-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DUCfrZvDDUcrQA/cUKGBo8JXXhbV1hYV49iHAzWSD3gUeNUP7t6foZBgjFzP7GX+ IwGhs0/EhPrMxvfTdJv/KA== 0000950109-01-502821.txt : 20010814 0000950109-01-502821.hdr.sgml : 20010814 ACCESSION NUMBER: 0000950109-01-502821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WACHOVIA CORP/ NC CENTRAL INDEX KEY: 0000774203 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561473727 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09021 FILM NUMBER: 1706848 BUSINESS ADDRESS: STREET 1: 100 N MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27101 BUSINESS PHONE: 3367705000 MAIL ADDRESS: STREET 1: 100 NORTH MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27101 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WACHOVIA CORP DATE OF NAME CHANGE: 19910603 10-Q 1 d10q.txt WACHOVIA CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Ex- change Act of 1934 Commission File Number 1-9021 Wachovia Corporation North Carolina 56-1473727 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Address and Telephone Number: 100 North Main Street 191 Peachtree Street NE Winston-Salem, North Carolina 27101 Atlanta, Georgia 30303 (336) 770-5000 (404) 332-5000 Indicate by check mark whether the registrant (1) has filed all reports re- quired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the regis- trant was required to file such reports), and (2) has been subject to such fil- ing requirements for the past 90 days. [X] Yes [ ] No As of June 30, 2001, Wachovia Corporation had 203,322,801 shares of common stock outstanding. PART I -- FINANCIAL INFORMATION Item 1. Financial Statements
Page No. -------- Consolidated Statements of Condition at June 30, 2001, December 31, 2000 and June 30, 2000.............................................. 2 Consolidated Statements of Income for the three and six months ended June 30, 2001 and June 30, 2000..................................... 3 Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2001 and June 30, 2000............................... 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and June 30, 2000.......................................... 5 Notes to Consolidated Financial Statements........................... 6
FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements regard- ing Wachovia, including, without limitation, statements relating to Wachovia's expectations with respect to revenue, credit losses, levels of nonperforming assets, expenses, earnings and other measures of financial performance. Words such as "may," "could," "would," "should," "believes," "expects," "antici- pates," "estimates," "intends," "plans," "targets" or similar expressions are intended to identify forward-looking statements. These forward-looking state- ments are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond Wachovia's control). The following factors, among others, could cause Wachovia's financial performance to differ materially from the ex- pectations expressed in such forward-looking statements: (1) business increas- es, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated; (2) competitive pressures among financial services companies increase significantly; (3) the strength of the United States economy in general and/or the strength of the local economies of the States in which Wachovia conducts operations changes; (4) trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, change; (5) inflation, interest rates and/or market conditions fluctuate; (6) conditions in the stock market, the public debt market and other capital markets deteriorate, and impact Wachovia's activities; (7) Wachovia fails to develop competitive new products and services and/or new and existing customers do not accept these products and services; (8) financial services' laws and regulations change; (9) tech- nology changes and Wachovia fails to adapt to those changes; (10) consumer spending and saving habits change; (11) unanticipated regulatory or judicial proceedings occur; and (12) Wachovia is unsuccessful at managing the risks in- volved in the foregoing. Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that Wachovia files with the Securities and Exchange Commission. Wachovia cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. Wachovia does not intend to update any forward- looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report on Form 10-Q. 1 Consolidated Statements of Condition - -------------------------------------------------------------------------------- ($ in thousands, except per share) wachovia corporation and subsidiaries
June 30 December 31 June 30 2001 2000 2000 ----------- ----------- ----------- Assets Cash and due from banks................. $ 2,587,278 $ 3,686,871 $ 3,208,459 Interest bearing bank balances.......... 54,976 137,504 118,971 Federal funds sold and securities purchased under resale agreements...... 631,129 788,618 202,273 Trading account assets.................. 2,084,549 960,838 1,457,467 Securities available-for-sale........... 6,276,448 7,487,696 7,088,977 Securities held-to-maturity (fair value of $655,212, $1,052,535 and $1,109,096 respectively).......................... 625,327 1,023,750 1,101,461 Loans, net of unearned income........... 52,159,625 50,567,502 48,522,061 Less allowance for loan losses.......... 756,768 667,654 644,445 ----------- ----------- ----------- Net loans............................. 51,402,857 49,899,848 47,877,616 Investment in discontinued operations... 354,495 392,469 403,154 Premises and equipment.................. 927,285 903,411 926,602 Due from customers on acceptances....... 62,782 82,008 80,917 Goodwill and other intangible assets.... 1,317,592 1,024,766 1,008,071 Other assets............................ 3,977,888 3,223,349 2,698,404 ----------- ----------- ----------- Total assets.......................... $70,302,606 $69,611,128 $66,172,372 =========== =========== =========== Liabilities Deposits in domestic offices: Demand................................. $ 8,525,977 $ 9,180,330 $ 8,783,729 Interest-bearing demand................ 5,380,199 5,116,571 4,885,151 Savings and money market savings....... 14,499,195 12,902,336 12,716,834 Savings certificates................... 9,474,735 9,534,778 9,530,065 Large denomination certificates........ 3,413,320 3,673,219 3,862,754 ----------- ----------- ----------- Total deposits in domestic offices.... 41,293,426 40,407,234 39,778,533 Interest-bearing deposits in foreign offices................................ 2,984,283 4,004,948 2,807,675 ----------- ----------- ----------- Total deposits........................ 44,277,709 44,412,182 42,586,208 Federal funds purchased and securities sold under repurchase agreements....... 7,167,806 6,753,164 7,440,013 Commercial paper........................ 1,990,469 1,855,923 1,649,239 Other short-term borrowed funds......... 1,893,562 1,253,058 2,172,587 Short-term borrowed funds allocated to discontinued operations................ (3,136,636) (3,055,119) (3,204,459) Long-term debt.......................... 10,006,181 10,808,218 8,858,331 Long-term debt allocated to discontinued operations............................. (1,344,273) (1,309,337) (1,373,339) Acceptances outstanding................. 62,782 82,008 80,917 Other liabilities....................... 2,929,531 2,526,492 2,026,831 ----------- ----------- ----------- Total liabilities..................... 63,847,131 63,326,589 60,236,328 Shareholder's Equity Preferred stock, par value $5 per share: Authorized 50,000,000 shares; none outstanding........................... -- -- -- Common stock, par value $5 per share: Authorized 1,000,000,000 shares; issued and outstanding 203,322,801, 203,423,606 and 203,267,427 shares, respectively.......................... 1,016,614 1,017,118 1,016,337 Capital surplus......................... 704,933 731,162 721,378 Retained earnings....................... 4,727,783 4,505,947 4,277,886 Accumulated other comprehensive income (loss)................................. 6,145 30,312 (79,557) ----------- ----------- ----------- Total shareholders' equity............ 6,455,475 6,284,539 5,936,044 ----------- ----------- ----------- Total liabilities and shareholders' equity............................... $70,302,606 $69,611,128 $66,172,372 =========== =========== ===========
2 Consolidated Statements of Income - -------------------------------------------------------------------------------- (thousands, except per share) wachovia corporation and subsidiaries
Three Months Ended Six Months Ended June 30 June 30 --------------------- --------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Interest Income Loans, including fees............. $ 978,522 $1,002,913 $2,019,301 $1,935,156 Securities available-for-sale..... 123,690 117,736 249,412 230,478 Securities held-to-maturity: State and municipal.............. 3,554 3,727 7,342 7,367 Other investments................ 10,857 15,197 24,888 31,021 Interest-bearing bank balances.... 2,496 954 4,210 2,176 Federal funds sold and securities purchased under resale agreements....................... 8,010 6,796 16,436 14,288 Trading account assets............ 5,008 11,022 11,888 21,379 ---------- ---------- ---------- ---------- Total interest income........... 1,132,137 1,158,345 2,333,477 2,241,865 Interest Expense Deposits: Domestic offices................. 338,002 346,818 704,868 669,676 Foreign offices.................. 38,001 62,308 84,987 114,230 ---------- ---------- ---------- ---------- Total interest on deposits...... 376,003 409,126 789,855 783,906 Short-term borrowed funds......... 74,948 82,425 174,612 160,288 Long-term debt.................... 115,843 121,578 260,768 226,913 ---------- ---------- ---------- ---------- Total interest expense.......... 566,794 613,129 1,225,235 1,171,107 Net Interest Income............... 565,343 545,216 1,108,242 1,070,758 Provision for loan losses......... 143,809 223,169 210,373 244,212 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses........ 421,534 322,047 897,869 826,546 Other Income Service charges on deposit accounts......................... 115,157 104,380 219,439 205,191 Fees for trust services........... 57,923 54,189 115,013 105,423 Investment fees................... 75,609 81,439 151,473 178,209 Capital markets income............ 45,581 45,014 93,747 89,800 Electronic banking................ 29,300 26,153 56,070 49,549 Mortgage fees..................... 14,955 5,921 23,323 10,922 Other operating income............ 72,600 66,119 174,120 130,361 ---------- ---------- ---------- ---------- Total other operating revenue... 411,125 383,215 833,185 769,455 Securities gains.................. 97,180 59 106,256 226 ---------- ---------- ---------- ---------- Total other income.............. 508,305 383,274 939,441 769,681 Other Expense Salaries.......................... 283,179 270,569 551,995 546,262 Employee benefits................. 55,420 50,916 108,230 104,675 ---------- ---------- ---------- ---------- Total personnel expense......... 338,599 321,485 660,225 650,937 Net occupancy expense............. 42,088 39,347 82,003 77,548 Equipment expense................. 43,250 44,806 87,343 92,928 Merger-related charges............ 11,670 8,872 11,670 17,030 Litigation settlement charge...... -- -- -- 20,000 Restructuring charge.............. -- -- 13,152 -- Other operating expense........... 150,024 147,793 301,581 284,243 ---------- ---------- ---------- ---------- Total other expense............. 585,631 562,303 1,155,974 1,142,686 Income from continuing operations before income tax expense........ 344,208 143,018 681,336 453,541 Income tax expense................ 121,030 44,287 241,207 152,843 ---------- ---------- ---------- ---------- Income from continuing operations....................... 223,178 98,731 440,129 300,698 Income from discontinued operations, net of income tax.... 21,935 38,840 47,076 81,580 ---------- ---------- ---------- ---------- Net Income........................ $ 245,113 $ 137,571 $ 487,205 $ 382,278 ========== ========== ========== ========== Income per common share -- continuing operations: Basic............................ $ 1.09 .49 $ 2.14 $ 1.48 Diluted.......................... $ 1.08 .48 $ 2.12 $ 1.47 Net income per common share: Basic............................ $ 1.19 .68 $ 2.37 $ 1.89 Diluted.......................... $ 1.18 .67 $ 2.35 $ 1.87 Average shares outstanding: Basic............................ 205,595 202,728 205,827 202,596 Diluted.......................... 207,123 204,572 207,345 204,392
3 Consolidated Statement of Shareholders' Equity - -------------------------------------------------------------------------------- ($ in thousands, except per share) wachovia corporation and subsidiaries
Accumulated Common Stock Other ----------------------- Capital Retained Comprehensive Shares Amount Surplus Earnings Income (Loss) Total ----------- ---------- --------- ---------- ------------- ---------- Period ended June 30, 2000 Balance at beginning of year................... 201,812,295 $1,009,061 $ 598,149 $4,125,524 $(74,277) $5,658,457 Net income............. 177,253 886 10,374 11,260 Other comprehensive income, net of tax: Unrealized losses on securities available- for-sale, net of deferred tax benefit and reclassification adjustment........... (5,280) (5,280) ---------- Comprehensive income*............ 376,998 Cash dividends declared -- $1.08 a share....... (219,599) (219,599) Common stock issued pursuant to: Stock option and employee benefit plans................. 800,534 4,003 43,752 47,755 Dividend reinvestment plan.................. 382,278 382,278 Acquisitions........... 2,254,947 11,275 167,674 178,949 Common stock acquired... (1,777,602) (8,888) (98,571) (107,459) Miscellaneous........... (10,317) (10,317) ----------- ---------- --------- ---------- -------- ---------- Balance at end of period................. 203,267,427 $1,016,337 $ 721,378 $4,277,886 $(79,557) $5,936,044 =========== ========== ========= ========== ======== ========== Period ended June 30, 2001 Balance at beginning of year................... 203,423,606 $1,017,118 $ 731,162 $4,505,947 $ 30,312 $6,284,539 Net income............. 487,205 487,205 Other comprehensive income, net of tax: Unrealized losses on securities available- for-sale, net of deferred tax benefit and reclassification adjustment........... (8,388) (8,388) Minimum pension liability adjustment........... (15,207) (15,207) Unrealized gains on derivative financial instruments qualifying as cash flow hedges.......... (572) (572) -------- ---------- Comprehensive income*............ 463,038 Cash dividends declared -- $1.20 a share....... (243,993) (243,993) Common stock issued pursuant to: Stock option and employee benefit plans................. 1,196,912 5,985 64,303 70,288 Dividend reinvestment plan.................. 95,031 475 5,492 5,967 Acquisitions........... 6,775,695 33,878 394,957 428,835 Note conversions....... 5,183 26 76 102 Common stock acquired... (8,173,626) (40,868) (491,035) (531,903) Miscellaneous........... (22) (21,376) (21,398) ----------- ---------- --------- ---------- -------- ---------- Balance at end of period................. 203,322,801 $1,016,614 $ 704,933 $4,727,783 $ 6,145 $6,455,475 =========== ========== ========= ========== ======== ==========
* Comprehensive income for the second quarters of 2001 and 2000 was $176,656 and $146,140, respectively. 4 Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- ($ in thousands) wachovia corporation and subsidiaries
Six Months Ended June 30 ---------------------- 2001 2000 ---------- ---------- Operating Activities Net income............................................ $ 487,205 $ 382,278 Income from discontinued operations................... (47,076) (81,580) ---------- ---------- Income from continuing operations..................... 440,129 300,698 Adjustments to reconcile income from continuing operations to net cash provided by operations: Provision for loan losses............................. 210,373 244,212 Depreciation and amortization......................... 122,331 122,504 Deferred income taxes................................. 120,201 96,221 Securities gains...................................... (106,256) (226) Loss on sale of noninterest-earning assets............ 654 334 Increase (decrease) in accrued income taxes........... 28,348 (3,439) Decrease (increase) in accrued interest receivable.... 89,911 (24,543) (Decrease) increase in accrued interest payable....... (127,883) 9,339 Net change in other accrued and deferred income and expense.............................................. (171,528) (8,363) Net trading account activities........................ 637,267 (587,163) Net loans held for resale............................. (201,520) (3,356) ---------- ---------- Net cash provided by operating activities........... 1,042,027 146,218 Investing Activities Net decrease in interest-bearing bank balances........ 96,805 56,113 Net decrease in federal funds sold and securities purchased under resale agreements.................... 164,929 578,006 Purchases of securities available-for-sale............ (3,089,110) (646,876) Purchases of securities held-to-maturity.............. (14,154) (126,786) Sales of securities available-for-sale................ 1,475,969 361,371 Calls, maturities and prepayments of securities available-for-sale................................... 1,206,137 355,891 Calls, maturities and prepayments of securities held- to-maturity.......................................... 414,739 97,501 Net decrease (increase) in loans made to customers.... 513,453 (3,205,066) Capital expenditures.................................. (45,163) (55,511) Proceeds from sales of premises and equipment......... 10,337 3,312 Net decrease in other assets.......................... 252,185 91,976 Business combinations................................. 83,597 19,377 Net cash used by discontinued operations.............. (32,931) (173,560) ---------- ---------- Net cash provided (used) by investing activities.... 1,036,793 (2,644,252) Financing Activities Net increase (decrease) in demand, savings and money market accounts...................................... 166,831 (874,838) Net (decrease) increase in certificates of deposit.... (2,405,709) 1,161,479 Net increase in federal funds purchased and securities sold under repurchase agreements..................... 228,464 2,063,641 Net increase (decrease) in commercial paper........... 134,546 (9,749) Net increase (decrease) in other short-term borrowings........................................... 389,004 (898,906) Proceeds from issuance of long-term debt.............. 4,100 1,522,859 Maturities and repayments of long-term debt........... (1,284,773) (487,413) Net increase in other liabilities..................... 327,538 92,423 Common stock issued................................... 41,706 23,602 Dividend payments..................................... (243,993) (219,599) Common stock repurchased.............................. (536,127) (104,088) ---------- ---------- Net cash (used) provided by financing activities.... (3,178,413) 2,269,411 Decrease in Cash and Cash Equivalents (1,099,593) (228,623) Cash and cash equivalents at beginning of year........ 3,686,871 3,437,082 ---------- ---------- Cash and cash equivalents at end of period............ $2,587,278 $3,208,459 ========== ==========
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ in thousands) Note 1 -- Basis of Presentation In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the results of operations for the periods present- ed. The results of operations shown in the interim statements are not necessar- ily indicative of the results that may be expected for the entire year. Note 2 -- Discontinued Operations On July 27, 2001, Wachovia completed the sale of its consumer credit card busi- ness to Bank One Corporation. The capital made available by the transaction will be redeployed for general corporate purposes including investing in higher growth businesses, repurchasing shares, reducing balance sheet leverage or re- ducing debt. The pre-tax gain from the sale is estimated to be approximately $1.3 billion. As a result of the recent shareholder approval of the merger with First Union Corporation, $450 million has been deferred in connection with cer- tain provisions of the agent bank arrangement. Condensed financial information for the consumer credit card business is presented below.
Three Months Ended Six Months Ended June 30 June 30 ---------------------- --------------------- 2001 2000 2001 2000 ---------- ----------- ---------- ---------- Summary Income Statement Interest income................... $ 138,403 $ 166,766 $ 287,259 $ 328,603 Allocated interest expense (2).... 50,652 72,600 112,566 140,483 ---------- ---------- ---------- ---------- Net interest income.............. 87,751 94,166 174,693 188,120 Provision for loan losses......... 71,911 50,196 126,847 102,819 Noninterest income................ 74,447 87,084 143,973 171,643 Noninterest expense (3)........... 55,254 68,988 116,633 126,583 ---------- ---------- ---------- ---------- Income before income tax expense......................... 35,033 62,066 75,186 130,361 Income tax expense................ 13,098 23,226 28,110 48,781 ---------- ---------- ---------- ---------- Net income....................... $ 21,935 $ 38,840 $ 47,076 $ 81,580 ========== ========== ========== ========== June 30 December 31 June 30 2001 2000 2000 ---------- ----------- ---------- Summary Balance Sheet Cash.............................. $ 39,351 $ 40,570 $ 52,329 Interest bearing bank balances.... 13,596 36,025 39,078 Securities available-for-sale..... 41,228 84,000 83,024 Loans, net of allowance........... 4,429,771 4,279,313 4,475,390 Intangible assets................. 211,529 231,461 249,816 Other assets...................... 144,828 141,624 141,960 ---------- ---------- ---------- Total assets..................... $4,880,303 $4,812,993 $5,041,597 ========== ========== ========== Short-term borrowed funds (2)..... $3,136,636 $3,055,119 $3,204,459 Long-term debt (2)................ 1,344,273 1,309,337 1,373,339 Other liabilities................. 44,899 56,068 60,645 Total liabilities................ 4,525,808 4,420,524 4,638,443 Equity capital (1)................ 354,495 392,469 403,154 ---------- ---------- ---------- Total liabilities and equity..... $4,880,303 $4,812,993 $5,041,597 ========== ========== ==========
(1) Equity capital was assigned to discontinued operations based upon Wachovia's targeted Tier I risk-based capital requirements for the under- lying risk weighted assets and off-balance sheet items. (2) Interest-bearing liabilities were assigned to discontinued operations based on an assumed funding mix of 70 percent short-term borrowings and 30 percent long-term debt. Interest expense was calculated by applying Wachovia's average funding cost for each period and funding category to the respective assigned average balances. (3) The amount of general overhead costs allocated to discontinued operations is the amount estimated to be eliminated upon completion of the transac- tion. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Table 1 Selected Period-End Data - --------------------------------------------------------------------------------
June 30 --------------- 2001 2000 ------- ------- Banking offices: North Carolina................................................. 183 190 Virginia....................................................... 193 212 Georgia........................................................ 122 142 South Carolina................................................. 115 118 Florida........................................................ 135 38 ------- ------- Total......................................................... 748 700 ======= ======= Automated banking machines: North Carolina................................................. 444 454 Virginia....................................................... 265 285 Georgia........................................................ 301 313 South Carolina................................................. 266 286 Florida........................................................ 141 39 ------- ------- Total......................................................... 1,417 1,377 ======= ======= Employees (full-time equivalent)*.............................. 20,677 21,509 Common stock shareholders of record............................ 50,053 51,377 Common shares outstanding (thousands).......................... 203,323 203,267
* Includes personnel employed in discontinued operations. Common Stock Data -- Per Share Table 2 - --------------------------------------------------------------------------------
2001 2000 ---------------- ------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- Market value: Period-end..................... $71.15 $60.25 $58.13 $56.69 $54.25 High........................... 71.25 69.36 58.56 60.38 75.25 Low............................ 57.31 54.50 47.44 53.38 53.56 Book value at period-end......... 31.75 32.64 30.89 29.93 29.20 Dividend......................... .60 .60 .60 .60 .54 Price/earnings ratio (1)......... 15.6x 14.9x 14.3x 13.7x 12.3x Price/earnings ratio without nonrecurring items (1), (2)..... 14.2 13.4 12.7 12.3 11.9
(1) Based on the most recent four quarters of net income per diluted share and end of period stock price. (2) Excludes the after-tax impact of nonrecurring charges. 7 Financial Summary Table 3 - --------------------------------------------------------------------------------
Twelve Six Months Ended Months 2001 2000 June 30 Ended ---------------------- ---------------------------------- ---------------------- June 30 Second First Fourth Third Second 2001 Quarter Quarter Quarter Quarter Quarter 2001 2000 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Summary of Operations (thousands, except per share data) Interest income......... $4,790,826 $1,132,137 $1,201,340 $1,247,950 $1,209,399 $1,158,345 $2,333,477 $2,241,865 Interest expense........ 2,603,381 566,794 658,441 707,822 670,324 613,129 1,225,235 1,171,107 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income..... 2,187,445 565,343 542,899 540,128 539,075 545,216 1,108,242 1,070,758 Provision for loan losses................. 356,392 143,809 66,564 68,536 77,483 223,169 210,373 244,212 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses............ 1,831,053 421,534 476,335 471,592 461,592 322,047 897,869 826,546 Other operating revenue................ 1,634,541 411,125 422,060 381,362 419,994 383,215 833,185 769,455 Securities gains (losses)............... 105,613 97,180 9,076 (480) (163) 59 106,256 226 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total other income...... 1,740,154 508,305 431,136 380,882 419,831 383,274 939,441 769,681 Personnel expense....... 1,254,091 338,599 321,626 280,994 312,872 321,485 660,225 650,937 Merger-related charges.. 23,598 11,670 -- -- 11,928 8,872 11,670 17,030 Litigation settlement charge................. -- -- -- -- -- -- -- 20,000 Restructuring charge.... 120,639 -- 13,152 19,543 87,944 -- 13,152 -- Other expense........... 940,060 235,362 235,565 240,956 228,177 231,946 470,927 454,719 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total other expense..... 2,338,388 585,631 570,343 541,493 640,921 562,303 1,155,974 1,142,686 Income from continuing operations before income tax expense..... 1,232,819 344,208 337,128 310,981 240,502 143,018 681,336 453,541 Income tax expense...... 430,365 121,030 120,177 105,534 83,624 44,287 241,207 152,843 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations............. 802,454 223,178 216,951 205,447 156,878 98,731 440,129 300,698 Income from discontinued operations, net of income tax............. 134,781 21,935 25,141 39,259 48,446 38,840 47,076 81,580 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income.............. $ 937,235 $ 245,113 $ 242,092 $ 244,706 $ 205,324 $ 137,571 $ 487,205 $ 382,278 ========== ========== ========== ========== ========== ========== ========== ========== Income per common share -- continuing operations: Basic.................. $ 3.92 $ 1.09 $ 1.05 $ 1.01 $ .77 $ .49 $ 2.14 $ 1.48 Diluted................ $ 3.91 $ 1.08 $ 1.05 $ 1.01 $ .77 $ .48 $ 2.12 $ 1.47 Net income per common share: Basic.................. $ 4.57 $ 1.19 $ 1.17 $ 1.20 $ 1.01 $ .68 $ 2.37 $ 1.89 Diluted................ $ 4.55 $ 1.18 $ 1.17 $ 1.20 $ 1.00 $ .67 $ 2.35 $ 1.87 Cash dividends paid per common share........... $ 2.40 $ .60 $ .60 $ .60 $ .60 $ .54 $ 1.20 $ 1.08 Cash dividends paid on common stock........... $ 487,412 $ 121,566 $ 122,427 $ 121,429 $ 121,990 $ 109,505 $ 243,993 $ 219,599 Cash dividend payout ratio.................. 52.01% 49.60% 50.57% 49.62% 59.41% 79.60% 50.08% 57.44% Average basic shares outstanding............ 204,592 205,595 206,061 203,407 203,347 202,728 205,827 202,596 Average diluted shares outstanding............ 205,914 207,123 207,569 204,393 204,621 204,572 207,345 204,392 Selected Average Balances (millions) Total assets............ $ 68,287 $ 70,613 $ 69,463 $ 67,607 $ 65,514 $ 64,792 $ 70,042 $ 63,911 Loans -- net of unearned income................. 50,528 52,225 51,295 50,045 48,584 47,451 51,762 46,586 Securities.............. 8,532 8,744 8,903 8,350 8,140 8,323 8,823 8,331 Other interest-earning assets................. 1,243 1,286 1,208 1,323 1,155 1,206 1,247 1,214 Total interest-earning assets................. 60,303 62,255 61,406 59,718 57,879 56,980 61,832 56,131 Interest-bearing deposits............... 35,770 37,049 35,727 35,518 34,800 35,663 36,392 35,268 Short-term borrowed funds.................. 6,643 6,845 7,184 6,447 6,111 5,376 7,014 5,504 Long-term debt.......... 8,881 8,983 9,430 8,873 8,252 7,460 9,205 7,066 Total interest-bearing liabilities............ 51,295 52,877 52,341 50,838 49,163 48,499 52,611 47,838 Noninterest-bearing deposits............... 8,407 8,460 8,264 8,428 8,474 8,373 8,363 8,346 Total deposits.......... 44,177 45,509 43,991 43,946 43,274 44,036 44,755 43,614 Shareholders' equity.... 6,245 6,528 6,439 6,069 5,952 5,833 6,484 5,760 Ratios (averages) Annualized net loan losses to loans........ .53% .66% .48% .36% .64% .19% .57% .19% Annualized net yield on interest-earning assets................. 3.68 3.69 3.64 3.66 3.77 3.92 3.67 3.90 Annualized return on assets (2)............. 1.37 1.27 1.26 1.22 .96 .61 1.26 .95 Annualized return on shareholders' equity (2).................... 15.01 14.50 14.31 14.45 11.26 7.27 14.41 11.20 Operating Performance (1) (thousands, except per share data) Income from continuing operations............. $ 898,108 $ 230,763 $ 227,400 $ 218,150 $ 221,795 $ 104,497 $ 458,163 $ 326,267 Income from continuing operations per share... $ 4.36 $ 1.11 $ 1.10 $ 1.07 $ 1.08 $ .51 $ 2.21 $ 1.60 Annualized return on assets (2)............. 1.32% 1.31% 1.32% 1.30% 1.36% .65% 1.32% 1.03% Annualized return on shareholders' equity (2).................... 14.38 14.99 15.00 15.34 15.92 7.70 15.00 12.15
(1) Excludes the effects of nonrecurring merger-related, litigation settlement and restructuring charges. (2) Computed as net income from continuing operations divided by assets and equity attributable to continuing operations. 8 RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q should be read in conjunction with Wachovia's 2000 Annual Report on Form 10-K, and will serve to update previously reported information for current interim period results. Overview The U.S. economy continued to slow through the second quarter of 2001 with gross domestic product rising 0.7 percent for the quarter, the weakest quarter of gross domestic product growth since the first quarter of 1993. Consumer spending was reported to be lackluster in most of the Federal Reserve's twelve districts and several districts reported that manufacturing activity and com- mercial real estate and construction slowed. Labor markets began to show signs of overall easing as most Federal Reserve districts reported only modest pres- sure on wages. Based on preliminary data, the nation's average unemployment rate increased to 4.5 percent from 4.0 percent in December and June 2000. Within Wachovia's five-state operating area, unemployment averaged 4.0 percent during the quarter. During the second quarter, the Federal Open Markets Committee ("FOMC") took ac- tion on three separate occasions to further reduce the federal funds target by a total of 125 basis points, following four reductions totaling 200 basis points during the first quarter. Concurrent with each FOMC action, the Board of Governors of the Federal Reserve also lowered the discount rate by an equal amount. The FOMC cited softening capital investment, erosion in profitability, weak expansion of consumption and slowing growth abroad in arriving at its de- cisions. On April 16, 2001, Wachovia announced an agreement for a merger of equals transaction with First Union Corporation. Terms of the agreement call for com- mon stockholders of Wachovia to receive 2.0 shares of common stock of First Union and the option to receive either a special dividend of $.48 or 2.0 Divi- dend Equalization Preferred Shares (DEPS) in exchange for each share of Wacho- via common stock. The DEPS allow Wachovia shareholders to continue to receive at least a $2.40 per share dividend post-combination that they currently re- ceive as Wachovia shareholders. The merger with First Union is expected to close in the third quarter, subject to regulatory approval and certification of Wachovia's shareholder vote. Wachovia's shareholders met August 3 to vote on the proposed merger. Based on a preliminary count, Wachovia's management be- lieves sufficient votes were obtained to approve the merger. On March 1, 2001 Wachovia completed its acquisition of Republic Security Finan- cial Corporation, parent company of Republic Security Bank. The acquisition added more than 178,000 new customers and significantly expanded Wachovia's presence in Florida. On May 1, 2001 Wachovia completed its acquisition of Ham- ilton Dorsey Alston Company, an Atlanta-based insurance broker that specializes in personal and commercial risk management and employee benefits. The results of operations of both acquired companies are included in the consolidated fi- nancial statements from their respective acquisition dates. 9 During the third quarter of 2000, Wachovia announced plans to realign resources and eliminate 1,800 positions as part of a continuing performance improvement project. Wachovia incurred $13 million in charges during the first quarter of 2001 to complete the resource realignment. On July 27, 2001, Wachovia completed the sale of its consumer credit card busi- ness. The pre-tax gain from the sale is expected to be approximately $1.3 bil- lion, of which $450 million has been deferred. Accordingly, the consumer credit card business is being presented as discontinued operations in the financial statements and accompanying schedules. All financial discussion is for continu- ing operations unless otherwise stated. Computation of Earnings Per Common Share Table 4 - -------------------------------------------------------------------------------- (thousands, except per share)
Three Months Ended Six Months Ended June 30 June 30 ------------------- ----------------- 2001 2000 2001 2000 --------- --------- -------- -------- Basic Average common shares outstanding....... 205,595 202,728 205,827 202,596 ========= ========= ======== ======== Income from continuing operations....... $ 223,178 $ 98,731 $440,129 $300,698 Income from discontinued operations..... 21,935 38,840 47,076 81,580 --------- --------- -------- -------- Net income............................ $ 245,113 $ 137,571 $487,205 $382,278 ========= ========= ======== ======== Per share amount: Continuing operations.................. $ 1.09 $ .49 $ 2.14 $ 1.48 Discontinued operations................ .10 .19 .23 .41 --------- --------- -------- -------- Net income............................ $ 1.19 $ .68 $ 2.37 $ 1.89 ========= ========= ======== ======== Diluted Average common shares outstanding....... 205,595 202,728 205,827 202,596 Dilutive common stock options at average market price........................... 1,387 1,640 1,393 1,590 Dilutive common stock awards at average market price........................... 123 181 105 184 Convertible long-term debt assumed converted.............................. 18 23 20 22 --------- --------- -------- -------- Average diluted shares outstanding..... 207,123 204,572 207,345 204,392 ========= ========= ======== ======== Income from continuing operations....... $ 223,178 $ 98,731 $440,129 $300,698 Add interest on convertible long-term debt, net of tax....................... 16 11 32 28 --------- --------- -------- -------- Adjusted income from continuing operations............................. 223,194 98,742 440,161 300,726 Income from discontinued operations..... 21,935 38,840 47,076 81,580 --------- --------- -------- -------- Adjusted net income.................... $ 245,129 $ 137,582 $487,237 $382,306 ========= ========= ======== ======== Per share amount: Continuing operations.................. $ 1.08 $ .48 $ 2.12 $ 1.47 Discontinued operations................ .10 .19 .23 .40 --------- --------- -------- -------- Net income............................ $ 1.18 $ .67 $ 2.35 $ 1.87 ========= ========= ======== ========
Wachovia's operating net income, including the results of Wachovia's discontin- ued consumer credit card business, was $253 million or $1.22 per diluted share for the second quarter versus $143 million or $.70 per diluted share a year earlier. Continuing operations, which excludes the consumer credit card busi- ness, accounted for $231 million or $1.11 per diluted share of the total in the second quarter of 2001 versus $104 million or $.51 per diluted share for the same period a year ago. On a reported basis, net income, including discontinued operations, was $245 million or $1.18 per diluted share for the quarter versus $138 million or $.67 per diluted share a year earlier. These earnings included $223 million or $1.08 per diluted share in the second quarter of 2001 and $99 million or $.48 per diluted share a year ago from continuing operations. 10 Year-to-date, Wachovia's operating net income, including discontinued opera- tions, was $505 million or $2.44 per diluted share compared with $408 million or $2.00 per diluted share for the same period of 2000. Included in year-to- date operating earnings were earnings of $458 million or $2.21 per diluted share and $326 million or $1.60 per diluted share in 2001 and 2000, respec- tively, from continuing operations. On a reported basis, earnings for the first six months, including discontinued operations, were $487 million or $2.35 per diluted share in 2001 compared with $382 million or $1.87 per di- luted share a year earlier. Continuing operations accounted for $440 million or $2.12 per diluted share of reported earnings in 2001 versus $301 million or $1.47 per diluted share a year earlier. Earnings from Wachovia's discontinued consumer credit card business were $22 million or $.10 per diluted share for the second quarter of 2001 compared with $39 million or $.19 per diluted share a year ago. For the first six months, the discontinued consumer credit card business produced earnings of $47 mil- lion or $.23 per diluted share in 2001 compared with $82 million or $.40 per diluted share a year earlier. The decline in profitability in the consumer credit card business from the prior year reflects the changes in the overall economy which produced a narrower interest rate spread and a higher net charge off rate. These factors also reduced credit card fee income as they compressed the amount Wachovia earns in excess of the investors' coupon on securitized receivables. Most of the improvement in earnings from continuing operations was due to a lower provision for loan losses. The provision charged to earnings in second quarter 2000 added more than $200 million to the allowance for loan losses while the current period provision added $58 million to the allowance for loan losses. While the balance of nonperforming loans is higher than a year ago, it has declined significantly over the last two quarters. Noninterest income rose from a year ago with deposit service charges and mortgage fee income leading the growth. Origination activity in Wachovia's mortgage business remained strong with lower interest rates. Wachovia's continued expansion in the insur- ance business through recent acquisitions of DavisBaldwin and Hamilton Dorsey Alston Company pushed insurance fees up from a year ago. Operating earnings exclude nonoperating charges such as restructuring, merger integration and a litigation settlement charge recorded in the first quarter of 2000. Comparisons between the 2001 and 2000 periods are also impacted by the results of acquisitions that are included in reported results from their respective acquisition dates each year. Expanded discussion of results of operations and financial condition follows. Interest income is stated on a taxable equivalent basis, which is adjusted for the tax-favored status of earnings from certain loans and securities. Refer- ences to changes in assets and liabilities represent daily average levels un- less otherwise noted. Business Segments Wachovia has four reportable business segments: Asset and Wealth Management, Corporate, Consumer and Treasury & Administration. Business segment results are reported on a management accounting basis. They reflect evolving information needs specific to a company's business managers and may differ by company due to wide discretion in application. As a result, Wachovia's business segment results are not necessarily comparable with those of other financial institutions with similar segments or with those of other companies that compete directly in one or more of Wachovia's lines of busi- ness. In addition, business segment results may be restated in the future as Wachovia's management structure, information needs or reporting systems evolve. Changes in management accounting, including the effect of presenting Wachovia's consumer credit card business as discontinued operations, were im- plemented during the year with prior periods restated to reflect the changes. 11 The provision for loan losses is charged to each business segment based on the credit risk of each segment's loan portfolio. Operating expenses to support business unit revenues are either charged directly as incurred or allocated from support areas based on usage. In addition, general overhead expense that cannot be specifically attributed to a business unit is allocated based on the proportion of each segment's direct expenses to total direct expenses of the combined segments. Income tax expense is calculated for each business segment with a blended tax rate. This rate is adjusted as applicable for the assumed tax effect of tax-exempt income and nondeductible intangible amortization ex- pense. Wachovia uses a marginal matched maturity funds transfer pricing methodology for management reporting that evaluates the cash flows and repricing character- istics of all balance sheet transactions at an instrument level by benchmarking pricing decisions against Wachovia's wholesale cost of funds. This approach re- moves most forms of interest rate risk, prepayment risk and liquidity risk from the balance sheets of the business units and isolates them in Treasury & Admin- istration for centralized evaluation and management. Financial results by business segment are discussed below. Business Segments Table 5 - -------------------------------------------------------------------------------- (Three Months Ended June 30) (millions)
Asset and Wealth Treasury & Total Management Corporate Consumer Administration Eliminations Corporation -------------- ---------------- ---------------- ---------------- -------------- --------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Operations Summary External net interest margin......... $ 40 $ 35 $ 589 $ 649 $ (7) $ (45) $ (50) $ (84) $ (7) $ (10) $ 565 $ 545 Internal funding (charge) credit......... (4) 3 (341) (405) 251 275 120 153 (26) (26) -- -- ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Net interest income*........ 36 38 248 244 244 230 70 69 (33) (36) 565 545 Total other income......... 150 147 109 107 130 104 119 25 -- -- 508 383 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Total revenue... 186 185 357 351 374 334 189 94 (33) (36) 1,073 928 Provision for loan losses.... 1 1 134 224 7 5 2 (7) -- -- 144 223 Other expense... 141 136 150 154 213 206 96 81 (15) (15) 585 562 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Profit contribution... 44 48 73 (27) 154 123 91 20 (18) (21) 344 143 Allocated expenses....... 23 19 24 24 28 31 (64) (63) (11) (11) -- -- ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Pretax income from continuing operations..... 21 29 49 (51) 126 92 155 83 (7) (10) 344 143 Income tax expense........ 9 11 18 (18) 46 32 55 29 (7) (10) 121 44 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Income from continuing operations..... $ 12 $ 18 $ 31 $ (33) $ 80 $ 60 $ 100 $ 54 $ -- $ -- $ 223 $ 99 ====== ====== ======= ======= ======= ======= ======= ======= ====== ====== ======= ======= Percentage contribution to total revenue**...... 16.8% 19.2% 32.3% 36.4% 33.8% 34.6% 17.1% 9.8% Percentage contribution to total income from continuing operations..... 5.4% 18.2% 13.9% (33.3%) 35.9% 60.6% 44.8% 54.5% Average Balances Total assets.... $4,709 $4,003 $38,260 $37,950 $13,933 $10,465 $13,711 $12,374 $70,613 $64,792
* Net interest income is reported on a taxable equivalent basis by segment and on a nontaxable equivalent basis for the Corporation. The difference is in- cluded in the eliminations column. ** Percentage contribution to total revenue is based on the proportion of each segment's revenue to the combined revenue of all segments. 12 Business Segments Table 6 - -------------------------------------------------------------------------------- (Six Months Ended June 30) (millions)
Asset and Wealth Treasury & Total Management Corporate Consumer Administration Eliminations Corporation -------------- ---------------- ---------------- ---------------- -------------- --------------- 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Operations Summary External net interest margin... $ 83 $ 70 $ 1,247 $ 1,263 $ (47) $ (92) $ (159) $ (151) $ (16) $ (19) $ 1,108 $ 1,071 Internal funding (charge) credit... (12) 5 (751) (777) 517 541 298 281 (52) (50) -- -- ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Net interest income*........... 71 75 496 486 470 449 139 130 (68) (69) 1,108 1,071 Total other income............ 298 311 216 218 244 203 181 38 -- -- 939 770 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Total revenue..... 369 386 712 704 714 652 320 168 (68) (69) 2,047 1,841 Provision for loan losses............ 3 1 190 242 9 10 8 (9) -- -- 210 244 Other expense...... 281 277 301 306 409 401 195 190 (30) (31) 1,156 1,143 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Profit contribution..... 85 108 221 156 296 241 117 (13) (38) (38) 681 454 Allocated expenses.......... 44 37 47 46 57 63 (126) (127) (22) (19) -- -- ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Pretax income from continuing operations....... 41 71 174 110 239 178 243 114 (16) (19) 681 454 Income tax expense.......... 18 28 64 40 88 64 87 40 (16) (19) 241 153 ------ ------ ------- ------- ------- ------- ------- ------- ------ ------ ------- ------- Income from continuing operations....... $ 23 $ 43 $ 110 $ 70 $ 151 $ 114 $ 156 $ 74 $ -- $ -- $ 440 $ 301 ====== ====== ======= ======= ======= ======= ======= ======= ====== ====== ======= ======= Percentage contribution to total revenue**... 17.4% 20.2% 33.7% 36.9% 33.8% 34.1% 15.1% 8.8% Percentage contribution to total income from continuing operations........ 5.2% 14.3% 25.0% 23.2% 34.3% 37.9% 35.5% 24.6% Average Balances Total assets....... $4,621 $3,761 $38,908 $37,471 $13,066 $10,217 $13,447 $12,462 $70,042 $63,911
* Net interest income is reported on a taxable equivalent basis by segment and on a nontaxable equivalent basis for the Corporation. The difference is in- cluded in the eliminations column. ** Percentage contribution to total revenue is based on the proportion of each segment's revenue to the combined revenue of all segments. Asset and Wealth Management Asset and Wealth Management aspires to be the preferred provider of integrated investment and wealth management services in the Southeast and selected na- tional markets. This is being achieved through a combination of a strong base business and recent strategic acquisitions. On May 1, 2001, Asset and Wealth Management completed the acquisition of Hamilton Dorsey Alston Company, an At- lanta-based insurance broker that specializes in personal and commercial risk management and employee benefits. Products and Services. Asset and Wealth Management delivers innovative tailored products and services through a variety of distribution channels. The Private Financial Advisors group provides a full range of products and services to af- fluent customers, including banking and credit services, tax planning and con- sulting, trust services, portfolio management, estate planning, investment counseling and insurance. Subsidiary companies OFFITBANK and Barry, Evans, Jo- sephs & Snipes provide wealth management and specialized investment and insur- ance products for the high-end of the affluent market. Wachovia's brokerage business offers a wide variety of services and investment products including the Wachovia Funds through full-service brokers and branch- based investment consultants. Customers making their own investment decisions can trade through Wachovia Investments Direct using a broker, a touch-tone tel- ephone service or the Internet. Wachovia Asset Management provides investment strategies and portfolio manage- ment for individuals and institutions, in addition to managing the Wachovia Funds. Institutional Client Services provides asset management, employee bene- fit, retirement services and philanthropy management services to businesses, endowments, foundations, and other institutions. Executive Services is a na- tionally recognized leader in providing retirement and wealth accumulation products for high-net-worth individuals. It also provides change-of-control and employee benefit protection services to client management teams. 13 Industry Dynamics and Strategy. Within Wachovia's five-state geographic foot- print, households are growing much faster than the national average, and over the next five years, affluent households are expected to grow substantially. Market volatility and the projected need for intergenerational wealth transfer capabilities also are driving demand. These factors create an attractive market opportunity. Asset and Wealth Management is uniquely positioned to take advan- tage of this environment through its market presence, brand names and strategic focus. The competition in the wealth management business is increasing. Many financial service providers pursue a product-based or silo approach to serving the afflu- ent. Asset and Wealth Management's strategy is to provide a "relationship ap- proach" such as the Private Financial Advisor model that coordinates and man- ages a full range of services through a trusted financial advisor. This in- volves a team approach to client service within the Asset and Wealth Management business and across Wachovia's other business segments. The integration of re- cent merger partners has allowed this business segment to increase its product offerings, leverage existing services and expand distribution channels. In Sep- tember 2000, Wachovia launched the Market Acceleration Project that expands the penetration of the successful Private Financial Advisor model across Wachovia's markets. The goal of the project is to increase profit by generating more suc- cessful client leads and improving linkages among Wachovia's other lines of business. Financial Results. Asset and Wealth Management's profit contribution declined $3 million or 7 percent to $44 million from the same quarter last year. Net in- come was also down from a year ago by $5 million. While the business continued to grow, the weakened economic environment, decline in market values of managed assets and falling interest rates all negatively impacted margin loans, trading commissions, investment fees and deposit spreads. Average loans and deposits grew 23 percent and 4 percent, respectively, from the second quarter of 2000 with Private Financial Advisors leading the growth in both categories. Despite the rise in loan and deposit volumes, net interest income dropped slightly due to a shift in loan portfolio mix and a lag in pricing down deposits in an ef- fort to attract and retain customer balances. Other income rose $4 million pri- marily due to an increase in insurance commissions from the acquisitions of DavisBaldwin and Hamilton Dorsey Alston Company. The increase in insurance com- missions was partially offset by a decline in investment fees that reflected weaker market conditions than a year ago. Noninterest expense increased $5 mil- lion or 4 percent from second quarter 2000, primarily due to the expenses of DavisBaldwin and Hamilton Dorsey Alston Company, although strategic spending on the Market Acceleration Project and the expansion of OFFITBANK offices also contributed to the increase. Excluding acquisitions, staff expense decreased $5 million or 6% from a combination of lower variable compensation and staff re- ductions. Year to date, Asset and Wealth Management's profit contribution declined $23 million or 21 percent to $85 million from the first half of 2000. Net income was also down from a year ago by $20 million. The weaker economic environment of the first half of 2001 sharply contrasted with the heavy equity trading vol- umes and high market values experienced during 2000, particularly in the first quarter. Loan and deposit volumes grew 25 percent and 5 percent, respectively, led by Private Financial Advisors. Spread compression on deposits neutralized much of the positive impact of the growth on net interest income as deposit pricing intentionally lagged rate reductions in order to attract and retain customer balances. Other income declined $13 million or 4 percent from a year ago despite a $14 million increase in insurance premiums and commissions mostly related to the acquisitions of DavisBaldwin and Hamilton Dorsey Alston Company and a $10 million increase in trust fees. Investment fees were down $25 million from the first half of 2000 as equity trading volumes declined with investor confidence. Trading levels have remained depressed relative to the prior year. Other expense was up $4 14 million or 1 percent from the first half of 2000. Excluding acquisitions, ex- penses were down from a year ago reflecting internal cost control efforts and a reduction in variable compensation. Asset and Wealth Management continued to increase its strategic spending on the Market Acceleration Project and the ex- pansion of OFFITBANK. Corporate Corporate aspires to be the preferred provider of financial services to commer- cial clients in the Southeast and to selected client segments nationally and overseas. To achieve this goal, Corporate works to know its customers better than the competition; anticipate customer needs and provide innovative solu- tions; align products, services and delivery channels with customer needs; and serve customers through insightful, trusted professionals. Products and Services. Corporate provides a comprehensive array of corporate banking, investment banking, capital markets and industry-leading cash manage- ment services through a variety of client-focused subsegments. Global Corporate Finance serves the needs of domestic and multinational companies with annual sales above $200 million. The group also serves selected industry sectors in- cluding communications/technology and diversified financial services. The group operates through offices in the Southeast, Boston, Chicago, London, Sao Paulo, and Hong Kong. Regional Corporate Finance serves 2,200 Southeastern companies with sales of $25 million to $200 million. Business Banking serves 18,000 regional clients with sales from $2 million to $25 million. A new Emerging Companies group tar- gets smaller growth companies. Real Estate Finance serves 4,000 commercial real estate developers, investors and REITs, primarily in the Southeast. Dealer Fi- nance serves 2,500 automobile and other specialty finance customers throughout the Southeast. Capital Markets offers a variety of services including investment banking, mergers and acquisitions, loan syndication finance, asset-backed finance, com- mercial paper, corporate bonds, interest rate and foreign exchange risk manage- ment, leasing, public equity research, sales and trading, private equity in- vestments, third-party research and option trading execution. Capital Markets closely aligns its products and services to meet the needs of each targeted client subsegment. Corporate also provides industry-leading treasury consulting and cash manage- ment solutions through its Treasury Services Group. This area has been consist- ently cited for its superior quality of service, technology, and operations performance. The Treasury Services Group achieved top honors in the Phoenix- Hecht Quality Index 2000 and ranks high in other important industry surveys. In addition to treasury consulting, the group provides an array of cash management products and has become a leading provider of Internet-based and wireless ac- cess. Industry Dynamics and Strategy. While general demand for corporate services re- mains solid, the continuing credit cycle poses risk of weakness in certain do- mestic activities. Softening general economic conditions, rising bond default rates, the significant increase in credit rating downgrades versus upgrades, greater incidence of public company bankruptcies, and the velocity of borrower deterioration all evidence rising risk in the corporate lending environment. Despite these challenging market conditions and a fiercely competitive industry climate, Corporate maintains a strong market position in each of its client segments. Corporate's strategy to remain competitive is to build strong and long-lasting relationships with targeted clients through deep knowledge of unmet needs com- bined with superior execution. Dynamic and focused customer segmentation and sales model development enhance customer service, productivity and performance. Key to 15 this strategy is a sharp focus on Capital Markets products and improved invest- ment banking expertise. In addition, Treasury Services is accelerating the de- velopment of innovative new products and outsourcing services. Financial Results. Corporate's profit contribution and net income increased from the second quarter of 2000 due primarily to a lower provision for loan losses. Net interest income increased $4 million or 2 percent compared with the second quarter of 2000 as average loans also grew 2 percent with the increase coming from Regional Corporate. The loan loss provision decreased $90 million primarily due to an additional provision charge that added $200 million to the allowance for loan losses in the second quarter of 2000. Other income increased $2 million or 2 percent due to growth in deposit service charges and letter of credit fees. Other expense decreased by $4 million or 3 percent primarily due to lower staff expenses related to Wachovia's expense control initiatives. The lower staff expense was offset by higher systems development costs in support of product development initiatives. Year to date profit contribution and net income increased as a result of a lower provision for loan losses. Net interest income rose $10 million or 2 per- cent based on a 5 percent increase in average loans outstanding. Growth in the regional corporate portfolio offset a decline in the large corporate portfolio, where credit exposure was reduced to improve returns on capital. The provision for loan losses decreased $52 million or 21 percent due to aggressive steps to build the allowance for loan losses in 2000 in light of the emerging credit cy- cle. Other income dropped slightly due to softness in capital markets advisory and syndication revenue, and amounts paid to third parties to assume certain customer letters of credit. Increases in deposit service charges due to im- proved pricing and letter of credit fees offset most of these decreases. Other expense decreased $5 million or 2 percent due to a decline in staff expenses and most other expense categories related to Wachovia's strategic cost control initiative. Professional services expense increased related to legal expense in support of loan workout activities, and systems development expense increased due to product development initiatives. Consumer Consumer aspires to be the preferred provider of financial services to consum- ers and small businesses in Wachovia's regional markets. To achieve this goal, Consumer develops customer relationships for the greatest lifetime value, man- ages the cost of the sales and service network and pursues opportunities to at- tract and serve customers through traditional and digital channels. It targets consumers, worksite groups and small businesses throughout the Southeast, of- fering a broad array of competitively priced products and services. Consumer is also important to the entire Wachovia franchise because of the value provided to Wachovia's other business segments by its branch network, brand identity and customer base. Products and Services. Consumer provides traditional retail banking services, including mortgage lending, deposit products and consumer loans, to 4 million customers. It also offers access to investment and insurance products to these customer segments. Wachovia ranks among the top ten nationally in Visa(R) Check Card sales volume, according to a study conducted by Visa(R). Delivery channels include 748 traditional and in-store branches and worksite centers, 1,417 ATMs and 30 kiosks, Wachovia on Call and the Internet. Campus Card programs provide card-based banking access to students and faculty at nine university campuses, and Wachovia At Work serves employees of more than 5,200 companies and 237,000 consumers. The Internet is growing in importance as a forum for financial services. Ap- proximately 576,000 of Wachovia's demand deposit customers are enrolled in Internet banking, up from approximately 500,000 at year-end and 16 375,000 a year ago. Wachovia's Internet site, wachovia.com, serves as a finan- cial portal with extensive account information and transaction capability sup- ported by relevant financial news. Industry Dynamics and Strategy. Consumer operates in some of the country's most attractive retail growth markets, including Florida, Georgia, South Carolina, North Carolina and Virginia. The majority of Wachovia's deposits are in large, high and medium-growth metropolitan areas within this region. Consumer's strat- egy is to assess customer relationship potential, identify financial needs and achieve alignment between needs, service expectations and cost, thereby deliv- ering optimal value to each customer. Specific initiatives to implement this strategy include: . Information-Based Relationship Managementsm. Wachovia has developed strong proprietary data collection and analytical tools around its customers' buying and financial behaviors. These are used to proactively identify customer needs for sales activities and targeted product development. The Profitable Relationship Optimization (PRO) desktop technology connects to data ware- houses and delivers targeted leads to Personal Financial Advisors, small business and branch bankers. These bankers are trained to use solution-based selling skills, supported by the PRO technology to better serve more than 400,000 high-potential customers. Focus is placed on creating sales and serv- ice strategies to retain and grow targeted customers. . Market Network Strategy. Network optimization models provide an analytical framework to optimize customer points of presence while reducing branch net- work expenses. This strategy drives network location and effectiveness, branch and ATM openings, closings and consolidations, as well as staffing strategies. . Wachovia at Work and Campus Banking Programs. These strategies involve de- ploying Wachovia products and services through employers and universities to provide access to employees and students. . Selective Geographic Expansion. Wachovia continues to evaluate expansion op- portunities in high-growth areas. During the first quarter of 2000, Wachovia completed the acquisition of Bank of Canton in the Atlanta area. Wachovia completed the acquisition of the National Bank of Commerce in suburban Or- lando in the second quarter of 2000. During the first quarter of 2001, Wacho- via completed the acquisition of Republic Security Financial Corporation, which serves 178,000 customers, giving Wachovia the 11th largest deposit share in Florida. Also during the first quarter of 2001, Wachovia completed a branch swap transaction that allows entry into the Tennessee market. eBusiness activities at Wachovia are enterprise-wide. Advances in technology are rapidly transforming the financial services industry. The eBusiness Divi- sion provides corporate-wide eBusiness strategic planning, leadership and oper- ational management for the entire corporation. Business units sponsor specific Internet initiatives to meet the dynamic demands of their customer groups. This collaborative structure maximizes the leverage from technology and research with the necessary responsiveness to customer requirements and deliverables. Wachovia's eBusiness strategy is to develop a personalized and seamlessly de- livered customer experience when using wachovia.com and Wachovia's other web sites, macroworld.net, ijlwachovia.com and offitbank.com. eBusiness activities create value by aligning customer acquisition, retention, cross-selling and cost reduction throughout all customer segment and delivery channels. Financial Results. For the second quarter of 2001, Consumer's profit contribu- tion increased $30 million or 24 percent from the same quarter last year. The acquisition of Republic Security Bank and the branch dispositions in the third quarter of 2000 affect comparability between periods. Net interest income in- creased $13 million or 17 6 percent primarily due to the acquisition of Republic Security Bank as the lower interest rate environment caused spread compression on deposits that off- set the positive effect of increases in loan and deposit volumes. Deposit vol- ume increases were led by growth in Premiere money market deposits. Other in- come increased $25 million or 24 percent led by deposit service charges and electronic banking fees as usage increased and mortgage fees, due to the lower rate environment and from the addition of Republic Security Bank. Other expense was up $7 million or 3 percent, caused primarily by Republic Security Bank and an increase in mortgage expenses, particularly variable compensation, to handle the increased origination volume. For the six months, Consumer's profit contribution increased $55 million or 23 percent from the same period last year. The acquisitions of Bank of Canton, Na- tional Bank of Commerce and Republic Security Bank and the branch dispositions in the third quarter of 2000 affect comparability between periods. Net interest income increased $21 million or 5 percent primarily due to the acquisition of Republic Security Bank. Continued spread compression offset the positive effect of increases in loan and deposit volumes when comparing the existing branches to the same branches last year. Deposit volume increases were driven by an in- crease in the Premiere money market product. Other income increased $41 million or 20 percent led by deposit service charges, electronic banking fees and mort- gage fees. The acquisition of Republic Security Bank contributed approximately 25 percent of the overall increase. Other expense was up $8 million or 2 per- cent due to the inclusion of Republic Security Bank and an increase in variable compensation costs associated with the increase in mortgage origination volume. The expenses in the branch network were lower than the same period in the prior year. Treasury & Administration The Treasury & Administration segment principally reflects asset and liability management for interest rate risk, management of the securities portfolio, in- ternal compensation for funding sources and charges for funds used. Other unal- located corporate costs and certain nonrecurring expenses are also included. Financial Results. Treasury & Administration's profit contribution increased $72 million from the second quarter of 2000, primarily due to securities gains recorded in the current quarter. Net income was up $46 million for the same pe- riod. Other income increased $94 million from the second quarter of 2000, re- flecting the securities gains. Other expense increased $15 million or 18 per- cent mostly due to an increase in institutional incentive compensation related to the improvement in Wachovia's earnings performance from the second quarter of 2000. Merger integration charges also contributed to the increase as they were $3 million greater than a year ago. Second quarter 2001 merger integration charges were evenly split between the Republic Security Bank and the proposed merger with First Union. Year to date, Treasury & Administration's profit contribution and net income were up $130 million and $82 million, respectively from the first six months of 2000. Net interest income increased $9 million. The average yield on the secu- rities portfolio was down only 10 basis points from a year ago while the aver- age rates on Wachovia's short-term borrowed funds and long-term debt dropped 84 basis points and 75 basis points, respectively, over the same period. The pro- vision for loan losses increased $17 million from a year ago. Other income in- creased $143 million from the first six months of 2000, primarily due to secu- rities gains. Also included in 2001 other income is a $42 million gain on Wachovia's equity investment in Star Systems, Inc. as a result of Star's acqui- sition by a publicly held company. The $5 million or 3 percent increase in other expense is due to a higher incentive compensation resulting from improved business performance from a year ago. A $12 million decrease in nonrecurring charges offset the increase in incentive compensation. 18 Taxable Equivalent Rate/Volume Analysis -- Second Quarter Table 7 - --------------------------------------------------------------------------------
Average Variance Average Volume Rate Interest Attributable to --------------- ----------- --------------------- ------------------- 2001 2000 2001 2000 2001 2000 Variance Rate Volume ------- ------- ----- ----- ---------- ---------- -------- --------- -------- (millions) (thousands) Interest income Loans: $16,209 $17,570 7.10 8.50 Commercial............ $ 286,865 $ 371,154 $(84,289) $ (57,305) $(26,984) 540 673 8.97 9.30 Tax-exempt............ 12,066 15,545 (3,479) (522) (2,957) ------- ------- ---------- ---------- -------- 16,749 18,243 7.16 8.53 Total commercial..... 298,931 386,699 (87,768) (58,091) (29,677) 1,539 1,236 8.04 8.84 Direct retail......... 30,836 27,162 3,674 (2,595) 6,269 4,595 3,906 8.77 8.11 Indirect retail....... 100,538 78,756 21,782 6,905 14,877 Other revolving 952 800 10.35 11.28 credit................ 24,567 22,437 2,130 (1,930) 4,060 ------- ------- ---------- ---------- -------- 7,086 5,942 8.83 8.69 Total retail......... 155,941 128,355 27,586 2,113 25,473 3,995 2,797 7.43 9.96 Construction.......... 74,032 69,244 4,788 (20,264) 25,052 Commercial 9,501 8,206 7.63 8.48 mortgages............. 180,819 173,096 7,723 (18,232) 25,955 Residential 10,626 8,272 7.55 8.00 mortgages............. 199,984 164,611 35,373 (9,702) 45,075 ------- ------- ---------- ---------- -------- 24,122 19,275 7.56 8.49 Total real estate.... 454,835 406,951 47,884 (47,511) 95,395 2,789 2,694 6.92 9.08 Lease financing....... 48,139 60,794 (12,655) (14,751) 2,096 1,479 1,297 6.61 7.64 Foreign............... 24,377 24,636 (259) (3,496) 3,237 ------- ------- ---------- ---------- -------- 52,225 47,451 7.54 8.54 Total loans.......... 982,223 1,007,435 (25,212) (122,317) 97,105 Securities: 800 1,098 7.82 7.51 Held-to-maturity...... 15,596 20,490 (4,894) 837 (5,731) 7,944 7,225 6.37 6.75 Available-for-sale.... 126,129 121,199 4,930 (6,923) 11,853 ------- ------- ---------- ---------- -------- 8,744 8,323 6.50 6.85 Total securities..... 141,725 141,689 36 (7,144) 7,180 1,286 1,206 4.84 6.27 Other earning assets... 15,514 18,775 (3,261) (4,471) 1,210 ------- ------- ---------- ---------- -------- Total interest- 62,255 56,980 7.34 8.24 earning assets........ 1,139,462 1,167,899 (28,437) (132,564) 104,127 Cash and due from 2,701 2,895 banks................. Investment in discontinued 372 402 operations............ 5,993 4,958 Other Assets........... Allowance for loan (708) (443) losses................ ------- ------- $70,613 $64,792 Total assets......... ======= ======= Interest Expense Interest-bearing $ 5,378 $ 4,793 1.27 1.46 demand................ 16,991 17,379 (388) (2,396) 2,008 Savings and money 14,369 13,305 3.54 4.20 market savings........ 126,828 139,095 (12,267) (22,918) 10,651 9,772 9,243 5.58 5.59 Savings certificates... 135,830 128,528 7,302 (381) 7,683 Large denomination 4,012 4,198 5.83 5.92 certificates.......... 58,354 61,816 (3,462) (881) (2,581) ------- ------- ---------- ---------- -------- Total interest- bearing deposits in 33,531 31,539 4.04 4.42 domestic offices.... 338,003 346,818 (8,815) (30,313) 21,498 Interest-bearing deposits in foreign 3,518 4,124 4.33 6.08 offices............... 38,000 62,308 (24,308) (16,082) (8,226) ------- ------- ---------- ---------- -------- Total interest- 37,049 35,663 4.07 4.61 bearing deposits.... 376,003 409,126 (33,123) (48,817) 15,694 Short-term borrowed 6,845 5,376 4.39 6.17 funds*................ 74,949 82,425 (7,476) (26,938) 19,462 8,983 7,460 5.17 6.55 Long-term debt*........ 115,842 121,578 (5,736) (28,146) 22,410 ------- ------- ---------- ---------- -------- Total interest- bearing 52,877 48,499 4.30 5.08 liabilities......... 566,794 613,129 (46,335) (99,109) 52,774 ----- ----- 3.04 3.16 Interest rate spread... ----- ----- Non interest-bearing 8,460 8,373 deposits.............. 2,748 2,087 Other liabilities...... 6,528 5,833 Shareholders' equity... ------- ------- Total liabilities and shareholders' $70,613 $64,792 equity. ======= ======= Net yield on interest- earning assets and 3.69 3.92 net interest income... $ 572,668 $ 554,770 $ 17,898 (32,598) 50,496 ===== ===== ========== ========== ========
Interest income and yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. Any variance attributable jointly to volume and rate changes is allocated to the volume and rate vari- ances in proportion to the relationship of the absolute dollar amount of the change in each. Securities available-for-sale are reported at amortized cost. Pretax unrealized gains of $124 million in 2001 and pretax unrealized losses of $159 million in 2000 are included in other assets for purposes of this presentation. * Net of amounts allocated to discontinued operations. See Note 2 to consoli- dated financial statements. 19 Taxable Equivalent Rate/Volume Analysis -- Six Months Table 8 - --------------------------------------------------------------------------------
Average Variance Average Volume Rate Interest Attributable to ---------------- ----------- --------------------- ------------------ 2001 2000 2001 2000 2001 2000 Variance Rate Volume ------- ------- ----- ----- ---------- ---------- -------- -------- -------- (millions) (thousands) Interest income Loans: $16,794 $17,393 7.61 8.28 Commercial............ $ 633,811 $ 716,050 $(82,239) $(57,653) $(24,586) 557 673 9.37 9.29 Tax-exempt............ 25,903 31,104 (5,201) 259 (5,460) ------- ------- ---------- ---------- -------- 17,351 18,066 7.67 8.32 Total commercial..... 659,714 747,154 (87,440) (58,048) (29,392) 1,466 1,172 8.35 8.77 Direct retail......... 60,712 51,131 9,581 (2,573) 12,154 4,488 3,855 8.59 8.00 Indirect retail....... 191,104 153,382 37,722 11,604 26,118 Other revolving 933 773 10.99 11.21 credit................ 50,839 43,125 7,714 (856) 8,570 ------- ------- ---------- ---------- -------- 6,887 5,800 8.86 8.59 Total retail......... 302,655 247,638 55,017 8,089 46,928 3,763 2,626 7.97 9.45 Construction.......... 148,703 123,400 25,303 (21,652) 46,955 Commercial 9,373 8,100 7.96 8.40 mortgages............. 369,931 338,324 31,607 (18,728) 50,335 Residential 10,138 8,066 7.80 7.91 mortgages............. 392,184 317,391 74,793 (4,612) 79,405 ------- ------- ---------- ---------- -------- 23,274 18,792 7.89 8.34 Total real estate.... 910,818 779,115 131,703 (43,942) 175,645 2,812 2,650 7.45 9.32 Lease financing....... 103,939 122,731 (18,792) (25,894) 7,102 1,438 1,278 7.04 7.50 Foreign............... 50,235 47,685 2,550 (3,088) 5,638 ------- ------- ---------- ---------- -------- 51,762 46,586 7.90 8.39 Total loans.......... 2,027,361 1,944,323 83,038 (121,003) 204,041 Securities: 910 1,096 7.71 7.60 Held-to-maturity...... 34,783 41,443 (6,660) 568 (7,228) 7,913 7,235 6.49 6.59 Available-for-sale.... 254,779 237,108 17,671 (3,656) 21,327 ------- ------- ---------- ---------- -------- 8,823 8,331 6.62 6.72 Total securities..... 289,562 278,551 11,011 (4,592) 15,603 1,247 1,214 5.26 6.27 Other earning assets... 32,542 37,846 (5,304) (6,314) 1,010 ------- ------- ---------- ---------- -------- Total interest- 61,832 56,131 7.66 8.10 earning assets........ 2,349,465 2,260,720 88,745 (128,543) 217,288 Cash and due from 2,768 2,921 banks................. Investment in discontinued 374 392 operations............ 5,760 4,904 Other Assets........... Allowance for loan (692) (437) losses................ ------- ------- $70,042 $63,911 Total assets......... ======= ======= Interest Expense Interest-bearing $ 5,215 $ 4,774 1.39 1.48 demand................ 36,000 35,225 775 (2,301) 3,076 Savings and money 13,904 13,334 3.92 4.08 market savings........ 270,520 270,226 294 (10,626) 10,920 9,758 9,104 5.75 5.44 Savings certificates... 278,074 246,265 31,809 14,006 17,803 Large denomination 4,029 4,112 6.02 5.77 certificates.......... 120,275 117,960 2,315 4,844 (2,529) ------- ------- ---------- ---------- -------- Total interest- bearing deposits in domestic 32,906 31,324 4.32 4.30 offices............. 704,869 669,676 35,193 3,025 32,168 Interest-bearing deposits in foreign 3,486 3,944 4.92 5.82 offices............... 84,986 114,230 (29,244) (16,770) (12,474) ------- ------- ---------- ---------- -------- Total interest- 36,392 35,268 4.38 4.47 bearing deposits.... 789,855 783,906 5,949 (17,388) 23,337 Short-term borrowed 7,014 5,504 5.02 5.86 funds*................ 174,613 160,288 14,325 (25,184) 39,509 9,205 7,066 5.71 6.46 Long-term debt*........ 260,767 226,913 33,854 (28,602) 62,456 ------- ------- ---------- ---------- -------- Total interest- bearing 52,611 47,838 4.70 4.92 liabilities......... 1,225,235 1,171,107 54,128 (56,711) 110,839 ----- ----- 2.96 3.18 Interest rate spread... ----- ----- Non interest-bearing 8,363 8,346 deposits.............. 2,584 1,967 Other liabilities...... 6,484 5,760 Shareholders' equity... ------- ------- Total liabilities and shareholders' $70,042 $63,911 equity.............. ======= ======= Net yield on interest- earning assets and 3.67 3.90 net interest income... $1,124,230 $1,089,613 $ 34,617 (69,902) 104,519 ===== ===== ========== ========== ========
Interest income and yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. Any variance attributable jointly to volume and rate changes is allocated to the volume and rate vari- ances in proportion to the relationship of the absolute dollar amount of the change in each. Securities available-for-sale are reported at amortized cost. Pretax unrealized gains of $108 million in 2001 and pretax unrealized losses of $154 million in 2000 are included in other assets for purposes of this presentation. * Net of amounts allocated to discontinued operations. See Note 2 to consoli- dated financial statements. 20 CONSOLIDATED FINANCIAL RESULTS Net Interest Income Wachovia's taxable equivalent net interest income from continuing operations rose $18 million or 3.2 percent from the second quarter of 2000 to $573 mil- lion. For the first six months, taxable equivalent net interest income from continuing operations increased $35 million or 3.2 percent from the same period a year ago. The Federal Reserve continued to lower short-term interest rates by a total of 125 basis points during the second quarter and 325 basis points year to date. The rate reductions followed six rate increases beginning in July of 1999 and ending with a 50 basis point increase on May 16, 2000 when the economy appeared to be growing at an unsustainable pace leading to the perceived risk of inflation. Upon each action by the Federal Reserve, Wachovia lowered or raised its prime lending rate to keep pace with the changes in funding costs. For second quarter 2001, Wachovia's average prime lending rate and the average federal funds rate were 7.34 percent and 4.33 percent, respectively, compared with 9.25 percent and 6.27 percent, respectively, a year ago. Wachovia's net yield on interest-earning assets was 3.69 percent compared with 3.92 percent reported for the second quarter of 2000. Year to date, the net yield on interest earnings assets was 3.67 percent compared with 3.90 percent a year ago. The lower net yield on interest-earning assets in both the quarter and year to date comparisons was caused primarily by intentionally lagging the market in rate reductions on deposit products in order to attract and retain balances. Although this strategy was successful in retaining deposits, much of the growth from a year ago results from the acquisition of Republic Security Bank. Loan growth continued to outpace growth in core deposits leading to greater use of wholesale sources to fund loan demand. This contributed posi- tively to net interest income, but had a slightly dilutive effect on the net yield on interest-earning assets. The average yield on interest-earning assets decreased 90 basis points from the second quarter of 2000 and 44 basis points year to date, reflecting the change in market rates. A positive shift in portfolio mix between commercial and re- tail loans somewhat mitigated the decline in the average yield on interest earning assets. The average yield in the commercial loan portfolio experienced the largest decline while the yield on retail loans rose 14 basis points for the quarter due to improved pricing in the indirect auto lending portfolio. The average rate on interest-bearing liabilities decreased 78 basis points from the second quarter of 2000 and was down 22 basis points year to date. In com- paring both periods, most of the decline in rates occurred in Wachovia's whole- sale funding sources as domestic deposit rates intentionally lagged market re- ductions in order to attract and retain customer balances. The average rate on savings certificates remained level with the second quarter of 2000 and in- creased 31 basis points year to date due to special promotions in the latter half of 2000. Much of the proceeds of maturing savings certificates migrated to lower-rate money market accounts which helped lower the overall funding rate. Related Balance Sheet Analysis Solid growth in the retail and real estate loan portfolios offset the effect of an intentional reduction in the large corporate portfolio leaving average total loans $4.774 billion higher than the second quarter of 2000 and $2.180 billion above the average for the fourth quarter of 2000. The acquisition of Republic Security Bank accounted for approximately half of the growth from a year ago and almost all of the increase from the fourth quarter. Commercial loans de- clined $1.494 billion or 8.2 percent from the second quarter of 2000 as Wacho- via 21 exited certain lending relationships that were not economically beneficial. Much of the reduction in the commercial portfolio was the result of loan sales due to favorable pricing in the secondary market. Retail loans grew $1.144 billion or 19.3 percent from second quarter 2000 with approximately half of the increase from Republic Security Bank and the rest primarily due to strong demand for automobile loans. The real estate loan portfolio grew $4.847 bil- lion or 25.1 percent from a year ago with Republic Security accounting for ap- proximately 30 percent of the growth, primarily in the residential category. Period-End Loans by Category Table 9 - ------------------------------------------------------------------------------- (thousands)
June 30 March 31 Dec. 31 Sept. 30 June 30 2001 2001 2000 2000 2000 ----------- ----------- ----------- ----------- ----------- Commercial.............. $15,670,375 $16,897,378 $17,660,562 $18,005,046 $17,823,579 Tax-exempt.............. 530,734 548,246 605,165 657,441 668,953 ----------- ----------- ----------- ----------- ----------- Total commercial...... 16,201,109 17,445,624 18,265,727 18,662,487 18,492,532 Direct retail........... 1,548,071 1,514,825 1,338,265 1,286,724 1,270,661 Indirect retail......... 4,650,633 4,571,517 4,219,917 4,159,669 3,985,073 Other revolving credit.. 966,447 924,745 894,639 854,217 821,348 ----------- ----------- ----------- ----------- ----------- Total retail.......... 7,165,151 7,011,087 6,452,821 6,300,610 6,077,082 Construction............ 4,217,670 3,746,881 3,370,031 3,206,898 2,960,285 Commercial mortgages.... 9,437,455 9,576,763 9,025,271 8,893,611 8,423,985 Residential mortgages... 10,845,122 10,394,934 9,234,080 8,987,962 8,558,292 ----------- ----------- ----------- ----------- ----------- Total real estate..... 24,500,247 23,718,578 21,629,382 21,088,471 19,942,562 Lease financing......... 2,848,492 2,805,779 2,839,386 2,777,382 2,701,108 Foreign................. 1,444,626 1,385,747 1,380,186 1,295,778 1,308,777 ----------- ----------- ----------- ----------- ----------- Total loans........... $52,159,625 $52,366,815 $50,567,502 $50,124,728 $48,522,061 =========== =========== =========== =========== ===========
Average balances of securities increased in comparison to both the second and fourth quarters of 2000 partially due to the inclusion of the acquired Repub- lic Security Bank portfolio. Although the average balances show an increase, the period end balances dropped considerably from both prior periods as Wacho- via sold securities in order to realize gains resulting from the lower rate environment. The proceeds from sales are being reinvested in similar securi- ties with longer maturities. This also accomplished changing Wachovia's inter- est rate position to slightly liability sensitive. Wachovia and its affiliates regularly purchase securities for their own accounts. In this connection, since April 16, 2001 (the date on which the proposed merger of Wachovia and First Union Corporation was announced), Wachovia and its affiliates have pur- chased approximately $552 million of First Union common stock in the open mar- ket. Wachovia and its affiliates may continue to purchase First Union common stock from time to time in the future consistent with applicable legal and regulatory requirements. Securities Table 10 - ------------------------------------------------------------------------------- June 30, 2001 (thousands) Securities available-for-sale at fair value: U.S. Government and agency......................................... $1,014,203 Mortgage-backed.................................................... 4,201,075 Other.............................................................. 1,061,170 ---------- Total available-for-sale.......................................... 6,276,448 Securities held-to-maturity: U.S. Government and agency......................................... 143,160 Mortgage-backed.................................................... 270,982 State and municipal................................................ 206,050 Other.............................................................. 5,135 ---------- Total held-to-maturity............................................ 625,327 ---------- Total securities.................................................. $6,901,775 ==========
22 The increase in average other assets from the second and fourth quarters of 2000 as presented on the Taxable Equivalent Rate/Volume Variance Analysis table was primarily due to the change in the mark-to-market adjustment on securities classified as available-for-sale. Securities available-for-sale had an average unrealized gain of $124 million in the second quarter of 2001 compared with av- erage unrealized losses of $30 million and $159 million, respectively, in the fourth and second quarters of 2000. An increase in intangible assets resulting from acquisitions and the unrealized gains on derivative securities qualifying as hedges accounted for most of the remaining increase. Average interest-bearing deposits rose $1.386 billion or 3.9 percent from the second quarter of 2000 and $1.531 billion or 4.3 percent from the fourth quar- ter of 2000. Excluding the effects of acquisitions and branch sales in the third quarter of 2000, average interest-bearing deposits were level with the second quarter of 2000 although the mix shifted from certificates of deposit, in particular large denominations, toward lower rate savings and money market accounts. Wachovia's Premiere money market deposit product experienced strong growth in particular much of which came from maturing certificates of deposit. Wachovia utilizes a wide variety of wholesale funding sources including large denomination certificates of deposit, foreign deposits, repurchase agreements, federal funds, Federal Home Loan Bank advances, trust preferred securities, bank notes and senior and subordinated debt to fund the balance sheet. The mix and characteristics of wholesale funding are determined based on interest rate risk management, liquidity needs and available pricing. Subordinated debt and trust preferred securities are used for capital management purposes since they qualify for inclusion in Tier II and Tier I capital, respectively, for risk based capital purposes. Liquidity Management Wachovia manages liquidity at both the parent and subsidiary levels through ac- tive management of the balance sheet. Parent company liquidity comes from short-term investments that can be sold immediately, the ability to issue debt and equity securities, and from dividends and interest income from subsidiar- ies. At June 30, 2001, Wachovia Corporation had $1.222 billion in interest- bearing balances with Wachovia Bank, N.A. ("Wachovia Bank"), and $750 million available for issuance as senior or subordinate debt securities under existing shelf registrations filed with the Securities and Exchange Commission. At July 1, 2001, $852 million was available from Wachovia's bank subsidiaries to pay dividends to Wachovia Corporation without prior regulatory approval. As a back- up liquidity facility for commercial paper, Wachovia has $395 million in lines of credit from unaffiliated banks. No borrowings have occurred under these lines. Wachovia Corporation's senior notes are rated AA- by Fitch, A1 by Moody's and A+ by Standard & Poor's, and its subordinated notes are rated A+ by Fitch, A2 by Moody's and A by Standard & Poor's. The subordinated debt securities qualify for inclusion in Tier II capital under risk-based capital guidelines. Capital securities, also classified as part of other long-term debt, totaled $997 mil- lion at June 30, 2001. The capital securities are rated A+ by Fitch, a1 by Moody's and A by Standard & Poor's and qualify as Tier I capital under risk- based capital guidelines. Through its global bank note program, Wachovia Bank is authorized to issue up to $17.0 billion of bank notes. The global bank note program consists of issu- ances with original maturities beginning at seven days. Bank notes with origi- nal maturities of one year or less are included in other short-term borrowed funds, and bank notes with original maturities greater than one year are con- sidered medium-term in nature and are classified as long-term debt. Under the existing offering circular, Wachovia Bank can have outstanding up to $10 bil- lion of notes 23 at any one time with original maturities from 7 to 270 days. Wachovia Bank may issue up to an aggregate of $8 billion of notes with maturities of more than 270 days. At June 30, 2001, Wachovia Bank had approximately $6.4 billion of the notes with maturities of more than 270 days available under the existing autho- rization. There were no short-term bank notes outstanding as of June 30, 2001. Medium-term bank notes were $1.291 billion on the same date, with an average cost of 4.89 percent and an average maturity of 7.3 years. Short-term issues under the global bank note program are rated F1+ by Fitch, P-1 by Moody's and A-1+ by Standard & Poor's, while medium-term issues are rated AA- by Fitch, Aa3 by Moody's and AA- by Standard & Poor's. Allowance for Loan Losses Table 11 - -------------------------------------------------------------------------------- (thousands)
Six Months Ended 2001 2000 June 30 ------------------ ---------------------------- ------------------ Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter 2001 2000 -------- -------- -------- -------- -------- -------- -------- Summary of Transactions Balance at beginning of period.......... $698,676 $667,654 $644,555 $644,445 $440,749 $667,654 $436,680 Additions from acquisitions............. -- 25,739 -- -- 3,289 25,739 7,017 Provision for loan losses............... 143,809 66,564 68,536 77,483 223,169 210,373 244,212 Deduct net loan losses: Loans charged off: Commercial............................ 66,699 41,689 35,871 70,573 14,991 108,388 26,271 Other revolving credit................ 4,704 3,336 2,901 3,013 2,417 8,040 4,946 Other retail.......................... 12,897 13,282 9,325 8,437 8,124 26,179 17,999 Real estate........................... 10,032 9,242 2,513 887 1,612 19,274 2,832 Lease financing....................... 2,297 834 262 226 404 3,131 972 Foreign............................... 37 -- -- -- -- 37 -- -------- -------- -------- -------- -------- -------- -------- Total................................. 96,666 68,383 50,872 83,136 27,548 165,049 53,020 Recoveries: Commercial............................ 6,280 1,925 2,047 1,673 583 8,205 1,204 Other revolving credit................ 673 534 448 494 662 1,207 1,328 Other retail.......................... 3,066 2,937 2,072 2,441 3,018 6,003 5,584 Real estate........................... 823 1,625 794 1,033 402 2,448 1,188 Lease financing....................... 107 81 74 122 121 188 252 Foreign............................... -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total................................. 10,949 7,102 5,435 5,763 4,786 18,051 9,556 -------- -------- -------- -------- -------- -------- -------- Net loan losses........................ 85,717 61,281 45,437 77,373 22,762 146,998 43,464 -------- -------- -------- -------- -------- -------- -------- Balance at end of period................ $756,768 $698,676 $667,654 $644,555 $644,445 $756,768 $644,445 ======== ======== ======== ======== ======== ======== ======== Net Loan Losses (Recoveries) by Category Commercial.............................. $ 60,419 $ 39,764 $ 33,824 $ 68,900 $ 14,408 $100,183 $ 25,067 Other revolving credit.................. 4,031 2,802 2,453 2,519 1,755 6,833 3,618 Other retail............................ 9,831 10,345 7,253 5,996 5,106 20,176 12,415 Real estate............................. 9,209 7,617 1,719 (146) 1,210 16,826 1,644 Lease financing......................... 2,190 753 188 104 283 2,943 720 Foreign................................. 37 -- -- -- -- 37 -- -------- -------- -------- -------- -------- -------- -------- Total................................. $ 85,717 $ 61,281 $ 45,437 $ 77,373 $ 22,762 $146,998 $ 43,464 ======== ======== ======== ======== ======== ======== ======== Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial.............................. 1.44% .89% .75% 1.54% .32% 1.15% .28% Other revolving credit.................. 1.69 1.23 1.14 1.21 .88 1.47 .94 Other retail............................ .64 .72 .53 .45 .40 .68 .49 Real estate............................. .15 .14 .03 -- .03 .14 .02 Lease financing......................... .31 .11 .03 .02 .04 .21 .05 Foreign................................. .01 -- -- -- -- .01 -- Total loans............................. .66 .48 .36 .64 .19 .57 .19 Period-end allowance to outstanding loans.................................. 1.45 1.33 1.32 1.29 1.33 1.45 1.33
24 Allowance for Loan Losses Wachovia's allowance for loan losses is maintained at a level adequate to ab- sorb probable losses inherent in the loan portfolio at the date of the finan- cial statements. At June 30, 2001, the allowance for loan losses assigned to continuing operations was $757 million or 1.45 percent of outstanding loans compared with $668 million or 1.32 percent and $644 million or 1.33 percent at December 31, 2000 and June 30, 2000, respectively. The allowance for loan losses varied over the periods presented due to changes in the portfolio's risk profile. Compared with a year ago, the increase in the allowance at June 30, 2001 was due to a rise in the level of nonperforming loans and downward migra- tion on Wachovia's internal loan risk grades. External factors such as lower corporate earnings growth, rising default rates and an increase in the ratio of credit rating downgrades to upgrades indicate rising risk in the corporate lending environment. Nonperforming loans decreased $120 million from December 31, 2000, but were up $96 million from June 30, 2000. The level has fallen from December 31, 2000, primarily from the sale or charge-off of nonperforming loans. Management has taken aggressive action to recognize losses where appropriate and to limit ex- posure through the sale of nonperforming loans where market pricing was favora- ble. While the level of nonperforming loans has steadily declined over the last two quarters, other factors such as continued softening in reported corporate earnings, a general lowering of future earnings expectations by public compa- nies and continued announcements concerning layoffs, led to the increase in the allowance during the second quarter. Management continues to monitor the loan portfolio and is taking appropriate action to proactively reduce credit expo- sure. Early in the year, Wachovia formed a workout group comprised of approxi- mately 30 highly experienced bankers that has been successful in trimming expo- sure to problem loans. Nonperforming Assets and Contractually Past Due Loans Table 12 - -------------------------------------------------------------------------------- (thousands)
Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 2001 2001 2000 2000 2000 -------- -------- -------- -------- -------- Nonperforming Assets Nonaccrual loans............ $378,554 $408,646 $498,592 $443,620 $282,333 Restructured loans.......... -- -- -- -- -- -------- -------- -------- -------- -------- Total nonperforming loans.................... 378,554 408,646 498,592 443,620 282,333 Foreclosed property: Foreclosed real estate..... 15,710 18,712 13,855 12,794 12,946 Less valuation allowance... 1,788 1,960 2,210 2,429 2,867 Other foreclosed assets.... 8,039 10,148 9,733 6,501 5,060 -------- -------- -------- -------- -------- Total foreclosed property................. 21,961 26,900 21,378 16,866 15,139 -------- -------- -------- -------- -------- Total nonperforming assets................... $400,515 $435,546 $519,970 $460,486 $297,472 ======== ======== ======== ======== ======== Nonperforming loans to period-end loans........... .73% .78% .95% .88% .56% Nonperforming assets to period-end loans and foreclosed property........ .77 .83 .99 .91 .59 Period-end allowance for loan losses times nonperforming loans........ 2.00x 1.85x 1.40x 1.51x 2.28x Period-end allowance for loan losses times nonperforming assets....... 1.89 1.74 1.34 1.45 2.17 Contractually Past Due Loans (accruing loans past due 90 days or more).............. $ 74,176 $ 57,181 $ 75,277 $ 55,621 $ 53,966 ======== ======== ======== ======== ========
At June 30, 2001, Wachovia's nonperforming assets represented .77 percent of total loans and foreclosed property compared with 1.03 percent and .61 percent at December 31, 2000 and June 30, 2000, respectively. 25 The provision for loan losses charged to earnings was an amount sufficient to position the allowance for loan losses at the appropriate level as described above. For the second quarter the provision for loan losses was $144 million compared with $223 million for the same period of 2000. In both periods the provision for loan losses increased the allowance for loan losses in response to deteriorating economic conditions. In the second quarters of 2001 and 2000, Wachovia increased the allowance for loan losses $58 million and $200 million, respectively, through charges to earnings. Net charge-offs were $86 million or .66 percent of average loans outstanding in the second quarter of 2001 compared with $23 million or .19 percent of average loans outstanding a year earlier. Year to date, the provision for loan losses was $210 million compared with $244 million a year earlier. Looking forward, management remains watchful of credit quality issues and some further increase in nonperforming loans could be experienced over the next few quarters. Noninterest Income Other operating revenue, which excludes securities transactions, grew $28 mil- lion or 7.3 percent for the second quarter and $64 million or 8.3 percent for the first six months from the respective year earlier periods. Growth occurred in most categories except investment fees which continue to be suppressed by market conditions. Adjusting for the effects of acquisitions, operating revenue grew approximately 5 percent from second quarter 2000. Noninterest Income and Expense Table 13 - -------------------------------------------------------------------------------- (thousands)
Six Months Ended 2001 2000 June 30 ----------------- ---------------------------- ----------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter 2001 2000 -------- -------- -------- -------- -------- -------- -------- Noninterest Income Service charges on deposit accounts....... $115,157 $104,282 $106,655 $106,765 $104,380 $219,439 $205,191 Fees for trust services............... 57,923 57,090 57,417 56,636 54,189 115,013 105,423 Investment fees......... 75,609 75,864 76,521 80,065 81,439 151,473 178,209 Capital markets income.. 45,581 48,166 40,115 40,092 45,014 93,747 89,800 Electronic banking...... 29,300 26,770 27,029 26,254 26,153 56,070 49,549 Mortgage fees........... 14,955 8,368 7,082 7,373 5,921 23,323 10,922 Bankers' acceptance and letter of credit fees.. 14,803 13,547 14,948 15,102 13,671 28,350 25,268 Other service charges and fees............... 28,293 25,326 25,723 20,253 17,915 53,619 37,054 Other income............ 29,504 62,647 25,872 67,454 34,533 92,151 68,039 -------- -------- -------- -------- -------- -------- -------- Total other operating revenue............... 411,125 422,060 381,362 419,994 383,215 833,185 769,455 Securities gains (losses)............... 97,180 9,076 (480) (163) 59 106,256 226 -------- -------- -------- -------- -------- -------- -------- Total.................. $508,305 $431,136 $380,882 $419,831 $383,274 $939,441 $769,681 ======== ======== ======== ======== ======== ======== ========
Service charges on deposit accounts grew $11 million or 10.3 percent from the second quarter of 2000 and $14 million or 6.9 percent year to date. The acqui- sition of Republic Security Bank accounted for approximately 40 percent of the increase over the second quarter of 2000. The remaining increase is due to higher commercial analysis fees reflecting improved pricing and an increase in returned check charges. The increase in returned check charges is primarily due to a higher occurrence rate although improvement in the collection rate also contributed. 26 Trust fees were up $4 million or 6.9 percent from the second quarter of 2000 and were up $10 million or 9.1 percent from the first six months of 2000 de- spite softening market conditions that eroded asset values. Due to the use of tiered pricing structures, a reduction in the value of assets under management does not proportionately reduce fee income derived from the value of managed assets. Successful sales efforts, particularly with institutional customers, offset the reduction in fees caused by declining asset values. Investment fees were down $6 million or 7.2 percent from the second quarter of 2000 and were down $27 million or 15.0 percent from the first half of 2000. The equity markets and trading activity reached record levels in the first quarter of 2000 and have since retreated leaving mutual fund income and equity trading commissions down from a year ago. A sharp increase in annuity fees in the sec- ond quarter partially offset the decrease in mutual fund income and equity trading commissions. Capital markets income was mostly flat with the second quarter of 2000 but was up $4 million or 4.4 percent over the first half of 2000. Increases in deriva- tive income and asset backed finance fees offset declines in loan syndication and foreign exchange fees. Electronic banking fees were up $3 million or 12.0 percent for the quarter and $7 million or 13.2 percent for the first six months from the same respective periods a year ago. Higher debit card transaction volume pushed interchange fees higher. Mortgage fees were also up $9 million or over 150 percent from the second quarter of 2000 and were up $12 million or 113.5 percent due to increas- ing demand for fixed rate mortgages in the lower rate environment. Wachovia originates and sells fixed rate mortgages and receives a fee for the sale of the servicing rights. Other service charges and fees increased by $10 million or 57.9 percent from the second quarter of 2000. For the first six months, other service charges and fees increased $17 million or 44.7 percent from a year ago. Most of the in- crease was in insurance premiums and commissions reflecting core business growth and the acquisitions of DavisBaldwin in the fourth quarter of 2000 and Hamilton Dorsey Alston Company on May 1. The acquisitions had the greatest im- pact on property and casualty commissions that were up over $4 million for the quarter and almost $8 million year to date from the comparable 2000 periods. Other income decreased $5 million from the second quarter of 2000 but increased $24 million from the first half of 2000. The decrease from the second quarter of 2000 is primarily due to amounts paid to third parties in the first and sec- ond quarters of 2001 to assume Wachovia's liability for unfunded commitments related to certain customers. The first quarter of 2001 also included the rec- ognition of a $42 million gain on Wachovia's investment in Star Systems, Inc. Included in noninterest income for the second quarter and first six months of 2001 were securities gains of $97 million and $106 million, respectively, com- pared with $59 thousand and $226 thousand, respectively, for the same periods of 2000. During the second quarter of 2001, Wachovia took the opportunity to sell securities and recognize gains caused by declining interest rates. 27 Noninterest Expense Noninterest expense for continuing operations was up $23 million or 4.1 per- cent from the second quarter of 2000 and up $13 million or 1.2 percent from the first half of 2000. Acquisitions and nonrecurring charges affect compara- bility between periods. Adjusting for those items, noninterest expense was down slightly from a year ago reflecting successful cost control efforts. Non- recurring expenses include restructuring charges, merger-related expenses, and a litigation settlement charge. The restructuring charge recorded in the first quarter of 2001 is explained in more detail on page 29. The litigation settle- ment charge recorded in the first quarter of 2000 resulted from an agreement reached with the U. S. Department of Labor to settle litigation stemming from a lawsuit begun against South Carolina National Bank (a predecessor of Wacho- via Bank) in May 1991. Noninterest Income and Expense Table 14 - ------------------------------------------------------------------------------- (thousands)
Six Months Ended 2001 2000 June 30 ------------------ ---------------------------- ---------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter 2001 2000 -------- -------- -------- -------- -------- ---------- ---------- Noninterest Expense Salaries................ $283,179 $268,816 $230,394 $264,491 $270,569 $ 551,995 $ 546,262 Employee benefits....... 55,420 52,810 50,600 48,381 50,916 108,230 104,675 -------- -------- -------- -------- -------- ---------- ---------- Total personnel expense............... 338,599 321,626 280,994 312,872 321,485 660,225 650,937 Net occupancy expense... 42,088 39,915 38,571 38,986 39,347 82,003 77,548 Equipment expense....... 43,250 44,093 46,409 44,235 44,806 87,343 92,928 Postage and delivery.... 11,081 10,806 10,781 11,022 11,155 21,887 22,717 Outside data processing, programming and software............... 30,173 28,685 28,950 24,963 23,538 58,858 48,450 Stationery and supplies............... 9,650 9,145 8,769 8,914 9,494 18,795 18,218 Advertising and sales promotion.............. 7,232 7,897 11,591 9,075 8,761 15,129 16,574 Professional services... 13,771 16,107 23,613 18,342 16,964 29,878 28,854 Travel and business promotion.............. 9,895 9,327 10,378 9,352 10,982 19,222 20,367 Telecommunications...... 14,976 14,351 14,145 13,959 14,128 29,327 27,531 Amortization of intangible assets...... 18,127 15,226 13,923 14,304 13,957 33,353 27,587 Foreclosed property expense -- net of income................. 834 985 109 (349) (220) 1,819 (2,942) Other expense........... 34,285 39,028 33,717 35,374 39,034 73,313 76,887 -------- -------- -------- -------- -------- ---------- ---------- Total operating expense............... 573,961 557,191 521,950 541,049 553,431 1,131,152 1,105,656 Merger-related charges.. 11,670 -- -- 11,928 8,872 11,670 17,030 Litigation settlement charge................. -- -- -- -- -- -- 20,000 Restructuring charge.... -- 13,152 19,543 87,944 -- 13,152 -- -------- -------- -------- -------- -------- ---------- ---------- Total.................. $585,631 $570,343 $541,493 $640,921 $562,303 $1,155,974 $1,142,686 ======== ======== ======== ======== ======== ========== ========== Overhead ratio*......... 59.5% 58.6% 58.2% 66.2% 60.0% 59.1% 61.5% Operating overhead ratio.................. 58.3 57.2 56.1 55.9 59.0 57.8 59.5
* Noninterest expense as a percentage of taxable equivalent net interest in- come and total other operating revenue. Total personnel expense was up $17 million or 5.3 percent and $9 million or 1.4 percent from the second quarter and first six months of 2000, respective- ly. Adjusted for acquisitions, the increase in personnel expense is approxi- mately 1 percent reflecting the success of Wachovia's expense control initiatives. At June 30, 2001, Wachovia had 20,725 full time equivalent em- ployees, including approximately 890 added with the acquisitions of Republic Security Bank and Hamilton Dorsey Alston Company, compared with 21,509 a year earlier. The combined categories of occupancy and equipment expense were mostly level with a year ago when comparing both the second quarter and the first six months despite additional expense added by acquisitions. This reflects manage- ment's expense control efforts, and lower depreciation of personal computer and peripheral equipment, adjusted for lower staffing levels. 28 Professional services expense was down $3 million or 18.8 percent from the sec- ond quarter of 2000 but up $1 million from the first half of 2000 primarily due to the timing of projects. Several initiatives were completed during the first quarter of 2001 and other projects have been suspended. Amortization of intangible assets rose from prior year levels primarily as a result of intangibles associated with the acquisition of Republic Security Bank. The other major expense categories show little change from their level a year ago in comparing both the quarter and the first half of the year. On August 28, 2000, Wachovia announced the realignment of resources that called for the elimination of 1,800 positions. In connection with the restructuring plan, Wachovia incurred charges of $88 million and $20 million, respectively, during the third and fourth quarters of 2000. The remaining charge of $13 mil- lion to complete the project was incurred during the first quarter of 2001. The amounts expensed and paid during the first half of 2001 are reported below. Restructuring Charge Table 15 - -------------------------------------------------------------------------------- (thousands)
Balance at Charge to Utilized During Balance at Dec. 31, 2000 Earnings 2001 June 30, 2001 ------------- --------- --------------- ------------- Severance and personnel- related costs.......... $38,233 $ 5,226 $29,111 $14,348 Occupancy and other costs.................. 1,384 7,926 9,240 70 ------- ------- ------- ------- Total................... $39,617 $13,152 $38,351 $14,418 ======= ======= ======= =======
Severance and personnel related costs include severance payments to terminated employees as well as benefits including pension, medical and job transition as- sistance. Occupancy and other costs represent asset impairment charges and other facility exit costs associated with the project. Included in occupancy and other costs were non-cash items of approximately $7 million. Income Taxes Table 16 - -------------------------------------------------------------------------------- (thousands)
Three Months Six Months Ended Ended June 30 June 30 ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Income before income taxes............ $344,208 $123,017 $681,336 $453,541 ======== ======== ======== ======== Federal income taxes at statutory rate................................. $120,472 $ 50,056 $238,468 $158,739 State and local income taxes--net of federal benefit...................... 5,480 428 12,930 7,493 Effect of tax-exempt securities interest and other income............ (11,537) (11,453) (23,113) (22,723) Other items........................... 6,615 5,256 12,922 9,334 -------- -------- -------- -------- Total tax expense................... $121,030 $ 44,287 $241,207 $152,843 ======== ======== ======== ======== Current: Federal.............................. $ 73,049 $ 21,226 $102,093 $ 42,831 Foreign.............................. 406 364 1,002 700 State and local...................... 10,383 6,400 17,911 13,092 -------- -------- -------- -------- Total............................... 83,838 27,990 121,006 56,623 Deferred: Federal.............................. 37,196 22,038 118,221 97,784 State and local...................... (4) (5,741) 1,980 (1,564) -------- -------- -------- -------- Total............................... 37,192 16,297 120,201 96,220 -------- -------- -------- -------- Total tax expense................... $121,030 $ 44,287 $241,207 $152,843 ======== ======== ======== ========
29 Income Taxes Applicable income taxes for continuing operations for the second quarter of 2001 increased $77 million from the second quarter of 2000 and increased $88 million from the first half of 2000 reflecting a higher level of pretax earn- ings. Wachovia's effective tax rate is higher than 2000 in comparing both the second quarter and first half of the year. The increase is caused by tax exempt income accounting for a proportionately larger share of pretax income in 2000. The current year also included a larger amount of nondeductible intangible am- ortization that resulted from recent acquisitions. New Accounting Standards Effective January 1, 2001, Wachovia adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activi- ties" (FASB 133), which established accounting and reporting standards for de- rivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the risk being hedged are recognized in earnings. If the derivative is des- ignated as a cash flow hedge, the effective portion of the changes in the fair value of the derivative are recorded in other comprehensive income and are rec- ognized in the income statement when the hedged item affects earnings. Ineffec- tive portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in income. The adoption of FASB 133 did not have a material impact on Wachovia's financial position or re- sults of operations. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" (FASB 140) which re- places FASB Statement No. 125. FASB 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain additional disclosures regarding these activities. The state- ment is effective for transfers and servicing of financial assets or extin- guishments of liabilities that occur after March 31, 2001. The statement was effective for recognition and reclassification of collateral and for disclo- sures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Adoption did not result in a material financial impact. In July 2001, the Financial Accounting Standards Board issued Statement of Fi- nancial Accounting Standards No. 141, "Business Combinations" (FASB 141) which supercedes Accounting Principles Board Opinion No. 16 "Business Combinations" and FASB 38 "Accounting for Preacquisition Contingencies of Purchased Enter- prises". FASB 141 changes the existing accounting treatment for business combi- nations to allow only the purchase method. The statement applies to all busi- ness combinations initiated after June 30, 2001. The statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Adoption of this statement is not expected to have a material impact on Wachovia's results of operations or financial position. In July 2001, the Financial Accounting Standards Board issued Statement of Fi- nancial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FASB 142) which supercedes Accounting Principles Board Opinion No. 17 "Intan- gible Assets". FASB 142 addresses how intangible assets that are acquired indi- vidually or with a group of other assets (but not those acquired in a business combination) should be accounted for in 30 financial statements upon their acquisition. FASB 142 also addresses how good- will and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The most significant change from current accounting standards is that goodwill will no longer be amortized but will instead be tested periodically for impairment. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of FASB 142 are to be reported as resulting from a change in ac- counting principle. FASB 142 is effective for Wachovia beginning in the first quarter of 2002 and is required to be applied to all goodwill and intangibles recognized in the financial statements at that date. Adoption is not expected to have a material impact on results of operations or financial position. SHAREHOLDERS' EQUITY AND CAPITAL RATIOS Shareholders' equity at June 30, 2001 was $6.455 billion, up $519 million or 8.8 percent from $5.936 billion one year earlier and up $171 million or 2.7 percent from December 31, 2000. Included in shareholders' equity at the end of the second quarter of 2001 was $6 million, net of tax, of accumulated other comprehensive income comprised of $22 million in unrealized gains on securi- ties available-for sale, $15 million minimum pension liability and $572 thou- sand in unrealized losses on derivatives qualifying as cash flow hedges. This compared with accumulated other comprehensive losses of $80 million, net of tax, one year earlier and accumulated other comprehensive income of $30 mil- lion at December 31, 2000 that were entirely comprised of unrealized losses and gains on securities available-for-sale. The change in the value of securi- ties available-for-sale is primarily due to the decline in interest rates and securities sales executed during the second quarter of 2001. Wachovia had three share repurchase authorizations outstanding during the quarter. Wachovia may repurchase up to 8 million shares of its common stock under a January 28, 2000 authorization effective through January 25, 2002. Wa- chovia was also authorized to repurchase shares to offset the approximately 7 million shares issued to acquire Republic Security Financial Corporation and Hamilton Dorsey Alston Company. During the second quarter of 2001, Wachovia Corporation repurchased 8 million shares that completed both acquisition-re- lated repurchase authorizations. As of June 30, 2001, approximately 6 million shares remain available for repurchase under the January 28, 2000 authoriza- tion. Management will continue to work within the guidelines of its share re- purchase authorizations while assessing the best deployment of Wachovia's cap- ital. At its July 27, 2001 meeting, the Board of Directors declared a third quarter dividend of $.60 per share, payable September 4 to shareholders of record as of August 10. The dividend is equal to the amount paid in the same quarter of 2000. Intangible assets at June 30, 2001 totaled $1,317 billion, consisting of $1,195 million of goodwill, $108 million of deposit base intangibles and $14 million of other intangibles. The acquisitions of Republic Security Financial Corporation and Hamilton Dorsey Alston Company added intangibles of approxi- mately $265 million and $40 million, respectively. Intangible assets at the end of the second quarter of 2000 were $1.008 billion, with $935 million of goodwill and $73 million of deposit base intangibles. Regulatory agencies divide capital into Tier I (consisting of shareholders' equity and certain cumulative preferred stock instruments less ineligible in- tangible assets) and Tier II (consisting of the allowable portion of the re- serve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company's risk-adjusted assets and off-balance sheet items. Regulatory requirements presently specify that Tier I capital should exclude the unrealized gain or loss, net of tax, on se- curities available-for-sale. In addition to these capital ratios, regulatory agencies have established a Tier I leverage ratio which measures Tier I capi- tal to average assets less ineligible intangible assets. 31 Capital Components and Ratios Table 17 - -------------------------------------------------------------------------------- (thousands)
2001 2000 ------------------------ ------------------------------------- Second First Fourth Third Second Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- Tier I capital: Common shareholders' equity................ $ 6,455,475 $ 6,864,856 $ 6,284,539 $ 6,090,164 $ 5,936,044 Trust capital securities............ 997,307 997,213 997,119 997,025 996,932 Less ineligible intangible assets..... 1,347,694 1,316,300 1,071,679 1,040,066 1,057,314 Unrealized (gains) losses on securities available-for-sale -- net of tax........... (6,145) (74,602) (30,312) 29,780 77,233 ----------- ----------- ----------- ----------- ----------- Total Tier I capital.. 6,098,943 6,471,167 6,179,667 6,076,903 5,952,895 Tier II capital: Allowable allowance for loan losses........... 906,674 851,082 822,560 799,461 799,351 Allowable long-term debt.................. 2,304,548 2,464,279 2,463,031 2,542,833 2,242,780 ----------- ----------- ----------- ----------- ----------- Tier II capital additions............ 3,211,222 3,315,361 3,285,591 3,342,294 3,042,131 ----------- ----------- ----------- ----------- ----------- Total capital......... $ 9,310,165 $ 9,786,528 $ 9,465,258 $ 9,419,197 $ 8,995,026 =========== =========== =========== =========== =========== Risk-adjusted assets.... $83,020,443 $82,948,338 $81,856,272 $81,073,761 $80,796,945 Quarterly average assets*................ $73,560,023 $72,392,777 $70,803,380 $68,773,165 $68,559,502 Risk-based capital ratios: Tier I capital......... 7.35% 7.80% 7.55% 7.50% 7.37% Total capital.......... 11.21 11.80 11.56 11.62 11.13 Tier I leverage ratio... 8.29 8.94 8.73 8.84 8.68
* Excludes ineligible intangible assets and average unrealized gains and losses on securities available-for-sale, net of tax. Regulatory guidelines require a minimum of total capital to risk-adjusted as- sets ratio of 8 percent with at least one-half consisting of tangible common shareholders' equity and a minimum Tier I leverage ratio of 3 percent. Banks that meet or exceed a Tier I ratio of 6 percent, a total capital ratio of 10 percent and a Tier I leverage ratio of 5 percent are considered well capital- ized by regulatory standards. It is Wachovia's policy that it and its banking subsidiaries be well capitalized at all times. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk and Asset/Liability Management Market risk is the risk of loss due to adverse changes in instrument values or earnings fluctuation resulting from changes in market factors including changes in interest rates, foreign exchange rates, commodity prices and other market variables such as equity price risk. Wachovia primarily is exposed to interest rate risk with immaterial risk exposure to changes in foreign exchange rates and equity prices in the nontrading portfolios. Trading Market Risk Trading market risk is the risk to net income from changes in the fair value of assets and liabilities and off-balance sheet instruments that are marked-to- market through the income statement. The earnings risk due to changes in fair value in the trading portfolios is limited by the short-term holding periods of some of the portfolios, entering into offsetting trades with market counterparties, establishing and monitoring market risk limits by portfolio, and utilizing various hedging techniques. 32 Wachovia uses a value-at-risk (VaR) methodology to gauge potential losses in various trading portfolios due to changes in interest rates. The VaR estimate represents the maximum expected loss in fair value of a trading portfolio over a one day time horizon, given a 99 percent confidence level. In other words, there is about a 1 percent chance, given historical volatility of interest rates, that a loss greater than the VaR estimate will occur by the end of the next day. At June 30, 2001, the combined VaR exposure was $80 thousand representing .02 percent of the combined trading portfolio value of $451 million. The combined average VaR exposure for the second quarter of 2001 was $64 thousand represent- ing .02 percent of the combined average trading portfolio value of $419 mil- lion. These VaR numbers are for the combined fixed income and equity trading portfolios. Nontrading Market Risk Nontrading market risk is the risk to net income and equity capital from changes in interest rates on asset, liability and off-balance sheet portfolios other than trading. The risk is driven by potential mismatches resulting from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, and potential exercise of explicit and embedded options. There also is net income risk from changes in market rate relationships known as basis risk. Management believes that nontrading interest rate risk is best measured by sim- ulation modeling which calculates expected net income based on projected inter- est-earning assets, interest-bearing liabilities, off-balance sheet financial instruments, other income and other expense. The model projections are based upon historical trends and management's expectations of balance sheet growth patterns, spreads to market rates, historical market rate relationships, pre- payment behavior, current and expected product offerings, sales activity, and expected exercise of explicit and embedded options. In order to discern risk levels preset in the balance sheet beyond the 24 month time horizon used in simulation modeling, Wachovia utilizes a present value methodology commonly re- ferred to as Economic Value of Equity or EVE. The policy guideline limit for net income (after-tax changes in net interest income) simulation is a negative impact to net income of 7.5 percent for the up or down 200 basis point ramp scenarios when compared with the flat rate scenar- io. Management has generally maintained a risk position well within the policy guideline level. The model indicated the impact of a 200 basis point gradual rise in rates over the next 12 months would cause approximately a .11 percent decrease in net income at June 30, 2001 versus a .64 percent increase one year earlier. A gradual decrease in rates over the next 12 months would cause ap- proximately a .32 percent increase in net income as of June 30, 2001 compared with a .68 percent decrease at June 30, 2000. Wachovia runs additional scena- rios beyond the standard shock and ramp scenarios, including yield curve steep- ening, flattening and inversion scenarios. Various sensitivity analyses are performed on a regular basis to segregate interest rate risk into separate com- ponents and understand the risk attributable to prepayments, caps and floors, and other options. Extensive assumptions testing is performed to understand the degree of impact from changing key assumptions such as the speed of prepay- ments, the interest rate elasticity of core deposit rates and faster- or slow- er-growing balance sheets. 33 PART II -- OTHER INFORMATION Item 1. Legal Proceedings Certain State Court Lawsuits related to the First Union/Wachovia Merger. As referenced in Wachovia's quarterly report filed on form 10-Q for the quarter ended March 31, 2001 (as amended on June 26, 2001), in May 2001, two individual stockholders of Wachovia, purporting to represent a class of holders of Wacho- via common stock, filed putative Class Action Complaints against Wachovia and the Wachovia directors, alleging that the Wachovia directors breached their fi- duciary duties by entering into the merger agreement with First Union Corpora- tion. The first of these actions, captioned Bennett v. Baker, et al., was filed in North Carolina Superior Court, Forsyth County, and the second of these ac- tions, captioned Leser v. Wachovia, et al., was filed in North Carolina Supe- rior Court, Guilford County. Subsequently, in May and June 2001, five addi- tional putative Class Action Complaints were filed by individual stockholders of Wachovia, in each case purporting to represent a class of holders of Wacho- via common stock and making substantially similar allegations, including: Heaney v. Wachovia, et al., filed in North Carolina Superior Court, Forsyth County; Wachsman v. Wachovia, et al., filed in North Carolina Superior Court, Forsyth County; Rosenberg v. Wachovia, et al., filed in North Carolina Superior Court, Forsyth County; Drucker v. Wachovia, et al., filed in North Carolina Su- perior Court, County of Mecklenburg; and Hrobar v. Baker, et al., filed in North Carolina Superior Court, Wake County. In each of the above shareholder suits, the plaintiffs seek injunctive relief, unspecified damages and costs and attorneys' fees. On May 23, Wachovia joined as a plaintiff a lawsuit filed on May 22, 2001, by First Union and First Union National Bank against SunTrust, captioned First Union Corporation and First Union National Bank v. SunTrust Banks, Inc., in North Carolina Superior Court, County of Mecklenburg. The complaint, as amend- ed, asserts claims by First Union for unfair trade practices, and tortious in- terference with prospective economic advantage, asserts a claim by First Union, First Union National Bank and Wachovia for a declaratory judgment that the stock option agreements are valid and fully enforceable and asserts a separate claim by Wachovia against SunTrust for breach of a confidentiality agreement. The complaint seeks temporary, preliminary and permanent injunctive relief and declaratory relief. On May 23, 2001, SunTrust filed a complaint against First Union, Wachovia and 10 of Wachovia's directors, captioned SunTrust v. Baker, et al., in the Georgia Superior Court, Fulton County. The complaint asserts claims for breach of fidu- ciary duty and breach of the duty of loyalty and candor against the Wachovia directors, and aiding and abetting the breaches of those duties by First Union. The complaint also asserts a claim for restraint of trade under Georgia Code section 13-8-2 and the Georgia Constitution. The complaint seeks declaratory and preliminary and permanent injunctive relief, and costs and attorneys' fees. On June 1, 2001, Wachovia, First Union and SunTrust entered into an agreement that all litigation brought by them (other than claims over which the federal courts have exclusive jurisdiction) would be moved to the North Carolina Busi- ness Court, and that SunTrust would dismiss its Georgia state court action. The individual shareholder cases filed in North Carolina were also transferred to the North Carolina Business Court. The shareholder plaintiffs agreed to be bound by the court's decision on SunTrust's counterclaims. On June 6, SunTrust filed its answer and filed counterclaims against Wachovia, certain Wachovia di- rectors and First Union alleging that the Wachovia directors, aided and abetted by First Union, breached their fiduciary duties by approving the merger agree- ment and the amended stock option agreements, that those agreements are unrea- sonable restraints of trade in violation of Georgia law, and seeking a declara- tion that Wachovia must allow Wachovia shareholders to vote on SunTrust's pro- posed by-law amendment at the August 3 Wachovia shareholder meeting and seeking 34 declaratory and injunctive relief. On June 18, the Georgia court dismissed SunTrust's claim for unreasonable restraint of trade under Georgia law, but al- lowed SunTrust to proceed with its remaining claims. On July 20, 2001, the North Carolina Business Court denied all injunctive re- lief that SunTrust and the shareholder plaintiffs had sought, thereby allowing the proposed First Union/Wachovia transaction to proceed to a shareholder vote as scheduled for Wachovia's annual meeting on August 3. The court upheld the decision made by Wachovia's Board of Directors to approve the merger and deter- mined that the Wachovia shareholders were fully informed and had an unfettered opportunity to vote on the proposed merger. The court held as invalid one of the termination provisions of the merger agreement between Wachovia and First Union, which did not allow either party to terminate the Merger Agreement if it is not approved by shareholders. In Georgia, putative Class Action Complaints were filed against Wachovia, the Wachovia directors and First Union, by individual stockholders of Wachovia, in each case purporting to represent a class of holders of Wachovia common stock. Each of these complaints alleges that the Wachovia directors, aided and abetted by First Union, breached their fiduciary duties by entering into the merger agreement with First Union and by failing to consider other alternatives and seeks injunctive relief, unspecified damages and costs and attorneys' fees. Re- garding the first of these actions, captioned Wyatt, et al. v. Baker, et al., filed on May 16, 2001, in Georgia Superior Court, Fulton County, Wachovia be- lieves that the complaint is without merit and intends to defend it vigorously. The second of these actions, captioned Drucker v. Wachovia, et al., filed on May 23, 2001, in Georgia Superior Court, Fulton County, was dismissed without prejudice on July 16, 2001. Certain Federal Court Lawsuits related to the First Union/Wachovia Merger. On April 20, 2001, as referenced in Wachovia's quarterly report filed on form 10-Q for the quarter ended March 31, 2001 (as amended on June 26, 2001), an individ- ual shareholder of Wachovia, purporting to represent a class of Wachovia share- holders, filed a complaint in the United States District Court for the Middle District of North Carolina, naming Wachovia, Leslie M. Baker, Jr., and Morris W. Offit as defendants, captioned Krim v. Wachovia, et al., alleging that the defendants breached their fiduciary duties to Wachovia's shareholders by enter- ing into the merger agreement and related agreements with First Union Corpora- tion. On July 23, plaintiff sought to amend his complaint to allege claims that the joint proxy statement of First Union and Wachovia contains materially false and misleading statements in violation of the federal securities laws. On July 26, plaintiff sought an expedited hearing on his demand for injunctive relief to enjoin the shareholder vote and to force Wachovia to distribute a revised proxy statement. On August 3 the court denied plaintiff's request for an expe- dited hearing and for injunctive relief. On May 22, 2001, SunTrust filed a lawsuit against First Union and Wachovia in the United States District Court for the Northern District of Georgia, cap- tioned SunTrust Banks, Inc., v. Wachovia, et al. The complaint asserts claims that the preliminary joint proxy statement of First Union and Wachovia contains materially false and misleading statements in violation of the federal securi- ties laws. The complaint seeks preliminary and permanent injunctive relief and costs. On May 23, First Union filed an answer to the complaint, denying any li- ability and asserting affirmative defenses. Also on May 23, SunTrust filed a putative amended complaint asserting the same claims as in the original com- plaint, and adding a claim that Wachovia has not complied with federal rules concerning the record date for a shareholder meeting. The putative amended com- plaint seeks substantially similar relief as the original complaint. On June 11 and 12, First Union and Wachovia, respectively, filed their answers to the amended complaint and filed counterclaims against SunTrust asserting that its preliminary proxy statement contained false and misleading statements in viola- tion of the federal securities laws. The counterclaims seek preliminary and permanent injunctive relief. 35 Wachovia believes that these complaints are without merit and intends to defend them vigorously. Shareholder List Litigation. On May 31, 2001, an individual shareholder of Wa- chovia, who is also the Vice Chairman of SunTrust, filed an action in the North Carolina Superior Court, Forsyth County, captioned Hoepner v. Wachovia, seeking to examine the Wachovia shareholder list and certain related shareholder list materials of Wachovia to enable plaintiff and SunTrust to communicate with other Wachovia shareholders with respect to SunTrust's solicitation of proxies urging Wachovia shareholders to vote against the First Union merger. The com- plaint alleges that Wachovia declined to provide the requested information un- less plaintiff confirmed that he would not provide such records to SunTrust or any other person that has not established its entitlement as a qualified share- holder, or certify SunTrust's status as a qualified shareholder. The complaint seeks a declaration that Wachovia's failure to permit plaintiff to inspect the requested documents constitutes a violation of North Carolina common and statu- tory law, and seeks injunctive relief, and costs and attorneys' fees. This ac- tion was moved to the North Carolina Business Court. On June 14, that court or- dered Wachovia to produce its shareholder list to Hoepner or his agent by June 20. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -- The exhibits listed on the accompanying Exhibit Index, immedi- ately following the signature page are filed as part of or incorporated by ref- erence into this report. (b) Reports on Form 8-K. A current report on Form 8-K dated April 9, 2001, was filed with the Secu- rities and Exchange Commission announcing an agreement for Bank One Corpo- ration to acquire Wachovia's consumer credit card business, subject to reg- ulatory approval. The companies also announced a long-term agent bank rela- tionship under which Wachovia will offer its branded credit cards to retail customers with servicing provided by First USA, Bank One Corporation's credit card subsidiary. A current report on Form 8-K dated April 17, 2001, was filed with the Secu- rities and Exchange Commission announcing an Agreement and Plan of Merger with First Union Corporation dated April 15, 2001. Also included were pre- sentation materials related to the Agreement and Plan of Merger and an an- nouncement of Wachovia's first quarter 2001 earnings and postponement of Wachovia's annual shareholders' meeting. 36 A current report on Form 8-K dated April 19, 2001, was filed with the Secu- rities and Exchange Commission concerning Wachovia's earnings and results for the first quarter of 2001. A current report on Form 8-K dated May 1, 2001, was filed with the Securi- ties and Exchange Commission announcing Wachovia's intent to resume repur- chases of its outstanding common stock under existing authorizations by its board of directors. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the regis- trant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WACHOVIA CORPORATION /s/ Robert S. McCoy, Jr. August 13, 2001 __________________________ By: Robert S. McCoy, Jr. Vice Chairman, Chief Financial Officer and Treasurer /s/ David L. Gaines August 13, 2001 __________________________ By: David L. Gaines Comptroller 38 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 2.1 Agreement and Plan of Merger dated as of April 15, 2001 and amended and restated between First Union Corporation and Wachovia Corporation (incorporated by reference to Appendix A of Schedule 14A of Wachovia Corporation dated June 29, 2001, File No. 1-9021). 2.2 Letter Agreement, dated as of July 20, 2001, between Wachovia and First Union amending Agreement and Plan of Merger described in Exhibit 2.1 hereto (incorporated by reference to Exhibit 2.1 of Form 8-K of Wachovia Corporation, dated July 20, 2001, File No. 1-9021). 2.3 Stock Option Agreement, dated as of April 15, 2001 and amended and restated between First Union Corporation, as grantee, and Wachovia Corporation, as issuer (incorporated by reference to Appendix B of Schedule 14A of Wachovia Corporation dated June 29, 2001, File No. 1- 9021). 2.4 Stock Option Agreement, dated as of April 15, 2001 and amended and restated between Wachovia Corporation, as grantee, and First Union Corporation, as issuer (incorporated by reference to Appendix C of Schedule 14A of Wachovia Corporation dated June 29, 2001, File No. 1- 9021). 3.1 Amended and Restated Articles of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 of Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1998, File No. 1- 9021). 3.2 Bylaws of the registrant as amended (incorporated by reference to Exhibit 3.2 of Form S-4 Registration Statement of Wachovia Corporation dated December 14, 1998, File No. 333-68823). 4 Instruments defining the rights of security holders, including indentures--Wachovia Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of security holders that are not required to be filed. 4.1 Articles IV, VII, IX, X and XI of the registrant's Amended and Restated Articles of Incorporation (included in Exhibit 3.1 hereto). 4.2 Article 1, Section 1.8, and Article 6 of the registrant's Bylaws (included in Exhibit 3.2 hereto). 4.3 Indenture dated as of May 15, 1986 between South Carolina National Corporation and Morgan Guaranty Trust Company of New York, as Trustee, relating to $35,000,000 principal amount of 6 1/2% Convertible Subordinated Debentures due in 2001 (incorporated by reference to Exhibit 28 of Form S-3 Registration Statement of South Carolina National Corporation, File No. 33-7710). 4.4 First Supplemental Indenture dated as of November 26, 1991 by and among South Carolina National Corporation, Wachovia Corporation and Morgan Guaranty Trust Company of New York, Trustee, amending the Indenture described in Exhibit 4.3 hereto (incorporated by reference to Exhibit 4.10 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1991, File No. 1-9021). 4.5 Indenture dated as of March 15, 1991 between South Carolina National Corporation and Bankers Trust Company, as Trustee, relating to certain unsecured subordinated securities (incorporated by reference to Exhibit 4(a) of Form S-3 Registration Statement of South Carolina National Corporation, File No. 33-39754). 4.6 First Supplemental Indenture dated as of January 24, 1992 by and among South Carolina National Corporation, Wachovia Corporation and Bankers Trust Company, as Trustee, amending the Indenture described in Exhibit 4.5 hereto (incorporated by reference to Exhibit 4.12 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1991, File No. 1-9021). 4.7 Indenture dated as of July 15, 1998 between Wachovia Corporation and The Chase Manhattan Bank, as Trustee, relating to subordinated debt securities (incorporated by reference to Exhibit 4(b) of Form S-3 Registration Statement of Wachovia Corporation, File No. 333-59165). 4.8 Indenture dated as of August 15, 1996 between Wachovia Corporation and The Chase Manhattan Bank, as Trustee, relating to senior debt securities (incorporated by reference to Exhibit 4(a) of Post- Effective Amendment No. 1 of Form S-3 Registration Statement of Wachovia Corporation, File No. 33-6280). 4.9 Indenture between Wachovia Corporation, Wachovia Capital Trust II and First National Bank of Chicago, as Trustee, relating to Floating-Rate Junior Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures) (incorporated by reference to Exhibit 4(c) of Amendment No. 1 of Form S-3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365).
39 EXHIBIT INDEX (continued) 4.10 Amended and Restated Declaration of Trust of Wachovia Capital Trust II, relating to Preferred Securities (incorporated by reference to Exhibit 4(b)(iv) of Amendment No. 1 of Form S-3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365). 4.11 Preferred Securities Guarantee Agreement of Wachovia Corporation (incorporated by reference to Exhibit 4(g) of Amendment No. 1 of Form S- 3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365). 4.12 Indenture between Central Fidelity Banks, Inc. and Chemical Bank, as Trustee, relating to $150,000,000 principal amount of subordinated debt securities (incorporated by reference to Exhibit 4.1 of Form 8-K of Central Fidelity Banks, Inc., dated November 18, 1992, File No. 0-8829). 4.13 Indenture between Central Fidelity Banks, Inc., Central Fidelity Capital Trust I and The Bank of New York, as Trustee, relating to $100,000,000 Floating-Rate Junior Subordinated Debentures (incorporated by reference to Exhibit 4.1 of Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 4.14 Amended and Restated Declaration of Trust of Central Fidelity Capital Trust I (incorporated by reference to Exhibit 4.4 of Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 4.15 Form of New Guarantee Agreement for the benefit of the holders of the Trust Securities (incorporated by reference to Exhibit 4.6 of Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated as of April 23, 1997, File No. 333-28917). 4.16 Indenture dated as of June 30, 1997 by and between First Palm Beach Bancorp, Inc. and The Bank of New York, as Trustee, relating to the Company's 10.35% Senior Debentures due June 30, 2002 (incorporated by reference to the Exhibits to Form S-4 Registration Statement filed by First Palm Beach Bancorp, Inc. on September 11, 1997, Registration No. 333-35431). 4.17 Supplemental Indenture dated as of October 29, 1998 by and among the Company, First Palm Beach Bancorp, Inc. and The Bank of New York, as Trustee, relating to the Company's 10.35% Senior Debentures due June 30, 2002 (incorporated by reference to Exhibits to Form 8-K filed on November 2, 1998, File No. 000-14671). 4.18 Second Supplemental Indenture dated as of December 20, 2000 by and between Republic Security Financial Corporation and The Bank of New York as Trustee, relating to the Company's 10.35% Senior Debentures due on June 30, 2002 (incorporated by reference to Exhibit 4.18 of Report on Form 10-Q of Wachovia Corporation for the quarter ended March 31, 2001, File No. 1-9021). 4.19 Third Supplemental Indenture dated as of March 1, 2001 by and between Republic Security Financial Corporation, Wachovia Acquisition Corporation 2001-01 and The Bank of New York as Trustee, relating to the Company's 10.35% Senior Debentures due on June 30, 2002 (incorporated by reference to Exhibit 4.19 of Report on Form 10-Q of Wachovia Corporation for the quarter ended March 31, 2001, File No. 1-9021). 4.20 Form of 10.35% Senior Debenture Due June 30, 2002 (incorporated by reference to Exhibit 4.2 of Report on Form 10-K of Republic Security Financial Corporation for the year ended December 31, 1999, File No. 000-14671). 4.21 Form of Series B 10.35% Senior Debenture due June 30, 2002 (incorporated by reference to Exhibit 4.5 of Report on Form 10-K filed by First Palm Beach Bancorp, Inc. for the fiscal year ended September 30, 1997, File No. 0-21942). 10.1 Senior Management Incentive Plan of Wachovia Corporation as amended through January 1, 1999 (incorporated by reference to Exhibit 10.4 of Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1999, File No. 1-9021). 10.2 Wachovia Corporation Amended and Restated Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 of Report on Form 10-Q of Wachovia Corporation for the quarter ended March 31, 2000, File No. 1-9021). 10.3 Employment Agreement between Wachovia Corporation and L. M. Baker, Jr. dated as of November 29, 1999 (incorporated by reference to Exhibit 10.3 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.4 Employment Agreement between Wachovia Corporation and Robert S. McCoy, Jr. dated as of April 13, 2001.
40 EXHIBIT INDEX (continued) 10.5 Employment Agreement between Wachovia Corporation and G. Joseph Prendergast dated as of October 22, 1999 (incorporated by reference to Exhibit 10.5 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.6 Employment Agreement between Wachovia Corporation and Mickey W. Dry dated as of October 22, 1999 (incorporated by reference to Exhibit 10.6 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.7 Employment Agreement between Wachovia Corporation and Jean E. Davis dated as of October 22, 1999. (incorporated by reference to Exhibit 10.7 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 2000, File No. 1-9021). 10.8 Form of Employment Agreement between Wachovia Corporation and Executive Officers (other than Messrs. Baker, McCoy, Prendergast, Dry and Ms. Davis) (incorporated by reference to Exhibit 10.8 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.9 Employment Agreement between Wachovia Corporation and Morris W. Offit dated as of May 13, 1999 (incorporated by reference to Exhibit 10.1 of Form S-4 Registration Statement of Wachovia Corporation dated June 25, 1999, File No. 333-81627). 10.10 Senior Executive Retirement Agreement between Wachovia Corporation and L. M. Baker, Jr. dated as of November 29, 1999 (incorporated by reference to Exhibit 10.10 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.11 Senior Executive Retirement Agreement between Wachovia Corporation and Robert S. McCoy, Jr. dated as of April 13, 2001. 10.12 Senior Executive Retirement Agreement between Wachovia Corporation and G. Joseph Prendergast dated as of October 22, 1999 (incorporated by reference to Exhibit 10.12 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.13 Senior Executive Retirement Agreement between Wachovia Corporation and Mickey W. Dry dated as of October 22, 1999 (incorporated by reference to Exhibit 10.13 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.14 Senior Executive Retirement Agreement between Wachovia Corporation and Jean E. Davis dated as of October 22, 1999 (incorporated by reference to Exhibit 10.14 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 2000, File No. 1-9021). 10.15 Form of Senior Executive Retirement Agreement between Wachovia Corporation and Executive Officers (other than Messrs. Baker, McCoy, Prendergast, Dry and Ms. Davis) (incorporated by reference to Exhibit 10.15 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1999, File No. 1-9021). 10.16 Senior Management and Director Stock Plan of Wachovia Corporation (incorporated by reference to Exhibit 10 of Quarterly Report on Form 10- Q of First Wachovia Corporation for the quarter ended March 31, 1989, File No. 1-9021). 10.17 1990 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.16 hereto (incorporated by reference to Exhibit 10.17 of Report on Form 10-K of First Wachovia Corporation for the year ended December 31, 1989, File No. 1-9021). 10.18 1996 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.16 hereto (incorporated by reference to Exhibit 10.24 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1996, File No. 1-9021). 10.19 Deferred Compensation Plan dated as of January 19, 1987, as amended (incorporated by reference to Exhibit 10(c) of Report on Form 10-K of South Carolina National Corporation for the year ended December 31, 1986, File No. 0-7042). 10.20 Amendment to Deferred Compensation Plan described in Exhibit 10.19 hereto (incorporated by reference to Exhibit 19(b) of Quarterly Report on Form 10-Q of South Carolina National Corporation for the quarter ended September 30, 1987, File No. 0-7042). 10.21 Amendment to Deferred Compensation Plan described in Exhibit 10.19 hereto (incorporated by reference to Exhibit 10(d) of Report on Form 10- K of South Carolina National Corporation for the year ended December 31, 1988, File No. 0-7042).
41 EXHIBIT INDEX (continued) 10.22 Amendment to Deferred Compensation Plan described in Exhibit 10.19 hereto (incorporated by reference to Exhibit 10.35 of Report on Form 10- K of Wachovia Corporation for the year ended December 31, 1993, File No. 1-9021). 10.23 Amended and Restated Wachovia Corporation Stock Plan. (incorporated by reference to Exhibit 10.23 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.24 Wachovia Corporation Director Deferred Stock Unit Plan (incorporated by reference to Exhibit 10.37 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1996, File No. 1-9021). 10.25 Wachovia Corporation Executive Insurance Plan (incorporated by reference to Exhibit 10.36 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1995, File No. 1-9021). 10.26 Executive Long-Term Disability Income Plan (incorporated by reference to Exhibit 10.34 of Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1997, File No. 1-9021). 10.27 Split Dollar Life Insurance Agreement between Wachovia Corporation and L. M. Baker, Jr. dated as of September 1, 2000 (incorporated by reference to Exhibit 10.35 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.28 Split Dollar Life Insurance Agreement between Wachovia Corporation and Robert S McCoy Jr. dated as of September 1, 2000 (incorporated by reference to Exhibit 10.36 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.29 Split Dollar Life Insurance Agreement between Wachovia Corporation and G. Joseph Prendergast dated as of September 1, 2000 (incorporated by reference to Exhibit 10.37 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.30 Split Dollar Life Insurance Agreement between Wachovia Corporation and Mickey W Dry dated as of September 1, 2000 (incorporated by reference to Exhibit 10.38 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.31 Split Dollar Life Insurance Agreement between Wachovia Corporation and Jean E. Davis dated as of September 20, 2000 (incorporated by reference to Exhibit 10.31 of Report on Form 10-K for Wachovia Corporation for the year ended December 31, 2000, File No. 1-9021). 10.32 Form of Callable Split Dollar Life Insurance Agreement between Wachovia Corporation and Executive Officers (other than Messrs. Baker, McCoy, Prendergast, Dry and Ms. Davis). (incorporated by reference to Exhibit 10.39 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 10.33 Form of Non-Callable Split Dollar Life Insurance Agreement between Wachovia Corporation and Executive Officers (other than Messrs. Baker, McCoy, Prendergast, Dry and Ms. Davis). (incorporated by reference to Exhibit 10.40 of Report on Form 10-Q for Wachovia Corporation for the quarter ended September 30, 2000, File No. 1-9021). 11 Computation of Earnings Per Common Share (included on page 10 herein). 12 Statement setting forth computation of ratio of earnings to fixed charges.
42 EX-10.4 3 dex104.txt EMPLOYMENT AGREEMENT MCCOY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made as of the 13/th/ day of April, 2001 by and between WACHOVIA CORPORATION (the "Corporation") and ROBERT S. McCOY, JR. (the "Executive"); R E C I T A L S: The Corporation desires to secure the services of the Executive in its behalf or in behalf of one or more of its subsidiaries for which the Executive shall render services hereunder from time to time, in accordance with the terms and conditions set forth herein. In addition, the Corporation desires to provide the Executive with an incentive to remain in the service of the Corporation or one or more of its subsidiaries by granting to the Executive "Continuation Benefits" as set forth below should his employment be terminated under circumstances described herein for which Continuation Benefits are provided. NOW, THEREFORE, the Corporation and the Executive hereby mutually agree as follows: 1. a. Employment. The Executive shall devote his working time ---------- exclusively to the performance of such senior management duties for the Corporation or one or more of its subsidiaries as may be assigned to him by the Corporation from time to time, and shall perform such duties faithfully and to the best of his ability. Such duties shall be of a type for which the Executive is suited by background, experience and training, in the Corporation's sole discretion. References herein to duties performed for the Corporation and compensation and benefits payable or provided by the Corporation shall include duties performed for and compensation and benefits payable or provided by any subsidiary of the Corporation. The Executive may participate in other business activities, such as service on corporate, civic or charitable boards or committees, with the permission of the Corporation, and such activities shall be subject to the obligations in Section 7 below. The Executive agrees to use his best reasonable efforts to avoid unnecessary conflict between the Executive's duties to the Corporation and his pursuit of other business or civic or charitable interests. b. Base Salary. During the employment of the Executive, the ----------- Executive shall receive an annual base salary ("Base Salary") at least equal to the annual base salary in effect for the Executive on the date of this Agreement. Base Salary shall be paid in accordance with the Corporation's normal payroll practices (but not less frequently than monthly). The Executive's Base Salary will be reviewed in accordance with the Corporation's standard procedures and may be increased from time to time consistent with such procedures. Effective as of the date of any such increase, the Base Salary as so increased shall be considered the new Base Salary for purposes of this Agreement, and may not thereafter be reduced except with the express written consent of the Executive. c. Expenses. During the employment of the Executive, the -------- Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the policies, practices and procedures of the Corporation at the time the expense is incurred. 2. Term of Agreement. The term of this Agreement shall commence on ----------------- the date hereof and shall continue in effect until August 31, 2002. References herein to the "term" of this Agreement shall mean the term as described in the preceding sentence. The "term" shall not be deemed to refer to the Compensation Period described in Section 4. 3. Termination of Employment by the Corporation. The Corporation may -------------------------------------------- terminate the employment of the Executive at any time for any reason; provided that except as set forth in Sections 6 and 7, the Corporation shall provide the Executive with Continuation Benefits as set forth in Section 4 if the Executive's employment is involuntarily terminated during the term of the Agreement. The Executive's employment shall be deemed to be involuntarily terminated if he is terminated by the Corporation for any reason other than for "cause" as defined in Section 6, or if he voluntarily terminates employment because: (a) his Base Salary is reduced without the Executive's consent, or (b) the Corporation amends the Senior Executive Retirement Agreement between the Corporation and the Executive (the "Retirement Agreement") without the Executive's consent, and such amendment materially reduces the benefits to which the Executive would have been entitled had such amendment not been made, or (c) the duties and responsibilities assigned to the Executive as of the date of this Agreement are materially reduced and the Executive does not consent to such material reduction of duties. In order for voluntary termination pursuant to (a), (b) and (c) of this Section to be effective: (1) the Executive must give written notice to the Corporation within sixty (60) days of an event specified in clauses (a), (b) or (c) above indicating that the Executive intends to terminate employment under this Section and which describes the reasons for such termination, (2) the Executive's voluntary termination under this Section must occur within ninety (90) days after an event described in clause (a), (b) or (c) of this Section, or within ninety (90) days after the last in a series of such events, and (3) the Corporation must have failed to remedy the event described in clause (a), (b) or (c) of this Section, as the case may be, within thirty (30) days after receiving the Executive's written notice. If the Corporation so remedies the event described in clause (a), (b) or (c) of this Section, the Executive may not terminate employment under this Section on account of the event specified in the Executive's notice. At any time after the Executive's sixty-second birthday, the Corporation may employ or appoint another person or persons to perform all or substantially all the Executive's duties, in which event the Corporation may terminate the Executive's employment and shall pay him Continuation Benefits pursuant to Section 4 until the end of the "term", but not thereafter, except in the event of his termination pursuant to Section 10 (Change in Control) of this Agreement. 4. Continuation Benefits. If the Executive's employment hereunder is --------------------- involuntarily terminated as described in Section 3, he will be entitled to receive the cash compensation and benefits described in (a), (b) and (c) below (herein, "Continuation Benefits") for the period beginning with the date of such involuntary termination and ending with the earlier of (i) the third anniversary of the date of such termination, or (ii) the Normal Retirement Date of the Executive as defined in the Retirement Agreement (such period, is referred to herein as the "Compensation Period"). The duration of the Compensation Period shall not be affected by the fact that the term of this Agreement otherwise would end before such Period expires. The Continuation Benefits are as follows: (a) Cash Compensation. The amount of cash compensation to be received monthly during the Compensation Period shall equal one- twelfth of the sum of (i) the Executive's highest annual Base Salary from the Corporation in effect during the 12-month period before his involuntary termination, plus (ii) an amount equal to the average of the annual incentive compensation paid to the Executive by the Corporation, if any, for the three (3) full calendar years within the final five full calendar years of his employment which will produce the highest average (or shorter period if the executive has been employed less than five years) (and annualized for any partial calendar year); provided, that the incentive compensation to be recognized for this purpose shall be approved by the Management Resources and Compensation Committee in good faith and in its sole discretion, plus (iii) the average of any annual contributions by the Corporation (excluding participant contributions) in behalf of the Executive under the Retirement Savings and Profit-Sharing Plan of Wachovia Corporation and the Wachovia Corporation Executive Deferred Compensation Plan (or any successor or replacement plans) for the three (3) full calendar years within the final five full calendar years of his employment which will produce the highest average (or shorter period if the executive has been employed less than five years) (and annualized for any partial calendar year). Each monthly payment of such cash compensation shall have deducted therefrom all payroll taxes and withholdings required by law. Cash compensation shall not include any benefits or compensation provided to the Executive under the Wachovia Corporation Stock Plan, any similar plan or any successor or replacement plan. (b) Employee Benefits. During the Compensation Period the Executive shall be deemed to be continuing in the employment of the Corporation for the purpose of applying and administering employee benefit plans of the Corporation (other than any tax-qualified retirement plans) and individual contracts, if any, between the Corporation and the Executive providing supplemental or equalization payments or benefits with respect to the Executive. The Executive shall participate in any changes during the Compensation Period in benefit plans or programs applicable generally to employees of the Corporation, or to a class of employees which includes senior executives of the Corporation, but shall not have any right or option to participate in any such plan or program in which he was not a participant immediately prior to his involuntary termination of employment. Any individual contract between the Corporation and the Executive in effect at the time of his involuntary termination of employment may be terminated or amended by the Corporation to the extent permitted by the terms of such contract; provided, that during the Compensation Period the Corporation shall not, without the written consent of the Executive or except to the extent required by law, make any amendment to or terminate any one or more of the following individual contracts or plans if applicable to the Executive: (i) the Retirement Agreement; and (ii) the Wachovia Corporation Executive Deferred Compensation Plan. The Corporation shall have no obligation to the Executive to make any change or improvement in the Retirement Agreement or the Deferred Compensation Plan during the Compensation Period even if the Corporation shall make changes or improvements during such period in similar contracts or plans, if any, with or for the benefit of other senior executives of the Corporation. Notwithstanding the foregoing, if the Corporation reasonably determines that providing continued coverage under one or more of its welfare benefit plans could adversely affect the tax treatment of other participants covered under the plans, or would otherwise have adverse legal ramifications, the Corporation may, in its discretion, either (1) provide other coverage at least as valuable as the continued coverage through insurance or otherwise, or (2) pay the Executive a lump sum cash amount that reasonably approximates the after-tax value to the Executive of the premiums for continued coverage, in lieu of providing such continued coverage. (c) Stock Options, Restricted Awards, etc. The Management Resources and Compensation Committee has determined, in the exercise of its administrative discretion under the Wachovia Corporation Stock Plan (and any successor or replacement plan thereto), that the termination of the Executive's employment under this Agreement shall not constitute either a "retirement" or a "displacement" of the Executive (as those terms are defined in the Wachovia Corporation Stock Plan), and that the Executive shall be deemed to continue in the employment of the Corporation during the Compensation Period for purposes of all outstanding stock options, restricted awards and other awards granted to the Executive under the Wachovia Corporation Stock Plan. At the end of the Compensation Period, and provided that the Corporation has not terminated the Executive's Compensation Period pursuant to Section 7 of this Agreement, the Executive will be deemed to have retired from employment with the Corporation for the purpose of establishing his rights under the Wachovia Corporation Stock Plan (and any successor or replacement plan thereto) and any applicable award agreement. In the event that the Executive shall engage in full-time employment permitted hereunder for another employer or on a self-employed basis during the Compensation Period, his employment with the Corporation shall be deemed to have terminated for purposes of Section 4(b) as of the date he begins such full-time employment, but the payments in Section 4(a) shall continue for the remainder of the Compensation Period and the rights under Section 4(c) shall be applicable, in each case subject to the provisions of Section 7. 5. Voluntary Termination of Employment by the Executive. The ---------------------------------------------------- Executive reserves the right to terminate his employment voluntarily at any time for any reason following at least ninety (90) days notice to the Corporation. If such notice shall be given, this Agreement shall terminate as of the effective date of termination as set forth in such notice (or the date ninety (90) days from the date of receipt by the Corporation of such notice, if no effective date shall be set forth therein), unless sooner terminated as provided in Section 3, 6 or 8. The Executive shall not be entitled to any form of Continuation Benefits as a result of such voluntary termination, except in the event of voluntary termination pursuant to Section 3 or Section 10 of this Agreement. 6. Termination for Cause. This Agreement shall immediately terminate and neither party shall have any further obligation hereunder (including but not limited to any obligation of the Corporation to provide Continuation Benefits) if the Executive's employment is terminated for "cause." Termination for cause shall occur when termination results from the Executive's (a) criminal dishonesty, (b) refusal to perform his duties hereunder on an exclusive and substantially full-time basis, (c) refusal to act in accordance with any specific substantive instructions of the Chief Executive Officer or the Board of Directors of the Corporation, or (d) engaging in conduct which could be materially damaging to the Corporation without a reasonable good faith belief that such conduct was in the best interests of the Corporation. The determination whether a termination is for cause shall be made by the Management Resources and Compensation Committee of the Board of Directors of the Corporation (the "Committee"), and such determination shall be final and conclusive on the Executive and all other persons affected thereby. 7. Executive's Obligations; Early Termination of Compensation Period. ----------------------------------------------------------------- (a) During the Compensation Period, the Executive shall provide consulting services to the Corporation at such time or times as the Corporation shall reasonably request, subject to appropriate notice and to reimbursement by the Corporation of all reasonable travel and other expenses incurred and paid by the Executive in accordance with the Corporation's current policy for expense reimbursement. In the event the Executive shall engage in full-time employment permitted hereunder during the Compensation Period for another employer or on a self-employed basis, his obligation to provide the consulting services hereunder shall be adjusted in accordance with the requirements of such employment. (b) The Executive shall not disclose to any other person the Corporation's or any of its subsidiaries' confidential information or trade secrets at any time during or after the term of this Agreement or the Compensation Period. The Executive shall regard all material non-public information as confidential. The Executive will at all times refrain from taking any action or making any statements, written or oral, which are intended to or which disparage the business, goodwill or reputation of the Corporation or any of its subsidiaries, or their respective directors, officers, executives or other employees, or which could adversely affect the morale of employees of the Corporation or any subsidiaries. (c) The Executive shall not, without the Corporation's written consent, engage in competitive employment at any time during the Compensation Period. The Executive shall be deemed to engage in competitive employment if he shall render services as an owner, employee, officer, director, consultant or otherwise, for himself or any employer which conducts a business or enterprise in any area where the Corporation or affiliate of the Corporation conducts business that competes directly or indirectly with the Corporation or affiliate of the Corporation. (d) The Executive shall not, during the Compensation Period, directly or indirectly, for himself or on behalf of any other person, partnership, company or corporation, induce or attempt to induce any employee of the Corporation to leave the employ of the Corporation, or in any way interfere with the relationship between the Corporation and an employee of the Corporation except in the proper exercise of the Executive's authority. (e) In the event that the Executive shall refuse to provide consulting services in accordance with paragraph (a) of this Section, or shall materially violate the terms and conditions of paragraph (b) or (c) of this Section, the Corporation may, at its election, terminate the Compensation Period and Continuation Benefits to the Executive. The Corporation may also initiate any form of legal action it may deem appropriate seeking damages or injunctive relief with respect to any material violations of paragraph (a), (b) or (c) of this Section. (f) The Committee shall be responsible for determining whether the Executive shall have violated this Section 7, and all such determinations shall be final and conclusive. Upon the request of the Executive, the Committee will provide an advance opinion as to whether a proposed activity would violate the provisions of paragraph (c) of this Section. 8. Death and Disability. In the event that, during the term of this -------------------- Agreement or during the Compensation Period, the Executive shall die or shall become entitled to benefits under the Corporation's Long-Term Disability Plan, this Agreement shall thereupon terminate and neither the Executive nor any other person shall have any further rights or benefits hereunder (including any rights to Continuation Benefits). All rights pertaining to stock options and restricted stock awards held by the Executive as of the date of his death or disability shall be governed by the terms of such stock options and restricted stock awards (and applicable plans). 9. Other Severance Benefits. Except as provided in Section 4 of this ------------------------ Agreement, the Executive shall not be entitled to any other form of severance benefits, including benefits otherwise payable under any of the Corporation's regular severance plans or policies, irrespective of the circumstances of his termination of employment. The Executive agrees that the payments and benefits provided hereunder, subject to the terms and conditions hereof, shall be in full satisfaction of any rights which he might otherwise have or claim by operation of law, by implied contract or otherwise, except for rights which he may have under employee benefit plans of the Corporation or other individual written contracts with the Corporation. 10. Change of Control. ----------------- (a) Notwithstanding any other provision of this Agreement, if the Executive voluntarily terminates his employment for any reason, or he is involuntarily terminated, except pursuant to Section 6 (Termination for Cause), during the period beginning on the date of a Change of Control (as defined in Section 10(b) herein) and ending on the third anniversary of such date, then in either event the Executive shall be entitled to receive the Continuation Benefits described in Section 4 for a period of three years beginning with the date of such termination (without regard to the Executive's Normal Retirement Date or the last date this Agreement could terminate). (b) For the purposes herein, a "Change of Control" shall be deemed to have occurred on the earliest of the following dates: (i) The date any entity or person shall have become the beneficial owner of, or shall have obtained voting control over, thirty (30%) percent or more of the outstanding Common Stock of the Corporation; (ii) The date the shareholders of the Corporation approve a definitive agreement (A) to merge or consolidate the Corporation with or into another corporation, in which the Corporation is not the continuing or surviving corporation or pursuant to which any shares of Common Stock of the Corporation would be converted into cash, securities or other property of another corporation, other than a merger of the Corporation in which holders of Common Stock immediately prior to the merger have the same proportionate ownership of Common Stock of the surviving corporation immediately after the merger as immediately before, or (B) to sell or otherwise dispose of substantially all the assets of the Corporation; or (iii) The date there shall have been a change in a majority of the Board of Directors of the Corporation within a twelve month period unless the nomination for election by the Corporation's shareholders of each new director was approved by the vote of two- thirds of the directors then still in office who were in office at the beginning of the twelve month period. For the purposes herein, the term "person" shall mean any individual, corporation, partnership, group, association or other person, as such term is defined in Section13(d)(3) or Section 14(d)(2) of the Exchange Act, other than the Corporation, a subsidiary of the Corporation or any employee benefit plan(s) sponsored or maintained by the Corporation or any subsidiary thereof, and the term "beneficial owner" shall have the meaning given the term in Rule 13d-3 under the Exchange Act. (c) (i) In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by the Corporation or one or more trusts established by the Corporation for the benefit of its employees, to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement, or otherwise) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1996, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (ii) Subject to the provisions of Section 10(c)(iii), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized certified public accounting firm designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for an individual, entity or group effecting the change in ownership or effective control (within the meaning of Section 280G of the Code), the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Corporation to the Executive within five days after the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall so indicate to the Executive in writing. Any determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to Section 10(c)(iii) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive. (iii) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30- day period following the date on which it gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the Corporation any information reasonably requested by the Corporation relating to such claim; (B) take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation; (C) cooperate with the Corporation in good faith in order to effectively contest such claim; and (D) permit the Corporation to participate in any proceedings relating to such claim; provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c)(iii), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that if the Executive is required to extend the statute of limitations to enable the Corporation to contest such claim, the Executive may limit this extension solely to such contested amount. The Corporation's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to Section 10(c)(iii), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation's complying with the requirements of Section 10(c)(iii)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by Company pursuant to Section 10(c)(iii), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Release and Waiver of Claims. In consideration of any ---------------------------- Continuation Benefits the Corporation provides to the Executive under this Agreement, the Executive upon termination of employment with the Corporation shall execute a separate release and waiver of claims in a form acceptable to the Corporation. The Executive shall not be eligible for any Continuation Benefits until he has executed such release and waiver of claims. 12. Notices. All notices hereunder shall be in writing and deemed ------- properly given if delivered by hand and receipted or if mailed by registered mail, return receipt requested. Notices to the Corporation shall be directed to the Secretary of the Corporation with a copy directed to the Corporation's General Counsel. Notices to the Executive shall be directed to his last known address. Notice may not be provided by e-mail. 13. Miscellaneous. ------------- (a) The waiver, whether express or implied, by either party of a violation of any of the provisions of this Agreement shall not operate or be construed as a waiver of any subsequent violation of any such provision. (b) No right, benefit or interest hereunder shall be subject to assignment, encumbrance, charge, pledge, hypothecation or set off in respect of any claim, debt or obligation, or similar process. (c) This Agreement may not be amended, modified or canceled except by written agreement of the parties. (d) Words used in this Agreement in the singular shall include the plural, and the plural shall include the singular and words in the feminine or masculine shall include the masculine and feminine, respectively, and the neuter. (e) In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall remain in full force and effect to the fullest extent permitted by law. (f) This Agreement shall be binding upon and inure to the benefit of the Executive and the Corporation, and their respective heirs, successors and assigns. (g) No benefit or promise hereunder shall be secured by any specific assets of the Corporation. The Executive shall have only the rights of an unsecured general creditor of the Corporation in seeking satisfaction of such benefits or promises. (h) This Agreement shall be governed by the construed in accordance with the laws of the State of North Carolina. (i) This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the matters covered hereby, and replaces any predecessor employment agreement between the parties hereto, and any such predecessor agreement shall be deemed terminated and neither party thereto shall have any rights or obligations thereunder. IN WITNESS WHEREOF, this Agreement has been executed by or in behalf of the parties hereto as of the date first above written. WACHOVIA CORPORATION By: _______________________________________ Chief Executive Officer Attest: ______________________________ Secretary [Corporate Seal] ______________________________________ (Seal) Robert S. McCoy, Jr. EX-10.11 4 dex1011.txt SEN. RETIRE. AGREE. MCCOY SENIOR EXECUTIVE RETIREMENT AGREEMENT THIS SENIOR EXECUTIVE RETIREMENT AGREEMENT (the "Agreement"), made and entered into as of the 13/th/ day of April, 2001, by and between WACHOVIA CORPORATION (the "Corporation"), a North Carolina corporation, and ROBERT S. McCOY, JR. (the "Executive"), a senior management employee of the Corporation; RECITALS The Executive is a senior management employee of the Corporation, and as such has rendered and is expected to continue to render valuable services in behalf of the Corporation. The Management Resources and Compensation Committee (the "Committee") of the Corporation desires for the Corporation to provide the Executive with supplemental retirement benefits partially in recognition of such services. In addition, the Committee has determined that providing such benefits will make the Corporation's benefits package more competitive with packages offered by many other employers and will facilitate management succession planning for the Corporation. NOW, THEREFORE, the Corporation and the Executive hereby mutually agree as follows: Section 1. Definitions. When used herein, the words and phrases below shall ----------- have the meanings set forth, unless a different meaning is clearly required by the context. Terms used but not defined herein, and which are defined in the Retirement Plan, shall have the meaning assigned to them in the Retirement Plan. Masculine pronouns include feminine pronouns wherever used and vice versa. 1.1 "Board of Directors" means the Board of Directors of the Corporation. 1.2 "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. 1.3 "Effective Date" means April 13, 2001. 1.4 "Final Average Compensation" means the average of the annual compensation of the Executive for the three full calendar years within the final five full calendar years of his employment which will produce the highest average. For this purpose, the annual compensation of the Executive shall mean his total cash remuneration from the Corporation, including an amount equal to the average of the annual incentive compensation paid to the Executive by the Corporation, if any, provided that the incentive compensation to be recognized for this purpose shall be approved by the Management Resources and Compensation Committee in good faith and in its sole discretion, plus the sum of: (a) any salary reduction amounts which the Executive elects to have contributed with respect to him to a qualified cash or deferred arrangement under Section 401(k) of the Code, to a benefit enhancement plan in lieu of contributions to such a qualified cash or deferred arrangement, to a cafeteria plan under Section 125 of the Code, or to any similar plan or arrangement, and (b) any amounts deferred under any deferred compensation plan or contract. Amounts described in (a) and (b) shall be deemed received at the time the Executive would have received them but for the programs described in (a) and (b). Notwithstanding the foregoing, the Executive's total cash remuneration shall not include any benefits or compensation provided to the Executive under the Wachovia Corporation Stock Plan, any similar plan, or any successor or replacement plan. 1.5 "Normal Retirement Date" means the first day of the month coincident with or next following the date the Executive attains age sixty-four. 1.6 "Other Pension Plan" means any defined benefit pension plan, other than the Retirement Plan, in which the Executive is a participant and which is qualified under Section 401(a) of the Code and is maintained by the Corporation or a subsidiary of the Corporation. 1.7 "Retirement Date" means the date the Executive retires under this Agreement on account of early or normal retirement. 1.8 "Retirement Plan" means the Retirement Income Plan of Wachovia Corporation and any successor thereto. 1.9 "Supplemental Benefit" means the monthly benefit payable to the Executive under this Agreement. Section 2. Normal Retirement. At his Normal Retirement Date, the Executive ----------------- will retire and will be entitled to receive the Supplemental Benefit, computed in the form of a single life annuity for his life. The monthly amount of the Supplemental Benefit shall equal one-twelfth of the product of fifty-five percent (55%), increased by one percentage point for each year of creditable service (as determined under the Retirement Plan) in excess of ten years, provided that the maximum percentage as increased does not exceed sixty percent (60%), multiplied by the Executive's Final Average Compensation, reduced by the monthly amount payable under the Retirement Plan and any Other Pension Plan. The offset shall equal the monthly amounts actually payable under the Retirement Plan and any Other Pension Plan, based on the payment option elected by the Executive. Section 3. Early Retirement. If the Executive has attained his fifty-fifth ---------------- birthday but has not attained his Normal Retirement Date, and has ten or more years of service, he may elect early retirement as of the first day of any calendar month following written notice of at least ninety days to the Corporation and the Committee. The Supplemental Benefit of the Executive who elects early retirement shall equal the benefit determined under Section 2 as of such date, reduced by five percent for each year (with proportionate allowance for complete months) by which the starting date of the benefit precedes attainment of his sixty-second birthday. With the consent of the Committee, the Supplemental Benefit shall be payable to the Executive pursuant to Section 2 commencing as of the first day of any calendar month on or after his early retirement and before his Normal Retirement Date. The request for benefit payment must be filed by the Executive in writing with the Committee at least thirty days prior to the date payments are requested to commence. Section 4. Spouse's Supplemental Benefit. If the Executive shall be married on ----------------------------- his Retirement Date, and shall die thereafter survived by such spouse, or if the Executive shall die prior to his Retirement Date and shall be married on the date of his death, such spouse shall be entitled to a monthly supplemental benefit (herein the "Spouse's Supplemental Benefit") payable for life and equal to 60% of the monthly amount of the Supplemental Benefit payable to the Executive (assuming, for an Executive who shall die prior to his Retirement Date, that the Executive had retired on the date immediately preceding the date of his death and that the years of his creditable service included the years and fractions thereof from the date of death to his Normal Retirement Date), before applying the reduction for the monthly amount payable to the Executive under the Retirement Plan and any Other Pension Plan, but reduced by the monthly amount, if any, payable to the spouse under the Retirement Plan and any Other Pension Plan in the calendar month next following the death of the Executive. The monthly amount of the Spouse's Supplemental Benefit shall be payable on the first day of each calendar month following the death of the Executive and preceding the death of such spouse. Section 5. Optional Forms of Payment. Notwithstanding the provisions of ------------------------- Sections 2 through 4, the present value of the sum of the Supplemental Benefit and the Spouse's Supplemental Benefit (if any) may, at the request of the Executive and with the consent of the Executive's spouse (if any) and the Committee, be payable in cash in a lump sum within thirty days following the Retirement Date of the Executive. Such present value shall be the actuarial equivalent (as defined in the Retirement Plan) of the Supplemental Benefit and Spouse's Supplemental Benefit (if any). The request for a lump sum distribution, and the consent of the Executive's spouse, must be filed by the Executive with the Committee at least sixty days prior to the Retirement Date. Such consent shall be in writing on a form provided by the Committee. Section 6. Disability; Death. ----------------- (a) In the event the Executive suffers a disability (as defined in the Retirement Plan) prior to the Retirement Date, the Executive shall continue to accrue a Supplemental Benefit under this Agreement based upon the Final Average Compensation of the Executive as of the last date the Executive was paid by the Corporation (including sick pay) and taking into account the period from the disability of the Executive to the Normal Retirement Date as creditable service for purposes of this Agreement. The Supplemental Benefit of the Executive who is disabled shall be determined and payable as of the Normal Retirement Date of the Executive. (b) In the event that both the Executive and his spouse (if any) die before the date on which the Executive would have attained age 83, their designated beneficiary (or the estate of the last to die if no beneficiary has been designated) shall receive a lump sum death benefit (the "Death Benefit"). The Death Benefit shall be equal to the product of (i) 60% of the annual amount of the Supplemental Benefit payable to the Executive (subject to the assumptions described in Section 4 if the Executive dies before his Retirement Date), and (ii) the difference between 83 and the age that the Executive attained (or would have attained) as of the later of the date on which he died or the date on which his spouse died. Section 7. Miscellaneous. ------------- (a) The Executive shall forfeit any right to the Supplemental Benefit or any other rights hereunder (including the Spouse's Supplemental Benefit) if he (i) declines to retire at his Normal Retirement Date, (ii) terminates employment with the Corporation prior to his Retirement Date without written consent of the Committee, or (iii) is terminated for "cause." Termination for cause shall arise if the Executive's employment by the Corporation is terminated because of or arising out of: (A) criminal dishonesty, (B) refusal to perform his employment duties for the Corporation on substantially a full-time basis, (C) refusal to act in accordance with any specific substantive instructions of the Corporation's Chief Executive Officer or Board of Directors, or (D) engaging in conduct which could be materially damaging to the Corporation without a reasonable good faith belief by the Executive that such conduct was in the best interest of the Corporation. Notwithstanding the foregoing provisions of this Section 7(a), in the event of a Change of Control of the Corporation, the Executive shall be vested in the right to receive payment of the Supplemental Benefit under this Agreement, which right shall not be forfeited upon the termination of the Executive for any reason other than for cause as defined in this Section 7(a). In the event the employment of the Executive is voluntarily or involuntarily terminated during the period beginning on the date of the Change of Control and ending on the third anniversary of such date, and as a result of such termination the Executive is entitled to receive Continuation Benefits pursuant to an employment agreement between the Corporation and the Executive, then notwithstanding any other provision of this Agreement to the contrary, the Executive shall continue to be credited with creditable service during the Compensation Period, and the annual cash compensation paid to the Executive during the Compensation Period shall be taken into account in determining his Final Average Compensation under this Agreement. The Executive's Supplemental Benefit shall be paid commencing as of the later of the end of the Compensation Period or the date the Executive actually attains (or would have attained but for death) the age of fifty-five. If payment of the Executive's Supplemental Benefit commences at a date prior to the Executive's Normal Retirement Date, the Executive shall be deemed to have satisfied all of the conditions and requirements described in Section 3 for purposes of computing the amount of his Supplemental Benefit. For purposes herein, the terms "Change of Control," Continuation Benefits," and "Compensation Period" shall have the meaning given such terms in the employment agreement between the Corporation and the Executive. (b) The Supplemental Benefit shall cease to be paid to the Executive (and rights to the Spouse's Supplemental Benefit shall terminate) if he shall disclose material confidential information or trade secrets concerning the Corporation or any of its subsidiaries without the Corporation's consent, or shall engage in any activity that is materially damaging to the Corporation including, but not limited to, engaging in competitive employment at any time. The Executive shall be deemed to engage in competitive employment if he shall render services as an owner, employee, officer, director, consultant or otherwise, for himself or any employer which conducts a business or enterprise in any area where the Corporation or affiliate of the Corporation conducts business that competes directly or indirectly with the Corporation or affiliate of the Corporation. The Committee shall have authority to cease payments under this paragraph (b), and the determination of the Committee shall be final and conclusive. Upon the request of the Executive, the Committee may grant an advance opinion as to whether a proposed activity would violate the provisions of this paragraph (b). (c) In consideration of any benefit payable to the Executive under this Agreement, the Executive upon termination of employment with the Corporation shall execute a separate release and waiver of claims in a form acceptable to the Corporation. The Executive shall not be eligible for any benefit under this Agreement until he has executed such release and waiver of claims. (d) In the event the employment of the Executive terminates prior to a Change of Control, and as a result of such termination the Executive is entitled to receive Continuation Benefits pursuant to an employment agreement between the Corporation and the Executive, then notwithstanding any other provision of this Agreement to the contrary, the Executive shall continue to be credited with creditable service during the Compensation Period, and the annual cash compensation paid to the Executive during the Compensation Period shall be taken into account in determining his Final Average Compensation under this Agreement. The Executive shall be deemed to retire from the Corporation on the last day of the Compensation Period and to have given the Corporation written notice of such retirement at least ninety days before such date. The Executive's Supplemental Benefit shall be paid commencing as of the end of the Compensation Period. The terms "Change of Control," "Continuation Benefits" and "Compensation Period" shall have the meaning given to such terms in the employment agreement between the Corporation and the Executive. (e) Nothing in this Agreement shall be construed as giving the Executive the right to be retained in the employ of the Corporation or any subsidiary of the Corporation at all or for any specified period in any particular position, or any right to any payment whatsoever except to the extent provided for by this Agreement. (f) Notwithstanding any other provisions hereof, if any person entitled to receive payments hereunder (the "recipient") shall be physically or mentally or legally incapable of receiving or acknowledging receipt of such payment, the Corporation, upon the receipt of satisfactory evidence that another person or institution is maintaining the recipient and that no guardian or committee has been appointed for the recipient, may cause such payment to be made to such person or institution so maintaining the recipient. (g) Nothing in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or shall be construed as creating a trust of any kind, or a fiduciary relationship between the Corporation and the Executive or any other person. Any amounts which are or may be set aside hereunder shall continue for all purposes to be a part of the general funds of the Corporation, and no person other than the Corporation shall, by virtue of the provisions of this Agreement, have any interest in such funds. To the extent that any person acquires a right to receive payments from the Corporation hereunder, such right shall be no greater than the right of any unsecured general creditor of the Corporation. (h) The benefits payable under this Agreement may not be assigned by the Executive or any other person nor anticipated in any way. (i) The Committee may, in its sole discretion, terminate, suspend or amend this Agreement at any time or from time to time, in whole or in part; provided, that except as otherwise specifically provided herein no such termination, suspension or amendment made following the date that payments commence hereunder will affect the right of any person to receive benefits earned hereunder. Upon a change of control of the Corporation as defined in the Wachovia Corporation Stock Plan as it may be amended from time to time, this Agreement may not be amended or terminated without the express written consent of the Executive. (j) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, to the extent not preempted by applicable federal law. (k) This Agreement replaces and supersedes any other individual retirement agreement between the Executive and the Corporation. (l) All notices hereunder shall be in writing and deemed properly given if delivered by hand and receipted or if mailed by registered mail, return receipt requested. Notices to the Corporation shall be directed to the Secretary of the Corporation with a copy directed to the Corporation's General Counsel. Notices to the Executive shall be directed to his last known address. Notice may not be provided by e-mail. Section 8. Administration. -------------- (a) This Agreement shall be administered by the Corporation. The Corporation shall interpret this Agreement, establish regulations to further the purposes of this Agreement and take any other action necessary to the proper operation of this Agreement. Prior to paying any benefit under this Agreement, the Corporation may require the Executive or his spouse to provide such information or material as the Corporation, in its sole discretion, shall deem necessary for it to make any determination it may be required to make under this Agreement. The Corporation may withhold payment of any benefit under this Agreement until it receives all such information and material and is reasonably satisfied of its correctness and genuineness. (b) If for any reason a benefit payable under this Agreement is not paid when due, the Executive or his spouse may file a written claim with the Corporation. If the claim is denied or no response is received within forty-five (45) days after the date on which the claim was filed with the Corporation (in which case the claim will be deemed to have been denied), the Executive or his spouse may appeal the denial to the Committee within sixty (60) days of receipt of written notification of the denial or the end of the forty-five day period, whichever occurs first. In pursuing an appeal, the Executive or his spouse may request that the Committee review the denial, may review pertinent documents, and may submit issues and documents in writing to the Committee. A decision on appeal will be made within thirty (30) days after the appeal is made, unless special circumstances require the Committee to extend the period for another thirty (30) days. (c) The Corporation may appoint one or more persons to act as administrator and delegate its administrative responsibilities to such administrator. IN WITNESS WHEREOF, this Agreement has been executed in behalf of the Corporation by its duly authorized officers and by the Executive as of the day and year first above stated. WACHOVIA CORPORATION By:__________________________________ Chief Executive Officer Attest: ______________________________ Secretary [Corporate Seal] _______________________________(SEAL) Robert S. McCoy, Jr. EX-12 5 dex12.txt SCHEDULE WACHOVIA CORPORATION RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
Six Months Year Ended Ended June 30, December 31, (A) Excluding interest on deposits 2001 2000 ----------------- ----------------- Earnings: Income before income taxes $756,522 $1,275,530 Less capitalized interest 0 (812) Fixed charges 561,257 1,200,426 ----------------- ----------------- Earnings as adjusted $1,317,779 $2,475,144 ================= ================= Fixed charges: Interest on purchased and other short term borrowed funds $249,986 $559,336 Interest on long-term debt 297,960 614,134 Portion of rents representative of the interest factor (1/3) of rental expense 13,311 26,956 ----------------- ----------------- Fixed charges $561,257 $1,200,426 ================= ================= Ratio of earnings to fixed charges 2.35 X 2.06 X (B) Including interest on deposits: Adjusted earnings from (A) above $1,317,779 $2,475,144 Add interest on deposits 789,855 1,656,163 ----------------- ----------------- Earnings as adjusted $2,107,634 $4,131,307 ================= ================= Fixed charges: Fixed charges from (A) above $561,257 $1,200,426 Interest on deposits 789,855 1,656,163 ----------------- ----------------- Adjusted fixed charges $1,351,112 $2,856,589 ================= ================= Adjusted earnings to adjusted fixed 1.56 X 1.45 X charges
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