SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement.
[ ] Confidential, for use of the commission only (as permitted by Rule
14a-6(e)(2)).
[ ] Definitive proxy statement.
[X] Definitive additional materials.
[ ] Soliciting material under Rule 14a-12.
Wachovia Corporation
(Name of Registrant as Specified in Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Date: July 23, 2001
The proposed merger of First Union and Wachovia will be submitted to First
Union's and Wachovia's shareholders for their consideration. Shareholders are
urged to read the joint proxy statement/prospectus regarding the proposed merger
between First Union and Wachovia and any other relevant documents filed with the
SEC because they contain important information. Shareholders may obtain a free
copy of the joint proxy statement/prospectus, as well as other filings
containing information about First Union and Wachovia, without charge, at the
SEC's Internet site (http://www.sec.gov). Copies of the joint proxy
statement/prospectus and other SEC filings that will be incorporated by
reference in the joint proxy statement/prospectus can also be obtained, without
charge, from First Union, Investor Relations, One First Union Center, Charlotte,
North Carolina 28288-0206 (704-374-6782), or from Wachovia, Investor Relations,
100 North Main Street, Winston-Salem, North Carolina 27150 (866-883-0789).
The information presented below may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation: (i) statements about the benefits of the merger between
First Union Corporation and Wachovia Corporation, including future financial and
operating results, cost savings, enhanced revenues, and accretion to reported
earnings that may be realized from the merger; (ii) statements with respect to
First Union's and Wachovia's plans, objectives, expectations and intentions and
other statements that are not historical facts; and (iii) other statements
identified by words such as "believes", "expects", "anticipates", "estimates",
"intends", "plans", "targets", "projects" and similar expressions. These
statements are based upon the current beliefs and expectations of First Union's
and Wachovia's management and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the
forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements: (1) the risk that the businesses of First Union and
Wachovia will not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected revenue
synergies and cost savings from the merger may not be fully realized or realized
within the expected time frame; (3) revenues following the merger may be lower
than expected; (4) deposit attrition, operating costs, customer loss and
business disruption following the merger, including, without limitation,
difficulties in maintaining relationships with employees, may be greater than
expected; (5) the ability to obtain governmental approvals of the merger on the
proposed terms and schedule; (6) the failure of First Union's and Wachovia's
shareholders to approve the merger; (7) competitive pressures among depository
and other financial institutions may increase significantly and have an effect
on pricing, spending, third-party relationships and revenues; (8) the strength
of the United States economy in general and the strength of the local economies
in which the combined company will conduct operations may be different than
expected resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit, including the resultant effect on the combined
company's loan portfolio and allowance for loan losses; (9) changes in the U.S.
and foreign legal and regulatory framework; and (10) adverse conditions in the
stock market, the public debt market and other capital markets (including
changes in interest rate conditions) and the impact of such conditions on the
combined company's capital markets and asset management activities. Additional
factors that could cause First Union's and Wachovia's results to differ
materially from those described in the forward-looking statements can be found
in First Union's and Wachovia's reports (such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the
Securities and Exchange Commission and available at the SEC's Internet site
(http://www.sec.gov). All subsequent written and oral forward-looking statements
concerning the proposed transaction or other matters attributable to First Union
or Wachovia or any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements above. First Union and Wachovia do
not undertake any obligation to update any forward-looking statement to reflect
circumstances or events that occur after the date the forward-looking statements
are made.
LETTER SENT TO WACHOVIA SHAREHOLDERS REGARDING PROPOSED MERGER OF FIRST UNION
AND WACHOVIA - SCRIPT OF WACHOVIA EARNINGS RELEASE CONFERENCE CALL -
PRESENTATION TO WACHOVIA EMPLOYEES REGARDING PROPOSED MERGER OF FIRST UNION AND
WACHOVIA
THE FOLLOWING LETTER WAS SENT TO WACHOVIA SHAREHOLDERS REGARDING THE PROPOSED
MERGER OF FIRST UNION AND WACHOVIA
July 17, 2001
Dear Fellow Wachovia Shareholder:
Our August 3, 2001 shareholder meeting is fast approaching. If you have not yet
done so, I ask you to please vote FOR our merger with First Union -- and the
creation of the new Wachovia -- on the enclosed WHITE proxy card. Even if you
have voted in favor of the merger on SunTrust's blue card, please vote again FOR
the merger on the WHITE card.
We are committed to our merger with First Union because we believe the benefits
to you from the merger are overwhelming; which is why we continue to ask for
your support. Here are some additional reasons:
Wachovia and First Union reported excellent financial performance
Just last week, Wachovia and First Union each reported their financial results
for the second quarter of 2001. Both companies reported very strong earnings.
First Union CEO Ken Thompson, management teams of both banks and I feel a
renewed sense of optimism over the prospects for the new Wachovia. In addition,
we are gratified with the financial market's reaction to our performance. Let me
share with you what some of the leading experts in the banking industry are
saying about First Union and Wachovia.
'Turnaround Solidly In Place; Stock Unusually Attractive . . . Virtually every
aspect of First Union's business demonstrated improvement during the quarter.
This suggests that First Union's outlook going forward is more attractive than
it has been for years . . .'
-- Raymond James & Associates: Richard X. Bove, July 12, 2001
'Based on the improvement evident in the Q2 results as well as our numerous
discussions with management over the last month or two we have also become
increasingly more comfortable with the proposed merger with Wachovia . . . There
is no question that First Union is better positioned than we previously
thought.'
-- A.G. Edwards: David C. Stumpf, July 12, 2001
'In our judgment, this strong second quarter performance virtually guarantees
First Union is the winning bidder for the recently announced Wachovia
franchise.'
U.S. Bancorp Piper Jaffray: Andrew B. Collins, July 13, 2001
'Wachovia's results were solid in a challenging environment.'
-- UBS Warburg: Michael A. Plodwick, July 12, 2001
'Wachovia demonstrated that its employees could keep their eye on the ball and
post solid operating results of $1.22, which met our estimate and beat consensus
by 2 cents.'
-- Janney Montgomery Scott: Claire M. Percarpio, July 12, 2001
Trends in [First Union's] general bank and in capital management were impressive
. . . The results underscore our view that this company is pointed in the right
direction.'
-- Deutsche Banc Alex. Brown Inc.: George A. Bicher, July 12, 2001
(permission to use quotes was received)
First Union's momentum continues
Since Ken Thompson began First Union's restructuring a year ago, his company has
been revitalized and has delivered steadily improving results to its
shareholders. Consider the following about our merger partner:
4 consecutive quarters of increased core earnings per share growth.
Dramatically improved customer service as demonstrated by nine consecutive
quarters of increased customer satisfaction throughout First Union's branches
and other areas of the company. We believe First Union now stands on the
threshhold of reaching its goal of 'best in class' in customer service when
compared with other financial institutions.
Most importantly, First Union's shareholders have been rewarded. Since the
beginning of this year, First Union's stock price has risen by 23% and has
outperformed the S&P500, which was down by 9%.
While the new Wachovia is looking toward the future,
SunTrust is rooted in the past
SunTrust has made a lot of noise lately about its past record. We believe you
should look at the future when evaluating the benefits of a merger between
Wachovia and First Union.
Let's look at the future. Here are what we believe to be just a few of the
considerable strengths of a Wachovia/First Union merger.
Superior profit growth. We expect the new Wachovia's profits will grow at least
10-12 percent per year. In a combination with SunTrust, we believe SunTrust's
profit growth will be lower and affected by SunTrust's lackluster core earnings
record.
Greater capital strength. In our view, the new Wachovia will have a strong Tier
I capital ratio of 7.7 percent. In a combination with SunTrust, SunTrust's Tier
I capital ratio would be dead last among the top 50 U.S. banks.
Conservative dividend payout. The new Wachovia expects a conservative 35 percent
dividend payout ratio, in line with banking industry norms. This would allow the
new Wachovia to invest more in its growth businesses and grow profits faster.
In order to pay Wachovia shareholders a $2.40 dividend, SunTrust will be forced
to raise its dividend payout ratio to an uncomfortably high 47% -- this would
place SunTrust's ratio significantly above the industry norm (the 47th highest
among the top 50 U.S. banks). In our view, this would also seriously limit
SunTrust's ability to invest in its businesses in the future and could seriously
restrict profit growth.
Greater flexibility to increase future dividends. The faster profit growth and
better financial condition we expect from our merger we believe allows the new
Wachovia to increase dividends faster than SunTrust.
In a combination with SunTrust, SunTrust's ability to grow dividends would be
limited by its slower profit growth and its lower capital.
The new Wachovia's dividend is better. Don't let SunTrust fool you.
We believe that superior profit growth, greater capital strength, a conservative
payout ratio and greater flexibility to increase future dividends all add up to
a better dividend from the new Wachovia. Wachovia shareholders
can receive at least the same $2.40 dividend rate they now enjoy from their
Wachovia shares.
By now, you have received a great deal of material from Wachovia and SunTrust. I
very much regret the inconvenience and confusion this may have caused you. As
you know, SunTrust has made an unsolicited and hostile attempt to break up our
planned merger with First Union and to force a takeover of Wachovia on terms
dictated strictly by SunTrust. We are committed to our merger with First Union
because we believe the benefits to you from the merger are overwhelming; this is
why we continue to ask for your support.
Important Reminder
Your vote is extremely important. We need your vote today to create the new
Wachovia. If you vote for the merger on SunTrust's blue card and our white
card on the same day, it could nullify your vote. Please vote FOR the merger
of Wachovia and First Union by signing, dating and returning the WHITE proxy
card today. Please discard SunTrust's blue card.
Thank you for your continued support.
On behalf of the Board of Directors
Sincerely,
L.M. BAKER, JR.
Chairman and Chief Executive Officer
If you have any questions, require assistance in filling out your proxy card,
or need additional copies of the Proxy Statement or related materials, a team
of professionals is available to help you. Please call the Shareholder Hotline
at 866-883-0789 or our proxy solicitors:
MacKenzie Partners, Inc.: 800-322-2885
Georgeson
Shareholder: 800-223-2064
The proposed merger of Wachovia and First Union will be submitted to Wachovia's
and First Union's shareholders for their consideration. Shareholders are urged
to read the joint proxy statement/prospectus regarding the proposed merger
between Wachovia and First Union and any other relevant documents filed with the
SEC because they contain important information. Shareholders may obtain a free
copy of the joint proxy statement/prospectus, as well as other filings
containing information about Wachovia and First Union, without charge, at the
SEC's Internet site (http://www.sec.gov). Copies of the joint proxy
statement/prospectus and other SEC filings that will be incorporated by
reference in the joint proxy statement/prospectus can also be obtained, without
charge, from Wachovia, Investor Relations, 100 North Main Street, Winston-Salem,
North Carolina 27150 (866-883-0789), or from First Union, Investor Relations,
One First Union Center, Charlotte, North Carolina 28288-0206 (704-374-6782).
The information presented above may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation: (i) statements about the benefits of the merger between
Wachovia Corporation and First Union Corporation, including future financial and
operating results, cost savings, enhanced revenues, and accretion to reported
earnings that may be realized from the merger; (ii) statements with respect to
Wachovia's and First Union's plans, objectives, expectations and intentions and
other statements that are not historical facts; and (iii) other statements
identified by words such as 'believes', 'expects', 'anticipates', 'estimates',
'intends', 'plans', 'targets', 'projects' and similar expressions. These
statements are based upon the current beliefs and expectations of Wachovia's and
First Union's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in the forward-looking statements.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements: (1) the risk that the businesses of Wachovia and
First Union will not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected revenue
synergies and cost savings from the merger may not be fully realized or realized
within the expected time frame; (3) revenues following the merger may be lower
than expected; (4) deposit attrition, operating costs, customer loss and
business disruption following the merger, including, without limitation,
difficulties in maintaining relationships with employees, may be greater than
expected; (5) the ability to obtain governmental approvals of the merger on the
proposed terms and schedule; (6) the failure of Wachovia's and First Union's
shareholders to approve the merger; (7) competitive pressures among depository
and other financial institutions may increase significantly and have an effect
on pricing, spending, third-party relationships and revenues; (8) the strength
of the United States economy in general and the strength of the local economies
in which the combined company will conduct operations may be different than
expected resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit, including the resultant effect on the combined
company's loan portfolio and allowance for loan losses; (9) changes in the U.S.
and foreign legal and regulatory framework; and (10) adverse conditions in the
stock market, the public debt market and other capital markets (including
changes in interest rate conditions) and the impact of such conditions on the
combined company's capital markets and asset management activities. Additional
factors that could cause Wachovia's and First Union's results to differ
materially from those described in the forward-looking statements can be found
in Wachovia's and First Union's reports (such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the
Securities and Exchange Commission and available at the SEC's Internet site
(http://www.sec.gov). All subsequent written and oral forward-looking statements
concerning the proposed transaction or other matters attributable to Wachovia or
First Union or any person acting on their behalf are expressly qualified in
their entirety by the cautionary statements above. Wachovia and First Union do
not undertake any obligation to update any forward-looking statement to reflect
circumstances or events that occur after the date the forward-looking statements
are made.
SCRIPT OF WACHOVIA CORPORATIONS EARNINGS RELEASE CONFERENCE CALL
WACHOVIA
Moderator: Bob McCoy
July 11, 2001
9:00 a.m. CT
Operator: Good day everyone and welcome to the Wachovia second quarter 2001
earnings conference call.
Today's conference is being recorded. At this time for opening remarks
and introductions I would like to turn the call over to the Vice
Chairman and Chief Financial Officer, Mr. Robert S. McCoy, Jr. Please
go ahead, sir.
Robert McCoy: Thank you. Good morning and welcome to Wachovia. This is Bob
McCoy and thank you for joining us today. In just a moment Bud Baker
will provide some opening comments. We will then review Wachovia's
second quarter and receive your questions before we wrap up in about an
hour.
Also joining us on the call this morning are Don Truslow, Chief Risk
Officer and David Gaines, Comptroller for Wachovia.
Let me preface our discussion by reminding you that our comments will
contain forward looking statements primarily pertaining to anticipated
income and expense trends related to future earnings. These statements
involve risk and uncertainty and listeners are cautioned to not place
undo reliance on them since actual results may differ materially from
management's expectations.
Additional information about the risk and uncertainty of such
statements is contained in Wachovia's annual report and other filings
with the Securities and Exchange Commission.
We urge shareholders to read the proxy statements for the proposed
merger with First Union and the related documents filed with the SEC
because they contain important information. You may obtain these
documents by calling 866-883-0789 or by accessing the SEC's Internet
Web site.
Our press release was distributed earlier this morning. The earnings
announcements, financial tables and a replay of this discussion are all
available from the investor relations section of our Web site
www.wachovia.com.
Let me now introduce Bud Baker, Chairman and Chief Executive Officer of
Wachovia.
Bud Baker: Thanks very much, Bob.
This is Bud Baker and thank you for joining us this morning. Let me say
that I think Wachovia reports a good quarter this morning. And Bob will
go over that in great detail with you in just a few moments.
The economy continues to provide challenges and is certainly of
interest during this period of time. I would say in a general way that
the economy continues as it relates to our customers to perform better
than we thought it might given the kind of pressure that we're under.
And business conditions by and large for most lines of business that
are prominent within Wachovia were good during the quarter. There were
some obvious weaknesses that Bob will point out in certain
market-related areas but that is -- that is not news at this point --
it is a continuation of some trends we've seen over the past year.
But generally we saw good loan growth, we saw good deposit activity and
lots of forward thinking activity going on on the part of our
customers. I'm very pleased to report to you that under the conditions
in which we've operated, with a merger proposal pending with First
Union, that our employees during this period of time -- the people of
Wachovia -- have responded extremely well. One of the things we knew as
we announced the First Union-Wachovia transaction is that it would be
very important to stay in touch with our customers and to keep our eye
on the most important ingredient in this, which is the level of service
we are providing with our customers and the level of service that they
are accomplishing with us.
So our business volumes are looking good. Our people have done an
extraordinary job, in my opinion, of doing business with our customers
and serving them while in some cases also helping with the integration
effort that's underway.
Relative to that effort, Bob McCoy is one of the -- is the co-chair of
the integration process. He may have some comments about that but I
would say to you that our integration effort continues to go well. We
are about 70 days into the process. The interaction between the people
of Wachovia and First Union is extremely rewarding. Good ideas are
coming forth. There's been a lot of work done and I think that we have
made remarkable progress. And, if anything, I am even more optimistic
than I was when we reported our proposed merger in mid-April. I'll look
forward to being here to help answer your questions later and now let
me turn this over to Bob.
Bob McCoy: Thank you, Bud.
As you have seen from our press release, we had a good second quarter.
Wachovia announced net operating earnings of $253 million or $1.22 per
share for the second quarter. These results are both consistent with
both expectations and our first-quarter results.
We believe this quarter actually reflects stronger core operations than
the prior period. Average loan volume grew modestly as continued
reductions in the large corporate portfolio offset growth in the retail
and real estate books.
Net yield on earning assets posted better than expected results, rising
four basis points to 3.97 percent on a linked quarter basis.
Fee income also grew well across a number of fronts, most notably in
service charges and mortgage fees, which reflected the attractive rate
environment.
Growth in operating expenses remained comfortably within our annual
target of three percent excluding acquisitions.
On the credit front we provided more reserves than was recognized in
charge-offs for the period and non-performing loans were reduced.
We repurchased eight million shares during the quarter, which enabled
us to hold average diluted share count steady despite the earlier
issuance of stock for Republic securities and normal share increases.
These shares were retired as stipulated by North Carolina law and have
no impact on our upcoming proxy vote. We are not repurchasing shares
during the current blackout period.
The quarter included two events that did not impact quarter earnings
but merit particular description. First, we have provided supplemental
financial tables showing the retail credit card business on a
discontinued basis given it's pending sale. Our intent is to provide
you with the traditional view of Wachovia for prior period comparison
and the future view for constructing earnings models.
We had originally anticipated closing this transaction in the second
quarter. However, our proposed merger with First Union has necessitated
changes to the agent bank agreement, which are in the final stages of
completion. As described when the transaction was originally announced,
the sale is still expected to generate in excess of $1 billion in
capital.
The $1.22 consolidated operating earnings per share in the current
period include the $1.11 from continuing operations and 11 cents from
the discontinued card operations.
Second, we elected to take advantage of recent Federal Reserve rate
cuts by harvesting $88 million more in gains from our investment
portfolio than in the first quarter. These gains were deployed into an
aggressive loan sale program, which was a
critical driver behind our $30 million net reduction in non-performing
assets during the period. It also funded $56 million in additional loan
loss reserves. None of this gain fell to our bottom line.
This action also allowed us to achieve objectives of becoming slightly
more liability sensitive by extending our average portfolio maturity.
Shifting to our detailed financials, operating net income was $252.7
million for the second quarter, virtually unchanged from the prior
quarter.
Excluding card, operating net income was $230.8 million for the second
quarter versus $227.4 million in the first. Operating return on assets
was 1.35 percent, while operating return on equity was 15.48 percent.
Though period end shareholders' equity was reduced by share
repurchases, average equity was higher than the prior period.
We remain very well capitalized with our tier one capital ratio
standing at 7.3 percent and total risk-based capital ratio of 11.2
percent.
Reported earnings EPS numbers include $11.7 million of pre-tax
integration charges which are evenly split between the Republic
Security acquisition and expenses incurred to date for the proposed
First Union merger.
Net income interest increased 23.2 million or 3.7 percent on a linked
quarter basis. Roughly half of this growth resulted from higher loan
volumes and half from better spreads.
Net interest margin yield rose four basis points to 3.97 percent due to
better pricing on both sides of the balance sheet and increased deposit
levels. A return to more normal loan fees also contributed to this
improvement.
Excluding card, net interest yield was 3.69 percent compared to 3.64
percent in the prior period.
Average loan volumes increased just over $1 billion or 1.8 percent on a
linked quarter basis as strong growth in retail and real estate lending
exceeded planned reductions in the large corporate portfolio.
Average commercial loans decreased 1.2 billion or 6.7 percent through a
planned pull back in large corporate reflecting our view of the current
economic environment and shifting assets to areas expected to bring
better returns on capital.
We continue to lend to attractive customer relationships throughout the
commercial portfolio.
Average retail loans grew 4.5 percent -- about half from inclusion of a
full quarter Republic Security Bank with remaining growth particularly
strong in automobile lending.
Average real estate loans increase 1.7 billion or 7.6 percent on a
linked quarter basis, while half of the real estate growth was also
related to the inclusion of Republic Security Bank.
On funding, we had a beneficial shift in our liability mix as deposits
increased while wholesale funding was lower. Total deposits increased
1.5 billion or 3.5 percent linked quarter, including excellent business
performance by Republic Security Bank.
Our important Premier Deposit product, which serves the affluent
market, posted $730 million in growth or 7.3 percent on a linked
quarter basis. Other wholesale funding fell by 699 million or 3.3
percent.
Non-interest income, excluding security gains and the prior period's
$42 million positive mark on the (Concord EFS) increased 36 million or
eight percent on a linked quarter basis. There are several categories
to note. Service charges on deposit accounts were up 10 percent over
prior quarter with the increase about evenly split between commercial
service charges and NSF and overdraft fees.
Trust fees were up one-and-a-half percent compared with prior quarter
despite difficult market conditions.
Credit card income posted a 14 percent rebound from the seasonally slow
first quarter including impact of renewed customer purchase volumes,
which increased interchange payments and over limit fees.
Investment fees were steady with the first quarter despite lower market
values and slower trading volume. Continued growth in annuity income is
offsetting declines in equity commissions.
Capital (Markets) fees did decline five percent versus a very robust
first quarter, but remains significantly higher than run rate of prior
quarters. Customer derivatives and fixed income activities continued
strong. However, syndications suffered from the pull back in large
corporate lending and other investment banking activities remained soft
due to market conditions.
Mortgage fees rose 6.6 million as lower rates continue to drive
extraordinary volume. Other income is down substantially from the first
quarter, given that period's $42 million pre-tax gains from the (Star
System) merger with (Concord EFS).
As previously mentioned, we recognized $97.2 million of securities
gains for the quarter or $88 million more than the prior period.
Approximately $5 million related to our sale of the (Concord EFS) stock
in the secondary offering and five million to normal securities
activities.
Opportunistic harvesting of the investment portfolio yields the
remaining $87 million.
The gains were deployed into credit actions. There are a couple of ways
you might think of this. First, the $88 million increase in security
gains on a linked quarter basis is less than the $94 million increase
in the provision expense.
Alternatively, the $88 million increase in security gains was offset by
$56 million from the loan loss allowance increase and $33 million in
charge-offs and other expenses related to loan sales.
Cash proceeds from these sales were reinvested in longer maturity
assets, extending the investment portfolio duration. As a result of
this shift we have become slightly more liability sensitive. It is
worth noting that the gains embedded in this portfolio would have been
lost in the purchase accounting adjustments related to our proposed
merger with First Union.
Non-interest expense growth remained comfortably within our annual
target of three percent, increasing just one percent from the prior
year and 1.7 percent from the prior quarter.
Personnel expenses rose 4.9 percent due to more normal incentive pay
accruals and full quarter inclusion of Republic Security Bank.
Non-personnel expenses fell two percent including large declines in the
areas of professional services, marketing and donations. Resulting
overhead ratio excluding non-recurring expense was 54.9 percent, less
than the 55.6 percent recorded a year earlier and about equal to the
first quarter.
Moving to the topic of credit, we continued to make good progress in
the second quarter on managing credit risk and reducing exposure to
distressed credits.
We told you at our March investors conference that we would be very
pro-active in credit risk management. We are pleased with the work
accomplished thus far including improved allowance to total loans and
allowance to non-performing loans coverage ratios, which stood at 1.60
percent and 2.39 (times) respectively at the end of the quarter.
Charge-offs increased $41 million to $160 million with 17 million of
the increase coming from the discontinued credit card operation. The
remainder includes 30 million from loan sales taking advantage of
periodic strains in secondary market pricing.
In March, we shared that we had identified roughly $3 billion in
exposure to companies where we're exiting the credit for relationship
reasons or credit concerns. So far we have reduced this exposure by
half or about $1.6 billion.
We also shared that we had moved roughly $2.2 billion to our workout
group. Since then we have reduced these exposures by roughly $600
million while adding to them $200 million for a net reduction of about
$400 million in the workout group.
Good progress continues in reducing non-performing loans as well.
Non-performing loans decreased $30.3 million during the quarter and
totaled $379.8 million or 67 basis points of loans at the end of the
quarter.
Since the beginning of the year, aggressive management has reduced our
non-performing loans by 24 percent or $120 million. During the quarter
we moved two significant loans to non-perform status. First was our $29
million exposure to (Warnaco), which filed for bankruptcy. And second
was a $23 million exposure to a private company where we have
restructured the debt to help the company work through a challenging
business environment.
Provision for loan loses was 215.7 million covering net loan losses of
160.1 million in building and loan loss allowance by $55.6 million.
Based upon our reserve models given the current weak economic
environment we believe it was prudent to build the loan loss allowance.
We remain guarded in our outlook for credit quality for the remainder
of the year given the continuing signs of weakness in many sectors of
the economy.
Now let me quickly comment on upcoming events and our outlook. We
expect to close the sale of our consumer credit card operation before
the end of July. Even with the aforementioned modifications to the
agent bank agreement this sale is expected to generate in excess of $1
billion in economic capital for our shareholders.
We will be meeting with shareholders throughout the end of July to
discuss the merits of our proposed merger with First Union.
The Wachovia shareholder meeting will be held August 3rd. It may be two
to three weeks after that date before the outcome of the vote can be
certified.
Assuming the proposed First Union merger is approved by our
shareholders, consummation should occur in September. At that point
shareholders will exchange each Wachovia share for two shares in the
new Wachovia and choose either the additional 48 cents per share in
cash consideration or an additional two shares of the dividend
equalization preferred stock.
The two options allow shareholders to select their preferred approach
to maintaining Wachovia's existing $2.40 per share.
The current First Call consensus for Wachovia indicates expected
earnings per share of $4.84 for the year. Assuming no re-deployment of
excess capital from the credit card sale and the stock repurchases or
investments in new businesses, we are comfortable with the full year
consensus.
In conclusion, we had a good second quarter. We achieved healthy
revenue growth in important business lines, controlled expenses and
improved our risk profile. Before moving to your questions it is
important to thank our employees for their extraordinary
professionalism and commitment during this unusual time for our company
and our customers for allowing us to continue serving their financial
needs and the employees of First Union for partnering with us in
creating the Premiere East Coast Financial Services firm.
This concludes my prepared remarks. Also joining Bud and me for today's
question and answer session are Don Truslow and David Gaines. I'd now
like to ask the operator to begin the question and answer session.
Operator: Thank you, gentlemen. Our question-and-answer session will be
conducted electronically today. If you would like to ask a question
simply press the star key, followed by the digit one on your touch-tone
telephone. We will proceed in the order that you signal us and we will
take as many questions as time permits.
Once again, if you would like to ask a question, press star, one at
this time. And we'll pause for just a moment. We'll first hear from
Mike Mayo of Prudential.
Mike Mayo: Good morning everyone.
Bob McCoy: Hi, Mike.
Mike Mayo: Just some clarification on the credit quality. How much in loan
sales did you have during the quarter? How much in NPAs were sold? How
much did charge-offs increase due to the loan sales? I thought I heard
both $33 million and $30 million. And just any more color you can give
on the loan sales and credit quality.
Bob McCoy: Mike, I'm going to let Don handle that question.
Don Truslow: Hey, Mike. Basically during the quarter we saw an improvement in
the secondary market for certain credits. And so coming off of March we
decided to move maybe a little more aggressively than planned when we
had the investor conference in March during the quarter to take
advantage of those opportunities.
We in essence sold about $125 million in exposure in the secondary
market. The impact of non-performs for the quarter was about $64
million so we reduced non-performs by about $64 million through the
sale.
The charge through the loan loss allowance that Bob referred to was
about $30 million. And in addition to that we had about $2.5-3.0
million in charges that went through other income that basically
relates to un-funded commitments. And we don't take those discounts
through the loan loss allowance because they're not on- balance sheet
assets.
So, Mike, in essence what we did in the second quarter was really a
continuation of what we began last fall and accelerated a little bit in
the first quarter in trying to be opportunistic and taking advantage of
different vehicles while reducing and mitigating risk in the portfolio.
And in some instances we saw prices as much as double as we came
through the second quarter and so we moved on some of those
opportunities and were able to move some of those assets off the
balance sheet.
Mike Mayo: I just have a quick follow up. As far as the charges in other income
due to the un-funded commitments, has that item been there or is that a
newer item?
Don Truslow: There was a little bit of that that flowed through in the first
quarter and we did have some assets sales in the first quarter. About
$5 million I believe in the first quarter that we had talked about. So
the difference between first quarter and the second quarter it came
down somewhat from the first quarter but where we had sold un-funded
exposures before, that's been the preferred accounting treatment for
taking those discounts.
Mike Mayo: And where do you see a run rate for provisions going forward?
Don Truslow: Mike, coming into the year and in the first quarter we anticipated
that charge-offs would be somewhat higher in the first half of the year
versus the second half of the year. I'll tell you, the charge-offs
spiked up a little bit more in the card business than I had anticipated
at the beginning of the first quarter. We saw a real jump up in May and
in June, as I think the rest of the industry did, in bankruptcies.
I would say the outlook right now is that I think the pace will
moderate in the last half of the year from the first half but it's
still going to be a pretty challenging environment for us to work
through. We saw a lot of softening in the economy in the second quarter
and we continue to read news that will represent significant challenges
for our customers for the rest of the year.
So I still think that charge-offs and therefore provisions will
moderate a little bit in the second half of the year but I do put a
little bit of uncertainty and caution around that.
Mike Mayo: All right, thank you.
Operator: Our next question will come from John Balkind of Fox, Pitt, Kelton.
John Balkind: Good morning, guys.
Bob McCoy: Good morning, John.
John Balkind: A couple of quick questions.
First, on the loan growth side. Could you talk a little bit about where
the construction growth is coming from because that seems pretty
strong. And on -- and on the indirect side could you just discuss where
that growth is coming from -- the trends in pricing there? And what is
the outlook for that business after the deal closes with First Union
assuming it does close?
Don Truslow: John, this is Don.
On the construction, side we've seen a very favorable environment in
the residential business with interest rates down. So we have seen an
uptick there in the construction business. Also remember that we closed
the Republic transaction at the end of February so we have a full
quarter's results in the second quarter of Republic. And -- so some of
those loans mapped over into the construction and the commercial
mortgage category as well.
In the commercial side, we've seen -- commercial real estate side for
construction loans -- we have seen a slow down in growth. We are being
more cautious there as we have talked about before given, again, the
economic environment and some of the softness that is beginning to
creep into a variety of markets and a number of our customers are
pulling back on the projects that -- a number of projects that they had
otherwise been working on.
On the indirect side, that business has actually been pretty good for
this year. We've seen spreads widen out and so returns have been
reasonably attractive for the first half of this year.
You're correct in somewhat pointing out that First Union exited that
business some time ago. It's a business that's still important to us
and as we're moving through the integration and the teams are working
with one another, it's a business that in the outlook for right now
will continue to be important for us.
John Balkind: Sounds good. And one quick follow up on the earnings guidance.
I was just noticing that for the first half using your $1.17 in Q1 and
your $1.22 in Q2, you've done about $2.39. And then looking at the
continuing ops for the first half, which I guess we could sort of
translate to the second half, you've done around $2.21. If you just put
those together you're a little bit below the $4.84. I'm wondering what
the earnings leverage will be in the second half? Is it lower
provisioning levels? Is it more improvement in the margin? What do you
think the key issues are for you to hit that $4.84 number?
Bob McCoy: John, I think I go back to where we -- where we started the year
with. And we haven't changed much. As to Don's point we expect
provisioning to be lower. But we did feel it necessary to have stronger
reserves going into the period and so we've just done it.
What we've seen in the margin yield is we expect the margin yield to
stay right in there. We were -- we were probably more pessimistic in
our outlook than what actually happened. And so the yield is stronger
than what we had actually thought it was going to be.
We look for loan growth to continue in the mid-single digit range.
We're not looking for a return to double-digit loan growth as we're
moving forward. And I think that for the rest of it, I think it's
continuing to do what we did this quarter. And it's improving I think.
It's costs -- as we've looked at our cost control we think that that's
going to continue. We still see good movement in basic banking -- that
is electronic banking, service charge revenue, et cetera. And I just
think, John, we see no reason to come off of the $4.84 right this
minute based upon where we are.
We think that we've got momentum recognizing what's going on with our
employees out there and all the pressure they have and the customers.
We just had a good result for this quarter and we couldn't be happier
about how our employees are performing and the loyalty of our
customers. And we think that will continue. And while Bud said -- Don
said business was softer and looking in but Bud did say, though, in our
marketplace we still see spurts of pretty good business. So, John, I
just think -- I feel still comfortable where we are.
John Balkind: Sounds good. Thanks, Bob.
Bob McCoy: Yeah.
Operator:Once again, if you would like to ask a question, press star, one. And
we'll now hear from Jeff Davis -- I'm sorry -- Kate Blecher of Sandler
O'Neill.
Kate Blecher: Yes. Actually I have two questions. One is on the more
philosophical bend. How much of the decision to take the securities
gains -- is really because there's going to be an increased concern of
commercial quality. Because it would seem that you've already announced
the intention to increase the reserve with the First Union merger. And
also if you have the credit card gain I would think you could possibly
increase the reserve at that point? And I have a follow up on the
credit card sale.
Bob McCoy: Well, I just think the credit card gain -- you've got to remember
that you have to separate a decision on your loan loss allowance from
the credit card gain. And the credit card gain really doesn't have
anything to do with the loan loss allowance.
In the -- in the mathematics to get to the credit card gain and
discontinuing operations, you do pull out of the loan loss reserve.
That allowance is allocated to the credit card.
But when you -- when you put it back in it has to be done as if you
need -- as a separate transaction -- it's a separate computation and it
stands by itself. So the credit card gain -- I think conceptually one
could argue is an opportunity. But on the other hand, the allowance
addition for this quarter has to stand on it's own and it has to stand
based on what we know today -- and nothing involved in the credit card
-- credit card gain.
With respect to the securities transactions and waiting until the next
quarter, we didn't believe that it was appropriate to put off a
decision which Don felt pretty strongly about when we were looking at
the portfolio and looking at economic decisions. We made the decision
to go ahead and build the reserve before we decided to take the
securities gains. What I said was, "look, if we're going to build the
reserve and we're going to take this aggressive action, let's pay for
it. And let's pay for it because we've got a window of opportunity on
the spreads on our portfolio." And secondly is those gains will never
be recognized under purchase accounting transactions subsequent to this
quarter.
So it's a little bit of -- a little bit of all of that, Kate. There's
no one issue but it just seemed appropriate to monetize that portfolio
-- that part of the portfolio when we know it -- we saw that we were
going to have about a $94 million increase in loan loss provision
linked toward a basis really driven by proactive decisions and Don's
review of the portfolio. Don, you might want to have a comment on that.
Don Truslow: Yeah, as you're probably well aware, each quarter we -- at least
once a quarter -- we come up and look at the level of our loan loss
reserves and run current conditions through our models. And basically
the softening economy and the results that we saw in that ((inaudible))
in the second quarter, the fact that with the cards being classified as
a discontinued operation from an accounting standpoint, as Bob
mentioned, we have to pull out a portion of the reserves -- about $150
million in this case -- that in some ways while on an ongoing basis the
loan loss reserves are reallocated into certain buckets, it is
available to cover losses anywhere in the loan portfolio.
And so now if I find the card business is discontinued and having to
segregate out that portion of the loan loss reserve in a sense,
accounting-wise, it's not available to the whole portfolio. And a
combination of those two things and just because we thought it was a
prudent action to take in the second quarter led us to our decision to
build the loan loss reserve by about $55-56 million.
Kate Blecher: OK.
Don Truslow: And not wait.
Kate Blecher: So thank you. And then also on the credit card, you mentioned
that you expect to close before the end of the quarter and that you're
still talking to First USA. I guess there have just been some rumors
going around that there have been -- funny rumors going around -- about
the potential problems with that deal. Are you currently talking to
both First USA and MBNA?
Bob McCoy: With -- I won't -- MBNA -- we don't -- we don't have any control
over MBNA. Our discussions -- we're continuing the dialog with the
people we signed a contract with and we fully expect to close that out
-- actually before -- not before the end of the quarter, before the end
of the month.
Kate Blecher: Oh, I'm sorry, before the end of the month. Right, and so you're
not -- are you looking for any additional costs associated with that
then you had originally?
Bob McCoy: Costs?
Kate Blecher: Yeah.
Bob McCoy: No, not really. No, no. We're continuing to run it and we would
have been running it anyway under a -- under an agreement with them to
continue to run it until they could do the conversion. And so there's
no additional costs.
Kate Blecher: OK, thank you.
Operator: We'll take our next question from Catherine Murray of JP Morgan.
Catherine Murray: Yes, good morning. I have two questions. The first, could we
just clarify on a sequential quarter basis what was the loan growth if
we exclude the effect of Republic?
Bob McCoy: ((inaudible)). It's about -- it's about half. If you took the loan
growth of -- I looked at the net interest margin dollars but if I look
at the loan growth it's about -- if I take out -- I'm just looking at
the schedule -- their growth was about -- it's about two percent loan
growth.
Catherine Murray: So does that two percent exclude Republic?
Bob McCoy: Yeah, if you take out -- actually most of the loan growth -- if you
look at the loan growth most of it -- the total loan growth was $1
billion. And the loan growth from Republic is most of that.
Catherine Murray: OK, thank you. And then, secondly, could you just review,
because you did it in a couple of different places, but could you just
review the effects of Republic on the major income statement line items
just so we can line it up in one place?
Bob McCoy: Sure. If you look at -- if you look at overall it had about a $12
million net interest income, about half the increase. On non-interest
income it's about $5 million of the increase. So if you look at overall
increase and you take linked quarters and you take out the Concord EFS
gain from it we probably had somewhere around $28 million of true
growth in non-interest income. And it had about $14 million of the
expense growth.
Catherine Murray: OK, great. And did it effect the provisioning?
Bob McCoy: Not to any -- not to any magnitude -- no. What it is, is by the
time it gets in it's now a part of the overall portfolio and so to say
that it impacted -- it's very, very minor. It had -- we allocated about
$1 million of additional provision to Republic.
Catherine Murray: OK.
Bob McCoy: Very minor, Katherine. And bottom line -- after you allocate
amortization, the DBI -- and after add goodwill amortization the cost
of ((inaudible)) it breaks even ...
Catherine Murray: OK.
Bob McCoy: ... for the first quarter.
Catherine Murray: OK, all right. Great, thank you.
Bob McCoy: ((inaudible)) net on the bottom line.
Catherine Murray: Nothing net on the bottom line?
Bob McCoy: That is correct.
Catherine Murray: OK, great. Thank you very much.
Bob McCoy: Yeah.
Operator: Next we'll hear from John Coffey of Citigroup.
John Coffey: Yeah, Bob, I heard you mention in a couple of places -- overdraft
fees and over limit charges I think in credit cards -- other than the
bank increase -- the increase in bankruptcy filings, are you seeing any
other negative trends on consumer credit quality?
Bob McCoy: I'll let Don respond to that, John.
Don Truslow: John, the credit card business is really where we have seen most of
it. There's been just a little bit of an uptick in some of the other
categories in past dues but really not very much change from the first
quarter or the fourth quarter of last year as it relates to loss rates.
It was really the credit card business where we saw a jump in the May
and June timeframe.
John Coffey: OK. And then switching gears, on the bond sales -- what is the give
up in basis points on your yields on the securities after you
reinvested them?
Bob McCoy: It's actually not much. We didn't give up much in the way of spread.
One way to look at it is you do give up basis points but what you
really want to look at is the spread. And what we were looking at is a
basis that's almost immaterial to the size of the portfolio, John. It's
going to have hardly any impact on it.
It was really done -- actually there were two reasons to do it. One was
to recognize the gain. The second is we extended the portfolio's
duration by a year and that was very important to our liability
sensitivity. But about one basis point.
John Coffey: And when you're thinking about liability sensitivity right now are
you thinking about it in combination with First Union or still Wachovia
standalone?
Bob McCoy: We were looking at Wachovia standalone, John.
John Coffey: OK, thanks.
Don Truslow: It really is a very slight ((inaudible)).
Bob McCoy: Yeah, when you -- when you -- when you look at the sensitivity
movement it's pretty -- we had -- we were pretty neutral to slightly --
now we're slightly more liability sensitive. And our size institution
-- I don't want you to think we're as precise as you think we can be
but we're pretty close and we think we're now slightly more liability
-- going forward -- slightly more liability sensitive.
John Coffey: OK, thanks.
Bob McCoy: OK.
Operator: Our next question will come from Nancy Bush of Ryan Beck.
Nancy Bush: Good morning.
Bob McCoy: Good morning.
Nancy Bush: In your integration talks can you tell us how the branch operations
piece of this is evolving? Are you going to end up, as you see it now,
having significant impact on the way First Union configures and
operates their branches?
Bob McCoy: Well, I think, first of all, we have had a business review from the
retail group and they have proposed their models as to what they
believe going forward the retail bank ought to look like. I think it's
premature to say we know exactly what's going to happen but their
initial proposal has been, "Look, first of all, we're going to look at
the whole network as it exists." And we've made that very conscious
decision not to close branches right up front and take a year to look
and see where it should be. And part of that really is to give the
retail people an opportunity to decide what that branch configurations
look like. For example, how many new investment centers should be set
up? How many new small business centers should be set up? If you have
branches next to each other, can you really afford to close one and
drive all of that volume into another one?
And the nice thing is because of the transaction there will be such a
little premium that we don't have to be driving expense saving right
off the bat -- we're able to take time to do that.
Now as far as which model is going to survive -- whether it's the
Wachovia or the First Union model -- there was a free flowing
discussion that concentrated in two areas. One, Wachovia's customer
service model certainly is the model that's been significantly
discussed and I think the consensus was in the retail group that they
like that part of it and you would think that the customer service
model from the Wachovia franchise would probably be the new model.
If you go to the sales side and the product side, the First Union model
is an excellent model. And that is driving sales through the -- through
the branch network. And they're just more effective than the Wachovia
side. So I really think it's going to be a combination of both. And, of
course, that was out -- that was what we tried to do right from the
start.
So the retail model, which is still in it's development stage but the
part that they have provided to the project office was really a
combination of both sides. That included small business lending -- the
whole -- the full approach to small business through the branches and
through the call center. And so it's really a pretty all-inclusive one
but the work has certainly not been done by any stretch. And we still
have a lot of work to go. David, do you have anything you want to add
to that?
David Gaines: Well, you mentioned, this is David Gaines -- you may even say on
the sales side you've also got a blend because, as Bob alluded to,
First Union has had great experience and success licensing people in
the branches and making investment sales happen much more than we have.
And that's obviously a piece of the model we want to leverage in the
new Wachovia.
We've probably done pretty well on the business banking front and with
mortgages in our branches are we're going to leverage that in the new
Wachovia. So you're really getting a blend across the...
Nancy Bush: Is there any discussion on -- in the interim before you close and
integrate branches how you're going to bridge -- because the branches
look fairly dramatically different -- how you're going to bridge the
customer experience going from one to the other?
Bob McCoy: I think -- and, again, I wouldn't say we have got all of the
answers but I think that's why this year was selected as a minimum
period because there's a timeframe in there to get people to stay with
their tellers, to stay with their CRs and to spend that time -- of
course, nothing will really be done in terms of conversion until the
deposit system's converted. And that will -- that will be done at some
point out into 2002 and then the movement over to the customers
themselves. You're point's very well taken because this is the most
difficult part of one of these transactions is moving -- is moving
people into a new environment and a new surrounding. And, yes, they are
different -- the forms are different and what have you.
But I think given the timeframe we've put on this of over a year we
certainly should be able to spend time training both our employees of
both sides and the customers feeling more comfortable as we move
forward. So if we had given ourselves this much time I don't think I
could answer this question very well to you.
I feel real good about the integration process that we've seen
recommended coming from the retail branch people and feel that we've
got a significant amount of time to study it and make sure we do it
right. And everybody is still saying the same thing -- we're still
saying it -- that the customer is the one we need to preserve and take
care of. And I think all of the training -- there's just an incredible
amount of training that is set up for this thing prior to any kind of
conversion.
So the best I can say is the plan looks good. Of course, the proof will
be in the implementation but the plan looks pretty good.
David Gaines: Well, Nancy this is Dave, again, probably the most important thing
we can and will do for our customers day one is give them access to the
full ATM network with no surcharges. And so you can keep the
programming for that without having the branch conversions -- the
actual deposit conversions achieved.
And so that would be there. But as Bob said, you will continue until
you convert and the current intent on conversion is you would take them
state by state to make sure that you're taking your pace and you're
doing it correctly and you're not trying a "Big Bang" approach, which
would be too risky.
But until you convert each phase -- you've still got First Union and
Wachovia branch networks out there that are independent bank networks
just as they are today in terms of customer impact. You wouldn't have
people walking into First Union with Wachovia checks and being able to
transact them as if it's a
Wachovia branch. You'd get the ATMs there, you'd get the online systems
as quickly as you can there.
Nancy Bush: All right, thanks very much.
Operator: Once again, if you would like to ask a question, press star, one. And
we'll now hear from Chris Mutascio of Legg Mason.
Chris Mutascio: Good morning, gentlemen.
Male: Good morning, Chris.
Chris Mutascio: Don, just -- I missed much of the -- your response to the first
question.
Don Truslow: Yeah?
Chris Mutascio: Did you say you sold $64 to $65 million NPAs during the quarter?
Don Truslow: Yeah.
Chris Mutascio: So ...
Don Truslow: That's right.
Chris Mutascio: So roughly you'd have about -- without the sale just a $30
million or so increase in NPAs for the quarter?
Don Truslow: Yeah, Chris, basically we -- net reduction of about $30 overall.
We had sales impact by about $64 million. Bob mentioned two larger
non-performs that dropped on. We also had roughly $15 or $16 million of
other non-performs that came on of smaller amounts. But then we were
also successful in getting some collected. So when you wash all of that
through that brought us to the net reduction of about $30 million.
Chris Mutascio: OK, do you have -- typically you report the 90 day past due
number on your releases. Do you have that available right now?
Don Truslow: Because we moved up the date for reporting I'm not sure that we had
a final number to drop in the schedule at this point.
Chris Mutascio: OK, I'll just follow up later then.
Don Truslow: OK, that would be fine.
Chris Mutascio: All right. Thanks, guys.
Operator: Mr. Mutascio, did that answer your question?
Chris Mutascio: Oh, yes.
Operator: And we'll now hear from Tom Purcell of Viking Global Investments.
Tom Purcell: Hi, I just had a quick question. I noticed on the taxable
equivalent yield analysis that the long-term debt yield on your funding
side dropped a fair amount. I was just wondering if that had anything
to do with swaps?
Bob McCoy: Yes, it's swaps.
Tom Purcell: OK, thanks.
Operator: And we'll take a follow up question from Kate Blecher of Sandler
O'Neill.
Kate Blecher: Yes, thanks. I guess -- first, I'm sorry to keep harping on the
credit quality but you had just gone over a bit of the non-performers
-- the decrease. Can you -- is there a way you can give us a core
number of what non-performers would have done if not for the loan sales
and if not for the charge-offs impact on non-performing assets?
Bob McCoy: Well, actually our goal was to be very aggressive to take care of it
so, yeah, we can say that non-performers without the loan sales and
without charge-offs probably would have been up. But that wasn't the
point. The point is that our goal was to
take them down and we said that in March and Don is doing exactly what
we said in March. Don, you might want to amplify that.
Don Truslow: Yeah, Kate, it's a dynamic -- it's a dynamic category. And so each
quarter we have ones drop in the non-perform and we get some taken care
of in a variety of ways. But if you step back and said, "Well, what
would non-performs -- what would they have been like had not taken any
action and we didn't get any pay outs or nothing good happened," if you
will. Then we would have had the two increases combined about $52
million and then there's probably another $12 or $15 million that
dropped on as well.
But, again, it's a very dynamic category and we have movement in and
out in every quarter.
Kate Blecher: OK. And is there a way you could give some sort of idea of what
is the core earnings growth power of Wachovia as a standalone
institution as a percentage growth rate exclusive of credit card?
Bob McCoy: Yeah, I think I would go back to the investor presentation. I
wouldn't come off of that at all, Kate.
Kate Blecher: OK, so ...
Bob McCoy: You were there. It was -- yeah, I don't know of any reason why we
would come off of that. We haven't seen any reason to come off what we
said in March.
Kate Blecher: OK, so things still look fairly bright?
Bob McCoy: Yeah, yeah -- challenging -- heck. Very challenging but I wouldn't
say we have any reason to come off what we said.
Kate Blecher: OK, excellent. Thank you.
Bob McCoy: Sure.
Operator: And gentlemen, it appears there are no further questions at this time.
I'll turn the conference back over to you for an additional or closing
remarks.
Bob McCoy: I don't have any closing remarks other than to say thank you. Bud,
anything you want to say?
Bud Baker: Thank you very much. We're pleased with the quarter and
exceptionally pleased with all of the good things that the Wachovians
did with our customers. Generally a very good quarter we think. Thank
you very much.
Bob: Thank you.
Operator: And that concludes today's conference call. Thank you for your
participation.
END
THE FOLLOWING PRESENTATION WAS MADE TO WACHOVIA EMPLOYEES REGARDING THE PROPOSED
MERGER OF FIRST UNION AND WACHOVIA
[FIRST UNION LOGO APPEARS HERE] [WACHOVIA LOGO APPEARS HERE]
The new
[WACHOVIA LOGO APPEARS HERE]
A Clearly Superior Value
Proposition
July 16, 2001
Cautionary Statement
- --------------------------------------------------------------------------------
The proposed merger of First Union and Wachovia will be submitted to First
Union's and Wachovia's stockholders for their consideration, and First Union has
filed a registration statement on Form S-4 with the SEC containing a preliminary
joint proxy statement/prospectus of First Union and Wachovia and other relevant
documents concerning the proposed transaction. Stockholders are urged to read
the definitive joint proxy statement/prospectus when it becomes available and
any other relevant documents filed with the SEC, as well as any amendments or
supplements to those documents, because they will contain important information.
You will be able to obtain a free copy of the registration statement and the
joint proxy statement/prospectus, as well as other filings containing
information about First Union and Wachovia, at gov). Copies of the joint proxy
statement/prospectus and the SEC filings that will be incorporated by reference
in the joint proxy statement/prospectus can also be obtained, without charge, by
directing a request to First Union, Investor Relations, One First Union Center,
Charlotte, North Carolina 28288-0206 (704-374-6782), or to Wachovia, Investor
Relations, 100 North Main Street, Winston-Salem, North Carolina 27150
(888-492-6397).
First Union and Wachovia, their respective directors and executive officers and
certain other persons may be deemed to be participants in the solicitation of
proxies from the stockholders of First Union and Wachovia in connection with the
merger. Information about the directors and executive officers of First Union
and their ownership of First Union common stock is set forth in First Union's
proxy statement on Schedule 14A, as filed with the SEC on March 13, 2001.
Information about the directors and executive officers of Wachovia and their
ownership of Wachovia common stock is set forth in Wachovia's proxy statement on
Schedule 14A, as filed with the SEC on March 19, 2001. Information regarding the
interests of other participants and additional information regarding directors
and officers of First Union and Wachovia may be obtained by reading the
registration statement, including Exhibit 99.8 thereto, and the definitive joint
proxy statement/prospectus regarding the proposed transaction when it becomes
available.
This presentation may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, including, without
limitation, (i) statements about the benefits of the merger between First Union
Corporation and Wachovia Corporation, including future financial and operating
results, cost savings, enhanced revenues, and accretion to reported earnings
that may be realized from the merger; (ii) statements with respect to First
Union's and Wachovia's plans, objectives, expectations and intentions and other
statements that are not historical facts; and (iii) other statements identified
by words such as "believes", "expects", "anticipates", "estimates", "intends",
"plans", "targets", "projects" and similar expressions. These statements are
based upon the current beliefs and expectations of First Union's and Wachovia's
management and are subject to significant risks and uncertainties. Actual
results may differ from those set forth in the forward-looking statements.
2
Cautionary Statement
- --------------------------------------------------------------------------------
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the
forward-looking statements: (1) the risk that the businesses of First Union and
Wachovia will not be integrated successfully or such integration may be more
difficult, time-consuming or costly than expected; (2) expected revenue
synergies and cost savings from the merger may not be fully realized or realized
within the expected time frame; (3) revenues following the merger may be lower
than expected; (4) deposit attrition, operating costs, customer loss and
business disruption following the merger, including, without limitation,
difficulties in maintaining relationships with employees, may be greater than
expected; (5) the ability to obtain governmental approvals of the merger on the
proposed terms and schedule; (6) the failure of First Union's and Wachovia's
stockholders to approve the merger; (7) competitive pressures among depository
and other financial institutions may increase significantly and have an effect
on pricing, spending, third-party relationships and revenues; (8) the strength
of the United States economy in general and the strength of the local economies
in which the combined company will conduct operations may be different than
expected resulting in, among other things, a deterioration in credit quality or
a reduced demand for credit, including the resultant effect on the combined
company's loan portfolio and allowance for loan losses; (9) changes in the U.S.
and foreign legal and regulatory framework; and (10) adverse conditions in the
stock market, the public debt market and other capital markets (including
changes in interest rate conditions) and the impact of such conditions on the
combined company's capital markets and asset management activities. Additional
factors that could cause First Union's and Wachovia's results to differ
materially from those described in the forward-looking statements can be found
in First Union's and Wachovia's reports (such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the
Securities and Exchange Commission and gov). All subsequent written and oral
forward-looking statements concerning the proposed transaction or other matters
attributable to First Union or Wachovia or any person acting on their behalf are
expressly qualified in their entirety by the cautionary statements above. First
Union and Wachovia do not undertake any obligation to update any forward-looking
statement to reflect circumstances or events that occur after the date the
forward-looking statements are made.
3
Agenda
- --------------------------------------------------------------------------------
|X| The New Wachovia - A Superior Value
- Strategically
- Financially
- From a risk/reward perspective
|X| Why A Combination with SunTrust Will Not Work
|X| What Independent Observers Are Saying
|X| Conclusion
4
The New Wachovia
- --------------------------------------------------------------------------------
In Our View, a Superior Value for Wachovia Shareholders
Strategically >> #1 retail bank in the East based on deposits
>> Premier wealth management and brokerage franchise
>> Industry- leading product set and distribution platform
>> Diversified, high-quality revenue and earnings stream
Financially >> Substantial accretion to EPS
>> Protected dividend payment
>> Well-capitalized institution with ability to generate
significant excess capital
>> Excess capital to fund future dividend increases and
strategic initiatives
Risk/Reward >> Significant growth potential in the new Wachovia stock
>> Deliberate 3-year integration plan
>> Achievable cost savings
>> Full-time, dedicated and experienced integration team
5
The New Wachovia
Market Leadership in a Superior Footprint
- --------------------------------------------------------------------------------
The new
[WACHOVIA LOGO APPEARS HERE]
[MAP APPEARS HERE]
- --------------------------------------------------------------
#1 Retail Bank in East
Deposit
Rank State Share
#1 North Carolina 24%
#1 South Carolina 21%
#1 Virginia 20%
#1 Eastern PA 20%
#1 Georgia 19%
#2 Florida 16%
#2 New Jersey 12%
- --------------------------------------------------------------
Source: SNL Securities. Ranked by deposit market share.
6
Competitive Landscape
Creating a Powerful Franchise
- --------------------------------------------------------------------------------
East Coast Deposit Market Share(1)(2)
# OF TOTAL MARKET
RANK INSTITUTION BRANCHES DEPOSIT($BN) SHARES
- --------------------------------------------------------------------
The New Wachovia(3) 2,794 $172.9 11.5%
1 First Union 2,082 132.1 8.8
2 Bank of America 1,580 111.5 7.4
3 Fleet Boston 1,131 65.9 4.4
4 SunTrust 927 50.9 3.4
5 Wachovia 712 40.7 2.7
6 PNC 614 40.1 2.7
7 BB&T 930 38.4 2.6
8 Mellon Financial 284 21.9 1.5
9 M&T Bank 438 21.1 1.4
10 SouthTrust 399 16.3 1.1
Source: SNL Securities as of June 30, 2000.
(1) Consists of FL, GA, SC, NC, VA, DC, MD, DE, NJ, PA, NY and CT.
(2) Excludes money center banks including J.P. Morgan, Citigroup, HSBC and Bank
of New York.
(3) Excludes impact of deposit divestitures.
7
Scale in Retail Banking
Efficient Retail Distribution System
- --------------------------------------------------------------------------------
Average Deposits Per Branch
(Dollars in Millions)
[BAR CHART APPEARS HERE]
The New Wachovia SunTrust Proposal
$73.5 $75.3 $61.9 $64.7
-------------------------------------------------------------
1 Mile 2 Miles 1 Mile 2 Miles
-------------------------------------------------------------
Pro Forma Consolidated Pro Forma Consolidated
Retail Distribution
The new SunTrust
Wachovia Proposal
Retail Customers 19MM 8MM
On-line Banking Customers 3MM 1MM
Total Deposits(1) $186BN $108BN
Core Deposits(1)(2) $164BN $81BN
Branches(3) 2,600 1,700
ATM Network 5,128 3,415
- --------------------------------------------------------------------------------
(1) As of March 31, 2001.
(2) Excludes time deposits > $100M and estimated divestitures.
(3) Excludes approximately 300 branches for First Union/Wachovia and 160
branches for SunTrust/Wachovia.
Source: SNL Securities as of June 2000, excludes branches with zero deposits.
8
Small Business & Middle Market Platform
Leverages Strong Product & Service Capabilities to Create a Leading Franchise
- --------------------------------------------------------------------------------
>>Strength in serving needs of small businesses
- New Wachovia will serve 900,000 small businesses
- Ranked as the #1 SBA lender in loans originated in the East
>>Leading provider of financial products and services to corporate/middle market
customers in the East
>>Premier treasury services/cash management provider
- 3rd largest corporate cash management provider, based on
First Union's volume
- Combined with Wachovia's industry leader position in overall
quality, overall customer satisfaction
>>Full service investment banking capability - capital markets, advisory
services, private equity
9
Asset & Wealth Management/Brokerage
The New Wachovia - a National Leader
- --------------------------------------------------------------------------------
The new SunTrust
Wachovia Proposal
- --------------------------------------------------------------------------------
Total Assets Under Management $222 billion $142 billion
Mutual Fund Assets Under Management $98 billion $31 billion
# of Licensed Brokers 8,350(1) 674
# of Brokerage Offices 600 75
# of Private Client/High Net Worth Offices 133 57
- --------------------------------------------------------------------------------
Note: Wachovia contributes $50 billion in assets under management, $11 billion
in mutual fund assets under management, 571 licensed brokers, 64 brokerage
offices and 57 private
(1) 6th largest brokerage firm in the U.S. in terms of number of licensed
brokers.
10
Superior Product Offering
Creating a Leading Financial Services Franchise
- --------------------------------------------------------------------------------
The new SunTrust
Wachovia Proposal
- --------------------------------------------------------------------------------
Investment Management [Strong] [Below Average]
Mutual Funds [Strong] [Below Average]
High Net Worth / Personal Trust [Strong] [Acceptable]
Insurance [Strong] [Acceptable]
401(k) - Institutional [Acceptable] [Strong]
CAP / Consolidated Accounts [Strong] [Strong]
Capital Markets Products [Strong] [Acceptable]
Treasury Services / Cash Mgmt [Strong] [Acceptable]
Commercial Lending [Strong] [Strong]
Consumer Lending [Strong] [Strong]
Deposit Products [Strong] [Strong]
[Shaded Circle] = Strong
[Line down middle of Circle] = Acceptable
[One quarter shaded] = Below Average
[Circle] = Weak
11
Technology Platform
We Believe That Technology Will Be Strategic Advantage for the New Wachovia
- --------------------------------------------------------------------------------
The new SunTrust
Wachovia Proposal
E-business - Leading Edge - SunTrust initiative
under development
Customer Service - Broader product offerings - Standard product offerings
- Combines WB's high touch - Undifferentiated service
approach with FTU's leading
automated platform
- Proven ability to achieve - Limited ability to absorb
integration continued growth
Scalability
- Scale necessary to maintain - Significant need for
leadership position ongoing investment
Investment - A strategic emphasis of both - SunTrust has traditionally
partners taken a "wait-an-see"
- Investment has resulted in approach
superior systems and efficient
operations
12
Quality of Earnings
Higher-Quality Earnings Should Drive Multiple Expansion at the New Wachovia
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
Asset Management & Capital Markets Revenues to Total Net Revenues
SunTrust Proposal 41.8%
- ------------------------------
The new Wachovia 20.8%
Fee Income to Total Net Revenues
SunTrust Proposal 47.5%
- -------------------------------
The new Wachovia 41.7%
13
Growth Engines
Wachovia Shareholders Benefit from First Union's Growth Drivers
- --------------------------------------------------------------------------------
[FIRST UNION LOGO]
[BAR CHART APPEARS HERE]
12/31/98 12/31/00 1Q99 4Q00(1)
AUM ($BN) Revenues ($MM)
12% 54%
---------- -----------
$152 $171 $620 $955
Scale in Asset Mgmt Business with Established
Growth and Integration Track Record
[SUNTRUST LOGO]
[BAR CHART APPEARS HERE]
12/31/98 12/31/00 1Q99 4Q00
AUM ($BN) Revenues ($MM)
2% (1%)
-------- -----------
$91 $93 $167 $165
Low Growth, Sub-scale Business
(1) First Union changed its line of business reporting in 1Q01 for its asset
management division resulting in the inability to compare 1Q01 transaction.
Organic growth over this time period equaled approximately 30%.
14
The New Wachovia
- --------------------------------------------------------------------------------
In Our View, a Superior Value for Wachovia Shareholders
Strategically
>> #1 retail bank in the East based on deposits
>> Premier wealth management and brokerage franchise
>> Industry-leading product set and distribution platform
>> Diversified, high- quality revenue and earnings stream
[GRAPHIC]
Financially
>> Substantial accretion to EPS
>> Protected dividend payment
>> Well-capitalized institution with ability to generate significant excess
capital
>> Excess capital to fund future dividend increases and strategic initiatives
Risk/Reward
>> Significant growth potential in the new Wachovia stock
>> Deliberate 3-year integration plan
>> Achievable cost savings
>> Full-time, dedicated and experienced integration team
15
Superior Earnings Growth
- --------------------------------------------------------------------------------
Wachovia's Earnings Are Expected to Grow Much Faster in a Combination
with First Union Than with SunTrust
[BAR CHART APPEARS HERE]
2002 2003 2004
----------- ----------- -----------
15.2% 1.9% 17.4% 5.7% 19.8% 9.3%
X - X - X -
X The new Wachovia - SunTrust Proposal
Note: Figures are for cash EPS and are based on data reflected in respective
investor presentations.
16
The New Wachovia Offers a Better Dividend
- --------------------------------------------------------------------------------
And Is Expected to Result in Superior Dividend Growth Long-Term
We believe:
>> Profits of the new Wachovia will grow faster than in combination with
SunTrust
>> The new Wachovia will have more funds available to pay to its
>> The new Wachovia will grow its dividend faster than a hypothetical dividend
from SunTrust
>> Wachovia shareholders are given a choice that assures them of at least the
same $2.40 annual dividend they receive on their current Wachovia shares
17
The new Wachovia
- --------------------------------------------------------------------------------
In Our View, a Superior Value for Wachovia Shareholders
Strategically
>> #1 retail bank in the East based on deposits
>> Premier wealth management and brokerage franchise
>> Industry-leading product set and distribution platform
>> Diversified, high-quality revenue and earnings stream
Financially
>> Substantial accretion to EPS
>> Protected dividend payment
>> Well-capitalized institution with ability to generate significant excess
capital
>> Excess capital to fund future dividend increases and strategic initiatives
[GRAPHIC]
Risk/Reward
>> Significant growth potential in the new Wachovia stock
>> Deliberate 3-year integration plan
>> Achievable cost savings
>> Full-time, dedicated and experienced integration team
18
Less Integration Risk - More Experience
We Believe Creating the New Wachovia is Best for Shareholders
- --------------------------------------------------------------------------------
The new Wachovia
Agreed-Upon Transaction
|X| 40+ transactions since 1992 with cumulative acquired assets of
approximately $150 billion
|X| Integrated 10 mutual fund complexes and 4 brokerage houses representing
3 million customers
|X| Common operating platform / systems
|X| Public commitment by senior Wachovia managers
SunTrust Proposal
Hostile Proposal
|X| Largest transaction ever attempted by a factor of 3x (based on assets)
|X| Only one transaction greater than $100 million in deal value in the last
10 years
|X| Has never attempted an in-market integration of any size
|X| Continuity of Wachovia management to support necessary integration is at
risk
19
Integration Risk - This Is Not CoreStates
CoreStates Was an Entirely Different Type of Transaction
- --------------------------------------------------------------------------------
CoreStates Issues The new Wachovia
- ---------------------- ---------------------------
Higher Cost Savings / --> Lower Cost Savings /
Lower Overlap Higher Overlap
Projected Synergies --> Cost Savings Equal to
Equal to 2/3rd of Approximately 1/3rd of
CoreStates' Expenses Wachovia's Expenses
Accelerated Phase-In --> Deliberate Phase-In
Over Three Years.
Full-time dedicated and
experienced integration team
"Can't-fail" Attitude --> Learned From
CoreStates Experience
20
Availability of Cost Savings
We Believe Our Assumptions Are Conservative and Lower Risk
- --------------------------------------------------------------------------------
[GRAPHIC]
8% of Combined Expenses
>> The new Wachovia predicated on lower relative cost savings / greater
overlap
- Cost savings assumptions have been confirmed - we have a high degree
of comfort in our estimates
- Close to 2x branch overlap and greater business line overlap drive
synergies
- Scale differential has a meaningful impact in terms of purchasing
power, marginal costs and technology spend
- Pro forma efficiency ratio of 56% is consistent with peer averages
[GRAPHIC]
Lower Risk
[GRAPHIC]
10% of Combined Expenses
>> SunTrust cost savings estimate 25% to 30% greater than when "agreed
upon" in December
- Lower relative franchise overlap heightens execution risk,
Georgia and Virginia
- Lack of business line scale/overlap limits savings
- Pro forma efficiency ratio of 50% is aggressive compared to peer
averages
[GRAPHIC]
Much Higher Risk
21
Agenda
- --------------------------------------------------------------------------------
[ ] The New Wachovia -A Superior Value
- Strategically
- Financially
- From a risk / reward perspective
[GRAPHIC] [ ] Why A Combination with SunTrust Will Not Work
[ ] What Independent Observers Are Saying
[ ] Conclusion
[ ] Appendix
22
Wachovia's Conclusion
We Believe a Transaction with SunTrust Will Not Work
- --------------------------------------------------------------------------------
>> Management teams unable
to build a constructive
working relationship
Transaction with SunTrust
>> No consensus on business Inconsistent with
model philosophy Wachovia's Recently
[GRAPHIC] Completed Strategic Plan
>> Merger would not resolve
strategic challenges:
- Product Capabilities
- Technology
- Scale
>> Concern over SunTrust's
future earnings growth
23
Inferior Earnings Growth
Wachovia's Earnings Are Expected to Grow Much Slower in a Combination
with SunTrust Than with First Union
- --------------------------------------------------------------------------------
[Bar chart appears here]
2002 2003 2004
15.2% 1.9% 17.4% 5.7% 19.8% 9.3%
X - X - X -
X First Union Merger - SunTrust Proposal
Note: Figures are for cash EPS and are based on data reflected in respective
investor presentations.
24
Wachovia Board of Directors' Conclusion
Strongly Committed to Merger with First Union
- --------------------------------------------------------------------------------
>> Wachovia has rejected SunTrust not once, but twice
>> After a thorough review, Wachovia's board of directors concluded that a
transaction with SunTrust is strategically and financially inferior to our
agreed-upon merger with First
>> SunTrust's hostile actions only reinforce the incompatibility of
"SunTrust's break-up attempt is an act born of desperation that is more
about preventing the formation of a formidable competitor - the new
Wachovia - than about creating value for Wachovia shareholders."
Bud Baker, Chairman & CEO, Wachovia (Letter to shareholders, June 20, 2001)
25
The Market Also Has Spoken
Near Term Premium to First Union Transaction Has Virtually Evaporated
[need to update stock prices and therefore percentages]
- --------------------------------------------------------------------------------
Premium Relative to First Union Transaction(1)
[Bar chart appears here]
1/1/01 5/11/01 7/12/01
21.4% 15.8% 1.5%
Beginning Day Before SunTrust's Today
of the Year Hostile Proposal
(1) Implied value of First Union merger includes impact of $0.48 special
dividend.
26
Agenda
- --------------------------------------------------------------------------------
[ ] The New Wachovia - A Superior Value
- Strategically
- Financially
- From a risk / reward perspective
[ ] Why A Combination with SunTrust Will Not Work
[GRAPHIC] [ ] What Independent Observers Are Saying
[ ] Conclusion
27
What Independent Observers Are Saying
- --------------------------------------------------------------------------------
"First Union / Wachovia is the better combination"
"The five reasons why I favor a First Union / Wachovia combination are as
follows:
1. It's friendly
2. First Union / Wachovia would have a better business mix
3. The cost savings potential in a First Union / Wachovia combination is
greater than in a SunTrust / Wachovia combination
4. First Union would handle the integration of Wachovia better than SunTrust
5. There is more upside in First Union stock..."
- Bankstocks.com Research Report, T. Brown, CEO, Second Curve Capital,
June 4, 2001
"...Wachovia's decision to end discussions with SunTrust in December would
appear to have been the result of a thoughtful assessment of whether the
combination would ultimately add to shareholder value. Wachovia's
management has always seemed to be diligent in its decision-making process,
and it is hard to believe it rushed into a marriage with First Union simply
to get out of SunTrust's clutches. We think the process was a lot more
thoughtful than that..."
" Given the two competing offers are both for stock, and with the bids
fairly close together, shareholders will have to make an assessment about
which deal promises greater long-term returns. Wachovia's now-public doubts
about a SunTrust combination would seem to add an additional layer of risk
to that transaction over and above risks that would have existed if the two
sides had arrived at a friendly deal..."
- Keefe, Bruyette & Woods, Inc., M.P. O'Doherty, May 24, 2001
Note: Permission to use quotes obtained.
28
What Independent Observers Are Saying
- --------------------------------------------------------------------------------
"...We now believe the First Union merger with Wachovia ought to prevail...As
the premium of SunTrust' offer has declined - the deal becomes less about top
price and more about the currency of the acquiror - we like First Union's
currency better..."
"...In our opinion, the total return potential of First Union (over a 12-month
period) is better than the total return of the SunTrust offer ..."
"...the pro forma [SunTrust/Wachovia] company would be limited in its
ability to capture a broader range of financial ...this combination would
revolve around cost savings as a means to drive the bottom line in the
short run and as capital builds, share repurchases would then contribute to
EPS growth. This is not a scenario that drives significant multiple
expansion..."
- Deutsche Banc. Alex Brown Inc., G. Bicher, May 25, 2001
"...We believe that given the lengthy time this is bound to drag out, STI
shares will have limited upside potential until some ...The increase [in STI's
bid] would have to be significant to make an investment in WB attractive enough
to overcome the potential downward move in STI's stock price (eroding the
higher purchase price again), as well as the time value of money...FTU shares,
on the other hand, look attractive...We believe institutional shareholders
would look at the value they would receive in FTU stock today versus the
possibility of STI being successful in a hostile transaction..."
- Sandler O'Neill & Partners LP, K. Blecher, May 24, 2001
Note: Permission to use quotes obtained.
29
What Independent Observers Are Saying
- --------------------------------------------------------------------------------
"...Based on our discussion with WB Management it is evident that they are
committed to the merger of equals with First Union and that is an integral step
in advancing WB toward its goal of becoming a Regional Ruler... WB and FTU
complement each others strengths and weaknesses..."
- Lehman Brothers, H. Dickson, May 29, 2001
"...The second point raised by Wachovia is that a combination with First Union
would result in stronger performance near ...It does seem likely that a
Wachovia/First Union combination would generate higher ..."
"...Both companies have exactly the same goals, which are to maximize wealth
management programs, increase investment banking activities and develop new
approach to retail banking that will increase the yields on this business.
Operating together, they are more likely to be successful than as competitors in
the same geographic region... move is a brilliant stroke that will yield
Wachovia shareholders significant benefits despite the fact that the premium
paid for the acquisition is relatively low..."
- Raymond James & Associates, R. , April 16 - May 23, 2001
"...Although this merger is likely to increase the short-term operating risk
associated with the newly formed company, in the longer term, we believe the
prospects for both banks have been greatly improved. The relatively low deal
premium allows for an attractive return for shareholders..."
- Friedman, Billings, Ramsey & Co. Inc., J.B. ,April 17, 2001
Note: Permission to use quotes obtained.
30
Agenda
- --------------------------------------------------------------------------------
[ ] The New Wachovia - A Superior Value
- Strategically
- Financially
- From a risk / reward perspective
[ ] Why A Combination with SunTrust Will Not Work
[ ] What Independent Observers Are Saying
[GRAPHIC] [ ] Conclusion
31
The New Wachovia - A Compelling Story
WB's Due Diligence Focused on FTU's Core Earnings Growth Trends
- --------------------------------------------------------------------------------
Benefits of First Union's restructuring efforts are being realized and outlook
for earnings is strong
[GRAPHIC]
Our Questions Were Consistent with Those Of The Market
>> Focus of due diligence was on:
- Core underlying growth trends
- Quality of earnings
- Credit quality and adequacy of reserves
[GRAPHIC]
Our Conclusion Was Unambiguous
>> First Union has turned the corner:
- Restructuring essentially complete
- Core earnings demonstrably trending upwards
- Revenue momentum building
- 2nd quarter 2001 earnings above investors' expectations
- Impact of growth engines being recognized
- All prior transactions are fully integrated
32
First Union Has Significant Core Earnings
Momentum
Impact of Restructuring Essentially Completed [need to confirm reported for 2Q
and projections going forward based on revised Street consensus as appropriate]
- --------------------------------------------------------------------------------
[X] Core EPS [-] Reported EPS [+] Projected Core EPS
[Bar chart appears here]
1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01
$0.85(X) $0.73(X) $0.71(X) $0.69(X) $0.63(X) $0.66(X) $0.65+ $0.67+
$0.68- $0.62- $0.58- $0.59- $0.62- Projected
Source: Wachovia due diligence and current Street estimates.
NOTE: 2Q01 earnings exceeded street consensus of $0.63
33
[GRAPHIC]
Market Starting to See What We Saw
First Union Stock Significantly Outperforming SunTrust Stock in 2001
[need to update stock prices and therefore percentages!!!]
- --------------------------------------------------------------------------------
YTD Price Performance
(Through July 12, 2001)
24% 4% Our Expectations Were On Target
[First Union logo] [SunTrust Logo] (STI Premium Relative to FTU Transaction)(1)
[GRAPHIC] 21.4% 15.8 1.6%
1/1 5/11 7/12
Beginning Day before Today
of the year hostile proposal
YTD Price Performance Prior
To Respective Announcements
15% 2%
[First Union Logo] [SunTrust Logo]
(1) Includes value of the $0.48 special dividend.
34
[GRAPHIC]
SunTrust "Premium" Illusory
Cannot Look at Premium in Stock Transaction at a Single Point in Time
[need to update numbers and footnote]
- --------------------------------------------------------------------------------
[GRAPHIC] [GRAPHIC}
Last 360 Days(1) (check) Current First Union valuation
believed to be adversely impacted
187 Days When the New Wachovia Transaction by arbitrage investors
Was Worth More
(check) The new Wachovia transaction
173 Days When the SunTrust Proposal Was worth more (on average) over last
Worth More 360 days
(check) Current implied premium of approximately
1.6% in SunTrust proposal insignificant
(1) Based on last 360 trading days as of July 12, 2001.
35
[GRAPHIC]
[GRAPHIC]
The New Wachovia
We Believe the New Wachovia is Superior for Shareholders
- --------------------------------------------------------------------------------
>> Longer term, we believe the new Wachovia provides significantly greater
upside
- Superior franchise
- Greater upside for P/E ratio
- Considerably lower risk
>> SunTrust proposal not financially attractive to Wachovia shareholders
- No appreciable premium, less growth long term
- Is a proposal, not a transaction
>> SunTrust alternative has been fully reviewed and repeatedly rejected
36
The New Wachovia
We Believe the New Wachovia is Superior for Employees
- --------------------------------------------------------------------------------
>> Less disruption
- Mergers of equals approach employee displacement differently than
hostile takeovers
- Extended integration period allows a gradual, deliberate process
- No branches will close in the first year
- We expect much of the headcount reduction to occur through normal
attrition
>> Greater prospective career opportunities
- The new Wachovia will be a growing, dynamic company
- The new Wachovia is positioned to be a dominant player in its
industry
37