99 million or 16 percent over 1998. At
the same time, net income increased $65 million. Net interest income increased
$160 million or 21 percent. Approximately two-thirds of this margin growth was
attributable to a 15 percent or $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. Other income was up 23
percent, reflecting increased service charges and strong performance in core
capital markets businesses, including loan syndications and asset-backed
finance, as well as the inclusion of IJL for nine months. Other expense
increased $97 million, largely due to the added expense base of IJL.
Consumer. Although profit contribution increased $7 million or 1 percent from
the prior year, net income was up $21 million or 10 percent due to a lower level
of allocated expenses in 1999. Net interest income increased modestly. Excluding
the impact of divested branches, deposit volumes held steady 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 deposit funding for 7 and 29 months. Other
income increased $33 million or 8 percent to $420 million. Deposit account fee
revenue was up as a result of new pricing strategies. Electronic banking
revenues grew as a result of higher 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 divestiture gains on the sale of branches, totaling $8
million in 1999 compared with $17 million in 1998. In addition, mortgage fee
income decreased 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 resulted in reduced
fee income, it added to earning assets and, therefore, to future revenue. Other
expense increased $27 million from the prior year.
Credit Card. Profit contribution rose sharply in 1999, up $68 million or 36
percent as a result of lower loan losses and higher fee revenue. Net interest
income grew $39 million or 8 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 3 percent largely due to the acquisition of a
$269 million portfolio in September 1998. The loan loss provision declined 7
percent as a result of reduced bankruptcies and contractual charge-offs. Other
income increased $21 million or 14 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. Other expense grew $12 million or 7 percent.
42
Treasury & Administration. Profit contribution for 1999 was unchanged from 1998
although net income declined $17 million over the same period. Net interest
income dropped $128 million due to attrition in the securities portfolio and the
impact of the two credit card securitization transactions in 1999. Other income
for the year grew $43 million or 42 percent, driven principally by gains on the
two credit card securitization transactions during 1999, offset by a $10 million
reduction in securities gains. Other expense, including allocated expenses,
decreased $42 million due to a $66 million decline in merger-related expenses
that was offset by increases in professional services expense, equipment
expense, and outside data processing, programming and software charges.
Business Segments -- Years 1999 and 1998 Table 24
- --------------------------------------------------------------------------------
(millions)
Asset and
Wealth
Management Corporate Consumer
------------------- ---------------- ---------------
1999 1998 1999 1998 1999 1998
-------- ---- ---- ---- ---- ----
Operations Summary
External net interest
margin ..................... $ 103 $ 75 $ 2,197 $ 1,979 $ (154) $ (183)
Internal funding
(charge) credit ............ 24 21 (1,261) (1,203) 1,011 1,037
-------- ------ -------- -------- ------ -------
Net interest income* ........ 127 96 936 776 857 854
Total other income .......... 485 284 403 328 420 387
-------- ------ -------- -------- ------ -------
Total revenue ............... 612 380 1,339 1,104 1,277 1,241
Provision for loan
losses ..................... -- 1 59 20 15 13
Other expense ............... 433 254 562 465 780 753
-------- ------ -------- -------- ------ -------
Profit contribution ......... 179 125 718 619 482 475
Allocated expenses .......... 70 53 92 101 130 158
-------- ------ -------- -------- ------ -------
Pretax income ............... 109 72 626 518 352 317
Income tax expense .......... 42 26 225 182 128 114
-------- ------ -------- -------- ------ -------
Net income .................. $ 67 $ 46 $ 401 $ 336 $ 224 $ 203
======== ====== ======== ======== ====== =======
Percentage
contribution to total
revenue** .................. 14.5% 10.1% 31.7% 29.5% 30.2% 33.1%
Percentage
contribution to net
income ..................... 6.6% 5.3% 39.7% 38.4% 22.2% 23.2%
Average Balances
Total assets ................ $2,860 $2,335 $ 34,591 $ 31,378 $9,787 $10,259
Treasury & Total
Credit Card Administration Eliminations Corporation
------------------- ------------------- --------------- ----------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ---- -------- -------- ------ ------ ------- ------
Operations Summary
External net interest
margin ..................... $ 853 $ 830 $ (489) $ (303) $ (40) $ (47) $ 2,470 $ 2,351
Internal funding
(charge) credit ............ (328) (344) 649 592 (95) (103) -- --
------- ------ -------- ------- ------- ------- -------- --------
Net interest income* ........ 525 486 160 289 (135) (150) 2,470 2,351
Total other income .......... 169 148 144 101 -- -- 1,621 1,248
------- ------ -------- ------- ------- ------- -------- --------
Total revenue ............... 694 634 304 390 (135) (150) 4,091 3,599
Provision for loan
losses ..................... 257 277 (33) (12) -- -- 298 299
Other expense ............... 185 173 354 419 (63) (68) 2,251 1,996
------- ------ -------- ------- ------- ------- -------- --------
Profit contribution ......... 252 184 (17) (17) (72) (82) 1,542 1,304
Allocated expenses .......... 31 37 (291) (314) (32) (35) -- --
------- ------ -------- ------- ------- ------- -------- --------
Pretax income ............... 221 147 274 297 (40) (47) 1,542 1,304
Income tax expense .......... 79 52 97 103 (40) (47) 531 430
------- ------ -------- ------- ------- ------- -------- --------
Net income .................. $ 142 $ 95 $ 177 $ 194 $ -- $ -- $ 1,011 $ 874
======= ====== ======== ======= ======= ======= ======== ========
Percentage
contribution to total
revenue** .................. 16.4% 16.9% 7.2% 10.4%
Percentage
contribution to net
income ..................... 14.0% 10.9% 17.5% 22.2%
Average Balances
Total assets ................ $6,283 $6,095 $11,899 $13,882 $65,420 $63,949
* Net interest income is reported on a taxable equivalent basis by segment and
on a nontaxable equivalent basis for the Corporation. The difference is
included in the eliminations column.
** Percentage contribution to total revenue is based on the proportion of each
segment's revenue to the combined revenue of all segments.
Consolidated Financial Results
Consolidated net income for 1999 was $1.011 billion or $4.90 per diluted share
compared with $874 million or $4.18 per diluted share in 1998. Results were
impacted by pretax nonoperating charges totaling $19 million and $85 million in
1999 and 1998, respectively. Excluding the after-tax effect of the nonoperating
charges, net income on an operating basis was $1.024 billion or $4.97 per
diluted share and $930 million or $4.45 per diluted share in 1999 and 1998,
respectively.
Taxable equivalent net interest income increased $113 million or 4.7 percent,
fueled by good loan demand and a higher net interest spread. The net yield on
interest-earning assets improved 8 basis points to 4.32 percent. Loan yields
fell 27 basis points, partially reflecting the two credit card securitization
transactions in 1999. Commercial loan yields held steady at 7.37 percent. The
average cost of funds fell 30 basis points.
43
Average loans increased $2.822 billion or 6.4 percent. Commercial loans, the
real estate portfolio and lease financing led the loan growth. Credit card
securitization transactions reduced average balances by approximately $833
million. Interest-bearing deposits rose $314 million or less than 1 percent
primarily in the savings and money market category, reflecting growth in the
Premiere and Business Premiere products. Short-term borrowed funds decreased
$1.494 billion and long-term debt increased $1.855 billion as Wachovia replaced
short-term borrowings with longer-term funding for liquidity and capital
management.
Taxable Equivalent Rate/Volume Analysis -- Years 1999 and 1998 Table 25
- --------------------------------------------------------------------------------
Variance
Average Volume Average Rate Interest Attributable to
- ----------------- -------------- ----------------------- ----------------------
1999 1998 1999 1998 1999 1998 Variance Rate Volume
- -------- ------- ------ ------ ---------- ---------- ----------- --------- ----------
(millions) (thousands)
Interest Income
Loans:
$15,751 $14,023 7.25 7.21 Commercial ..................... $1,141,309 $1,011,401 $ 129,908 $ 4,749 $ 125,159
808 1,219 9.79 9.24 Tax-exempt ..................... 79,075 112,672 (33,597) 6,290 (39,887)
------- ------- ---------- ---------- ---------
16,559 15,242 7.37 7.37 Total commercial ............. 1,220,384 1,124,073 96,311 (725) 97,036
1,064 1,143 8.63 9.39 Direct retail .................. 91,882 107,405 (15,523) (8,363) (7,160)
3,482 3,091 7.89 8.27 Indirect retail ................ 274,843 255,512 19,331 (11,886) 31,217
5,040 5,680 13.44 13.46 Credit card .................... 677,232 764,426 (87,194) (1,214) (85,980)
589 498 10.93 11.18 Other revolving credit ......... 64,405 55,644 8,761 (1,265) 10,026
------- ------- ---------- ---------- ---------
10,175 10,412 10.89 11.36 Total retail.................. 1,108,362 1,182,987 (74,625) (48,095) (26,530)
2,193 1,893 8.54 9.00 Construction ................... 187,396 170,403 16,993 (9,019) 26,012
7,324 6,813 8.11 8.58 Commercial mortgages ........... 594,166 584,266 9,900 (32,520) 42,420
7,421 7,808 7.77 7.92 Residential mortgages .......... 576,624 618,118 (41,494) (11,257) (30,237)
------- ------- ---------- ---------- ---------
16,938 16,514 8.02 8.31 Total real estate ............ 1,358,186 1,372,787 (14,601) (49,324) 34,723
2,266 1,429 11.07 11.63 Lease financing ................ 250,868 166,128 84,740 (8,274) 93,014
1,285 804 6.56 6.85 Foreign ........................ 84,262 55,067 29,195 (2,458) 31,653
------- ------- ---------- ---------- ---------
47,223 44,401 8.52 8.79 Total loans .................. 4,022,062 3,901,042 121,020 (121,785) 242,805
Securities:
1,319 1,476 7.41 7.97 Held-to-maturity ............... 97,757 117,609 (19,852) (7,856) (11,996)
8,021 9,106 6.45 6.69 Available-for-sale ............. 517,242 609,245 (92,003) (21,452) (70,551)
------- ------- ---------- ---------- ---------
9,340 10,582 6.58 6.87 Total securities ............. 614,999 726,854 (111,855) (29,170) (82,685)
1,553 1,579 4.52 5.33 Other earning assets .......... 70,245 84,223 (13,978) (12,621) (1,357)
------- ------- ---------- ---------- ---------
58,116 56,562 8.10 8.33 Total interest-earning assets. 4,707,306 4,712,119 (4,813) (132,506) 127,693
3,117 3,211 Cash and due from banks ..........
4,728 4,712 Other assets .....................
(541) (536) Allowance for loan losses ........
------- -------
$65,420 $63,949 Total assets .................
======= =======
Interest Expense
$ 4,657 $ 4,984 1.25 1.29 Interest-bearing demand .......... 58,434 64,530 (6,096) (1,941) (4,155)
Savings and money market
13,339 11,604 3.58 3.89 savings ........................ 477,557 451,655 25,902 (38,134) 64,036
8,765 9,943 5.11 5.46 Savings certificates ............. 447,583 542,477 (94,894) (33,271) (61,623)
3,318 3,051 5.20 5.42 Large denomination certificates... 172,539 165,384 7,155 (6,897) 14,052
------- ------- ---------- ---------- ---------
Total interest-bearing
deposits in domestic
30,079 29,582 3.84 4.14 offices..................... 1,156,113 1,224,046 (67,933) (88,181) 20,248
Interest-bearing deposits in
2,246 2,429 4.86 5.59 foreign offices ................ 109,082 135,659 (26,577) (16,880) (9,697)
------- ------- ---------- --------- --------
Total interest-bearing
32,325 32,011 3.91 4.25 deposits ................... 1,265,195 1,359,705 (94,510) (107,722) 13,212
9,401 10,895 4.86 5.18 Short-term borrowed funds ........ 457,161 563,846 (106,685) (32,595) (74,090)
8,134 6,279 5.83 6.22 Long-term debt ................... 474,378 390,662 83,716 (25,763) 109,479
------- ------- ---------- --------- --------
Total interest-bearing
49,860 49,185 4.41 4.71 liabilities ................ 2,196,734 2,314,213 (117,479) (148,884) 31,405
---------- --------- --------
8,255 7,803 Noninterest-bearing deposits .....
1,875 1,793 Other liabilities ................
5,430 5,168 Shareholders' equity .............
------- -------
Total liabilities and
$65,420 $63,949 shareholders' equity........
======= ======= ----- -----
3.69 3.62 Interest rate spread
----- -----
Net yield on interest-earning
assets and net interest
4.32 4.24 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 variance in
proportion to the relationship of the absolute dollar amount of the change in
each.
Securities available-for-sale are reported at amortized cost. Pretax unrealized
gains of $18 million in 1999 and $132 million in 1998 are included in other
assets for purposes of this presentation.
44
Nonperforming assets at December 31, 1999 were $224 million or .45 percent of
loans and foreclosed property. The total was up from year-end 1998 by $42
million or 23 percent.
At $298 million, the provision for loan losses in 1999 was slightly below the
amount recorded for 1998. Net loan losses also fell below the amount recorded in
1998 due to favorable conditions in the credit card portfolio and a reduction in
on-balance sheet receivables resulting from the 1999 securitization
transactions. Net loan losses were $291 million or .62 percent of average loans
compared with $299 million or .67 percent of loans in 1998.
Total other operating revenue increased $382 million or 31.1 percent with the
increase occurring in all categories except mortgage fees and other income.
Growth was greatest in investment fees, credit card income, capital markets
income, deposit account service charges and trust services fees. The
acquisitions of IJL and OFFITBANK accounted for much of the growth in investment
fees and capital markets income. Securitization transactions occurring in 1999
accounted for much of the increase in credit card income with gains from the
sale of receivables of $27 million included in the 1999 balance. Other income
included gains from the sale of branches of $8 million and $17 million in 1999
and 1998, respectively.
Noninterest expense for 1999 was higher by $254 million or 12.7 percent, with
the expense base of acquired companies accounting for much of the increase. In
1999 and 1998, Wachovia incurred merger expenses of $19 million and $85 million,
respectively, primarily for integrating IJL in 1999 and systems conversions and
signage changes related to Virginia and Florida banking acquisitions in 1998.
Excluding the effect of acquisitions, expenses rose approximately 5 percent over
1998, concentrated in equipment, outside data processing, programming and
software costs reflecting continued technology investments.
45
SUPERVISION AND REGULATION
General
Wachovia and its bank subsidiaries are subject to an extensive system of banking
laws and regulations that are intended primarily for the protection of customers
and depositors. These laws and regulations govern such areas as permissible
activities, reserves, loans and investments, and rates of interest that can be
charged on loans. Similarly, Wachovia's subsidiaries engaged in investment
advisory and other securities related activities are subject to various U.S.
federal and state laws and regulations that are intended to benefit clients of
investment advisors, shareholders in mutual funds and investors. In addition,
Wachovia and its subsidiaries are subject to general U.S. federal laws and
regulations and to the laws and regulations of the states or countries in which
they conduct their businesses. Described below are the material elements of
selected laws and regulations applicable to Wachovia and its subsidiaries. The
descriptions are not intended to be complete and are qualified in their entirety
by reference to the full text of the statutes and regulations described.
Regulated Entities of Wachovia
Financial Holding Company. As a financial holding company, Wachovia is regulated
under the Bank Holding Company Act of 1956, as amended by the
Graham-Leach-Bliley Act ("GLB Act") (collectively "BHC Act"), and is subject to
the supervision of the Federal Reserve Board. Wachovia also is a savings and
loan holding company registered under the Home Owners' Loan Act of 1933, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989, and is subject to the supervision of the Office of Thrift Supervision
("OTS").
In general, the BHC Act limits the business of bank holding companies that are
financial holding companies to banking, managing or controlling banks,
performing certain servicing activities for subsidiaries, and engaging in any
activity, or acquiring and retaining the shares of any company engaged in any
activity that is either (1) financial in nature or incidental to such financial
activity [as determined by the Federal Reserve Board in consultation with the
Office of the Comptroller of the Currency ("OCC")] or (2) complementary to a
financial activity and does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally (as
solely determined by the Federal Reserve Board). Activities that are financial
in nature include activities that the Federal Reserve Board had determined, by
order or regulation in effect prior to the enactment of the GLB Act, to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
Bank Subsidiaries. As federally insured national banks, Wachovia Bank, National
Association ("WBNA") and The First National Bank of Atlanta ("FNBA") are subject
to supervision and examination by the OCC and the Federal Deposit Insurance
Corporation ("FDIC"). Atlantic Savings Bank F.S.B. ("Atlantic") is a federally
insured savings bank and is subject to supervision and examination by the FDIC
and the OTS. OFFITBANK is a trust company chartered under New York Banking Law
and is subject to supervision and examination by the New York State Banking
Department.
Nonbank Subsidiaries. The Securities and Exchange Commission ("SEC") and the
New York Stock Exchange ("NYSE") regulate Wachovia's nonbank subsidiaries
engaged in securities-related activities. Wachovia Securities, Inc. and
CapTrust Financial Advisors, LLC. conduct brokerage operations and engage in
securities activities. Both subsidiaries act as broker-dealers for the sale of
shares of mutual funds, including the Wachovia Funds family of mutual funds.
Mecklenburg Securities, Inc. acts as a limited broker-dealer in variable life
insurance and variable annuity products. Wachovia Securities, Inc., CapTrust
Financial Advisors, LLC and Mecklenburg Securities, Inc. are
46
registered broker-dealers and members of the National Association of Securities
Dealers, Inc., a securities industry self-regulatory organization. Wachovia
Securities, Inc. is also a member of the NYSE, the American Stock Exchange, the
Midwest Stock Exchange, the Boston Stock Exchange and the New York Futures
Exchange.
Investment Advisors and Investment Companies. Certain of Wachovia's subsidiaries
are registered investment advisors under the Investment Advisors Act of 1940
and, as such, are supervised by the SEC. They also are subject to various U.S.
federal and state laws and regulations and to the laws of any other countries in
which they conduct business. These laws and regulations generally grant
supervisory agencies broad administrative powers, including the power to limit
or restrict the conduct of business due to failure to comply with such laws and
regulations. The possible sanctions that may be imposed for violations of these
laws and regulations include the suspension of individual employees, limitations
on engaging in business for specific periods, the revocation of the registration
as an investment advisor, censures and fines. Each investment company (as
defined in the Investment Company Act of 1940) which is advised by a subsidiary
of Wachovia, including the Wachovia Funds and OFFITBANK families of mutual
funds, is registered with the SEC.
MSRB and CFTC. Certain of Wachovia's public finance activities are regulated by
the Municipal Securities Rulemaking Board. Wachovia Securities, Inc. and
certain of Wachovia's other subsidiaries are registered with the Commodity
Futures Trading Commission ("CFTC") and are subject to CFTC regulation.
Payment of Dividends and Other Restrictions
Wachovia is a legal entity separate and distinct from its subsidiaries. There
are various legal and regulatory limitations on the extent to which Wachovia's
subsidiaries, including its bank and savings and loan subsidiaries, can finance
or otherwise supply funds to Wachovia.
The principal source of Wachovia's cash revenues is dividends from its
subsidiaries, and there are certain legal restrictions under federal and state
law on the payment of dividends by such subsidiaries. The amount of dividends
that may be paid by WBNA and FNBA without regulatory approval is limited to the
lesser of (i) its net profits for the current year combined with its retained
net profits for the preceding two calendar years or (ii) its cumulative
undivided profits. The relevant regulatory agencies also have authority to
prohibit a bank holding company, which would include Wachovia, or a national
banking association from engaging in what, in the opinion of such regulatory
body, constitutes an unsafe or unsound practice in conducting its business. The
payment of dividends could, depending upon the financial condition of the
subsidiary, be deemed to constitute an unsafe or unsound practice. Under
applicable law, as a savings bank, Atlantic must give the OTS 30 days prior
notice of any proposed payment of dividends.
WBNA and FNBA and their respective subsidiaries are subject to limitations under
Sections 23A and 23B of the Federal Reserve Act with respect to extensions of
credit to, investments in, and certain other transactions with, Wachovia and its
other subsidiaries. Furthermore, loans and extensions of credit also are subject
to various collateral requirements.
Capital Adequacy
The federal bank regulatory agencies have adopted minimum risk-based and
leverage capital guidelines for U.S. banking organizations. The minimum required
risk-based capital ratio of qualifying total capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8%, of which 4% must consist
47
of Tier I capital. The minimum required leverage capital ratio (Tier I capital
to average total assets) is 3% for banking organizations that meet certain
specified criteria, including that they have the highest regulatory rating.
Failure to meet capital guidelines can subject a banking organization to a
variety of enforcement remedies, including additional substantial restrictions
on its operations and activities, termination of deposit insurance by the FDIC,
and under certain conditions the appointment of a receiver or conservator.
Federal banking statutes establish five capital categories for depository
institutions ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized") and impose
significant restrictions on the operations of an institution that is not at
least adequately capitalized. Under certain circumstances, an institution may be
downgraded to a category lower than that warranted by its capital levels and
subjected to the supervisory restrictions applicable to institutions in the
lower capital category. A depository institution is generally prohibited from
making capital distributions (including paying dividends) or paying management
fees to a holding company if the institution would thereafter be
undercapitalized. Adequately capitalized institutions may accept brokered
deposits only with a waiver from the FDIC, while undercapitalized institutions
may not accept, renew or rollover brokered deposits.
An undercapitalized depository institution also is subject to restrictions in a
number of areas, including asset growth, acquisitions, branching, new lines of
business and borrowing from the Federal Reserve System. In addition, an
undercapitalized depository institution is required to submit a capital
restoration plan. A depository institution's holding company must guarantee the
capital plan up to an amount equal to the lesser of 5% of the depository
institution's assets at the time it becomes undercapitalized or the amount
needed to restore the capital of the institution to the levels required for the
institution to be classified as adequately capitalized at the time the
institution fails to comply with the plan and any such guarantee would be
entitled to a priority of payment in bankruptcy. A depository institution is
treated as if it is significantly undercapitalized if it fails to submit a
capital plan that (i) is based on realistic assumptions and (ii) is likely to
succeed in restoring the depository institution's capital.
Significantly undercapitalized depository institutions may be subject to a
number of additional significant requirements and restrictions, including
requirements to sell sufficient voting stock to become adequately capitalized,
to replace or improve management, to reduce total assets, to cease acceptance of
correspondent bank deposits, to restrict senior executive compensation and to
limit transactions with affiliates. Critically undercapitalized depository
institutions are further subject to restrictions on paying principal or interest
on subordinated debt, making investments, expanding, acquiring or selling
assets, extending credit for highly leveraged transactions, paying excessive
compensation, amending their charters or bylaws and making any material changes
in accounting methods. In general, a receiver or conservator must be appointed
for a depository institution within 90 days after the institution is deemed to
be critically undercapitalized.
Support of Subsidiary Banks
Under Federal Reserve Board policy, Wachovia is expected to act as a source of
financial strength to, and to commit resources to support its banking
subsidiaries. This support may be required at times when, absent such FRB
policy, Wachovia may not be inclined to provide it. In the event of a financial
holding company's bankruptcy, any commitment by the financial holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
will be assumed by the bankruptcy trustee and entitled to a priority in payment.
48
A depository institution insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of a commonly controlled FDIC insured depository institution or
any assistance provided by the FDIC to any commonly controlled FDIC insured
depository institution "in danger of default." Default is defined generally as
the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. Liability
for the losses of commonly controlled depository institutions can lead to the
failure of some or all depository institutions in a holding company structure,
if the remaining institutions are unable to pay the liability assessed by the
FDIC. Any obligation or liability owed by a subsidiary bank to its parent
company is subordinate to the subsidiary bank's cross-guarantee liability for
losses of commonly controlled depository institutions.
FDIC Insurance Assessments
All of the deposits of Wachovia's bank and thrift subsidiaries are subject to
FDIC deposit insurance assessments. The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve certain designated
reserve ratios in the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") and to impose special additional assessments. The FDIC
applies a risk-based assessment system that places each financial institution
into one of nine risk categories, based on capital levels and supervisory
criteria and an evaluation of the bank's risk to the BIF or SAIF, as applicable.
The current FDIC premium schedule for the SAIF and the BIF ranges from 0% to
0.27%.
Community Reinvestment Act
The Community Reinvestment Act requires banks to help serve the credit needs in
their communities, including credit to low and moderate income individuals and
geographies. Should Wachovia or its bank subsidiaries fail to adequately serve
the community, there are penalties which might be imposed, including denials to
expand branches, relocate, add subsidiaries and affiliates, expand into new
financial activities and merge with or purchase other financial institutions.
Legislative Initiatives
Various legislative initiatives are from time to time introduced in Congress.
Wachovia cannot determine the ultimate effect that any such potential
legislation, if enacted, would have upon its financial condition or operations.
49
Five-Year Total Return
The graph below presents the cumulative total return, assuming the reinvestment
of dividends, for the period from December 31, 1995 through December 31, 2000,
from an investment of $100 in each of Wachovia common stock, the Standard &
Poor's 500 Stock Index and the Keefe, Bruyette & Woods 50 Total Return Index
(the "KBW 50"). The KBW 50 is a published industry index providing a market
capitalization weighted measure of the total return of 50 U.S. banking
companies, including all money center and most major regional banks.
[LINE CHART APPEARS HERE]
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Wachovia $100.00 $127.61 $188.08 $207.21 $165.56 $147.02
KBW 50 $100.00 $141.46 $206.80 $223.91 $216.14 $259.50
S&P 500 $100.00 $122.96 $163.98 $210.85 $255.21 $231.98
Base period 12/31/95 = $100
Dividends reinvested
Data for the S&P 500 Index and KBW 50 Index is weighted by market
capitalization
50
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
accounting principles generally accepted in the United States 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, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wachovia
Corporation and subsidiaries at December 31, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ERNST & YOUNG LLP
Winston-Salem, North Carolina
January 17, 2001
51
Consolidated Statements of Condition
- --------------------------------------------------------------------------------
($ in thousands) Wachovia Corporation and Subsidiaries
DECEMBER 31 DECEMBER 31
2000 1999
-------------- --------------
ASSETS
Cash and due from banks .................................................................. $ 3,727,441 $ 3,475,004
Interest-bearing bank balances ........................................................... 173,529 184,904
Federal funds sold and securities purchased under resale agreements ...................... 788,618 761,962
Trading account assets ................................................................... 960,838 870,304
Securities available-for-sale ............................................................ 7,571,696 7,095,790
Securities held-to-maturity (fair value of $1,052,535 in 2000 and $1,061,150 in 1999)..... 1,023,750 1,048,724
Loans, net of unearned income ............................................................ 55,001,721 49,621,225
Less allowance for loan losses ........................................................... 822,560 554,810
----------- -----------
Net loans .............................................................................. 54,179,161 49,066,415
Premises and equipment ................................................................... 911,304 953,832
Due from customers on acceptances ........................................................ 82,008 111,684
Goodwill and other intangible assets ..................................................... 1,256,227 937,225
Other assets ............................................................................. 3,357,080 2,846,693
----------- -----------
Total assets ........................................................................... $74,031,652 $67,352,537
=========== ===========
LIABILITIES
Deposits in domestic offices:
Demand .................................................................................. $ 9,180,330 $ 8,730,673
Interest-bearing demand ................................................................. 5,116,571 4,527,711
Savings and money market savings ........................................................ 12,902,336 13,760,479
Savings certificates .................................................................... 9,534,778 8,701,074
Large denomination certificates ......................................................... 3,673,219 3,154,754
----------- -----------
Total deposits in domestic offices ..................................................... 40,407,234 38,874,691
Interest-bearing deposits in foreign offices ............................................. 4,004,948 2,911,727
----------- -----------
Total deposits ......................................................................... 44,412,182 41,786,418
Federal funds purchased and securities sold under repurchase agreements .................. 6,753,164 5,372,493
Commercial paper ......................................................................... 1,855,923 1,658,988
Other short-term borrowed funds .......................................................... 1,253,058 3,071,493
Long-term debt ........................................................................... 10,808,218 7,814,263
Acceptances outstanding .................................................................. 82,008 111,684
Other liabilities ........................................................................ 2,582,560 1,878,741
----------- -----------
Total liabilities ...................................................................... 67,747,113 61,694,080
Off-balance sheet items, commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Preferred stock, par value $5 per share:
Authorized 50,000,000 shares; none outstanding .......................................... -- --
Common stock, par value $5 per share:
Authorized 1,000,000,000 shares; issued and outstanding 203,423,606 shares
in 2000 and 201,812,295 shares in 1999 ................................................. 1,017,118 1,009,061
Capital surplus .......................................................................... 731,162 598,149
Retained earnings ........................................................................ 4,505,947 4,125,524
Accumulated other comprehensive income (loss) ............................................ 30,312 (74,277)
----------- -----------
Total shareholders' equity ............................................................. 6,284,539 5,658,457
----------- -----------
Total liabilities and shareholders' equity ............................................. $74,031,652 $67,352,537
=========== ===========
See notes to consolidated financial statements
52
Consolidated Statements of Income
- --------------------------------------------------------------------------------
($ in thousands, except per share) Wachovia Corporation and Subsidiaries
YEAR ENDED DECEMBER 31
--------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
INTEREST INCOME
Loans, including fees .................................................... $ 4,728,737 $ 4,000,541 $ 3,873,404
Securities available-for-sale ............................................ 460,486 504,470 597,557
Securities held-to-maturity:
State and municipal ..................................................... 15,124 11,673 15,044
Other investments ....................................................... 60,654 79,919 95,952
Interest-bearing bank balances ........................................... 6,527 7,390 12,988
Federal funds sold and securities purchased under resale agreements ...... 30,892 30,696 25,803
Trading account assets ................................................... 42,934 32,131 44,497
----------- ----------- -----------
Total interest income .................................................. 5,345,354 4,666,820 4,665,245
INTEREST EXPENSE
Deposits:
Domestic offices ........................................................ 1,417,160 1,156,113 1,224,046
Foreign offices ......................................................... 239,003 109,082 135,659
----------- ----------- -----------
Total interest on deposits ............................................. 1,656,163 1,265,195 1,359,705
Short-term borrowed funds ................................................ 559,336 457,161 563,846
Long-term debt ........................................................... 614,134 474,378 390,662
----------- ----------- -----------
Total interest expense ................................................. 2,829,633 2,196,734 2,314,213
NET INTEREST INCOME ...................................................... 2,515,721 2,470,086 2,351,032
Provision for loan losses ................................................ 588,450 298,105 299,480
----------- ----------- -----------
Net interest income after provision for loan losses ...................... 1,927,271 2,171,981 2,051,552
OTHER INCOME
Service charges on deposit accounts ...................................... 418,611 369,646 334,980
Fees for trust services .................................................. 219,476 216,392 199,949
Credit card income ....................................................... 297,833 255,243 171,127
Investment fees .......................................................... 334,795 235,350 61,556
Capital markets income ................................................... 170,007 170,771 130,083
Electronic banking ....................................................... 102,832 88,626 74,257
Mortgage fees ............................................................ 25,377 33,213 44,929
Other operating income ................................................... 362,758 240,882 211,238
----------- ----------- -----------
Total other operating revenue .......................................... 1,931,689 1,610,123 1,228,119
Securities (losses) gains ................................................ (417) 10,894 20,442
----------- ----------- -----------
Total other income ..................................................... 1,931,272 1,621,017 1,248,561
OTHER EXPENSE
Salaries ................................................................. 1,086,694 1,020,384 874,750
Employee benefits ........................................................ 212,649 199,902 180,603
----------- ----------- -----------
Total personnel expense ................................................ 1,299,343 1,220,286 1,055,353
Net occupancy expense .................................................... 160,350 151,282 138,636
Equipment expense ........................................................ 188,061 198,062 153,007
Merger-related charges ................................................... 28,958 19,309 85,312
Litigation settlement charge ............................................. 20,000 -- --
Restructuring charge ..................................................... 107,487 -- --
Other operating expense .................................................. 778,814 661,686 564,024
----------- ----------- -----------
Total other expense .................................................... 2,583,013 2,250,625 1,996,332
Income before income tax expense ......................................... 1,275,530 1,542,373 1,303,781
Income tax expense ....................................................... 443,222 531,152 429,611
----------- ----------- -----------
NET INCOME ............................................................... $ 832,308 $ 1,011,221 $ 874,170
=========== =========== ===========
Net income per common share:
Basic ................................................................... $ 4.10 $ 4.99 $ 4.26
Diluted ................................................................. $ 4.07 $ 4.90 $ 4.18
Average shares outstanding:
Basic ................................................................... 202,989 202,795 205,058
Diluted ................................................................. 204,450 206,192 209,153
See notes to consolidated financial statements
53
Consolidated Statements of Shareholders' Equity
- --------------------------------------------------------------------------------
($ in thousands, except per share) Wachovia Corporation and Subsidiaries
COMMON STOCK
--------------------------------
SHARES AMOUNT
---------------- ---------------
YEAR ENDED DECEMBER 31, 1998
Balance at beginning of year ............................ 205,926,632 $ 1,029,633
Comprehensive income:
Net income .............................................
Other comprehensive income:
Unrealized holding gains on securities available-
for-sale (net of 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
Dividend reinvestment plan ............................. 301,992 1,510
Acquisitions ........................................... 1,127,723 5,639
Common stock acquired ................................... (6,581,846) (32,909)
Miscellaneous ........................................... ----------- -----------
Balance at end of year .................................. 202,986,100 $ 1,014,931
=========== ===========
YEAR ENDED DECEMBER 31, 1999
Balance at beginning of year ............................ 202,986,100 $ 1,014,931
Comprehensive income:
Net income .............................................
Other comprehensive loss:
Unrealized holding losses on securities available-
for-sale (net of 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
Dividend reinvestment plan ............................. 282,947 1,414
Acquisitions ........................................... 4,801,987 24,010
Note conversions ....................................... 3,065 15
Common stock acquired ................................... (7,514,400) (37,572)
Miscellaneous ........................................... ----------- -----------
Balance at end of year .................................. 201,812,295 $ 1,009,061
=========== ===========
YEAR ENDED DECEMBER 31, 2000
Balance at beginning of year ............................ 201,812,295 $ 1,009,061
Comprehensive income:
Net income .............................................
Other comprehensive income:
Unrealized holding gains on securities available-
for-sale (net of tax expense of $64,352)..............
Add reclassification adjustment for losses realized
in net income (net of tax benefit of $146)............
Comprehensive income ................................
Cash dividends declared -- $2.28 a share.................
Common stock issued pursuant to:
Stock option and employee benefit plans ................ 1,078,507 5,392
Dividend reinvestment plan ............................. 393,346 1,967
Acquisitions ........................................... 2,254,947 11,275
Common stock acquired ................................... (2,115,489) (10,577)
Miscellaneous ...........................................
------------ -----------
Balance at end of year .................................. 203,423,606 $ 1,017,118
============ ===========
ACCUMULATED
OTHER
CAPITAL RETAINED COMPREHENSIVE
SURPLUS EARNINGS INCOME (LOSS) TOTAL
-------------- --------------- --------------- ---------------
YEAR ENDED DECEMBER 31, 1998
Balance at beginning of year ............................ $ 974,803 $ 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 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 ................ 102,540 113,598
Dividend reinvestment plan ............................. 22,885 24,395
Acquisitions ........................................... 77,674 83,313
Common stock acquired ................................... (508,093) (541,002)
Miscellaneous ........................................... (565) (19,522) (20,087)
------------ ----------- ---------- -----------
Balance at end of year .................................. $ 669,244 $ 3,571,617 $ 82,440 $ 5,338,232
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 1999
Balance at beginning of year ............................ $ 669,244 $ 3,571,617 $ 82,440 $ 5,338,232
Comprehensive income:
Net income ............................................. 1,011,221 1,011,221
Other comprehensive loss:
Unrealized holding losses on securities available-
for-sale (net of 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 ................ 111,308 117,571
Dividend reinvestment plan ............................. 21,692 23,106
Acquisitions ........................................... 399,059 423,069
Note conversions ....................................... 235 250
Common stock acquired ................................... (603,357) (640,929)
Miscellaneous ........................................... (32) (38,867) (38,899)
------------ ----------- ---------- -----------
Balance at end of year .................................. $ 598,149 $ 4,125,524 $ (74,277) $ 5,658,457
============ =========== ========== ===========
YEAR ENDED DECEMBER 31, 2000
Balance at beginning of year ............................ $ 598,149 $ 4,125,524 $ (74,277) $ 5,658,457
Comprehensive income:
Net income ............................................. 832,308 832,308
Other comprehensive income:
Unrealized holding gains on securities available-
for-sale (net of tax expense of $64,352).............. 104,318 104,318
Add reclassification adjustment for losses realized
in net income (net of tax benefit of $146)............ 271 271
----------- ---------- -----------
Comprehensive income ................................ 832,308 104,589 936,897
Cash dividends declared -- $2.28 a share................. (463,018) (463,018)
Common stock issued pursuant to:
Stock option and employee benefit plans ................ 58,310 63,702
Dividend reinvestment plan ............................. 20,864 22,831
Acquisitions ........................................... 167,673 178,948
Common stock acquired ................................... (113,834) (124,411)
Miscellaneous ........................................... 11,133 11,133
------------ ----------- ---------- -----------
Balance at end of year .................................. $ 731,162 $ 4,505,947 $ 30,312 $ 6,284,539
============ =========== ========== ===========
See notes to consolidated financial statements
54
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
($ in thousands) Wachovia Corporation and Subsidiaries
YEAR ENDED DECEMBER 31
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
OPERATING ACTIVITIES
Net income ..................................................................... $ 832,308 $ 1,011,221 $ 874,170
Adjustments to reconcile net income to net cash provided by operations:
Provision for loan losses ..................................................... 588,450 298,105 299,480
Depreciation and amortization ................................................. 295,411 245,803 155,069
Deferred income taxes ......................................................... 235,174 383,302 266,451
Securities losses (gains) ..................................................... 417 (10,894) (20,442)
Gain on sale of noninterest-earning assets .................................... (6,364) (13,485) (7,421)
Increase in accrued income taxes .............................................. 2,187 26,459 224,609
(Increase) decrease in accrued interest receivable ............................ (94,083) (25,158) 40,246
Increase (decrease) in accrued interest payable ............................... 134,533 11,578 (26,107)
Net change in other accrued and deferred income and expense ................... 120,851 (163,073) (60,053)
Net trading account activities ................................................ (90,534) (91,125) 334,310
Net loans held for resale ..................................................... (74,432) 250,632 (184,571)
Gain from branch sales ........................................................ (41,618) (7,554) (17,155)
------------ ------------ ------------
Net cash provided by operating activities .................................... 1,902,300 1,915,811 1,878,586
INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing bank balances ...................... 28,185 (73,826) 23,208
Net (increase) decrease in federal funds sold and securities purchased under
resale agreements ............................................................. (8,339) (40,361) 947,064
Purchases of securities available-for-sale ..................................... (1,488,647) (2,222,574) (3,106,977)
Purchases of securities held-to-maturity ....................................... (140,324) (95,531) (394,956)
Sales of securities available-for-sale ......................................... 482,692 366,714 590,447
Calls, maturities and prepayments of securities available-for-sale ............. 854,051 2,525,569 3,564,575
Calls, maturities and prepayments of securities held-to-maturity ............... 189,461 431,963 532,922
Net increase in loans made to customers ........................................ (5,019,413) (5,471,971) (1,634,527)
Net credit card receivables securitized ........................................ 250,000 1,395,954 --
Capital expenditures ........................................................... (115,993) (213,229) (258,719)
Proceeds from sales of premises and equipment .................................. 16,998 27,154 38,959
Net increase in other assets ................................................... (341,355) (279,575) (375,080)
Business combinations .......................................................... (805,754) (11,123) 16,108
Branch sales ................................................................... (378,559) (114,761) (111,901)
------------ ------------ ------------
Net cash used by investing activities ........................................ (6,476,997) (3,775,597) (168,877)
FINANCING ACTIVITIES
Net increase in demand, savings and money market accounts ...................... 377,471 757,675 1,584,124
Net increase (decrease) in certificates of deposit ............................. 2,173,930 163,578 (3,192,149)
Net increase (decrease) in federal funds purchased and securities sold under
repurchase agreements ......................................................... 1,376,791 (151,068) (2,870,049)
Net increase in commercial paper ............................................... 196,935 299,606 325,358
Net (decrease) increase in other short-term borrowings ......................... (1,818,435) 1,125,558 1,159,388
Proceeds from issuance of long-term debt ....................................... 3,893,075 1,588,733 2,684,679
Maturities and repayments of long-term debt .................................... (915,267) (1,410,819) (1,028,772)
Common stock issued ............................................................ 40,465 59,478 80,375
Dividend payments .............................................................. (463,018) (418,447) (381,798)
Common stock repurchased ....................................................... (116,086) (634,623) (531,122)
Net increase in other liabilities .............................................. 81,273 154,854 38,704
------------ ------------ ------------
Net cash provided (used) by financing activities ............................. 4,827,134 1,534,525 (2,131,262)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 252,437 (325,261) (421,553)
Cash and cash equivalents at beginning of year ................................. 3,475,004 3,800,265 4,221,818
------------ ------------ ------------
Cash and cash equivalents at end of period ..................................... $ 3,727,441 $ 3,475,004 $ 3,800,265
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Interest paid .................................................................. $ 2,695,100 $ 2,185,156 $ 2,340,320
Income taxes paid .............................................................. 204,811 119,959 159,500
See notes to consolidated financial statements
55
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note A -- Accounting Policies
Nature of Operations -- The Corporation is a southeastern interstate financial
holding company maintaining dual headquarters in Atlanta, Georgia, and
Winston-Salem, North Carolina. The Corporation's principal banking subsidiary is
Wachovia Bank, N.A., which maintains operations in Florida, Georgia, North
Carolina, South Carolina and Virginia. 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.
Business combinations completed during 1998, 1999 and 2000 are described in Note
C -- Business Combinations. In October 2000, Wachovia announced a definitive
agreement to acquire West Palm Beach, Florida-based Republic Security Financial
Corporation, the parent company of Republic Security Bank. Republic Security
Bank operates 94 banking facilities in 12 Florida counties and had approximately
$3.1 billion in assets and $2 billion in deposits at December 31, 2000. The
transaction will be accounted for as a purchase business combination and is
expected to be completed during the first quarter of 2001.
Principles of Consolidation -- The consolidated financial statements include the
accounts of Wachovia Corporation and its subsidiaries after elimination of all
material intercompany balances and transactions.
Business Combinations -- In business combinations accounted for as
poolings-of-interests, the financial position and results of operations and cash
flows of the respective companies are restated as though the companies were
combined for all historical periods.
In business combinations accounted for using the purchase method of accounting,
the net assets of the companies acquired are recorded at their fair values at
the date of acquisition. Goodwill is amortized on a straight-line basis over the
estimated periods benefited. Identifiable intangibles, including deposit base
intangibles, are amortized on an accelerated or straight-line basis over the
estimated periods benefited. The results of operations of the acquired companies
are included since the date of acquisition.
Use of Estimates -- The financial statements are prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Due From Banks -- The Corporation considers cash and due from banks,
all of which are maintained in financial institutions, as cash and cash
equivalents for purposes of the Consolidated Statements of Cash Flows.
Trading Instruments -- The Corporation maintains trading positions in both
derivative and nonderivative (or cash) financial instruments. Trading cash
instruments are held for distribution through retail sales or in anticipation of
market movements and are carried at fair value. Gains and losses, both realized
and unrealized, are included in capital markets income. Interest revenue arising
from cash financial instruments is included in interest income-trading account
assets. Trading cash instruments are comprised primarily of securities backed by
the U.S. Treasury and various federal agencies and state and local governmental
bodies.
Trading derivative financial instruments are customer oriented, and trading
positions are established as necessary to accommodate customers' requirements.
Gains and losses from trading derivatives and foreign exchange activities are
included in capital markets income.
Securities Held-to-Maturity and Available-for-Sale -- Management determines the
appropriate classification of debt securities at the time of purchase. Debt
securities are classified as held-to-maturity when the Corporation has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities are classified as available-for-sale and are stated at fair
value. Unrealized gains and losses, net of tax, on available-for-sale securities
are included in accumulated other comprehensive income -- a separate component
of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from securities. The specific identification method is used to determine
realized gains and losses on sales of securities, which are reported as
securities gains and losses.
Securities Purchased and Sold Agreements -- Securities purchased under resale
agreements and securities sold under repurchase agreements are generally
accounted for as collateralized financing transactions. They are recorded at the
current fair value of the securities plus accrued interest. It is the
Corporation's policy to take possession of securities purchased under resale
agreements, which are primarily U.S. Government and Government agency
securities. The current fair value of these securities is monitored, and
additional securities are obtained when deemed appropriate. The Corporation also
monitors its exposure with respect to securities sold under repurchase
agreements and a request to the lender for additional money is made when
necessary.
Risk Management Instruments -- Interest rate swaps and options (caps and floors)
are used as part of the Corporation's overall interest rate risk management and
are designated as hedges of interest-bearing assets, liabilities, firm
commitments and anticipated transactions. These derivatives modify the interest
rate characteristics of specified financial instruments. Amounts receivable or
payable under interest rate swap and option agreements are recognized in net
interest income. Derivative instruments not qualifying as end-user positions are
treated as trading positions and marked-to-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
56
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note A -- Accounting Policies -- Continued
and ongoing basis using statistical calculations of correlation. Gains and
losses on risk management derivatives that are terminated early are deferred and
amortized to net interest income over the remaining period originally covered by
the instrument. If the underlying designated item is no longer held, or if an
anticipated transaction is no longer likely to occur, any previously
unrecognized gain or loss on the derivative contract is recognized in earnings
and the contract is subsequently accounted for at fair value.
Loans and Allowance for Loan Losses -- Loans are carried at their principal
amount outstanding net of unearned income, including net deferred loan fees and
costs, except for loans held for resale which are carried at the lower of cost
or market. The Corporation defers certain nonrefundable loan origination and
commitment fees and the direct costs of originating or acquiring loans. Interest
on loans is accrued and recorded as interest income based upon the principal
amount outstanding. Except for revolving credit loans, the recognition of
interest income is discontinued when a loan becomes 90 days past due as to
principal and interest or when, in management's judgment, the principal or
interest will not be collectible in the normal course of business. When interest
accruals are discontinued, the balance of accrued interest is reversed.
Management may elect to continue the accrual of interest when the estimated net
realizable value of collateral is sufficient to cover the principal balance and
accrued interest and the loan is in the process of collection. Interest is
accrued on revolving credit loans until payments become 180 days past due, at
which time the outstanding principal balance and accrued unpaid interest is
charged off. For installment loans and other closed-end consumer loans, the
accrual of interest is discontinued when the loan becomes 120 days past due, at
which time the outstanding principal and unpaid interest is charged off. The
Corporation records a charge-off for commercial loans and commercial real estate
loans when available information confirms that specific loans, or portions
thereof, are uncollectible.
The Corporation applies Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" (FASB 5), and Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FASB
114), in determining the balance of the allowance for loan losses and the amount
of impaired loans. The allowance is maintained at a level believed to be
adequate by management to absorb probable losses in the loan portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current domestic and
international economic conditions, volume and composition of the loan portfolio
and other risks inherent in the portfolio. The method used to determine the
amount of loss inherent in the loan portfolio and thereby assess the adequacy of
the recorded balance of the allowance for loan losses involves identifying
portfolios of loans with similar characteristics for which estimates of inherent
future probable losses can be made. The estimates are based on historical loss
factors as adjusted for current business and economic conditions. The loss
factors are applied to the respective portfolios in order to determine the
overall allowance adequacy.
Loan Securitization -- Loan securitization involves the sale, generally to a
trust, of a pool of loan receivables. The Corporation continues to own the
accounts that generate the loan receivables. In securitization transactions, the
Corporation retains interest-only strips, servicing rights, and in some cases a
cash reserve account, all of which are retained interests in the securitized
receivables. Gain or loss on sale of the receivables depends in part on the
previous carrying amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interests based on their
relative fair value at the date of transfer. The fair value of retained
interests is obtained from market prices if available, or estimates of fair
value based on the present value of estimated future expected cash flows.
Premises and Equipment -- Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
computed on a straight-line basis over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the life of the leasehold asset or the lease term.
Internal Use Software -- The Corporation relies on company personnel and
independent contractors to plan, develop, install, customize and enhance
computer systems applications that support corporate and administrative
operations. Software development costs, such as those related to program coding,
testing, configuration and installation, are capitalized and are amortized on a
straight-line basis over the expected useful life. All other costs incurred
related to planning and post-development phases of an internal software project
are expensed as incurred.
Impairment of Long-Lived Assets -- Impairment losses on long-lived assets to be
held and used are recognized whenever events or changes in circumstances result
in the carrying value of the assets exceeding the sum of the expected future
cash flows. The measurement of the impairment losses recognized is based on the
difference between the fair value and carrying value of the assets. Long-lived
assets to be disposed of are reported at the lower of carrying value or fair
value less cost to sell.
Income Taxes -- Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Each subsidiary
provides for income taxes based on its contribution to income taxes (benefit) of
the consolidated group. The Corporation and its subsidiaries file a consolidated
tax return.
Stock-Based Compensation -- The Corporation applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Corporation's stock at the date of grant over the
amount an employee must pay to acquire the stock. Compensation cost for stock
awards and appreciation rights is recorded based on the market price at the date
of grant, or the date in which the stated performance criteria are met, and the
end of the period, respectively. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (FASB 123), encourages, but does
not require, adoption of a fair value method of
57
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note A -- Accounting Policies -- Continued
accounting for employee stock-based compensation plans. The Corporation follows
the pro forma disclosure provisions of FASB 123.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FASB 133). FASB
133 establishes new accounting and reporting requirements for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. The standard requires all derivatives to be
measured at fair value and recognized as either assets or liabilities in the
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. The Corporation will adopt the standard, as required, effective
January 1, 2001 with an immaterial financial statement impact.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" (FASB 140). FASB 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain additional disclosures
regarding these activities. The statement is effective for transfers and
servicing of financial assets or extinguishments of liabilities that occur after
March 31, 2001. The statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The impact of the
disclosure and recognition provisions of this standard are not material.
Reclassification -- Certain 1999 and 1998 amounts have been reclassified to
conform to the 2000 presentation.
- --------------------------------------------------------------------------------
Note B -- 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, Consumer, Credit Card and Treasury &
Administration. Asset and Wealth Management earns revenues by providing estate
planning services, insurance, investment and trust products to high-wealth
individuals and corporate executives. Corporate earns its revenues primarily by
providing financing, deposit, cash management, investment and asset
administration products to corporate customers. Consumer gen erates its revenues
primarily from individuals and small businesses by providing credit and deposit
services as well as insurance, investment and trust products. 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. Treasury
& Administration is comprised of balance sheet management activities that
include managing the investment portfolio, discretionary funding, asset
securitization, utilization of off-balance sheet financial instruments and
optimizing the Corporation's equity position. Nonoperating and other corporate
expenses such as merger-related charges, litigation settlement charges,
restructuring charges and Year 2000 conversion costs are included in the
Treasury & Administration segment.
ASSET AND
YEAR ENDED WEALTH
DECEMBER 31, 2000 MANAGEMENT CORPORATE CONSUMER
- -------------------------------- --------------- ---------------- --------------
External net interest margin ... $ 147,443 $ 2,636,003 $ (180,777)
Internal funding (charge)
credit ........................ (3,019) (1,653,334) 1,093,898
----------- ------------- ------------
Net interest income ............ 144,424 982,669 913,121
Provision for loan losses ...... 1,693 383,221 19,905
Total other income ............. 618,609 426,973 484,697
Other expense .................. 556,025 587,549 809,638
----------- ------------- ------------
Profit contribution ........... 205,315 438,872 568,275
Allocated expenses ............. 72,758 90,936 116,482
----------- ------------- ------------
Income before income tax
expense ....................... 132,557 347,936 451,793
Income tax expense ............. 53,353 126,318 164,684
----------- ------------- ------------
Net income ..................... $ 79,204 $ 221,618 $ 287,109
=========== ============= ============
Average total assets ........... $ 3,975,097 $ 38,082,316 $ 11,003,413
=========== ============= ============
YEAR ENDED CREDIT TREASURY &
DECEMBER 31, 2000 CARD ADMINISTRATION ELIMINATIONS TOTAL
- -------------------------------- -------------- ---------------- --------------- --------------
External net interest margin ... $ 1,166,604 $ (1,217,063) $ (36,489) $ 2,515,721
Internal funding (charge)
credit ........................ (502,487) 1,165,322 (100,380) --
----------- ------------- ------- ------------
Net interest income ............ 664,117 (51,741) (136,869) 2,515,721
Provision for loan losses ...... 384,175 (200,544) -- 588,450
Total other income ............. 220,530 180,463 -- 1,931,272
Other expense .................. 256,901 435,051 (62,151) 2,583,013
----------- ------------- ----------- ------------
Profit contribution ........... 243,571 (105,785) (74,718) 1,275,530
Allocated expenses ............. 31,349 (273,296) (38,229) --
----------- ------------- ----------- ------------
Income before income tax
expense ....................... 212,222 167,511 (36,489) 1,275,530
Income tax expense ............. 75,986 59,370 (36,489) 443,222
----------- ------------- ----------- ------------
Net income ..................... $ 136,236 $ 108,141 $ -- $ 832,308
=========== ============= =========== ============
Average total assets ........... $ 7,913,248 $ 8,725,322 $ -- $ 69,699,396
=========== ============= =========== ============
58
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note B -- Business Segment Information -- Concluded
ASSET AND
YEAR ENDED WEALTH
DECEMBER 31, 1999 MANAGEMENT CORPORATE CONSUMER
- -------------------------------------- ------------ --------------- --------------
External net interest margin ......... $ 103,284 $ 2,196,757 $ (153,504)
Internal funding (charge)
credit .............................. 23,410 (1,260,978) 1,011,011
---------- ----------- ----------
Net interest income .................. 126,694 935,779 857,507
Provision for loan losses ............ 726 58,569 15,086
Total other income ................... 485,750 403,141 419,727
Other expense ........................ 432,141 561,856 780,747
---------- ----------- ----------
Profit contribution ................. 179,577 718,495 481,401
Allocated expenses ................... 70,446 92,387 129,560
---------- ----------- ----------
Income before income tax
expense ............................. 109,131 626,108 351,841
Income tax expense ................... 42,385 224,765 128,001
---------- ----------- ----------
Net income ........................... $ 66,746 $ 401,343 $ 223,840
========== =========== ==========
Average total assets ................. $2,859,920 $34,591,059 $9,787,018
========== =========== ==========
YEAR ENDED CREDIT TREASURY &
DECEMBER 31, 1999 CARD ADMINISTRATION ELIMINATIONS TOTAL
- -------------------------------------- ------------- ---------------- -------------- -------------
External net interest margin ......... $ 852,793 $ (488,759) $(40,485) $ 2,470,086
Internal funding (charge)
credit .............................. (327,599) 649,047 (94,891) --
---------- ----------- -------- -----------
Net interest income .................. 525,194 160,288 (135,376) 2,470,086
Provision for loan losses ............ 256,598 (32,874) -- 298,105
Total other income ................... 168,782 143,617 -- 1,621,017
Other expense ........................ 185,043 353,956 (63,118) 2,250,625
---------- ----------- -------- -----------
Profit contribution ................. 252,335 (17,177) (72,258) 1,542,373
Allocated expenses ................... 30,587 (291,207) (31,773) --
---------- ----------- -------- -----------
Income before income tax
expense ............................. 221,748 274,030 (40,485) 1,542,373
Income tax expense ................... 79,355 97,131 (40,485) 531,152
---------- ----------- -------- -----------
Net income ........................... $ 142,393 $ 176,899 $ -- $ 1,011,221
========== =========== ======== ===========
Average total assets ................. $6,283,548 $11,898,713 $ -- $65,420,258
========== =========== ======== ===========
ASSET AND
YEAR ENDED WEALTH
DECEMBER 31, 1998 MANAGEMENT CORPORATE CONSUMER
- -------------------------------------- ------------ --------------- --------------
External net interest margin ......... $ 75,018 $ 1,978,805 $ (182,884)
Internal funding (charge)
credit .............................. 21,006 (1,203,149) 1,037,393
---------- ----------- -----------
Net interest income .................. 96,024 775,656 854,509
Provision for loan losses ............ 1,435 19,804 13,495
Total other income ................... 283,808 327,806 387,439
Other expense ........................ 253,445 465,239 753,573
---------- ----------- -----------
Profit contribution ................. 124,952 618,419 474,880
Allocated expenses ................... 53,004 100,432 158,150
---------- ----------- -----------
Income before income tax
expense ............................. 71,948 517,987 316,730
Income tax expense ................... 26,166 181,956 113,471
---------- ----------- -----------
Net income ........................... $ 45,782 $ 336,031 $ 203,259
========== =========== ===========
Average total assets ................. $2,335,270 $31,377,718 $10,258,913
========== =========== ===========
YEAR ENDED CREDIT TREASURY &
DECEMBER 31, 1998 CARD ADMINISTRATION ELIMINATIONS TOTAL
- -------------------------------------- ------------- ---------------- -------------- -------------
External net interest margin ......... $ 829,963 $ (302,996) $(46,874) $ 2,351,032
Internal funding (charge)
credit .............................. (343,748) 591,439 (102,941) --
---------- ----------- -------- -----------
Net interest income .................. 486,215 288,443 (149,815) 2,351,032
Provision for loan losses ............ 276,765 (12,019) -- 299,480
Total other income ................... 148,450 101,058 -- 1,248,561
Other expense ........................ 172,955 419,239 (68,119) 1,996,332
---------- ----------- -------- -----------
Profit contribution ................. 184,945 (17,719) (81,696) 1,303,781
Allocated expenses ................... 37,546 (314,310) (34,822) --
---------- ----------- -------- -----------
Income before income tax
expense ............................. 147,399 296,591 (46,874) 1,303,781
Income tax expense ................... 51,982 102,910 (46,874) 429,611
---------- ----------- -------- -----------
Net income ........................... $ 95,417 $ 193,681 $ -- $ 874,170
========== =========== ======== ===========
Average total assets ................. $6,095,315 $13,881,319 $ -- $63,948,535
========== =========== ======== ===========
The Corporation's management accounting policies generally follow the policies
described in Note A, except for net interest income which is reported on a fully
taxable equivalent basis. Beginning January 2000, the Corporation adopted a
marginal matched maturity funds transfer pricing system to simulate matched
funding to compensate or charge for funds provided or used with a corresponding
offset in the Treasury & Administration business segment. Formerly, the
Corporation utilized a multiple pool method for funds transfer pricing. This
change in management accounting has been reflected for all periods presented.
Provision for loan losses is charged to each segment based on the credit risk of
each segment's loan portfolio. Operating expense is recognized as incurred and
charged on a fully absorbed basis. Additionally, income tax expense is
calculated based on the business segment's fully taxable equivalent income and
the Corporation's effective tax rate.
Reconciling items between management accounting and the Corporation's
consolidated financial statements are limited to the taxable equivalent
adjustment and other income statement reclassifications shown as Eliminations.
The Corporation operates primarily in the United States; accordingly, geographic
distribution of revenue and long-lived assets in other countries is not
significant. Revenue from no individual customer exceeded 10% of consolidated
total revenue.
- --------------------------------------------------------------------------------
Note C -- Business Combinations
On December 15, 1997, the Corporation merged in a pooling-of-interests
transaction, with Central Fidelity Banks, Inc., headquartered in Richmond,
Virginia. In connection with the transaction, the Corporation incurred a
restructuring charge to consolidate Central Fidelity's operations, business line
locations and administrative functions. These activities were completed during
1998. The remaining accrual associated with this charge was $4,894 and $21,927,
respectively, at December 31, 2000 and 1999 and was comprised of salary
continuation payments. The balance remaining at December 2000 will be paid
during 2001.
59
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note C -- Business Combinations -- Concluded
During 1998, the Corporation acquired Ameribank Bancshares (Ameribank),
headquartered in Hollywood, Florida, with $280 million in assets; Hunt, DuPree,
Rhine and Associates Inc., a benefits consulting company; and Retirement Plan
Securities Inc., a registered investment advisor.
On April 1, 1999, the Corporation completed its merger with Interstate/Johnson
Lane, Inc. (IJL), headquartered in Charlotte, North Carolina. The acquisition of
IJL resulted in the issuance of approximately 2.6 million shares of common stock
valued at $215,562. The purchase price was allocated to the net assets acquired
resulting in $125,205 of goodwill. In September 1999, the Corporation completed
its merger with OFFITBANK Holdings, Inc. (OFFITBANK), headquartered in New York.
The acquisition of OFFITBANK resulted in the issuance of approximately 2.1
million shares of common stock valued at $203,173. The purchase price was
allocated to the net assets acquired resulting in $175,568 of goodwill. Also,
during 1999, the Corporation acquired Barry, Evans, Josephs & Snipes (BEJS), a
national life insurance broker specializing in wealth transfer strategies and
benefit plans for affluent families and corporate executives.
On February 1, 2000, the Corporation completed its purchase of a majority of the
credit card business of Partners First Holdings, LLC, adding 1.2 million
customers and approximately $2 billion of managed receivables. The transaction
resulted in $234,524 of purchased credit card intangibles. Also during 2000, the
Corporation acquired B C Bankshares, parent company of the Bank of Canton,
headquartered in suburban Atlanta with $400 million in assets; Commerce National
Corporation, parent company of the National Bank of Commerce in suburban
Orlando, Florida, with $180 million in assets; and DavisBaldwin, Inc., a Tampa,
Florida-based insurance agency specializing in property and casualty insurance
services for commercial customers.
The proforma impact of these purchase transactions was not material to the
Corporation's reported results of operations. Amounts incurred for systems
conversion and integration of business lines related to merger transactions are
included in merger-related charges in the income statement. Goodwill arising
from the purchase transactions above is being amortized over 20 to 25 years.
Deposit base intangibles and purchased credit card premiums resulting from the
above acquisitions are being amortized over 7 years.
- --------------------------------------------------------------------------------
Note D -- Restructuring Charge
During 2000, the Corporation recorded charges of $107,487 in connection with
strategic actions to realign resources and eliminate approximately 1,800 staff
positions. The positions eliminated were identified through a productivity
review focused on improving work processes, introducing new technology,
broadening spans of control and eliminating levels of management across the
company. The affected positions are diversely scattered among all lines of
business and at all levels throughout the organization.
The restructuring plan includes closing the Corporation's Raleigh, North
Carolina, operations center. Functions currently performed at that location will
move to other operations centers. Several underperforming branches are also
being closed including 11 in-store branches in Atlanta and Fayetteville, North
Carolina, and the Corporation exited the municipal finance business. The closed
branches and the discontinued municipal finance business were immaterial to
financial results.
The amounts expensed and paid in 2000 are presented below.
DEC. 31,
2000 UTILIZED 2000
PROVISION IN 2000 BALANCE
----------- ---------- -----------
Severance and personnel
related costs .............. $ 85,666 $ 47,433 $ 38,233
Occupancy and other costs ..... 21,821 20,437 1,384
--------- -------- --------
Total ....................... $ 107,487 $ 67,870 $ 39,617
========= ======== ========
Severance and personnel related costs include severance payments and related
benefits to terminated employees. The charge recorded in 2000 included benefits
for 1,410 employees who received notice or had otherwise been identified prior
to December 31, 2000. Included in occupancy and other costs are non-cash items
of approximately $15 million for asset impairment for discontinued facilities
and equipment. Additional costs will be incurred in 2001 related to this
project.
- --------------------------------------------------------------------------------
60
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note E -- Securities
The aggregate amortized cost, fair value and gross unrealized gains and losses
of securities as of December 31 were as follows:
2000
-----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ------------- ------------- ------------
Held-to-Maturity
- -----------------------------
U.S. Treasury and other
agencies ................... $ 465,978 $ 1,358 $ 1,432 $ 465,904
State and municipal ......... 224,575 14,653 2 239,226
Mortgage-backed ............. 325,384 14,232 36 339,580
Other ....................... 7,813 12 -- 7,825
---------- ------- ------- ----------
$1,023,750 $30,255 $ 1,470 $1,052,535
========== ======= ======= ==========
Available-for-Sale
- ------------------------------
U.S. Treasury and other
agencies ................... $2,713,515 $26,461 $ 5,722 $2,734,254
State and municipal ......... 64,277 2,111 9 66,379
Mortgage-backed ............. 4,192,619 38,628 7,123 4,224,124
Other ....................... 174,562 -- 3,937 170,625
Equity ...................... 375,781 1,520 987 376,314
---------- ------- ------- ----------
$7,520,754 $68,720 $17,778 $7,571,696
========== ======= ======= ==========
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
========== ======= ======== ==========
The amortized cost and estimated fair value of securities at December 31, 2000,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
AMORTIZED FAIR
COST VALUE
------------- ------------
Held-to-Maturity
- ---------------------------------
Due in one year or less ......... $ 69,956 $ 70,278
Due after one year through five
years ........................ 541,708 547,284
Due after five years through ten
years ........................ 142,772 151,381
Due after ten years ............. 269,314 283,592
---------- ----------
Total ......................... 1,023,750 1,052,535
---------- ----------
Available-for-Sale
- ----------------------------------
Due in one year or less ......... 472,350 472,775
Due after one year through five
years ........................ 2,307,173 2,323,259
Due after five years through ten
years ........................ 1,147,443 1,157,356
Due after ten years ............. 3,218,007 3,241,992
---------- ----------
Total ......................... 7,144,973 7,195,382
No contractual maturity ......... 375,781 376,314
---------- ----------
Total ......................... 7,520,754 7,571,696
---------- ----------
Total securities .............. $8,544,504 $8,624,231
========== ==========
Proceeds, gross gains and losses realized from the sales of available-for-sale
securities for December 31 were as follows:
2000 1999
------------ -----------
Proceeds ............. $ 482,692 $366,714
Gross gains .......... 396 10,996
Gross losses ......... 813 102
Trading account assets are reported at fair value with net unrealized gains of
$17 and net unrealized losses of $526 and $554 included in earnings during 2000,
1999 and 1998, respectively.
At December 31, 2000 and 1999, securities with a carrying value of $5,667,630
and $5,811,075, respectively, were pledged as collateral to secure public
deposits and for other purposes. There were no obligations of any one issuer
exceeding 10% of consolidated shareholders' equity at December 31, 2000. There
were no transfers or sales of held-to-maturity securities during 2000 or 1999.
- --------------------------------------------------------------------------------
61
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note F -- Loans and Allowance for Loan Losses
Loans at December 31 are summarized as follows:
2000 1999
--------------- --------------
Commercial:
Commercial, financial
and other ................ $ 17,660,562 $ 17,042,740
Tax-exempt ................. 605,165 690,053
Retail:
Direct ..................... 1,338,265 1,063,619
Indirect ................... 4,219,917 3,740,683
Credit card ................ 4,494,303 4,736,485
Other revolving credit ..... 834,555 667,149
Real estate:
Construction ............... 3,370,031 2,311,362
Commercial mortgages ....... 9,025,271 7,754,206
Residential mortgages ...... 9,234,080 7,756,983
Lease financing -- net ........ 2,839,386 2,597,271
Foreign ....................... 1,380,186 1,260,674
------------ ------------
Total loans -- net ......... $ 55,001,721 $ 49,621,225
============ ============
Loans at December 31, 2000 and 1999 that had been placed on nonaccrual totaled
$499,899 and $204,098, respectively. Interest income which would have been
recorded pursuant to the original terms of nonaccrual loans was $36,536 and
$38,121 on the preceding dates. Interest income recorded on these loans was
$12,403 and $6,653, respectively.
The Corporation follows Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan." A loan is defined as
impaired when, based on current information and events, it is probable that the
creditor will be unable to collect all amounts of principal and interest due
according to the contractual terms of the loan agreement. Impairment is measured
by discounting the expected future cash flows at the loan's effective interest
rate. For real estate loans, impairment is measured based on the estimated fair
value of the underlying collateral. If the present value of the expected future
cash flows, or the fair value of collateral in the case of a real estate loan,
is less than the loan's recorded balance, the deficiency is considered in
evaluating the overall adequacy of the allowance for loan losses. The following
table summarizes impaired loans and related allowance information at December
31.
2000 1999
------------ -----------
Impaired loans with related
allowance ........................ $ 320,107 $139,815
Impaired loans with no related
allowance ........................ 121,792 9,441
--------- --------
Total impaired loans ............... $ 441,899 $149,256
========= ========
Allowance on impaired loans ......... $ 128,153 $ 42,900
========= ========
YEAR ENDED DECEMBER 31
-----------------------------------
2000 1999 1998
------------ ----------- ----------
Average impaired loans ........ $ 248,730 $117,548 $31,026
Interest income ............... 3,641 2,012 5,942
Cash-basis interest income..... 3,641 851 2,600
Changes in the allowance for loan losses for the three years ended December 31
were as follows:
2000 1999 1998
------------ ------------- -------------
Balance at beginning of
year ....................... $ 554,810 $ 547,992 $ 544,723
Additions from
acquisitions ............... 43,793 39 2,613
Provision for loan losses ..... 588,450 298,105 299,480
Recoveries on loans
previously charged off 64,140 59,936 59,365
Loans charged off ............. (428,633) (351,262) (358,189)
--------- ---------- ----------
Balance at end of year ........ $822,560 $ 554,810 $ 547,992
========= ========== ==========
Loans totaling $15,937, $14,583 and $15,258 were transferred to foreclosed real
estate during 2000, 1999 and 1998, respectively.
It is the policy of the Corporation to review each prospective credit in order
to determine an adequate level of security or collateral to obtain prior to
making the loan. The type of collateral will vary and ranges from liquid assets
to real estate. The Corporation's access to collateral, in the event of borrower
default, is assured through adherence to state lending laws and the
Corporation's lending standards and credit monitoring procedures. The
Corporation regularly monitors its credit concentrations on loan purpose,
industry and customer bases. At year-end, there were no material credit
concentrations within these categories.
The Corporation's subsidiaries have granted loans and extended letters of credit
to certain directors and executive officers of the Corporation and its
subsidiaries and to their associates. The aggregate amount of loans was $42,035
and $152,904 at December 31, 2000 and 1999, respectively. During 2000, $247,776
in new loans were made and repayments totaled $358,645. Outstanding standby
letters of credit to related parties totaled $945 at December 31, 2000. There
were no outstanding standby letters of credit to related parties at December 31,
1999. Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility.
At December 31, 2000, loans with a carrying value of $6,134,149 were pledged as
collateral for Federal Funds purchased, long-term debt and other liabilities.
Loans held for sale at December 31 along with activity during the period are
summarized as follows:
2000 1999
--------------- ---------------
Balance at beginning of year ... $ 45,185 $ 295,817
Originations/purchases ......... 2,584,416 4,258,957
Sales/transfers ................ (2,509,984) (4,509,589)
------------ ------------
Balance at end of year ......... $ 119,617 $ 45,185
============ ============
- --------------------------------------------------------------------------------
62
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note G -- Sales of Receivables
In August 2000, the Corporation sold $750 million of credit card receivables in
a securitization transaction and recognized a pretax gain of $17,268 reflecting
the recognition of retained interest in the cash flows of the trust. The
Corporation retained servicing responsibilities and receives annual servicing
fees approximating 2% of the outstanding credit card balances. In addition, the
Corporation retained subordinated interests which represent the rights to future
cash flows arising after the investors have received their contractual return.
The investors and the securitization trusts have no recourse to the
Corporation's other assets for failure of debtors to pay when due. The
Corporation's retained interests are subordinate to investors' interests. Their
value is subject to credit, prepayment, and interest rate risks on the
transferred financial assets.
Key economic assumptions used in measuring the retained interest at the date of
securitization during the year were as follows: a monthly payment rate of 10.0%,
a weighted average life of .81 years, expected annual credit losses of 3.91%, a
discount rate of 12.0%, an expected yield of 15.24% and a variable coupon rate
to investors of 6.29%.
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows, related to the aggregate securitized
credit card receivables outstanding, to adverse changes in those assumptions are
presented in the table below:
Carrying amount/fair value of retained interests..... $177,357
Weighted-average life (in years) .................... .82
Prepayment speed assumption (annual rate) ........... 10.0%
Impact on fair value of 10% adverse change ....... $13,094
Impact on fair value of 20% adverse change ....... $24,395
Expected credit losses (annual rate) ................ 6.83%
Impact on fair value of 10% adverse change ....... $25,605
Impact on fair value of 20% adverse change ....... $41,648
Residual cash flows discount rate (annual) .......... 12.0%
Impact on fair value of 10% adverse change ....... $ 1,417
Impact on fair value of 20% adverse change ....... $ 2,811
Interest rates on variable and
adjustable contracts ............................. LIBOR plus
contracted spread
Impact on fair value of 10% adverse change ....... $30,842
Impact on fair value of 20% adverse change ....... $48,221
The sensitivities above are hypothetical and should be used with caution.
Changes in fair value based on a 10% variation in assumptions should not be
extrapolated because the relationship of the change in assumption to the change
in fair value is not linear. The effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might magnify or
counteract the sensitivities.
The table below summarizes certain cash flows received from and paid to
securitization trusts. There were no purchases of delinquent or foreclosed loans
during the period:
YEAR ENDED
DECEMBER 31
2000
--------------
Proceeds from new securitizations ................. $ 750,000
Proceeds from collections reinvested in
previous credit card securitizations ........... 4,142,417
Servicing fees received ........................... 68,380
Cash flows received on interests retained ......... 61,368
Selected securitization information as of December 31, 2000 is as follows:
Average credit card loans:
Loans held in portfolio .............. $4,537,404
Loans securitized .................... 3,434,903
----------
Total managed loans ................ $7,972,307
==========
Year-end credit card loans:
Loans held in portfolio .............. $4,494,303
Loans securitized .................... 3,645,954
----------
Total managed loans ................ $8,140,257
==========
Net credit losses:
Loans held in portfolio .............. $ 198,944
Loans securitized .................... 185,939
----------
Total managed loans ................ $ 384,883
==========
Principal amount of loans 30 days or
more past due:
Loans held in portfolio .............. $ 196,423
Loans securitized .................... 146,677
----------
Total managed loans ................ $ 343,100
==========
- --------------------------------------------------------------------------------
63
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note H -- Premises, Equipment and Leases
Premises and equipment at December 31 are summarized as follows:
2000 1999
------------ ------------
Land ................................ $ 130,468 $ 126,442
Premises ............................ 700,885 685,185
Equipment ........................... 897,891 892,165
Leasehold improvements .............. 138,457 135,765
---------- ----------
1,867,701 1,839,557
Less accumulated depreciation and
amortization ..................... 956,397 885,725
---------- ----------
Total premises and
equipment ......................... $ 911,304 $ 953,832
========== ==========
The annual minimum rentals under the terms of the Corporation's noncancelable
operating leases as of December 31, 2000 are as follows:
2001 ......................................... $ 75,536
2002 ......................................... 62,292
2003 ......................................... 53,808
2004 ......................................... 47,397
2005 ......................................... 39,940
Thereafter ................................... 167,454
--------
Total minimum lease payments ......... $446,427
========
The net rental expense for all operating leases amounted to $87,079 in 2000,
$82,377 in 1999 and $70,416 in 1998. Certain leases have various renewal options
and require increased rentals under cost of living escalation clauses.
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was
$144,373, $146,451 and $114,742, respectively.
- --------------------------------------------------------------------------------
Note I -- Credit Arrangements, Short-Term Borrowed Funds and Certificates of
Deposit
At December 31, 2000 and 1999, lines of credit arrangements aggregating
$490,000 and $400,000, respectively, were available to the Corporation from
unaffiliated banks. Commitment fees were 8 basis points in 2000 and 1999;
compensating balances are not required. The unused portion of these banking
arrangements principally serves as commercial paper back-up lines. There were no
borrowings outstanding under credit arrangements during 2000 or 1999.
Federal funds purchased and securities sold under repurchase agreements
generally mature within one to four days from the transaction date. Securities
sold under repurchase agreements are delivered to either broker-dealers or to
custodian accounts for customers. The broker-dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
their operations and have agreed to resell to the Corporation identical
securities at the maturity of the agreements. Other borrowed funds consist of
term federal funds purchased, treasury tax and loan deposits and short-term bank
notes and are generally repaid within seven to 120 days from the transaction
date. Information concerning short-term borrowed funds is included in Table 9 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The scheduled maturities of certificates of deposit subsequent to December 31,
2000 are $9,418,376 in 2001, $1,842,698 in 2002, $1,294,911 in 2003, $172,365 in
2004 and $479,647 thereafter. The remaining maturity of domestic office
certificates of deposit in denominations of $100 or more is $1,268,671, three
months or less; $613,192, over three through six months; $847,146, over six
through twelve months; and $944,210, over twelve months.
- --------------------------------------------------------------------------------
64
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note J -- Long-Term Debt
Long-term debt at December 31 is summarized as follows:
2000 1999
-------------- -------------
Wachovia Corporation:
Senior debt:
Senior floating rate notes due in 2000, net of discount of $93 ......................... $ -- $ 249,907
Senior floating rate notes due in 2001, net of discount of $116 and $266, respectively . 299,884 299,734
6.925% senior notes due in 2003, net of discount of $370 ............................... 299,630 --
6.70% senior notes due in 2004, net of discount of $1,522 and $1,907, respectively ..... 598,478 598,093
7.45% senior notes due in 2005, net of discount of $461 ................................ 549,539 --
6.625% senior notes due in 2006, net of discount of $572 and $651, respectively ........ 199,428 199,349
----------- ----------
Total senior debt .................................................................... 1,946,959 1,347,083
Subordinated debt (a):
8.15% subordinated notes due in 2002 ................................................... 150,000 150,000
6.375% subordinated debt securities due in 2003, net of discount of $537 and $759,
respectively ......................................................................... 249,463 249,241
Floating rate subordinated debt securities due in 2005 ................................. 300,000 --
6.8% subordinated notes due in 2005, net of discount of $191 and $226, respectively .... 249,809 249,774
6.25% subordinated notes due in 2008, net of discount of $1,843 and $2,031,
respectively.......................................................................... 348,157 347,969
5.625% subordinated notes due in 2008, net of discount of $2,179 and $2,396,
respectively.......................................................................... 397,821 397,604
6.375% subordinated notes due in 2009, net of discount of $213 and $232, respectively .. 249,787 249,768
6.15% subordinated notes due in 2009, net of discount of $2,238 and $2,445,
respectively.......................................................................... 397,762 397,555
6.605% subordinated notes due in 2025 .................................................. 250,000 250,000
----------- ----------
Total subordinated debt .............................................................. 2,592,799 2,291,911
Other ................................................................................... 27,027 27,024
----------- ----------
Total Wachovia Corporation ........................................................... 4,566,785 3,666,018
Subsidiaries:
Bank notes, net of discount of $4,045 and $5,641, respectively (b) ...................... 2,206,821 2,353,053
Federal Home Loan Bank borrowings (c) ................................................... 2,722,989 782,989
7.70% subordinated notes due in 2010, net of discount of $129 (a)........................ 299,871 --
Other ................................................................................... 14,633 15,459
----------- ----------
Total subsidiaries ................................................................... 5,244,314 3,151,501
Capital trusts (a):
Wachovia Capital Trust I -- 7.64% Capital Securities due in 2027 (d) .................... 300,000 300,000
Wachovia Capital Trust II -- Floating Rate Capital Securities due in 2027, net of
discount of $2,117 and $2,465, respectively (e) ........................................ 297,883 297,535
Wachovia Capital Trust V -- 7.965% Capital Securities due in 2027 (f) ................... 300,000 300,000
Central Fidelity Capital Trust I -- Floating Rate Capital Securities due in 2027, net of
discount of $764 and $791, respectively (g) ............................................ 99,236 99,209
----------- ----------
Total capital trusts ................................................................. 997,119 996,744
----------- ----------
Total long-term debt ................................................................. $10,808,218 $7,814,263
=========== ==========
(a) Subordinated debt qualifies for inclusion in the determination of total
capital under the risk-based capital guidelines. The capital trusts qualify
for inclusion in Tier I capital under the risk-based capital guidelines.
(b) Wachovia Bank, N.A. has an ongoing bank note program under which the bank
may offer an aggregate principal amount of up to $19.4 billion. The notes
can be issued globally as fixed or floating rate and with maturities
beginning at seven days. Bank notes with original maturities of one year or
less are included in other short-term borrowed funds. Bank notes with
original maturities greater than one year are classified as long-term debt.
Interest rates on long-term notes ranged from 5.4% to 7.0% and 4.9% to 7.0%
with maturities ranging from 2001 to 2040 and 2000 to 2039 at December 31,
2000 and 1999, respectively. The average rates were 6.58% and 6.07% with
average maturities of 4.7 years and 3.9 years at December 31, 2000 and 1999,
respectively.
(c) The Federal Home Loan Bank borrowings were issued as fixed or floating rate
with terms of 2 years to 5 years. Interest rates on the borrowings ranged
from 4.940% to 7.06% and 5.63% to 7.06% for December 31, 2000 and 1999 and
with maturities ranging from 2001 to 2009 and 2000 to 2004 at December 31,
2000 and 1999, respectively. Borrowings from the Federal Home Loan Bank are
collateralized by qualifying securities and loans.
(d) In December 1996, Wachovia Capital Trust I (WCT I), a wholly owned
subsidiary, issued $300,000 of 7.64% Capital Securities due in 2027. WCT I
invested the proceeds of the Capital Securities, together with $9,280 paid
by the Corporation for WCT I's Common Securities, in $309,280 of the
Corporation's 7.64% Junior Subordinated Deferrable Interest Debentures. WCT
I's sole asset is the Junior Subordinated Deferrable Interest Debentures
which mature in 2027. The Corporation has guaranteed all of WCT I's
obligations under the Capital Securities.
(e) In January 1997, Wachovia Capital Trust II (WCT II), a wholly owned
subsidiary, issued $300,000 Floating Rate Capital Securities due in 2027.
WCT II invested the proceeds of the Capital Securities, together with $9,280
paid by the Corporation for WCT II's Common Securities, in $305,692, net of
discount of $3,588, of the Corporation's Floating Rate Junior Subordinated
Deferrable Interest Debentures. WCT II's sole asset is the Junior
Subordinated Deferrable Interest Debentures which mature in 2027. The
Corporation has guaranteed all of WCT II's obligations under the Capital
Securities.
(f) In June 1997, Wachovia Capital Trust V (WCT V), a wholly owned subsidiary,
issued $300,000 of 7.965% Capital Securities due in 2027. WCT V invested the
proceeds of the Capital Securities, together with $9,280 paid by the
Corporation for WCT V's Common Securities, in $309,280 of the Corporation's
7.965% Junior Subordinated Deferrable Interest Debentures. WCT V's sole
asset is the Junior Subordinated Deferrable Interest Debentures which mature
in 2027. The Corporation has guaranteed all of WCT V's obligations under the
Capital Securities.
(g) In April 1997, Central Fidelity Capital Trust I (CFCT I), a wholly owned
subsidiary, issued $100,000 Floating-Rate Capital Securities due in 2027.
CFCT I invested the proceeds of the Capital Securities, together with $3,093
paid by the Corporation for CFCT I's Common Securities, in $103,093 of the
Corporation's Floating-Rate Junior Subordinated Debt Securities. CFCT I's
sole asset is the Junior Subordinated Debt Securities which mature in 2027.
The Corporation has guaranteed all of CFCT I's obligations under the Capital
Securities.
The principal maturities of long-term debt subsequent to December 31, 2000 are
$1,546,978 in 2001, $904,013 in 2002, $853,615 in 2003, $824,387 in 2004,
$2,099,864 in 2005 and $4,579,361 thereafter.
- --------------------------------------------------------------------------------
65
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note K -- Capital Stock
At December 31, 2000, 39,419,911 common shares were reserved for the conversion
of notes and issuance for employee benefit plans, the dividend reinvestment plan
and pending business combinations.
During 2000, the Corporation repurchased 1,999,300 shares under three separate
stock repurchase authorizations by the Board of Directors. Repurchased shares
were or will be used for various corporate purposes including the issuance of
shares for purchase business combinations, employee benefit plans and the
dividend reinvestment plan.
The Corporation has one active stock option plan, the restated 1994 Wachovia
Corporation Stock Plan. Under this Plan, up to 2.5% of the Corporation's
outstanding common stock at year-end may be granted to selected key employees
and nonemployee directors in the form of incentive and nonqualified stock
options, stock appreciation rights (SARS), restricted stock awards and
restricted units. Since the inception, a total of 16,006,299 options, 2,505,305
awards and 125,000 SARS have been granted. The Corporation also has several
predecessor plans, the 1989 Plan and plans of merged entities which were assumed
with appropriate conversion shares under option and option price. These plans
continue to have options outstanding which may be exercised.
The Corporation's stock plans provide for the granting of options or awards for
the purchase or issuance of 21,792,187 shares at 100% of the fair market value
of the stock at the date of the grant. A committee of the Board of Directors
determines such times options and awards shall be granted and exercised and the
term of the exercise period (not to exceed 10 years). The plan awards officers
shares of restricted stock earned contingent upon both a performance requirement
and a five-year period. Additionally, newly elected nonemployee directors are
granted a one-time award of 1,000 shares of restricted stock to be earned over a
three-year period and nonemployee directors are awarded 250 shares of restricted
stock annually which are earned over a one-year period. The cost relating to
performance-based stock compensation was $33,132, $26,177 and $15,998 during
2000, 1999 and 1998, respectively.
The following table reflects pro forma net income and earnings per share had the
Corporation elected to adopt the fair value approach of FASB 123.
2000 1999 1998
-------------- --------------- -------------
Net Income:
As reported ........ $ 832,308 $ 1,011,221 $ 874,170
Pro forma .......... 809,580 995,484 866,883
Basic earnings
per share:
As reported ........ $ 4.10 $ 4.99 $ 4.26
Pro forma .......... 3.99 4.91 4.23
The weighted average fair values of options at their grant date during 2000,
1999 and 1998 were $17.17, $18.18 and $16.46, respectively. The estimated fair
value of each option granted is calculated using the Black-Scholes
option-pricing model. The following summarizes the weighted-average of the
assumptions used in the model.
2000 1999 1998
----------- ---------- ----------
Risk-free interest rate .............. 6.68% 4.87% 5.73%
Expected years until exercise ........ 7.50 6.50 6.50
Expected stock volatility ............ 22% 21% 19%
Dividend yield ....................... 3.01% 3.04% 3.20%
Activity in the option and award plans during 2000, 1999 and 1998 is summarized
as follows:
OPTIONS AND AWARDS
OUTSTANDING
AVAILABLE ----------------------------- OPTION PRICE
FOR GRANT AWARDS OPTIONS PER SHARE
--------------- ------------- --------------- -----------------
Total December 31,
1997 .................. 5,148,165 659,974 8,295,661 $ 11.10-76.69
Granted ............... (3,209,626) 364,426 2,845,200 75.00-87.38
Exercised ............. -- (69,150) (2,159,068) 15.73-75.00
Authorized ............ 3,064,084 -- -- --
Forfeited ............. 72,030 (1,000) (115,150) 33.88-86.50
---------- ------- ----------
Total December 31,
1998 .................. 5,074,653 954,250 8,866,643 11.10-87.38
Granted ............... (4,243,285) 769,456 3,473,829 79.44-89.19
Assumed (IJL and
OFFITBANK) ......... 352,646 200,662 24.35-65.29
Exercised ............. -- (80,676) (1,151,761) 11.12-85.88
Authorized ............ 3,984,924 -- -- --
Forfeited ............. 229,015 (18,699) (226,121) 19.75-86.50
---------- ------- ----------
Total December 31,
1999 .................. 5,045,307 1,976,977 11,163,252 11.10-89.19
Granted ............... (5,204,049) 712,049 4,492,000 48.69-69.13
Exercised ............. -- (292,974) (793,963) 11.12-60.63
Authorized ............ 4,735,350 -- -- --
Forfeited ............. 508,982 (36,546) (514,198) 33.88-89.19
---------- --------- ----------
Total December 31,
2000 .................. 5,085,590 2,359,506 14,347,091 11.10-89.19
========== ========= ==========
The following table summarizes information concerning currently outstanding and
exercisable options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ------------- ------------- ---------- ------------- -----------
$11.10-30.00 432,898 1.50 $ 26.71 432,898 $ 26.71
30.01-50.00 2,456,155 4.40 38.24 2,199,709 37.51
50.01-70.00 5,749,156 8.40 61.16 1,133,046 58.84
70.01-89.19 5,708,882 7.68 81.67 2,103,782 80.78
--------- ---------
14,347,091 5,869,435
========== =========
- --------------------------------------------------------------------------------
66
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note L -- Off-Balance Sheet Trading and Lending Activities
The Corporation maintains positions in a variety of financial instruments with
off-balance sheet risk to accommodate customers' financing objectives and
management of interest rate and foreign currency risk. The Corporation maintains
active trading positions in foreign exchange forward contracts and manages
credit risk through the establishment of offsetting sell positions, as well as
standard limit and monitoring procedures. The Corporation maintains a trading
portfolio of interest rate swap and option (caps and floors) contracts and
foreign exchange options consisting of generally matched, offsetting contracts
with customer and market counterparties.
Off-balance sheet financial instruments involve, in varying degrees, exposure to
credit and interest rate risk in excess of the amount recognized in the
statements of financial condition. The Corporation follows the same credit
policies and careful underwriting practices in making commitments and
conditional obligations as it does for on-balance sheet instruments. In those
instances where collateral is necessary to support financial instrument credit
risk, the Corporation assures its ability to access borrower's collateral, in
the event of default, through strict adherence to corporate lending policy and
applicable state lending laws.
Derivative Financial Instruments Held or Issued for Trading Purposes -- The
amounts disclosed below represent the year-end notional and fair value of
derivative financial instruments held or issued for trading purposes and the
average fair value during the year. Notional principal amounts are often used to
express the volume of these transactions but do not represent the much smaller
amounts potentially subject to credit risk. The Corporation's credit exposure to
off-balance sheet derivative financial instruments is represented by the fair
value gain of the instrument if a counterparty fails to perform. Options written
do not expose the Corporation to credit risk, except to the extent of the
underlying risk in the debt instrument that the Corporation may be obligated to
acquire under certain written put options. The present value of purchased caps
and floors in a gain position represents the Corporation's potential credit
exposure.
2000
-----------------------------------------------------------
NOTIONAL FAIR VALUE FAIR VALUE AVERAGE
VALUE GAINS (LOSSES) FAIR VALUE
-------------- ------------- --------------- --------------
U.S. dollar interest rate contracts as
intermediary:
Interest rate swaps-pay fixed ............ $ 7,257,120 $ 33,148 $ (62,100) $ 226
Interest rate swaps-pay floating ......... 7,363,943 85,806 (16,833) (113)
Interest rate caps and floors written..... 2,029,128 2,194 (46,658) (265)
Interest rate caps and floors
purchased ............................... 1,265,882 47,724 (2,491) 158
Securities trading activities:
Commitments to purchase
securities, futures and forward
contracts ............................... 3,200 -- -- (9)
Commitments to sell securities,
futures and forward contracts ........... 86,880 -- -- (3)
Foreign exchange trading activities:
Commitments to purchase foreign
exchange ................................ 3,882,168 81,840 (31,114) (36,865)
Commitments to sell foreign
exchange ................................ 2,477,118 34,191 (81,396) 219,137
Foreign exchange options written ......... 33,803 388 (242) 94
Foreign exchange options
purchased ............................... 25,500 299 (131) 169
1999
---------------------------------------------------
NOTIONAL FAIR VALUE FAIR VALUE AVERAGE
VALUE GAINS (LOSSES) FAIR 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
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, 2000, the weighted average maturity of pay-fixed swaps and
receive-fixed swaps held in the customer portfolio was 3.58 years. Under
pay-fixed swap agreements, the Corporation paid interest at a weighted average
fixed rate of 5.96% and received interest at a weighted average floating rate of
6.58% (based on year-end rates). Under receive-fixed swap agreements, the
Corporation received interest at a weighted average fixed rate of 6.13% and paid
interest at a weighted average floating rate of 6.58% (based on year-end rates).
67
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note L -- Off-Balance Sheet Trading and Lending Activities -- Concluded
Interest Rate Caps and Floors -- These instruments are written by the
Corporation to enable its customers to transfer, modify, or reduce their
interest rate risk exposure. In a cap or floor contract, the purchaser pays a
premium at the initiation of the contract for the right to receive payments if
market interest rates are greater than the strike price of a cap or less than
the strike price of a floor. Payments made or received under cap or floor
contracts are accrued based on contractual terms and are reported as other
operating income.
Commitments to Purchase and Sell Securities, Futures and Forward Contracts --
These instruments are contracts for delayed delivery of securities or money
market instruments in which the seller agrees to deliver a specified instrument
at a specified price or yield at a specified date. Commitments to purchase and
sell securities, futures and forward contracts used in securities trading
operations are recognized currently at market value and are reported in capital
markets income.
Net Options Written to Purchase and Sell Foreign Exchange -- Forward commitments
involve the purchase or sale of foreign currency amounts for delivery at a
specified future date. Payments on forward commitments are exchanged on the
delivery date based on the exchange rate in the contract. Forward commitments to
purchase and sell foreign exchange are recognized at market value and are
reported as other operating income.
Foreign Exchange Options -- These agreements represent rights to purchase or
sell foreign currency at a predetermined price at a future date. The purchaser
pays a premium at the initiation of the contract for the right to exchange a
specified amount at the contract's exchange rate at the maturity of the option.
Revenues from the derivative trading portfolio are shown below.
2000 1999 1998
------------ ---------- ----------
Interest rate contracts..... $ 16,533 $19,004 $19,406
Securities activities ...... (1,714) 2,261 (2,304)
Foreign exchange
activities .............. 22,899 19,694 20,054
--------- ------- -------
Total .................... $ 37,718 $40,959 $37,156
========= ======= =======
Off-Balance Sheet Financial Instruments Issued for Lending Activities -- The
Corporation issues off-balance sheet financial instruments as part of its
commercial and consumer lending activities. The contract amounts of these
instruments represent potential credit risk at December 31 as shown below:
2000 1999
---------------- --------------
Commercial and consumer
lending activities:
Unfunded commitments
to extend credit ........... $ 63,770,669 $ 56,408,734
Standby letters of credit..... 9,444,534 9,564,012
Commercial and similar
letters of credit .......... 177,897 146,523
Participations in bankers'
acceptances ................ 5,850 4,950
Commitments to Extend Credit -- These are legally binding contracts to lend to a
customer, provided there is no contract violation. These commitments have fixed
termination dates and generally require payment of a fee. As most commitments
expire prior to being drawn, the amounts shown do not necessarily represent the
future cash requirements of the contracts. Credit worthiness is evaluated and in
some instances collateral is obtained to support the borrowing. Approximately
18% at December 31, 2000 and 1999 of unfunded commitments to extend credit were
supported by collateral. Of the total unfunded commitment amounts presented,
approximately 27% in 2000 and 23% in 1999 were comprised of cancelable credit
card commitments, and approximately 12% in 2000 and 11% in 1999 were represented
by real estate commitments.
Standby, Commercial and Similar Letters of Credit -- These instruments are
conditional commitments issued by the Corporation guaranteeing the performance
of a customer to a third party. These guarantees are issued primarily to support
public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending credit
to customers and is subject to the Corporation's underwriting process. At
December 31, 2000 and 1999, approximately 5% of these instruments were supported
by collateral. There were no significant concentrations of letters of credit to
any one group of borrowers at either year-end.
Participation in Bankers' Acceptances -- These instruments represent risk
participation in time drafts drawn by customers under a committed multibank
credit facility. These drafts have been accepted and remarketed by other
financial institutions. Under the terms of these arrangements, the Corporation
may be required to reimburse the accepting financial institution for the
Corporation's pro rata share of any payment default by the customer.
- --------------------------------------------------------------------------------
Note M -- 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
68
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note M -- Off-Balance Sheet Risk
Management Activities -- Concluded
with indices that correlate to on-balance sheet instruments to modify the
repricing characteristics of interest-earning assets and interest-bearing
liabilities.
The amounts disclosed in the following table represent the year-end notional and
fair value of derivative financial instruments held for risk management
purposes. The Corporation's credit exposure to off-balance sheet derivative
financial instruments is represented by the fair value gain of the instrument if
a counterparty fails to perform.
2000
------------------------------------------
NOTIONAL FAIR VALUE FAIR VALUE
VALUE GAINS (LOSSES)
-------------- ------------- -------------
Convert floating rate liabilities to fixed:
Swaps-pay fixed/receive floating ............... $ 300,000 $ 892 $ (467)
Convert fixed rate assets to floating:
Swaps-pay fixed/receive floating ............... 134,611 548 (588)
Convert fixed rate liabilities to floating:
Swaps-receive fixed/pay floating ............... 5,396,000 141,681 (21,991)
Forward starting swaps-pay floating/receive
fixed ......................................... 72,468 -- (439)
Convert liabilities with quarterly rate resets to
monthly:
Swaps-receive floating/pay floating ............ 300,000 65 --
Convert floating rate assets to fixed:
Swaps-receive fixed/pay floating ............... 202,850 1,993 --
---------- -------- --------
Total derivatives ........................... $6,405,929 $145,179 $(23,485)
========== ======== ========
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)
Convert fixed rate liabilities to floating:
Swaps-receive fixed/pay floating ............... 3,100,000 842 (144,128)
Forward starting swaps-pay floating/receive
fixed ......................................... 72,468 -- (7,633)
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 derivatives ........................... $4,567,278 $20,210 $(158,917)
========== ======= =========
- --------------------------------------------------------------------------------
Note N -- Income Taxes
The provision for income taxes is summarized below.
2000 1999 1998
------------ ----------- -----------
Current:
Federal ..................... $ 167,691 $115,593 $145,058
Foreign ..................... 2,469 1,275 686
State and local ............. 37,888 30,982 17,416
--------- -------- --------
Total current ................ 208,048 147,850 163,160
Deferred:
Federal ..................... 232,450 364,181 251,902
State ....................... 2,724 19,121 14,549
--------- -------- --------
Total deferred ............... 235,174 383,302 266,451
--------- -------- --------
Total income tax
expense ...................... $ 443,222 $531,152 $429,611
========= ======== ========
The reasons for the difference between consolidated income tax expense and the
amount computed by applying the statutory federal income tax rate of 35% to
income before taxes were as follows:
2000 1999 1998
----------- ---------- ----------
Income before
income taxes ........... $ 1,275,530 $1,542,373 $1,303,781
=========== ========== ==========
Federal income taxes
at statutory rate ...... $ 446,436 $ 539,830 $ 456,324
State and local
income taxes, net
of federal benefit ..... 26,398 32,567 20,778
Effect of tax-exempt
securities interest
and other income ....... (46,658) (47,116) (51,499)
Other items ............... 17,046 5,871 4,008
----------- ---------- ----------
Total income
tax expense ............. $ 443,222 $ 531,152 $ 429,611
=========== ========== ==========
69
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note N -- Income Taxes -- Concluded
Significant components of the Corporation's deferred tax assets and
liabilities, which are included in other liabilities, at December 31 are
as follows:
DEFERRED TAX ASSETS
------------------------
2000 1999
------------ -----------
Allowance for loan losses ......... $ 314,270 $211,363
Employee compensation and
retirement benefits ............ 126,072 103,361
Unrealized losses on securities
available-for-sale ............. -- 45,450
Other ............................. 18,267 23,217
--------- --------
Gross deferred tax assets ....... $ 458,609 $383,391
========= ========
DEFERRED TAX LIABILITIES
-------------------------
2000 1999
----------- -----------
Unrealized gains on securities
available-for-sale .................... $ 19,048 $ --
Depreciation ............................. 47,185 40,248
Lease financing .......................... 1,133,044 798,191
Accretion of discounts on securities ..... 16,497 16,519
Identifiable intangibles ................. 22,914 12,855
Other .................................... 44,989 47,159
---------- --------
Gross deferred tax liabilities ... $1,283,677 $914,972
========== ========
Net deferred tax liability ....... $ 825,068 $531,581
========== ========
- --------------------------------------------------------------------------------
Note O -- Cash, Dividend, Loan Restrictions, Capital Ratios and Contingent
Liabilities
In the normal course of business, the Corporation and its subsidiaries enter
into agreements, or are subject to regulatory requirements, that result in cash,
debt and dividend restrictions. A summary of the most restrictive items follows.
The Corporation's banking subsidiaries are required to maintain average reserve
balances with the Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 2000 was approximately $244,614.
Under current Federal Reserve regulations, the banking subsidiaries also are
limited in the amount they may loan to their affiliates, including the
Corporation. Loans to a single affiliate may not exceed 10% and loans to all
affiliates may not exceed 20% of the bank's capital, surplus and undivided
profits plus the allowance for loan losses. Based on these limitations,
approximately $901,172 was available for loans to the Corporation at December
31, 2000.
The approval of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds the bank's
net profits, as defined, for that year combined with its retained net profits
for the preceding two calendar years. Under this formula, the banking
subsidiaries cannot distribute as dividends to the Corporation in 2001, without
the approval of the Comptroller of the Currency, more than $652,064 plus an
additional amount equal to the banks' retained net profits for 2001 up to the
date of any dividend declaration.
As a result of the above dividend and loan restrictions, approximately
$5,081,969 of consolidated net assets of the Corporation's banking subsidiaries
at December 31, 2000 was restricted from transfer to the Corporation in the form
of cash dividends, loans or advances.
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Under the
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its banking subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Failure to meet minimum capital requirements can initiate certain
mandatory, and possible discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements.
The Corporation and its banking subsidiaries are required to maintain minimum
Tier I capital, total risk-based capital and Tier I leverage ratios of 4%, 8%
and 3%, respectively. The Corporation and its banking subsidiaries meet all
capital adequacy requirements to which they are subject.
At December 31, 2000, the most recent notification from the Comptroller of the
Currency categorized the Corporation's banking subsidiaries as well capitalized
under the regulatory framework for prompt corrective action. To be well
capitalized, the banking subsidiaries must maintain minimum Tier I capital,
total risk-based capital, and Tier I leverage ratios of 6%, 10% and 5%,
respectively. There are no conditions or events since that notification that
management believes have changed the banking subsidiaries' well capitalized
status.
The actual capital amounts and ratios for the Corporation at December 31, 2000
are presented in the following table:
2000 1999
-------------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO
-------------- ----------- ------------- ----------
Wachovia Corporation
Tier I capital .............. $ 6,179,667 7.55% $5,795,946 7.52%
Total risk-based capital..... 9,465,258 11.56 8,458,090 10.98
Tier I leverage ............. 6,179,667 8.73 5,795,946 8.77
Wachovia Bank, N.A.
Tier I capital .............. 5,769,926 7.39 5,458,716 7.33
Total risk-based capital..... 9,124,248 11.69 8,191,453 11.00
Tier I leverage ............. 5,769,926 8.64 5,458,716 8.69
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.
- --------------------------------------------------------------------------------
70
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note P -- Pension and Other Postretirement Benefits
The Corporation maintains several defined benefit pension plans, the first of
which covers substantially all employees (the Qualified Plan). The Qualified
Plan provides pension benefits that are based upon the employee's length of
credited service and final average compensation as defined in the plan. The
pension expense of the Qualified Plan is determined using the projected unit
credit method. The Corporation's policy is to fund amounts allowable for federal
income tax purposes. The Corporation also sponsors separate unfunded
nonqualified pension plans that provide certain officers with defined pension
benefits in excess of limits imposed on qualified plans by federal tax law and
for certain compensation not covered in the qualified plans.
The Corporation and its subsidiaries provide certain health care benefits for
retired employees. Substantially all of the employees may become eligible for
these benefits if they reach normal retirement age while working for the
Corporation or its subsidiaries. The benefits are provided through self-insured
plans administered by insurance companies whose premiums are based on the claims
paid during the year.
The following table sets forth the changes in the projected benefit obligations
and the fair value of plan assets for the Corporation's defined benefit pension
plans and health care benefits provided for retired employees and the amounts
recognized in the Consolidated Statements of Condition at December 31.
PENSION BENEFITS
----------------------
2000 1999
---------- ---------
Change in benefit obligation
Projected benefit obligation at beginning of year ......... $ 828,236 $858,601
Service cost .............................................. 34,644 37,346
Interest cost ............................................. 67,563 61,407
Actuarial loss (gain) ..................................... 66,027 (93,420)
Benefits paid ............................................. (38,433) (38,322)
Plan participants' contributions .......................... -- --
Plan amendments ........................................... 9,968 --
Special termination benefits .............................. 3,894 --
Acquisitions .............................................. 3,655 2,624
--------- ---------
Projected benefit obligation at end of year ............... $ 975,554 $828,236
========= =========
Change in plan assets
Fair value of plan assets at beginning of year ............ $ 910,841 $827,310
Actual return on plan assets .............................. (3,282) 117,556
Employer contributions .................................... 4,581 4,297
Plan participants' contributions .......................... -- --
Benefits paid ............................................. (38,433) (38,322)
Acquisitions .............................................. 2,940 --
--------- ---------
Fair value of plan assets at end of year .................. $ 876,647 $910,841
========= =========
Accrued benefit cost
Funded status ............................................. $ (98,907) $ 82,605
Unrecognized transition (asset) liability ................. (11,176) (16,747)
Unrecognized prior service cost ........................... 25,379 16,479
Unrecognized net loss (gains) ............................. 24,924 (125,889)
--------- ---------
Accrued benefit cost ...................................... $ (59,780) $(43,552)
========= =========
Weighted-average assumptions as of December 31:
Discount rate ............................................. 7.75% 8.00%
Expected return on plan assets ............................ 9.00% 9.00%
Rate of compensation increase ............................. 5.31% 6% through 2005,
5% thereafter
Assumed rate of increase in health care costs:
Retirees under age 65 .................................... -- --
Retirees over age 65 ..................................... -- --
OTHER BENEFITS
------------------------
2000 1999
---------- -----------
Change in benefit obligation
Projected benefit obligation at beginning of year ......... $ 70,620 $ 76,059
Service cost .............................................. 1,943 1,555
Interest cost ............................................. 7,648 5,488
Actuarial loss (gain) ..................................... 31,568 (6,767)
Benefits paid ............................................. (14,168) (8,845)
Plan participants' contributions .......................... 3,206 3,130
Plan amendments ........................................... 5,233 --
Special termination benefits .............................. 4,355 --
Acquisitions .............................................. 796 --
--------- ---------
Projected benefit obligation at end of year ............... $111,201 $ 70,620
========= =========
Change in plan assets
Fair value of plan assets at beginning of year ............ $ 14,947 $ 13,530
Actual return on plan assets .............................. 467 1,417
Employer contributions .................................... 10,962 5,715
Plan participants' contributions .......................... 3,206 3,130
Benefits paid ............................................. (14,168) (8,845)
Acquisitions .............................................. -- --
--------- ---------
Fair value of plan assets at end of year .................. $ 15,414 $ 14,947
========= =========
Accrued benefit cost
Funded status ............................................. $(95,787) $ (55,673)
Unrecognized transition (asset) liability ................. 39,078 51,736
Unrecognized prior service cost ........................... 4,591 (6,103)
Unrecognized net loss (gains) ............................. 12,250 (19,893)
--------- ---------
Accrued benefit cost ...................................... $(39,868) $ (29,933)
========= =========
Weighted-average assumptions as of December 31:
Discount rate ............................................. 7.75% 8.00%
Expected return on plan assets ............................ 7.00% 7.00%
Rate of compensation increase ............................. 5.31% 6.00%
Assumed rate of increase in health care costs:
Retirees under age 65 ............................. 12% in 2000; 8% in 8.00%
2001; grading to 6%
in 2005
Retirees over age 65 .............................. Same as Pre-65 6.00%
71
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note P -- Pension and Other Postretirement Benefits -- Concluded
The rate of increase in health care costs is assumed to remain constant for each
category of retirees. Included in plan assets at December 31, 2000 were 130,626
shares of Wachovia Corporation common stock with a market value of $7,593.
PENSION BENEFITS OTHER BENEFITS
----------------------------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
----------- ------------ ------------ ----------- ---------- ----------
Components of net periodic benefit cost:
Service cost ........................... $ 34,644 $ 37,346 $ 31,933 $ 1,943 $ 1,555 $ 1,396
Interest cost .......................... 67,563 61,407 54,963 7,648 5,488 5,573
Expected return on plan assets ......... (81,090) (73,438) (63,050) (1,042) (947) (852)
Amortization of unrecognized amounts:
Transition obligation .................. (5,587) (5,585) (5,585) 3,265 3,980 3,980
Prior service cost ..................... 564 536 537 284 (509) (509)
Net actuarial (gain) loss .............. (414) 3,235 2,132 -- (36) (262)
Acquisitions ............................ 715 -- -- 796 -- --
Special termination benefits ............ 4,414 -- -- 8,003 -- --
--------- --------- --------- -------- ------- -------
Benefit cost ............................ $ 20,809 $ 23,501 $ 20,930 $ 20,897 $ 9,531 $ 9,326
========= ========= ========= ======== ======= =======
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
---------------- ---------------
Effect on total of service and interest
cost components in 2001 ............ $ 221 $ 195
Effect on postretirement benefit
obligation as of December 31,
2000 ............................... $2,992 $2,644
The Corporation also provides supplemental benefits to substantially all
employees through defined contribution plans designed to encourage participants
to save on a regular basis and to provide such participants with deferred
compensation and additional performance incentive. Total expense relating to
these plans, which represented the Corporation's matching and discretionary
contributions, was $35,048 in 2000, $31,585 in 1999, and $23,473 in 1998.
Employee participants may elect to contribute from 1% to 15% of base salary. The
Corporation matches 100% of each participant's contribution up to the first 3%
of base salary and 50% of each participant's remaining contribution up to 6% of
base salary with a maximum employer contribution of 4.5% of base salary. The
plans provide for additional contributions of up to 1.5% of salary in accordance
with a pre-established formula based on certain earnings performance criteria
and also for special discretionary employer contributions of up to 4% of each
eligible employee's base salary as approved annually by the Board of Directors.
- --------------------------------------------------------------------------------
Note Q -- Selected Income Statement Information
The components of other operating income and expense for the three years ended
December 31 were as follows:
2000 1999 1998
------------ ------------- -----------
Other operating income:
Bankers' acceptance and letter of credit fees ............. $ 55,318 $ 46,037 $ 39,025
Other service charges and fees ............................ 132,186 79,893 54,726
Other income .............................................. 175,254 114,952 117,487
--------- --------- ---------
Total other operating income ........................... $ 362,758 $ 240,882 $ 211,238
========= ========= =========
Other operating expense:
Postage and delivery ...................................... $ 53,697 $ 55,410 $ 52,981
Outside data processing, programming and software ......... 111,640 102,773 64,450
Stationery and supplies ................................... 37,820 35,939 34,767
Advertising and sales promotion ........................... 66,983 66,468 71,257
Professional services ..................................... 79,911 75,002 56,066
Travel and business promotion ............................. 40,783 33,944 29,254
Telecommunications ........................................ 61,131 58,088 54,467
Amortization of intangible assets ......................... 92,897 50,879 39,091
Foreclosed property expense ............................... (3,182) (853) 571
Other expense ............................................. 237,134 184,036 161,120
--------- --------- ---------
Total other operating expense .......................... $ 778,814 $ 661,686 $ 564,024
========= ========= =========
- --------------------------------------------------------------------------------
72
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note R -- Earnings Per Share
YEAR ENDED DECEMBER 31
-------------------------------------------
2000 1999 1998
---------- ---------- --------
Basic (thousands, except per share)
Average common shares outstanding .............................. 202,989 202,795 205,058
========= ========== ========
Net income ..................................................... $832,308 $1,011,221 $874,170
========= ========== ========
Per share amount ............................................... $ 4.10 $ 4.99 $ 4.26
Diluted (thousands, except per share)
Average common shares outstanding .............................. 202,989 202,795 205,058
Dilutive common stock options at average market price .......... 1,311 2,976 3,778
Dilutive common stock awards at average market price ........... 127 397 300
Convertible long-term debt assumed converted ................... 23 24 17
--------- ---------- --------
Average diluted shares outstanding ............................. 204,450 206,192 209,153
========= ========== ========
Net income ..................................................... $832,308 $1,011,221 $874,170
Add interest on convertible long-term debt, net of tax ......... 62 71 48
--------- ---------- --------
Adjusted net income ............................................ $832,370 $1,011,292 $874,218
========= ========== ========
Per share amount ............................................... $ 4.07 $ 4.90 $ 4.18
- --------------------------------------------------------------------------------
Note S -- Fair Value of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rates and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts. Also, the fair value estimates presented are
based on pertinent information available to management as of December 31, 2000
and 1999. Such amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and therefore, current estimates of
fair value may differ significantly from the amounts presented.
Trading Account Assets -- Fair values are based on quoted market prices as
recognized in the statements of condition.
Securities -- Fair values are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using market prices for similar
securities.
Loans -- For 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.
2000
--------------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------- --------------
Financial assets:
Trading account assets ..... $ 960,838 $ 960,838
Securities ................. 8,595,446 8,624,231
Loans, net of allowance
for loan losses .......... 54,179,161 54,345,169
Financial liabilities:
Deposits ................... 44,412,182 44,466,325
Long-term debt ............. 10,808,218 10,403,092
73
Notes to Consolidated Financial Statements -- Continued
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note S -- Fair Value of Financial Instruments -- Concluded
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
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 L and M for additional
information about off-balance sheet financial instruments.
The estimated fair values of the Corporation's off-balance sheet financial
instruments as of December 31 are summarized below. The amounts for commitments
and letters of credit are presented as negative in order to represent the
approximate cost the Corporation would incur to pay third parties to assume
these commitments. Interest rate contracts and other off-balance sheet financial
instruments represent the net fair value gain or loss of the contracts.
2000 1999
ESTIMATED ESTIMATED
FAIR VALUE FAIR VALUE
--------------- -------------
Unfunded commitments to
extend credit ................... $ (73,396) $ (76,770)
Letters of credit .................. (68,865) (69,921)
Interest rate contracts issued for
trading purposes ................ 40,790 34,119
Interest rate contracts held for
purposes other than trading ..... 121,694 (138,707)
Other off-balance sheet financial
instruments issued or held for
trading or lending purposes ..... 3,835 8,322
This presentation excludes certain financial instruments and all nonfinancial
instruments. The disclosures excludes customer relationships, deposit base
intangibles and goodwill. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Corporation.
- --------------------------------------------------------------------------------
74
Notes to Consolidated Financial Statements -- Concluded
- --------------------------------------------------------------------------------
$ in thousands Wachovia Corporation and Subsidiaries
Note T -- Wachovia Corporation (Parent Company Only) Information
The following is a condensed statement of financial condition of the parent
company at December 31.
2000 1999
--------------- ---------------
Assets
Cash on demand deposit with bank
subsidiary ............................ $ -- $ 669
Interest-bearing bank balances with
bank subsidiaries ..................... 2,017,855 1,269,354
Securities ............................... 174,102 170,856
Demand loans to nonbank subsidiaries ..... 1,244,092 1,243,252
Notes receivable from subsidiaries ....... 2,766,714 2,456,455
Investments in:
Bank subsidiaries ...................... 6,635,207 6,023,150
Nonbank subsidiaries ................... 821,257 731,090
Other assets ............................. 202,419 211,670
------------ ------------
Total assets ...................... $ 13,861,646 $ 12,106,496
============ ============
Liabilities and Shareholders' Equity
Parent company commercial paper .......... $ 1,855,923 $ 1,658,988
Subordinated notes payable to nonbank
subsidiaries ........................... 1,027,987 1,027,600
Long-term debt ........................... 4,566,785 3,666,018
Demand loans from bank subsidiary ........ 18,015 18,015
Other liabilities ........................ 108,397 77,418
Shareholders' equity ..................... 6,284,539 5,658,457
------------ ------------
Total liabilities and shareholders'
equity .......................... $ 13,861,646 $ 12,106,496
============ ============
The operating results of the parent company for the three years ended December
31 are shown below.
2000 1999 1998
------------- -------------- ------------
Income
Dividends from:
Bank subsidiaries ................... $ 462,600 $ 617,800 $ 562,000
Nonbank subsidiaries ................ 27,393 77,000 --
Interest from subsidiaries ............ 366,907 301,576 222,956
Other interest income ................. 12,391 12,840 7,997
Other income .......................... 9,060 33,317 57,387
---------- ----------- ---------
Total income ................... 878,351 1,042,533 850,340
Expense
Interest on short-term
borrowed funds ...................... 103,256 69,619 64,086
Interest on long-term debt ............ 352,458 297,646 197,944
Interest paid to subsidiaries ......... 1,239 1,354 1,746
Other expense ......................... 8,838 33,714 47,858
---------- ----------- ---------
Total expense .................. 465,791 402,333 311,634
Income before income tax
benefit and equity in
undistributed net income of
subsidiaries ........................ 412,560 640,200 538,706
Income tax benefit .................... 28,910 19,801 14,259
---------- ----------- ---------
Income before equity in
undistributed net income of
subsidiaries ........................ 441,470 660,001 552,965
Equity in undistributed net
income of subsidiaries .............. 390,838 351,220 321,205
---------- ----------- ---------
Net income ..................... $ 832,308 $ 1,011,221 $ 874,170
========== =========== =========
The cash flows for the parent company for the three years ended December 31,
were as follows:
2000 1999 1998
--------------- -------------- ---------------
Operating Activities
Net Income .................... $ 832,308 $ 1,011,221 $ 874,170
Other, net .................... 51,200 21,648 52,802
Equity in undistributed
net income of
subsidiaries ............... (390,838) (351,220) (321,205)
---------- ----------- ----------
Net cash provided by
operations ............... 492,670 681,649 605,767
Investing Activities
Net increase in interest-
bearing bank balances ....... (748,501) (227,883) (184,968)
Purchases of securities ....... (31,198) (76,433) (105,763)
Sales, calls, prepayments
and maturities of
securities .................. 27,427 38,371 38,257
Net (increase) decrease in
demand loans to
nonbank subsidiaries ........ (840) (464,217) 214,038
Notes issued to
subsidiaries ................ (312,764) (213,733) (1,015,908)
Notes repaid by
subsidiaries ................ 2,536 300,103 908
Net decrease (increase) in
other assets ................ 12,278 (18,810) (22,318)
Equity investment in
subsidiaries ................ (25,339) (3,780) (249,001)
---------- ----------- ----------
Net cash used by
investing activities ..... (1,076,401) (666,382) (1,324,755)
Financing Activities
Net decrease in loans and
notes from subsidiaries -- (3,810) (50,474)
Net increase in
commercial paper ............ 196,935 299,606 325,358
Proceeds from long-term
debt ........................ 1,144,966 993,359 1,288,859
Maturities and
repayments of
long-term debt .............. (250,000) (318,115) --
Issuance of stock ............. 40,465 59,478 80,375
Dividend payments ............. (463,018) (418,447) (381,798)
Common stock
repurchased ................. (116,086) (634,623) (531,122)
Increase (decrease) in
other liabilities ........... 29,800 7,434 (18,658)
---------- ----------- ----------
Net cash provided
(used) by financing
activities ............... 583,062 (15,118) 712,540
---------- ----------- ----------
(Decrease) increase in
cash ........................ (669) 149 (6,448)
Cash at beginning of year 669 520 6,968
---------- ----------- ----------
Cash at end of year ........... $ -- $ 669 $ 520
========== =========== ==========
Noncash investing and
financing activities:
Common stock issued on
conversion of long term
debt ........................ $ -- $ 250 $ --
The principal maturities of the parent company's long-term debt subsequent to
December 31, 2000 are $325,483 in 2001, $151,427 in 2002, $549,093 in 2003,
$598,477 in 2004, $1,099,349 in 2005 and $2,870,943 thereafter.
75
DIRECTORS AND OFFICERS
Directors of Wachovia Corporation and Wachovia Bank, N.A.
- --------------------------------------------------------------------------------
F. Duane Ackerman
Chairman, President and
Chief Executive Officer
BellSouth Corporation
L.M. Baker, Jr.
Chairman, President and
Chief Executive Officer
James S. Balloun
Chairman, President and
Chief Executive Officer
National Service Industries, Inc.
Peter C. Browning
Chairman
Nucor Corporation
John T. Casteen, III
President
University of Virginia
Thomas K. Hearn, Jr.
President
Wake Forest University
George W. Henderson, III
Chairman and
Chief Executive Officer
Burlington Industries, Inc.
W. Hayne Hipp
Chairman, President and
Chief Executive Officer
The Liberty Corporation
Robert A. Ingram
Chief Operating Officer and President,
Pharmaceutical Operations
GlaxoSmithKline plc
George R. Lewis
President and
Chief Executive Officer
Philip Morris Capital Corporation
Elizabeth Valk Long
Executive Vice President
Time Inc.
Lloyd U. Noland, III
Chairman, President and
Chief Executive Officer
Noland Company
Morris W. Offit
Chief Executive Officer
OFFITBANK
Sherwood H. Smith, Jr.
Chairman Emeritus
Carolina Power & Light Company
John C. Whitaker, Jr.
Chairman and
Chief Executive Officer
Inmar Enterprises, Inc.
Dona Davis Young
President
Phoenix Home Life Mutual Insurance Company
Principal Corporate Officers of Wachovia Corporation
- --------------------------------------------------------------------------------
L.M. Baker, Jr.
Chairman, President and
Chief Executive Officer
Jean E. Davis
Senior Executive Vice President
Operations and Technology, Retail and eBusiness
Stanhope A. Kelly
Senior Executive Vice President
Banking and Wealth Management Services
Kenneth W. McAllister
Senior Executive Vice President
General Counsel/Administrative Services
Robert S. McCoy, Jr.
Vice Chairman
Chief Financial Officer and Treasurer
John C. McLean, Jr.
Senior Executive Vice President
Corporate Financial Services
Donald K. Truslow
Senior Executive Vice President
Chief Risk Officer
76
Wachovia Information
- --------------------------------------------------------------------------------
Corporate Headquarters
Wachovia Corporation
100 North Main Street 191 Peachtree Street, N.E.
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
Internet Address
The corporation's Internet address is wachovia.com
Notice of Annual Meeting
The Annual Meeting of Shareholders of Wachovia Corporation will be held Friday,
April 27, 2001, 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.
Shareholder Information
Shareholder information can be found at:
wachovia.com/investor/shareholder.asp
Shareholders who wish to change the address or ownership of stock, report lost
certificates, eliminate duplicate mailings or request assistance with other
account registration procedures should contact the Transfer Agent at the address
or phone number below.
Through the Dividend Reinvestment and Common Stock Purchase Plan, record
shareholders can invest dividends as well as optional cash payments in
additional shares without payments 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.
Transfer Agent
EquiServe
P.O. Box 8218
Boston, MA 02266-8218
1-800-633-4236
Shareholder Relations Contact
H. Jo Barlow
Vice President
336-732-5787
Common Stock
Wachovia common stock trades on the New York Stock Exchange (NYSE) and options
trade on the Chicago Board Options Exchange (CBOE) under the ticker symbol WB.
Company News Line
Shareholders and other interested individuals can access timely corporate
information about 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.
Investor Relations Contact
General investor information can be accessed through:
wachovia.com/about
Analysts, portfolio managers and other investors seeking additional information
about the corporation should contact:
Robert S. McCoy, Jr.
Vice Chairman,
Chief Financial Officer and Treasurer
336-732-5926
Marsha L. Smunt
Senior Vice President
Investor Relations
336-732-5788
Independent Auditors
Ernst & Young LLP
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 wachovia.com/about or will be provided upon written request to the
Corporate Secretary at the corporate mailing address in Winston-Salem.
Credit Ratings
DECEMBER 31, 2000
STANDARD
FITCH MOODY'S & POOR'S
Wachovia Corporation
Senior debt AA- A1 A+
Subordinated debt A+ A2 A
Commercial paper F1+ P-1 A-1
Wachovia Bank, N.A.
Long-term deposits AA Aa3 AA-
Short-term deposits F1+ P-1 A-1+
Short-term bank notes F1+ P-1 A-1+
Medium-term bank notes AA- Aa3 AA-
77
(c) Wachovia Corporation 00011-51 (03/01)