EXHIBIT 99(a)
Report of Independent Auditors
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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
1
Consolidated Statements of Condition
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($ 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 $67,352,537
=========== ===========
See notes to consolidated financial statements
2
Consolidated Statements of Income
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($ in thousands, except per share) Wachovia Corporation and Subsidiaries
YEAR ENDED DECEMBER 31
--------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
INTEREST INCOME
Loans, including fees .................................................... $ 4,728,737 $ 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
3
Consolidated Statements of Shareholders' Equity
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($ 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
4
Consolidated Statements of Cash Flows
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($ in thousands) Wachovia Corporation and Subsidiaries
YEAR ENDED DECEMBER 31
-----------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
OPERATING ACTIVITIES
Net income ..................................................................... $ 832,308 $ 1,011,221 $ 874,170
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
5
Notes to Consolidated Financial Statements
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$ 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
6
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
7
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
=========== ============= =========== ============
8
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.
9
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.
- --------------------------------------------------------------------------------
10
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.
- --------------------------------------------------------------------------------
11
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
============ ============
- --------------------------------------------------------------------------------
12
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
==========
- --------------------------------------------------------------------------------
13
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.
- --------------------------------------------------------------------------------
14
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.
- --------------------------------------------------------------------------------
15
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
========== =========
- --------------------------------------------------------------------------------
16
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).
17
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
18
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
=========== ========== ==========
19
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.
- --------------------------------------------------------------------------------
20
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%
21
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
========= ========= =========
- --------------------------------------------------------------------------------
22
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
23
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.
- --------------------------------------------------------------------------------
24
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.
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