EX-19 5 g76239ex19.txt WACHOVIA'S 1ST QUARTER 2002 FINANCIAL SUPPLEMENT W A C H O V I A C O R P O R A T I O N A N D S U B S I D I A R I E S ------------------------------------------------------------------------------- First Quarter 2002 Management's Analysis of Operations Quarterly Financial Supplement Three Months Ended March 31,2002 [WACHOVIA LOGO] WACHOVIA WACHOVIA CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL SUPPLEMENT THREE MONTHS ENDED MARCH 31, 2002 TABLE OF CONTENTS
--------------------------------------------------------------------------------------------------------------------------- PAGE --------------------------------------------------------------------------------------------------------------------------- Financial Highlights 1 Management's Analysis of Operations 2 Selected Statistical Data 25 Summaries of Income, Per Common Share and Balance Sheet Data 26 Merger-Related and Restructuring Charges 27 Business Segments 28 Fee and Other Income - Corporate and Investment Bank 36 Selected Ratios 37 Securities 38 Loans - On-Balance Sheet, and Managed and Servicing Portfolios 39 Loans Held for Sale 40 Allowance for Loan Losses and Nonperforming Assets 41 Nonaccrual Loan Activity 42 Goodwill and Other Intangible Assets 43 Deposits 44 Time Deposits in Amounts of $100,000 or More 45 Long-Term Debt 46 Changes in Stockholders' Equity 47 Capital Ratios 48 Risk Management Derivative Financial Instruments 49 Risk Management Derivative Financial Instruments - Expected Maturities 51 Risk Management Derivative Financial Instruments Activity 52 Net Interest Income Summaries - Five Quarters Ended March 31, 2002 53 Consolidated Condensed Statement of Income 55 Consolidated Statements of Operating Earnings - Five Quarters Ended March 31, 2002 56 Consolidated Balance Sheets 57 Consolidated Statements of Income (Loss) - Five Quarters Ended March 31, 2002 58 Consolidated Statements of Cash Flows 59
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ----------------------- Percent Increase (Dollars in millions, except per share data) 2002 2001 (Decrease) ----------------------------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS OPERATING EARNINGS Net interest income (Tax-equivalent) $ 2,477 1,734 43 % Fee and other income 2,027 1,546 31 ------------------------------------------------------------------------------------------------------- Total revenue (Tax-equivalent) 4,504 3,280 37 Provision for loan losses 339 219 55 Noninterest expense 2,777 2,138 30 Income taxes (Tax-equivalent) 480 313 53 ------------------------------------------------------------------------------------------------------- Income before merger-related, restructuring and other charges/gains (Operating earnings) 908 610 49 After-tax merger-related, restructuring and other charges/gains 5 (26) - ------------------------------------------------------------------------------------------------------- Net income 913 584 56 Dividends on preferred stock 6 - - ------------------------------------------------------------------------------------------------------- Net income available to common stockholders (As reported) $ 907 584 55 % ================================================================================================================= DILUTED EARNINGS COMMON PER SHARE Income before merger-related, restructuring and other charges/gains $ 0.66 0.62 6 % Net income $ 0.66 0.59 12 % ================================================================================================================= PROFITABILITY (OPERATING EARNINGS) Return on average common stockholders' equity 12.68 % 15.64 - Net interest margin 3.90 3.42 - Fee and other income as % of total revenue 45.00 47.13 - Overhead efficiency ratio 61.66 65.18 - Effective income tax rate 32.09 % 31.54 - ================================================================================================================= CASH OPERATING EARNINGS Net income $ 1,016 684 49 % Diluted earnings per common share $ 0.74 0.69 7 % Return on average tangible common stockholders' equity 25.30 % 22.91 - Return on average common stockholders' equity 14.19 17.52 - Overhead efficiency ratio 57.93 % 62.80 - Operating leverage $ 42 (67) - % ================================================================================================================= PERIOD-END BALANCE SHEET DATA Securities $ 57,382 51,528 11 % Loans, net 162,294 122,853 32 Total assets 319,853 252,949 26 Total deposits 180,033 140,795 28 Long-term debt 39,936 36,092 11 Stockholders' equity $ 28,785 16,081 79 % ================================================================================================================= CAPITAL ADEQUACY Tier I capital ratio 7.49 % 7.18 - Total capital ratio 11.56 11.33 - Leverage ratio 6.51 % 5.88 - ================================================================================================================= ASSET QUALITY Allowance as % of loans, net 1.84 % 1.43 - Allowance as % of nonperforming assets 162 132 - Net charge-offs as % of average loans, net 0.83 0.53 - Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale 1.21 % 1.30 - ================================================================================================================= OTHER DATA Employees 82,809 69,362 19 % Financial centers 3,362 2,695 25 ATMs 4,618 3,676 26 Common shares outstanding (In millions) 1,368 981 39 Common stock price $ 37.08 33.00 12 Book value per common share 21.04 16.39 28 Common stock price to book value 176 201 (12) Market capitalization 50,716 32,382 57 Dividends paid per common share $ 0.24 0.24 - % =================================================================================================================
1 WACHOVIA [WACHOVIA LOGO] The following discussion and other portions of this Quarterly Report contain various forward-looking statements. Please refer to our 2002 First Quarter Report on Form 10-Q for a discussion of various factors that could cause our actual results to differ materially from those expressed in such forward-looking statements. In addition, please refer to our 2001 Annual Report on Form 10-K for further information related to our accounting policies, off-balance sheet profile, and risk governance and administration. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- Wachovia's results for the first quarter of 2002 reflect the merger of First Union and the former Wachovia, which closed on September 1, 2001. Because this merger was accounted for under the purchase method of accounting, periods prior to September 1, 2001, have not been restated. Therefore, combined results are presented only from September 1, 2001, and results in the first quarter a year ago include only First Union.
--------------------------------------------------------------------------------------------------------------------------- SUMMARY OPERATING RESULTS 2002 2001 ------------ ------------------------------------------------ FIRST Fourth Third Second First (In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- OPERATING EARNINGS Net interest income (a) $ 2,477 2,484 1,974 1,742 1,734 Fee and other income 2,027 2,060 1,036 1,629 1,546 --------------------------------------------------------------------------------------------------------------------------- Total revenue (a) 4,504 4,544 3,010 3,371 3,280 Provision for loan losses 339 381 244 223 219 Noninterest expense, excluding goodwill and other intangible amortization 2,609 2,691 2,193 2,092 2,060 Goodwill and other intangible amortization 168 251 117 77 78 Income taxes (a) 480 422 158 330 313 --------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 908 799 298 649 610 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common stockholders $ 907 730 (334) 633 584 Cash operating earnings (b) 1,016 980 395 723 684 PER DILUTED COMMON SHARE Net income (loss) 0.66 0.54 (0.31) 0.64 0.59 Operating earnings 0.66 0.58 0.27 0.66 0.62 Cash operating earnings (b) $ 0.74 0.71 0.36 0.73 0.69 RATIOS Operating return on average common equity 12.68 % 10.77 5.77 16.19 15.64 Cash operating return on average tangible common stockholders' equity (b) 25.30 % 23.56 11.36 23.35 22.91 --------------------------------------------------------------------------------------------------------------------------- (a) Tax-equivalent. (b) Cash operating earnings are reported net income excluding after-tax net merger-related, restructuring and other charges and gains and exclude deposit base intangible, goodwill and other intangible amortization. ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATING RESULTS Wachovia reported net income available to common stockholders of $907 million, or 66 cents per share, in the first quarter of 2002, and $584 million, or 59 cents per share, in the first quarter of 2001. Merger-related and restructuring charges were more than offset by gains on the sale of divested First Union branch offices in the first quarter of 2002, resulting in a net after-tax gain of $5 million. In the first quarter of 2001, after-tax net merger-related, restructuring and other charges amounted to $26 million, or 3 cents per share. Included in the net charge were branch sale gains of $44 million after tax from the divestiture of 26 branch offices in connection with the 2000 strategic repositioning. Operating earnings, which exclude the net merger-related, restructuring and 2 other charges, were $908 million, or 66 cents per share, in the first quarter of 2002 and $610 million, or 62 cents per share, in the first quarter of 2001. Cash operating earnings, which exclude goodwill and other intangible amortization as well as the net merger-related, restructuring and other charges, were $1.0 billion, or 74 cents per share, in the first quarter of 2002 and $684 million, or 69 cents per share, in the first quarter of 2001. See Merger-Related and Restructuring Charges for further information. On an operating basis, total revenue of $4.5 billion in the first quarter of 2002 rose 37 percent from the first quarter of 2001, the majority of which came from a $743 million increase in net interest income due to additional earning assets from the former Wachovia, wider spreads resulting from declines in interest rates, growth in low-cost core deposits and declines in higher-cost deposit products such as certificates of deposit and other time deposits. Fee and other income of $2.0 billion in the first quarter of 2002 reflected a $481 million increase from the first quarter of 2001, largely due to the addition of the former Wachovia. Otherwise, a weak economic environment dampened growth in market-related revenue, particularly in principal investing, which had a $90 million net loss in the first quarter of 2002 and a $43 million net loss in the first quarter of 2001, a result of market value write-downs in both quarters. On an operating basis, noninterest expense was $2.8 billion in the first quarter of 2002, an increase of 30 percent from the first quarter of 2001, primarily reflecting the addition of expenses from the former Wachovia, as well as amortization of intangibles recorded in connection with the merger. This was offset by expense efficiencies connected with merger integration and expense control initiatives. On an operating basis, the provision for loan losses increased $120 million from the first quarter of 2001 to $339 million in the first quarter of 2002, reflecting the impact of integrating the two loan portfolios as a result of the merger, as well as a weakening economic environment. The provision in the first quarter of 2002 included $14 million in connection with loans sold or transferred to loans held for sale. Net charge-offs were $325 million, or 0.83 percent of loans, in the first quarter of 2002 and $159 million, or 0.53 percent of loans, in the first quarter of 2001. Nonperforming assets, including those in loans held for sale, increased $376 million from the first quarter of 2001 to $2.1 billion in the first quarter of 2002 largely due to the addition of nonperforming assets from the former Wachovia, troubled credits in Argentina, the telecommunications sector, the energy services-related sector and a single credit in the retail sector. As a percentage of net loans, foreclosed properties and loans held for sale, nonperforming assets were 1.21 percent at March 31, 2002, a decline of 9 basis points from 1.30 percent at March 31, 2001. Improvement in key measures underscored progress in meeting financial performance objectives. A strengthened balance sheet led to an improved Tier 1 capital ratio of 7.49 percent in the first quarter of 2002 compared with 7.18 percent in the first quarter of 2001. On a cash operating basis, the overhead efficiency ratio improved from 62.8 percent in the first quarter of 2001 to 57.9 percent in the first quarter of this year, reflecting strict cost control and merger efficiencies. This was the lowest overhead efficiency ratio since the third quarter of 1999. FIRST UNION-WACHOVIA MERGER The merger of the former Wachovia and First Union closed on September 1, 2001, and the combined company adopted the name "Wachovia Corporation." The merger was accounted for under the purchase method of accounting, and accordingly, the results in 2001 include a full year of First Union and four months of the former Wachovia. In connection with the merger, shareholders of the former Wachovia received two First Union shares for each former Wachovia common share and were also given the right to choose either a one-time cash payment of 48 cents per common share of the former Wachovia or two shares of a new class of preferred shares, which pays dividends equal to the difference between the last dividend paid by the former Wachovia of 30 cents per share and the common stock dividend declared by the combined company. This dividend will cease once Wachovia's total dividends paid to common stockholders for four consecutive quarters equal at least $1.20 per common share. 3 The merger integration is progressing well and much has already been achieved. By the end of the first quarter of 2002: o Three-quarters of employee selections had been finalized. o More than 30 percent of major systems-related activities had been completed, including conversion of systems related to human resources, payroll and benefits, accounts payable, fixed assets, and purchasing. o Nearly 170,000 hours out of 1.5 million hours of planned product and system training for financial center personnel was conducted. o $150 million of expense efficiencies across all segments were achieved in the quarter. In addition, in the second quarter of 2002: o Our two principal banking subsidiaries, First Union National Bank and Wachovia Bank, N.A., were combined on April 1, 2002, and renamed Wachovia Bank, N.A. o Integrated systems testing for regional deposit conversions will begin. o 400,000 additional hours of product and system training for financial center personnel is scheduled to be completed. o Brokerage and mortgage banking conversions and additional investment banking conversions are scheduled to be completed. The March 31, 2002, consolidated balance sheet includes the assets and liabilities of the former Wachovia, which were recorded at their respective fair values as of September 1, 2001. Certain fair values are preliminary and are subject to refinement as information relative to the fair values as of September 1, 2001, becomes available and as plans relative to the disposition of certain assets are finalized. Based on the former Wachovia ending tangible assets of $70 billion, liabilities of $64 billion and tangible equity of $5.5 billion, an aggregate purchase price of $13.0 billion and net purchase accounting adjustments of $2.1 billion, the merger resulted in total intangible assets of $9.6 billion. Of the $9.6 billion, $1.9 billion was assigned to deposit base intangible and $340 million was assigned to other intangibles, primarily related to the customer relationships and trade name of the former Wachovia. Under new accounting standards that were effective on July 1, 2001, the $7.3 billion of goodwill recorded in connection with this merger is not subject to amortization. Deposit base and customer relationship intangibles are being amortized using accelerated methods and the trade name intangible, because of its indefinite life, is not subject to amortization. More information is in the Accounting and Regulatory Matters section. In the first quarter of 2002, additional goodwill associated with the Wachovia merger of $103 million was recorded. In the first quarter of 2002, we obtained additional information relative to the fair values of certain assets and liabilities of the former Wachovia that resulted in refinements to the initial estimates. Also included in these refinements was an adjustment to reflect the final disposition of the former Wachovia credit card portfolio. These adjustments resulted in a net increase to goodwill of $49 million. Additionally, in the first quarter of 2002, we recorded $84 million in exit costs of the former Wachovia including employee termination costs, facilities-related cost and branch sale gains of $53 million. 4 OUTLOOK We made excellent progress in the first quarter of 2002 in meeting our corporate objectives of quality earnings growth, improved customer service, tight expense control and a strengthened balance sheet. This performance built solid momentum for future growth with merger integration progressing well and customer relationship enhancement initiatives under way. While the pace of economic growth in the rest of 2002 is uncertain, we expect modest revenue growth, flat expenses unless a market rebound leads to higher incentive compensation, continued upward pressure on nonperforming assets, stable margins and continued improvement in capital ratios. In addition we continue to target a dividend payout ratio of 30 percent to 35 percent of cash earnings. We have optimism for the future due to the strategies in place and demographic trends that favor our core businesses of the General Bank, Capital Management, Wealth Management and the Corporate and Investment Bank. Despite a seasonally weak first quarter, the General Bank continued to build momentum with a strong increase in low-cost core deposits and record sales of consumer and small business loans. Our Corporate and Investment Bank, Capital Management and Wealth Management businesses also performed well relative to trends in their respective industries in light of the challenging financial markets. We will continue to evaluate our operations and organizational structures to ensure they are closely aligned with our goal of maximizing performance through increased efficiency and competitiveness in our four core businesses. When consistent with our overall business strategy, we may consider the disposition of certain assets, branches, subsidiaries or lines of business. We continue to routinely explore acquisition opportunities in areas that would complement our core businesses, and frequently conduct due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities could occur. CORPORATE RESULTS OF OPERATIONS -------------------------------------------------------------------------------- MERGER-RELATED AND RESTRUCTURING CHARGES We are finalizing and executing a number of plans to integrate the operations of First Union and the former Wachovia. Certain costs of the merger integration, such as employee termination benefits for employees of First Union and system integration costs, are recorded as merger-related and restructuring charges in the consolidated statements of income. The merger-related and restructuring charges in the consolidated statements of income will continue to be recognized throughout our previously announced three-year integration period. Additionally, in accordance with the purchase method of accounting, certain other costs associated with the integration plans, such as employee termination benefits for employees of the former Wachovia, are treated as adjustments to goodwill. We expect to finalize all integration plans that would affect goodwill by the end of the third quarter of 2002. In the first quarter of 2002, we recorded a net gain of $8 million in net merger-related and restructuring charges. This included $113 million of charges offset by $121 million in gains from the sale of 27 First Union branch offices. These charges primarily consisted of systems conversion, occupancy and equipment and employee termination costs. In the first quarter of 2002, we recorded a net $84 million of purchase accounting adjustments that included employee termination benefits and facility integration cost of $137 million and $53 million in gains on the sale of 10 former Wachovia branch offices. Total employee termination benefits, including purchase accounting adjustments and merger related and restructuring charges, were $81 million in the first quarter of 2002, and included severance payments and related benefits for 2,505 employees. Of the terminated employees in the first quarter of 2002, 53 percent were from staff support areas within the 5 Parent segment, 28 percent were from the General Bank segment, 4 percent were from the Corporate and Investment Bank segment, 7 percent were from the Capital Management segment and 8 percent were from the Wealth Management segment. Since the consummation of the merger on September 1, 2001, $244 million of employee termination benefits have been recorded representing 3,745 employee terminations. Of the $244 million, $102 million was recorded as merger-related and restructuring charges and $142 million was recorded as a purchase accounting adjustment. Through March 31, 2002, we have paid $45 million in employee termination benefits recorded as restructuring charges and $49 million as purchase accounting adjustments, leaving $57 million and $93 million from the restructuring charges and purchase accounting adjustments, respectively, for future payments. The rest of this discussion of Corporate Results of Operations is on an operating basis, and accordingly, excludes these merger-related and restructuring charges. For information related to merger-related and restructuring charges, see the Consolidated Condensed Statements of Income and Merger-Related and Restructuring Charges tables.
-------------------------------------------------------------------------------------------------------------------------- AVERAGE BALANCE SHEET AND INTEREST RATES 2002 2001 ----------------------- ------------------------------------------------ FIRST QUARTER Fourth Quarter First Quarter ----------------------- ------------------------------------------------ AVERAGE Average Average (In millions) BALANCE RATE Balance Rate Balance Rate -------------------------------------------------------------------------------------------------------------------------- Interest-bearing bank balances $ 4,341 2.07 % $ 3,333 2.50 % $ 1,826 5.69 % Federal funds sold 12,020 3.13 11,784 3.32 7,036 5.49 Trading account assets 14,703 4.53 14,552 4.81 13,315 6.24 Securities 56,287 6.29 55,708 6.49 50,417 7.50 Commercial loans 99,489 6.62 102,230 7.17 77,270 8.51 Consumer loans 57,575 7.16 60,609 7.49 42,580 8.63 -------------------------------------------------------------------------------------------------------------------------- Total loans 157,064 6.82 162,839 7.29 119,850 8.55 -------------------------------------------------------------------------------------------------------------------------- Other earning assets 11,073 5.13 11,668 6.11 11,276 8.96 -------------------------------------------------------------------------------------------------------------------------- Total earning assets 255,488 6.24 259,884 6.68 203,720 8.03 -------------------------------------------------------------------------------------------------------------------------- Interest-bearing deposits 140,400 2.64 142,430 3.11 110,239 4.61 Federal funds purchased 31,940 2.68 33,028 3.59 25,005 6.13 Commercial paper 3,435 1.15 3,709 3.07 2,540 5.32 Other short-term borrowings 10,550 2.51 9,617 1.86 9,580 3.46 Long-term debt 41,057 2.69 42,979 3.64 36,631 6.30 -------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 227,382 2.63 231,763 3.22 183,995 5.10 -------------------------------------------------------------------------------------------------------------------------- Net interest income and margin $ 2,477 3.90 % $ 2,484 3.81 % $ 1,734 3.42 % --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND MARGIN Net interest income on a tax-equivalent basis increased 43 percent from the first quarter of 2001 to $2.5 billion in the first quarter of 2002. The net interest margin, which is the difference between the tax-equivalent yield on earning assets and the equivalent rate paid to fund those assets, increased to 3.90 percent in the first quarter of 2002 from 3.42 percent in the first quarter of 2001. The increase in net interest income and in the margin was due to the lower interest rate environment, an increase in the proportion of low-cost core deposits and the addition of earning assets from the former Wachovia. These benefits were offset by the sale and securitization of home equity loans as well as branch divestitures that took place in the first quarter of 2001. Our interest rate risk position is such that we benefit in a declining rate environment as our liabilities reprice more quickly than assets. The average federal funds rate declined 345 basis points year over year. The contribution of hedge-related derivative income to the net interest margin increased from 14 basis points in the first quarter of 2001 to 47 basis points in the first quarter of 2002. In order to maintain our targeted interest rate risk profile, derivatives are used to hedge the repricing risk inherent in our assets and liabilities. In a declining rate environment, an increase in the contribution of derivatives, primarily interest rate swaps on fixed rate debt, fixed rate consumer deposits and floating rate loans, offsets declining net interest income 6 from our assets and liabilities. Subsequent to the April 18, 2002, announcement of first quarter 2002 earnings results, we adjusted certain 2002 amounts within interest income and interest expense with no impact on the net interest margin. The Risk Governance and Administration section provides additional information on our methodology for interest rate risk management. Premiums and discounts that resulted from recording the interest-earning assets and the interest-bearing liabilities of the former Wachovia at their respective fair values at September 1, 2001, are being accreted and amortized using a method that results in a constant effective yield over the terms of the assets and liabilities. This net accretion increased net interest income by $84 million, or 13 basis points in the first quarter of 2002. The projected increase in net interest income of net accretion related to these premiums and discounts for the rest of 2002 is $180 million. The average rate on earning assets declined 179 basis points from the first quarter of 2001 to 6.24 percent in the first quarter of 2002 and the average rate on interest-bearing liabilities decreased 247 basis points from the first quarter of 2001 to 2.63 percent in the first quarter of 2002.
-------------------------------------------------------------------------------------------------------------------------- FEE AND OTHER INCOME - OPERATING BASIS 2002 2001 ------------ ----------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------- Service charges and fees $ 661 672 541 486 468 Commissions 464 448 356 389 375 Fiduciary and asset management fees 477 478 400 384 381 Advisory, underwriting and other investment banking fees 240 223 177 238 198 Principal investing (90) (21) (585) (58) (43) Other income 275 260 147 190 167 -------------------------------------------------------------------------------------------------------------------------- Total fee and other income $ 2,027 2,060 1,036 1,629 1,546 --------------------------------------------------------------------------------------------------------------------------
FEE AND OTHER INCOME On an operating basis, fee and other income was $2.0 billion in the first quarter of 2002, an increase of 31 percent from the first quarter of 2001, largely due to fee and other income from the former Wachovia. Service charges and fees increased 41 percent from the first quarter of 2001 to $661 million in the first quarter of 2002 due to the addition of the former Wachovia. Commissions, which include brokerage and insurance commissions, increased 24 percent to $464 million in the first quarter of 2002. Growth was primarily due to the former Wachovia and modest organic growth in a weakened trading environment. Fiduciary and asset management fees increased 25 percent from the first quarter of 2001 to $477 million, primarily due to increased asset management fees related to growth in mutual fund assets under management and to the addition of fee income from the former Wachovia. Advisory, underwriting and other investment banking fees increased 21 percent to $240 million primarily due to strength in the fixed income businesses in the Corporate and Investment Bank. Growth in first quarter 2002 advisory, underwriting and other investment banking fees was offset by $42 million of losses in connection with the purchase of $361 million of assets from our commercial paper conduit pursuant to a credit enhancement agreement between Wachovia and the conduit. Principal investing, which includes the results of investments in equity and mezzanine securities, experienced losses of $90 million in the first quarter of 2002 and $43 million in the first quarter of 2001. Other income, including results from portfolio securities transactions and asset sales and securitizations, increased $108 million from the first quarter of 2001 to $275 million in the first quarter of 2002. Portfolio securities transactions resulted in a net loss of $6 million in the first quarter of this year, including impairment losses of $45 million offset by realized gains of $39 million. Income from investments classified as other assets increased $49 million primarily due to additions from the former Wachovia. In the first quarter of 2001, portfolio securities transactions resulted in a net loss of $16 million, including impairment losses of 7 $37 million. Other securitization income included $47 million related to home equity sales and securitizations in the first quarter of 2002. There were no home equity sales and securitizations in the first quarter of 2001. Net gains from sales of loans held for sale offset by market value adjustments were $21 million in the first quarter of 2002 compared with a net loss of $10 million in the first quarter of 2001. Mortgage banking income in the first quarter of 2002 increased $21 million from the first quarter of 2001. Other income in the first quarter of 2001 included a $75 million gain in connection with the sale of Star Systems, Inc.
---------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE - OPERATING BASIS 2002 2001 ------------ ------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits $ 1,663 1,663 1,374 1,363 1,329 Occupancy 195 210 176 155 163 Equipment 226 247 214 198 205 Advertising 19 21 15 11 9 Communications and supplies 134 142 117 111 110 Professional and consulting fees 88 113 79 69 73 Sundry expense 284 295 218 185 171 --------------------------------------------------------------------------------------------------------------------------- Noninterest expense, excluding goodwill and other intangible amortization 2,609 2,691 2,193 2,092 2,060 Goodwill and other intangible amortization 168 251 117 77 78 --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense $ 2,777 2,942 2,310 2,169 2,138 ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE On an operating basis, noninterest expense increased 30 percent from the first quarter of 2001 to $2.8 billion in the first quarter of 2002, due to the addition of expenses related to the former Wachovia and increased amortization related to intangibles recorded in connection with the merger. This increase was partially offset by a reduction in expenses as a result of expense control initiatives, merger efficiencies and the elimination of goodwill amortization. The Accounting and Regulatory Matters-Business Combinations section has further information related to goodwill and other intangible assets. On a cash operating basis, the overhead efficiency ratio improved 487 basis points from the first quarter of 2001 to 57.9 percent in the first quarter of 2002 primarily due to expense control programs and merger efficiencies. BUSINESS SEGMENTS -------------------------------------------------------------------------------- Our segment reporting reflects the results of our four core business segments, the General Bank, Capital Management, Wealth Management, the Corporate and Investment Bank, plus the Parent. We use a management reporting model that includes methodologies for funds transfer pricing, allocations of economic capital, expected losses and cost transfers. Under this platform, intersegment revenues are paid by a segment to the segment that distributes or services the product. The amount of the referral fee is based on comparable fees paid in the market or negotiated amounts that approximate the value provided by the selling segment. Cost transfers are made for services provided by one segment to another. Activity-based costing studies are continually being refined to better align expenses with products and their revenues. We continuously assess the assumptions, methodologies and reporting classifications to better reflect the true economics of our business segments. Several significant refinements were made in 2002. An area of particular focus was the methodologies and assumptions used in deriving the level of economic capital attributed to each business segment. As a matter of practice, most changes to our capital assumptions and methodologies are made on an annual basis consistent with our internal planning process. Accordingly, economic capital changes can be 8 more significant in the first quarter of any year. In the first quarter of 2002, we reduced the cost of capital charge to 11 percent compared with 12 percent in 2001, primarily as a result of the lower interest rate environment. In 2002 there were significant changes made to the assumptions driving two of our economic capital components, credit risk capital and operating risk capital. For credit risk capital, we increased the assumed "cycle-neutral" one year default probabilities for our lower quality assets and raised our desired confidence interval to be consistent with Wachovia's "AA" targeted debt rating. The impact of these changes was partially offset by a reduction in some default probabilities greater than one year but still caused more credit capital to be attributed to the Corporate and Investment Bank segment. For operating risk capital, we revised our allocation techniques to require more capital for business lines with the potential for more volatile earnings. This also increased the capital requirements for the Corporate and Investment Bank segment. In addition to these changes, certain management accounting practices can affect economic capital in the business segments. In 2002 we modified the way certain fixed assets are reported causing economic capital to decrease for some segments (primarily Capital Management and Wealth Management) and to increase in the Parent. The fourth quarter of 2001 was restated to reflect the modifications to economic capital and fixed asset allocation methodologies described above. The impact to the fourth quarter operating earnings of the business segments as a result of these methodology modifications was immaterial with the exception of the Corporate and Investment Bank and Parent, as reflected in the restated fourth quarter results. Operating earnings for the Corporate and Investment Bank increased by $25 million offset by a decrease of $25 million in the Parent. In 2002 for segment reporting purposes we also changed the way we report tax credits for historic and low income housing. In past quarters, the write-downs associated with the business were recorded as fee income and the associated tax credits were in income taxes. We now report the write-downs net of the related tax benefit in fee and other income. Results for 2001 have been restated to reflect this change. This is consistent with the reporting of other tax-preferred items. The following discussion of segment results is on an operating basis, and accordingly, excludes net merger-related and restructuring charges. 9
--------------------------------------------------------------------------------------------------------------------------- GENERAL BANK - OPERATING BASIS PERFORMANCE SUMMARY 2002 2001 ------------- ------------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Net interest income (Tax-equivalent) $ 1,649 1,642 1,270 1,133 1,079 Fee and other income 498 578 434 378 333 Intersegment revenue 40 45 29 27 25 --------------------------------------------------------------------------------------------------------------------------- Total revenue (Tax-equivalent) 2,187 2,265 1,733 1,538 1,437 Provision for loan losses 115 130 97 98 100 Noninterest expense 1,205 1,239 1,011 922 891 Income taxes (Tax-equivalent) 317 327 219 176 155 --------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 550 569 406 342 291 --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- Performance and other data Economic profit $ 392 412 280 255 220 Risk adjusted return on capital (RAROC) 40.07 % 42.56 36.95 39.86 37.44 Economic capital, average $ 5,473 5,356 4,446 3,675 3,507 Cash overhead efficiency ratio 55.12 % 54.70 57.80 59.00 61.02 Average loans, net $ 98,030 97,004 76,383 65,240 63,107 Average core deposits $ 136,096 133,996 109,656 98,429 97,421 ---------------------------------------------------------------------------------------------------------------------------
GENERAL BANK Our General Bank provides customized deposit and lending products, comprehensive commercial lending and commercial real estate solutions, and integrated investment products and services through two major lines of business: (1) Retail and Small Business and (2) Commercial. Our strategic focus is on providing exceptional customer service combined with leveraging in-depth customer knowledge to retain and acquire customers, and to deepen and enhance relationships through tailored products and services. Our retail strategy is to reduce the number of single-service customers and to increase the proportion of our customers who save, invest and borrow as well as conduct deposit transactions with us. Our wholesale strategy is to provide a comprehensive array of financial solutions, including traditional commercial lending, and to provide access to asset management, global treasury management and capital markets products and services through our partnership with Capital Management, Wealth Management and the Corporate and Investment Bank. Our integrated multiple channels enable customers to have a single view of their accounts and a choice on whether to use our full-service retail financial centers, direct telephone bank, ATMs or the Internet. The General Bank is focused on providing excellent service to customers throughout the merger integration process, growing low-cost core deposits, and improving both loan spreads and efficiency. On an operating basis, General Bank total revenue was $2.2 billion in the first quarter of 2002 and $1.4 billion in the first quarter of 2001. The year over year increase was due primarily to the addition of revenue related to the former Wachovia. Compared with the fourth quarter of 2001, revenue growth in the first quarter of 2002 was dampened by typical seasonal weakness, as seen in lower service charges, and by anticipated declines in mortgage originations from record levels in the fourth quarter of 2001. Net interest income was $1.6 billion in the first quarter of 2002 and $1.1 billion in the first quarter of 2001, reflecting increases in average loans and average core deposits due to the addition of the former Wachovia. In the first quarter of 2002 compared with the fourth quarter of 2001, despite the seasonal weakness, growth in average core deposits was 2 percent and growth in low-cost core deposits was a strong 6 percent; sales of investment products were up 6 percent and originations of prime equity lines, direct loans and small business loans continued to set company records. Loan growth from the fourth quarter of 2001 reflected strength in consumer real estate-secured products and student lending. This growth excludes the impact of $195 million of commercial loans and $206 million of consumer loans divested in connection with branch sales in February 2002. 10 Fee and other income was $498 million in the first quarter of 2002 and $333 million in the first quarter of 2001, with the increase reflecting the addition of the former Wachovia. Declines from the fourth quarter of 2001 reflected lower mortgage volumes and seasonality. Noninterest expense increased to $1.2 billion in the first quarter of 2002 from $891 million in the first quarter of 2001, reflecting the addition of the former Wachovia. Strong expense management and the realization of merger efficiencies were evident in an improved cash overhead efficiency ratio of 55 percent in both the first quarter of 2002 and fourth quarter of 2001, down from 61 percent in the first quarter of 2001.
----------------------------------------------------------------------------------------------------------------------------- CAPITAL MANAGEMENT - OPERATING BASIS PERFORMANCE SUMMARY 2002 2001 ------------- ------------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Net interest income (Tax-equivalent) $ 45 47 32 31 33 Fee and other income 778 782 652 687 678 Intersegment revenue (17) (19) (12) (12) (11) ----------------------------------------------------------------------------------------------------------------------------- Total revenue (Tax-equivalent) 806 810 672 706 700 Provision for loan losses - - - - - Noninterest expense 676 670 573 583 574 Income taxes (Tax-equivalent) 48 51 34 42 44 ----------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 82 89 65 81 82 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- Performance and other data Economic profit $ 64 68 41 59 59 Risk adjusted return on capital (RAROC) 49.95 % 53.14 32.22 42.79 42.91 Economic capital, average $ 669 661 801 768 772 Cash overhead efficiency ratio 83.91 % 82.77 85.24 82.42 82.12 Average loans, net $ 169 337 269 110 129 Average core deposits $ 1,423 1,505 1,535 1,609 1,827 -----------------------------------------------------------------------------------------------------------------------------
CAPITAL MANAGEMENT Our Capital Management Group (CMG) has created a growing and diversified business with a balanced mix of products and multiple channels of distribution. CMG is organized into two major lines of business: Retail Brokerage Services, which includes the retail brokerage and insurance groups; and Asset Management, which includes mutual funds, customized investment advisory services and corporate and institutional trust services. A full line of investment products and services are distributed through multiple channels, including a national retail brokerage branch network, full-service retail financial centers in our East Coast marketplace and online brokerage. On an operating basis, CMG total revenue was $806 million in the first quarter of 2002, an increase of $106 million from the first quarter of 2001 due mainly to the addition of the former Wachovia. First quarter 2002 revenue was relatively stable compared with fourth quarter 2001 revenue of $810 million, as solid sales production through CMG's multiple distribution channels offset the effects of a weak market environment. CMG's operating earnings were flat at $82 million from the first quarter of 2001. Assets under management were $230 billion at March 31, 2002, a 2 percent increase from year-end 2001. In the first quarter of 2002, mutual fund assets grew to $106 billion at March 31, 2002, from $104 billion at year-end 2001 as solid fixed income and money market inflows helped offset the effects of relatively flat equity markets. Brokerage client assets were essentially unchanged at $275 billion at March 31, 2002. 11
--------------------------------------------------------------------------------------------------------------------------- WEALTH MANAGEMENT - OPERATING BASIS PERFORMANCE SUMMARY 2002 2001 ------------- ------------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Net interest income (Tax-equivalent) $ 96 93 61 48 46 Fee and other income 140 136 100 79 79 Intersegment revenue 1 1 - - - --------------------------------------------------------------------------------------------------------------------------- Total revenue (Tax-equivalent) 237 230 161 127 125 Provision for loan losses 1 4 2 - - Noninterest expense 168 160 114 85 84 Income taxes (Tax-equivalent) 25 24 16 13 15 --------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 43 42 29 29 26 --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- Performance and other data Economic profit $ 31 32 20 22 20 Risk adjusted return on capital (RAROC) 49.02 % 50.96 46.24 62.73 62.09 Economic capital, average $ 330 318 237 171 165 Cash overhead efficiency ratio 70.82 % 69.44 71.00 65.81 67.07 Average loans, net $ 8,400 8,148 5,680 4,449 4,368 Average core deposits $ 9,771 9,431 7,313 6,367 6,176 ---------------------------------------------------------------------------------------------------------------------------
WEALTH MANAGEMENT Our Wealth Management Group includes private banking, personal trust, investment advisory services, charitable services, financial planning, insurance brokerage and executive services. Our strategic focus is to provide integrated wealth management services to affluent and ultra-high net worth clients using a team-based approach that promotes continuous and comprehensive client relationships. Wealth Management's strategic partnerships with Capital Management, the General Bank and the Corporate and Investment Bank ensure that a comprehensive array of financial solutions is available to clients across the entire Wachovia franchise. On an operating basis, Wealth Management total revenue of $237 million in the first quarter of 2002 represented a $112 million increase from the first quarter of 2001, reflecting the addition of revenue from the former Wachovia. The increase in expenses year over year similarly was due to the addition of expenses from the former Wachovia. Strong private banking results and insurance commissions drove revenue growth in the first quarter of 2002 compared with the fourth quarter of 2001. Solid increases in both loans and deposits combined with stable spreads resulted in a 3 percent increase in net interest income. Strong momentum in insurance brokerage and deposit account service charges drove a 3 percent increase in fee and other income. Trust fees were slightly lower due to a 3 percent decline in assets under management to $76 billion at March 31, 2002, from year-end 2001. 12
--------------------------------------------------------------------------------------------------------------------------- CORPORATE AND INVESTMENT BANK - OPERATING BASIS PERFORMANCE SUMMARY 2002 2001 ------------- ------------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA Net interest income (Tax-equivalent) $ 597 693 506 479 450 Fee and other income 498 419 (218) 374 354 Intersegment revenue (18) (19) (16) (15) (12) --------------------------------------------------------------------------------------------------------------------------- Total revenue (Tax-equivalent) 1,077 1,093 272 838 792 Provision for loan losses 222 254 126 93 70 Noninterest expense 521 551 483 503 475 Income taxes (Tax-equivalent) 124 107 (129) 82 85 --------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 210 181 (208) 160 162 --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- Performance and other data Economic profit $ 67 34 (358) 6 (3) Risk adjusted return on capital (RAROC) 14.37 % 13.60 (10.46) 12.36 11.82 Economic capital, average $ 8,028 8,262 6,311 6,040 6,235 Cash overhead efficiency ratio 48.57 % 50.54 n/m 59.84 59.79 Average loans, net $ 43,342 46,235 42,070 41,145 42,751 Average core deposits $ 12,766 12,633 10,490 10,200 9,456 ---------------------------------------------------------------------------------------------------------------------------
CORPORATE AND INVESTMENT BANK Our Corporate and Investment Bank offers a range of fixed income and equity products, asset securitization, and strategic advisory and cash management services for large corporate and institutional clients. Our corporate relationship coverage model focuses on ten key industry sectors nationwide: consumer and retail, defense and aerospace, energy, financial services, healthcare, industrial growth and services, media, real estate, telecommunications and technology, and utilities. The Corporate and Investment Bank includes three major lines of business: Corporate Banking, Investment Banking and Principal Investing. Corporate Banking includes large corporate lending, commercial and rail leasing, treasury services, correspondent banking operations and trade services. Investment Banking includes fixed income underwriting, sales, trading and research activities; equity underwriting, sales, trading and research activities; fixed income and equity derivatives; currency risk management; loan syndications; merger and acquisition advisory services; various real estate capital markets products and services; and asset securitization. Principal Investing includes direct investments primarily in private equity and mezzanine securities and investments in funds sponsored by selected private equity and venture capital groups. On an operating basis, Corporate and Investment Bank total revenue of $1.1 billion represented a $285 million increase from the first quarter of 2001 primarily due to the addition of revenue from the former Wachovia. Corporate and Investment Bank results were adversely affected by a $90 million net loss in principal investing results in the first quarter of 2002 and a $43 million net loss in principal investing in the first quarter of 2001. Our principal investing business was negatively affected in the first quarter of 2002 by the significant decline in equity market valuations, particularly in the telecommunications and technology sectors, and the related change in debt and private equity capital availability afforded to venture capital-backed companies. Excluding principal investing, the Corporate and Investment Bank's first quarter 2002 revenue increased 5 percent from the fourth quarter of 2001 despite poor market conditions due to strength in fixed income results. The provision for loan losses increased from the first quarter of 2001 due to the addition of loans from the former Wachovia and losses in the telecommunications and energy services-related sectors. Noninterest expense increased 10 percent from the first quarter of 2001 due to the addition of noninterest expense from the former Wachovia. Compared with the fourth quarter of 2001, noninterest expense declined 5 percent, reflecting merger efficiencies and increased emphasis on expense management. 13 The revenue from the Principal Investing and Investment Banking businesses is typically more volatile than revenues from more traditional banking businesses and can vary significantly from period to period with market conditions. In addition Corporate Banking results may vary significantly from period to period as the credit quality of the loan portfolio changes. PARENT Parent includes all of our asset and liability management functions. The Parent also included: o The goodwill asset, funding cost and in 2001 the associated amortization expense; o Certain revenue items not recorded in the business segments discussed in the Fee and Other Income section; o Certain expenses that are not allocated to the business segments; o Corporate charges; and o The results of First Union's mortgage servicing, The Money Store home equity lending and indirect auto leasing businesses and the credit card portfolios that have been divested or are being wound down. Net interest income in the Parent declined $36 million from the first quarter of 2001 due to continued runoff of divested businesses. Fee and other income increased modestly due to the addition of revenue from former Wachovia corporate investments and asset securitization gains in the first quarter of 2002, while fee and other income in the first quarter of 2001 included a $75 million gain recorded in connection with the sale of Star Systems, Inc. Noninterest expense increased $93 million largely due to incremental deposit base intangible amortization expense as a result of the merger. The Funding Sources and Risk Governance and Administration sections provide information about our funding sources and asset and liability management functions. BALANCE SHEET ANALYSIS -------------------------------------------------------------------------------- SECURITIES The securities portfolio, all of which is classified as available for sale, consists primarily of U.S. Government agency and asset-backed securities. Activity in this portfolio is undertaken primarily to manage liquidity and interest rate risk and to take advantage of market conditions that create more economically attractive returns on these investments. We had securities available for sale with a market value of $57 billion at March 31, 2002, and $58 billion at December 31, 2001. Included in securities available for sale at March 31, 2002, were residual interests with a market value of $878 million, which included a net unrealized gain of $180 million. At December 31, 2001, securities available for sale included residual interests with a market value of $904 million, which included a net unrealized gain of $85 million. These residual interests resulted from the securitization of SBA, student, auto and home equity loans and prime equity lines. In the first quarter of 2002, we securitized certain residential mortgage loans to reduce funding costs, diversify funding sources and achieve more efficient capital levels. Residential mortgage loans of $1.1 billion were swapped for mortgage-backed securities, substantially all of which we retained as securities available for sale. In addition, we securitized and sold $955 million of prime equity lines. Of this amount, $30 million of interest-only residuals were retained. 14
-------------------------------------------------------------------------------------------------------------------------- LOANS - ON-BALANCE SHEET 2002 2001 -------------- ----------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Commercial, financial and agricultural $ 60,385 61,258 63,616 52,516 52,687 Real estate - construction and other 8,137 7,969 7,457 3,060 3,345 Real estate - mortgage 17,186 17,234 17,156 7,964 9,187 Lease financing 22,223 21,958 21,625 16,903 16,625 Foreign 6,920 7,653 7,572 5,920 5,396 -------------------------------------------------------------------------------------------------------------------------- Total commercial 114,851 116,072 117,426 86,363 87,240 -------------------------------------------------------------------------------------------------------------------------- CONSUMER Real estate - mortgage 20,901 22,139 25,466 17,277 17,678 Installment loans 36,073 34,666 35,577 24,597 23,253 Vehicle leasing 345 618 941 1,231 1,640 -------------------------------------------------------------------------------------------------------------------------- Total consumer 57,319 57,423 61,984 43,105 42,571 -------------------------------------------------------------------------------------------------------------------------- Total loans 172,170 173,495 179,410 129,468 129,811 Unearned income 9,876 9,694 9,730 6,976 6,958 -------------------------------------------------------------------------------------------------------------------------- Loans, net (on-balance sheet) $ 162,294 163,801 169,680 122,492 122,853 -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- LOANS - MANAGED PORTFOLIO (Including on-balance sheet) 2002 2001 -------------- ----------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------- Commercial $ 121,629 123,377 125,687 93,016 94,838 Real estate - mortgage 26,636 29,903 29,659 22,196 22,692 Installment loans 63,907 62,402 61,285 50,561 50,216 Vehicle leasing 345 618 941 1,231 1,640 -------------------------------------------------------------------------------------------------------------------------- Total managed portfolio $ 212,517 216,300 217,572 167,004 169,386 --------------------------------------------------------------------------------------------------------------------------
LOANS Net loans were $162 billion at March 31, 2002, down $2 billion from December 31, 2001, due to planned reductions related to portfolio management actions, weak commercial loan demand, and consumer loan sales and securitizations. Commercial loans represented 67 percent and consumer loans 33 percent of the loan portfolio at March 31, 2002. Managed loans were $213 billion at March 31, 2002, and $216 billion at December 31, 2001, with the decline due to consumer loan sales and securitizations. The average rate earned on loans decreased 173 basis points from the first quarter of 2001 to 6.82 percent in the first quarter of 2002, which was in line with reductions in interest rates. 15
--------------------------------------------------------------------------------------------------------------------------- ASSET QUALITY 2002 2001 ------------ ------------------------------------------------ FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- NONPERFORMING ASSETS Nonaccrual loans $ 1,685 1,534 1,506 1,223 1,231 Foreclosed properties 159 179 126 104 106 --------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 1,844 1,713 1,632 1,327 1,337 --------------------------------------------------------------------------------------------------------------------------- as % of loans, net and foreclosed properties 1.14 % 1.04 0.96 1.08 1.09 --------------------------------------------------------------------------------------------------------------------------- Nonperforming loans in loans held for sale $ 213 228 273 250 344 --------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets in loans and in loans held for sale $ 2,057 1,941 1,905 1,577 1,681 --------------------------------------------------------------------------------------------------------------------------- as % of loans, net, foreclosed properties and loans in other assets as held for sale 1.21 % 1.13 1.08 1.23 1.30 --------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES Balance, beginning of period $ 2,995 3,039 1,760 1,759 1,722 Former Wachovia balance, September 1, 2001 - - 766 - - Loan losses, net (325) (378) (243) (157) (159) Allowance relating to loans transferred or sold (23) (47) (368) (65) (23) Provision for loan losses related to loans transferred or sold 14 3 230 36 15 Provision for loan losses 325 378 894 187 204 --------------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 2,986 2,995 3,039 1,760 1,759 --------------------------------------------------------------------------------------------------------------------------- as % of loans, net 1.84 % 1.83 1.79 1.44 1.43 as % of nonaccrual and restructured loans (a) 177 195 202 144 143 as % of nonperforming assets (a) 162 % 175 186 133 132 --------------------------------------------------------------------------------------------------------------------------- LOAN LOSSES, NET $ 325 378 243 157 159 Commercial, as % of average commercial loans 0.97 % 1.19 0.85 0.55 0.56 Consumer, as % of average consumer loans 0.59 0.48 0.53 0.48 0.48 Total, as % of average loans, net 0.83 % 0.93 0.73 0.52 0.53 --------------------------------------------------------------------------------------------------------------------------- PAST DUE LOANS, 90 DAYS AND OVER Commercial, as a % of loans, net 1.49 % 1.38 1.30 1.41 1.31 Consumer, as a % of loans, net 0.70 % 0.62 0.68 0.73 0.93 --------------------------------------------------------------------------------------------------------------------------- (a) These ratios do not include nonperforming loans included in other assets as held for sale. ---------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS At March 31, 2002, nonperforming assets, including nonperforming loans classified as loans held for sale, were $2.1 billion and at December 31, 2001, $1.9 billion. The increase in the first quarter of 2002 was due largely to the bankruptcy of a large retailer and to further deterioration in the telecommunications sector. Nonperforming loans classified as loans held for sale amounted to $213 million in the first quarter of 2002 and $228 million in the fourth quarter of 2001. As a percentage of net loans, foreclosed properties and loans held for sale, nonperforming assets were 1.21 percent at March 31, 2002, and 1.13 percent at December 31, 2001. IMPAIRED LOANS Impaired loans, which are included in nonperforming loans, amounted to $1.6 billion at March 31, 2002, and $1.5 billion at December 31, 2001. Included in the allowance for loan losses at March 31, 2002, was $245 million related to $837 million of impaired loans. The remaining impaired loans were recorded at or below either the fair value of collateral or the present value of expected future cash flows. In the first quarter of 2002, the average recorded investment in impaired loans was $1.5 billion, and $6 million of interest income was recognized on impaired loans. This income was recognized using the cash-basis method of accounting. PAST DUE LOANS Accruing loans 90 days or more past due, excluding loans that are classified as held for sale, amounted to $275 million at March 31, 2002, and $288 million at December 31, 2001. Of these past due loans at March 31, 2002, $56 million were commercial loans or commercial real estate loans and $219 million were consumer loans. NET CHARGE-OFFS Net charge-offs were $325 million, or 0.83 percent of average net loans, in the first quarter of 2002 and $378 million, or 0.93 percent, in the fourth quarter of 2001. Net charge-offs increased from $159 million, or 0.53 percent of loans, in the first quarter of 2001 due to 16 charge-offs of $57 million related to an energy services company, to net charge-offs related to the addition of the former Wachovia and to charge-offs in the telecommunications sector. PROVISION AND ALLOWANCE FOR LOAN LOSSES On an as reported basis, the provision for loan losses was $339 million in the first quarter of 2002 and $381 million in the fourth quarter of 2001. The provision in the first quarter of 2002 included $14 million related to loans sold or transferred to held for sale. The provision related to the transfer of loans to held for sale was recorded to reduce the carrying value of these loans to their respective fair values. The allowance for loan losses was $3.0 billion at both March 31, 2002, and at December 31, 2001. The allowance was 1.84 percent of net loans at March 31, 2002, and 1.83 percent of net loans at December 31, 2001. As a percentage of nonperforming loans, the allowance was 177 percent at March 31, 2002, and 195 percent at December 31, 2001. Loans transferred to held for sale are carried at the lower of cost or market value, and accordingly, they are not included in the evaluation of the adequacy of the allowance for loan losses subsequent to the transfer. The allowance for loan losses is maintained at a level that we believe is adequate to absorb probable losses inherent in the loan portfolio as of the date of the consolidated financial statements. We employ a variety of tools as well as seasoned judgment in assessing the adequacy of the allowance. Our methodology for assessing the adequacy of the allowance establishes both an allocated and an unallocated component. The allocated component of the allowance for commercial loans is based principally on current loan grades and historical loss rates. For consumer loans, it is based on loan payment status and historical loss rates. The unallocated component of the allowance represents the results of analyses that estimate probable losses inherent in the portfolio that are not fully captured in the allocated allowance. These analyses include industry concentrations, model imprecision and the estimated impact of current economic conditions on historical loss rates. We continuously monitor trends in loan portfolio qualitative and quantitative factors, including trends in the levels of past due, criticized and nonperforming loans. The trends in these factors are used to evaluate the reasonableness of the unallocated component. The distribution of the allowance into an allocated and unallocated component does not diminish the fact that the entire allowance is available to absorb credit losses in the loan portfolio. Our principal focus is, therefore, on the adequacy of the total allowance for loan losses. As a result, future material shifts between the allocated and unallocated components of the allowance are possible. A management committee headed by our chief risk management officer and composed of the chief risk management officers of our major business units, our principal accounting officer, the senior officer from our independent credit risk review unit and other experienced credit risk professionals is responsible for a comprehensive review and formal approval of the allowance for loan losses at the end of each quarter. LOANS HELD FOR SALE At March 31, 2002, loans held for sale amounted to $7.1 billion and $7.8 billion at December 31, 2001. In the first quarter of 2002, we transferred $46 million of loans to loans held for sale, all of which were performing at the time of the transfer. Of the $4 million allowance that was associated with these loans transferred to loans held for sale in the first quarter of 2002, $1 million represented existing reserves and $3 million represented additional provision to adjust the loans to the lower of cost or market value at the date of transfer. We have made significant progress in reducing the $1.5 billion portfolio of post-merger overlapping loans and loans representing areas of perceived higher risk, primarily in the textile, technology and telecommunications, commercial real estate and asbestos-related sectors, which we transferred to held for sale in the third quarter of 2001. Of these 17 overlapping and higher risk loans, $1.4 billion were performing loans and $113 million were nonperforming. Remaining loans related to this transfer had a net carrying value of $268 million at March 31, 2002. In the first quarter of 2002, we sold $6.2 billion in loans out of the held for sale portfolio. Of this total, $702 million were commercial loans and $5.5 billion were consumer loans, primarily mortgages sold to agencies and prime equity lines. Substantially all of the consumer loan sales represented normal flow business, which is originated directly into the held for sale portfolio. Of the loans sold, $22 million were nonperforming. In addition to the above activity, in the first quarter of 2002, we sold $136 million of loans directly out of the portfolio. Of these nonflow loans, $55 million were performing and $81 million were nonperforming at the time of the sale. FUNDING SOURCES -------------------------------------------------------------------------------- CORE DEPOSITS Core deposits were $167 billion at March 31, 2002, and $170 billion at December 31, 2001. The decrease reflects runoff in higher cost consumer certificate of deposit balances as we focus on increasing the proportion of low-cost core deposits, which grew 4 percent on an annualized basis in a seasonally weak quarter to $112 billion at March 31, 2002, from $107 billion at December 31, 2001. In both the first quarter of 2002 and the first quarter of 2001, average noninterest-bearing deposits were 23 percent of average core deposits. The portion of core deposits in higher-rate, other consumer time deposits was 22 percent at March 31, 2002, and 23 percent at December 31, 2001. Other consumer time and other noncore deposits usually pay higher rates than savings and transaction accounts, but they generally are not available for immediate withdrawal. They are also less expensive to service. PURCHASED FUNDS Average purchased funds, which include wholesale borrowings with maturities of 12 months or less, were $60 billion in the first quarter of 2002 and $56 billion in the first quarter of 2001. Our current trading strategy resulted in growth in securities sold under repurchase agreements to fund trading positions. Purchased funds were $59 billion at March 31, 2002, and $61 billion at December 31, 2001. LONG-TERM DEBT Long-term debt was $40 billion at March 31, 2002, and $42 billion at December 31, 2001. In the rest of 2002, scheduled maturities of long-term debt amount to $7.0 billion. We anticipate either extending the maturities of these obligations or replacing the maturing obligations. Long-term debt included $3 billion of trust capital securities at both March 31, 2002, and December 31, 2001. Subsidiary trusts issued these capital securities and used the proceeds to purchase junior subordinated debentures from the parent company. These capital securities are considered tier 1 capital for regulatory purposes. Wachovia Bank, N.A., has available a global note program for the issuance of up to $45 billion of senior or subordinated notes. Under prior global bank note programs, $10 billion of long-term debt was outstanding at March 31, 2002. The sale of any additional notes will depend on future market conditions, funding needs and other factors. Under a current shelf registration statement with the Securities and Exchange Commission, we have $11 billion of senior or subordinated debt securities, common stock or preferred stock available for issuance. In addition, we have filed a registration statement providing for the issuance of up to $4 billion under a medium-term note program covering senior or subordinated debt securities. We expect this registration statement to become effective and the medium-term note program to begin in the second quarter of 2002. The sale of debt or equity securities will depend on future market conditions, funding needs and other factors. 18 CREDIT LINES We have a $175 million committed back-up line of credit that expires in July 2002. This credit facility contains covenants that require the company to maintain a minimum level of tangible net worth, restrict double leverage ratios and require capital levels at subsidiary banks to meet regulatory standards. We have not used this line of credit. STOCKHOLDERS' EQUITY The management of capital in a regulated banking environment requires a balance between maximizing leverage and return on equity while maintaining sufficient capital levels and related ratios to satisfy regulatory requirements. Our goal is to generate attractive returns on equity to our stockholders while maintaining sufficient regulatory capital ratios. Stockholders' equity was $29 billion at March 31, 2002, and $28 billion at December 31, 2001. Common shares outstanding amounted to 1.4 billion at both March 31, 2002, and December 31, 2001. At March 31, 2002, we had authority to repurchase up to 99 million shares of our common stock. At March 31, 2002, we had an equity forward contract outstanding involving 3 million shares at an aggregate cost of $100 million and forward purchase contracts outstanding involving 33 million shares at an aggregate cost of $1.2 billion. These contracts mature at various times in 2002 and can be extended by mutual consent of the counterparties. The forward price of the shares subject to equity forward and forward purchase contracts is the share price at the inception of the contract plus a premium that accrues over the life of the contract, net of dividends paid to the counterparty. In calculating diluted earnings per share, the premium component of the forward price on equity forward contracts is subtracted in calculating income available to common stockholders. For forward purchase contracts, diluted shares include the share equivalent of the excess of the forward price over the current market price of the shares. In the first quarter of 2002, the premium component of the equity forward contract was anti-dilutive. We paid $328 million in dividends to common stockholders in the first quarter of 2002 and $235 million in the first quarter of 2001. This represented a dividend payout ratio on cash operating earnings of 32.43 percent in the first quarter of 2002 and 34.78 percent in the first quarter of 2001. In connection with the Wachovia merger, we issued 97 million shares of Dividend Equalization Preferred shares (DEPs), which were recorded at their fair value as of September 1, 2001, of 24 cents per share or $23 million for shares issued through December 31, 2001. A dividend of six cents per DEP share, or $6 million, was paid to holders of the DEPs in the first quarter of 2002 representing the difference between the Wachovia dividend paid to common stockholders in the first quarter of 2002 of 24 cents and the last common stock dividend paid by the former Wachovia of 30 cents per share. The DEP dividends are recorded as a reduction in the carrying value of the DEPs. Since September 1, 2001, DEP dividends of $12 million have been paid. SUBSIDIARY DIVIDENDS First Union National Bank, which was merged with Wachovia Bank, N.A., and renamed "Wachovia Bank, N.A." on April 1, 2002, is the largest source of parent company dividends. Capital requirements established by regulators limit dividends that this subsidiary and certain other of our subsidiaries can pay. Under these and other limitations, which include an internal requirement to maintain all deposit-taking banks at the well-capitalized level, at March 31, 2002, our subsidiaries had $1.2 billion available for dividends that could be paid without prior regulatory approval. Our subsidiaries paid $696 million in dividends to the parent company in the first quarter of 2002. REGULATORY CAPITAL Our tier 1 and total capital ratios were 7.49 percent and 11.56 percent, respectively, at March 31, 2002, and 7.04 percent and 11.08 percent, respectively, at December 31, 2001. Our leverage ratio at March 31, 2002, was 6.51 percent and at December 31, 2001, 6.19 percent. At March 31, 2002, our deposit-taking bank subsidiaries met the capital and leverage ratio requirements for well capitalized banks. 19 OFF-BALANCE SHEET PROFILE -------------------------------------------------------------------------------- In the normal course of business, we engage in a variety of financial transactions that, under generally accepted accounting principles, either are not recorded on the balance sheet or are recorded on the balance sheet in amounts that differ from the full contract or notional amounts. These transactions involve varying elements of market, credit and liquidity risk. These transactions fall under two broad categories: corporate transactions and customer transactions. Corporate transactions are designed to diversify our funding sources; reduce our credit, market or liquidity risk; and optimize capital. Customer transactions are executed to facilitate customers' funding needs or risk management objectives. Within these two categories, there are many types of transactions, which for purposes of the table below, we have grouped into lending commitments, liquidity and credit facilities, asset securitizations, derivatives and other transactions. Refer to our 2001 Annual Report on Form 10-K for a detailed description of each of these types of transactions.
-------------------------------------------------------------------------------------------------------------------------- SUMMARY OF OFF-BALANCE SHEET EXPOSURES MARCH 31, December 31, (In millions) 2002 2001 -------------------------------------------------------------------------------------------------------------------------- Lending commitments $ 146,200 150,800 Liquidity and credit facilities 44,800 45,000 Asset securitizations 11,100 10,000 Derivatives 10,500 11,400 Other transactions Leasing transactions 9,400 9,000 Share repurchase agreements 1,300 1,300 Principal investing commitments 1,200 1,200 -------------------------------------------------------------------------------------------------------------------------- Total $ 224,500 228,700 --------------------------------------------------------------------------------------------------------------------------
Lending commitments at March 31, 2002, decreased $4.6 billion from December 31, 2001, as a result of a $6.1 billion decrease in commercial loan commitments partially offset by a $2.1 billion increase in consumer loan commitments. The decrease in commercial loan commitments was primarily driven by weak commercial loan demand as a result of uncertain economic conditions. In addition portfolio management actions have reduced exposure to accounts that do not provide adequate returns. Liquidity and credit facilities decreased modestly due to lower balances in the commercial paper conduits. Asset securitizations increased $1.1 billion as a result of credit enhancement provided on first quarter 2002 securitizations. Derivatives in the table above represent on-balance sheet risk and the related off-balance sheet contract or notional amounts exceed the amount at risk. Derivatives decreased $900 million from December 31, 2001, to $10.5 billion as a result of changes in the long-term rate environment and cash receipts based on first quarter 2002 reset rates. At March 31, 2002, the total market value-related credit risk for derivative transactions in excess of counterparty thresholds was $1.1 billion. The fair value of collateral held exceeded the total market value-related credit risk in excess of counterparty thresholds as of that date. RISK GOVERNANCE AND ADMINISTRATION -------------------------------------------------------------------------------- Our chief risk management officer reports directly to the chief executive officer and is responsible for credit, market and operational risk governance. The chief risk management officer provides loan portfolio, market risk and other information to appropriate management and board of directors oversight committees on a regular basis. These management committees include the Credit Policy Committee and the Asset and Liability 20 Committee, both of which meet monthly and are headed by the chief executive officer. The Market Risk Committee, headed by the chief risk management officer, and the Credit & Finance Committee of the board of directors, composed of outside directors, meets bi-monthly. Our risk management practices include key elements such as independent checks and balances, formal authority limits, well-defined policies and procedures, quantitative modeling, diversification, active portfolio management and experienced risk management personnel. The policies, strategies and methodologies underlying our management of credit, market, operational, liquidity and interest rate risk are discussed in more detail in our 2001 Annual Report on Form 10-K. MARKET RISK MANAGEMENT We trade a variety of debt securities, foreign exchange instruments and derivatives in order to provide customized solutions for the risk management needs of our customers and for proprietary trading. Risk is controlled through the use of value at risk (VAR) methodology with limits approved by the Asset and Liability Management Committee and an active, independent monitoring process. Our 1-day VAR limit for the first quarter of 2002 was $30 million. The VAR methodology uses recent market volatility to estimate within a given level of confidence the maximum trading loss over a period of time that we would expect to incur from an adverse movement in market rates and prices over the period. We calculate 1-day and 10-day VAR at the 97.5 percent and 99 percent confidence levels, respectively. The VAR model uses historical data from the most recent 252 trading days. The VAR model is supplemented by stress testing on a daily basis. The analysis captures all financial instruments that are considered trading positions. The total 1-day VAR was $12 million at March 28, 2002, and $11 million at December 31, 2001, and primarily related to interest rate risk and equity risk. The high, low and average VARs in the first quarter of 2002 were $15 million, $9 million and $11 million, respectively. INTEREST RATE RISK MANAGEMENT Managing interest rate risk is fundamental to banking. The inherent maturity and repricing characteristics of our day-to-day lending and deposit activities create a naturally asset-sensitive structure. By using a combination of financial instruments, we manage the sensitivity of earnings to changes in interest rates within our established policy guidelines. The Asset and Liability Management Committee oversees the interest rate risk management process and approves policy guidelines. Balance sheet management and finance personnel monitor the day-to-day exposure to changes in interest rates in response to loan and deposit flows. They make adjustments within established policy guidelines. In analyzing interest rate sensitivity for policy measurement, we compare our forecasted earnings per share in both a "high rate" and "low rate" scenario to base-line scenarios. Our base-line scenario is our estimated most likely path for future short-term interest rates over the next 24 months. The second base-line scenario holds short-term rates flat at their current level over our forecast horizon. The "high rate" and "low rate" scenarios assume gradual 200 basis point increases or decreases in the federal funds rate from the beginning point of each base-line scenario over the next 12-month period. Our policy limit for the maximum negative impact on earnings per share resulting from "high rate" or "low rate" scenarios is 5 percent. The policy limit applies to the "most likely rate" and the "flat rate" base-line scenarios. The policy measurement period is 12 months in length, beginning with the first month of the forecast. EARNINGS SENSITIVITY Our "flat rate" scenario holds the federal funds rate constant at 1.75 percent through March 2003. Based on our April 2002 outlook, if interest rates were to follow our "high rate" scenario (i.e., a 200 basis point increase in short-term rates from our "flat rate" scenario), our earnings sensitivity model indicates earnings during the policy measurement period would be negatively affected by 1.6 percent. Our model indicates that earnings would benefit by 0.9 percent in our "low rate" scenario (i.e., a 50 basis point decline in short-term rates from our "flat rate" scenario). Typically we analyze a 200 basis point decline for our "low rate" scenario. However, because of the current federal funds rate level, we believe a 50 basis point decline in rates is more appropriate. 21 For our "most likely rate" scenario, we believe the market forward implied rate ("market rate") is the most appropriate. This scenario assumes the federal funds rate remains flat at 1.75 percent until June 2002 and gradually rises to 4.25 percent by March 2003. Sensitivity to the "market rate" scenario is measured using a gradual 200 basis point increase over a 12-month period. Our model indicates that earnings would be negatively affected by 2.7 percent in a "high rate" scenario relative to the market rate over the policy period. In addition to the standard scenarios used to analyze rate sensitivity over the policy measurement period, we regularly analyze the potential impact of other more extreme interest rate scenarios. These alternate "what if" scenarios may include interest rate paths that are higher, lower and more volatile than those used for policy measurement. We also perform our analysis for time periods that reach beyond the 12-month policy period. For example, based on our April 2002 outlook, if interest rates remain consistent with our "market rate" scenario until December 31, 2002, and then increase by 300 basis points over the course of 2003, earnings in 2003 would decline by 3.6 percent. While our interest rate sensitivity modeling assumes that management takes no action, we regularly assess the viability of strategies to reduce unacceptable risks to earnings and we implement such strategies when we believe those actions are prudent. As new monthly outlooks become available, we formulate strategies aimed at protecting earnings from the potential negative effects of changes in interest rates. ACCOUNTING AND REGULATORY MATTERS -------------------------------------------------------------------------------- The following information addresses new or proposed accounting pronouncements related to our industry as well as legislation that has had a significant impact on our industry. ASSET IMPAIRMENT In August 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supercedes both SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale and resolves significant implementation issues associated with SFAS 121. Unlike SFAS 121, an impairment assessment under SFAS 144 will not result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS 142, as described below. We adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 for long-lived assets held for use had no material impact on our consolidated financial statements. The provisions of SFAS 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. BUSINESS COMBINATIONS In July 2001 the FASB issued SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. Also under SFAS 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under the provisions of SFAS 142, goodwill and identified intangible assets with indefinite useful lives are not subject to amortization. Rather they are subject to impairment testing on an annual basis, or more often if events or circumstances indicate that there may be impairment. Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the intangible asset and reviewed for impairment when events or circumstances indicate that there may be impairment. 22 We adopted the provisions of SFAS 141 for business combinations initiated after June 30, 2001, and we adopted the provisions of SFAS 142 on January 1, 2002. Any goodwill and any identified intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, are not subject to amortization. Goodwill and intangible assets acquired in purchase business combinations completed before July 1, 2001, were amortized through December 31, 2001. Upon adoption of SFAS 142 on January 1, 2002, all amortization of goodwill and identified intangible assets with indefinite useful lives ceased. The merger of First Union and the former Wachovia was accounted for using the purchase method, and in accordance with the provisions of SFAS 141, the goodwill recorded in connection with the merger was never subject to amortization. Under the provisions of SFAS 142, all goodwill and identified intangible assets with an indefinite useful life must be tested for impairment as of January 1, 2002, and annually thereafter. This test involves assigning tangible and intangible assets, liabilities, identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying value. If the fair value is less than the carrying value, a further test is required to measure the amount of goodwill impairment. The company's impairment evaluation as of January 1, 2002, indicated that none of the company's goodwill was impaired. CONSOLIDATIONS In the first quarter of 2002, the FASB reached tentative conclusions on issues related to the consolidation of special purpose entities (SPE), and announced plans to issue an exposure draft of an interpretation of FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, and Accounting Research Bulletin No. 51. Under the accounting model being considered by the FASB, an SPE would be consolidated by its primary beneficiary when the SPE lacks sufficient independent economic substance. Because the FASB has not yet issued an exposure draft, we are not in a position at this time to assess the impact that any action the FASB may take might have on our consolidated financial statements. The potential impact may include the consolidation by the company of certain SPEs that are currently not included in our consolidated financial statements. Please refer to the discussion of our off-balance sheet profile in our 2001 Annual Report on Form 10-K. REGULATORY MATTERS On October 26, 2001, the President signed the USA Patriot Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the IMLAFA). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. As of the date of this filing, we have not determined the impact the IMLAFA will have on our operations but the impact is not expected to be material. We will establish policies and procedures to ensure compliance with the IMLAFA. In 1999 the Gramm-Leach-Bliley Financial Modernization Act of 1999 (Modernization Act) became law. The Modernization Act allows bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than was permissible before enactment, including underwriting insurance and making merchant banking investments in commercial and financial companies. It also allows insurers and other financial services companies to acquire banks; removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities activities. This part of 23 the Modernization Act became effective in March 2000. In 2000 we became a financial holding company pursuant to the Modernization Act and are thereby permitted to engage in the broader range of activities that the Modernization Act permits. The Modernization Act also modifies current law related to financial privacy and community reinvestment. The new privacy provisions generally prohibit financial institutions, including Wachovia, from disclosing nonpublic personal financial information to non-affiliated third parties unless customers have the opportunity to "opt out" of the disclosure. Various legislative and regulatory proposals concerning the financial services industry are pending in Congress, the legislatures in states in which we conduct operations and before various regulatory agencies that supervise our operations. Given the uncertainty of the legislative and regulatory process, we cannot assess the impact of any such legislation or regulations on our financial condition or results of operations. 24 TABLE 1 SELECTED STATISTICAL DATA
-------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------ --------------------------------------------- FIRST Fourth Third Second First (Dollars in millions, except per share data) QUARTER Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------- PROFITABILITY (a) Diluted earnings per common share $ 0.66 0.58 0.27 0.66 0.62 Diluted earnings per common share - cash earnings $ 0.74 0.71 0.36 0.73 0.69 Return on average common stockholders' equity 12.68 % 10.77 5.77 16.19 15.64 Return on average tangible common stockholders' equity - cash earnings 25.30 23.56 11.36 23.35 22.91 Net interest margin (b) 3.90 3.81 3.58 3.41 3.42 Fee and other income as % of total revenue 45.00 45.33 34.42 48.32 47.13 Overhead efficiency ratio - cash earnings 57.93 % 59.22 72.86 62.06 62.80 Operating leverage - cash earnings (c) $ 42 1,036 (462) 59 (67) Effective income tax rate 32.09 % 31.65 27.67 31.54 31.54 -------------------------------------------------------------------------------------------------------------------------- CAPITAL ADEQUACY Tier 1 capital ratio 7.49 % 7.04 6.75 7.37 7.18 Total capital ratio 11.56 11.08 10.84 11.45 11.33 Leverage 6.51 % 6.19 7.22 6.00 5.88 -------------------------------------------------------------------------------------------------------------------------- ASSET QUALITY Allowance as % of loans, net 1.84 % 1.83 1.79 1.44 1.43 Allowance as % of nonperforming assets (d) 162 175 186 133 132 Net charge-offs as % of average loans, net 0.83 0.93 0.73 0.52 0.53 Nonperforming assets as % of loans, net, foreclosed properties and loans held for sale 1.21 % 1.13 1.08 1.23 1.30 -------------------------------------------------------------------------------------------------------------------------- OTHER DATA Employees 82,809 84,046 85,534 67,420 69,362 Financial centers 3,362 3,434 3,461 2,690 2,695 ATMs 4,618 4,675 4,698 3,419 3,676 Common shares outstanding (In millions) 1,368 1,362 1,361 979 981 Common stock price $ 37.08 31.36 31.00 34.94 33.00 Market capitalization $ 50,716 42,701 42,191 34,213 32,382 ========================================================================================================================== (a) Based on operating earnings. (b) Tax-equivalent. (c) Incremental change on a quarter-to-quarter basis in tax-equivalent net interest income and fee and other income, less noninterest expense, excluding goodwill and other intangible amortization. (d) These ratios do not include nonperforming loans included in loans held for sale.
25 TABLE 2 SUMMARIES OF INCOME, PER COMMON SHARE AND BALANCE SHEET DATA
------------------------------------------------------------------------------------------------------------------------ 2002 2001 ------------ -------------------------------------------- FIRST Fourth Third Second First (In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------ SUMMARIES OF INCOME Interest income $ 3,903 4,311 3,944 3,820 4,025 ======================================================================================================================== Interest income (a) $ 3,954 4,363 3,988 3,851 4,057 Interest expense 1,477 1,879 2,014 2,109 2,323 ------------------------------------------------------------------------------------------------------------------------ Net interest income (a) 2,477 2,484 1,974 1,742 1,734 Provision for loan losses 339 381 1,124 223 219 ------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses (a) 2,138 2,103 850 1,519 1,515 Securities transactions - portfolio (6) (16) (35) - (16) Fee and other income 2,033 2,076 1,067 1,630 1,590 Merger-related and restructuring charges (8) 88 85 (69) 2 Other noninterest expense 2,777 2,942 2,310 2,266 2,207 ------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (benefits) (a) 1,396 1,133 (513) 952 880 Income taxes (benefits) 432 345 (223) 288 264 Tax-equivalent adjustment 51 52 44 31 32 ------------------------------------------------------------------------------------------------------------------------ Net income (loss) 913 736 (334) 633 584 Dividends on preferred stock 6 6 - - - ------------------------------------------------------------------------------------------------------------------------ Net income (loss) available to common stockholders $ 907 730 (334) 633 584 ======================================================================================================================== PER COMMON SHARE DATA Basic 0.67 0.54 (0.31) 0.65 0.60 Diluted 0.66 0.54 (0.31) 0.64 0.59 Cash dividends $ 0.24 0.24 0.24 0.24 0.24 Average common shares - Basic 1,355 1,352 1,094 969 968 Average common shares - Diluted 1,366 1,363 1,105 978 976 Average common stockholders' equity Quarter-to-date $ 28,887 28,528 20,330 16,026 15,846 Year-to-date 28,887 20,218 17,417 15,937 15,846 Book value per common share 21.04 20.88 20.94 16.49 16.39 Common stock price High 37.50 31.90 36.38 34.94 34.09 Low 30.26 27.90 27.95 29.70 27.81 Period-end $ 37.08 31.36 31.00 34.94 33.00 To earnings ratio (b) 24.24 X 21.63 20.39 12.99 (150.00) To book value 176 % 150 148 212 201 BALANCE SHEET DATA Assets $ 319,853 330,452 325,897 245,941 252,949 Long-term debt $ 39,936 41,733 43,233 36,060 36,092 ======================================================================================================================== (a) Tax-equivalent. (b) Based on diluted earnings per common share.
26 TABLE 3 MERGER-RELATED AND RESTRUCTURING CHARGES
----------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, (In millions) 2002 ----------------------------------------------------------------------------------------------------------------------- MERGER-RELATED AND RESTRUCTURING CHARGES - FIRST UNION/WACHOVIA Merger-related charges Personnel costs $ 4 Occupancy and equipment 16 Gain on regulatory-mandated branch sales (121) System conversion costs 18 Other 10 ----------------------------------------------------------------------------------------------------------------------- Total merger-related charges (73) Restructuring charges Employee termination benefits 33 Occupancy and equipment 25 Other 6 ----------------------------------------------------------------------------------------------------------------------- Total restructuring charges 64 ----------------------------------------------------------------------------------------------------------------------- Total First Union/Wachovia merger-related and restructuring charges (9) Merger-related charges from other mergers 1 ----------------------------------------------------------------------------------------------------------------------- Total merger-related and restructuring charges $ (8) ======================================================================================================================= First Union/ Wachovia (In millions) Merger Other Total ----------------------------------------------------------------------------------------------------------------------- ACTIVITY IN THE RESTRUCTURING ACCRUAL Balance, December 31, 2001 $ 63 63 126 Restructuring charge 64 - 64 Cash payments (42) (7) (49) ----------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2002 $ 85 56 141 =======================================================================================================================
27 TABLE 4 BUSINESS SEGMENTS
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 --------------- ---------------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- GENERAL BANK COMBINED (a) Net interest income (b) $ 1,649 1,642 1,270 1,133 1,079 Fee and other income 498 578 434 378 333 Intersegment revenue 40 45 29 27 25 --------------------------------------------------------------------------------------------------------------------------------- Total revenue 2,187 2,265 1,733 1,538 1,437 Provision for loan losses 115 130 97 98 100 Noninterest expense 1,205 1,239 1,011 922 891 Income taxes 307 317 209 167 149 Tax-equivalent adjustment 10 10 10 9 6 --------------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 550 569 406 342 291 --------------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 40.07 % 42.56 36.95 39.86 37.44 Cash overhead efficiency ratio 55.12 % 54.70 57.80 59.00 61.02 Economic profit $ 392 412 280 255 220 Average loans, net 98,030 97,004 76,383 65,240 63,107 Average core deposits 136,096 133,996 109,656 98,429 97,421 Economic capital, average $ 5,473 5,356 4,446 3,675 3,507 ================================================================================================================================= COMMERCIAL Net interest income (b) $ 337 334 223 181 169 Fee and other income 71 65 42 30 28 Intersegment revenue 16 20 14 14 12 --------------------------------------------------------------------------------------------------------------------------------- Total revenue 424 419 279 225 209 Provision for loan losses 39 38 25 13 19 Noninterest expense 152 156 116 101 95 Income taxes 75 72 39 28 28 Tax-equivalent adjustment 10 10 9 9 6 --------------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 148 143 90 74 61 --------------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 25.84 % 26.61 25.27 26.69 23.76 Cash overhead efficiency ratio 35.71 % 37.34 41.09 44.24 45.08 Economic profit $ 78 74 45 36 28 Average loans, net 39,942 40,336 28,758 23,139 22,481 Average core deposits 14,081 13,289 10,794 9,602 9,129 Economic capital, average $ 2,135 2,012 1,332 980 972 ================================================================================================================================= RETAIL AND SMALL BUSINESS Net interest income (b) $ 1,312 1,308 1,047 952 910 Fee and other income 427 513 392 348 305 Intersegment revenue 24 25 15 13 13 --------------------------------------------------------------------------------------------------------------------------------- Total revenue 1,763 1,846 1,454 1,313 1,228 Provision for loan losses 76 92 72 85 81 Noninterest expense 1,053 1,083 895 821 796 Income taxes 232 245 170 139 121 Tax-equivalent adjustment - - 1 - - --------------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 402 426 316 268 230 --------------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 49.17 % 52.15 41.95 44.64 42.68 Cash overhead efficiency ratio 59.80 % 58.66 61.01 61.54 63.72 Economic profit $ 314 338 235 219 192 Average loans, net 58,088 56,668 47,625 42,101 40,626 Average core deposits 122,015 120,707 98,862 88,827 88,292 Economic capital, average $ 3,338 3,344 3,114 2,695 2,535 ================================================================================================================================= (a) General Bank Combined represents the consolidation of the General Bank's Commercial and Retail and Small Business lines of business. (b) Tax-equivalent.
(Continued) 28 TABLE 4 BUSINESS SEGMENTS
------------------------------------------------------------------------------------------------------------------------------ 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------ CAPITAL MANAGEMENT COMBINED (a) Net interest income (b) $ 45 47 32 31 33 Fee and other income 778 782 652 687 678 Intersegment revenue (17) (19) (12) (12) (11) ------------------------------------------------------------------------------------------------------------------------------ Total revenue 806 810 672 706 700 Provision for loan losses - - - - - Noninterest expense 676 670 573 583 574 Income taxes 48 51 34 42 44 Tax-equivalent adjustment - - - - - ------------------------------------------------------------------------------------------------------------------------------ Operating earnings $ 82 89 65 81 82 ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital 49.95 % 53.14 32.22 42.79 42.91 Cash overhead efficiency ratio 83.91 % 82.77 85.24 82.42 82.12 Economic profit $ 64 68 41 59 59 Average loans, net 169 337 269 110 129 Average core deposits 1,423 1,505 1,535 1,609 1,827 Economic capital, average 669 661 801 768 772 Assets under management $ 230,204 226,470 226,341 172,158 168,343 ============================================================================================================================== RETAIL BROKERAGE SERVICES Net interest income (b) $ 45 46 37 35 36 Fee and other income 552 552 460 489 483 Intersegment revenue (17) (17) (14) (11) (11) ------------------------------------------------------------------------------------------------------------------------------ Total revenue 580 581 483 513 508 Provision for loan losses - - - - - Noninterest expense 523 519 434 449 443 Income taxes 21 22 17 23 22 Tax-equivalent adjustment - - - - - ------------------------------------------------------------------------------------------------------------------------------ Operating earnings $ 36 40 32 41 43 ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital 26.20 % 28.43 19.96 26.75 26.67 Cash overhead efficiency ratio 90.35 % 89.48 89.78 87.49 87.26 Economic profit $ 20 22 13 24 23 Average loans, net 2 2 1 - 1 Average core deposits 99 75 93 79 104 Economic capital, average $ 550 541 645 636 642 ============================================================================================================================== (a) Capital Management Combined represents the consolidation of Capital Management's Retail Brokerage Services, Asset Management, and Other, which primarily serves to eliminate intersegment revenue. (b) Tax-equivalent.
(Continued) 29 TABLE 4 BUSINESS SEGMENTS
------------------------------------------------------------------------------------------------------------------------------ 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------ ASSET MANAGEMENT Net interest income (b) $ (1) - (6) (6) (4) Fee and other income 237 238 206 208 206 Intersegment revenue - - (1) - - ------------------------------------------------------------------------------------------------------------------------------ Total revenue 236 238 199 202 202 Provision for loan losses - - - - - Noninterest expense 166 163 151 144 141 Income taxes 26 28 16 19 22 Tax-equivalent adjustment - - - - - ------------------------------------------------------------------------------------------------------------------------------ Operating earnings $ 44 47 32 39 39 ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital 146.60 % 152.29 79.07 114.45 121.78 Cash overhead efficiency ratio 70.37 % 68.57 75.66 71.04 69.92 Economic profit $ 41 44 27 34 36 Average loans, net 167 335 268 110 128 Average core deposits 1,324 1,430 1,442 1,530 1,723 Economic capital, average $ 123 124 159 135 132 ============================================================================================================================== OTHER Net interest income (b) $ 1 1 1 2 1 Fee and other income (11) (8) (14) (10) (11) Intersegment revenue - (2) 3 (1) - ------------------------------------------------------------------------------------------------------------------------------ Total revenue (10) (9) (10) (9) (10) Provision for loan losses - - - - - Noninterest expense (13) (12) (12) (10) (10) Income taxes 1 1 1 - - Tax-equivalent adjustment - - - - - ------------------------------------------------------------------------------------------------------------------------------ Operating earnings $ 2 2 1 1 - ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital - % - - - - Cash overhead efficiency ratio - % - - - - Economic profit $ 3 2 1 1 - Average loans, net - - - - - Average core deposits - - - - - Economic capital, average $ (4) (4) (3) (3) (2) ==============================================================================================================================
(Continued) 30 TABLE 4 BUSINESS SEGMENTS
--------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- WEALTH MANAGEMENT Net interest income (a) $ 96 93 61 48 46 Fee and other income 140 136 100 79 79 Intersegment revenue 1 1 - - - --------------------------------------------------------------------------------------------------------------------------- Total revenue 237 230 161 127 125 Provision for loan losses 1 4 2 - - Noninterest expense 168 160 114 85 84 Income taxes 25 24 16 13 15 Tax-equivalent adjustment - - - - - --------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 43 42 29 29 26 --------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 49.02 % 50.96 46.24 62.73 62.09 Cash overhead efficiency ratio 70.82 % 69.44 71.00 65.81 67.07 Economic profit $ 31 32 20 22 20 Average loans, net 8,400 8,148 5,680 4,449 4,368 Average core deposits 9,771 9,431 7,313 6,367 6,176 Economic capital, average $ 330 318 237 171 165 =========================================================================================================================== (a) Tax-equivalent.
(Continued) 31 TABLE 4 BUSINESS SEGMENTS
---------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- CORPORATE AND INVESTMENT BANK COMBINED (a) Net interest income (b) $ 597 693 506 479 450 Fee and other income 498 419 (218) 374 354 Intersegment revenue (18) (19) (16) (15) (12) ---------------------------------------------------------------------------------------------------------------------------- Total revenue 1,077 1,093 272 838 792 Provision for loan losses 222 254 126 93 70 Noninterest expense 521 551 483 503 475 Income taxes 99 85 (146) 69 74 Tax-equivalent adjustment 25 22 17 13 11 ---------------------------------------------------------------------------------------------------------------------------- Operating earnings (loss) $ 210 181 (208) 160 162 ---------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 14.37 % 13.60 (10.46) 12.36 11.82 Cash overhead efficiency ratio 48.57 % 50.54 n/m 59.84 59.79 Economic profit $ 67 34 (358) 6 (3) Average loans, net 43,342 46,235 42,070 41,145 42,751 Average core deposits 12,766 12,633 10,490 10,200 9,456 Economic capital, average $ 8,028 8,262 6,311 6,040 6,235 ============================================================================================================================ CORPORATE BANKING Net interest income (b) $ 446 495 365 356 356 Fee and other income 271 208 186 181 173 Intersegment revenue (13) (14) (10) (8) (8) ---------------------------------------------------------------------------------------------------------------------------- Total revenue 704 689 541 529 521 Provision for loan losses 222 248 125 95 71 Noninterest expense 267 293 243 234 243 Income taxes 80 56 62 68 71 Tax-equivalent adjustment 1 1 - - - ---------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 134 91 111 132 136 ---------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 15.18 % 13.13 15.49 18.43 17.24 Cash overhead efficiency ratio 38.13 % 42.82 44.87 43.98 46.49 Economic profit $ 57 16 35 56 47 Average loans, net 39,689 42,307 38,083 36,809 38,137 Average core deposits 9,878 9,784 7,925 7,658 7,349 Economic capital, average $ 5,580 5,708 3,912 3,541 3,614 ============================================================================================================================ (a) Corporate and Investment Bank Combined represents the consolidation of the Corporate and Investment Bank's Corporate Banking, Investment Banking and Principal Investing lines of business. (b) Tax-equivalent.
(Continued) 32 TABLE 4 BUSINESS SEGMENTS
---------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- INVESTMENT BANKING Net interest income (b) $ 151 195 150 132 106 Fee and other income 317 232 181 251 224 Intersegment revenue (5) (5) (6) (7) (4) ---------------------------------------------------------------------------------------------------------------------------- Total revenue 463 422 325 376 326 Provision for loan losses - 6 1 (2) (1) Noninterest expense 248 251 231 261 223 Income taxes 54 38 12 26 26 Tax-equivalent adjustment 24 21 17 13 11 ---------------------------------------------------------------------------------------------------------------------------- Operating earnings $ 137 106 64 78 67 ---------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 41.07 % 30.75 24.10 25.46 22.32 Cash overhead efficiency ratio 53.65 % 59.28 70.91 69.14 68.47 Economic profit $ 101 67 31 41 31 Average loans, net 3,653 3,887 3,969 4,335 4,615 Average core deposits 2,888 2,849 2,565 2,542 2,107 Economic capital, average $ 1,348 1,417 1,058 1,160 1,252 ============================================================================================================================ PRINCIPAL INVESTING Net interest income (b) $ - 3 (9) (9) (12) Fee and other income (90) (21) (585) (58) (43) Intersegment revenue - - - - - ---------------------------------------------------------------------------------------------------------------------------- Total revenue (90) (18) (594) (67) (55) Provision for loan losses - - - - - Noninterest expense 6 7 9 8 9 Income taxes (35) (9) (220) (25) (23) Tax-equivalent adjustment - - - - - ---------------------------------------------------------------------------------------------------------------------------- Operating loss $ (61) (16) (383) (50) (41) ---------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital (22.44) % (5.41) (113.40) (15.02) (12.09) Cash overhead efficiency ratio n/m % n/m n/m n/m n/m Economic profit $ (91) (49) (424) (91) (81) Average loans, net - 41 18 1 (1) Average core deposits - - - - - Economic capital, average $ 1,100 1,137 1,341 1,339 1,369 ============================================================================================================================
(Continued) 33 TABLE 4 BUSINESS SEGMENTS
------------------------------------------------------------------------------------------------------------------------------ 2002 2001 ------------ ------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------ PARENT Net interest income (a) $ 90 9 105 51 126 Fee and other income 113 145 68 111 102 Intersegment revenue (6) (8) (1) - (2) ------------------------------------------------------------------------------------------------------------------------------ Total revenue 197 146 172 162 226 Provision for loan losses 1 (7) 19 32 49 Noninterest expense 207 322 129 76 114 Income taxes (50) (107) 1 8 (1) Tax-equivalent adjustment 16 20 17 9 15 ------------------------------------------------------------------------------------------------------------------------------ Operating earnings (loss) $ 23 (82) 6 37 49 ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital 19.29 % 13.47 24.64 29.37 28.83 Cash overhead efficiency ratio 19.86 % 46.97 12.47 10.51 22.83 Economic profit $ 53 9 51 65 76 Average loans, net 7,123 11,115 8,624 8,268 9,495 Average core deposits 3,634 4,261 3,209 2,430 3,312 Economic capital, average $ 2,588 2,488 1,597 1,517 1,820 ============================================================================================================================== CONSOLIDATED Net interest income (a) $ 2,477 2,484 1,974 1,742 1,734 Fee and other income 2,027 2,060 1,036 1,629 1,546 Intersegment revenue - - - - - ------------------------------------------------------------------------------------------------------------------------------ Total revenue 4,504 4,544 3,010 3,371 3,280 Provision for loan losses 339 381 244 223 219 Noninterest expense 2,777 2,942 2,310 2,169 2,138 Income taxes 429 370 114 299 281 Tax-equivalent adjustment 51 52 44 31 32 ------------------------------------------------------------------------------------------------------------------------------ Operating earnings 908 799 298 649 610 ------------------------------------------------------------------------------------------------------------------------------ Adjustments from operating earnings to net income (loss) Merger-related, restructuring and other charges/gains Provision for loan losses - - (880) - - Fee and other income - - (4) 1 28 Noninterest expense 8 (88) (85) (28) (71) Income tax (expense) benefits (3) 25 337 11 17 ------------------------------------------------------------------------------------------------------------------------------ After-tax merger-related, restructuring and other charges/gains 5 (63) (632) (16) (26) ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) 913 736 (334) 633 584 Dividends on preferred stock 6 6 - - - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) available to common stockholders $ 907 730 (334) 633 584 ------------------------------------------------------------------------------------------------------------------------------ Risk adjusted return on capital 25.41 % 24.88 13.02 25.41 24.07 Cash overhead efficiency ratio 57.93 % 59.22 72.86 62.06 62.80 Economic profit $ 607 555 34 407 372 Average loans, net 157,064 162,839 133,026 119,212 119,850 Average core deposits 163,690 161,826 132,203 119,035 118,192 Economic capital, average $ 17,088 17,085 13,392 12,171 12,499 ============================================================================================================================== (a) Tax-equivalent.
(Continued) 34 TABLE 4 BUSINESS SEGMENTS
--------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2002 ----------------------------------------------------------------------------------------------- MERGER- CORPORATE RELATED AND AND GENERAL CAPITAL WEALTH INVESTMENT RESTRUCTURING (in millions) BANK MANAGEMENT MANAGEMENT BANK PARENT CHARGES (b) TOTAL --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Net interest income (a) $ 1,649 45 96 597 90 (51) 2,426 Fee and other income 498 778 140 498 113 - 2,027 Intersegment revenue 40 (17) 1 (18) (6) - - --------------------------------------------------------------------------------------------------------------------------------- Total revenue 2,187 806 237 1,077 197 (51) 4,453 Provision for loan losses 115 - 1 222 1 - 339 Noninterest expense 1,205 676 168 521 207 (8) 2,769 Income taxes (benefits) 307 48 25 99 (50) 3 432 Tax-equivalent adjustment 10 - - 25 16 (51) - --------------------------------------------------------------------------------------------------------------------------------- Net income 550 82 43 210 23 5 913 Dividends on preferred stock - - - - 6 - 6 --------------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 550 82 43 210 17 5 907 --------------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 40.07 % 49.95 49.02 14.37 19.29 - 25.41 Cash overhead efficiency ratio 55.12 % 83.91 70.82 48.57 19.86 - 57.93 Economic profit $ 392 64 31 67 53 - 607 Average loans, net 98,030 169 8,400 43,342 7,123 - 157,064 Average core deposits 136,096 1,423 9,771 12,766 3,634 - 163,690 Economic capital, average $ 5,473 669 330 8,028 2,588 - 17,088 ================================================================================================================================= Three Months Ended March 31, 2001 ----------------------------------------------------------------------------------------------- Merger- Related, Corporate Restructuring and and Other General Capital Wealth Investment Charges/ (In millions) Bank Management Management Bank Parent Gains (b) Total --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED Net interest income (a) $ 1,079 33 46 450 126 (32) 1,702 Fee and other income 333 678 79 354 102 28 1,574 Intersegment revenue 25 (11) - (12) (2) - - --------------------------------------------------------------------------------------------------------------------------------- Total revenue 1,437 700 125 792 226 (4) 3,276 Provision for loan losses 100 - - 70 49 - 219 Noninterest expense 891 574 84 475 114 71 2,209 Income taxes (benefits) 149 44 15 74 (1) (17) 264 Tax-equivalent adjustment 6 - - 11 15 (32) - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 291 82 26 162 49 (26) 584 --------------------------------------------------------------------------------------------------------------------------------- Risk adjusted return on capital 37.44 % 42.91 62.09 11.82 28.83 - 24.07 Cash overhead efficiency ratio 61.02 % 82.12 67.07 59.79 22.83 - 62.80 Economic profit $ 220 59 20 (3) 76 - 372 Average loans, net 63,107 129 4,368 42,751 9,495 - 119,850 Average core deposits 97,421 1,827 6,176 9,456 3,312 - 118,192 Economic capital, average $ 3,507 772 165 6,235 1,820 - 12,499 ================================================================================================================================= (a) Tax-equivalent. (b) See "Merger-Related and Restructuring Charges" in Management's Analysis of Operations and the Consolidated Condensed Statements of Income for more information on merger-related and restructuring charges. Additionally, the tax-equivalent amounts are eliminated herein in order for "Total" amounts to agree with amounts appearing in the Consolidated Statements of Income.
35 TABLE 5 FEE AND OTHER INCOME - CORPORATE AND INVESTMENT BANK (a)
----------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------ -------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------- CORPORATE BANKING Lending/Treasury services $ 162 93 82 74 70 Leasing 41 45 40 48 46 International 68 70 64 59 57 ----------------------------------------------------------------------------------------------------------------------- Total 271 208 186 181 173 Intersegment revenue (13) (14) (10) (8) (8) ----------------------------------------------------------------------------------------------------------------------- Total Corporate Banking 258 194 176 173 165 ----------------------------------------------------------------------------------------------------------------------- INVESTMENT BANKING Agency 137 142 57 116 40 Fixed income 163 60 113 122 174 Affordable housing 17 30 11 13 10 ----------------------------------------------------------------------------------------------------------------------- Total 317 232 181 251 224 Intersegment revenue (5) (5) (6) (7) (4) ----------------------------------------------------------------------------------------------------------------------- Total Investment Banking 312 227 175 244 220 ----------------------------------------------------------------------------------------------------------------------- PRINCIPAL INVESTING (90) (21) (585) (58) (43) ----------------------------------------------------------------------------------------------------------------------- Total fee and other income - Corporate and Investment Bank $ 480 400 (234) 359 342 ======================================================================================================================= (a) The aggregate amounts of trading account profits included in this table in the first quarter of 2002 and in the fourth, third, second and first quarters of 2001 were $121 million, $43 million, $66 million, $110 million and $83 million, respectively.
36 TABLE 6 SELECTED RATIOS
--------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- ---------------------------------------------------- FIRST Fourth Third Second First QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS (a) Assets to stockholders' equity 10.89 X 11.17 13.15 15.43 15.49 Return on assets 1.18 % 0.92 (0.50) 1.03 0.97 Return on total stockholders' equity 12.81 % 10.22 (6.52) 15.84 14.95 =========================================================================================================================== DIVIDEND PAYOUT RATIOS ON Operating earnings Common shares 36.36 % 41.38 89.45 36.36 38.71 Preferred and common shares 36.74 41.30 89.45 36.36 38.71 Net income (b) Common shares 36.36 44.44 - 37.50 40.68 Preferred and common shares 36.54 % 44.86 - 37.50 40.68 =========================================================================================================================== OTHER RATIOS Operating earnings Return on assets 1.17 % 0.99 0.44 1.05 1.01 Return on common stockholders' equity 12.68 % 10.77 5.77 16.19 15.64 =========================================================================================================================== (a) Based on average balances and net income. (b) Dividend payout ratios are not presented for periods in which there is a net loss.
37 TABLE 7 SECURITIES (a)
---------------------------------------------------------------------------------------------------------------------------------- March 31, 2002 ------------------------------------------------------------------------------------------------ GROSS UNREALIZED AVERAGE 1 YEAR 1-5 5-10 AFTER 10 --------------------- AMORTIZED MATURITY (in millions) OR LESS YEARS YEARS YEARS TOTAL GAINS LOSSES COST IN YEARS ---------------------------------------------------------------------------------------------------------------------------------- MARKET VALUE U.S. Treasury $ 917 12 3 88 1,020 1 11 1,030 2.63 U.S. Government agencies 20 7,286 23,090 1 30,397 217 373 30,553 6.29 Asset-backed 316 11,427 5,067 218 17,028 579 153 16,602 3.12 State, county and municipal 75 261 491 1,609 2,436 135 16 2,317 17.61 Sundry 257 1,625 3,003 1,616 6,501 71 151 6,581 6.99 ------------------------------------------------------------------------------------------------------------------------ Total market value $ 1,585 20,611 31,654 3,532 57,382 1,003 704 57,083 5.82 ================================================================================================================================== MARKET VALUE Debt securities $ 1,585 20,611 31,654 2,304 56,154 988 694 55,860 Equity securities - - - 1,228 1,228 15 10 1,223 ------------------------------------------------------------------------------------------------------------------------ Total market value $ 1,585 20,611 31,654 3,532 57,382 1,003 704 57,083 ======================================================================================================================== AMORTIZED COST Debt securities $ 1,591 20,298 31,687 2,284 55,860 Equity securities - - - 1,223 1,223 -------------------------------------------------------------------------------------- Total amortized cost $ 1,591 20,298 31,687 3,507 57,083 ====================================================================================== WEIGHTED AVERAGE YIELD U.S. Treasury 1.76 % 5.91 7.13 5.21 2.15 U.S. Government agencies 4.04 5.84 6.24 6.06 6.14 Asset-backed 7.94 7.34 7.06 7.63 7.27 State, county and municipal 7.85 8.43 9.74 8.03 8.39 Sundry 7.17 6.25 7.37 5.19 6.54 Consolidated 4.19 % 6.74 6.52 6.60 6.54 ====================================================================================== (a) At March 31, 2002, all securities were classified as available for sale. Securities with an aggregate amortized cost of $34 billion are pledged to secure U.S. Government and other public deposits and for other purposes as required by various statutes or agreements. Included primarily in "Sundry" are $3.9 billion of securities denominated in currencies other than the U.S. dollar. These securities had a weighted average maturity of 6.49 years and a weighted average yield of 6.19 percent. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Average maturity excludes equity securities and money market funds. Yields related to securities exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates. At March 31, 2002, there were forward commitments to purchase securities at a cost that approximates a market value of $2.7 billion, and commitments to sell securities at a cost that approximates a market value of $375 million. Gross gains and losses realized on the sale of debt securities for the three months ended March 31, 2002, were $38 million and $42 million, respectively, and gross gains and losses realized on equity securities were $6 million and $8 million, respectively.
38 TABLE 8 LOANS - ON-BALANCE SHEET, AND MANAGED AND SERVICING PORTFOLIOS
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------- ----------------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- ON-BALANCE SHEET LOAN PORTFOLIO COMMERCIAL Commercial, financial and agricultural $ 60,385 61,258 63,616 52,516 52,687 Real estate - construction and other 8,137 7,969 7,457 3,060 3,345 Real estate - mortgage 17,186 17,234 17,156 7,964 9,187 Lease financing 22,223 21,958 21,625 16,903 16,625 Foreign 6,920 7,653 7,572 5,920 5,396 --------------------------------------------------------------------------------------------------------------------------------- Total commercial 114,851 116,072 117,426 86,363 87,240 --------------------------------------------------------------------------------------------------------------------------------- CONSUMER Real estate - mortgage 20,901 22,139 25,466 17,277 17,678 Installment loans 36,073 34,666 35,577 24,597 23,253 Vehicle leasing 345 618 941 1,231 1,640 --------------------------------------------------------------------------------------------------------------------------------- Total consumer 57,319 57,423 61,984 43,105 42,571 --------------------------------------------------------------------------------------------------------------------------------- Total loans 172,170 173,495 179,410 129,468 129,811 Unearned income 9,876 9,694 9,730 6,976 6,958 --------------------------------------------------------------------------------------------------------------------------------- Loans, net (on-balance sheet) $ 162,294 163,801 169,680 122,492 122,853 ================================================================================================================================= MANAGED PORTFOLIO --------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL On-balance sheet loan portfolio $ 114,851 116,072 117,426 86,363 87,240 Securitized loans - off-balance sheet 5,816 5,827 6,613 6,284 6,302 Loans held for sale included in other assets 962 1,478 1,648 369 1,296 --------------------------------------------------------------------------------------------------------------------------------- Total commercial 121,629 123,377 125,687 93,016 94,838 --------------------------------------------------------------------------------------------------------------------------------- CONSUMER Real estate - mortgage On-balance sheet loan portfolio 20,901 22,139 25,466 17,277 17,678 Securitized loans included in securities 4,181 5,344 2,506 2,625 3,081 Loans held for sale included in other assets 1,554 2,420 1,687 2,294 1,933 --------------------------------------------------------------------------------------------------------------------------------- Total real estate - mortgage 26,636 29,903 29,659 22,196 22,692 --------------------------------------------------------------------------------------------------------------------------------- Installment loans On-balance sheet loan portfolio 36,073 34,666 35,577 24,597 23,253 Securitized loans - off-balance sheet 13,989 14,095 12,746 12,909 13,229 Securitized loans included in securities 9,230 9,776 9,460 9,755 10,173 Loans held for sale included in other assets 4,615 3,865 3,502 3,300 3,561 --------------------------------------------------------------------------------------------------------------------------------- Total installment loans 63,907 62,402 61,285 50,561 50,216 --------------------------------------------------------------------------------------------------------------------------------- Vehicle leasing - on-balance sheet loan portfolio 345 618 941 1,231 1,640 --------------------------------------------------------------------------------------------------------------------------------- Total consumer 90,888 92,923 91,885 73,988 74,548 --------------------------------------------------------------------------------------------------------------------------------- Total managed portfolio $ 212,517 216,300 217,572 167,004 169,386 ================================================================================================================================= SERVICING PORTFOLIO Commercial $ 47,657 42,210 41,394 38,943 37,678 Consumer $ 893 1,761 1,510 1,551 2,123 =================================================================================================================================
39 TABLE 9 LOANS HELD FOR SALE
------------------------------------------------------------------------------------------------------------------------------ 2002 2001 -------------- ----------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period $ 7,763 6,837 5,963 6,790 8,146 Former Wachovia balance, September 1, 2001 - - 297 - - Originations/purchases 5,866 7,471 4,955 5,279 4,773 Performing loans transferred to (from) loans held for sale, net 46 (43) 1,351 (189) 192 Nonperforming loans transferred to loans held for sale, net - 35 79 128 90 Allowance for loan losses related to loans transferred to loans held for sale (4) (10) (262) (40) (23) Lower of cost or market value adjustments (14) (58) (15) (35) (80) Performing loans sold (6,179) (5,845) (5,177) (5,535) (5,910) Nonperforming loans sold (22) (106) (88) (130) (45) Other, net (a) (325) (518) (266) (305) (353) ------------------------------------------------------------------------------------------------------------------------------ Balance, end of period (b) $ 7,131 7,763 6,837 5,963 6,790 ============================================================================================================================== (a) Other, net represents primarily loan payments. (b) Nonperforming loans included in loans held for sale at March 31, 2002, and at December 31, September 30, June 30, and March 31, 2001, were $213 million, $228 million, $273 million, $250 million and $344 million, respectively.
40 TABLE 10 ALLOWANCE FOR LOAN LOSSES AND NONPERFORMING ASSETS
------------------------------------------------------------------------------------------------------------------------------ 2002 2001 ------------- ------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------------------ ALLOWANCE FOR LOAN LOSSES Balance, beginning of period $ 2,995 3,039 1,760 1,759 1,722 Provision for loan losses relating to loans transferred to other assets or sold 14 3 230 36 15 Provision for loan losses 325 378 894 187 204 Former Wachovia balance, September 1, 2001 - - 766 - - Allowance relating to loans acquired, transferred to other assets or sold (23) (47) (368) (65) (23) Loan losses, net (325) (378) (243) (157) (159) ------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $ 2,986 2,995 3,039 1,760 1,759 ============================================================================================================================== as a % of loans, net 1.84 % 1.83 1.79 1.44 1.43 ============================================================================================================================== as a % of nonaccrual and restructured loans (a) 177 % 195 202 144 143 ============================================================================================================================== as a % of nonperforming assets (a) 162 % 175 186 133 132 ============================================================================================================================== LOAN LOSSES Commercial, financial and agricultural $ 275 333 192 122 121 Real estate - commercial construction and mortgage 2 2 1 3 4 Real estate - residential mortgage 4 - 1 2 1 Installment loans and vehicle leasing 100 90 80 64 63 ------------------------------------------------------------------------------------------------------------------------------ Total loan losses 381 425 274 191 189 ------------------------------------------------------------------------------------------------------------------------------ LOAN RECOVERIES Commercial, financial and agricultural 36 30 14 15 16 Real estate - commercial construction and mortgage - 1 1 5 1 Real estate - residential mortgage - - 1 - - Installment loans and vehicle leasing 20 16 15 14 13 ------------------------------------------------------------------------------------------------------------------------------ Total loan recoveries 56 47 31 34 30 ------------------------------------------------------------------------------------------------------------------------------ Loan losses, net $ 325 378 243 157 159 ============================================================================================================================== Commercial loan net charge-offs as % of average commercial loans, net (b) 0.97 % 1.19 0.85 0.55 0.56 Consumer loan net charge-offs as % of average consumer loans, net (b) 0.59 0.48 0.53 0.48 0.48 Total net charge-offs as % of average loans, net (b) 0.83 % 0.93 0.73 0.52 0.53 ============================================================================================================================== NONPERFORMING ASSETS Nonaccrual loans Commercial, financial and agricultural $ 1,371 1,294 1,253 1,069 993 Real estate - commercial construction and mortgage 128 87 63 19 33 Real estate - residential mortgage 58 60 75 45 74 Installment loans and vehicle leasing 128 93 115 90 131 ------------------------------------------------------------------------------------------------------------------------------ Total nonaccrual loans 1,685 1,534 1,506 1,223 1,231 Foreclosed properties (c) 159 179 126 104 106 ------------------------------------------------------------------------------------------------------------------------------ Total nonperforming assets $ 1,844 1,713 1,632 1,327 1,337 ============================================================================================================================== Nonperforming loans included in loans held for sale (d) $ 213 228 273 250 344 Nonperforming assets included in loans and in loans held for sale $ 2,057 1,941 1,905 1,577 1,681 ============================================================================================================================== as % of loans, net, and foreclosed properties (a) 1.14 % 1.04 0.96 1.08 1.09 ============================================================================================================================== as % of loans, net, foreclosed properties and loans in other assets as held for sale (d) 1.21 % 1.13 1.08 1.23 1.30 ============================================================================================================================== Accruing loans past due 90 days $ 275 288 310 213 220 ============================================================================================================================== (a) These ratios do not include nonperforming loans included in loans held for sale. (b) Annualized. (c) Restructured loans are not significant. (d) These ratios reflect nonperforming loans included in loans held for sale. Loans held for sale, which are included in other assets, are recorded at the lower of cost or market value, and accordingly, the amount shown and included in the ratios is net of the transferred allowance for loan losses and the lower of cost or market value adjustments.
41 TABLE 11 NONACCRUAL LOAN ACTIVITY (a)
---------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- --------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $ 1,534 1,506 1,223 1,231 1,176 ---------------------------------------------------------------------------------------------------------------------------- COMMERCIAL NONACCRUAL LOAN ACTIVITY Commercial nonaccrual loans, beginning of period 1,381 1,316 1,088 1,026 939 Former Wachovia balance, September 1, 2001 - - 209 - - ---------------------------------------------------------------------------------------------------------------------------- New nonaccrual loans and advances 541 668 376 361 314 Charge-offs (277) (335) (193) (125) (125) Transfers to loans held for sale - - (20) - - Transfers to other real estate owned - (40) (5) - - Sales (64) (64) (36) (50) - Other, principally payments (82) (164) (103) (124) (102) ---------------------------------------------------------------------------------------------------------------------------- Net commercial nonaccrual loan activity 118 65 19 62 87 ---------------------------------------------------------------------------------------------------------------------------- Commercial nonaccrual loans, end of period 1,499 1,381 1,316 1,088 1,026 ---------------------------------------------------------------------------------------------------------------------------- CONSUMER NONACCRUAL LOAN ACTIVITY Consumer nonaccrual loans, beginning of period 153 190 135 205 237 Former Wachovia balance, September 1, 2001 - - 33 - - ---------------------------------------------------------------------------------------------------------------------------- New nonaccrual loans and advances, net 50 76 75 53 58 Transfers to loans held for sale - (22) (53) (123) (90) Sales and securitizations (17) (91) - - - ---------------------------------------------------------------------------------------------------------------------------- Net consumer nonaccrual loan activity 33 (37) 22 (70) (32) ---------------------------------------------------------------------------------------------------------------------------- Consumer nonaccrual loans, end of period 186 153 190 135 205 ---------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD $ 1,685 1,534 1,506 1,223 1,231 ============================================================================================================================ (a) Excludes nonaccrual loans included in loans held for sale and foreclosed properties.
42 TABLE 12 GOODWILL AND OTHER INTANGIBLE ASSETS
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- --------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- Goodwill $ 10,728 10,616 10,496 3,476 3,524 Deposit base 1,661 1,822 2,433 140 157 Customer relationships 237 244 8 9 9 Tradename 90 90 - - - --------------------------------------------------------------------------------------------------------------------------------- Total goodwill and other intangible assets $ 12,716 12,772 12,937 3,625 3,690 ---------------------------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS CREATED BY THE FIRST UNION/WACHOVIA MERGER
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 ----------- ------------------------- FIRST Fourth Third (In millions) QUARTER Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- PURCHASE PRICE LESS FORMER WACHOVIA ENDING TANGIBLE STOCKHOLDERS' EQUITY AS OF SEPTEMBER 1, 2001 $ 7,466 7,466 7,466 --------------------------------------------------------------------------------------------------------------------------------- PRELIMINARY FAIR VALUE PURCHASE ACCOUNTING ADJUSTMENTS (a) Financial assets 829 829 747 Premises and equipment 164 132 146 Employee benefit plans 276 276 276 Financial liabilities (13) (13) (13) Other, including income taxes (152) (169) (144) --------------------------------------------------------------------------------------------------------------------------------- Total fair value purchase accounting adjustments 1,104 1,055 1,012 --------------------------------------------------------------------------------------------------------------------------------- PRELIMINARY EXIT COST PURCHASE ACCOUNTING ADJUSTMENTS Personnel and employee termination benefits (b) 142 94 43 Occupancy and equipment 83 - - Gain on regulatory-mandated branch sales (53) - - Contract cancellations 2 2 - Other 51 45 22 --------------------------------------------------------------------------------------------------------------------------------- Total pre-tax exit costs 225 141 65 Income taxes (67) (37) (9) --------------------------------------------------------------------------------------------------------------------------------- Total after-tax exit cost purchase accounting adjustments (One-time costs) 158 104 56 --------------------------------------------------------------------------------------------------------------------------------- Total purchase intangibles 8,728 8,625 8,534 Preliminary deposit base intangible (Net of income taxes) 1,194 1,194 1,465 Other identifiable intangibles (Net of income taxes) 209 209 - --------------------------------------------------------------------------------------------------------------------------------- Preliminary goodwill $ 7,325 7,222 7,069 ================================================================================================================================= (a) These adjustments represent preliminary fair value adjustments in compliance with business combination accounting standards and adjust assets and liabilities of the former Wachovia to their fair value as of September 1, 2001. (b) These adjustments represent incremental costs relating to combining the two organizations which are specifically related to the former Wachovia.
43 TABLE 13 DEPOSITS
------------------------------------------------------------------------------------------------------------------ 2002 2001 -------------- ---------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------------------------------ CORE DEPOSITS Noninterest-bearing $ 39,323 43,464 36,382 29,633 28,582 Savings and NOW accounts 47,436 47,175 44,154 37,266 37,599 Money market accounts 43,248 40,210 37,020 21,330 20,737 Other consumer time 37,134 39,649 42,231 32,793 33,868 ------------------------------------------------------------------------------------------------------------------ Total core deposits 167,141 170,498 159,787 121,022 120,786 OTHER DEPOSITS Foreign 7,535 9,116 10,181 6,977 7,810 Other time 5,357 7,839 10,581 10,568 12,199 ------------------------------------------------------------------------------------------------------------------ Total deposits $ 180,033 187,453 180,549 138,567 140,795 ==================================================================================================================
44 TABLE 14 TIME DEPOSITS IN AMOUNTS OF $100,000 OR MORE
------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 --------------------------- (In millions) ------------------------------------------------------------------------------------------------------------------ MATURITY OF 3 months or less $ 4,299 Over 3 months through 6 months 1,630 Over 6 months through 12 months 3,155 Over 12 months 3,093 ------------------------------------------------------------------------------------------------------------------ Total $ 12,177 ==================================================================================================================
45 TABLE 15 LONG-TERM DEBT
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- ---------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- NOTES AND DEBENTURES ISSUED BY THE PARENT COMPANY Notes 4.95% to 7.70%, due 2003 to 2006 $ 6,468 6,475 4,735 3,084 3,084 Floating rate, due 2002 to 2005 2,214 2,217 2,669 2,368 2,368 Floating rate extendible, due 2005 10 10 10 10 10 Subordinated notes 5.625% to 8.15%, due 2002 to 2009 4,701 4,702 4,703 2,665 2,664 8.00%, due 2009 149 149 208 208 208 6.605%, due 2025 250 250 250 - - 6.30%, Putable/Callable, due 2028 200 200 200 200 200 Floating rate, due 2003 150 150 150 150 150 Subordinated debentures 6.55% to 7.574%, due 2026 to 2035 795 794 794 794 794 Hedge-related basis adjustments 258 389 606 258 378 --------------------------------------------------------------------------------------------------------------------------------- Total notes and debentures issued by the Parent Company 15,195 15,336 14,325 9,737 9,856 --------------------------------------------------------------------------------------------------------------------------------- NOTES ISSUED BY SUBSIDIARIES Notes, primarily notes issued under global bank note programs, varying rates and terms to 2040 10,386 11,630 13,686 14,698 16,639 Subordinated notes 5.875% to 9.375%, due 2002 to 2006 925 925 925 925 925 Bank, 5.80% to 7.875%, due 2006 to 2036 2,544 2,544 2,548 2,548 2,548 6.625% to 8.375%, due 2002 to 2007 574 574 571 570 570 --------------------------------------------------------------------------------------------------------------------------------- Total notes issued by subsidiaries 14,429 15,673 17,730 18,741 20,682 --------------------------------------------------------------------------------------------------------------------------------- OTHER DEBT Trust preferred securities 2,986 2,989 2,993 2,007 2,027 Collateralized notes, floating rate, due 2006 2,459 2,489 2,474 2,463 - 4.556% auto securitization financing, due 2008 164 304 523 698 828 Advances from the Federal Home Loan Bank 4,823 4,933 4,930 2,562 2,762 Capitalized leases 23 25 26 18 19 Mortgage notes and other debt of subsidiaries 7 10 9 6 6 Hedge-related basis adjustments (150) (26) 223 (172) (88) --------------------------------------------------------------------------------------------------------------------------------- Total other debt 10,312 10,724 11,178 7,582 5,554 --------------------------------------------------------------------------------------------------------------------------------- Total $ 39,936 41,733 43,233 36,060 36,092 =================================================================================================================================
46 TABLE 16 CHANGES IN STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- ---------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of period $ 28,455 28,506 16,144 16,081 15,347 -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income Net income (loss) 913 736 (334) 633 584 Net unrealized gain (loss) on debt and equity securities (243) (389) 903 (176) 290 Net unrealized gain (loss) on derivative financial instruments (104) (169) 184 (138) 145 -------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 566 178 753 319 1,019 Preferred shares issued - 23 - - - Purchases of common stock - - (1,115) (67) (102) Common stock issued for Stock options and restricted stock 131 6 13 (17) 90 Dividend reinvestment plan - 15 14 15 14 Acquisitions - - 12,811 - - Stock options issued in acquisition - - 187 - - Deferred compensation, net (33) 57 (64) 49 (52) Cash dividends Preferred shares (6) (6) - - - Common shares (328) (324) (237) (236) (235) -------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 28,785 28,455 28,506 16,144 16,081 ================================================================================================================================
47 TABLE 17 CAPITAL RATIOS
---------------------------------------------------------------------------------------------------------------------------- 2002 2001 -------------- ----------------------------------------------------- FIRST Fourth Third Second First (In millions) QUARTER Quarter Quarter Quarter Quarter ---------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED CAPITAL RATIOS (a) Qualifying capital Tier 1 capital $ 19,706 18,999 18,447 14,631 14,212 Total capital 30,402 29,878 29,641 22,727 22,408 Adjusted risk-weighted assets 262,957 269,726 273,396 198,536 197,854 Adjusted leverage ratio assets $ 302,835 306,745 255,326 243,660 241,814 Ratios Tier 1 capital 7.49 % 7.04 6.75 7.37 7.18 Total capital 11.56 11.08 10.84 11.45 11.33 Leverage 6.51 6.19 7.22 6.00 5.88 STOCKHOLDERS' EQUITY TO ASSETS Quarter-end 9.00 8.61 8.75 6.56 6.36 Average 9.18 % 8.95 7.60 6.48 6.46 ============================================================================================================================ BANK CAPITAL RATIOS Tier 1 capital First Union National Bank 7.86 % 7.55 7.18 7.62 7.38 Wachovia Bank, N.A. 7.75 7.84 7.22 - - First Union National Bank of Delaware 9.35 12.51 12.32 12.61 11.97 First National Bank of Atlanta 15.98 13.24 18.86 - - Total capital First Union National Bank 12.09 11.68 11.36 11.61 11.39 Wachovia Bank, N.A. 11.82 12.14 11.53 - - First Union National Bank of Delaware 10.72 13.98 14.53 14.39 13.82 First National Bank of Atlanta 16.00 13.27 18.95 - - Leverage First Union National Bank 6.60 6.29 6.03 6.12 5.95 Wachovia Bank, N.A. 8.93 8.56 8.03 - - First Union National Bank of Delaware 6.86 7.92 8.38 7.97 8.08 First National Bank of Atlanta 10.15 % 9.28 7.20 - - ============================================================================================================================ (a) Risk-based capital ratio guidelines require a minimum ratio of tier 1 capital to risk-weighted assets of 4.00 percent and a minimum ratio of total capital to risk-weighted assets of 8.00 percent. The minimum leverage ratio of tier 1 capital to adjusted average quarterly assets is from 3.00 percent to 4.00 percent.
48 TABLE 18 RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS (a)
------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2002 ------------------------------------------------------------------------------------ GROSS UNREALIZED IN- AVERAGE NOTIONAL ---------------------------- EFFECTIVE- MATURITY IN (In millions) AMOUNT GAINS LOSSES (f) EQUITY (g) NESS (h) YEARS (i) ------------------------------------------------------------------------------------------------------------------------------- ASSET HEDGES Cash flow hedges (b) Interest rate swaps $ 51,827 508 (645) (86) 4 5.70 Interest rate options 1,000 2 - 1 - 3.17 Forward purchase commitments 2,689 9 - 5 - 0.41 Call option on eurodollar futures 500 - - - - 0.22 Futures 12,025 - (4) (2) - 0.25 Fair value hedges (c) Interest rate swaps 51 1 (1) - - 4.75 Forward sale commitments 779 4 - - 2 0.07 Futures 117 - - - - 0.25 ----------------------------------------------------------------------------------------------------------------- Total asset hedges $ 68,988 524 (650) (82) 6 4.39 =============================================================================================================================== LIABILITY HEDGES Cash flow hedges (d) Interest rate swaps $ 36,322 266 (602) (207) (2) 5.46 Interest rate options 17,900 67 (7) 37 - 3.23 Put options on Eurodollar futures 900 - - - - 0.22 Futures 31,850 6 (145) (86) - 0.25 Fair value hedges (e) Interest rate swaps 15,997 501 (132) - - 5.18 Interest rate options 300 2 - - - 1.21 ----------------------------------------------------------------------------------------------------------------- Total liability hedges $ 103,269 842 (886) (256) (2) 3.37 ===============================================================================================================================
49 (a) Includes only derivative financial instruments related to interest rate risk management activities. All of the company's other derivative financial instruments are classified as trading. (b) Receive-fixed interest rate swaps with a notional amount of $50.1 billion, of which $11.1 billion are forward-starting, and with pay rates based on one-to-six month LIBOR are primarily designated as cash flow hedges of the variability in cash flows related to the forecasted interest rate resets of one-to-six month LIBOR-indexed loans. Pay-fixed interest rate swaps with a notional amount of $1.7 billion and with receive rates based on one-month LIBOR are designated as cash flow hedges of securities and have a loss, net of income taxes, of $52 million in accumulated other comprehensive income. An interest rate collar that qualifies as a net purchased option with a notional amount of $1.0 billion is designated as a cash flow hedge of the variability in cash flows related to the forecasted interest rate resets of one-month LIBOR-indexed loans, when one-month LIBOR is below the purchased floor or above the sold cap. Forward purchase commitments of $2.7 billion are designated as a cash flow hedge of the variability of the consideration to be paid in the forecasted purchase of available for sale securities that will occur upon gross settlement of the commitment in 2002. A purchased call option on Eurodollar futures with a notional amount of $500 million and Eurodollar futures with a notional amount of $12.0 billion are primarily designated as cash flow hedges of the variability in cash flows related to the forecasted interest rate resets of three-month LIBOR-indexed loans. (c) Forward sale commitments of $779 million are designated as fair value hedges of mortgage loans in the warehouse. (d) Derivatives with a notional amount of $79.2 billion are designated as cash flow hedges of the variability in cash flows attributable to the forecasted issuance of fixed rate short-term liabilities that are part of a rollover strategy, primarily repurchase agreements and deposit products. Of this amount, $31.8 billion are Eurodollar futures, $900 million are purchased put options on Eurodollar futures, $32.8 billion are pay-fixed interest rate swaps with receive rates based on one-to-three month LIBOR, of which $18.7 billion are forward-starting, and $10.9 billion are purchased options on pay-fixed swaps with a strike based on three-month LIBOR. Interest rate collars that qualify as net purchased options with a notional amount of $2.8 billion also hedge the forecasted issuance of fixed rate short-term liabilities, when three-month LIBOR is below the sold floor or between the purchased and written caps. Derivatives with a notional amount of $7.7 billion are primarily designated as cash flow hedges of the variability in cash flows related to the forecasted interest rate resets of one-to-three month LIBOR-indexed long-term debt. Of this amount, $3.5 billion are pay-fixed interest rate swaps with receive rates based on one-to-three month LIBOR and $4.2 billion are purchased options on pay-fixed swaps with a strike based on three-month LIBOR. (e) Receive-fixed interest rate swaps with a notional amount of $16.0 billion and with pay rates based primarily on one-to-six month LIBOR are designated as fair value hedges of fixed rate liabilities, primarily CDs, long-term debt and bank notes. (f) Represents the fair value of derivative financial instruments less accrued interest receivable or payable. (g) At March 31, 2002, the net unrealized loss on derivatives included in accumulated other comprehensive income, which is a component of stockholders' equity, was $82 million, net of income taxes. Of this net of tax amount, a $338 million loss represents the effective portion of the net gains (losses) on derivatives that qualify as cash flow hedges, and a $256 million gain relates to terminated and/or redesignated derivatives. As of March 31, 2002, $318 million of net gains, net of income taxes, recorded in accumulated other comprehensive income are expected to be reclassified as interest income or expense during the next twelve months. The maximum length of time over which cash flow hedges are hedging the variability in future cash flows associated with the forecasted transactions is 22.52 years. (h) In the three months ended March 31, 2002, gains in the amount of $4 million were recognized in other fee income representing the ineffective portion of the net gains (losses) on derivatives that qualify as cash flow and fair value hedges. In addition, net interest income in the three months ended March 31, 2002, was reduced by $3 million representing ineffectiveness of cash flow hedges caused by differences between the critical terms of the derivative and the hedged item, primarily differences in reset dates. (i) Estimated maturity approximates average life. 50 TABLE 19 RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS - EXPECTED MATURITIES
------------------------------------------------------------------------------------------------------------------------------- MARCH 31, 2002 ---------------------------------------------------------------------------------- 1 YEAR 1 -2 2 -5 5 -10 AFTER 10 (In millions) OR LESS YEARS YEARS YEARS YEARS TOTAL ------------------------------------------------------------------------------------------------------------------------------- CASH FLOW ASSET HEDGES Notional amount - swaps $ 8,568 1,500 16,009 19,492 6,258 51,827 Notional amount - other 9,214 6,000 1,000 - - 16,214 Weighted average receive rate (a) 5.53 % 5.88 5.64 4.46 5.95 5.12 Weighted average pay rate (a) 1.99 % 1.93 2.08 1.89 2.04 1.97 Unrealized gain (loss) $ 108 33 61 (315) (17) (130) ------------------------------------------------------------------------------------------------------------------------------- FAIR VALUE ASSET HEDGES Notional amount - swaps $ - - 45 - 6 51 Notional amount - other 779 30 77 10 - 896 Weighted average receive rate (a) - % - 1.80 - 1.83 1.83 Weighted average pay rate (a) - % - 4.31 - 7.36 7.36 Unrealized gain (loss) $ 4 - 1 - (1) 4 ------------------------------------------------------------------------------------------------------------------------------- CASH FLOW LIABILITY HEDGES Notional amount - swaps $ 8,755 675 14,712 7,515 4,665 36,322 Notional amount - other 26,450 4,000 11,700 8,500 - 50,650 Weighted average receive rate (a) 1.91 % 1.89 1.98 1.95 1.91 1.95 Weighted average pay rate (a) 5.07 % 4.69 4.91 7.14 6.47 5.72 Unrealized gain (loss) $ (140) (12) 33 (51) (245) (415) ------------------------------------------------------------------------------------------------------------------------------- FAIR VALUE LIABILITY HEDGES Notional amount - swaps $ 875 650 9,000 4,950 522 15,997 Notional amount - other - 300 - - - 300 Weighted average receive rate (a) 7.27 % 6.35 6.53 6.72 6.66 6.63 Weighted average pay rate (a) 1.96 % 1.88 2.19 2.19 1.91 2.16 Unrealized gain (loss) $ 18 9 241 88 15 371 =============================================================================================================================== (a) Weighted average receive and pay rates include the impact of currently effective interest rate swaps and basis swaps only and not the impact of forward-starting interest rate swaps. All of the interest rate swaps have variable pay or receive rates based on one-to-six month LIBOR, and they are the pay or receive rates in effect at March 31, 2002.
51 TABLE 20 RISK MANAGEMENT DERIVATIVE FINANCIAL INSTRUMENTS ACTIVITY
----------------------------------------------------------------------------------------------------------------------- Asset Liability (In millions) Hedges Hedges Total ----------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 45,199 84,129 129,328 Additions 26,578 38,132 64,710 Maturities and amortizations (2,489) (16,532) (19,021) Terminations (300) (2,435) (2,735) Redesignations and transfers to trading account assets - (25) (25) ----------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 2002 $ 68,988 103,269 172,257 =======================================================================================================================
52 WACHOVIA CORPORATION AND SUBSIDIARIES NET INTEREST INCOME SUMMARIES
---------------------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 2002 FOURTH QUARTER 2001 ------------------------------------ ------------------------------------ AVERAGE Average INTEREST RATES Interest Rates AVERAGE INCOME/ EARNED/ Average Income/ Earned/ (In millions) BALANCES EXPENSE PAID Balances Expense Paid ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing bank balances $ 4,341 22 2.07 % $ 3,333 21 2.50 % Federal funds sold and securities purchased under resale agreements 12,020 93 3.13 11,784 99 3.32 Trading account assets (a) 14,703 165 4.53 14,552 175 4.81 Securities (a) 56,287 884 6.29 55,708 905 6.49 Loans (a) (b) Commercial Commercial, financial and agricultural 59,927 1,049 7.10 62,220 1,202 7.67 Real estate - construction and other 8,126 86 4.28 7,919 101 5.02 Real estate - mortgage 17,163 238 5.61 17,139 263 6.10 Lease financing 7,442 193 10.37 7,578 199 10.51 Foreign 6,831 62 3.71 7,374 81 4.34 ----------------------------------------------------------------------------- ------------------------ Total commercial 99,489 1,628 6.62 102,230 1,846 7.17 ----------------------------------------------------------------------------- ------------------------ Consumer Real estate - mortgage 21,444 354 6.60 24,032 414 6.90 Installment loans and vehicle leasing 36,131 668 7.49 36,577 724 7.87 ----------------------------------------------------------------------------- ------------------------ Total consumer 57,575 1,022 7.16 60,609 1,138 7.49 ----------------------------------------------------------------------------- ------------------------ Total loans 157,064 2,650 6.82 162,839 2,984 7.29 ----------------------------------------------------------------------------- ------------------------ Other earning assets 11,073 140 5.13 11,668 179 6.11 ----------------------------------------------------------------------------- ------------------------ Total earning assets 255,488 3,954 6.24 259,884 4,363 6.68 ======================== ======================== Cash and due from banks 10,047 9,814 Other assets 49,281 49,024 ---------------------------------------------------------------- ----------- Total assets $ 314,816 $ 318,722 ================================================================ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits Savings and NOW accounts 48,931 175 1.45 47,527 222 1.85 Money market accounts 38,974 271 2.82 36,306 289 3.16 Other consumer time 38,182 399 4.24 40,951 484 4.69 Foreign 7,578 35 1.85 8,603 56 2.58 Other time 6,735 35 2.17 9,043 65 2.81 ----------------------------------------------------------------------------- ------------------------ Total interest-bearing deposits 140,400 915 2.64 142,430 1,116 3.11 Federal funds purchased and securities sold under repurchase agreements 31,940 211 2.68 33,028 298 3.59 Commercial paper 3,435 10 1.15 3,709 29 3.07 Other short-term borrowings 10,550 65 2.51 9,617 45 1.86 Long-term debt 41,057 276 2.69 42,979 391 3.64 ----------------------------------------------------------------------------- ------------------------ Total interest-bearing liabilities 227,382 1,477 2.63 231,763 1,879 3.22 ======================== ======================= Noninterest-bearing deposits 37,603 37,042 Other liabilities 20,928 21,377 Stockholders' equity 28,903 28,540 ---------------------------------------------------------------- ----------- Total liabilities and stockholders' equity $ 314,816 $ 318,722 ================================================================ =========== Interest income and rate earned $ 3,954 6.24 % $ 4,363 6.68 % Interest expense and equivalent rate paid 1,477 2.34 1,879 2.87 ------------------------------------------------------------------------------------------ ----------------------- Net interest income and margin (c) $ 2,477 3.90 % $ 2,484 3.81 % ========================================================================================== ======================= (a) Yields related to securities and loans exempt from federal and state income taxes are stated on a fully tax-equivalent basis. They are reduced by the nondeductible portion of interest expense, assuming a federal tax rate of 35 percent and applicable state tax rates. Lease financing amounts include related deferred income taxes. (b) The loan averages are stated net of unearned income, and the averages include loans on which the accrual of interest has been discontinued.
53
------------------------------------------------------------------------------------------------------------------------- THIRD QUARTER 2001 SECOND QUARTER 2001 FIRST QUARTER 2001 ------------------------------------------------------------------------------------------------------------------------- Average Average Average Interest Rates Interest Rates Interest Rates Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balances Expense Paid Balances Expense Paid Balances Expense Paid ------------------------------------------------------------------------------------------------------------------------- $ 1,740 17 3.86 % $ 2,529 29 4.57 % $ 1,826 25 5.69 % 10,031 107 4.25 8,923 99 4.41 7,036 95 5.49 14,572 199 5.43 13,965 202 5.78 13,315 206 6.24 50,621 877 6.93 49,931 899 7.21 50,417 945 7.50 55,490 1,142 8.17 53,160 1,098 8.29 53,416 1,130 8.56 4,512 66 5.88 3,193 52 6.56 3,231 62 7.76 10,923 184 6.66 8,525 149 7.01 9,195 180 7.95 6,441 168 10.42 6,075 157 10.29 6,084 161 10.62 6,267 83 5.26 5,425 83 6.12 5,344 92 7.01 ------------------------- ------------------------- ------------------------ 83,633 1,643 7.80 76,378 1,539 8.08 77,270 1,625 8.51 ------------------------- ------------------------- ------------------------ 19,816 353 7.12 17,435 318 7.29 17,610 331 7.52 29,577 637 8.57 25,399 572 9.02 24,970 580 9.41 ------------------------- ------------------------- ------------------------ 49,393 990 7.99 42,834 890 8.32 42,580 911 8.63 ------------------------- ------------------------- ------------------------ 133,026 2,633 7.87 119,212 2,429 8.17 119,850 2,536 8.55 ------------------------- ------------------------- ------------------------ 9,682 155 6.35 10,113 193 7.68 11,276 250 8.96 ------------------------- ------------------------- ------------------------ 219,672 3,988 7.23 204,673 3,851 7.54 203,720 4,057 8.03 ======================= ======================= ======================= 8,357 7,568 7,749 39,337 35,013 34,000 ------------ ------------ ----------- $ 267,366 $ 247,254 $ 245,469 ============ ============ =========== 41,897 259 2.46 39,640 267 2.70 38,756 264 2.76 24,904 269 4.28 18,746 225 4.81 17,941 200 4.52 35,484 474 5.30 33,268 477 5.76 34,452 506 5.96 7,441 71 3.74 6,357 73 4.62 6,851 94 5.59 10,574 110 4.13 11,587 150 5.20 12,239 189 6.27 ------------------------- ------------------------- ------------------------ 120,300 1,183 3.90 109,598 1,192 4.36 110,239 1,253 4.61 26,982 332 4.87 27,128 356 5.27 25,005 378 6.13 2,950 25 3.36 2,435 25 4.08 2,540 33 5.32 9,870 60 2.45 9,809 73 2.98 9,580 82 3.46 38,220 414 4.34 36,254 463 5.11 36,631 577 6.30 ------------------------- ------------------------- ------------------------ 198,322 2,014 4.04 185,224 2,109 4.57 183,995 2,323 5.10 ======================= ======================= ======================= 29,918 27,381 27,043 18,796 18,623 18,585 20,330 16,026 15,846 ------------ ------------ ----------- $ 267,366 $ 247,254 $ 245,469 ============ ============ =========== $ 3,988 7.23 % $ 3,851 7.54 % $ 4,057 8.03 % 2,014 3.65 2,109 4.13 2,323 4.61 ----------------------- ----------------------- ----------------------- $ 1,974 3.58 % $ 1,742 3.41 % $ 1,734 3.42 % ======================= ======================= ======================= (c) The net interest margin includes (in basis points): 47, 27, 18, 13 and 14 in the first quarter of 2002, and in the fourth, third, second and first quarters of 2001, respectively, in net interest income from hedge-related derivative transactions.
54 WACHOVIA CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF INCOME
--------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------------ MERGER- RELATED AND OPERATING RESTRUCTURING AS (In millions, except per share data) EARNINGS CHARGES REPORTED --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 2,426 - 2,426 Provision for loan losses 339 - 339 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,087 - 2,087 --------------------------------------------------------------------------------------------------------------------------------- Fee and other income Asset sales and securitization 93 - 93 Other fee and other income 1,934 - 1,934 --------------------------------------------------------------------------------------------------------------------------------- Total fee and other income 2,027 - 2,027 --------------------------------------------------------------------------------------------------------------------------------- Noninterest expense Merger-related and restructuring charges Personnel and employee termination benefits - 37 37 Occupancy and equipment - 41 41 Gain on regulatory-mandated branch sales - (121) (121) Contract cancellations and system conversions - 18 18 Other - 16 16 --------------------------------------------------------------------------------------------------------------------------------- Total First Union/Wachovia merger-related and restructuring charges - (9) (9) Merger-related charges from other mergers - 1 1 --------------------------------------------------------------------------------------------------------------------------------- Total merger-related and restructuring charges - (8) (8) Other noninterest expense 2,777 - 2,777 --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,777 (8) 2,769 --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,337 8 1,345 Income taxes 429 3 432 --------------------------------------------------------------------------------------------------------------------------------- Net income 908 5 913 --------------------------------------------------------------------------------------------------------------------------------- Dividends on preferred stock 6 - 6 --------------------------------------------------------------------------------------------------------------------------------- Net income available to common stockholders $ 902 5 907 ================================================================================================================================= Diluted earnings per common share $ 0.66 - 0.66 =================================================================================================================================
55 WACHOVIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATING EARNINGS (a)
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------- --------------------------------------------------- FIRST Fourth Third Second First (In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 2,637 2,970 2,621 2,420 2,526 Interest and dividends on securities 856 876 852 881 925 Trading account interest 155 166 192 198 204 Other interest income 255 299 279 321 370 --------------------------------------------------------------------------------------------------------------------------------- Total interest income 3,903 4,311 3,944 3,820 4,025 --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 915 1,116 1,183 1,192 1,253 Interest on short-term borrowings 286 372 417 454 493 Interest on long-term debt 276 391 414 463 577 --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,477 1,879 2,014 2,109 2,323 --------------------------------------------------------------------------------------------------------------------------------- Net interest income 2,426 2,432 1,930 1,711 1,702 Provision for loan losses 339 381 244 223 219 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,087 2,051 1,686 1,488 1,483 --------------------------------------------------------------------------------------------------------------------------------- FEE AND OTHER INCOME Service charges and fees 661 672 541 486 468 Commissions 464 448 356 389 375 Fiduciary and asset management fees 477 478 400 384 381 Advisory, underwriting and other investment banking fees 240 223 177 238 198 Principal investing (90) (21) (585) (58) (43) Other income 275 260 147 190 167 --------------------------------------------------------------------------------------------------------------------------------- Total fee and other income 2,027 2,060 1,036 1,629 1,546 --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 1,663 1,663 1,374 1,363 1,329 Occupancy 195 210 176 155 163 Equipment 226 247 214 198 205 Advertising 19 21 15 11 9 Communications and supplies 134 142 117 111 110 Professional and consulting fees 88 113 79 69 73 Goodwill and other intangible amortization 168 251 117 77 78 Sundry expense 284 295 218 185 171 --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,777 2,942 2,310 2,169 2,138 --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,337 1,169 412 948 891 Income taxes 429 370 114 299 281 --------------------------------------------------------------------------------------------------------------------------------- Net operating earnings $ 908 799 298 649 610 ================================================================================================================================= Diluted earnings per common share $ 0.66 0.58 0.27 0.66 0.62 ================================================================================================================================= (a) Operating earnings exclude merger-related, restructuring and other charges and gains.
56 WACHOVIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 ---------- --------------------------------------------------- FIRST Fourth Third Second First (In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 10,038 13,917 10,051 8,665 7,857 Interest-bearing bank balances 3,356 6,875 2,128 1,666 2,971 Federal funds sold and securities purchased under resale agreements (carrying amount of collateral held $4,587 at March 31, 2002, $3,018 repledged) 13,154 13,919 9,354 9,161 11,866 --------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 26,548 34,711 21,533 19,492 22,694 --------------------------------------------------------------------------------------------------------------------------------- Trading account assets 28,227 25,386 26,763 23,181 20,431 Securities 57,382 58,467 56,929 48,055 51,528 Loans, net of unearned income 162,294 163,801 169,680 122,492 122,853 Allowance for loan losses (2,986) (2,995) (3,039) (1,760) (1,759) --------------------------------------------------------------------------------------------------------------------------------- Loans, net 159,308 160,806 166,641 120,732 121,094 --------------------------------------------------------------------------------------------------------------------------------- Premises and equipment 5,596 5,719 5,775 4,852 4,968 Due from customers on acceptances 888 745 796 856 894 Goodwill 10,728 10,616 10,496 3,476 3,524 Intangible assets 1,988 2,156 2,441 149 166 Other assets 29,188 31,846 34,523 25,148 27,650 --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 319,853 330,452 325,897 245,941 252,949 ================================================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Noninterest-bearing deposits 39,323 43,464 36,382 29,633 28,582 Interest-bearing deposits 140,710 143,989 144,167 108,934 112,213 --------------------------------------------------------------------------------------------------------------------------------- Total deposits 180,033 187,453 180,549 138,567 140,795 Short-term borrowings 46,559 44,385 44,303 34,754 39,719 Bank acceptances outstanding 892 762 798 859 902 Trading account liabilities 10,261 11,437 10,084 7,907 8,130 Other liabilities 13,387 16,227 18,424 11,650 11,230 Long-term debt 39,936 41,733 43,233 36,060 36,092 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 291,068 301,997 297,391 229,797 236,868 --------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Dividend Equalization Preferred shares, no par value, 97 million shares issued and outstanding at March 31, 2002 11 17 - - - Common stock, $3.33-1/3 par value; authorized 3 billion shares, outstanding 1.368 billion shares at March 31, 2002 4,559 4,539 4,537 3,264 3,271 Paid-in capital 17,989 17,911 17,835 6,345 6,307 Retained earnings 6,136 5,551 5,139 6,627 6,281 Accumulated other comprehensive income, net 90 437 995 (92) 222 --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 28,785 28,455 28,506 16,144 16,081 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 319,853 330,452 325,897 245,941 252,949 =================================================================================================================================
57 WACHOVIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS)
--------------------------------------------------------------------------------------------------------------------------------- 2002 2001 ------------- -------------------------------------------------- FIRST Fourth Third Second First (In millions, except per share data) QUARTER Quarter Quarter Quarter Quarter --------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 2,637 2,970 2,621 2,420 2,526 Interest and dividends on securities 856 876 852 881 925 Trading account interest 155 166 192 198 204 Other interest income 255 299 279 321 370 --------------------------------------------------------------------------------------------------------------------------------- Total interest income 3,903 4,311 3,944 3,820 4,025 --------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 915 1,116 1,183 1,192 1,253 Interest on short-term borrowings 286 372 417 454 493 Interest on long-term debt 276 391 414 463 577 --------------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,477 1,879 2,014 2,109 2,323 --------------------------------------------------------------------------------------------------------------------------------- Net interest income 2,426 2,432 1,930 1,711 1,702 Provision for loan losses 339 381 1,124 223 219 --------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,087 2,051 806 1,488 1,483 --------------------------------------------------------------------------------------------------------------------------------- FEE AND OTHER INCOME Service charges and fees 661 672 541 486 468 Commissions 464 448 356 389 375 Fiduciary and asset management fees 477 478 400 384 381 Advisory, underwriting and other investment banking fees 240 223 177 238 198 Principal investing (90) (21) (585) (58) (43) Other income 275 260 143 191 195 --------------------------------------------------------------------------------------------------------------------------------- Total fee and other income 2,027 2,060 1,032 1,630 1,574 --------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 1,663 1,663 1,374 1,400 1,373 Occupancy 195 210 176 180 164 Equipment 226 247 214 207 211 Advertising 19 21 15 16 14 Communications and supplies 134 142 117 111 110 Professional and consulting fees 88 113 79 84 83 Goodwill and other intangible amortization 168 251 117 77 78 Merger-related and restructuring charges (8) 88 85 (69) 2 Sundry expense 284 295 218 191 174 --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 2,769 3,030 2,395 2,197 2,209 --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (benefits) 1,345 1,081 (557) 921 848 Income taxes (benefits) 432 345 (223) 288 264 --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 913 736 (334) 633 584 Dividends on preferred stock 6 6 - - - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) available to common stockholders $ 907 730 (334) 633 584 ================================================================================================================================= PER COMMON SHARE DATA Basic earnings $ 0.67 0.54 (0.31) 0.65 0.60 Diluted earnings 0.66 0.54 (0.31) 0.64 0.59 Cash dividends $ 0.24 0.24 0.24 0.24 0.24 AVERAGE COMMON SHARES Basic 1,355 1,352 1,094 969 968 Diluted 1,366 1,363 1,105 978 976 =================================================================================================================================
58 WACHOVIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, ------------------------- (In millions) 2002 2001 ---------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 913 584 Adjustments to reconcile net income to net cash provided (used) by operating activities Accretion and amortization of securities discounts and premiums, net 7 44 Provision for loan losses 339 219 Securitization (gains) losses (93) 32 Gain on sale of mortgage servicing rights (15) (12) Securities transactions 6 16 Depreciation, goodwill and other amortization 412 284 Trading account assets, net (2,841) 1,228 Mortgage loans held for resale 866 (823) (Gain) loss on sales of premises and equipment 2 (1) Other assets, net 1,835 1,835 Trading account liabilities, net (1,176) 655 Other liabilities, net (2,744) (3,016) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (2,489) 1,045 ---------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Increase (decrease) in cash realized from Sales of securities 7,186 2,771 Maturities of securities 3,711 1,313 Purchases of securities (9,359) (4,870) Origination of loans, net 348 (45) Sales of premises and equipment 41 38 Purchases of premises and equipment (99) (160) Goodwill and other intangible assets, net (112) (102) Purchase of bank-owned separate account life insurance (46) (21) Cash equivalents acquired, net of purchases of banking organizations - (13) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities 1,670 (1,089) ---------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in cash realized from Sales of deposits, net (7,420) (1,873) Securities sold under repurchase agreements and other short-term borrowings, net 2,174 271 Issuances of long-term debt 188 2,470 Payments of long-term debt (1,985) (2,187) Sales of common stock 33 9 Purchases of common stock - (102) Cash dividends paid (334) (235) ---------------------------------------------------------------------------------------------------------------------------- Net cash used by financing activities (7,344) (1,647) ---------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents (8,163) (1,691) Cash and cash equivalents, beginning of year 34,711 24,385 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 26,548 22,694 ============================================================================================================================ NONCASH ITEMS Transfer to securities from loans $ 858 95 Transfer to securities from other assets - 908 Transfer to other assets from loans, net $ 46 282 ============================================================================================================================
59