-----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, H9ipaypKYJyNLpe5A0QD7DbK2JLknrR62JZdcxs48txmqsBV4ApFYrwrT4sdAWDH eCbZJW6umNYAvNpNnFzGlQ== 0000950168-98-000996.txt : 19980401 0000950168-98-000996.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950168-98-000996 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NYSE 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-K SEC ACT: SEC FILE NUMBER: 001-09021 FILM NUMBER: 98582519 BUSINESS ADDRESS: STREET 1: 100 N MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27150 BUSINESS PHONE: 9107705000 MAIL ADDRESS: STREET 1: 100 NORTH MAIN ST STREET 2: P O BOX 3099 CITY: WINSTON SALEM STATE: NC ZIP: 27150 FORMER COMPANY: FORMER CONFORMED NAME: FIRST WACHOVIA CORP DATE OF NAME CHANGE: 19910603 10-K 1 WACHOVIA CORP. 10-K 1997 Form 10-K United States Securities and Exchange Commission Washington, DC 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 1-9021 Wachovia Corporation - -------------------------------------------------------------------------------- Incorporated in the State of North Carolina IRS Employer Identification Number 56-1473727 Address and Telephone: 100 North Main Street, Winston-Salem, North Carolina, 27101, (336) 770-5000 191 Peachtree Street NE, Atlanta, Georgia, 30303, (404) 332-5000 Securities registered pursuant to Section 12(b) of the Act: Common Stock -- $5.00 par value, which is registered on the New York Stock Exchange. As of February 5, 1998, Wachovia Corporation had 205,872,778 shares of common stock outstanding. The aggregate market value of Wachovia Corporation common stock held by nonaffiliates on February 5, 1998 was approximately $16.255 billion and the number of shares held by nonaffiliates was 205,765,238. Wachovia Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Documents Incorporated by Reference - -------------------------------------------------------------------------------- Portions of the Wachovia Corporation's Proxy Statement for its 1998 Annual Shareholders' Meeting, which will be filed with the Commission by April 30, 1998 are incorporated by reference into Part III of this report. Portions of the annual report to shareholders for the year ended December 31, 1997 are incorporated by reference into Parts I and II as indicated in the table below. Except for parts of the Wachovia Corporation Annual Report expressly incorporated herein by reference, this Annual Report is not to be deemed filed with the Securities and Exchange Commission. Part I Page Item 1 Business: Description of Business.......................... 1, 20-48, 78-80, 81 Subsidiaries of Wachovia Corporation...................................... Page 2 of Form 10-K Average Balance Sheets/ Interest/Rates..................................... 70-71, 74-75, 76 Volume and Rate Variance Analysis............................................ 24, 48 Securities................................................ 26, 57-58 Loans............................................. 25, 33, 58-59, 77 Allowance for Loan Losses and Loan Loss Experience.................................. 33-35, 48 Deposits....................................... 27-28, 31, 70-71, 76 Return on Equity and Assets...................................... 76 Short-Term Borrowed Funds........................................ 32 Item 2 Properties........................................ Page 2 of Form 10-K Item 3 Legal Proceedings................................................ 65 Item 4 Submission of Matters to a Vote of Security Holders............................................ None Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 78-79 Item 6 Selected Financial Data................................... 72-73, 77 Part II -- Continued Page Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20-48, 81 Item 8 Financial Statements and Supplementary Data................... 43-69 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... None Part III Item 10 Directors and Executive Officers of the Registrant................................... Proxy Statement Item 11 Executive Compensation.............................. Proxy Statement Item 12 Security Ownership of Certain Beneficial Owners and Management...................................... Proxy Statement Item 13 Certain Relationships and Related Transactions................................ Proxy Statement Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ Page 3 of Form 10-K 1 Subsidiaries of Wachovia Corporation - -------------------------------------------------------------------------------- The following table sets forth the subsidiaries of Wachovia Corporation on December 31, 1997. The common stock of each of these subsidiaries is 100 percent owned by its parent. The financial statements of all subsidiaries are included in the consolidated statements of Wachovia Corporation and subsidiaries. Organized under the laws of the state of: Wachovia Bank, N.A. the United States Wachovia International Banking Corporation the United States* Wachovia Leasing Corporation North Carolina Wachovia Insurance Services, Inc. North Carolina Greenville Agricultural Credit Corporation North Carolina Wachovia Auto Leasing Company of Georgia Georgia WMCS, Inc. Georgia Wachovia Capital Associates, Inc. Georgia Wachovia Insurance Services of South Carolina, Inc. South Carolina First National Properties, Inc. South Carolina Central Fidelity National Bank the United States Mulberry Corporation Virginia G.C. Leasing, Inc. Virginia North Hart Run, Inc. Virginia New Salem of Virginia, Inc. Virginia S. Brooke, Corporation Virginia Central Fidelity Properties, Inc. Virginia Central Fidelity Services, Inc. Virginia CFB Insurance Agency, Inc. Virginia 1st United Bank Florida Island Investment Services Florida Jefferson National Bank the United States Jefferson Properties, Inc. Virginia Southern Provident Life Insurance Company Arizona Atlantic Savings Bank, FSB the United States Atlantic Mortgage Corporation of South Carolina, Inc. South Carolina Organized under the laws of the state of: Wachovia Mortgage Company North Carolina New Salem, Inc. North Carolina Wachovia Investments, Inc. North Carolina Wachovia Corporate Services, Inc. North Carolina Wachovia Operational Services Corporation North Carolina Wachovia Trust Services, Inc. North Carolina The First National Bank of Atlanta (Delaware) the United States Wachovia Bank Card Services, Inc. Delaware Financial Life Insurance Company of Georgia Georgia The Wachovia Insurance Agency of Georgia, Inc. Georgia First Atlanta Lease Liquidating Corporation Georgia Wachovia Corporation of Florida Florida Wachovia Corporation of Alabama Alabama Wachovia Corporation of Tennessee Tennessee Wachovia Capital Markets, Inc. Georgia Wachovia International Capital Corporation Georgia WSH Holdings, Ltd. Cayman Islands, British West Indies Banco Wachovia Brazil Wachovia International Servicos Limitada Brazil Wachovia Capital Trust I Delaware Wachovia Capital Trust II Delaware Wachovia Capital Trust V Delaware Central Fidelity Capital Trust I Delaware Wachovia Community Development Corporation North Carolina * Organized under Chapter 25(a) of the Federal Reserve Act of the United States Properties - -------------------------------------------------------------------------------- The principal offices of the Corporation and Wachovia Bank, N.A., are located at 100 North Main Street, Winston-Salem, North Carolina, where the company owns and occupies approximately 535,000 square feet of office space. Offices are also maintained at 191 Peachtree Street, N.E., Atlanta, Georgia, under a 380,000 square foot office space lease expiring in 2008, and at the Palmetto Center at 1426 Main Street, Columbia, South Carolina, under a 15,660 square foot lease expiring in 2003. Central Fidelity National Bank occupies approximately 201,665 square feet of office space in the James Center at 1021 East Cary Street, Richmond, Virginia, under a lease expiring in 2002. Jefferson National Bank owns and occupies approximately 37,400 square feet of office space at 123 East Main Street, Charlottesville, Virginia. 1st United Bank occupies approximately 8,000 square feet of office space at 980 North Federal Highway, Boca Raton, Florida, under a lease expiring in 2002. The table on page 3 lists the number of banking offices. The Corporation's banking subsidiaries own in fee 516 offices while the others are leased or are located on leased land. The approximate lease terms range from one to fifty years on these properties. In addition, the Corporation's banking subsidiaries own in fee or lease a number of multistory office buildings which house supporting services. Other subsidiaries of the Corporation maintain leased office space in cities in which they conduct their respective operations. 2 Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------------------------------------------------------------------------------- Exhibits -- The index of exhibits has been filed as separate pages of the 1997 Form 10-K. Copies of the exhibit list or of Exhibits are available upon request to: Corporate Reporting, Wachovia Corporation, P.O. Box 3099, Winston-Salem, North Carolina, 27150. A copying fee will be charged for the Exhibits. Financial Statement Schedules -- Omitted due to inapplicability or because required information is shown in the Financial Statements or the Notes thereto. Financial Data Schedule (for SEC purposes only). Reports on Form 8-K -- A Current Report on Form 8-K dated October 15, 1997 was filed with the Securities and Exchange Commission relating to Wachovia Corporation's third quarter earnings announcement. A Current Report on Form 8-K dated December 15, 1997 was filed relating to consummation of the merger with Central Fidelity Banks, Inc. A Current Report on Form 8-K dated Decem-ber 19, 1997 was filed relating to the announcement of three special charges in the fourth quarter of 1997. Signatures - -------------------------------------------------------------------------------- Pursuant to the requirements to Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 18, 1998. WACHOVIA CORPORATION ROBERT S. McCOY, JR. - -------------------- Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 18, 1998. L. M. BAKER, JR. - ---------------- L. M. Baker, Jr. Director, President and Chief Executive Officer ROBERT S. McCOY, JR. - -------------------- Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer DONALD K. TRUSLOW - ----------------- Donald K. Truslow Comptroller The Directors of Wachovia Corporation (listed below) have executed a power of attorney appointing Kenneth W. McAllister, their attorney-in-fact, empowering him to sign this report on their behalf: James S. Balloun James F. Betts Peter C. Browning John T. Casteen, III John L. Clendenin Lawrence M. Gressette, Jr. Thomas K. Hearn, Jr. George W. Henderson, III W. Hayne Hipp Robert M. Holder, Jr. Robert A. Ingram James W. Johnston George R. Lewis John G. Medlin, Jr. Lloyd U. Noland, III Wyndham Robertson Herman J. Russell Sherwood H. Smith, Jr. John C. Whitaker, Jr. KENNETH W. McALLISTER - --------------------- Kenneth W. McAllister Attorney-in-Fact 3 PART III ITEM 10. Directors and Executive Officers of the Registrant The names, ages and positions of the executive officers of Wachovia as of January 31, 1998 are shown below along with their business experience during the past five years and the year of their employment with Wachovia and subsidiaries. Officers are elected annually by the Board of Directors and hold office for one year or until their successors are chosen and qualified. There are no family relationships between any of them, nor is there any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The required information for the directors is included in the Proxy Statement. Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- L. M. Baker, Jr., 55 President and Chief Executive Officer of Director, President since Wachovia Bank, N.A. since June 1997; 1993 and Chief Executive Chief Operating Officer of Wachovia Officer since January 1994 Corporation, February-December 1993; Executive Vice President of Wachovia Corporation until January 1993; President and Chief Executive Officer of Wachovia Corporation of North Carolina, January 1990-March 1993; President and Chief Executive Officer of Wachovia Bank of North Carolina, N.A., January 1990-May 1993. Employed in 1969. Mickey W. Dry, 58 Executive Vice President of Wachovia Senior Executive Vice Corporation, November 1989-October 1997; President since October 1997 Senior Executive Vice President of and Chief Credit Officer Wachovia Bank, N.A. since July 1997; since November 1989 Executive Vice President of Wachovia Bank of North Carolina, N.A., October 1989-July 1997. Employed in 1961. Hugh M. Durden, 54 President of Wachovia Corporate Executive Vice President Services, Inc. since July 1994; since 1994 President of Wachovia Trust Services, Inc., January-June 1994; Executive Vice President of Wachovia Bank, N.A.; Western Division Executive, Wachovia Bank of North Carolina, N.A., 1991-1994; Employed in 1972. Item 10. Directors and Executive Officers of the Registrant (Continued) Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- Stanhope A. Kelly, 40 Senior Vice President of Wachovia Executive Vice President Corporation, 1996-1997; Regional Vice since October 1997 President of Wachovia Bank of North Carolina, N.A., 1994-1996. Employed in 1980. Robert S. Kniejski, 42 Executive in charge of Wachovia Executive Vice President Corporation's Personal Financial since October 1997 Services Group since 1995 (Chairman of Wachovia Investments, Inc. and Wachovia Insurance Services, Inc., Director and President of Wachovia Trust Services, Inc.); Senior Vice President of Wachovia Corporation, 1996-1997; Senior Vice President/Group Executive of Wachovia Investments, Inc., 1993-1995; Senior Vice President/Group Executive of Wachovia Bank, N.A. since 1991 (Trust Marketing and Development, 1991-1993). Employed in 1987. Walter E. Leonard, Jr. 52 Executive Vice President of Wachovia Senior Executive Vice Corporation, October 1988-October 1997; President since October Senior Executive Vice President of 1997 Wachovia Bank, N.A. since July 1997; Executive Vice President of Wachovia Bank of Georgia, N.A. until June 1997; President of Wachovia Operational Services Corporation since 1988. Employed in 1965. Kenneth W. McAllister, 49 Executive Vice President of Wachovia Senior Executive Vice Corporation, January 1994-October 1997. President since October Employed in 1988. 1997 and General Counsel since 1988 Robert S. McCoy, Jr., 59 Executive Vice President of Wachovia Senior Executive Vice Corporation, January 1992-October 1997; President since October 1997 Senior Executive Vice President of Wachovia and Chief Financial Officer Bank, N.A. since July 1997; Executive Vice since September 1992 President of Wachovia Bank of North Carolina, N.A., 1992-1997; Chief Financial Officer of Wachovia Bank of North Carolina, N.A. since 1992. Employed in 1984. 4 Item 10. Directors and Executive Officers of the Registrant (Continued) Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- John C. McLean, Jr., 48 Executive in charge of Wachovia Corporation's Executive Vice President capital markets and investment banking since October 1997 activities since September 1997 (President and CEO of Wachovia Capital Markets, Inc. and related subsidiaries); Senior Vice President of Wachovia Corporation, 1993-1997; Division Executive for Consumer Credit and Emerging Businesses, 1996-1997; Comptroller of Wachovia Corporation, 1993-1996; Senior Vice President of Wachovia Bank, N.A., 1990-1993. Employed in 1975. G. Joseph Prendergast, 52 Executive Vice President of Wachovia Senior Executive Vice Corporation, October 1988-October 1997; President since October 1997 Senior Executive Vice President of Wachovia Bank, N.A. since July 1997; Chairman of Wachovia Bank of Georgia, N.A., January 1994- June 1997; Chairman of Wachovia Bank of South Carolina, N.A., July 1995-June 1997; President and Chief Executive Officer of Wachovia Bank of Georgia, N.A., January 1993- January 1995; President and Chief Executive Officer of Wachovia Corporate Services, Inc. until July 1994; President and Chief Executive Officer of Wachovia Corporation of Georgia, January 1993-March 1993; Employed in 1973. Donald K. Truslow, 39 Senior Vice President of Wachovia Executive Vice President Corporation, April 1996-October 1997; since October 1997, Comptroller Executive Vice President, Wachovia since June 1996 and Treasurer Corporate Services, September 1995- since January 1998 April 1996; Executive Vice President and Chief Credit Officer, Wachovia Bank of South Carolina, N.A., January 1992-September 1995. Employed in 1980. 5 Item 10. Directors and Executive Officers of the Registrant (Continued) Name, Age Business Experience During Past and Position Five Years and Year Employed - ------------ ---------------------------- Beverly B. Wells, 47 Manager of Consumer Lending and Executive Vice President Emerging Businesses since September since October 1997 1997; President of Wachovia Bank Card Services, 1994-1997; Manager of Wachovia Treasury Services, 1993- 1994; Employed in 1976. During the past five years, there have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to an evaluation of the ability or integrity of any of Wachovia's executive officers, directors, or any persons nominated to become directors. 6 PART IV Item 14. Exhibits 2.1 Agreement and Plan of Merger, dated as of November 17, 1997, by and between Wachovia Corporation, The American Bank of Hollywood and Ameribank Bancshares, Inc. 2.2 Agreement and Plan of Merger, dated as of August 6, 1997, by and between Wachovia Corporation and 1st United Bancorp (Exhibit 2.1 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1997, File No. 1-9021*). 2.3 Agreement and Plan of Merger, dated as of June 23, 1997, by and between Wachovia Corporation and Central Fidelity Banks, Inc. (Exhibit 2.2 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1997, File No. 1-9021*). 2.4 Agreement and Plan of Merger, dated as of June 9, 1997, by and between Wachovia Corporation and Jefferson Bankshares, Inc. (Exhibit 2.1 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1997, File No. 1-9021*). 3.1 Amended and Restated Articles of Incorporation of the registrant (Exhibit 3.1 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1993, File No. 1-9021*). 3.2 Bylaws of the registrant as amended (Exhibit 3.2 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1997, File No. 1-9021*). 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 (Exhibit 28 to 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, as Trustee, amending the Indenture described in Exhibit 4.3 hereto (Exhibit 4.10 to Report on Form 10-K of Wachovia Corporation for the fiscal 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 (Exhibit 4(a) to S-3 Registration Statement of South Carolina National Corporation, File No. 33-39754*). 7 Item 14. Exhibits (Continued) 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 (Exhibit 4.12 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1991, File No. 1-9021*). 4.7 Indenture dated as of August 22, 1989 between First Wachovia Corporation and The Philadelphia National Bank, as Trustee, relating to $300,000,000 principal amount of subordinated debt securities (Exhibit 4(c) to S-3 (Shelf) Registration Statement of First Wachovia Corporation, File No. 33-30721*). 4.8 First Supplemental Indenture, dated as of September 15, 1992 between Wachovia Corporation and CoreStates Bank, National Association, as Trustee, amending the Indenture described in Exhibit 4.7 hereto (Exhibit 4(d) to Report on Form 8 of Wachovia Corporation, filed on October 15, 1992, File No. 1-9021*). 4.9 Indenture dated as of March 1, 1993 between Wachovia Corporation and CoreStates Bank, National Association, as Trustee, relating to subordinated debt securities (Exhibit 4 to S-3 (Shelf) Registration Statement of Wachovia Corporation, File No. 333-06319*). 4.10 Indenture dated as of August 15, 1996 between Wachovia Corporation and The Chase Manhattan Bank, as Trustee, relating to senior securities (Exhibit 4 (a) of Post-Effective Amendment No. 1 to Form S-3 (Shelf) Registration Statement of Wachovia Corporation, File No. 33-6280*). 4.11 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). (Exhibit 4 (c) of Amendment No. 1 to Form S-3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365.) 4.12 Amended and Restated Declaration of Trust of Wachovia Capital Trust II, relating to Preferred Securities (Exhibit 4(b)(iv) of Amendment No. 1 to Form S-3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365). 4.13 Preferred Securities Guarantee Agreement of Wachovia Corporation (Exhibit 4 (g) of Amendment No. 1 to Form S-3 Registration Statement of Wachovia Corporation and Wachovia Capital Trust II dated January 22, 1997, File No. 333-19365). 4.14 Indenture between Central Fidelity Banks, Inc. and Chemical Bank, as trustee, relating to $150,000,000 principal amount of subordinated debt securities (Exhibit 4.1 to Form 8-K of Central Fidelity Banks, Inc., dated November 18, 1992, File No. 0-8829). 4.15 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 (Exhibit 4.1 to Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 8 Item 14. Exhibits (Continued) 4.16 Amended and Restated Declaration of Trust of Central Fidelity Capital Trust I (Exhibit 4.4 to Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 4.17 Form of New Guarantee Agreement for the benefit of the holders of the Trust Securities (Exhibit 4.6 to Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated as of April 23, 1997, File No. 333-28917 10.1 Deferred Compensation Plan of Wachovia Bank of North Carolina, N.A. (Exhibit 10.1 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1992, File No. 1-9021*). 10.2 1983 Amendment to Deferred Compensation Plan described in Exhibit 10.1 hereto (Exhibit 10.2 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1992, File No. 1-9021*). 10.3 1986 Amendment to Deferred Compensation Plan described in Exhibit 10.1 hereto (Exhibit 10.9 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1986, File No. 1-9021*). 10.4 1986 Senior Management Stock Option Plan of Wachovia Corporation (Exhibit 10.20 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1986, File No. 1-9021*). 10.5 1987 Declaration of Amendment to 1986 Senior Management Stock Option Plan described in Exhibit 10.4 hereto (Exhibit 10.21 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1986, File No. 1-9021*). 10.6 1996 Declaration of Amendment to 1986 Senior Management Stock Option Plan as described in Exhibit 10.4 hereto. (Exhibit 10.6 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1996, File No. 1-9021*). 10.7 Senior Management Incentive Plan of Wachovia Corporation as amended through April 22, 1994 (Exhibit 10.2 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended March 31, 1994, File No. 1-9021*). 10.8 Retirement Savings and Profit-Sharing Benefit Equalization Plan of Wachovia Corporation (Exhibit 10.3 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1995, File No. 1-9021*). 10.9 Employment Agreements between Wachovia Corporation and Messrs. L. M. Baker, Jr., Robert S. McCoy, Jr., G. Joseph Prendergast, Hugh M. Durden and Walter E. Leonard, Jr. (Exhibit 10.17 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1987, File No. 1-9021*). 10.10 Amendment to Employment Agreements described in Exhibit 10.9 hereto (Exhibit 10.14 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1990, File No. 1-9021*). 10.11 Amendment to Employment Agreements described in Exhibit 10.9 hereto with L.M. Baker, Jr., Robert S. McCoy, Jr., G. Joseph Prendergast and Walter E. Leonard, Jr. (Exhibit 10.11 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1996, File No. 1-9021*). 10.12 Amended and Restated Employment Agreements described in 10.9 hereto with L.M. Baker, Jr., Robert S. McCoy, Jr., G. Joseph Prendergast and Walter E. Leonard, Jr. (Exhibit 10 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended March 31, 1997, File No. 1-9021*). 10.13 Amendment to Employment Agreement described in Exhibit 10.9 hereto with Hugh M. Durden. (Exhibit 10.12 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1996, File No. 1-9021*). 9 Item 14. Exhibits (Continued) 10.14 Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr. (Exhibit 10.16 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1993, File No. 1-9021*). 10.15 Amendment to Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr. described in Exhibit 10.14 hereto(Exhibit 10.4 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1995, File No. 1-9021*). 10.16 Executive Retirement Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr.(Exhibit 10.18 to Report on Form 10-K of First Wachovia Corporation for the fiscal year ended December 31, 1987, File No. 1-9021*). 10.17 Amendment to Executive Retirement Agreement described in Exhibit 10.16 hereto (Exhibit 10.17 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1991, File No. 1-9021*). 10.18 Amendment to Executive Retirement Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr. (Exhibit 10.3 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1993, File No. 1-9021*). 10.19 Amendment to Executive Retirement Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr. (Exhibit 10.4 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1993, File No. 1-9021*). 10.20 Executive Retirement Agreements between Wachovia Corporation and Messrs. L.M. Baker, Jr., G. Joseph Prendergast, Walter E. Leonard, Jr., and Hugh M. Durden, dated as of January 27, 1995 (Exhibit 10.1 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1995, File No. 1-9021*). 10.21 Executive Retirement Agreement between Wachovia Corporation and Mr. Robert S. McCoy, Jr. (Exhibit 10.2 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1995, File No. 1-9021*). 10.22 Amendment to Executive Retirement Agreements described in Exhibits 10.20 and 10.21 hereto. (Exhibit 10.21 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1996, File No. 1-9021*). 10.23 Senior Management and Director Stock Plan of Wachovia Corporation (Exhibit 10 to Quarterly Report on Form 10-Q of First Wachovia Corporation for the quarter ended March 31, 1989, File No. 1-9021*). 10.24 1990 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.23 hereto (Exhibit 10.17 to Report on Form 10-K of First Wachovia Corporation for fiscal year ended December 31, 1989, File No. 1-9021*). 10.25 1996 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.23 hereto. (Exhibit 10.24 to Report on Form 10-K of Wachovia Corporation for fiscal year ended December 31, 1996, File No. 1-9021*). 10 Item 14. Exhibits (Continued) 10.26 Deferred Compensation Plan dated as of January 19, 1987 as amended (Exhibit 10(c) to Report on Form 10-K of South Carolina National Corporation for the fiscal year ended December 31, 1986, File No. 0-7042*). 10.27 Amendment to Deferred Compensation Plan described in Exhibit 10.26 hereto (Exhibit 19(b) to Quarterly Report on Form 10-Q of South Carolina National Corporation for the quarter ended September 30, 1987, File No. 0-7042*). 10.28 Amendment to Deferred Compensation Plan described in Exhibit 10.26 hereto (Exhibit 10(d) to Report on Form 10-K of South Carolina National Corporation for the fiscal year ended December 31, 1988, File No. 0-7042*). 10.29 Amendment to Deferred Compensation Plan described in Exhibit 10.26 hereto (Exhibit 10.35 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1993, File No. 1-9021*). 10.30 Amended and Restated Wachovia Corporation Stock Plan (Exhibit 4.1 to S-8 Registration No. 033-53325.) 10.31 Wachovia Corporation Director Deferred Stock Unit Plan. (Exhibit 10.37 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1996, File No. 1-9021*). 10.32 Wachovia Corporation Incentive Plan Deferral Arrangement (Exhibit 10.35 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1995, File No. 1-9021*). 10.33 Wachovia Corporation Executive Insurance Plan (Exhibit 10.36 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1995, File No. 1-9021*). 10.34 Executive Long Term Disability Income Plan. 10.35 Form 11-K of the Wachovia Corporation Retirement Savings and Profit-Sharing Plan, to be filed as an amendment to Form 10-K for the year ended December 31, 1997. 11 Computation of Earnings Per Share (Note P to 1997 Consolidated Financial Statements of Wachovia Corporation and Subsidiaries, page 68 of 1997 Annual Report to Shareholders*). 12 Statement setting forth computation of ratio of earnings to fixed charges. 11 Item 14. Exhibits (Continued) 13 Wachovia Corporation 1997 Annual Report to Shareholders, with the Report of Independent Auditors therein being manually signed in one copy by Ernst & Young LLP. (Except for those portions thereof which are expressly incorporated by reference herein, this report is not "filed" as a part of this Report on Form 10-K). 21 Subsidiaries of the Registrant (listed under "Subsidiaries of Wachovia Corporation" and included on page 2 of Report on Form 10-K for the fiscal year ended December 31, 1997*). 23.1 Consent of Ernst & Young LLP. 23.2 Consent of KPMG Peat Marwick LLP. 24 Power of Attorney. 27.1 Financial Data Schedule (for SEC purposes only). 27.2 1996 restated Financial Data Schedule (for SEC purposes only). 27.3 1995 restated Financial Data Schedule (for SEC purposes only). 27.4 Third quarter 1997 restated Financial Data Schedule (for SEC purposes only). 27.5 Second quarter 1997 restated Financial Data Schedule (for SEC purposes only). 27.6 First quarter 1997 restated Financial Data Schedule (for SEC purposes only). 27.7 Third quarter 1996 restated Financial Data Schedule (for SEC purposes only). 27.8 Second quarter 1996 restated Financial Data Schedule (for SEC purposes only). 27.9 First quarter 1996 restated Financial Data Schedule (for SEC purposes only). 99.1 Opinion of KPMG Peat Marwick LLP, Independent Accountants, on the financial statements of Central Fidelity National Bank and subsidiaries, a wholly-owned subsidiary of Wachovia Corporation. 99.2 Opinion of KPMG Peat Marwick LLP, Independent Accountants, on the financial statements of Central Fidelity Banks, Inc. and subsidiaries. * Incorporated by reference. 12 EX-2.1 2 AGREEMENT AND PLAN OF MERGER ================================================================================ AGREEMENT AND PLAN OF MERGER dated as of November 17, 1997 by and between Wachovia Corporation, The American Bank of Hollywood and Ameribank Bancshares, Inc. ================================================================================ TABLE OF CONTENTS Page ---- RECITALS......................................................................1 ARTICLE 1 Certain Definitions................................................2 1.1 Certain Definitions................................................2 ARTICLE 2 The Merger and Bank Merger.........................................7 2.1 The Merger.........................................................7 2.2 Effective Date and Effective Time..................................7 2.3 Plan of Merger.....................................................8 2.4 Bank Merger........................................................8 ARTICLE 3 Consideration; Exchange Procedures.................................8 3.1 Merger Consideration...............................................8 3.2 Rights as Stockholders; Stock Transfers............................8 3.3 Fractional Shares..................................................9 3.4 Exchange Procedures................................................9 3.5 Anti-Dilution Provisions...........................................10 ARTICLE 4 Actions Pending Acquisition........................................10 4.1 Forbearances of X..................................................10 4.2 Forbearances of YZ.................................................13 ARTICLE 5 Representations and Warranties.....................................13 5.1 Disclosure Schedules...............................................13 5.2 Standard...........................................................13 5.3 Representations and Warranties of X................................13 5.4 Representations and Warranties of YZ...............................24 ARTICLE 6 Covenants..........................................................27 6.1 Reasonable Best Efforts............................................27 6.2 Stockholder Approvals..............................................28 6.3 Registration Statement/Exemption...................................28 6.4 Press Releases.....................................................29 6.5 Access; Information................................................29 6.6 Acquisition Proposals..............................................30 6.7 Affiliate Agreements...............................................31 6.8 Takeover Laws......................................................31 6.9 Certain Policies...................................................31 6.10 NYSE Listing.......................................................32 6.11 Regulatory Applications............................................32 6.12 Indemnification....................................................32 6.13 Benefit Plans......................................................33 6.14 Accountants' Letters...............................................34 6.15 Notification of Certain Matters....................................34 6.17 Dividend Coordination..............................................34 ARTICLE 7 Conditions to Consummation of the Merger...........................35 7.1 Conditions to Each Party's Obligation to Effect the Merger.........35 7.2 Conditions to Obligation of X......................................36 7.3 Conditions to Obligation of YZ.....................................36 ARTICLE 8 Termination........................................................37 8.1 Termination........................................................37 8.2 Effect of Termination and Abandonment..............................38 ARTICLE 9 Miscellaneous......................................................39 9.1 Survival...........................................................39 9.2 Waiver; Amendment..................................................39 9.3 Counterparts.......................................................39 9.4 Governing Law......................................................39 9.5 Expenses...........................................................39 9.6 Notices............................................................40 9.7 Entire Understanding; No Third Party Beneficiaries.................41 9.8 Interpretation; Effect.............................................41 EXHIBIT A Form of Stock Option Agreement EXHIBIT B Form of Shareholder Agreement EXHIBIT C Form of Plan of Merger EXHIBIT D Form of Bank Merger Agreement EXHIBIT E Form of Non-Competition Agreement AGREEMENT AND PLAN OF MERGER, dated as of November 17, 1997 (this "Agreement") by and between Ameribank Bancshares, Inc. ("Bancshares"), The American Bank of Hollywood ("American") and Wachovia Corporation ("Wachovia"). RECITALS A. Ameribank Bancshares. Bancshares is a Florida corporation, having its principal place of business in Hollywood, Florida and the owner of 100% of the issued and outstanding shares of American, a Florida chartered bank. B. Wachovia Corporation. Wachovia is a North Carolina corporation, having its principal place of business in Winston-Salem, North Carolina and Atlanta, Georgia and the owner of 100% of the issued and outstanding shares of 1st United Bank ("1st United"). C. Stock Option Agreement. As a condition and an inducement to Wachovia's entering into this Agreement, Bancshares has granted to Wachovia an option pursuant to a stock option agreement, in substantially the form of Exhibit A. D. Shareholder Agreement. As a further condition and inducement to the willingness of Wachovia to enter into this Agreement, shareholders of Bancshares who own not less than 50% of the Bancshares Common Stock issued and outstanding have entered into agreements (a "Voting Agreement") with Wachovia, in the form of Exhibit B hereto, under which each shareholder has agreed to vote in favor of this Agreement. E. Non-Competition Agreements. As a further condition and inducement to the willingness of Wachovia to enter into this Agreement, the directors and certain of the senior officers of Bancshares and American have entered into Non-Competition Agreements in the form of Exhibit "E" hereto. F. Intentions of the Parties. It is the intention of the parties to this Agreement that the business combination contemplated hereby be accounted for under the pooling of interest accounting method (but such accounting treatment shall not be a condition precedent to closing) and be treated as a "reorganization" under Section 368 of the Internal Revenue Code of 1986 (the "Code"). G. Board Action. The respective Boards of Directors of each of Wachovia, American and Bancshares have determined that it is in the best interests of their respective companies and their stockholders to consummate the strategic business combination transactions provided for herein. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements contained herein the parties agree as follows: ARTICLE 1 Certain Definitions 1.1. Certain Definitions. The following terms are used in this Agreement with the meanings set forth below: "1st United" has the meaning set forth in the preamble to this Agreement. "Acquisition Proposal" has the meaning set forth in Section 6.6. "Agreement" means this Agreement, as amended or modified from time to time in accordance with Section 9.2. "American" has the meaning set forth in the preamble to this Agreement. "American Board" means the Board of Directors of American. "American By-Laws" means the By-Laws of American. "American Certificate" means the Articles of Incorporation of American. "Bancshares" has the meaning set forth in the preamble to this Agreement. "Bancshares Affiliate" has the meaning set forth in Section 6.7(a). "Bancshares Board" means the Board of Directors of Bancshares. "Bancshares By-Laws" means the By-laws of Bancshares. "Bancshares Certificate" means the Articles of Incorporation of Bancshares. "Bancshares Common Stock" means the common stock, par value $5.00 per share, of Bancshares. "Bancshares Meeting" has the meaning set forth in Section 6.2. "Bank Merger" means the merger of American with and into 1st United. "Bank Merger Agreement" has the meaning set forth in Section 2.4. "Code" means the Internal Revenue Code of 1986, as amended. -2- "Compensation and Benefit Plans" has the meaning set forth in Section 5.3(m). "Costs" has the meaning set forth in Section 6.12(a). "Disclosure Schedule" has the meaning set forth in Section 5.1. "Effective Date" means the date on which the Effective Time occurs. "Effective Time" means the effective time of the Merger, as provided for in Section 2.2. "Environmental Laws" means all applicable local, state and federal environmental, health and safety laws and regulations, including, without limitation, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Clean Water Act, the Federal Clean Air Act, and the Occupational Safety and Health Act, each as amended, regulations promulgated thereunder, and state counterparts. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" has the meaning set forth in Section 5.3(m). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Exchange Agent" has the meaning set forth in Section 3.4. "Exchange Ratio" has the meaning set forth in Section 3.1. "Exemption" has the meaning set forth in Section 6.3. "FBCA" means the Florida Business Corporation Act. "Fairness Order" has the meaning set forth in Section 6.3. "FDIC" means the Federal Deposit Insurance Corporation. "Financial Statements" has the meaning set forth in Section 5.3(g). "Florida Department of State" has the meaning set forth in Section 2.1(b). "Florida Comptroller" means the Comptroller of the State of Florida acting as the head of the Florida Department of Banking and Finance. -3- "Governmental Authority" means any court, administrative agency or commission or other federal, state or local governmental authority or instrumentality. "Indemnified Party" has the meaning set forth in Section 6.12(a). "Insurance Amount" has the meaning set forth in Section 6.12(b). "Insurance Policy" has the meaning set forth in Section 5.3(t). "Lien" means any charge, mortgage, pledge, security interest, restriction, claim, lien, or encumbrance. "Material Adverse Effect" means, with respect to Wachovia, Bancshares or the Surviving Corporation, any effect that (i) is material and adverse to the financial position, results of operations or business of Wachovia and its Subsidiaries taken as a whole, Bancshares and its Subsidiaries taken as a whole, or the Surviving Corporation and its Subsidiaries taken as a whole, respectively, or (ii) would materially impair the ability of Wachovia or Bancshares or their Subsidiaries to perform their obligations under this Agreement or the Bank Merger Agreement or otherwise materially threaten or materially impede the consummation of the Merger, the Bank Merger and the other transactions contemplated by this Agreement; provided, however, that Material Adverse Effect shall not be deemed to include the impact of (a) changes in banking and similar laws of general applicability or interpretations thereof by courts or governmental authorities, (b) changes in generally accepted accounting principles or regulatory accounting requirements applicable to banks and their holding companies generally, (c) any modifications or changes to valuation policies and practices in connection with the Merger or the Bank Merger or restructuring charges taken in connection with the Merger or the Bank Merger, in each case in accordance with generally accepted accounting principles, (d) effects of any action taken with the prior written consent of Wachovia and (e) changes in conditions or circumstances that affect the banking industry generally. "Merger" has the meaning set forth in Section 2.1. "Merger Consideration" has the meaning set forth in Section 2.1. "Multiemployer Plans" has the meaning set forth in Section 5.3(m). "NCBCA" means the North Carolina Business Corporation Act. "New Certificate" has the meaning set forth in Section 3.4. "North Carolina Secretary" has the meaning set forth in Section 2.1(b). "NYSE" means the New York Stock Exchange, Inc. -4- "Offering Circular" has the meaning set forth in Section 6.3. "Old Certificate" has the meaning set forth in Section 3.4. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Plan" has the meaning set forth in Section 5.3(m). "Person" means any individual, bank, corporation, partnership, association, joint-stock company, business trust or unincorporated organization. "Plans" has the meaning set forth in Section 5.3(m). "Previously Disclosed" by a party shall mean information set forth in its Disclosure Schedule. "Proxy Statement" has the meaning set forth in Section 6.3. "Registration Statement" has the meaning set forth in Section 6.3. "Regulatory Authority" has the meaning set forth in Section 5.3(i). "Representatives" means, with respect to any Person, such Person's directors, officers, employees, legal or financial advisors or any representatives of such legal or financial advisors. "Rights" means, with respect to any Person, securities or obligations convertible into or exercisable or exchangeable for, or giving any person any right to subscribe for or acquire, or any options, calls or commitments relating to, or any stock appreciation right or other instrument the value of which is determined in whole or in part by reference to the market price or value of, shares of capital stock of such person. "SEC" means the Securities and Exchange Commission. "SEC Documents" has the meaning set forth in Section 5.4(g). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Stock Option Agreement" has the meaning set forth in Recital C. "Subsidiary" and "Significant Subsidiary" have the meanings ascribed to them in Rule 1-02 of Regulation S-X of the SEC. -5- "Surviving Corporation" has the meaning set forth in Section 2.1. "Takeover Laws" has the meaning set forth in Section 5.3(o). "Tax" and "Taxes" means all federal, state, local or foreign taxes, charges, fees, levies or other assessments, however denominated, including, without limitation, all net income, gross income, gross receipts, gains, sales, use, ad valorem, goods and services, capital, production, transfer, franchise, windfall profits, license, withholding, payroll, employment, disability, employer health, excise, estimated, severance, stamp, occupation, property, environmental, unemployment or other taxes, custom duties, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority whether arising before, on or after the Effective Date. "Tax Returns" means any return, amended return or other report (including elections, declarations, disclosures, schedules, estimates and information returns) required to be filed with respect to any Tax. "Treasury Stock" shall mean shares of Bancshares Common Stock held by Bancshares or any of its Subsidiaries or by Wachovia or any of its Subsidiaries, in each case other than in a fiduciary capacity or as a result of debts previously contracted in good faith. "Voting Agreement" has the meaning set forth in the preamble to this Agreement. "Wachovia" has the meaning set forth in the preamble to this Agreement. "Wachovia Board" means the Board of Directors of Wachovia. "Wachovia Common Stock" means the common stock, par value $5.00 per share, of Wachovia. "Wachovia Preferred Stock" means the preferred stock, par value $5.00 per share, of Wachovia. "Wachovia Stock" means, collectively, Wachovia Common Stock and Wachovia Preferred Stock. -6- ARTICLE 2 The Merger and Bank Merger 2.1. The Merger. (a) At the Effective Time, Bancshares shall merge with and into Wachovia (the "Merger"), the separate corporate existence of Bancshares shall cease and Wachovia shall survive and continue to exist as a North Carolina corporation (Wachovia, as the surviving corporation in the Merger, sometimes being referred to herein as the "Surviving Corporation"). Wachovia may at any time prior to the Effective Time change the method of effecting the combination with Bancshares (including, without limitation, the provisions of this Article II) or the Bank Merger Agreement or the method of effecting the combination of American and 1st United pursuant to the Bank Merger Agreement if and to the extent it deems such change to be necessary or appropriate; provided, however, that no such change shall (i) alter or change the amount or kind of consideration to be issued to holders of Bancshares Common Stock as provided for in this Agreement (the "Merger Consideration"), (ii) adversely affect the tax treatment of Bancshares's stockholders as a result of receiving the Merger Consideration or (iii) materially impede or delay consummation of the transactions contemplated by this Agreement. (b) Subject to the satisfaction or waiver of the conditions set forth in Article VII, the Merger shall become effective upon the occurrence of the filing in the office of the Florida Department of State of articles of merger in accordance with Section 607.1105 of the FBCA and the filing in the Office of the Secretary of State of the State of North Carolina (the "North Carolina Secretary") of articles of merger in accordance with Section 55-11-05 of the NCBCA or such later date and time as may be set forth in such articles. The Merger shall have the effects prescribed in the NCBCA and the FBCA. (c) Articles of Incorporation and By-Laws. The articles of incorporation and by-laws of Wachovia immediately after the Merger shall be those of Wachovia as in effect immediately prior to the Effective Time. (d) Directors and Officers of Wachovia. The directors and officers of Wachovia immediately after the Merger shall be the directors and officers of Wachovia immediately prior to the Effective Time, until such time as their successors shall be duly elected and qualified. 2.2. Effective Date and Effective Time. Subject to the satisfaction or waiver of the conditions set forth in Article VII, the parties shall cause the effective date of the Merger (the "Effective Date") to occur on (i) the tenth business day to occur after the last of the conditions set forth in Article VII shall have been satisfied or waived in accordance with the terms of this Agreement (or, at the election of Wachovia, on another business day prior to such tenth business -7- day) or (ii) such other date to which the parties may agree in writing. The time on the Effective Date when the Merger shall become effective is referred to as the "Effective Time." 2.3. Plan of Merger. Wachovia and Bancshares hereby adopt a separate plan of merger, in substantially the form of Exhibit C, for purposes of any filing requirement. 2.4. Bank Merger. Promptly after execution of this Agreement, Wachovia and Bancshares shall cause 1st United and American to enter into the merger agreement in the form attached hereto as Exhibit D (the "Bank Merger Agreement") pursuant to which, immediately after the Effective Time, American will be merged with and into 1st United on the terms of the Bank Merger Agreement. ARTICLE 3. Consideration; Exchange Procedures 3.1. Merger Consideration. Subject to the provisions of this Agreement, at the Effective Time, automatically by virtue of the Merger and without any action on the part of any Person: (a) Outstanding Bancshares Common Stock. Each share, excluding Treasury Stock, of Bancshares Common Stock, issued and outstanding immediately prior to the Effective Time shall become and be converted into the number of shares of Wachovia Common Stock equal to the Exchange Ratio (as defined in the following sentence). The "Exchange Ratio" shall mean 3.5019 shares of Wachovia Common Stock for each share of Bancshares Common Stock. (b) Outstanding Wachovia Stock. Each share of Wachovia Stock issued and outstanding immediately prior to the Effective Time shall remain issued and outstanding and unaffected by the Merger. (c) Treasury Shares. Each share of Bancshares Stock held as Treasury Stock immediately prior to the Effective Time shall be canceled and retired at the Effective Time and no consideration shall be issued in exchange therefor. 3.2. Rights as Stockholders; Stock Transfers. At the Effective Time, holders of Bancshares Stock shall cease to be, and shall have no rights as, stockholders of Bancshares, other than to receive any dividend or other distribution with respect to such Bancshares Stock with a record date occurring prior to the Effective Time and the consideration provided under this Article III. After the Effective Time, there shall be no transfers on the stock transfer books of Bancshares or the Surviving Corporation of shares of Bancshares Stock. -8- 3.3. Fractional Shares. Notwithstanding any other provision hereof, no fractional shares of Wachovia Common Stock and no certificates or scrip therefor, or other evidence of ownership thereof, will be issued in the Merger; instead, Wachovia shall pay to each holder of Bancshares Common Stock who would otherwise be entitled to a fractional share of Wachovia Common Stock (after taking into account all Old Certificates delivered by such holder) an amount in cash (without interest) determined by multiplying such fraction by the average of the last sale prices of Wachovia Common Stock, as reported by the NYSE Composite Transactions Reporting System (as reported in The Wall Street Journal or, if not reported therein, in another authoritative source), for the five NYSE trading days immediately preceding the Effective Date. 3.4. Exchange Procedures. (a) As promptly as practicable but in no event more than 20 days after the Effective Date, Wachovia or Wachovia Bank, N.A. (in such capacity, the "Exchange Agent"), shall send or cause to be sent to each former holder of record of shares of Bancshares Common Stock immediately prior to the Effective Time transmittal materials for use in exchanging such stockholder's certificates formerly representing shares of Bancshares Common Stock ("Old Certificates") for the consideration set forth in this Article III. Wachovia shall cause the certificates representing the shares of Wachovia Common Stock ("New Certificates") into which shares of a stockholder's Bancshares Common Stock are converted on the Effective Date and/or any check in respect of any fractional share interests or dividends or distributions which such person shall be entitled to receive to be delivered to such stockholder upon delivery to the Exchange Agent of Old Certificates representing such shares of Bancshares Common Stock (or indemnity reasonably satisfactory to Wachovia and the Exchange Agent, if any of such certificates are lost, stolen or destroyed) owned by such stockholder. No interest will be paid on any such cash to be paid in lieu of fractional share interests or in respect of dividends or distributions which any such person shall be entitled to receive pursuant to this Article III upon such delivery. (b) Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to any former holder of Bancshares Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (c) At the election of Wachovia, no dividends or other distributions with respect to Wachovia Common Stock with a record date occurring after the Effective Time shall be paid to the holder of any unsurrendered Old Certificate representing shares of Bancshares Common Stock converted in the Merger into the right to receive shares of such Wachovia Common Stock until the holder thereof shall be entitled to receive New Certificates in exchange therefor in accordance with the procedures set forth in this Section 3.4, and no such shares of Bancshares Common Stock shall be eligible to vote until the holder of Old Certificates is entitled to receive New Certificates in accordance with the procedures set forth in this Section 3.4. After becoming so entitled in accordance with this Section 3.4, the record holder thereof also shall be entitled to receive any such dividends or other distributions, without any interest thereon, which theretofore -9- had become payable with respect to shares of Wachovia Common Stock such holder had the right to receive upon surrender of the Old Certificate. 3.5. Anti-Dilution Provisions. In the event Wachovia changes (or establishes a record date for changing) the number of shares of Wachovia Common Stock issued and outstanding prior to the Effective Date as a result of a stock split, stock dividend, recapitalization or similar transaction with respect to the outstanding Wachovia Common Stock and the record date therefor shall be prior to the Effective Date, the Exchange Ratio shall be proportionately adjusted. ARTICLE 4. Actions Pending Acquisition 4.1. Forbearances of Bancshares. From the date hereof until the Effective Time, except as expressly contemplated by this Agreement, without the prior written consent of Wachovia, Bancshares will not, and will cause each of its Subsidiaries not to: (a) Ordinary Course. Conduct the business of Bancshares and its Subsidiaries other than in the ordinary and usual course or fail to use reasonable efforts to preserve intact their business organizations and assets and maintain their rights, franchises and existing relations with customers, suppliers, employees and business associates, or take any action reasonably likely to have an adverse affect upon Bancshares's or its Subsidiaries' ability to perform any of its material obligations under this Agreement or the Bank Merger Agreement. (b) Capital Stock. Issue, sell or otherwise permit to become outstanding, or authorize the creation of, any additional shares of Bancshares Common Stock or any Rights, (B) enter into any agreement with respect to the foregoing, (C) permit any additional shares of Bancshares Common Stock to become subject to new grants of employee or director stock options, other Rights or similar stock-based employee rights, (D) repurchase any shares of Bancshares Common Stock, (E) declare or pay a dividend in Bancshares Common Stock or Rights for Bancshares Common Stock or (F) except as Previously Disclosed enter into contracts with officers, directors or shareholders pursuant to which such officers, directors or shareholders will receive cash payments, Bancshares Common Stock or other valuable consideration from Bancshares or its Subsidiaries. (c) Dividends, Etc. (a) Make, declare, pay or set aside for payment any dividend (other than (A) quarterly cash dividends on Bancshares Common Stock in an amount not to exceed $.75 per share (the "Permitted Dividend Amount") with record and payment dates consistent with past practice if such payment dates occur before the Effective Time and the payment of the dividend will not result in the Bancshares Shareholders receiving the Bancshares dividend and the corresponding Wachovia quarterly dividend and (B) dividends from American to Bancshares on or in respect of, or -10- declare or make any distribution on any shares of Bancshares common Stock or (b) directly or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise acquire, any shares of its capital stock or Rights thereto. (d) Compensation; Employment Agreements; Etc. Except as Previously Disclosed enter into or amend or renew any employment, consulting, severance or similar agreements or arrangements with any director, officer or employee of Bancshares or its Subsidiaries, or, other than as Previously Disclosed, grant any salary or wage increase or increase any employee benefit (including incentive or bonus payments), except (i) for normal individual increases in compensation to employees or officers in the ordinary course of business consistent with past practice, (ii) for other changes that are required by applicable law, (iii) to satisfy Previously Disclosed contractual obligations existing as of the date hereof, or (iv) for grants of awards to newly hired employees consistent with past practice. (e) Benefit Plans. Except as Previously Disclosed enter into, establish, adopt or amend (except (i) as may be required by applicable law or (ii) to satisfy Previously Disclosed contractual obligations existing as of the date hereof) any pension, retirement, stock option, stock purchase, savings, profit sharing, deferred compensation, consulting, bonus, group insurance or other employee benefit, incentive or welfare contract, plan or arrangement, or any trust agreement (or similar arrangement) related thereto, in respect of any director, officer or employee of Bancshares or its Subsidiaries, or take any action to accelerate the vesting or exercisability of stock options, restricted stock or other compensation or benefits payable thereunder. (f) Dispositions. Except as Previously Disclosed, sell, transfer, mortgage, encumber or otherwise dispose of or discontinue any of its assets, deposits, business or properties except in the ordinary course of business and in a transaction that is not material to it and its Subsidiaries taken as a whole and further except that in the ordinary course of business and with Wachovia's prior approval which will not be unreasonably withheld or delayed Bancshares and its Subsidiaries may sell assets now or hereafter owned by Bancshares or its Subsidiaries which have been acquired in the realization of security for debts previously contracted even though such sales may be material to Bancshares and its Subsidiaries taken as a whole. (g) Acquisitions. Except as Previously Disclosed, acquire (other than by way of foreclosures or acquisitions of control in a bona fide fiduciary capacity or in satisfaction of debts previously contracted in good faith, in each case in the ordinary and usual course of business consistent with past practice) all or any portion of, the assets, business, deposits or properties of any other entity except in the ordinary course of business and in a transaction that is not material to it and its Subsidiaries taken as a whole. -11- (h) Governing Documents. Amend the Bancshares Certificate, Bancshares By-laws or the certificate of incorporation or by-laws (or similar governing documents) of any of Bancshares's Subsidiaries. (i) Accounting Methods. Implement or adopt any change in its accounting principles, practices or methods, other than as may be required by generally accepted accounting principles. (j) Contracts. Except as Previously Disclosed and except in the ordinary course of business consistent with past practice, enter into or terminate any material contract (as defined in Section 5.3(k)) or amend or modify in any material respect any of its existing material contracts. (k) Claims. Except in the ordinary course of business consistent with past practice, settle any claim, action or proceeding, except for any claim, action or proceeding involving solely money damages in an amount, individually or in the aggregate for all such settlements, that is not material to Bancshares and its Subsidiaries taken as a whole. (l) Adverse Actions. (a) Except as Previously Disclosed take any action reasonably likely to prevent or impede the Merger from qualifying for accounting treatment as a pooling of interests and as a reorganization within the meaning of Section 368 of the Code; or (b) knowingly take any action that is intended or is reasonably likely to result in (i) any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time at or prior to the Effective Time, (ii) any of the conditions to the Merger set forth in Article VII not being satisfied or (iii) a material violation of any provision of this Agreement except, in each case, as may be required by applicable law or regulation. (m) Risk Management. Except as required by applicable law or regulation, (i) implement or adopt any material change in its interest rate and other risk management policies, procedures or practices; (ii) fail to follow its existing policies or practices with respect to managing its exposure to interest rate and other risk; or (iii) fail to use commercially reasonable means to avoid any material increase in its aggregate exposure to interest rate risk. (n) Indebtedness. Incur any indebtedness for borrowed money other than in the ordinary course of business. (o) Commitments. Agree or commit to do any of the foregoing. 4.2. Forbearances of Wachovia. From and after the date hereof until the Effective Time, except as expressly contemplated by this Agreement, without the prior written consent of Bancshares, Wachovia will not, and will cause each of its Subsidiaries not to, take any action -12- reasonably likely to prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code. ARTICLE 5. Representations and Warranties 5.1. Disclosure Schedules. On or prior to the date hereof, Wachovia has delivered to Bancshares a schedule and Bancshares has delivered to Wachovia a schedule (respectively, its "Disclosure Schedule") setting forth, among other things, items the disclosure of which is necessary or appropriate either in response to an express disclosure requirement contained in a provision hereof or as an exception to one or more representations or warranties contained in Section 5.3 or 5.4 or to one or more of its covenants contained in Article IV; provided, that (a) no such item is required to be set forth in a Disclosure Schedule as an exception to a representation or warranty if its absence would not be reasonably likely to result in the related representation or warranty being deemed untrue or incorrect under the standard established by Section 5.2, and (b) the mere inclusion of an item in a Disclosure Schedule as an exception to a representation or warranty shall not be deemed an admission by a party that such item represents a material exception or fact, event or circumstance or that such item is reasonably likely to result in a Material Adverse Effect. 5.2. Standard. No representation or warranty of Bancshares or Wachovia contained in Section 5.3 or 5.4 shall be deemed untrue or incorrect, and no party hereto shall be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, event or circumstance unless such fact, circumstance or event, individually or taken together with all other facts, events or circumstances inconsistent with any representation or warranty contained in Section 5.3 or 5.4 has had or is reasonably likely to have a Material Adverse Effect except for the representations and warranties in Section 5.3(b), (c), (d), (e), (g), (m)(i) and (v) which shall be true, correct and complete in all material respects. 5.3. Representations and Warranties of Bancshares. Subject to Sections 5.1 and 5.2 and except as Previously Disclosed in a paragraph of its Disclosure Schedule corresponding to the relevant paragraph below, Bancshares hereby represents and warrants to Wachovia: (a) Organization, Standing and Authority. Bancshares is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida. Bancshares is duly qualified to do business and is in good standing in the states of the United States and any foreign jurisdictions where its ownership or leasing of property or assets or the conduct of its business requires it to be so qualified. (b) Bancshares Stock. As of the date hereof, the authorized capital stock of Bancshares consists solely of 400,000 shares of Bancshares Common Stock, of which 270,328 shares were outstanding as of the date hereof. As of the date hereof, 29,672 -13- shares of Bancshares Common Stock were held in treasury by Bancshares or otherwise owned by Bancshares or its Subsidiaries ("Treasury Stock"). The outstanding shares of Bancshares Common Stock have been duly authorized and are validly issued and outstanding, fully paid and nonassessable, and subject to no preemptive rights (and were not issued in violation of any preemptive rights). As of the date hereof, except as Previously Disclosed in its Disclosure Schedule, there are no shares of Bancshares Common Stock authorized and reserved for issuance, Bancshares does not have any Rights issued or outstanding with respect to Bancshares Stock, and Bancshares does not have any commitment to authorize, issue or sell any Bancshares Common Stock or Rights, except pursuant to this Agreement and the Stock Option Agreement. (c) Subsidiaries. (i)(A) Bancshares has Previously Disclosed a list of all of its Subsidiaries together with the jurisdiction of organization of each such Subsidiary, (ii) except as Previously Disclosed, it owns, directly or indirectly, all the issued and outstanding equity securities of each of its Subsidiaries, (iii) no equity securities of any of its Subsidiaries are or may become required to be issued (other than to it or its wholly-owned Subsidiaries) by reason of any Right or otherwise, (iv) there are no contracts, commitments, understandings or arrangements by which any of such Subsidiaries is or may be bound to sell or otherwise transfer any equity securities of any such Subsidiaries (other than to it or its wholly-owned Subsidiaries), (v) there are no contracts, commitments, understandings, or arrangements relating to its rights to vote or to dispose of such securities and (vi) all the equity securities of each Subsidiary held by Bancshares or its Subsidiaries are fully paid and nonassessable and are owned by Bancshares or its Subsidiaries free and clear of any Liens. (ii) Bancshares does not own beneficially, directly or indirectly, any equity securities or similar interests of any Person, or any interest in a partnership or joint venture of any kind, other than its Subsidiaries. (iii) Each of Bancshares's Subsidiaries has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to do business and in good standing in the jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified. (d) Corporate Power. Bancshares and each of its Subsidiaries has the corporate power and authority to carry on its business as it is now being conducted and to own all its properties and assets; and Bancshares and American each has the corporate power and authority to execute, deliver and perform its obligations under this Agreement, the Bank Merger Agreement and the Stock Option Agreement and to consummate the transactions contemplated hereby and thereby. (e) Corporate Authority. Subject in the case of this Agreement to receipt of the requisite approval of the Merger set forth in this Agreement and the requisite approval -14- of the Bank Merger as set forth in the Bank Merger Agreement by the holders of a majority of the outstanding shares of Bancshares Common Stock entitled to vote on the Merger unless Wachovia is the beneficial owner of more than 10% of the Bancshares Common Stock in which event the required percentage of outstanding shares of Bancshares Common Stock will be 80%, and the vote of Bancshares as the sole shareholder as American on the Bank Merger (which are the only shareholder votes required thereon), this Agreement, the Bank Merger Agreement, the Stock Option Agreement and the transactions contemplated hereby and thereby have been authorized by all necessary corporate action of Bancshares and the Bancshares Board and American and the American Board prior to the date hereof. This Agreement is a valid and legally binding obligation of Bancshares and the Bank Merger Agreement is the valid and legally binding obligation of American, each enforceable in accordance with its terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and similar laws of general applicability relating to or affecting creditors' rights or by general equity principles). The Bancshares Board of Directors has received the written opinion of Allen C. Ewing & Co. to the effect that as of the date hereof the Exchange Ratio is fair to the holders of Bancshares Common Stock from a financial point of view. (f) Regulatory Filings; No Defaults. (i) No consents or approvals of, or filings or registrations with, any Governmental Authority or with any third party are required to be made or obtained by Bancshares or any of its Subsidiaries in connection with the execution, delivery or performance by Bancshares of this Agreement or the Stock Option Agreement or by American of the Bank Merger Agreement or to consummate the Merger and the Bank Merger except for (A) the filing of a notice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (B) filings of applications or notices with federal and Florida banking authorities, (C) filings with the SEC and state securities authorities, (D) the filing of articles of merger with the North Carolina Secretary pursuant to the NCBCA and the Florida Department of State pursuant to the FBCA, and (E) the approvals set forth in Section 7.1(b). As of the date hereof, Bancshares is not aware of any reason why the approvals set forth in Section 7.1(b) will not be received without the imposition of a condition, restriction or requirement of the type described in Section 7.1(b). (ii) Except as Previously Disclosed, subject to receipt of the regulatory approvals referred to in the preceding paragraph, and expiration of related waiting periods, and required filings under federal and state securities laws, the execution, delivery and performance of this Agreement, the Bank Merger Agreement and the Stock Option Agreement and the consummation of the transactions contemplated hereby and thereby do not and will not (A) constitute a breach or violation of, or a default under, or give rise to any Lien, any acceleration of remedies or any right of termination under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument of Bancshares or of any of its Subsidiaries or to which -15- Bancshares or any of its Subsidiaries or properties is subject or bound, (B) constitute a breach or violation of, or a default under, the American Certificate, the American By-Laws, the Bancshares Certificate or the Bancshares By-Laws, or (C) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental permit or license, agreement, indenture or instrument. (g) Financial Reports; No Material Adverse Effect. (i) Bancshares's audited annual consolidated financial statements for the fiscal years ended December 31, 1994, 1995 and 1996, and the unaudited consolidated financial statement prepared by Bancshares for the period January 1, 1997 through September 30, 1997, copies of which have been provided to Wachovia (the "Financial Statements") (A) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis through the periods involved and fairly present the financial position of Bancshares and its Subsidiaries as of its date, and each of the statements of income and changes in stockholders' equity and cash flows or equivalent statements in such financial statements (including any related notes and schedules thereto) fairly presents the results of operations, changes in stockholders' equity and changes in cash flows, as the case may be, of Bancshares and its Subsidiaries for the periods to which they relate, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except unaudited statements are subject to normal year-end audit adjustments, and (B) did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) Except as Previously Disclosed, since December 31, 1996, Bancshares and its Subsidiaries have not incurred any liability other than in the ordinary course of business consistent with past practice. (iii) Except as Previously Disclosed, since December 31, 1996, (A) Bancshares and its Subsidiaries have conducted their respective businesses in the ordinary and usual course consistent with past practice (excluding the incurrence of expenses related to this Agreement and the transactions contemplated hereby) and (B) no event has occurred or circumstance arisen that, individually or taken together with all other facts, circumstances and events (described in any paragraph of Section 5.3 or otherwise), is reasonably likely to have a Material Adverse Effect with respect to Bancshares. (h) Litigation. Except as Previously Disclosed, no litigation, claim or other proceeding before any court or governmental agency is pending against Bancshares or any of its Subsidiaries and, to Bancshares's knowledge, no such litigation, claim or other proceeding has been threatened. -16- (i) Regulatory Matters. (i) Neither Bancshares nor any of its Subsidiaries or properties is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, or extraordinary supervisory letter from, any federal or state governmental agency or authority charged with the supervision or regulation of financial institutions or issuers of securities or engaged in the insurance of deposits (including, without limitation, the Federal Reserve Board and the FDIC) or the supervision or regulation of it or any of its Subsidiaries (collectively, the "Regulatory Authorities"). (ii) Neither Bancshares nor any of its Subsidiaries has been advised by any Regulatory Authority that such Regulatory Authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter, supervisory letter or similar submission. (j) Compliance with Laws. Bancshares and each of its Subsidiaries: (i) Except as Previously Disclosed, is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto or to the employees conducting such businesses, including, without limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act and all other applicable fair lending laws and other laws relating to discriminatory business practices; (ii) Has all permits, licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Authorities that are required in order to permit them to own or lease their properties and to conduct their businesses as presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to Bancshares's knowledge, no suspension or cancellation of any of them is threatened; and (iii) Except as Previously Disclosed, has received no notification or communication from any Governmental Authority (A) asserting that Bancshares or any of its Subsidiaries is not in substantial compliance with any of the statutes, regulations, or ordinances which such Governmental Authority enforces or (B) threatening to revoke any license, franchise, permit, or governmental authorization (nor, to Bancshares's knowledge, do any grounds for any of the foregoing exist). (k) Material Contracts; Defaults. Except as Previously Disclosed, neither Bancshares nor any of its Subsidiaries is a party to, bound by or subject to any agreement, -17- contract, arrangement, commitment or understanding (whether written or oral) (i) that is a "material contract" within the meaning of Item 601(b)(10) of the SEC's Regulation S-K or (ii) that in any respect restricts the conduct of business by it or any of its Subsidiaries. Neither it nor any of its Subsidiaries is in default under any contract, agreement, commitment, arrangement, lease, insurance policy or other instrument to which it is a party, by which its respective assets, business, or operations may be bound or affected, or under which it or its respective assets, business, or operations receives benefits, and there has not occurred any event that, with the lapse of time or the giving of notice or both, would constitute such a default. (l) No Brokers. No action has been taken by Bancshares that would give rise to any valid claim against any party hereto for a brokerage commission, finder's fee or other like payment with respect to the transactions contemplated by this Agreement, excluding a fee of not more than $15,000.00 to be paid to Allen C. Ewing & Co. for its fairness opinion. (m) Employee Benefit Plans. (i) Section 5.3(m)(i) of Bancshares's Disclosure Schedule contains a complete and accurate list of all existing bonus, incentive, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock option, severance, welfare and fringe benefit plans, employment or severance agreements and all similar practices, policies and arrangements in which any employee or former employee (the "Employees"), consultant or former consultant (the "Consultants") or director or former director (the "Directors") of Bancshares or any of its Subsidiaries participates or to which any such Employees, Consultants or Directors are a party (the "Compensation and Benefit Plans"). Except as Previously Disclosed, neither Bancshares nor any of its Subsidiaries has any commitment to create any additional Compensation and Benefit Plan or to modify or change any existing Compensation and Benefit Plan. (ii) Each Compensation and Benefit Plan has been operated and administered in all material respects in accordance with its terms and with applicable law, including, but not limited to, ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment Act, and any regulations or rules promulgated thereunder, and all filings, disclosures and notices required by ERISA, the Code, the Securities Act, the Exchange Act, the Age Discrimination in Employment Act or any other applicable law have been timely made. Each Compensation and Benefit Plan which is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter (including, if such plan is other than a "prototype" plan, a determination that the related trust under such Compensation and Benefit Plan is exempt from tax under Section 501(a) of the Code) from the Internal Revenue Service ("IRS") for "TRA" (as defined in Rev. Proc. 93-39), or will file for such determination letter prior to the expiration of the remedial amendment period for such Compensation and Benefit -18- Plan, and Bancshares is not aware of any circumstances likely to result in revocation of any such favorable determination letter. There is no material pending or, to the knowledge of Bancshares, threatened legal action, suit or claim relating to the Compensation and Benefit Plans, other than routine claims for benefits. Neither Bancshares nor any of its Subsidiaries has engaged in a transaction, or omitted to take any action, with respect to any Compensation and Benefit Plan that would reasonably be expected to subject Bancshares or any of its Subsidiaries to a material tax or penalty imposed by either Section 4975 of the Code or Section 502 of ERISA, assuming for purposes of Section 4975 of the Code that the taxable period of any such transaction expired as of the date hereof. (iii) No material liability (other than for payment of premiums to the PBGC which have been made or will be made on a timely basis) under Title IV of ERISA has been or is expected to be incurred by Bancshares or any of its Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or any single-employer plan of any entity (an "ERISA Affiliate") which is considered one employer with Bancshares under Section 4001(a)(14) of ERISA or Section 414(b) or (c) of the Code (an "ERISA Affiliate Plan"). None of Bancshares, any of its Subsidiaries or any ERISA Affiliate has contributed, or has been obligated to contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA at any time since September 26, 1980. No notice of a "reportable event", within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived, has been required to be filed for any Compensation and Benefit Plan or by any ERISA Affiliate Plan within the 12-month period ending on the date hereof, and to the knowledge of Bancshares no such notice will be required to be filed as a result of the transactions contemplated by this Agreement. The PBGC has not instituted proceedings to terminate any Pension Plan or ERISA Affiliate Plan and, to Bancshares's knowledge, no condition exists that presents a material risk that such proceedings will be instituted. To the knowledge of Bancshares, there is no pending investigation or enforcement action by the PBGC, the Department of Labor (the "DOL") or IRS or any other governmental agency with respect to any Compensation and Benefit Plan. Under each Pension Plan and ERISA Affiliate Plan, as of the date of the most recent actuarial valuation performed prior to the date of this Agreement, the actuarially determined present value of all "benefit liabilities", within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in such actuarial valuation of such Pension Plan or ERISA Affiliate Plan), did not exceed the then current value of the assets of such Pension Plan or ERISA Affiliate Plan and since such date there has been neither an adverse change in the financial condition of such Pension Plan or ERISA Affiliate Plan nor any amendment or other change to such Pension Plan or ERISA Affiliate Plan that would increase the amount of benefits thereunder which reasonably could be expected to change such result. -19- (iv) All contributions required to be made under the terms of any Compensation and Benefit Plan or ERISA Affiliate Plan or any employee benefit arrangements under any collective bargaining agreement to which Bancshares or any of its Subsidiaries is a party have been timely made or have been reflected on Bancshares's financial statements. Neither any Pension Plan nor any ERISA Affiliate Plan has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and all required payments to the PBGC with respect to each Pension Plan or ERISA Affiliate Plan have been made on or before their due dates. None of Bancshares, any of its Subsidiaries or any ERISA Affiliate (x) has provided, or would reasonably be expected to be required to provide, security to any Pension Plan or to any ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code, and (y) has taken any action, or omitted to take any action, that has resulted, or would reasonably be expected to result, in the imposition of a lien under Section 412(n) of the Code or pursuant to ERISA. (v) Except as Previously Disclosed, neither Bancshares nor any of its Subsidiaries has any obligations to provide retiree health and life insurance or other retiree death benefits under any Compensation and Benefit Plan, other than benefits mandated by Section 4980B of the Code, and each such Compensation and Benefit Plan may be amended or terminated without incurring liability thereunder. Except as Previously Disclosed, there has been no communication to Employees by Bancshares or any of its Subsidiaries that would reasonably be expected to promise or guarantee such Employees retiree health or life insurance or other retiree death benefits on a permanent basis. (vi) With respect to each Compensation and Benefit Plan, if applicable, Bancshares has provided, or made available to Wachovia, true and complete copies of existing: (A) Compensation and Benefit Plan documents and amendments thereto; (B) trust instruments and insurance contracts; (C) two most recent Forms 5500 filed with the IRS; (D) most recent actuarial report and financial statement; (E) the most recent summary plan description; (F) forms filed with the PBGC (other than for premium payments); (G) most recent determination letter issued by the IRS; (H) any Form 5310 or Form 5330 filed with the IRS; and (I) most recent nondiscrimination tests performed under ERISA and the Code (including 401(k) and 401(m) tests). (vii) Except as Previously Disclosed, the consummation of the transactions contemplated by this Agreement would not, directly or indirectly (including, without limitation, as a result of any termination of employment prior to or following the Effective Time) reasonably be expected to (A) entitle any Employee, Consultant or Director to any payment (including severance pay or similar compensation) or any increase in compensation, (B) result in the vesting or acceleration of any benefits under any Compensation and Benefit Plan or (C) result in any material increase in benefits payable under any Compensation and Benefit Plan. -20- (viii) Neither Bancshares nor any of its Subsidiaries maintains any compensation plans, programs or arrangements the payments under which would not reasonably be expected to be deductible as a result of the limitations under Section 162(m) of the Code and the regulations issued thereunder. (ix) Except as Previously Disclosed, as a result, directly or indirectly, of the transactions contemplated by this Agreement (including, without limitation, as a result of any termination of employment prior to or following the Effective Time), none of Wachovia, Bancshares or the Surviving Corporation, or any of their respective Subsidiaries will be obligated to make a payment that would be characterized as an "excess parachute payment" to an individual who is a "disqualified individual" (as such terms are defined in Section 280G of the Code), without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. (n) Labor Matters. Neither Bancshares nor any of its Subsidiaries is a party to or is bound by any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization, nor is Bancshares or any of its Subsidiaries the subject of a proceeding asserting that it or any such Subsidiary has committed an unfair labor practice (within the meaning of the National Labor Relations Act) or seeking to compel Bancshares or any such Subsidiary to bargain with any labor organization as to wages or conditions of employment, nor is there any strike or other labor dispute involving it or any of its Subsidiaries pending or, to Bancshares's knowledge, threatened, nor is Bancshares aware of any activity involving its or any of its Subsidiaries' employees seeking to certify a collective bargaining unit or engaging in other organizational activity. (o) Takeover Laws; Dissenters Rights. Bancshares has taken all action required to be taken by it in order to exempt this Agreement, the Bank Merger Agreement, the Stock Option Agreement and the transactions contemplated hereby and thereby from, and this Agreement, the Bank Merger Agreement, the Stock Option Agreement and the transactions contemplated hereby and thereby are exempt from, the requirements of any "moratorium", "control share", "fair price" "affiliate transaction", "business combination" or other antitakeover laws and regulations of any state (collectively, "Takeover Laws"), including, without limitation, the State of Florida, and including, without limitation, Sections 607.0901 and 607.0902 of the FBCA. Holders of Bancshares Common Stock do have dissenters rights in connection with the Merger. which rights and the procedure for exercise of which will be fully disclosed in the Proxy Statement. (p) Environmental Matters. Except as Previously Disclosed, to the knowledge of Bancshares and its Subsidiaries, neither the conduct nor operation of Bancshares or its -21- Subsidiaries nor any condition of any property presently or previously owned, leased or operated by any of them (including, without limitation, in a fiduciary or agency capacity), or on which any of them holds a Lien, violates or violated Environmental Laws and no condition has existed or event has occurred with respect to any of them or any such property that, with notice or the passage of time, or both, is reasonably likely to result in liability under Environmental Laws. Except as Previously Disclosed, neither Bancshares nor any of its Subsidiaries has received any notice from any person or entity that Bancshares or its Subsidiaries or the operation or condition of any property ever owned, leased, operated, or held as collateral or in a fiduciary capacity by any of them are or were in violation of or otherwise are alleged to have liability under any Environmental Law, including, but not limited to, responsibility (or potential responsibility) for the cleanup or other remediation of any pollutants, contaminants, or hazardous or toxic wastes, substances or materials at, on, beneath, or originating from any such property. (q) Tax Matters. Except as Previously Disclosed, (i) all Tax Returns that are required to be filed by or with respect to Bancshares and its Subsidiaries have been duly filed, (ii) all Taxes shown to be due on the Tax Returns referred to in clause (i) have been paid in full, (iii) no audits of or to Bancshares knowledge inquiries into the Tax Returns referred to in clause (i) by the Internal Revenue Service or the appropriate state, local or foreign taxing authority are ongoing, (iv) all deficiencies asserted or assessments made as a result of such examinations have been paid in full, (v) no issues that have been raised by the relevant taxing authority in connection with the examination of any of the Tax Returns referred to in clause (i) are currently pending, and (vi) no waivers of statutes of limitation have been given by or requested with respect to any Taxes of Bancshares or its Subsidiaries. Bancshares has made available to Wachovia true and correct copies of the United States federal income Tax Returns filed by Bancshares and its Subsidiaries for each of the three most recent fiscal years ended on or before December 31, 1996. Neither Bancshares nor any of its Subsidiaries has any liability with respect to income, franchise or similar Taxes that accrued on or before the end of the most recent period covered by the Financial Statement in excess of the amounts accrued with respect thereto that are reflected in the Financial Statements. Neither Bancshares nor any of its Subsidiaries has any reason to believe that any conditions exist that might prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. (r) Risk Management Instruments. Bancshares has not entered into any interest rate swaps, caps, floors, option agreements, futures and forward contracts and other similar risk management arrangements, whether entered into for Bancshares's own account, or for the account of one or more of Bancshares's Subsidiaries or their customers. (s) Books and Records. The books and records of Bancshares and its Subsidiaries have been fully, properly and accurately maintained in all material respects, -22- and there are no material inaccuracies or discrepancies of any kind contained or reflected therein, and they fairly present the financial position of Bancshares and its Subsidiaries. (t) Insurance. Bancshares's Disclosure Schedule sets forth all of the insurance policies, binders, or bonds maintained by Bancshares or its Subsidiaries or under which Bancshares pays the premiums ("Insurance Policies"). Bancshares and its Subsidiaries are insured with reputable insurers against such risks and in such amounts as the management of Bancshares reasonably has determined to be prudent in accordance with industry practices. All the Insurance Policies are in full force and effect; Bancshares and its Subsidiaries are not in material default thereunder; and all claims thereunder have been filed in due and timely fashion. (u) Asset Classification. Bancshares has Previously Disclosed a list, accurate and complete in all material respects, of the aggregate amounts of loans, extensions of credit or other assets of it and its Subsidiaries that have been classified by it as of September 30, 1997 (the "Asset Classification"); and no amounts of loans, extensions of credit or other assets that have been classified as of September 30, 1997 by any Regulatory Authority as "Other Loans Specially Mentioned", "Substandard", "Doubtful", "Loss", or words of similar import are excluded from the amounts disclosed in the Asset Classification, other than amounts of loans, extensions of credit or other assets that were charged off by it or a Subsidiary prior to September 30, 1997. (v) Related Party Transactions. Bancshares has Previously Disclosed a list, accurate and complete in all material respects, of all loans, extensions of credit and contracts between Bancshares or its Subsidiaries and any officer or director of Bancshares or its Subsidiaries or the spouse, parents, children or siblings of any such officer or director. (w) Prior Actions. Except as Previously Disclosed Bancshares and American have not during the period beginning June 1, 1995 (i) repurchased any Bancshares Common Stock or Rights, (ii) issued any Bancshares Common Stock or Rights, (iii) declared or paid a dividend in Bancshares Common Stock or (iv) implemented any significant increase or decrease in cash dividends inconsistent with prior practices. (x) Disclosure. The representations and warranties contained in this Section 5.3 do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 5.3 not misleading. 5.4. Representations and Warranties of Wachovia. Subject to Sections 5.1 and 5.2 and except as Previously Disclosed in a paragraph of its Disclosure Schedule corresponding to the relevant paragraph below, Wachovia hereby represents and warrants to Bancshares as follows: -23- (a) Organization, Standing and Authority. Wachovia is duly organized, validly existing and in good standing under the laws of the State of North Carolina. Wachovia is duly qualified to do business and is in good standing in the states of the United States and foreign jurisdictions where its ownership or leasing of property or assets or the conduct of its business requires it to be so qualified. Wachovia has in effect all federal, state, local, and foreign governmental authorizations necessary for it to own or lease its properties and assets and to carry on its business as it is now conducted. (b) Wachovia Stock. (i) As of the date hereof, the authorized capital stock of Wachovia consists solely of 500,000,000 shares of Wachovia Common Stock, of which ___________ shares were outstanding as of November 14, 1997 and 50,000,000 shares of Wachovia Preferred Stock, of which no shares were outstanding as of the date hereof. As of the date hereof, except as set forth in its Disclosure Schedule and except in connection with its publicly disclosed acquisitions, Wachovia does not have any Rights issued or outstanding with respect to Wachovia Stock, and Wachovia does not have any commitment to authorize, issue or sell any Wachovia Stock or Rights, except pursuant to this Agreement. (ii) The shares of Wachovia Common Stock to be issued in exchange for shares of Bancshares Common Stock in the Merger, when issued in accordance with the terms of this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. (c) Subsidiaries. Each of Wachovia's Significant Subsidiaries has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization, and is duly qualified to do business and in good standing in the jurisdictions where its ownership or leasing of property or the conduct of its business requires it to be so qualified and it owns, directly or indirectly, all the issued and outstanding equity securities of each of its Significant Subsidiaries. (d) Corporate Power. Wachovia and each of its Significant Subsidiaries has the corporate power and authority to carry on its business as it is now being conducted and to own all its properties and assets; and Wachovia and 1st United each has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and the Bank Merger Agreement and to consummate the transactions contemplated hereby and thereby. (e) Corporate Authority. This Agreement and the transactions contemplated hereby have been authorized by all necessary corporate action of Wachovia and its Board of Directors and does not require any vote of stockholders. This Agreement and the Bank Merger Agreement are valid and legally binding agreements of Wachovia and 1st United respectively enforceable in accordance with their terms (except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent -24- transfer and similar laws of general applicability relating to or affecting creditors' rights or by general equity principles). (f) Regulatory Approvals; No Defaults. (i) No consents or approvals of, or filings or registrations with, any court, administrative agency or commission or other governmental authority or instrumentality or with any third party are required to be made or obtained by Wachovia or any of its Subsidiaries in connection with the execution, delivery or performance by Wachovia of this Agreement or to consummate the Merger except for (A) the filing of applications and notices, as applicable, with the federal and state banking authorities; (B) approval of the listing on the NYSE of Wachovia Common Stock to be issued in the Merger; (C) the filing and declaration of effectiveness of the Registration Statement or the receipt by Wachovia of the Fairness Order; (D) the filing of articles of merger with the North Carolina Secretary pursuant to the NCBCA and the Florida Department of State pursuant to the FBCA; (E) such filings as are required to be made or approvals as are required to be obtained under the securities or "Blue Sky" laws of various states in connection with the issuance of Wachovia Stock in the Merger; and (F) receipt of the approvals set forth in Section 7.1(b). As of the date hereof, Wachovia is not aware of any reason why the approvals set forth in Section 7.1(b) will not be received without the imposition of a condition, restriction or requirement of the type described in Section 7.1(b). (ii) Subject to receipt of the regulatory approvals referred to in the preceding paragraph and expiration of the related waiting periods, and required filings or satisfaction of the requirements for exemptions from filing under federal and state securities laws, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (A) constitute a breach or violation of, or a default under, or give rise to any Lien, any acceleration of remedies or any right of termination under, any law, rule or regulation or any judgment, decree, order, governmental permit or license, or agreement, indenture or instrument of Wachovia or of any of its Subsidiaries or to which Wachovia or any of its Subsidiaries or properties is subject or bound, (B) constitute a breach or violation of, or a default under, the certificate of incorporation or by-laws (or similar governing documents) of Wachovia or any of its Subsidiaries, or (C) require any consent or approval under any such law, rule, regulation, judgment, decree, order, governmental permit or license, agreement, indenture or instrument. (g) Financial Reports and SEC Documents; Material Adverse Effect. (i) Wachovia's Annual Reports on Form 10K and all other reports, registration statements or information statements filed or to be filed by it or any of its Subsidiaries subsequent to December 31, 1994 under the Securities Act or under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed or to be filed (collectively, the "SEC Documents"), as of the date filed, (A) complied or will comply in all material respects as to form with the applicable requirements under the Securities Act or the Exchange Act, as the case may -25- be, and (B) did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each of the balance sheets contained in or incorporated by reference into any such SEC Document (including the related notes and schedules thereto) fairly presents, or will fairly present, the financial position of Wachovia and its Subsidiaries as of its date, and each of the statements of income and changes in stockholders' equity and cash flows or equivalent statements in such SEC Documents (including any related notes and schedules thereto) fairly presents, or will fairly present, the results of operations, changes in stockholders' equity and changes in cash flows, as the case may be, of Wachovia and its Subsidiaries for the periods to which they relate, in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except in each case as may be noted therein, subject to normal year-end audit adjustments in the case of unaudited statements. (ii) Since December 31, 1996, no event has occurred or circumstance arisen that, individually or taken together with all other facts, circumstances and events (described in any paragraph of Section 5.4 or otherwise), is reasonably likely to have a Material Adverse Effect with respect to Wachovia. (h) Litigation; Regulatory Action. (i) No litigation, claim or other proceeding before any Governmental Authority is pending against Wachovia or any of its Subsidiaries and, to the best of Wachovia's knowledge, no such litigation, claim or other proceeding has been threatened. (ii) Neither Wachovia nor any of its Subsidiaries or properties is a party to or is subject to any order, decree, agreement, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, or extraordinary supervisory letter from a Regulatory Authority, nor has Wachovia or any of its Subsidiaries been advised by a Regulatory Authority that such agency is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, decree, agreement, memorandum of understanding, commitment letter, supervisory letter or similar submission. (i) Compliance with Laws. Wachovia and each of its Subsidiaries: (i) in the conduct of its business, is in compliance with all applicable federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto or to the employees conducting such businesses, including, without limitation, the Equal Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act and all other applicable fair lending laws and other laws relating to discriminatory business practices; and -26- (ii) has all permits, licenses, authorizations, orders and approvals of, and has made all filings, applications and registrations with, all Governmental Authorities that are required in order to permit them to conduct their businesses substantially as presently conducted; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect and, to the best of its knowledge, no suspension or cancellation of any of them is threatened. (j) No Brokers. No action has been taken by Wachovia that would give rise to any valid claim against any party hereto for a brokerage commission, finder's fee or other like payment with respect to the transactions contemplated by this Agreement. (k) Tax Treatment. As of the date hereof, Wachovia has no reason to believe that any conditions exist that might prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. (l) Disclosure. The representations and warranties contained in this Section 5.4 do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Section 5.4 not misleading. (m) Transferability. The offer and sale of Wachovia Common Stock constituting the Merger Consideration will either be registered under the Securities Act pursuant to the Registration Statement or exempt from such registration pursuant to the Exemption. If such Wachovia Common Stock is offered and sold pursuant to the Exemption, it will be transferable under applicable Federal securities laws as set forth in SEC Staff Legal Bulletin #3 (CF) dated July 25, 1997. ARTICLE 6. Covenants 6.1. Reasonable Best Efforts. Subject to the terms and conditions of this Agreement, each of Bancshares and Wachovia agrees to use its reasonable best efforts in good faith to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or desirable, or advisable under applicable laws, so as to permit consummation of the Merger as promptly as practicable and otherwise to enable consummation of the transactions contemplated hereby and shall cooperate fully with the other party hereto to that end (it being understood that any amendments to the Registration Statement or the Offering Circular or a resolicitation of proxies as a consequence of an acquisition or other agreement involving Wachovia or any of its Subsidiaries shall not violate this covenant). -27- 6.2. Stockholder Approvals. Bancshares agrees to take, in accordance with applicable law and its articles of incorporation and by-laws, all action necessary to convene an appropriate meeting of stockholders of Bancshares to consider and vote upon the approval and adoption of this Agreement and any other matters required to be approved by Bancshares's stockholders for consummation of the Merger (including any adjournment or postponement, the "Bancshares Meeting") as promptly as practicable after the Fairness Order is obtained or the Registration Statement is declared effective. Except to the extent legally required for the discharge by the Bancshares Board of its fiduciary duties as advised in writing by its counsel, the Bancshares Board shall recommend such approval, and Bancshares shall take all reasonable, lawful action to solicit such approval by its stockholders. At the request of Wachovia, Bancshares will utilize a professional proxy solicitation firm to assist it in procuring the necessary stockholder vote. 6.3. Registration Statement/Exemption. (a) Wachovia, in Wachovia's sole discretion, agrees to either (i) prepare a registration statement on Form S-4 (the "Registration Statement") to be filed by Wachovia with the SEC in connection with the issuance of Wachovia Stock in the Merger (including the proxy statement and prospectus and other proxy solicitation materials of Bancshares constituting a part thereof (the "Proxy Statement") and all related documents) or (ii) take such steps as are necessary to qualify the Wachovia Stock to be issued in the Merger for an exemption (the "Exemption") from registration with the SEC pursuant to Section 3(a)(10) of the Securities Act including, without limitation, a determination by the Florida Comptroller of the fairness of the Merger and the Bank Merger to the shareholders of Bancshares (the "Fairness Order") and prepare an offering circular (including the Proxy Statement (the "Offering Circular")) . Each of the parties hereto agrees to cooperate, and to cause its Subsidiaries to cooperate, with the other, its counsel and its accountants, in preparation of the Registration Statement, Proxy Statement and Offering Circular and, if chosen by Wachovia, in the process of obtaining the Fairness Order and the Exemption. If Wachovia elects to file a Registration Statement, Wachovia agrees to file the Registration Statement with the SEC as soon as reasonably practicable. Each of Bancshares and Wachovia and their subsidiaries agrees to use all reasonable efforts to cause the Fairness Order and Exemption to be obtained or the Registration Statement to be declared effective under the Securities Act as promptly as reasonably practicable after filing thereof. Wachovia also agrees to use all reasonable efforts to obtain all necessary state securities law or "Blue Sky" permits and approvals required to carry out the transactions contemplated by this Agreement. Bancshares agrees to furnish to Wachovia all information concerning Bancshares, its Subsidiaries, officers, directors and stockholders as may be reasonably requested in connection with the foregoing. (b) Each of Bancshares and Wachovia agrees, as to itself and its Subsidiaries, that none of the information supplied or to be supplied by it for inclusion or incorporation by reference in (i) the Registration Statement will, at the time the Registration Statement and each amendment or supplement thereto, if any, becomes effective under the Securities Act, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the Offering Circular and/or Proxy Statement and any amendment or supplement thereto will, at the date of mailing to -28- stockholders and at the time of the Bancshares Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading or any statement which, in the light of the circumstances under which such statement is made, will be false or misleading with respect to any material fact, or which will omit to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier statement in the Proxy Statement or any amendment or supplement thereto. Each of Bancshares and Wachovia further agrees that if it shall become aware prior to the Effective Date of any information furnished by it that would cause any of the statements in the Offering Circular and/or Proxy Statement to be false or misleading with respect to any material fact, or to omit to state any material fact necessary to make the statements therein not false or misleading, to promptly inform the other party thereof and to take the necessary steps to correct the Proxy Statement. (a) Wachovia agrees to advise Bancshares, promptly after Wachovia receives notice thereof, of the time when the Fairness Order has been obtained or the Registration Statement has become effective or any supplement or amendment has been filed, of the issuance of any stop order or the suspension of the qualification of Wachovia Stock for offering or sale in any jurisdiction, of the initiation or threat of any proceeding for any such purpose, or of any request by the SEC for the amendment or supplement of the Registration Statement or for additional information. 6.4. Press Releases. Each of Bancshares and Wachovia agrees that it will not, without the prior approval of the other party, issue any press release or written statement for general circulation relating to the transactions contemplated hereby, except as otherwise required by applicable law or regulation or NYSE rules. 6.5. Access; Information. (a) Each of Bancshares and Wachovia agrees that upon reasonable notice and subject to applicable laws relating to the exchange of information, it shall afford the other party and the other party's officers, employees, counsel, accountants and other authorized representatives, such access during normal business hours throughout the period prior to the Effective Time to the books, records (including, without limitation, tax returns and work papers of independent auditors), properties, personnel and to such other information as any party may reasonably request and, during such period, it shall furnish promptly to such other party (i) a copy of each material report, schedule and other document filed by it pursuant to the requirements of federal or state securities or banking laws, and (ii) all other information concerning the business, properties and personnel of it as the other may reasonably request. (b) Each agrees that it will not, and will cause its representatives not to, use any information obtained pursuant to this Section 6.5 (as well as any other information obtained prior to the date hereof in connection with the entering into of this Agreement) for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. Subject to the requirements of law, each party will keep confidential, and will cause its representatives to keep confidential, all information and documents -29- obtained pursuant to this Section 6.5 (as well as any other information obtained prior to the date hereof in connection with the entering into of this Agreement) unless such information (i) was already known to such party, (ii) becomes available to such party from other sources not known by such party to be bound by a confidentiality obligation, (iii) is disclosed with the prior written approval of the party to which such information pertains or (iv) is or becomes readily ascertainable from published information or trade sources. In the event that this Agreement is terminated or the transactions contemplated by this Agreement shall otherwise fail to be consummated, each party shall promptly cause all copies of documents or extracts thereof containing information and data as to another party hereto to be returned to the party which furnished the same. No investigation by either party of the business and affairs of the other shall affect or be deemed to modify or waive any representation, warranty, covenant or agreement in this Agreement, or the conditions to either party's obligation to consummate the transactions contemplated by this Agreement. 6.6. Acquisition Proposals. Bancshares agrees that neither it nor any of its Subsidiaries nor any of the respective officers and directors of Bancshares or its Subsidiaries shall, and Bancshares shall direct and use its reasonable best efforts to cause its employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, initiate, solicit or encourage, directly or indirectly, any enquiries or the making of any proposal or offer (including, without limitation, any proposal or offer to stockholders of Bancshares) with respect to a merger, consolidation or similar transaction involving, or any purchase of all or any significant portion of the assets or any equity securities of, Bancshares or its Significant Subsidiary (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or, except to the extent legally required for the discharge by the Bancshares Board of its fiduciary duties as advised in writing by its counsel, engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to implement an Acquisition Proposal. Bancshares shall immediately cease and cause to be terminated any activities, discussions or negotiations conducted prior to the date of this Agreement with any parties other than Wachovia with respect to any of the foregoing and shall use its reasonable best efforts to enforce any confidentiality or similar agreement relating to an Acquisition Proposal. Bancshares shall promptly (within 24 hours) advise Wachovia following the receipt by Bancshares of any Acquisition Proposal and the substance thereof (including the identity of the person making such Acquisition Proposal), and advise Wachovia of any developments with respect to such Acquisition Proposal immediately upon the occurrence thereof. 6.7. Affiliate Agreements. (a) Not later than the 15th day prior to the mailing of the Proxy Statement, Bancshares shall deliver to Wachovia a schedule of each person that, to the best of its knowledge, is or is reasonably likely to be, as of the date of the Bancshares Meeting, deemed to be an "affiliate" of Bancshares (each, an "Bancshares Affiliate") as that term is used in Rule 145 under the Securities Act or SEC Accounting Series Releases 130 and 135. -30- (b) Bancshares shall use its reasonable best efforts to cause each person who may be deemed to be an Bancshares Affiliate, to execute and deliver to Wachovia on or before the date of mailing of the Proxy Statement an agreement in form and substance reasonably satisfactory to Wachovia. 6.8. Takeover Laws. No party hereto shall take any action that would cause the transactions contemplated by this Agreement, the Bank Merger Agreement or the Stock Option Agreement to be subject to requirements imposed by any Takeover Law and each of them shall take all necessary steps within its control to exempt (or ensure the continued exemption of) the transactions contemplated by this Agreement from, or if necessary challenge the validity or applicability of, any applicable Takeover Law, as now or hereafter in effect. 6.9. Certain Policies. Prior to the Effective Date, Bancshares shall, consistent with generally accepted accounting principles and on a basis mutually satisfactory to it and Wachovia, modify and change its loan, litigation and real estate valuation policies and practices (including loan classifications and levels of reserves) so as to be applied on a basis that is consistent with those of Wachovia; provided, however, that Bancshares shall not be obligated to book any accruals earlier than 7 days prior to closing and take any other such action pursuant to this Section 6.9 unless and until Wachovia acknowledges that all conditions to its obligation to consummate the Merger have been satisfied. Prior to the Effective Time all accruals for compensation and benefit plans will be made in accordance with generally accepted accounting principles and the retirement bonus to William B. Allender will be paid. The July, 1998 portion of the 25th Anniversary Bonus to be paid to employees and officers of Bancshares who are employees or officers on the date of this Agreement will be paid by Wachovia to the Bancshares employees or officers in July, 1998 if the employee or officer is still employed by Wachovia at that time or at such earlier time as the employment of that employee or officer is terminated by Wachovia, in which event the December, 1997 and July, 1998 installments of the 25th Anniversary Bonus will be credited against any severance benefits to which the employee or officer might otherwise be entitled under Wachovia's policies. 6.10. NYSE Listing. Wachovia agrees to use its reasonable best efforts to list, prior to the Effective Date, on the NYSE, subject to official notice of issuance, the shares of Wachovia Common Stock to be issued to the holders of Bancshares Common Stock in the Merger. 6.11. Regulatory Applications. (a) Wachovia and Bancshares and their respective Subsidiaries shall cooperate and use their respective reasonable best efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all third parties and Governmental Authorities necessary to consummate the transactions contemplated by this Agreement. Each of Wachovia and Bancshares shall have the right to review in advance, and to the extent practicable each will consult with the other, in each case subject to applicable laws relating to the exchange of information, with respect to, all material -31- written information submitted to any third party or any Governmental Authority in connection with the transactions contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto agrees to act reasonably and as promptly as practicable. Each party hereto agrees that it will consult with the other party hereto with respect to the obtaining of all material permits, consents, approvals and authorizations of all third parties and Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement and each party will keep the other party appraised of the status of material matters relating to completion of the transactions contemplated hereby. (b) Each party agrees, upon request, to furnish the other party with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with any filing, notice or application made by or on behalf of such other party or any of its Subsidiaries to any third party or Governmental Authority. 6.12. Indemnification. (a) Following the Effective Date and for a period of six years thereafter, Wachovia shall indemnify, defend and hold harmless the present directors and officers of Bancshares and its Subsidiaries (each, an "Indemnified Party") against all costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") incurred and advance legal expenses incurred by an Indemnified Party in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement) to the fullest extent that Bancshares is permitted to indemnify (and advance expenses to) its directors and officers under the laws of the State of Florida, the Bancshares Certificate and the Bancshares By-Laws as in effect on the date hereof; provided that any determination required to be made with respect to whether an officer's or director's conduct complies with the standards set forth under Florida law, the Bancshares Certificate and the Bancshares By-Laws shall be made by independent counsel (which shall not be counsel that provides material services to Wachovia) selected by Wachovia and reasonably acceptable to such officer or director; and provided, further, that in the absence of applicable judicial precedent to the contrary, such counsel, in making such determination, shall presume such officer's or director's conduct complied with such standard and Wachovia shall have the burden to demonstrate that such officer's or director's conduct failed to comply with such standard. (b) For a period of three years from the Effective Time, Wachovia shall use its reasonable best efforts to provide that portion of director's and officer's liability insurance that serves to reimburse the present and former officers and directors of Bancshares or any of its Subsidiaries (determined as of the Effective Time) (as opposed to Bancshares) with respect to claims against such directors and officers arising from facts or events which occurred before the Effective Time, which insurance shall contain at least the same coverage and amounts, and contain terms and conditions no less advantageous, as that coverage currently provided by Bancshares; provided, however, that -32- in no event shall Wachovia be required to expend for coverage for the entire three year period more than 300 percent of the current amount expended by Bancshares per year (the "Insurance Amount") to maintain or procure such directors and officers insurance coverage; provided, further, that if Wachovia is unable to maintain or obtain the insurance called for by this Section 6.12(b), Wachovia shall use its reasonable best efforts to obtain as much comparable insurance as is available for the Insurance Amount; provided, further, that officers and directors of Bancshares or any Subsidiary may be required to make application and provide customary representations and warranties to Wachovia's insurance carrier for the purpose of obtaining such insurance. (c) Any Indemnified Party wishing to claim indemnification under Section 6.12(a), upon learning of any claim, action, suit, proceeding or investigation described above, shall promptly notify Wachovia thereof; provided that the failure so to notify shall not affect the obligations of Wachovia under Section 6.12(a) unless and to the extent that Wachovia is actually prejudiced as a result of such failure. (d) If Wachovia or any of its successors or assigns shall consolidate with or merge into any other entity and shall not be the continuing or surviving entity of such consolidation or merger or shall transfer all or substantially all of its assets to any entity, then and in each case, proper provision shall be made so that the successors and assigns of Wachovia shall assume the obligations set forth in this Section 6.12. 6.13. Benefit Plans. As soon as practicable following the Effective Time (but, with respect to tax qualified employee pension plans within the meaning of Section 3(2) of ERISA for which earlier participation is not possible under the plan documents, in no event later than July 1, 1998 if the Effective Time occurs prior to July 1, 1998) (i) Wachovia will provide employees of Bancshares who become employees of Wachovia with employee benefit plans no less favorable in the aggregate than those provided to similarly situated employees of Wachovia; (ii) any such employees will receive credit for service with Bancshares or any of its Subsidiaries or predecessors prior to the Effective Time for the purpose of determining eligibility and vesting; (iii) Wachovia shall cause any and all pre-existing condition limitations (to the extent such limitations do not apply to a pre-existing condition under the Bancshares Compensation and Benefits Plans) and eligibility waiting periods under group health plans to be waived with respect to such participants and their eligible dependents; and (iv) Wachovia shall extend its Retirement Medical Plan to employees of Bancshares who become employees of Wachovia and retire following December 31, 1997 or the Effective Date, if later; and would qualify for retirement under the Bancshares Retirement Savings Plan and; provided, further, that a maximum of 20 years of service with Bancshares shall be recognized for benefit accrual purposes under the Retirement Medical Plan. All discretionary awards and benefits under any employee benefit plans of Wachovia shall be subject to the discretion of the persons or committee administering such plans. Wachovia shall honor, pursuant to the terms of the Bancshares Compensation and Benefit Plans Previously Disclosed, all employee benefit obligations to current and former employees of Bancshares under such Plans. -33- 6.14. Accountants' Letters. Each of Bancshares and Wachovia shall use its reasonable best efforts to cause to be delivered to the other party, and to Wachovia's directors and officers who sign the Registration Statement, letters of Lexow, Brackins, Koffler, CPA independent auditors for Bancshares and Ernst & Young, LLP, independent auditors for Wachovia, dated (i) the date on which the Registration Statement shall become effective and (ii) a date shortly prior to the Effective Date, and addressed to such other party, and such directors and officers, in form and substance customary for "comfort" letters delivered by independent accountants in accordance with Statement of Accounting Standards No. 72. 6.15. Notification of Certain Matters. Each of Bancshares and Wachovia shall give prompt notice to the other of any fact, event or circumstance known to it that (i) is reasonably likely, individually or taken together with all other facts, events and circumstances known to it, to result in any Material Adverse Effect with respect to it or (ii) would cause or constitute a material breach of any of its representations, warranties, covenants or agreements contained herein. 6.16. Dividend Coordination. If necessary to avoid missing a dividend payment by Bancshares in accordance with its regular dividend payment schedule, the Board of Directors of Bancshares may cause its regular quarterly dividend record dates and payment dates for Bancshares Common Stock to be the same as Wachovia's regular quarterly dividend record dates and payment dates for Wachovia Common Stock, and Bancshares shall not thereafter change its regular dividend payment dates and record dates. 6.17. Noncompetition Agreements. Simultaneously with the execution of this Agreement, Bancshares shall cause each director and Officer of Bancshares, other than Robert Butler during the period he is incapacitated, and its Significant Subsidiary ranking above Senior Vice President on the date of this Agreement to execute and deliver to Wachovia a noncompetition agreement in the form attached hereto as Exhibit "E" ARTICLE 7. Conditions to Consummation of the Merger 7.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each of Wachovia and Bancshares to consummate the Merger is subject to the fulfillment or written waiver by Wachovia and Bancshares prior to the Effective Time of each of the following conditions: (a) Stockholder Approval. This Agreement shall have been duly adopted by the affirmative vote of the holders of a number of the outstanding shares of Bancshares Common Stock entitled to vote thereon in accordance with Section 607.1103 of the -34- FBCA, other applicable law and the Bancshares Certificate and the Bancshares By-Laws sufficient to approve the plan of merger and the Merger. (b) Regulatory Approvals. All regulatory approvals required to consummate the transactions contemplated hereby, including, without limitation, the Bank Merger, shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired and no such approvals shall contain any conditions, restrictions or requirements which the Wachovia Board reasonably determines in good faith would (i) following the Effective Time, have a Material Adverse Effect on the Surviving Corporation and its Subsidiaries taken as a whole or (ii) reduce the benefits of the transactions contemplated hereby to such a degree that Wachovia would not have entered into this Agreement had such conditions, restrictions or requirements been known at the date hereof. (c) No Injunction. No Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, judgment, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and prohibits consummation of the transactions contemplated by this Agreement. (d) Registration Statement/Exemption. The Fairness Order has been entered or the Registration Statement shall have become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. (e) Blue Sky Approvals. All permits and other authorizations under state securities laws necessary to consummate the transactions contemplated hereby and to issue the shares of Wachovia Common Stock to be issued in the Merger shall have been received and be in full force and effect. (f) Listing. The shares of Wachovia Common Stock to be issued in the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance. 7.2. Conditions to Obligation of Bancshares. The obligation of Bancshares to consummate the Merger is also subject to the fulfillment or written waiver by Bancshares prior to the Effective Time of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Wachovia set forth in this Agreement shall be true and correct as of the date of this, after giving effect to Sections 5.1 and 5.2, Agreement and as of the Effective Date as though made on and as of the Effective Date (except that representations and warranties that by -35- their terms speak as of the date of this Agreement or some other date shall be true and correct as of such date), and Bancshares shall have received a certificate, dated the Effective Date, signed on behalf of Wachovia by the Chief Executive Officer and the Chief Financial Officer of Wachovia to such effect. (b) Performance of Obligations of Wachovia. Wachovia shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Effective Time, and Bancshares shall have received a certificate, dated the Effective Date, signed on behalf of Wachovia by the Chief Executive Officer and the Chief Financial Officer of Wachovia to such effect. (c) Opinion of Bancshares's Counsel. Bancshares shall have received an opinion of Luse, Lehman, Gorman, Pomerenk & Schick, counsel to Bancshares, to the effect that, on the basis of facts, representations and assumptions set forth in such opinion, (i) the Merger constitutes a "reorganization" within the meaning of Section 368 of the Code and (ii) no gain or loss will be recognized by stockholders of Bancshares who receive shares of Wachovia Common Stock in exchange for shares of Bancshares Common Stock, except that gain or loss may be recognized as to cash received in lieu of fractional share interests. In rendering its opinion, Luse, Lehman, Gorman, Pomerenk & Schick may require and rely upon representations contained in letters from Bancshares and others. (d) Accountants' Letters. Bancshares shall have received the letters referred to in Section 6.14 from Ernst & Young, LLP, Wachovia's independent auditors. 7.3. Conditions to Obligation of Wachovia. The obligation of Wachovia to consummate the Merger is also subject to the fulfillment or written waiver by Wachovia prior to the Effective Time of each of the following conditions: (a) Representations and Warranties. The representations and warranties of Bancshares set forth in this Agreement, after giving effect to Sections 5.1 and 5.2, shall be true and correct as of the date of this Agreement and as of the Effective Date as though made on and as of the Effective Date (except that representations and warranties that by their terms speak as of the date of this Agreement or some other date shall be true and correct as of such date) and Wachovia shall have received a certificate, dated the Effective Date, signed on behalf of Bancshares by the Chief Executive Officer and the Chief Financial Officer of Bancshares to such effect. (b) Performance of Obligations of Bancshares. Bancshares shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and Wachovia shall have received a certificate, dated the Effective Date, signed on behalf of Bancshares by the Chief Executive Officer and the Chief Financial Officer of Bancshares to such effect. -36- (c) Opinion of Wachovia's Counsel. Wachovia shall have received an opinion of Akerman, Senterfitt & Eidson, P.A., special counsel to Wachovia, dated the Effective Date, to the effect that, on the basis of facts, representations and assumptions set forth in such opinion, the Merger constitutes a reorganization under Section 368 of the Code. In rendering its opinion, Akerman, Senterfitt & Eidson, P.A. may require and rely upon representations contained in letters from Wachovia and others. (d) Accountants' Letters. Wachovia and its directors and officers who sign the Registration Statement shall have received the letters referred to in Section 6.14 from Lexow, Brackins, Koffler, CPA, Bancshares's independent auditors. (e) Bank Merger. The Bank Merger may be effected and is expected to be effected immediately following the Effective Time. ARTICLE 8. Termination 8.1. Termination. This Agreement may be terminated, and the Acquisition may be abandoned: (a) Mutual Consent. At any time prior to the Effective Time, by the mutual consent of Wachovia and Bancshares, if the Board of Directors of Bancshares so determines by vote of a majority of the members of its entire Board and the Chief Executive Officer or the Chief Financial Officer of Wachovia so determines. (b) Breach. At any time prior to the Effective Time, by Wachovia if its Chief Executive Officer or Chief Financial Officer so determines or Bancshares, if its Board of Directors so determines by vote of a majority of the members of its entire Board, in the event of either: (i) a breach by the other party of any representation or warranty contained herein (subject to the standard set forth in Section 5.2), which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach; or (ii) a breach by the other party of any of the covenants or agreements contained herein, which breach cannot be or has not been cured within 30 days after the giving of written notice to the breaching party of such breach, provided that such breach (whether under (i) or (ii)) would be reasonably likely, individually or in the aggregate with other breaches, to result in a Material Adverse Effect. (c) Delay. At any time prior to the Effective Time, by Wachovia if its Chief Executive Officer or Chief Financial Officer so determines or Bancshares, if its Board of Directors so determines by vote of a majority of the members of its entire Board, in the event that the Merger is not consummated by September 30, 1998, except to the extent that the failure of the Merger then to be consummated arises out of or results from the -37- knowing action or inaction of the party seeking to terminate pursuant to this Section 8.01(c). (d) No Approval. By Bancshares if its Chief Executive Officer or Chief Financial Officer so determines or Wachovia, if its Board of Directors so determines by a vote of a majority of the members of its entire Board, in the event (i) the approval of any Governmental Authority required for consummation of the Merger and the other transactions contemplated by this Agreement shall have been denied by final nonappealable action of such Governmental Authority or (ii) the stockholder approval required by Section 7.1(a) herein is not obtained at the Bancshares Meeting. (e) Failure to Recommend, Etc. At any time prior to the Bancshares Meeting, by Wachovia if its Chief Executive Officer or Chief Financial Officer so determines if Bancshares Board shall have failed to make its recommendation referred to in Section 6.2, withdrawn such recommendation or modified or changed such recommendation in a manner adverse in any respect to the interests of Wachovia. 8.2. Effect of Termination and Abandonment. In the event of termination of this Agreement and the abandonment of the Acquisition pursuant to this Article VIII, no party to this Agreement shall have any liability or further obligation to any other party hereunder except (i) as set forth in Section 9.1 and (ii) that termination will not relieve a breaching party from liability for any willful breach of this Agreement giving rise to such termination. ARTICLE 9. Miscellaneous 9.1. Survival. No representations, warranties, agreements and covenants contained in this Agreement shall survive the Effective Time (other than Sections 5.4(m) and 6.12 and this Article IX which shall survive the Effective Time) or the termination of this Agreement if this Agreement is terminated prior to the Effective Time (other than Sections 6.3(b), 6.5(b), 8.2 and this Article IX which shall survive such termination). 9.2. Waiver; Amendment. Prior to the Effective Time, any provision of this Agreement may be (i) waived by the party benefited by the provision, or (ii) amended or modified at any time, by an agreement in writing between the parties hereto executed in the same manner as this Agreement, except that, after the Bancshares Meeting, this Agreement may not be amended if it would violate the FBCA. 9.3. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to constitute an original. -38- 9.4. Governing Law. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of North Carolina applicable to contracts made and to be performed entirely within such State (except to the extent that mandatory provisions of Federal law or of the FBCA are applicable). 9.5. Expenses. Each party hereto will bear all expenses incurred by it in connection with this Agreement and the transactions contemplated hereby, except that printing expenses shall be shared equally between Bancshares and Wachovia. 9.6. Notices. All notices, requests and other communications hereunder to a party shall be in writing and shall be deemed given if personally delivered, telecopied (with confirmation) or mailed by registered or certified mail (return receipt requested) to such party at its address set forth below or such other address as such party may specify by notice to the parties hereto. If to Bancshares, to: Ameribank Bancshares, Inc. 6600 Taft Street Hollywood, FL 33024 Attention: David Cory, President Telephone: (954) 966-9810 Facsimile: (954) 966-4329 With a copy to: Luse, Lehman, Gorman, Pomerenk & Schick 5335 Wisconsin Avenue, N.W., Suite 400 Washington, D.C. 20015 Attention: Kenneth Lehman, Esq. Telephone: (202) 274-2000 Facsimile: (202) 362-2902 If to Wachovia, to: Wachovia Corporation 301 North Main Street Winston-Salem, North Carolina 27101 Attention: Chairman of the Board Telephone: (910) 770-5000 -39- Facsimile: (910) 770-5959 With a copy to: Wachovia Corporation 301 North Main Street Winston-Salem, North Carolina 27101 Attention: Kenneth W. McAllister Telephone: (910) 732-5141 Facsimile: (910) 732-5959 With a copy to: Akerman, Senterfitt & Eidson, P.A. Phillips Point - East Tower 777 South Flagler Drive, Suite 900 West Palm Beach, Florida 33401 Attention: Russell T. Kamradt, Esquire Telephone: (561) 659-5990 Facsimile: (561) 659-6313 With a copy to: Sullivan & Cromwell 125 Broad Street New York, New York 10004 Attention: Mark J. Menting, Esq. Telephone: (212) 558-4000 Facsimile: (212) 558-3588 9.7. Entire Understanding; No Third Party Beneficiaries. This Agreement and the Stock Option Agreement entered into represent the entire understanding of the parties hereto with reference to the transactions contemplated hereby and thereby and this Agreement supersedes any and all other oral or written agreements heretofore made (other than the Stock Option Agreement). Except for Section 6.12, nothing in this Agreement expressed or implied, is intended to confer upon any person, other than the parties hereto or their respective successors, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.8. Interpretation; Effect. When a reference is made in this Agreement to Sections, Exhibits or Schedules, such reference shall be to a Section of, or Exhibit or Schedule to, this -40- Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and are not part of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 9.9. JURY TRIAL. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIMS MADE BETWEEN THEM WHETHER NOW EXISTING OR ARISING IN THE FUTURE, INCLUDING, WITHOUT LIMITATION, ANY AND ALL CLAIMS, DEFENSES, COUNTERCLAIMS, THIRD PARTY CLAIMS AND INTERVENOR'S CLAIMS BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY DOCUMENTS EXECUTED PURSUANT TO THIS AGREEMENT, OR ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE PARTIES HERETO IN CONJUNCTION THEREWITH. * * * IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers, all as of the day and year first above written. AMERIBANK BANCSHARES, INC By:______________________________________ Print Name:______________________________ Title:___________________________________ -41- WACHOVIA CORPORATION By:______________________________________ Print Name:______________________________ Title:___________________________________ AMERICAN BANK OF HOLLYWOOD By:______________________________________ Print Name:______________________________ Title:___________________________________ -42- EX-10.34 3 EXECUTIVE LONG TERM DISABILITY INCOME PLAN ================================================================================ WACHOVIA CORPORATION EXECUTIVE LONG TERM DISABILITY INCOME PLAN ================================================================================ ================ GENERAL OVERVIEW ================ The purpose of the Executive Long Term Disability Income Plan is to provide long term disability income protection more commensurate with the pay levels of the eligible executives. o Eligible executives who elect to participate under the Executive Long Term Disability Income Plan will be afforded with an individual disability insurance policy currently issued by Provident Life and Accident Insurance Company. The amount of coverage provided to an executive who participates under the plan will be 66 2/3% of the base pay plus incentive pay of the covered executive less amounts payable from the Wachovia group long term disability plan. The cost of coverage is paid by Wachovia while the individual is employed. o The policy is owned by the individual executive and in the event the participant terminates employment or retires, the individual may continue the supplemental coverage at their own expense. o Eligible executives who elect to participate in the plan will continue to participate in the Company's group Long Term Disability plan at the 66 2/3% level of coverage. ==================== SPECIFIC INFORMATION ==================== o Eligibility - Executives whose base pay rate equals or exceeds $100,000 for the first time may be presented for eligibility consideration to the Management Resources and Compensation Committee (the "Committee") periodically for confirmation. The Committee may also impose a service requirement. It is anticipated that this periodic review will occur annually, but the Committee reserves the right to request less frequent updates. - Executives who are offered participation and elect to participate would be eligible to participate effective the first of the next calendar year. The Committee reserves the right to permit an earlier effective date for participation under the plan. - If an executive declines to participate, his/her Choice Benefits long term disability coverage will continue unchanged. If at a future time the executive wishes to participate, he/she will have to wait until the next enrollment opportunity. o Coverage - Executives who elect to participate under the Executive Insurance Plan will be afforded an individual long term disability policy covering 66 2/3% of the sum of (1) base compensation and (2) the three year average incentive compensation, less benefits payable from the company's group long term disability plan at the 66 2/3% level of coverage. Coverage in excess of the medical underwriting limit established by the insurance company may require a physical examination. - The executive may elect to continue coverage in the event of retirement or employment is terminated. - If an executive's base pay and/or incentive would warrant the movement into a category with a higher amount of coverage, such a change would be considered at the next enrollment opportunity, but only with the confirmation of the Committee. o Premium Payments - Wachovia is scheduled to pay premiums on behalf of the executive. These annual premiums would be payable while the executive is employed by Wachovia. - The executive may elect to continue coverage at his or her own expense in the event of retirement or termination of employment. - If an executive leaves Wachovia, he/she will be responsible for the ongoing payment of premiums - All premiums paid by Wachovia will be considered as taxable income, and as such, will be subject to withholding throughout the executive's tax year. o Policy Ownership - The executive will be the owner of the policy. - As a result of this ownership, the executive may exercise all options afforded him/her, if any, under the policy. o Underwriting - The plan, as designed, is configured for guaranteed issue up to a limit of $10,000 per month in addition to coverage provided by the company's group disability plan. Underwriting may be required for coverage in excess of this amount up to an overall maximum of $25,000 per month. - However, if an executive declines coverage and later wishes to participate, it is possible that guaranteed issue may not be available and some underwriting may be required. If any additional cost is incurred, as a result of such circumstances, Wachovia reserves the right to only pay for the cost of the policy on a guaranteed issue basis. o Administration - The Committee is hereby designated as the named fiduciary under this plan. The Committee shall have the authority to control and manage the operation and administration of this Plan, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this plan. The Committee shall make all determinations as to the rights to benefits under this Plan in accordance with the claims procedures set forth in Section 503 of ERISA and the regulations thereunder, which procedures are incorporated herein by this reference. o Plan Changes - The Committee reserves the right to amend, modify or terminate the commitment by Wachovia to continue payment of premiums as described above with at least 30 days notice to the affected participants. Effective - October 1, 1997 EX-12 4 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 WACHOVIA CORPORATION RATIO OF EARNINGS TO FIXED CHARGES
(A) Excluding interest on deposits. 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Earnings: Income before income taxes $ 869,119 $ 1,100,308 $ 1,023,290 $ 885,402 $ 834,791 Less capitalized interest (167) -- (1,530) (362) -- Fixed charges 884,806 900,277 885,040 603,157 350,292 ----------- ----------- ----------- ----------- ----------- Earnings as adjusted $ 1,753,758 $ 2,000,585 $ 1,906,800 $ 1,488,197 $ 1,185,083 =========== =========== =========== =========== =========== Fixed charges: Interest on purchased and other short term borrowed funds $ 478,162 $ 482,236 $ 527,765 $ 318,301 $ 206,195 Interest on long-term debt 387,107 399,796 340,211 267,841 125,756 Portion of rents representative of the interest factor (1/3) of rental expense 19,537 18,245 17,064 17,015 18,341 ----------- ----------- ----------- ----------- ----------- Fixed charges $ 884,806 $ 900,277 $ 885,040 $ 603,157 $ 350,292 =========== =========== =========== =========== =========== Ratio of earnings to fixed charges 1.98 X 2.22 X 2.15 X 2.47 X 3.38 X (B) Including interest on deposits: Adjusted earnings from (A) above $ 1,753,758 $ 2,000,585 $ 1,906,800 $ 1,488,197 $ 1,185,083 Add interest on deposits 1,303,549 1,203,739 1,143,179 782,864 796,758 ----------- ----------- ----------- ----------- ----------- Earnings as adjusted $ 3,057,307 $ 3,204,324 $ 3,049,979 $ 2,271,061 $ 1,981,841 =========== =========== =========== =========== =========== Fixed charges: Fixed charges from (A) above $ 884,806 $ 900,277 $ 885,040 $ 603,157 $ 350,292 Interest on deposits 1,303,549 1,203,739 1,143,179 782,864 796,758 ----------- ----------- ----------- ----------- ----------- Adjusted fixed charges $ 2,188,355 $ 2,104,016 $ 2,028,219 $ 1,386,021 $ 1,147,050 =========== =========== =========== =========== =========== Adjusted earnings to adjusted fixed 1.40 X 1.52 X 1.50 X 1.64 X 1.73 X charges
EX-13 5 EXHIBIT 13 Contents - --------------------------------------------------------------------------------
Financial Highlights ...................................................... 2 Wachovia Corporation ...................................................... 3 Selected Year-End Data .................................................... 3 Letter to Shareholders .................................................... 4 Special Section -- Consumer Initiatives ................................... 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 20 Results of Operations -- 1997 vs. 1996 ................................... 21 Shareholders' Equity and Capital Ratios .................................. 40 Fourth Quarter Analysis .................................................. 43 Results of Operations -- 1996 vs. 1995 ................................... 47 Management's Responsibility for Financial Reporting ....................... 49 Report of Independent Auditors ............................................ 49 Financial Statements ...................................................... 50 Six-Year Financial Summaries .............................................. 70 Stock Data ................................................................ 78 Historical Comparative Data ............................................... 80 Supervision and Regulation ................................................ 81 Wachovia Corporation Directors and Officers ............................... 82 Shareholder Information ................................................... 83
FORWARD-LOOKING STATEMENTS - -------------------------------------------------------------------------------- The Private Securities Litigation Reform Act of 1995 evidences Congress' determination that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This Annual Report, including the Letter to Shareholders and the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, the corporation notes that a variety of factors could cause the corporation's actual results and experience to differ materially from the anticipated results or other expectations expressed in the corporation's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, growth projections and results of the corporation's business include, but are not limited to, the growth of the economy, interest rate movements, timely development by the corporation of technology enhancements for its products and operating systems, the impact of competitive products, services and pricing, customer business requirements, Congressional legislation and similar matters. Readers of this report are cautioned not to place undue reliance on forward-looking statements which are subject to influence by the named risk factors and unanticipated future events. Actual results, accordingly, may differ materially from management expectations. 1 Financial Highlights - --------------------------------------------------------------------------------
Percent 1997 1996 Change ------- --------- -------- Earnings and Dividends (thousands, except per share data) Net income (1) ........................................... $ 592,806 $ 757,259 (21.7) Cash dividends paid on common stock ...................... 327,303 305,740 7.1 Payout ratio (total cash dividends / net income) ......... 55.2% 40.4% Net income per common share: Basic ................................................... $ 2.99 $ 3.70 (19.2) Diluted (1) ............................................. $ 2.94 $ 3.65 (19.5) Cash dividends paid per common share (2) ................. $ 1.68 $ 1.52 10.5 Average basic shares outstanding ......................... 198,290 204,889 (3.2) Average diluted shares outstanding ....................... 201,901 207,432 (2.7) Return on average assets (3) ............................. 1.03% 1.36% Return on average shareholders' equity (3) ............... 13.08 16.99 Balance Sheet Data at Year-End (millions, except per share data) Total assets ............................................. $ 65,397 $ 57,229 14.3 Interest-earning assets .................................. 57,335 50,728 13.0 Loans -- net of unearned income .......................... 44,194 38,007 16.3 Deposits ................................................. 42,654 35,322 20.8 Interest-bearing liabilities ............................. 50,100 43,989 13.9 Shareholders' equity ..................................... 5,174 4,608 12.3 Shareholders' equity to total assets ..................... 7.91% 8.05% Risk-based capital ratios: Tier I capital .......................................... 9.18 9.46 Total capital ........................................... 12.10 13.04 Per share: Book value .............................................. $ 25.13 $ 22.90 9.7 Common stock closing price (NYSE) ....................... 81.125 56.500 43.6 Price/earnings ratio (4) ................................ 27.6x 14.8x
(1) Nonrecurring items in 1997 include merger-related charges of $231,175, personal computer impairment charge of $67,202 and investment securities losses of $4,639. Excluding the after-tax impact of these charges, operating net income was $799,929, and operating net income per diluted share was $3.96. (2) Cash dividends per common share are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. (3) Excluding the 1997 after-tax impact of nonrecurring charges of $207,123, returns were 1.39% on assets and 17.65% on shareholders' equity. (4) Price earnings ratio is based on end-of-year stock price and net income per diluted share. Information for years before 1997 represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. Excluding the after-tax impact of nonrecurring charges, the 1997 price earnings ratio was 20.5x. 2 Wachovia Corporation - -------------------------------------------------------------------------------- Wachovia Corporation is an interstate bank holding company providing financial services to consumers and corporations. At December 31, 1997, Wachovia's assets of $65.4 billion and market capitalization of $16.7 billion ranked 17th and 15th in size, respectively, among the 25 largest U.S. banking companies. Wachovia offers credit and deposit services, insurance, investment and trust products, and information services to consumers, primarily in Florida, Georgia, North Carolina, South Carolina and Virginia, and to corporations both in and outside the United States. Consumer products and services are provided through a network of retail branches, ATMs, Wachovia On-Call 24-hour telephone banking, automated Phone Access and internet-based investing and banking at www.wachovia.com. In addition, Wachovia serves consumers nationwide through its credit card business. Wachovia provides global solutions to corporate clients through locations in Chicago, London, New York and S-o Paulo, through representatives in Hong Kong and Tokyo, and through worldwide strategic alliances. Founded in 1879, Wachovia maintains dual headquarters in Winston-Salem, North Carolina, and Atlanta, Georgia. Selected Year-End Data - ---------------------------- - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 -------- -------- ------- ------- ------- --------- Trust assets (millions): Discretionary management ..................... $ 33,568 $ 26,161 $ 22,409 $ 18,122 $ 18,904 $ 17,172 Total ........................................ $129,079 $108,557 $ 97,952 $ 83,973 $ 97,451 $ 90,969 Banking offices: North Carolina ............................... 201 220 219 216 223 222 Virginia ..................................... 341 242 242 228 228 228 Georgia ...................................... 130 123 124 127 129 134 South Carolina ............................... 125 145 146 150 157 158 Florida ...................................... 33 ---- ---- ---- ---- ---- --------- --------- --------- --------- --------- --------- Total ..................................... 830 730 731 721 737 742 ========= ========= ========= ========= ========= ========= Automated banking machines: North Carolina ............................... 423 351 328 297 251 221 Virginia ..................................... 325 221 211 194 195 192 Georgia ...................................... 282 222 204 189 180 173 South Carolina ............................... 272 213 180 166 167 164 Florida ...................................... 6 ---- ---- ---- ---- ---- --------- --------- --------- --------- --------- --------- Total ..................................... 1,308 1,007 923 846 793 750 ========= ========= ========= ========= ========= ========= Employees (full time equivalent) .............. 21,652 19,969 19,642 19,148 18,989 19,499 Common stock shareholders ..................... 55,681 47,892 42,868 43,503 45,838 42,672 Common shares outstanding (thousands) ......... 205,927 201,253 208,341 208,095 208,253 207,789
3 Letter To Shareholders ----------------------------------------------------------------- Dear Wachovia Shareholder The past year was very productive for Wachovia. Core operating earnings grew. Four bank mergers were announced with expansion into Virginia and Florida. Critical investment spending continued, while consumer and corporate banking initiatives produced attractive revenue growth. Year 2000 compliance issues were aggressively addressed. Risk management skills remained sharply honed. Wachovia's stock performed well, producing a total return of 47.4 percent. Wachovians' spirit is trans- forming the company These accomplishments reflect the dedication, enthusiasm and hard work of Wachovians across the company. They have been moving forward while buffeted by a whirlwind of change. They are leaping over hurdles, overcoming obstacles, winning new customers and strengthening relationships with existing ones. This spirit is helping transform Wachovia into a financial service company with a broad product array being sold to a growing base of customers in attractive markets. This positions Wachovia well as the world races toward the new millennium. For the full year, operating earnings were $3.96 per diluted share compared with $3.65 in 1996. Operating net income totaled $799.9 million versus $757.3 million. Operating earnings exclude three special charges taken in the 1997 fourth quarter. They are, on a pretax basis, $231.2 million related to Wachovia's mergers with Central Fidelity Banks, Inc., Jefferson Bankshares and 1st United Bancorp; $67.2 million to dispose of personal computer hardware and software in order to adopt a company-wide distributed technology platform; and $4.6 million in losses from the sale of investment securities. The net impact of all three charges on an after-tax basis was $207.1 million or $1.02 per diluted share for the full year. On a core operating basis, Wachovia's return on shareholders' equity was 17.6 percent for 1997 and return on assets was 1.39 percent compared with five-year averages of 17.0 percent and 1.37 percent, respectively. Average common equity to assets was 7.87 percent. Wachovia's historical performance results have been restated for the pooling-of-interests merger with Central Fidelity. At December 31, 1997, nonperforming assets were .29 percent of loans and foreclosed property. The corporation's reserve coverage of nonperforming loans was 538 percent. The corporation's overhead or efficiency ratio on a core operating basis was 53.2 percent for the year. Wachovia's core performance in these key measures compares favorably relative to its industry peers. Common stock's total return is 47.4 percent The total return on Wachovia's common stock, including price appreciation and dividends, was 47.4 per cent for 1997. This compares with 46.2 percent for the Keefe, Bruyette & Woods Index of 50 money center and regional banks and 33.4 percent for the Standard & Poor's 500 Index. The respective five-year compound annual rates of growth were 22.9 percent, 27.1 percent and 20.3 percent. The special charges taken in the fourth quarter were deliberate and forward-looking moves which provide a stronger foundation for the future. The mergers position Wachovia in significant new markets with attractive customer households. Adoption of a common distributed technology platform facilitates 4 Letter to Shareholders ----------------------------------------------------------------- improved employee communication and more efficient desktop maintenance and support across our expanding franchise. The sale of investment securities will help restructure the portfolio for higher yields. Mergers enhance business franchise The single most important strategic development for Wachovia in 1997 was expansion into Virginia and Florida. The Jefferson and Central Fidelity mergers were announced in June, consummated in October and December, respectively, and full consolidation of these Virginia banks with Wachovia systems is expected in late March 1998. Wachovia's merger with 1st United Bancorp, headquartered in Boca Raton, Florida, was announced in August and consummated in November. The acquisition of Ameribank Bancshares of Hollywood, Florida, announced in November, is scheduled for completion in early 1998. We are delighted to welcome these fine organizations to Wachovia. With these mergers, Wachovia has added over 700,000 Virginia and Florida households to its franchise in the Carolinas and Georgia, gained a major deposit market share in five of Virginia's six largest MSAs, established a presence in one of Florida's most attractive markets and added almost $14 billion in assets. Exciting results achieved with initiatives The Virginia and Florida markets are particularly fertile fields to leverage results stemming from the sizeable investment made in our consumer financial service area. Exciting progress is being made as a result of Wachovia's brand campaign, market network, PRO, financial integrator and consumer lending strategies. These initiatives are profiled in the following section which summarizes each program, how it is being executed and results achieved. I encourage you to take time to review it. These activities will be the source of even greater revenue and profit contribution over the years. There also are major revenue-generating initiatives under way in corporate banking. Wachovia Corporate Financial Services has 1,300 employees supporting business relationships in 50 states and global activity in 40 countries. Teams of financial specialists are equipped with a sophisticated array of services to support companies who seek real value from financial partners. To strengthen these relationships and gain new ones, Wachovia's corporate group is enhancing its ability to fulfill clients' trade needs and support their investments in global markets. We are adding capabilities required to supply and deliver capital and risk management solutions. Actions are under way to sustain Wachovia's leadership position as a top tier provider of cash management services. Sound technology will differentiate some banks All of these initiatives are based on a substantial commitment to technology. Wachovia has invested heavily in branch automation, interactive data bases, image processing, systems strengthening risk management and performance measurement. The corporation is aggressively addressing operating challenges posed by the "Year 2000." Technology is one of the most critical factors influencing our business today. Soundly developed and intelligently deployed, it is a major way for companies to differentiate themselves 5 Letter to Shareholders ----------------------------------------------------------------- in a crowded and competitive marketplace. There are pitfalls in this critical area which can be as troublesome as loan portfolios have been in the past. Recognition of the challenges associated with technology investment is a force driving industry consolidation. As banking moves rapidly toward the new millennium, it is undergoing profound change and facing challenges in its ability to continue growing revenue and produce attractive and sustained profitability. Stronger competition, a moderately advancing economy, narrowing margins, rising consumer loan losses, expense pressures and investments in complicated technology are challenging many financial service companies. Wachovia is well-positioned for the future I believe we are well-positioned for the future. Wachovia is in excellent markets and is expanding its geographic franchise. We have an attractive customer base, sophisticated technology and unwavering commitment to high service through relationship banking. We have invested in a strong portfolio of growth initiatives. And, Wachovia is privileged with an enviable reputation for high ethics, stability and superior quality. Wachovia can become larger, enhance its position in markets served and generate impressive financial performance. I believe these ambitious and challenging goals can be accomplished while sticking to the sound risk, expense and investment management practices which have served so well historically. My confidence is based on our people. It is their daily commitment to unparalleled service which always has made Wachovia excellent. They deliver the promise of always being there when needed for customers. They have earned a reputation for trust. That trust is, and will remain, the cornerstone of Wachovia, in a world where boundaries are steadily slipping away. Sincerely, /s/ L. M. Baker, Jr. L. M. Baker, Jr. Chief Executive Officer February 27, 1998 6 Brand Campaign Market Network (Picture of chess piece appears here) PRO Financial Integration Consumer Lending Market Management 7 Brand Campaign - ----------------------------------------------------------------------- (arrow) Concept Claim and distinctly deliver the value proposition that Wachovia has "your best interest at heart." The Wachovia Promise: --------------------- "We are Wachovia. We are the kind of people you can have faith in and trust without question to always have your best interest at heart. The kind of people who take a genuine interest in your financial well-being. We are not flashy. We are not pushy. We could brag about our accomplishments. But we don't. We are quiet strength you can feel. We are unselfish. We are thoughtful and knowledgeable. You have a sense you can trust us just by hearing how we talk. We are more than a bank. We create meaningful financial relationships." Execution (arrow) Developed internal and external communication strategy to deliver the message to targeted customers and noncustomers through television, radio, print, billboards, interactive media and other points of customer contact. (arrow) Results (arrow) (Picture of magazines appears here) Where Are You? We Are Here. Let's Get Started.(sm) are brand elements that embody Wachovia's solutions-oriented sales approach (photo of eyeglasses on magazine appears here) (arrow) In 1997, the brand campaign included more than 168 million television impressions in Georgia, North Carolina and South Carolina; during the year, 96% of people between 25-54 were reached an average of 20 times (arrow) Sales of new deposit accounts were up 10% and new balances grew 30% in 1997 in markets of concentrated brand investment, significantly higher growth than achieved in nontargeted markets (photo of child appears here) Going your (arrow) own way? Brand positioning and execution adopted by all lines of business 8 (photo of smiling people appears here) (arrow) The brand campaign message was embraced by Wachovians who are delivering the Wachovia Promise (arrow) Brand campaign advertising was created with a commitment to representing the diversity of Wachovia's employees and customers (photo of reports appears here) (arrow) Brand message reinforced at all points of customer contact, including targeted direct mail which increased 75% in core southeastern markets (arrow) Customer research indicates Wachovia's image is strengthening relative to competition in targeted households (photo of Lynn J. Brown appears here) (arrow) Lynn J. Brown, marketing executive with responsibility for advertising and other marketing activities throughout the corporation. Joined Wachovia in 1996. Previous experience in product development and segment management at BANC ONE and earlier at Kraft General Foods and Leo Burnett Advertising. "Wachovia is in an enviable position as it moves forward with its brand campaign throughout its markets. The corporation has a long history in both its consumer and corporate markets for being a relationship-driven company. It has a heritage of integrity, excellence in service and providing relevant solutions to its customers - the underpinnings of trust and knowledge. And, Wachovia is strengthening relationship delivery at all points of customer contact. This is a recipe for brand-building success." - ----------------------------------------------------------------- Consumer Initiatives 9 Market Network - ------------------------------------------------------------------ (arrow) Concept To ensure that Wachovia is located in the most opportune markets, with a convenient network of sales and service points to retain and capture the lion's share of the market at an optimal cost structure. (arrow) Execution Expand, contract and reconfigure optimum combination of channels to serve targeted customer segments in targeted MSAs through traditional stores, in-supermarket locations, workplace stores, ATMs, Wachovia On-Call,(R) and PC Access(sm) Online Banking and Investing. Continuous management of Wachovia Market Network in order to most effectively capitalize on unique market opportunities and customer needs. (photo of computer/menu screen/ appears here) (arrow) Introduced online brokerage and banking services through Wachovia's web site www.wachovia.com (arrow) Project up to 100,000 users over next 12 months (photo of a Wachovia Bank appears here) (arrow) Wachovia On-Call and Phone Access(R) serve customers 24-hours-a-day, 7-days-a-week (arrow) Provided convenience and service to customers in 1997 by handling 37 million telephone calls with more than 88% served via automation (photo of Customer Service personnel appears here) (arrow) 43 in-supermarket banking centers (arrow) Serving customers at 1/4 the cost of a traditional branch 10 (photo of a Wachovia building appears here) (arrow) 8 new stores opened plus selective consolidation of 30 existing stores (arrow) Continuing to meet the needs of customers by handling more than 86 million transactions in 1997 Consumer Initiatives (photo of Wachovia ATM appears here) (arrow) Increased to 163 the number of bank-at-work ATMs which help build wallet share with employees, while enhancing overall corporate relationships (arrow) Cost per transaction 1/10 the cost of an in-branch transaction (photo of David L. Pope) David L. Pope, senior vice president in the Consumer Financial Services Group with responsibilities for Consumer Sales & Service, Small Business Banking, Wachovia On-Call and Training. Joined Wachovia in 1984. A variety of consumer, private and business-banking responsibilities, and consumer strategy development and implementation. "Market Network is a powerful quantitative and qualitative management process used to assess, plan and strengthen delivery channels in our growing geographic franchise, as well as help identify new expansion opportunities. An excellent example is the robust Research Triangle Park market in North Carolina's Central Region. "Five years ago, we had 30 full- service branches, each with an ATM. Today, this market has 22 full- service stores, 8 banking convenience stores, 42 Wachovia store ATMs, 33 off-site ATMs in hospitals, colleges and airports, and 32 workplace ATMs. This has enabled us to grow market share and significantly enhance customer convenience, while reducing the overhead ratio of this market to 46 percent. "This process is an integral component in delivering the Wachovia Promise." 11 (arrow) Concept Profitable Relationship Optimization (PRO) is a distinctive, integrated strategy employing information, technol- ogy and local market sales execution. The PRO strategy enables proactive and continual relationship management to targeted high-value customers from professionals they trust. (arrow) Execution Systematically leverage customer information to determine household profitability potential and identify the next most likely financial service for targeted customers. Utilize automated customer management system to direct leads daily to market-based sales professionals. Proactively contact customers with suggested service and capture results via automated feedback loop to build institutional knowledge and enhance next customer interaction. (arrow) Results Customer information analyzed and next likely service determined PRO begins with robust 1 2 customer information Customer leads scored and Continuous 3 distributed Relationship electronically Management to sales professionals Feedback loop 6 enriches customer information file, 4 facilitates learning and continuous Targeted customers contacted improvement 5 for relationship-based dialogue Results of customer contacts captured electronically Results (arrow) (picture of shooting light beams) Common systems, sales training and products are required for PRO and enable efficient distribution and sales execution in local markets 12 (photo of operator appears here) (arrow) Each business morning, 1,200 sales professionals will receive targeted customer leads when PRO is fully implemented in 5 states (arrow) 1 in 4 leads have resulted in a sale (photo of persons appears here) (arrow) 60,000 customers were proactively contacted in 1997 during program rollout in 3 states (arrow) Feedback from customer research is very positive (arrow) Customer retention and cross-selling is improving (Photo of computer menu screen appears here) (arrow) Data warehouse contains up to 2,000 data elements on each customer (arrow) Customer files updated daily (arrow) Account, customer and household profitability continuously updated and potential modeled (Photo of Stanhope A. Kelly appears here) Stanhope (Stan) A. Kelly, executive vice president for Consumer Financial Services. Joined Wachovia in 1980. A variety of line experience including executive for the North Carolina bank's Central Region (Raleigh, Durham, Chapel Hill) and broad experience in consumer banking. (arrow) (arrow) (arrow) (arrow) "PRO is a fully integrated relationship management system enabling Wachovia to leap towards one-on-one customer development. Every business morning, the PRO system enables our relationship managers to open their playbook with the click of a mouse. This year, 1,200 sales professionals will contact up to 5,000 high-value customers each business day to extend value through retaining and growing relationships. "PRO matches our most distinctive advantage, our employees, with our most highly valued customers to deliver our 'Best Interest at Heart' brand promise. The PRO strategy can distance Wachovia from the competition by claiming the high ground as the 'customer-intimate' financial service company." Consumer Initiatives 13 Financial Integration - ------------------------------------------------------------------------- (arrow) Concept Enable affluent consumers to optimize their financial affairs and achieve balance and peace of mind by providing integrated financial solutions from someone they trust. (arrow) Execution Core competencies have been strengthened to ensure superb delivery of private banking, invest- ment services, insurance and estate planning, the foundation on which financial integration rests. In 1997, Personal Financial Services defined its optimal market coverage, deployed sales teams of financial advisors and specialists, enhanced its product array and delivery channels, designed integrated compensation programs for sales team members and introduced financial planning. Building on this foundation, a learning experiment was conducted to validate the financial integration strategy, test the process and judge consumer and employee acceptance of the concept. (Picture of Wachovia report appears here) PRIVATE FINANCIAL ADVISORS TEAM Retirement Planning-Mortgage-Education Funding ESTATE INSURANCE ADVISOR PLANNING Banking/Credit- ADVISOR Brokerage Services- CLIENT Tax Planning FINANCIAL ADVISOR Financial Planning-Business Services-Trusts INVESTMENT MANAGEMENT ADVISOR (arrow) Teams of financial, investment management, insurance and estate planning advisors deployed to 27 market areas; supported by mortgage, brokerage, credit and business banking experts (arrow) Financial advisors completed financial planning course work (arrow) Investment services sales up 380% and estate planning sales increased 470% from 1996 (arrow) Introduced Internet-based online investing services integrated with online banking and 24-hours-a-day, 7-days-a-week automated telephone investing capability (arrow) Offered no-load fund supermarket, wrap account featuring Wachovia Funds, customized affluent mortgage products and new multitiered financial planning product (arrow) Made available life, disability, long-term care, impaired risk and nonqualified deferred compensation insurance products 14 Consumer Initiatives Private Financial Advisors Process Plan Devlopment by a team of Wachovia Advisors Analysis - Complete financial review - Evaluation of financial needs - Review by Wachovia specialists as required Customer Financial Information Expectations Coordination And Goals with an attorney and other advisors Ongoing Review Implementation (arrow) 28 affluent clients participated in financial integration learning experiment, completing in-depth financial analysis with their team of advisors resulting in blueprint for delivery of their financial peace of mind (arrow) 78% of participants increased their relationships with Wachovia (arrow) Revenue potential of participants increased by over 118% and profit contribution potential increased by over 100% Comments from learning experiment participants: (arrow) "They did a very thorough job of looking at what I have and analyzing the relationship to each other." (arrow) "Logic would lead you to believe that if the bank puts its strength, energy and corporate philosophy behind something, it will outpace anything else out there. They don't even have to outperform times two...and I'll move the whole block over." (arrow) "Finding people who you're confident have your interests at heart, who are able to look at all the aspects of your financial affairs, makes a lot of sense." (Photo of Robert S. Kniejski appears here) Robert S. Kniejski, executive vice president for Personal Financial Services with responsibility for Personal Trust, Capital Management, Private Banking, Investment Counselors, Investments Direct, the Wachovia Funds and Insurance Services. Joined Wachovia in 1987. Various positions in the trust and investment areas, including the development of Wachovia's Investment Counselor program and the Wachovia Funds. (arrow) (arrow) (arrow) (arrow) "Affluent consumers face a variety of financial issues related to invest- ments, insurance, stock options, estate and will planning, and fund- ing for education and retirement. They are seeking someone with knowledge and expertise they can trust to help them manage these critical but complex everyday and life decisions. "Advisors focus on understanding an individual's comprehensive financial situation and how their financial assets and services should work with each other. They specifi- cally address inefficiencies in the day-to-day management of an individual's financial affairs. Advisors address these issues on an ongoing basis and deliver a careful and considered approach that helps an individual achieve financial peace of mind." (Photo of individuals in line formation appears here) - ---------------------------------------------------------- 15 - ----------------------------------------------------------- Consumer Lending Concept (arrow) Meeting consumer demand for readily available credit with quick response, competitive rates and flexible products. Providing increasing return for Wachovia by deploying the "science" of marketing, risk and return management integrated with efficient operational delivery. Execution (arrow) The Mortgage Division is deploying point-of-sale technology (Decision Now sm) and reengineering operations to respond to customers' mortgage loan needs quickly while increasing profit. Specialized mortgage products are developed for all our different market segments. The Credit Card Division models external and internal information to optimize customer response, risk and return to increase the lifetime value of more than three million accounts. An automated centralized buying center for indirect automobile loans and leases and other consumer loans is supporting a six-state dealer network. Results (Picture of man, woman and child appears here) (arrow) More than 68% of mortgage loans were approved using Decision Now, with 50% of these loans approved on-the-spot by the mortgage lender (arrow) For Decision Now loan applications, time from application to closing averaged only 8 days, and operational support costs were reduced by approximately 30% (arrow) Mortgage loans designed for the affluent customer generated 785 loans totaling $160 million and a low-income mortgage focus produced 2,500 loans totaling $165 million (Picture of Business Man at board appears here) (arrow) Analysis of prospective customers' needs and risk criteria allowed targeting of individuals to build a $1 billion home equity loan portfolio (Picture of credit scoring appears here) (arrow) Automated credit scoring and tiered pricing created more consistent decision-making that is responsive to a changing risk environment to help build and manage an indirect lending portfolio of more than $4 billion (arrow) Automation and centralization created a 30% reduction in operational delivery costs (arrow) Faster response benefited 1,800 dealers and 225,000 consumers across 6 states 16 (Picture of real estate sign appears at top of page) Consumer Initiatives (Picture of graph appears below showing MasterCard and Visa cards) New Account Acquisition Cost 1995 $60 1996 $49 1997 $41 (arrow) A 16% reduction in the cost of acquiring new credit card accounts; more than 600,000 new accounts generated in 1997 (arrow) An estimated 30% increase in lifetime value of a credit card customer; in 1997, the net yield for the $6.2 billion credit card portfolio increased 70 basis points (arrow) A continued commitment to enhancing underwriting skills produced a loss rate about 55% of the industry average, supporting continued delivery of low rate credit card products to customers in all 50 states (Photo of Beverly B. Wells apperas here) Beverly (Bev) B. Wells, executive vice president for Consumer Credit with responsibility for credit card, sales finance (indirect automobile lending), residential mortgage origination and emerging businesses. Joined Wachovia in 1976. A variety of operational and line experience, including management of Treasury Services and the credit card area. (arrow) (arrow) (arrow) (arrow) "Consumer lending is an intensely competitive business. The public has become an increasingly well- educated, demanding shopper looking for value and service. We provide both, and our goal is to continue doing so profitably by offsetting growing margin pressures with excellent credit risk and expense management. "Wachovia's information-driven approach to consumer lending is supported by strong analytical skills, allowing for optimal new customer acquisition and portfolio performance management. "We will continue to build and leverage the 'science' that allows us to manage our risk-adjusted returns in consumer lending, while maintaining a strong focus on customer needs, ensuring that consumer lending continues to be a cornerstone of our consumer franchise." - ------------------------------------------------------------- 17 (Picture of map of southeastern United States appears here) Market Management (Photo of D. Gary Thompson appears here) (arrow) D. Gary Thompson Chief executive officer, Georgia banking Joined Wachovia in 1969. Variety of experience in consumer and corporate banking. Assumed current position in 1995. "Georgia, led by Atlanta, is one of the fastest- growing markets in the country. In 1997, Georgia was the second most attractive state for people to move to from other parts of the country. In a highly competitive marketplace, customers want fast, reliable, convenient access to financial information, products and services. Wachovia is thriving as it meets this challenge by aggressively implementing the company's initiatives. For example, the Market Network program allowed us to augment our existing network with actions like opening six new outlets in Harris Teeter supermarkets, while also adding eight new banking offices and 60 new ATMs in Georgia growth markets." (Photo of Warren S. Orlando appears here) (arrow) Warren S. Orlando Chief executive officer, Florida banking Joined Wachovia through merger with 1st United Bancorp where he was president and chief executive officer. In banking since 1965. "Our past success in the heart of Florida's southeast coast has centered largely around an attractive base of small and mid-sized businesses and various consumer markets, including professionals. Wachovia's PRO and Financial Integrator strategies are exactly what we need to profitably improve wallet share, particularly among the affluent market segments. We provide Wachovia an excellent base from which to expand its footprint in one of the most dynamic states in the country." 18 (Picture of Lewis N. Miller, Jr. appears here) (arrow) Lewis N. Miller, Jr. Chief executive officer, Virginia banking Joined Wachovia through merger with Central Fidelity where he was chairman and chief executive officer. In banking since 1972. "The Central Fidelity/Jefferson combination gives Wachovia an excellent position in one of the fastest-growing states in the Southeast. Like Wachovia, we have always been customer and shareholder focused. The merger with Wachovia gives our Virginia team a formidable arsenal of product capabilities and technological expertise to enhance service to existing customers, add new ones and raise the growth rate of the Virginia franchise." (Picture of J. Walter McDowell) (arrow) J. Walter McDowell Chief executive officer, North Carolina banking Joined Wachovia in 1973. Variety of experience in consumer and corporate banking. Assumed current position in 1993. "Rapid growth in entrepreneurial, technology, bioscience and service-sector companies is complementing North Carolina's traditional strengths in manufacturing and agribusiness. Individuals and companies are prospering in North Carolina's healthy business environment and Wachovia is well-positioned to grow and prosper with its customers. Differentiating capabil- ities, added convenience, a blend of high-tech and high-touch, professional employees and a sincere commitment to do what is in the customer's best interest are a winning recipe for North Carolina and Wachovia." (Picture of Will B. Spence, Jr.) (arrow) Will B. Spence, Jr. Chief executive officer, South Carolina banking Joined Wachovia in 1969. Variety of experience in consumer and corporate banking. Assumed current position in 1995. "In South Carolina, we have kept our expenses virtually flat for three consecutive years, while growing revenue and our profit contribution at double-digit rates. The business climate in our state is highly conducive to growth with another record-breaking year in capital investment and a continued surge in the tourism industry. In this context, we have implemented aggressive, carefully planned strategies to zero in on business opportunities and bring value to our customers and to the bank while containing costs. Wachovia's products and technology have given us the edge to operate in a lean and efficient manner while providing exceptional service." (Photo of G. Joseph Prendergast) G. Joseph Prendergast, Banking Division executive responsible for Wachovia's corporate and consumer banking and Wachovia Bank, N.A., offices. Joined Wachovia in 1973. Experience includes international banking, president of Wachovia Corporate Banking subsidiary, president of Wachovia Bank of Georgia prior to its merger into Wachovia Bank, N.A. (arrow) (arrow) (arrow) (arrow) "Wachovia is exceptionally well-positioned in the vibrant southeastern United States where economic growth has outpaced the nation for several years. We have statewide operations in Georgia, North Carolina, South Carolina, Virginia and an attractive presence in key Florida markets. These five states combined are growing faster than the entire region. "An excellent opportunity exists for Wachovia to systematically leverage the consumer initiatives reviewed in this report across our existing franchise and to rapidly introduce them into new markets we will enter. Our early success in executing these growth initiatives provides confidence that they are well-conceived, are relevant across a broad spectrum of consumers and markets, and that the philosophical and technological foundations upon which they are built make them readily transportable in a merger environment. They provide a winning combination for shareholders, customers and employees." 19 Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------- Financial Summary Table 1 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ---------- Summary of Operations (thousands, except per share data) Interest income ......................... $ 4,262,385 $ 4,009,508 $3,790,110 Interest expense ........................ 2,168,818 2,085,771 2,011,155 ----------- ----------- ---------- Net interest income ..................... 2,093,567 1,923,737 1,778,955 Provision for loan losses (1) ........... 264,949 193,776 130,504 ----------- ----------- ---------- Net interest income after provision for loan losses ........................ 1,828,618 1,729,961 1,648,451 Other operating revenue ................. 1,005,768 874,732 757,115 Gain on sale of mortgage servicing portfolio .............................. ---- ---- 79,025 Gain on sale of subsidiary .............. ---- ---- ---- Investment securities gains (losses) (2) ........................... 1,454 4,588 (19,672) ----------- ----------- ---------- Total other income ...................... 1,007,222 879,320 816,468 Personnel expense ....................... 905,157 796,932 733,790 Nonrecurring charges (3) ................ 287,532 ---- ---- Other expense ........................... 774,032 712,041 707,839 ----------- ----------- ---------- Total other expense ..................... 1,966,721 1,508,973 1,441,629 Income before income taxes .............. 869,119 1,100,308 1,023,290 Applicable income taxes ................. 276,313 343,049 315,377 ----------- ----------- ---------- Net income (4) .......................... $ 592,806 $ 757,259 $ 707,913 =========== =========== ========== Net income per common share: Basic .................................. $ 2.99 $ 3.70 $ 3.40 Diluted (4) ............................ $ 2.94 $ 3.65 $ 3.36 Cash dividends paid per common share (5) .............................. $ 1.68 $ 1.52 $ 1.38 Cash dividends paid on common stock (6) .............................. $ 327,303 $ 305,740 $ 282,517 Cash dividend payout ratio (6) .......... 55.2% 40.4% 39.9% Average basic shares outstanding ........ 198,290 204,889 208,230 Average diluted shares outstanding ...... 201,901 207,432 210,600 Selected Average Balances (millions) Total assets ............................ $ 57,607 $ 55,584 $ 51,703 Loans -- net of unearned income ......... 39,716 36,739 33,510 Investment securities ................... 10,859 11,969 12,011 Other interest-earning assets ........... 1,446 1,629 1,257 Total interest-earning assets ........... 52,021 50,337 46,778 Interest-bearing deposits ............... 29,582 27,609 25,601 Short-term borrowed funds ............... 8,987 9,018 8,860 Long-term debt .......................... 6,122 6,693 5,695 Total interest-bearing liabilities ...... 44,691 43,320 40,156 Noninterest-bearing deposits ............ 6,934 6,491 6,234 Total deposits .......................... 36,516 34,100 31,835 Shareholders' equity .................... 4,533 4,458 4,164 Ratios (averages) Net loan losses to loans ................ .67% .53% .38% Net yield on interest-earning assets..... 4.14 3.98 4.04 Shareholders' equity to: Total assets ........................... 7.87 8.02 8.05 Net loans .............................. 11.57 12.31 12.62 Return on assets (7) .................... 1.03 1.36 1.37 Return on shareholders' equity (7) ...... 13.08 16.99 17.00 Five-Year Compound 1994 1993 1992 Growth Rate ---------- ----------- ----------- ----------- Summary of Operations (thousands, except per share data) Interest income ......................... $3,025,654 $ 2,738,164 $ 2,803,880 8.7% Interest expense ........................ 1,369,006 1,128,709 1,252,659 11.6 ---------- ----------- ----------- Net interest income ..................... 1,656,648 1,609,455 1,551,221 6.2 Provision for loan losses (1) ........... 96,122 172,161 219,177 3.9 ---------- ----------- ----------- Net interest income after provision for loan losses ........................ 1,560,526 1,437,294 1,332,044 6.5 Other operating revenue ................. 690,099 669,469 595,849 11.0 Gain on sale of mortgage servicing portfolio .............................. ---- ---- ---- Gain on sale of subsidiary .............. ---- 8,030 19,486 Investment securities gains (losses) (2) ........................... (21,972) 74,256 54,151 (51.5) ---------- ----------- ----------- Total other income ...................... 668,127 751,755 669,486 8.5 Personnel expense ....................... 691,512 685,623 645,179 7.0 Nonrecurring charges (3) ................ ---- ---- ---- Other expense ........................... 651,739 668,635 650,850 3.5 ---------- ----------- ----------- Total other expense ..................... 1,343,251 1,354,258 1,296,029 8.7 Income before income taxes .............. 885,402 834,791 705,501 4.3 Applicable income taxes ................. 261,480 239,779 193,760 7.4 ---------- ----------- ----------- Net income (4) .......................... $ 623,922 $ 595,012 $ 511,741 3.0 ========== =========== =========== Net income per common share: Basic .................................. $ 3.00 $ 2.84 $ 2.51 3.6 Diluted (4) ............................ $ 2.96 $ 2.80 $ 2.46 3.6 Cash dividends paid per common share (5) .............................. $ 1.23 $ 1.11 $ 1.00 10.9 Cash dividends paid on common stock (6) .............................. $ 254,397 $ 230,430 $ 199,495 10.4 Cash dividend payout ratio (6) .......... 40.8% 38.7% 39.0% Average basic shares outstanding ........ 208,117 208,880 203,803 (.5) Average diluted shares outstanding ...... 210,651 212,584 208,759 (.7) Selected Average Balances (millions) Total assets ............................ $ 46,542 $ 42,529 $ 39,249 8.0 Loans -- net of unearned income ......... 29,533 25,776 23,754 10.8 Investment securities ................... 11,225 10,993 9,286 3.2 Other interest-earning assets ........... 1,025 1,379 1,986 (6.1) Total interest-earning assets ........... 41,783 38,148 35,026 8.2 Interest-bearing deposits ............... 22,847 22,860 23,062 5.1 Short-term borrowed funds ............... 7,369 6,500 5,898 8.8 Long-term debt .......................... 5,154 2,530 483 66.2 Total interest-bearing liabilities ...... 35,370 31,890 29,443 8.7 Noninterest-bearing deposits ............ 6,292 6,199 5,683 4.1 Total deposits .......................... 29,139 29,059 28,745 4.9 Shareholders' equity .................... 3,812 3,519 3,100 7.9 Ratios (averages) Net loan losses to loans ................ .30% .56% .65% Net yield on interest-earning assets..... 4.23 4.50 4.68 Shareholders' equity to: Total assets ........................... 8.19 8.27 7.90 Net loans .............................. 13.14 13.92 13.32 Return on assets (7) .................... 1.34 1.40 1.30 Return on shareholders' equity (7) ...... 16.37 16.91 16.51
(1) Includes $10,845 in nonrecurring merger-related provision in 1997 to align the practices of the merged entities with those of the corporation. (2) Includes $4,639 of nonrecurring losses to restructure the available-for-sale portfolio in 1997. (3) Nonrecurring charges in 1997 include merger-related items of $220,330 and personal computer hardware and software disposal charge of $67,202. (4) Net income excluding nonrecurring items was $799,929 for 1997. Net income per diluted share, excluding nonrecurring items, was $3.96 for 1997. (5) Cash dividends per common share are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. (6) Includes amounts of pooled companies. (7) Excluding the after-tax impact of nonrecurring charges of $207,123 returns were 1.39% on assets and 17.65% on shareholders' equity for 1997. 20 Results of Operations ----------------------------------------------------------------- 1997 vs. 1996 Overview The U.S. economy rose at a moderately strong pace in 1997, with gross domestic product up 3.8 percent, based on preliminary data. Economic expansion continued largely free of inflationary pressures but was hampered by growing strains from consumer indebtedness and cautiousness. Based on preliminary data, the nation's annual average unemployment rate fell to 4.9 percent from 5.4 percent in 1996. Economic conditions within Wachovia Corporation's primary operating states remained generally strong, with unemployment averaging 4.8 percent in Florida, 4.3 percent in Georgia, 3.6 percent in North Carolina, 4.6 percent in South Carolina and 4 percent in Virginia. Wachovia Corporation announced merger agreements with four banking companies in 1997: Jefferson Bankshares, Inc., of Charlottesville, Virginia; Central Fidelity Banks, Inc., of Richmond, Virginia; 1st United Bancorp of Boca Raton, Florida; and Ameribank Bancshares, Inc., of Hollywood, Florida. The merger agreements with Jefferson Bankshares, Central Fidelity Banks and 1st United Bancorp closed in the fourth quarter of 1997, with the Central Fidelity transaction accounted for on a pooling-of-interests basis and the others on a purchase basis. The Ameribank Bancshares agreement is expected to close in the early part of 1998 and will be accounted for as a purchase transaction. The corporation regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book values, and, therefore, some dilution of the corporation's book value and net income per share may occur in connection with any future transactions. NET INCOME PER SHARE (DILUTED) (Graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 2.46 2.80 2.96 3.36 3.65 2.94* *EXCLUDING NONRECURRING ITEMS, NET INCOME PER DILUTED SHARE WAS $3.96. NET INCOME (MILLIONS) (Graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 511.7 595.0 623.9 707.9 757.3 592.8* *EXCLUDING NONRECURRING ITEMS, NET INCOME WAS $799.9 MILLION. 21 Consolidated net income for 1997 was $592.806 million or $2.94 per diluted share compared with $757.259 million or $3.65 per diluted share in 1996. Results for 1997 include the impact of three special charges taken in the fourth quarter: $231.175 million, pretax, related to the corporation's mergers with Central Fidelity Banks, Jefferson Bankshares and 1st United Bancorp; $67.202 million, pretax, to write-down and dispose of personal computer hardware and software in order to adopt a company-wide distributed technology platform; and $4.639 million in pretax losses from the sale of investment securities to restructure the portfolio for higher yields. The net impact of all three charges was $207.123 million, after-tax, or $1.02 per diluted share. On an operating basis, excluding these special charges, the corporation's consolidated net income was $799.929 million or $3.96 per diluted share for 1997. Historical financial results have been restated to reflect the corporation's pooling-of-interests merger with Central Fidelity Banks, Inc. In addition, all per share earnings are reported on a basic and diluted basis versus primary and fully diluted basis in compliance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." The accounting standard became effective for December 31, 1997 financial statements with restatement of past periods required; the impact was not material. Expanded discussion of operating results and the corporation's financial condition is presented in the following narrative with accompanying tables and charts. Interest income is stated on a taxable equivalent basis, which is adjusted for the tax-favored status of earnings from certain loans and investments. References to changes in assets and liabilities represent daily average levels unless otherwise noted. The narrative should be read in conjunction with the Consolidated Financial Statements and Notes on pages 50 through 69. Expanded six-year financial data appears on pages 70 through 77. 22 Net Interest Income Taxable equivalent net interest income rose $150.683 million or 7.5 percent in 1997, the result of good loan growth, changes in the mix of interest-earning assets and a higher average rate earned. The net yield on interest-earning assets (taxable equivalent net interest income as a percentage of average interest-earning assets) improved 16 basis points to 4.14 percent for the year, reflecting a wider interest rate spread and assertive balance sheet management. Taxable equivalent net interest income is expected to rise at a more subdued pace in 1998 given the outlook for a slower economy and moderating loan demand. Based on the relationship between short- and long-term interest rates in early 1998, management expects the net yield on interest-earning assets to be modestly lower for the full year. NET INTEREST INCOME* (MILLIONS) (Graph appears here with the following plot points.) 1992 1993 1994 1995 1996 1997 Interest Income 2891.00 2845.00 3135.00 3898.00 4087.00 4320.00 Interest Expenses 1253.00 1129.00 1369.00 2011.00 2086.00 2169.00 Net Interest Income 1639.00 1716.00 1766.00 1887.00 2001.00 2151.00 *Taxable Equivalent Components of Earnings Per Basic Share Table 2 - --------------------------------------------------------------------------------
Change Change 1997 1996 1995 1997/1996 1996/1995 -------- -------- -------- ---------- ---------- Interest income ............................................. $ 21.50 $ 19.57 $ 18.20 $ 1.93 $ 1.37 Interest expense ............................................ 10.94 10.18 9.66 .76 .52 -------- -------- -------- ---------- ---------- Net interest income ......................................... 10.56 9.39 8.54 1.17 .85 Provision for loan losses ................................... 1.34 .95 .63 .39 .32 -------- -------- -------- ---------- ---------- Net interest income after provision for loan losses ......... 9.22 8.44 7.91 .78 .53 Other operating revenue ..................................... 5.07 4.27 3.65 .80 .62 Gain on sale of mortgage servicing portfolio ................ ---- ---- .38 ---- (.38) Investment securities gains (losses) ........................ .01 .02 (.11) (.01) .13 -------- -------- -------- ---------- ---------- Total other income .......................................... 5.08 4.29 3.92 .79 .37 Personnel expense ........................................... 4.57 3.89 3.52 .68 .37 Personal computer impairment charge ......................... .34 ---- ---- .34 ---- Merger-related charges ...................................... 1.11 ---- ---- 1.11 ---- Other expense ............................................... 3.90 3.47 3.40 .43 .07 -------- -------- -------- ---------- ---------- Total other expense ......................................... 9.92 7.36 6.92 2.56 .44 Income before income taxes .................................. 4.38 5.37 4.91 (.99) .46 Applicable income taxes ..................................... 1.39 1.67 1.51 (.28) .16 -------- -------- -------- ---------- ---------- Net income .................................................. $ 2.99 $ 3.70 $ 3.40 $ (.71) $ .30 ======== ======== ======== ========== ==========
23 Taxable Equivalent Rate/Volume Variance Analysis* Table 3 - -------------------------------------------------------------------------------- +(millions) ++(thousands)
Average Volume+ Average Rate - ----------------------- ------------------- 1997 1996 1997 1996 - --------- ------- ------- ---- Interest Income Loans: $11,327 $10,481 7.32 7.13 Commercial ..................................... 1,743 2,126 8.93 8.95 Tax-exempt ..................................... - ----------- -------- 13,070 12,607 7.54 7.44 Total commercial ............................... 1,194 1,194 8.99 8.93 Direct retail .................................. 2,966 3,139 8.56 8.49 Indirect retail ................................ 5,626 4,949 12.92 12.03 Credit card .................................... 424 418 12.27 12.21 Other revolving credit ......................... - ----------- -------- 10,210 9,700 11.17 10.51 Total retail ................................... 1,499 1,069 9.40 9.30 Construction ................................... 6,067 5,453 8.34 8.30 Commercial mortgages ........................... 7,422 6,797 7.99 8.14 Residential mortgages .......................... - ----------- -------- 14,988 13,319 8.27 8.30 Total real estate .............................. 955 656 9.71 9.42 Lease financing ................................ 493 457 6.93 7.02 Foreign ........................................ - ----------- -------- 39,716 36,739 8.79 8.59 Total loans .................................... Investment securities: Held-to-maturity: 30 ---- 6.12 ---- U.S. Government and agency ..................... 1,049 1,197 8.03 8.04 Mortgage-backed securities ..................... 221 274 11.87 12.26 State and municipal ............................ 23 2 6.94 8.80 Other .......................................... - ----------- -------- 1,323 1,473 8.61 8.83 Total securities held-to-maturity .............. Available-for-sale:** 5,269 5,678 6.62 6.71 U.S. Government and agency ..................... 3,174 3,594 6.91 6.82 Mortgage-backed securities ..................... 1,027 1,131 6.54 6.59 Other .......................................... - ----------- -------- 9,470 10,403 6.71 6.73 Total securities available-for-sale ............ - ----------- -------- 10,793 11,876 6.94 6.99 Total investment securities .................... 89 421 5.89 7.91 Interest-bearing bank balances ................. Federal funds sold and securities purchased 397 286 5.62 5.38 under resale agreements ........................ 960 922 5.38 5.61 Trading account assets ......................... - ----------- -------- $51,955 $50,244 8.32 8.13 Total interest-earning assets .................. =========== ======== Interest Expense $ 4,109 $ 3,993 1.56 1.50 Interest-bearing demand ........................ 10,595 9,441 3.83 3.57 Savings and money market savings ............... 10,365 10,522 5.62 5.69 Savings certificates ........................... 2,929 2,612 5.61 5.88 Large denomination certificates ................ - ----------- -------- 27,998 26,568 4.34 4.32 Total time deposits in domestic offices ........ 1,585 1,041 5.51 5.28 Time deposits in foreign offices ............... - ----------- -------- 29,583 27,609 4.41 4.36 Total time deposits ............................ Federal funds purchased and securities sold 6,744 7,136 5.30 5.37 under repurchase agreements .................... 781 596 5.06 4.88 Commercial paper ............................... 1,462 1,286 5.57 5.46 Other short-term borrowed funds ................ - ----------- -------- 8,987 9,018 5.32 5.35 Total short-term borrowed funds................. 3,075 4,610 6.14 5.74 Bank notes ..................................... 3,046 2,083 6.51 6.50 Other long-term debt ........................... - ----------- -------- 6,121 6,693 6.32 5.97 Total long-term debt ........................... - ----------- -------- $44,691 $43,320 4.85 4.81 Total interest-bearing liabilities ............. =========== ======== -------- ----- 3.47 3.32 Interest rate spread ======== ===== Net yield on interest-earning assets and net 4.14 3.98 interest income ................................ ======== ===== Variance Interest Attributable to -------------------------- 1997 1996 Variance++ Rate Volume ---------- ---------- ----------- ---------- ----------- Interest Income Loans: Commercial ..................................... $ 829,406 $ 747,463 $ 81,943 $ 20,413 $ 61,530 Tax-exempt ..................................... 155,689 190,285 (34,596) (366) (34,230) ----------- ----------- ---------- Total commercial ............................... 985,095 937,748 47,347 12,610 34,737 Direct retail .................................. 107,326 106,634 692 763 (71) Indirect retail ................................ 254,001 266,435 (12,434) 2,292 (14,726) Credit card .................................... 727,114 595,208 131,906 46,494 85,412 Other revolving credit ......................... 52,007 51,026 981 252 729 ----------- ----------- ---------- Total retail ................................... 1,140,448 1,019,303 121,145 65,971 55,174 Construction ................................... 140,780 99,470 41,310 1,028 40,282 Commercial mortgages ........................... 505,876 452,576 53,300 2,081 51,219 Residential mortgages .......................... 592,907 552,944 39,963 (10,134) 50,097 ----------- ----------- ---------- Total real estate .............................. 1,239,563 1,104,990 134,573 (3,430) 138,003 Lease financing ................................ 92,721 61,717 31,004 1,976 29,028 Foreign ........................................ 34,164 32,098 2,066 (406) 2,472 ----------- ----------- ---------- Total loans .................................... 3,491,991 3,155,856 336,135 75,779 260,356 Investment securities: Held-to-maturity: U.S. Government and agency ..................... 1,843 ---- 1,843 ---- 1,843 Mortgage-backed securities ..................... 84,191 96,316 (12,125) (177) (11,948) State and municipal ............................ 26,259 33,547 (7,288) (1,047) (6,241) Other .......................................... 1,597 193 1,404 (49) 1,453 ----------- ----------- ---------- Total securities held-to-maturity .............. 113,890 130,056 (16,166) (3,170) (12,996) Available-for-sale:** U.S. Government and agency ..................... 348,763 380,768 (32,005) (4,932) (27,073) Mortgage-backed securities ..................... 219,293 244,933 (25,640) 3,285 (28,925) Other .......................................... 67,139 74,501 (7,362) (518) (6,844) ----------- ----------- ---------- Total securities available-for-sale ............ 635,195 700,202 (65,007) (2,481) (62,526) ----------- ----------- ---------- Total investment securities .................... 749,085 830,258 (81,173) (6,017) (75,156) Interest-bearing bank balances ................. 5,230 33,284 (28,054) (6,861) (21,193) Federal funds sold and securities purchased under resale agreements ........................ 22,319 15,411 6,908 713 6,195 Trading account assets ......................... 51,654 51,740 (86) (2,201) 2,115 ----------- ----------- ---------- Total interest-earning assets .................. 4,320,279 4,086,549 233,730 92,646 141,084 Interest Expense Interest-bearing demand ........................ 64,249 59,761 4,488 2,728 1,760 Savings and money market savings ............... 405,444 336,596 68,848 25,818 43,030 Savings certificates ........................... 582,145 598,869 (16,724) (7,852) (8,872) Large denomination certificates ................ 164,391 153,571 10,820 (7,180) 18,000 ----------- ----------- ---------- Total time deposits in domestic offices ........ 1,216,229 1,148,797 67,432 5,369 62,063 Time deposits in foreign offices ............... 87,320 54,942 32,378 2,475 29,903 ----------- ----------- ---------- Total time deposits ............................ 1,303,549 1,203,739 99,810 12,956 86,854 Federal funds purchased and securities sold under repurchase agreements .................... 357,190 382,976 (25,786) (4,967) (20,819) Commercial paper ............................... 39,566 29,054 10,512 1,154 9,358 Other short-term borrowed funds ................ 81,406 70,206 11,200 1,445 9,755 ----------- ----------- ---------- Total short-term borrowed funds................. 478,162 482,236 (4,074) (2,425) (1,649) Bank notes ..................................... 188,710 264,486 (75,776) 17,330 (93,106) Other long-term debt ........................... 198,397 135,310 63,087 335 62,752 ----------- ----------- ---------- Total long-term debt ........................... 387,107 399,796 (12,689) 22,601 (35,290) ----------- ----------- ---------- Total interest-bearing liabilities ............. 2,168,818 2,085,771 83,047 16,574 66,473 ----------- ----------- ---------- Interest rate spread Net yield on interest-earning assets and net interest income ................................ $2,151,461 $2,000,778 $ 150,683 81,276 69,407 =========== =========== ==========
* 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. ** Volume amounts are reported at amortized cost; excludes pretax unrealized gains of $66 million in 1997 and $94 million in 1996. 24 Interest Income Taxable equivalent interest income expanded $233.730 million or 5.7 percent for the year, fueled by good loan growth, shifts in the interest-earning asset mix to reduce investment securities and a higher average rate earned on loans. Average loans were up $2.977 billion or 8.1 percent, representing 76.4 percent of total interest-earning assets compared with 73.1 percent in 1996. The average rate earned on loans increased 20 basis points to 8.79 percent. Management anticipates loan growth of approximately 6 percent in 1998, led by real estate loans in the commercial portfolio and by credit cards and residential mortgages, including home equity lending, in the consumer portfolio. Commercial loans, including related real estate categories, grew $1.842 billion or 9.1 percent. All categories advanced for the year except tax-exempt loans, which decreased due to paydowns in employee stock ownership plan loans and to the reduced availability under current tax laws of tax-exempt borrowing and lending at acceptable rates. Growth in the portfolio was led by taxable commercial loans, which rose $846 million or 8.1 percent; commercial mortgages, which increased $614 million or 11.3 percent; and construction loans, up $430 million or 40.2 percent. Based on regulatory definitions, commercial real estate loans at December 31, 1997 were $8.570 billion or 19.4 percent of total loans versus $6.930 billion or 18.2 percent one year earlier. Regulatory definitions for commercial real estate include loans that have real estate as the collateral but not the primary consideration in a credit risk evaluation. Lease financing, which primarily consists of commercial leases and other structured corporate transactions, rose $299 million or 45.6 percent for the year, while foreign loans grew $36 million or 7.9 percent. The corporation has foreign credit exposure to companies and financial institutions primarily in Europe, Canada and Latin America with minimal overall exposure. At December 31, 1997, Wachovia had cross-border commitments, primarily consisting of loans and leases, of $562 million, representing .86 percent of total assets. This compared with cross-border commitments of $510 million or .89 percent of total assets one year earlier. The loans and leases are predominately dollar denominated, minimizing the corporation's exposure to fluctuations in the value of foreign currencies. All cross-border commitments were to corporations and financial institutions with no loans or commitments extended to foreign governments at either year-end. Selected Loan Maturities and Interest Sensitivity Table 4 - -------------------------------------------------------------------------------- December 31, 1997 (thousands)
One year One to Over Total or less Five Years Five Years -------- -------------- ------------- ------------- Commercial, financial and other ....................... $13,528,344 $12,084,421 $ 947,804 $ 496,119 Industrial revenue and other tax-exempt financing ..... 1,607,159 826,534 325,995 454,630 Construction and land development ..................... 1,779,522 1,355,162 424,360 ---- Commercial mortgages .................................. 6,790,446 3,258,841 1,410,718 2,120,887 Foreign ............................................... 639,387 639,387 ---- ---- ----------- ----------- ---------- ---------- Selected loans, net ................................ $24,344,858 $18,164,345 $3,108,877 $3,071,636 =========== =========== ========== ========== Interest sensitivity: Loans with predetermined interest rates .............. $ 6,658,973 $ 2,598,638 $2,320,908 $1,739,427 Loans with floating interest rates ................... 17,685,885 15,565,707 787,969 1,332,209 ----------- ----------- ---------- ---------- Total .............................................. $24,344,858 $18,164,345 $3,108,877 $3,071,636 =========== =========== ========== ==========
25 Investment Securities Table 5 - -------------------------------------------------------------------------------- December 31 (thousands)
1997 ------------------------------------------------------ Amortized Unrealized Unrealized Fair Cost Gain Loss Value -------------- ----------- ----------- ---------- Held-to-Maturity U.S. Treasury and other U.S. Government agencies: Within one year .................... $ 97,213 $ 65 $ 49 $ 97,229 One to five years .................. 105,700 753 139 106,314 Five to ten years .................. ---- ---- ---- ---- Over ten years ..................... ---- ---- ---- ---- -------------- ----------- ----------- ----------- Total ............................ 202,913 818 188 203,543 State and municipal: Within one year .................... 16,033 174 ---- 16,207 One to five years .................. 59,950 4,337 ---- 64,287 Five to ten years .................. 94,835 13,068 ---- 107,903 Over ten years ..................... 52,085 5,315 ---- 57,400 -------------- ----------- ----------- ----------- Total ............................ 222,903 22,894 ---- 245,797 Mortgage-backed: Within one year .................... 553 ---- 3 550 One to five years .................. 103,233 1,883 10 105,106 Five to ten years .................. 129,809 2,676 1 132,484 Over ten years ..................... 728,566 40,547 173 768,940 -------------- ----------- ----------- ----------- Total ............................ 962,161 45,106 187 1,007,080 Other interest-earning investments: Within one year .................... 37,793 276 ---- 38,069 One to five years .................. 83,219 395 ---- 83,614 Five to ten years .................. 350 11 ---- 361 Over ten years ..................... ---- ---- ---- ---- -------------- ----------- ----------- ----------- Total ............................ 121,362 682 ---- 122,044 -------------- ----------- ----------- ----------- Total held-to-maturity ........... 1,509,339 69,500 375 1,578,464 Available-for-Sale U.S. Treasury and other U.S. Government agencies: Within one year .................... 1,428,265 8,166 257 1,436,174 One to five years .................. 2,966,942 43,418 282 3,010,078 Five to ten years .................. 98,262 1,842 478 99,626 Over ten years ..................... 8,078 4,153 ---- 12,231 -------------- ----------- ----------- ----------- Total ............................ 4,501,547 57,579 1,017 4,558,109 State and municipal: Within one year .................... 10,033 58 ---- 10,091 One to five years .................. 36,592 843 2 37,433 Five to ten years .................. 17,015 578 1 17,592 Over ten years ..................... 16,155 1,671 4 17,822 -------------- ----------- ----------- ----------- Total ............................ 79,795 3,150 7 82,938 Mortgage-backed: Within one year .................... 25,113 45 13 25,145 One to five years .................. 772,458 6,105 464 778,099 Five to ten years .................. 557,712 5,087 689 562,110 Over ten years ..................... 2,188,428 28,730 1,329 2,215,829 -------------- ----------- ----------- ----------- Total ............................ 3,543,711 39,967 2,495 3,581,183 Other interest-earning investments: Within one year .................... 52,435 252 11 52,676 One to five years .................. 350,400 2,550 ---- 352,950 Five to ten years .................. 6,524 394 1 6,917 Over ten years ..................... 99,616 59 850 98,825 -------------- ----------- ----------- ----------- Total ............................ 508,975 3,255 862 511,368 -------------- ----------- ----------- ----------- Total available-for-sale interest earning investments ................ 8,634,028 103,951 4,381 8,733,598 Federal Reserve Bank stock and other investments .................. 160,649 15,443 153 175,939 -------------- ----------- ----------- ----------- Total available-for-sale ......... 8,794,677 119,394 4,534 8,909,537 -------------- ----------- ----------- ----------- Total portfolio .................. $10,304,016 $ 188,894 $ 4,909 $10,488,001 ============== =========== =========== =========== 1997 1996 1995 ---------------------------- ------------------------- ------------------------- Taxable Average Equivalent Amortized Fair Amortized Fair Maturity Yield* Cost Value Cost Value ----------- ---------- ------------ ----------- ----------- ----------- (Yrs./Mos.) Held-to-Maturity U.S. Treasury and other U.S. Government agencies: Within one year .................... 5.75% $ ---- $ ---- $ ---- $ ---- One to five years .................. 6.33 ---- ---- ---- ---- Five to ten years .................. ---- ---- ---- ---- Over ten years ..................... ---- ---- ---- ---- ------------ ----------- ------------ ----------- Total ............................ 1/4 6.05 ---- ---- ---- ---- State and municipal: Within one year .................... 9.73 9,128 9,212 54,702 55,343 One to five years .................. 11.69 24,822 27,490 99,231 105,795 Five to ten years .................. 12.69 74,129 85,625 103,983 120,449 Over ten years ..................... 11.29 59,822 66,425 63,129 72,841 ------------ ----------- ------------ ----------- Total ............................ 6/11 11.82 167,901 188,752 321,045 354,428 Mortgage-backed: Within one year .................... 5.37 ---- ---- ---- ---- One to five years .................. 7.24 125,681 127,541 ---- ---- Five to ten years .................. 6.88 164,342 168,203 192,917 197,342 Over ten years ..................... 8.01 814,332 854,940 1,105,018 1,168,952 ------------ ----------- ------------ ----------- Total ............................ 17/5 7.77 1,104,355 1,150,684 1,297,935 1,366,294 Other interest-earning investments: Within one year .................... 6.64 5,399 5,442 ---- ---- One to five years .................. 6.32 29,111 30,350 250 250 Five to ten years .................. 5.14 37,711 40,193 250 250 Over ten years ..................... 7,614 8,134 ---- ---- ------------ ----------- ------------ ----------- Total ............................ 1/7 6.42 79,835 84,119 500 500 ------------ ----------- ------------ ----------- Total held-to-maturity ........... 12/5 8.03 1,352,091 1,423,555 1,619,480 1,721,222 Available-for-Sale U.S. Treasury and other U.S. Government agencies: Within one year .................... 6.80 2,118,932 2,122,993 571,027 576,392 One to five years .................. 6.64 3,000,028 3,038,951 5,377,907 5,512,426 Five to ten years .................. 4.30 5,149 5,500 251 266 Over ten years ..................... 13.60 11,166 15,858 16,188 23,272 ------------ ----------- ------------ ----------- Total ............................ 2/4 6.66 5,135,275 5,183,302 5,965,373 6,112,356 State and municipal: Within one year .................... 7.63 15,649 15,855 23,910 23,961 One to five years .................. 7.33 35,119 35,841 24,321 25,153 Five to ten years .................. 7.87 29,038 29,571 48,245 49,411 Over ten years ..................... 9.86 17,445 18,307 18,604 20,050 ------------ ----------- ------------ ----------- Total ............................ 5/4 8.02 97,251 99,574 115,080 118,575 Mortgage-backed: Within one year .................... 7.16 159,978 159,890 208,119 207,974 One to five years .................. 5.34 1,243,815 1,252,752 1,522,543 1,536,221 Five to ten years .................. 7.14 972,528 973,369 948,784 958,930 Over ten years ..................... 6.77 1,010,796 1,021,108 1,093,040 1,121,124 ------------ ----------- ------------ ----------- Total ............................ 15/0 6.52 3,387,117 3,407,119 3,772,486 3,824,249 Other interest-earning investments: Within one year .................... 7.13 166,407 166,905 151,196 152,589 One to five years .................. 6.72 801,346 803,543 618,844 628,774 Five to ten years .................. 7.54 ---- ---- 248 256 Over ten years ..................... 6.55 ---- ---- 73,200 73,200 ------------ ----------- ------------ ----------- Total ............................ 7/6 6.74 967,753 970,448 843,488 854,819 ------------ ----------- ------------ ----------- Total available-for-sale interest earning investments ................ 7/10 6.62 9,587,396 9,660,443 10,696,427 10,909,999 Federal Reserve Bank stock and other investments .................. 153,852 164,309 110,652 123,908 ------------ ----------- ------------ ----------- Total available-for-sale ......... 9,741,248 9,824,752 10,807,079 11,033,907 ------------ ----------- ------------ ----------- Total portfolio .................. $11,093,339 $11,248,307 $12,426,559 $12,755,129 ============ =========== ============ ===========
* Yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable. 26 Consumer loans, including residential mortgages, increased $1.135 billion or 6.9 percent. Credit cards and residential mortgages accounted for substantially all the growth, rising $677 million or 13.7 percent and $625 million or 9.2 percent, respectively. Growth in residential mortgages reflected gains in adjustable rate mortgages and equity banklines, with both categories combined advancing every month in 1997. Reduced net margins in automobile sales financing helped push indirect retail loans lower by $173 million or 5.5 percent, while direct retail loans remained essentially unchanged. The corporation's managed credit card portfolio, which includes securitized loans, was $6.419 billion or 14.4 percent of total managed loans at December 31, 1997 compared with $6.221 billion or 16.1 percent one year earlier. Included in the managed credit card amounts was $500 million of securitized loans at year-end 1997 versus $625 million at the end of 1996. Additional data on the corporation's managed credit cards, including net charge-offs and delinquency ratios, is presented on page 34. Investment securities, the second largest category of interest-earning assets, decreased $1.083 billion or 9.1 percent for the year with portions of the portfolio allowed to runoff as part of the corporation's balance sheet management strategy. Available-for-sale securities declined $933 million or 9 percent, reflecting decreases primarily in U.S. Government and agency securities and in mortgage-backed securities. Held-to-maturity securities were lower by $150 million or 10.2 percent. At December 31, 1997, available-for-sale securities totaled $8.910 billion and held-to-maturity securities were $1.509 billion. Marking average available-for-sale securities to fair market value resulted in an unrealized gain over amortized cost of $65.846 million, pretax, and $41.028 million, net of tax, for the year. The unrealized gain is included, net of tax, in average shareholders' equity. Interest Expense Interest expense for 1997 was up $83.047 million or 4 percent. The increase was driven primarily by deposit growth to fund loan expansion, with a higher average rate paid on interest-bearing liabilities also contributing to the rise. As part of its funding strategy, the corporation is innovatively marketing traditional funding sources while issuing a variety of debt instruments. Traditional funding sources are being broadened through marketing of the corporation's Premiere and Business Premiere accounts, both of which are high-yield money market deposit products; the introduction of PC Banking; and significant enhancements to the corporation's basic checking products. Wholesale funding sources include senior debt, trust capital securities and a global bank note program. Management believes that financial institutions will need continued flexibility and innovation to attract future funding through deposit products and alternative sources. Discussion of the corporation's liquidity policies may be found on pages 32 through 33. Interest-bearing time deposits rose $1.974 billion or 7.1 percent, accounting for all the year's growth in interest-bearing liabilities. Interest-bearing time deposits increased to 66.2 percent of total interest-bearing liabilities from 63.7 percent in 1996, helping moderate the rise in the average rate paid on interest-bearing liabilities. Growth in interest-bearing time deposits occurred primarily in savings and money market savings, which expanded $1.154 billion or 12.2 percent, reflecting increases in the corporation's Premiere account. Good gains also occurred in foreign time deposits and in large denomination certificates, due to their attractiveness relative to other sources of wholesale funds. Interest-bearing demand deposits were modestly higher for the year, while savings certificates decreased slightly. Gross deposits averaged $36.516 billion for the year, an increase of $2.416 billion or 7.1 percent from $34.100 billion in 1996. Collected deposits, net of float, averaged $34.518 billion, higher by $2.315 billion or 7.2 percent from $32.203 billion in the previous year. Short-term borrowings remained essentially unchanged. Lower levels of federal funds purchased and securities sold under repurchase agreements were offset by increases in commercial paper borrowings and in other short-term borrowings, which largely consists of short-term bank notes. 27 Long-term debt declined $572 million or 8.5 percent. Medium-term bank notes decreased $1.535 billion or 33.3 percent, reflecting maturation and runoff in note borrowings. Other long-term debt rose $963 million or 46.2 percent, partially offsetting the decline in medium-term bank notes. Included in other long-term debt at December 31, 1997 was a total of $995.993 million of trust capital securities issued in December 1996 and January, April and June 1997; $200 million of 10-year senior debt fixed rate notes issued in November 1996; and $250 million of 30-year subordinated debt with a 10-year put option issued in the fourth quarter of 1995. The trust capital securities are rated Aa3 by Moody's and A+ by Standard & Poor's and qualify as part of Tier I capital under risk-based capital guidelines. Wachovia Bank has an ongoing $16 billion global bank note program consisting of short-term issues of 7 days to one year and medium-term issues of greater than one year. At December 31, 1997, short-term bank notes were $227 million with an average cost of 5.64 percent and an average maturity of .7 months compared with $515 million, 5.44 percent and 3.6 months, respectively, one year earlier. Medium-term bank notes totaled $2.940 billion and had an average cost of 6.12 percent and an average maturity of 2.9 years versus $4.308 billion, 5.81 percent and 1.8 years, respectively, at the end of 1996. Included in medium-term bank notes at December 31, 1997 were four issues placed in Europe: $350 million of five-year floating rate notes issued in May 1997; $250 million of 12-year fixed rate notes issued in October 1996; $100 million of two-year fixed rate notes issued in August 1996; and $500 million of five-year floating rate notes issued in May 1996. Medium-term issues under the global bank note program are rated Aa2 by Moody's and AA+ by Standard & Poor's, and short-term issues are rated P-1 by Moody's and A-1+ by Standard & Poor's. Asset and Liability Management and Interest Rate Sensitivity The income stream of the corporation is subject to risk resulting from interest rate fluctuations to the extent there is a difference between the amount of the corporation's interest-earning assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, mature or reprice in specified periods. The goal of asset and liability management is to maintain high quality and consistent growth of net interest income with acceptable levels of risk to changes in interest rates. The corporation seeks to meet this goal by influencing the maturity and repricing characteristics of the various lending and deposit taking lines of business, by managing discretionary balance sheet asset and liability portfolios and by utilizing off-balance sheet financial instruments. Interest rate risk management is carried out by Funds Management which operates under the policies established by the Finance Committee of the corporation's board of directors and the guidance of the Management Finance Committee. Rate risk, liquidity, capital positions and discretionary on- and off-balance sheet activity is reviewed quarterly by the Board Finance Committee. Interim oversight of the asset and liability management function is provided through regular meetings of Funds Management managers and the Chief Financial Officer. Funds Management personnel carry out day-to-day activity within approved risk management guidelines and strategies. The corporation uses a number of tools to measure interest rate risk, including simulating net interest income under various rate scenarios, monitoring the change in present value of the asset and liability portfolios under the same rate scenarios and monitoring the difference or gap between rate sensitive assets and liabilities over various time periods. The rate sensitivity gap table on page 29 sets forth the volume of interest-earning assets and interest-bearing liabilities outstanding as of year-ends 1997 and 1996 which mature or are projected to reprice in each of the future time periods shown. The projected asset repricing volumes include management assumptions of prepayments of mortgage related assets and automobile financing. Also, the projected interest checking and savings and money market savings repricing volumes are based on management assumptions of the sensitivity of these accounts in relationship to changes in 28 short-term money market interest rates. Since assets and liabilities within each interest-sensitive period may not reprice by the same amount or at the same time, the following table may not be reflective of changes in net interest income which would result from changes in the general level of interest rates. Interest Rate Sensitivity Gap Analysis - --------------------------------------------------------------------------------
Interest Sensitive Period ------------------------------------ 0 to 3 4 to 6 7 to 12 Months Months Months -------- ------- ------- $ in millions December 31, 1997 - ----------------- Loans and net leases, net of unearned income ............................... $26,681 $1,920 $3,044 Investment securities ...................................................... 1,395 1,126 1,179 Interest-bearing bank balances ............................................. 133 ---- ---- Federal funds sold and securities purchased under resale agreements ........ 1,589 ---- ---- Trading account assets ..................................................... 999 ---- ---- -------- ------- ------- Total interest-earning assets ........................................... 30,797 3,046 4,223 Interest-bearing demand .................................................... 608 147 295 Savings and money market savings ........................................... 7,269 345 690 Savings certificates ....................................................... 3,263 1,937 2,809 Large denomination certificates ............................................ 1,070 415 510 Time deposits in foreign offices ........................................... 4,502 2 ---- Federal funds purchased and securities sold under repurchase agreements..... 8,314 1 ---- Commercial paper ........................................................... 1,034 ---- ---- Other short-term borrowed funds ............................................ 648 11 2 Bank notes ................................................................. 997 450 424 Other long-term debt ....................................................... 598 20 ---- -------- ------- ------- Total interest-bearing liabilities ...................................... 28,303 3,328 4,730 Interest rate swaps ........................................................ (808) (315) (34) -------- ------- ------- Interest sensitivity gap ................................................ 1,686 (597) (541) -------- ------- ------- Cumulative interest sensitivity gap ..................................... $ 1,686 $1,089 $ 548 ======== ======= ======= December 31, 1996 - ----------------- Loans and net leases, net of unearned income ............................... $21,543 $1,705 $2,579 Investment securities ...................................................... 1,071 964 1,817 Interest-bearing bank balances ............................................. 78 ---- ---- Federal funds sold and securities purchased under resale agreements ........ 276 ---- ---- Trading account assets ..................................................... 1,188 1 ---- -------- ------- ------- Total interest-earning assets ........................................... 24,156 2,670 4,396 Interest-bearing demand .................................................... 491 145 290 Savings and money market savings ........................................... 6,062 438 876 Savings certificates ....................................................... 2,329 1,897 2,078 Large denomination certificates ............................................ 1,104 481 236 Time deposits in foreign offices ........................................... 1,156 29 ---- Federal funds purchased and securities sold under repurchase agreements..... 7,171 15 ---- Commercial paper ........................................................... 706 ---- ---- Other short-term borrowed funds ............................................ 762 220 1 Bank notes ................................................................. 2,514 150 275 Other long-term debt ....................................................... 213 48 49 -------- ------- ------- Total interest-bearing liabilities ...................................... 22,508 3,423 3,805 Interest rate swaps ........................................................ (627) (139) (1) -------- ------- -------- Interest sensitivity gap ................................................ 1,021 (892) 590 -------- ------- ------- Cumulative interest sensitivity gap ..................................... $ 1,021 $ 129 $ 719 ======== ======= ======= Interest Sensitive Period ------------------------------------------- Over One Total Within Year and One Year Nonsensitive Total -------------- ------------ ------- $ in millions December 31, 1997 - ----------------- Loans and net leases, net of unearned income ............................... $31,645 $12,549 $44,194 Investment securities ...................................................... 3,700 6,719 10,419 Interest-bearing bank balances ............................................. 133 ---- 133 Federal funds sold and securities purchased under resale agreements ........ 1,589 ---- 1,589 Trading account assets ..................................................... 999 ---- 999 ------- ------- ------- Total interest-earning assets ........................................... 38,066 19,268 57,334 Interest-bearing demand .................................................... 1,050 3,604 4,654 Savings and money market savings ........................................... 8,304 3,375 11,679 Savings certificates ....................................................... 8,009 2,926 10,935 Large denomination certificates ............................................ 1,995 289 2,284 Time deposits in foreign offices ........................................... 4,504 (1) 4,503 Federal funds purchased and securities sold under repurchase agreements..... 8,315 8 8,323 Commercial paper ........................................................... 1,034 ---- 1,034 Other short-term borrowed funds ............................................ 661 92 753 Bank notes ................................................................. 1,871 1,069 2,940 Other long-term debt ....................................................... 618 2,376 2,994 ------- -------- ------- Total interest-bearing liabilities ...................................... 36,361 13,738 50,099 Interest rate swaps ........................................................ (1,157) 1,157 ---- ------- -------- ------- Interest sensitivity gap ................................................ $ 548 6,687 $ 7,235 ======= -------- ======= Cumulative interest sensitivity gap ..................................... $ 7,235 ======== December 31, 1996 - ----------------- Loans and net leases, net of unearned income ............................... $25,827 $12,180 $38,007 Investment securities ...................................................... 3,852 7,325 11,177 Interest-bearing bank balances ............................................. 78 ---- 78 Federal funds sold and securities purchased under resale agreements ........ 276 ---- 276 Trading account assets ..................................................... 1,189 1 1,190 ------- -------- ------- Total interest-earning assets ........................................... 31,222 19,506 50,728 Interest-bearing demand .................................................... 926 3,266 4,192 Savings and money market savings ........................................... 7,376 2,700 10,076 Savings certificates ....................................................... 6,304 4,057 10,361 Large denomination certificates ............................................ 1,821 378 2,199 Time deposits in foreign offices ........................................... 1,185 ---- 1,185 Federal funds purchased and securities sold under repurchase agreements..... 7,186 20 7,206 Commercial paper ........................................................... 706 ---- 706 Other short-term borrowed funds ............................................ 983 56 1,039 Bank notes ................................................................. 2,939 1,369 4,308 Other long-term debt ....................................................... 310 2,407 2,717 ------- -------- ------- Total interest-bearing liabilities ...................................... 29,736 14,253 43,989 Interest rate swaps ........................................................ (767) 767 ---- ------- -------- ------- Interest sensitivity gap ................................................ $ 719 6,020 $ 6,739 ======= -------- ======= Cumulative interest sensitivity gap ..................................... $ 6,739 ========
Note: Refer to page 28 for details on management's assumptions of the repricing characteristics of certain accounts without contractual maturity dates. Management believes that rate risk is best measured by simulation modeling which calculates expected net interest income based on projected interest-earning assets, interest-bearing liabilities and off-balance sheet financial instruments. The model projections are based upon historical trends and management's expectations of balance sheet growth patterns, spreads to market rates, and prepayment behavior for assets and liabilities. The Management Finance Committee regularly reviews the assumptions used in the model. The corporation monitors exposure to a gradual change in rates of 200 basis points up or down over a rolling 12-month period and an interest rate shock of an instantaneous change in rates of 200 basis 29 points up or down over the same period. The corporation policy limit for the maximum negative impact on net interest income from a gradual change in interest rates of 200 basis points over 12 months is 7.5 percent. Management generally has maintained a risk position well within the policy guideline level. As of December 31, 1997, the model indicated the impact of a 200 basis point gradual rise in rates over 12 months would approximate a .9 percent decrease in net interest income, while a 200 basis point decline in rates over the same period would approximate a .7 percent increase from an unchanged rate environment. At December 31, 1996, the model indicated the impact of a 200 basis point gradual rise in rates over 12 months would approximate a 1 percent decrease in net interest income, while a 200 basis point decline in rates over the same period would approximate a 1 percent increase from an unchanged rate environment. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. The corporation maintains trading accounts primarily to facilitate customer investment and risk management needs. The market risk inherent in these portfolios was immaterial at December 31, 1997. In addition to on-balance sheet instruments such as investment securities and purchased funds, the corporation uses off-balance sheet derivative instruments to manage interest rate risk, liquidity and net interest income. Off-balance sheet instruments include interest rate swaps, futures and options with indices that directly correlate to on-balance sheet instruments. The corporation has used off-balance sheet financial instruments, principally interest rate swaps, over a number of years and believes their use on a sound basis enhances the effectiveness of asset and liability and interest rate sensitivity management. Off-balance sheet asset and liability derivative transactions are based on referenced or notional amounts. At December 31, 1997, the corporation had $3.925 billion notional amount of derivatives outstanding for asset and liability management purposes. Details on the maturity schedule of asset and liability management derivatives including notional amounts and average maturities are contained in the following table. Maturity Schedule of Asset and Liability Management Derivatives ----------------------------------------------------------------- December 31, 1997
Within Over Average One Two Three Four Five Five Life $ in millions Year Years Years Years Years Years Total (Years) ----- --- --- --- --- --- ----- ----- Interest rate swaps: Pay fixed/receive floating: Notional amount ..................... $ 267 $ 338 $ 25 $ 3 $ 1 $ 82 $ 716 1.63 Weighted average rates received ..... 4.88% 5.77% 6.01% 6.40% 5.88% 5.91% 5.47% Weighted average rates paid ......... 7.29 6.10 6.54 9.03 6.19 7.92 6.78 Receive fixed/pay floating: Notional amount ..................... $ 476 $ 101 $ 53 $ 102 $ 250 $ 802 $1,784 10.84 Weighted average rates received ..... 7.04% 6.59% 6.92% 6.44% 7.09% 7.55% 7.21% Weighted average rates paid ......... 5.86 5.80 6.04 6.02 5.85 5.99 5.93 Receive floating/pay floating: Notional amount ..................... ---- ---- ---- $ 300 ---- ---- $ 300 3.43 Weighted average rates received ..... ---- ---- ---- 5.89% ---- ---- 5.89% Weighted average rates paid ......... ---- ---- ---- 5.99 ---- ---- 5.99 Index amortizing swaps:* Receive fixed/pay floating: Notional amount ..................... $ 125 ---- ---- ---- ---- ---- $ 125 .07 Weighted average rates received ..... 8.56% ---- ---- ---- ---- ---- 8.56% Weighted average rates paid ......... 5.81 ---- ---- ---- ---- ---- 5.81 Total interest rate swaps: Notional amount ..................... $ 868 $ 439 $ 78 $ 405 $ 251 $ 884 $2,925 7.36 Weighted average rates received ..... 6.60% 5.96% 6.62% 6.03% 7.08% 7.40% 6.71% Weighted average rates paid ......... 6.29 6.03 6.21 6.02 5.86 6.17 6.14 Futures ................... $ 1,000 ---- ---- ---- ---- ---- $1,000 .10 Total derivatives (notional amount) ................... $ 1,868 $ 439 $ 78 $ 405 $ 251 $ 884 $3,925 5.51
* Maturity is based upon expected average lives rather than contractual lives. 30 Credit risk of off-balance sheet derivative financial instruments is equal to the fair value gain of the instrument if a counterparty fails to perform. The credit risk is normally a small percentage of the notional amount and fluctuates as interest rates move up or down. The corporation mitigates this risk by subjecting the transactions to the same rigorous approval and monitoring process as is used for on-balance sheet credit transactions, by dealing in the national market with highly rated counterparties, by executing transactions under International Swaps and Derivatives Association Master Agreements and by using collateral instruments to reduce exposure where appropriate. Collateral is delivered by either party when the fair value of a particular transaction or group of transactions with the same counterparty on a net basis exceeds an acceptable threshold of exposure. The threshold level is determined based on the strength of the individual counterparty. The fair value of all asset and liability derivative positions for which the corporation was exposed to counterparties totaled $74.012 million at December 31, 1997. The fair value of all asset and liability derivative positions for which counterparties were exposed to the corporation amounted to $11.455 million on the same date. Details of the net fair value gain of $62.557 million are included in Note K of Notes to Consolidated Financial Statements. Asset and liability transactions are accounted for following hedge accounting rules. Accordingly, gains and losses related to the fair value of derivative contracts used for asset and liability management purposes are not immediately recognized in earnings. If the hedged or altered balance sheet amounts were marked to market, the resulting unrealized balance sheet gains or losses could be expected to approximately offset unrealized derivatives gains and losses. The corporation uses derivative financial contracts to (1) swap floating rate assets or liabilities to fixed rate; (2) convert fixed rate assets or liabilities to floating rate; (3) hedge the interest rate spread between assets and liabilities; and (4) hedge the yield or rate on future transactions. These transactions serve to better match the repricing characteristics of various assets and liabilities, reduce spread risk, adjust overall rate sensitivity and enhance net interest income. - ------------------------------------ Large Denomination Deposits* Table 6 - ------------------------------------ December 31, 1997 (thousands) Remaining Maturities Three months or less ............... $ 1,059,160 Over three through six months ...... 431,190 Over six through twelve months ..... 499,781 Over twelve months ................. 293,937 ----------- Total .............................. $ 2,284,068 =========== * Includes domestic office certificates of deposit of $100 or more. 31 - ------------------------------------ Short-Term Borrowed Funds Table 7 - -------------------------------------------------------------------------------- (thousands)
1997 1996 1995 ------------------- ------------------- ------------------- Amount Rate Amount Rate Amount Rate ----------- ----- ---------- ----- ---------- ----- At year-end: Federal funds purchased and securities sold under repurchase agreements ......................... $ 8,322,716 5.48% $7,206,005 5.71% $6,892,491 5.13% Commercial paper ................................ 1,034,024 4.66 706,376 4.69 535,218 4.30 Other borrowed funds ............................ 752,874 5.39 1,039,221 5.46 1,775,555 5.79 ------------ ----------- ----------- Total ......................................... $10,109,614 5.39 $8,951,602 5.60 $9,203,264 5.21 ============ =========== =========== Average for the year: Federal funds purchased and securities sold under repurchase agreements ......................... $ 6,743,997 5.30 $7,136,064 5.37 $6,263,319 5.97 Commercial paper* ............................... 781,345 5.06 595,806 4.88 535,210 5.48 Other borrowed funds ............................ 1,461,781 5.57 1,286,160 5.46 2,061,418 6.03 ------------ ----------- ----------- Total ......................................... $ 8,987,123 5.32 $9,018,030 5.35 $8,859,947 5.96 ============ =========== =========== Maximum month-end balance: Federal funds purchased and securities sold under repurchase agreements ......................... $ 8,322,716 $8,519,928 $8,051,601 Commercial paper ................................ 1,034,024 706,376 599,146 Other borrowed funds ............................ 1,953,440 1,961,632 2,971,885
* Average interest rate for each year includes effect of fees paid on back-up lines of credit. Changing the repricing characteristics of liabilities to match the assets they support generally is accom plished through an interest rate swap whereby the corporation pays a fixed rate and receives a floating rate. This allows the corporation to acquire fixed-rate assets without increasing exposure to rising interest rates. Converting fixed-rate debt to a floating rate is accomplished generally by receiving fixed on an interest rate swap and paying floating. The corporation has used this type of transaction to convert long-term subordinated debt to a floating rate. This transaction increases liquidity by allowing a long-term liability to replace a short-term liability, yet have a rate that is consistent with and fluctuates with short-term rates. Receiving a fixed rate on an interest rate swap and paying a floating rate has the effect of converting floating-rate assets to fixed-rate assets. The results are essentially the same as acquiring a fixed-rate security funded with a floating-rate liability. Both transactions reduce asset sensitivity. The corporation has used this type of transaction to convert a portion of the floating-rate credit card portfolio to fixed rates. Hedging the spread between the rate received and the rate paid on certain assets and liabilities can be achieved by the use of options contracts such as caps and floors. Changes in the yield or rate on anticipated future transactions can be hedged by purchasing or selling futures contracts on which change in price is highly correlated with the anticipated transaction. The corporation has used both futures contracts and options contracts to hedge spreads and anticipated transactions. Liquidity To ensure the corporation is positioned to meet immediate and Management future cash demands, management relies on liquidity analysis, knowledge of business trends over past economic cycles and forecasts of future conditions. Liquidity is monitored through policy guidelines, which limit the level, maturity and concentration of noncore funding sources. Liquidity is maintained through a strong balance sheet and operating performance that generates high credit ratings for funding at attractive rates and that assures market acceptance. At December 31, 1997, the corporation's senior debt was rated Aa3 by Moody's and AA by Standard & Poor's. Subordinated debt was rated A1 and AA- by Moody's and Standard & Poor's, respectively. Commercial paper was rated P-1 by Moody's and A-1+ by Standard & Poor's. Through its balance sheet, the corporation generates liquidity on the asset side by maintaining significant amounts of available-for-sale investment securities, which may be sold at any time, and loans which may be securitized or sold. Additionally, the corporation generates cash through deposit growth, the issuance of bank notes, the availability of unused lines of credit and through other forms of debt and equity instruments. 32 Through policy guidelines, the corporation limits net purchased funds to 50 percent of long-term assets, which include net loans and leases, investment securities with remaining maturities over one year and net foreclosed real estate. Policy guidelines insure against concentrations by maturity of noncore funding sources by limiting the cumulative percentage of purchased funds that mature overnight, within 30 days and within 90 days. Guidelines also require the monitoring of significant concentrations of funds by single sources and by type of borrowing category. Nonperforming Nonperforming assets at December 31, 1997 totaled $129.495 million Assets or .29 percent of period-end loans and foreclosed property. The total was down $2.023 million or 1.5 percent from one year earlier, primarily reflecting lower valuations for foreclosed real estate. The corporation's nonperforming assets historically have remained relatively low due to strong underwriting standards and a consistent and disciplined credit review policy. Real estate nonperforming assets, the largest category of total nonperforming assets, were $106.318 million or .64 percent of real estate loans and foreclosed real estate compared with $110.590 million or .79 percent at year-end 1996. Included in real estate nonperforming assets were real estate nonperforming loans of $84.872 million at December 31, 1997 versus $85.923 million one year earlier. Commercial real estate nonperforming assets totaled $50.930 million or .59 percent of related loans and foreclosed real estate compared with $61.574 million or .89 percent at year-end 1996. Commercial real estate nonperforming loans were $45.335 million versus $55.007 million at the end of 1996. - ----------------------------------------------------------------- Nonperforming Assets and Contractually Past Due Loans Table 8 - -------------------------------------------------------------------------------- December 31 (thousands)
1997 1996 ------ ---- Nonperforming Assets Cash-basis assets ............................. $ 101,156 $ 98,638 Restructured loans ............................ ---- ---- --------- --------- Total nonperforming loans ................. 101,156 98,638 Foreclosed property: Foreclosed real estate ....................... 38,071 35,472 Less valuation allowance ..................... 16,625 10,805 Other foreclosed assets ...................... 6,893 8,213 --------- --------- Total foreclosed property ................. 28,339 32,880 --------- --------- Total nonperforming assets ................ $ 129,495 $ 131,518 ========= ========= Nonperforming loans to year-end loans ......... .23% .26% Nonperforming assets to year-end loans and foreclosed property .......................... .29 .35 Year-end allowance for loan losses times nonperforming loans .......................... 5.38x 5.26x Year-end allowance for loan losses times nonperforming assets ......................... 4.21 3.95 Contractually Past Due Loans (accruing loans past due 90 days or more) Borrowers ..................................... $ 114,343 $ 84,788 ========= ========= 1995 1994 1993 1992 ---- ---- ---- ---- Nonperforming Assets Cash-basis assets ............................. $ 102,310 $ 146,246 $ 202,231 $ 258,378 Restructured loans ............................ ---- ---- 686 377 --------- --------- --------- --------- Total nonperforming loans ................. 102,310 146,246 202,917 258,755 Foreclosed property: Foreclosed real estate ....................... 39,877 53,746 101,253 127,971 Less valuation allowance ..................... 11,136 12,112 19,974 11,597 Other foreclosed assets ...................... 4,212 2,931 3,406 2,842 --------- --------- --------- --------- Total foreclosed property ................. 32,953 44,565 84,685 119,216 --------- --------- --------- --------- Total nonperforming assets ................ $ 135,263 $ 190,811 $ 287,602 $ 377,971 ========= ========= ========= ========= Nonperforming loans to year-end loans ......... .29% .46% .73% 1.03% Nonperforming assets to year-end loans and foreclosed property .......................... .38 .60 1.03 1.50 Year-end allowance for loan losses times nonperforming loans .......................... 5.07x 3.53x 2.51x 1.86x Year-end allowance for loan losses times nonperforming assets ......................... 3.84 2.70 1.77 1.27 Contractually Past Due Loans (accruing loans past due 90 days or more) Borrowers ..................................... $ 69,953 $ 48,050 $ 51,239 $ 64,464 ========= ========= ========= =========
Provision The provision for loan losses was $264.949 million, exceeding net and loan losses for the year and up for $71.173 million or 36.7 Allowance percent from $193.776 million in 1996. Included in the provision for Loan for 1997 was a special merger-related charge of $10.845 million to Losses align the practices of the merged entities with those of the corporation. The provision reflects management's assessment of the adequacy of the allowance for loan losses to absorb potential write-offs in the loan portfolio due to credit deterioration or changes in risk profile. Factors considered in this assessment include the strength and consistency of the corporation's underwriting 33 standards and charge-off policy, current and anticipated economic conditions, historical credit loss experience and the composition of the loan portfolio. Credit evaluations are made on a cash flow analysis basis with follow-up credit reviews consistently maintained. In addition, the corporation enforces an aggressive loan loss policy of early recognition and charge-off of troubled credits. Net loan losses for the year totaled $264.164 million or .67 percent of average loans compared with $193.487 million or .53 percent of loans in 1996, an increase of $70.677 million or 36.5 percent. The rise in net loan losses was driven primarily by higher charge-offs in credit cards, reflecting continued growth industry-wide in bankruptcy losses. Also contributing to the increase in net loan losses for the year were lower recoveries in real estate loans. Excluding credit cards, net loan losses totaled $44.830 million or .13 percent of average loans versus $30.545 million or .10 percent in 1996. Management anticipates net loan losses to continue to rise in 1998, primarily reflecting higher bankruptcy-driven credit card losses. Credit card net loan losses were $219.334 million or 3.90 percent of average credit card loans, up $56.392 million or 34.6 percent from $162.942 million or 3.29 percent of average receivables in 1996. Net recoveries in real estate loans totaled $569 thousand for the year compared with $8.573 million in 1996, a decline of $8.004 million. Selected data on the corporation's managed credit card portfolio, which includes securitized loans, appears in the following table. Managed credit card data -----------------------------------------------------------
$ in thousands 1997 1996 1995 ------- ---- ---- Average credit card outstandings ..................... $ 6,179,456 $ 5,573,626 $ 4,767,657 Net loan losses ...................................... 240,388 183,082 114,014 Net loan losses to average loans ..................... 3.89% 3.28% 2.39% Delinquencies (30 days or more) to period-end loans .. 2.75 2.35 2.31
The allowance for loan losses at December 31, 1997 was $544.723 million, representing 1.23 percent of year-end loans and 538 percent of nonperforming loans. This compared with a balance of $519.297 million, representing 1.37 percent of loans and 526 percent of nonperforming loans one year earlier. ALLOWANCE FOR LOAN LOSSES (MILLIONS) (Graph appears below) 1992 1993 1994 1995 1996 1997 Year-End Loan Loss Allowance 1.86x 2.51x 3.53x 5.07x 5.26x 5.38x x Allowance Times Nonperforming Loans EARNINGS COVERAGE OF NET LOAN LOSSES* (MILLIONS) (Graph appears below) 1992 1993 1994 1995 1996 1997 Earnings Before Income Taxes and Provision for Loan Losses 5.52x 6.43x 11.18x 8.56x 6.66x 5.38x x Number of Times Earnings Covered Net Loan Losses *Excluding Nonrecurring Items and Securities Transactions LOAN LOSS EXPERIENCE (MILLIONS) (Graph appears below) 1992 1993 1994 1995 1996 1997 Credit Card 69.0 62.0 69.7 109.7 162.9 219.3 Commercial 6.1 8.3 7.5 - 0.5 5.1 Real Estate 58.0 63.3 - - - - Other 21.1 10.1 12.8 24.7 38.7 40.4 .65% .56% .30% .38% .53% .67% % Net Loan Losses to Average Loans 34 - ------------------------------------ Allowance for Loan Losses Table 9 - -------------------------------------------------------------------------------- (thousands)
1997 1996 1995 1994 1993 1992 ------ ---- ----- ---- ---- ---- Summary of Transactions Balance at beginning of year ...................... $519,297 $518,808 $516,132 $509,798 $481,357 $421,193 Additions from acquisitions ....................... 24,641 200 ---- ---- ---- ---- Allowance of company sold ......................... ---- ---- ---- ---- ---- (4,811) Provision for loan losses ......................... 264,949 193,776 130,504 96,122 172,161 219,177 Deduct net loan losses: Loans charged off: Commercial ...................................... 9,254 6,375 6,364 14,319 15,047 20,007 Credit card ..................................... 246,008 184,387 125,301 83,597 75,325 82,272 Other revolving credit .......................... 10,564 8,834 5,966 4,933 5,259 6,468 Other retail .................................... 39,801 41,581 26,958 15,696 12,611 22,441 Real estate ..................................... 11,564 7,915 15,299 18,292 75,136 66,286 Lease financing ................................. 4,488 1,635 892 226 458 668 Foreign ......................................... ---- ---- ---- ---- ---- 960 -------- -------- -------- -------- -------- -------- Total ......................................... 321,679 250,727 180,780 137,063 183,836 199,102 Recoveries: Commercial ...................................... 4,171 5,905 9,078 6,848 6,720 13,860 Credit card ..................................... 26,674 21,445 15,644 13,913 13,350 13,292 Other revolving credit .......................... 2,361 1,695 1,369 1,278 1,328 1,223 Other retail .................................... 11,837 11,524 7,472 6,505 6,545 7,889 Real estate ..................................... 12,133 16,488 19,239 18,495 11,877 8,307 Lease financing ................................. 339 183 142 204 264 322 Foreign ......................................... ---- ---- 8 32 32 7 -------- -------- -------- -------- -------- -------- Total ......................................... 57,515 57,240 52,952 47,275 40,116 44,900 -------- -------- -------- -------- -------- -------- Net loan losses .................................. 264,164 193,487 127,828 89,788 143,720 154,202 -------- -------- -------- -------- -------- -------- Balance at end of year ............................ $544,723 $519,297 $518,808 $516,132 $509,798 $481,357 ======== ======== ======== ======== ======== ======== Net Loan Losses (Recoveries) by Category Commercial ........................................ $ 5,083 $ 470 $(2,714) $ 7,471 $ 8,327 $ 6,147 Credit card ....................................... 219,334 162,942 109,657 69,684 61,975 68,980 Other revolving credit ............................ 8,203 7,139 4,597 3,655 3,931 5,245 Other retail ...................................... 27,964 30,057 19,486 9,191 6,066 14,552 Real estate ....................................... (569) (8,573) (3,940) (203) 63,259 57,979 Lease financing ................................... 4,149 1,452 750 22 194 346 Foreign ........................................... ---- ---- (8) (32) (32) 953 -------- -------- ---------- -------- -------- -------- Total ......................................... $264,164 $193,487 $127,828 $ 89,788 $143,720 $154,202 ======== ======== ========= ======== ======== ======== Net loan losses -- excluding credit cards ......... $ 44,830 $ 30,545 $18,171 $ 20,104 $ 81,745 $ 85,222 Net Loan Losses (Recoveries) to Average Loans by Category Commercial ........................................ .04% ----% (.02%) .07% .10% .07% Credit card ....................................... 3.90 3.29 2.41 1.74 2.07 3.22 Other revolving credit ............................ 1.93 1.71 1.15 .96 1.06 1.42 Other retail ...................................... .67 .69 .47 .23 .17 .45 Real estate ....................................... ---- (.06) (.03) ---- .64 .62 Lease financing ................................... .43 .22 .27 .01 .14 .28 Foreign ........................................... ---- ---- ---- (.03) (.04) 1.32 Total loans ....................................... .67 .53 .38 .30 .56 .65 Total loans -- excluding credit cards ............. .13 .10 .06 .08 .36 .39 Year-end allowance to outstanding loans ........... 1.23% 1.37% 1.46% 1.63% 1.84% 1.92% Earnings coverage of net loan losses* ............. 5.38x 6.66x 8.56x 11.18x 6.43x 5.52x Allocation of Allowance for Loan Losses** Commercial ........................................ $120,195 $117,883 $123,161 $135,725 $135,898 $122,404 Credit card ....................................... 221,142 191,606 141,763 130,111 94,697 71,863 Other revolving credit ............................ 10,682 8,268 7,174 6,433 5,812 5,615 Other retail ...................................... 36,669 48,011 42,999 38,175 39,384 34,368 Real estate ....................................... 93,821 94,167 127,763 143,659 147,570 161,240 Lease financing ................................... 6,537 3,685 1,666 2,211 2,018 1,994 Foreign ........................................... 3,702 3,702 3,697 3,830 931 715 Unallocated ....................................... 51,975 51,975 70,585 55,988 83,488 83,158 -------- -------- --------- -------- -------- -------- Total ......................................... $544,723 $519,297 $518,808 $516,132 $509,798 $481,357 ======== ======== ========= ======== ======== ========
* Earnings before income taxes and provision for loan losses excluding subsidiary sale, securities transactions and nonrecurring charges. ** The allocation of the allowance for loan losses above represents an estimate based on historical loss experience, individual credits, economic conditions and other judgmental factors. Since any allocation is judgmental and involves consideration of many factors, the allocation may be more or less than the charge-offs that may ultimately occur. The entire allowance is available for charge-offs in any category of loans. See page 77 for percentages of loan categories to total loans. 35 Noninterest Total other operating revenue, which excludes investment Income securities sales, increased $131.036 million or 15 percent. All major categories of total other operating revenue advanced for the year, reflecting stronger sales efforts, higher fee volume and good gains from the corporation's consumer banking initiatives. Included in total other operating revenue for 1997 was a gain of approximately $21.096 million from sales of branch offices versus a gain of $12.496 million in 1996 from the sale of the corporation's bond trustee business. Excluding these one-time gains, total other operating revenue rose $122.436 million or 14.2 percent in 1997. Based on economic trends known at the end of 1997, management has targeted growth of approximately 14 percent in total other operating revenue for 1998 led by trust services, deposit charge revenues, debit card income, capital markets income and investment fee services. Deposit account service charge revenues rose $25.561 million or 9.1 percent. Higher commercial analysis fees, insufficient funds charges and overdraft fees primarily accounted for the year's increase. Trust service fees grew $20.928 million or 13.5 percent, reflecting greater business volume as well as increased fees from higher portfolio asset values. Good gains occurred in trust and investment management services, in institutional trust and retirement services and in asset management services, with fees collected from the Wachovia Funds also showing good growth for the year. At December 31, 1997, trust assets totaled $129.079 billion, including $33.568 billion under management, versus $108.557 billion with $26.161 billion under management at year-end 1996. Credit card income was up $18.852 million or 13.1 percent. Growth primarily reflected higher overlimit charges, greater card sales transactions and an increase in net revenues recognized from securitized loans. Active managed credit card accounts totaled 2.307 million at December 31, 1997 compared with 2.271 million one year earlier. Investment fee income rose $9.740 million or 22.3 percent. Gains occurred largely in mutual fund income, brokerage commissions and corporate financing activities, which are part of capital markets income. Included in investment fee income are sales by investment counselors of the Wachovia Funds, the corporation's proprietary family of mutual funds. The Wachovia Funds had assets totaling $5.062 billion at December 31, 1997 versus $3.739 billion one year earlier. - ----------------------------- Noninterest Income Table 10 - -------------------------------------------------------------------------------- (thousands)
1997 1996 1995 1994 1993 1992 ---------- -------- -------- -------- -------- -------- Service charges on deposit accounts .................. $ 306,231 $280,670 $ 244,671 $ 231,646 $237,328 $219,881 Fees for trust services .............................. 175,549 154,621 145,464 142,026 133,651 121,712 Credit card income -- net of interchange payments ............................................ 162,234 143,382 127,153 126,886 104,922 83,104 Electronic banking ................................... 64,640 56,226 39,722 28,347 17,857 15,290 Investment fee income ................................ 53,487 43,747 27,656 14,522 17,153 13,021 Mortgage fee income .................................. 23,544 21,371 26,139 33,997 41,339 41,747 Trading account profits (losses) -- excluding interest ............................................ 26,851 22,654 24,235 8,794 20,063 (5,199) Insurance premiums and commissions ................... 30,205 20,562 17,455 17,018 16,566 17,359 Bankers' acceptance and letter of credit fees ........ 34,526 28,243 25,953 25,801 22,277 22,438 Student loan servicing ............................... ---- ---- ---- ---- 5,535 33,250 Other service charges and fees ....................... 38,750 38,590 30,271 22,876 22,094 22,852 Other income ......................................... 89,751 64,666 48,396 38,186 30,684 10,394 ----------- --------- ---------- ---------- --------- --------- Total other operating revenue .................... 1,005,768 874,732 757,115 690,099 669,469 595,849 Gain on sale of mortgage servicing portfolio ......... ---- ---- 79,025 ---- ---- ---- Gain on sale of subsidiary ........................... ---- ---- ---- ---- 8,030 19,486 Investment securities gains (losses) ................. 1,454 4,588 (19,672) (21,972) 74,256 54,151 ----------- --------- ---------- ---------- --------- --------- Total ............................................ $1,007,222 $879,320 $ 816,468 $ 668,127 $751,755 $669,486 =========== ========= ========== ========== ========= =========
36 Electronic banking income, consisting of fees from debit card and ATM usage, increased $8.414 million or 15 percent for the year. Growth was driven principally by higher debit card interchange income and ATM foreign access fees. Trading account profits grew $4.197 million or 18.5 percent, reflecting gains from sales of U.S. Treasury securities and mortgage-backed securities as well as from derivatives income and foreign exchange trading. Both derivatives income and foreign exchange trading are part of the corporation's expanding capital markets services. Mortgage fee income was higher by $2.173 million or 10.2 percent. Gains on sales of mortgage loans to the secondary market and increased volume in mortgage servicing activities acquired through the merger with Central Fidelity principally accounted for the year's growth. Remaining combined categories of total other operating revenue rose $41.171 million or 27.1 percent. Insurance premiums and commissions were up $9.643 million or 46.9 percent, and bankers' acceptance and letter of credit fees grew $6.283 million or 22.2 percent. Other service charges and fees were modestly higher, while other income expanded $25.085 million or 38.8 percent. Included in other income in 1997 and in 1996 were the gains on branch sales and the gain from the sale of the corporation's bond trustee business, respectively. Including investment securities sales, total noninterest income increased $127.902 million or 14.5 percent for the year. Investment securities sales resulted in a net gain of $1.454 million in 1997 compared with $4.588 million in 1996. Noninterest Noninterest expense was up $457.748 million or 30.3 percent for Expense the year and included a total of $287.532 million, pretax, in nonrecurring charges taken in the fourth quarter. The corporation recorded a merger-related charge of $220.330 million, pretax, for its integration of Central Fidelity Banks, Inc., Jefferson Bankshares and 1st United Bancorp and a technology impairment charge of $67.202 million, pretax, for the write-down and disposal of personal computer hardware and software purchased before 1997. The merger-related charge covered pretax expenses of $114.079 million for severance and personnel related costs; $66.953 million for systems and operating charges; $16.316 million for business line and branch integration expenses; and $22.982 million for deal costs and other expenses. The technology impairment charge was taken because the corporation adopted a plan to implement a company-wide distributed technology platform for improved employee communication capabilities. Excluding the fourth quarter special charges, noninterest expense on a core operating basis rose $170.216 million or 11.3 percent for the year and the corporation's overhead ratio measuring noninterest expense as a percentage of total adjusted revenues (taxable equivalent net interest income and total other operating revenue) was 53.19 percent. Growth in noninterest expense was driven principally by higher personnel costs and increased programming and consulting expenses associated with Year 2000 systems conversions. Management expects noninterest expense to increase modestly on a core basis in 1998 from 1997's core operating expense level of $1.679 billion. Excluded from the 1998 projection are additional expenses of approximately $50 million for merger-related costs that will be recognized primarily in the first half of the year and approximately $17 million for Year 2000 project costs. 37 - ------------------------------- Noninterest Expense Table 11 - -------------------------------------------------------------------------------- (thousands) 1997 1996 ------- ---- Salaries ............................... $ 742,106 $ 655,065 Employee benefits ...................... 163,051 141,867 ----------- ----------- Total personnel expense ............ 905,157 796,932 Net occupancy expense .................. 116,654 114,001 Equipment expense ...................... 142,227 132,775 Postage and delivery ................... 48,657 47,195 Outside data processing, programming and software .......................... 86,497 51,139 Stationery and supplies ................ 30,960 30,043 Advertising and sales promotion ........ 72,046 68,639 Professional services .................. 54,113 41,223 Travel and business promotion .......... 25,215 21,096 Regulatory agency fees and other bank services .............................. 14,600 16,771 Amortization of intangible assets ...... 13,308 9,163 Foreclosed property expense ............ 1,875 1,930 Personal computer impairment charge..... 67,202 ---- Merger-related charges ................. 220,330 ---- Other expense .......................... 167,880 178,066 ----------- ----------- Total .............................. $ 1,966,721 $ 1,508,973 =========== =========== Overhead ratio* ........................ 62.3% 52.5%
1995 1994 1993 1992 ---- ---- ---- ---- Salaries ............................... $ 604,041 $ 566,368 $ 545,869 $ 533,000 Employee benefits ...................... 129,749 125,144 139,754 112,179 ----------- ----------- ----------- ----------- Total personnel expense ............ 733,790 691,512 685,623 645,179 Net occupancy expense .................. 109,543 102,131 101,225 100,818 Equipment expense ...................... 127,268 124,321 119,340 116,993 Postage and delivery ................... 44,553 41,169 44,051 42,771 Outside data processing, programming and software .......................... 47,737 39,870 42,810 37,562 Stationery and supplies ................ 30,238 27,327 28,100 29,120 Advertising and sales promotion ........ 57,957 42,576 43,972 33,091 Professional services .................. 41,152 23,326 19,025 19,692 Travel and business promotion .......... 20,267 16,743 15,977 13,927 Regulatory agency fees and other bank services .............................. 63,136 79,693 80,341 78,009 Amortization of intangible assets ...... 12,296 21,042 30,276 35,855 Foreclosed property expense ............ 2,420 7,508 22,929 14,850 Personal computer impairment charge..... ---- ---- ---- ---- Merger-related charges ................. ---- ---- ---- ---- Other expense .......................... 151,272 126,033 120,589 128,162 ----------- ----------- ----------- ----------- Total .............................. $ 1,441,629 $ 1,343,251 $ 1,354,258 $ 1,296,029 =========== =========== =========== =========== Overhead ratio* ........................ 54.5% 54.7% 56.8% 58.0%
* Overhead ratio excluding the after-tax impact of nonrecurring charges was 53.19% in 1997. The corporation has been working since late 1995 to identify and begin remediating data recognition problems that will be caused in computer systems and software by the change in date from the year 1999 to the year 2000. Management has identified all business and operational functions that will be impacted by the date change and is moving aggressively to convert its application systems for year 2000 date recognition. Conversion and testing of all in-house application systems is expected to be completed by mid-1998, with testing of remaining vendor application system packages expected to be finished by the end of 1998. While many companies will be doing their 21st century date testing beginning in 1999, Wachovia already has included 21st century date testing as part of its conversion process. Throughout 1999, the corporation will conduct testing with external entities, such as business partners and the Federal Reserve, as they become Year 2000 ready. The corporation also is working to assess year 2000 readiness on the part of its current and future vendors, particularly those vendors considered critical to the ongoing operations and business of the corporation. Management estimates that total Year 2000 project costs will be approximately $55 million, of which $38 million has been spent through 1997. The corporation's Year 2000 project costs are not expected to have a material impact on its results of operations, liquidity or capital resources. The impact of Year 2000 noncompliance by all outside parties with whom the corporation may transact business cannot be gauged at this time. Total personnel costs for 1997 grew $108.225 million or 13.6 percent. Salaries expense increased $87.041 million or 13.3 percent, primarily reflecting a shift by management in its workforce composition toward higher skilled and more revenue generating personnel. Employee benefits expense was up $21.184 million or 14.9 percent, fueled by increased medical and retirement benefit expenses and by higher payroll taxes. Combined net occupancy and equipment expense rose $12.105 million or 4.9 percent. Equipment expense accounted for most of the rise, growing $9.452 million or 7.1 percent, largely due to higher depreciation charges. 38 Excluding the $220.330 million for merger-related charges and the $67.202 million for the technology impairment charge, remaining combined categories of noninterest expense increased $49.886 million or 10.7 percent. Outside data processing, programming and software expense rose $35.358 million or 69.1 percent, reflecting Year 2000 contract programming expenses. Professional services expense grew $12.890 million or 31.3 percent, due to consulting costs for Year 2000 project issues. In April, the corporation launched its brand awareness advertising campaign as part of its growth initiatives. Advertising expense for the year increased $3.407 million or 5 percent. Income Taxes Applicable income taxes decreased $66.736 million or 19.5 percent, reflecting the reduction in the corpo ration's income before income taxes for the year. Income taxes computed at the statutory rate are reduced primarily by the interest income earned on state and municipal loans and debt securities. Also, within certain limitations, one-half of the interest income earned on qualifying employee stock ownership plan loans is exempt from federal taxes. The interest earned on certain state and municipal debt instruments is exempt from federal taxes. All Georgia and North Carolina state and municipal debt instruments are exempt from Georgia and North Carolina taxes but are taxable in other states. State and municipal obligations of other states are generally subject to state taxes. The tax-exempt nature of these assets provide both an attractive return for the corporation and substantial interest savings for local governments and their constituents. New In June 1996, the Financial Accounting Standards Board issued Accounting Statement of Financial Accounting Standards No. 125, "Accounting Standards for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FASB 125), which provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets and extinguishments of liabilities. FASB 125 is effective for transactions occurring after December 31, 1996, except for the provisions relating to repurchase agreements, securities lending and other similar transactions and pledged collateral, which were delayed until after December 31, 1997 by FASB 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125." Adoption of FASB 125 was not material; FASB 127 will be adopted as required in 1998 and will not be material. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FASB 130), was issued and establishes standards for reporting and displaying comprehensive income and its components. FASB 130 requires comprehensive income and its components, as recognized under the accounting standards, to be displayed in a financial statement with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FASB 131), also issued in June 1997, establishes new standards for reporting information about operating segments in annual and interim financial statements. The standard also requires descriptive information about the way the operating segments are determined, the products and services provided by the segments and the nature of differences between reportable segment measurements and those used for the consolidated enterprise. This standard is effective for years beginning after December 15, 1997. Adoption in interim financial statements is not required until the year after initial adoption, however comparative prior period information is required. The corporation plans to adopt these standards, as required, beginning in 1998; the disclosure requirements will have no impact on the corporation's financial position or results of operations. 39 ----------------------------------------------- Shareholders' Equity and Capital Ratios ----------------------------------------------------------------- At December 31, 1997, shareholders' equity was $5.174 billion, up $566 million or 12.3 percent from $4.608 billion one year earlier. In connection with its purchase acquisitions of Jefferson Bankshares and 1st United Bancorp, the corporation issued 11.743 million shares of its common stock, resulting in an increase in shareholders' equity of $747.744 million. Included in shareholders' equity at December 31, 1997 was $71.098 million, net of tax, of unrealized gains on securities available-for-sale marked to fair value versus $51.686 million, net of tax, at year-end 1996. Wachovia's book value at December 31, 1997 was $25.13, an increase of 9.7 percent from $22.90 one year earlier. The corporation's internal capital generation rate (net income less dividends as a percentage of average equity) was 5.9 percent in 1997 and 10.1 percent in 1996. The decline reflected the decrease in the corporation's net income for 1997 due to nonrecurring charges taken in the fourth quarter. - ----------------------------------------- Capital Components and Ratios Table 12 - -------------------------------------------------------------------------------- December 31 (thousands)
1997 1996 1995 ------- ---- ---- Tier I capital: Common shareholders' equity ............... $ 5,174,301 $ 4,608,401 $ 4,600,304 Trust capital securities .................. 995,993 300,000 ---- Less ineligible intangible assets ......... 634,052 91,509 93,308 Unrealized (gains) losses on securities available-for-sale, net of tax ........... (71,098) (51,686) (139,978) ----------- ----------- ----------- Total Tier I capital .................... 5,465,144 4,765,206 4,367,018 Tier II capital: Allowable allowance for loan losses ....... 544,723 519,297 518,808 Allowable long-term debt .................. 1,193,451 1,288,041 1,358,479 ----------- ----------- ----------- Tier II capital additions ............... 1,738,174 1,807,338 1,877,287 ----------- ----------- ----------- Total capital ........................... $ 7,203,318 $ 6,572,544 $ 6,244,305 =========== =========== =========== Risk-adjusted assets ....................... $59,543,254 $50,391,406 $45,974,802 Quarterly average assets* .................. $59,139,712 $55,897,010 $53,829,501 Risk-based capital ratios: Tier I capital ............................ 9.18% 9.46% 9.50% Total capital ............................. 12.10 13.04 13.58 Tier I leverage ratio ...................... 9.24% 8.52% 8.11% Shareholders' equity to total assets ....... 7.91% 8.05% 8.25% 1994 1993 1992 ---- ---- ---- Tier I capital: Common shareholders' equity ............... $ 3,909,580 $ 3,744,084 $ 3,378,702 Trust capital securities .................. ---- ---- ---- Less ineligible intangible assets ......... 61,995 65,835 69,600 Unrealized (gains) losses on securities available-for-sale, net of tax ........... 139,861 (45,853) ---- ------------ ----------- ------------ Total Tier I capital .................... 3,987,446 3,632,396 3,309,102 Tier II capital: Allowable allowance for loan losses ....... 516,132 457,571 424,054 Allowable long-term debt .................. 980,782 733,738 494,983 ------------ ----------- ------------ Tier II capital additions ............... 1,496,914 1,191,309 919,037 ------------ ----------- ------------ Total capital ........................... $ 5,484,360 $ 4,823,705 $ 4,228,139 ============ =========== ============ Risk-adjusted assets ....................... $ 42,300,758 $36,553,436 $ 33,867,036 Quarterly average assets* .................. $ 48,087,128 $44,516,447 $ 40,756,615 Risk-based capital ratios: Tier I capital ............................ 9.43% 9.94% 9.77% Total capital ............................. 12.97 13.20 12.48 Tier I leverage ratio ...................... 8.29% 8.16% 8.12% Shareholders' equity to total assets ....... 7.94% 8.11% 8.03%
* Excludes ineligible intangible assets and average unrealized gains (losses) on securities available-for-sale, net of tax. During 1997, the corporation repurchased a total of 6,913,400 shares of its common stock under three separate authorizations by the board of directors. The shares were repurchased at an average price of $61.78 per share for a total cost of $427.111 million. In 1996, the corporation repurchased a total of 7,931,100 shares at an average price of $47.21 per share for a total cost of $374.408 million. The majority of the shares repurchased in 1997 was under the corporation's January 24, 1997 authorization to repurchase up to 10 million shares of its common stock. The authorization was rescinded by the board of directors effective with the corporation's pooling-of-interests merger announcement with Central Fidelity Banks on June 24, 1997. Repurchases by Central Fidelity (adjusted for the exchange ratio of 0.63 to 1) during 1997 and 1996 totaled 1,883,196 and 818,370 shares at an average cost of $58.53 and $36.75, respectively. On January 23, 1998, the board of directors authorized the repurchase of up to 946,662 shares to be issued in connection with the pending merger with Ameribank Bancshares, Inc., to be accounted for as a purchase transaction. Total repurchases were authorized up to an amount that would preserve the accounting for the merger with Central Fidelity as a pooling-of-interests. Intangible assets at December 31, 1997 totaled $649.542 million, consisting of $520.803 million in goodwill, $113.248 million in deposit base intangibles, $13.780 million in mortgage servicing rights and $1.711 million in other intangibles, primarily purchased credit card intangibles. This compared with intangible assets of $109.367 million one year earlier, with $41.147 million in goodwill, $55.803 million 40 in deposit base intangibles, $10.972 million in mortgage servicing rights and $1.445 million in other intangible assets. The increase in goodwill and deposit base intangibles from year-end 1996 resulted from the corporation's purchase acquisitions of Jefferson Bankshares and 1st United Bancorp in the fourth quarter of 1997. Regulatory agencies divide capital into Tier I (consisting of shareholders' equity and certain cumulative preferred stock instruments less ineligible intangible assets) and Tier II (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company's risk-adjusted assets and off-balance sheet items. Regulatory requirements presently specify that Tier I capital should exclude the market appreciation or depreciation of securities available-for-sale arising from marking the securities portfolio to market value. In addition to these capital ratios, regulatory agencies have established a Tier I leverage ratio which measures Tier I capital to average assets less ineligible intangible assets. Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent with at least one-half consisting of tangible common shareholders' equity and a minimum Tier I leverage ratio of 3 percent. Banks, which 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 capitalized by regulatory standards. At December 31, 1997, the corporation's Tier I to risk-adjusted assets ratio was 9.18 percent and total capital to risk-adjusted assets was 12.10 percent. The Tier I leverage ratio was 9.24 percent. The capital ratios at year-end 1997 and 1996 included $995.993 million and $300 million, respectively, of trust capital securities. Dividends Cash dividends paid in 1997 totaled $327.303 million on a combined basis, an increase of $21.563 mil lion or 7.1 percent from $305.740 million paid in1996. The payout ratio of cash dividends paid to net income was 55.2 percent in 1997 and 40.4 percent in 1996, with the rise in 1997 principally attributable to the year's decrease in net income after special charges. Cash dividends paid per common share in 1997 by Wachovia Corporation prior to its merger with Central Fidelity were $1.68, higher by 10.5 percent from $1.52 paid in 1996. The corporation's board of directors declared at its meeting on January 23, 1998 a first quarter dividend of $.44 per common share, payable March 2, 1998 to shareholders of record on February 5. The dividend is higher by 10 percent from $.40 per share paid in the same quarter of 1997. Additional dividend information may be found on page 78. YEAR-END SHAREHOLDERS' EQUITY PER SHARE Five-Year Compound Growth Rate = 9.1% (Graph appears below) 1992 16.25 1993 17.98 1994 18.79 1995 22.08 1996 22.90 1997 25.13 41 - ----------------------------- Financial Summary Table 13 - --------------------------------------------------------------------------------
1997 ------------------------------------------- Fourth Third Second Quarter Quarter Quarter ------------ ------ ------- Summary of Operations (thousands, except per share data) Interest income ..................... $1,119,617 $ 1,072,921 $ 1,051,622 Interest expense .................... 564,145 549,277 539,423 ------------ ----------- ----------- Net interest income ................. 555,472 523,644 512,199 Provision for loan losses (1) ....... 76,915 62,756 63,047 ------------ ----------- ----------- Net interest income after provision for loan losses .......... 478,557 460,888 449,152 Other operating revenue ............. 263,258 256,047 259,594 Investment securities (losses) gains (2) .......................... (1,693) 1,091 498 ------------ ----------- ----------- Total other income .................. 261,565 257,138 260,092 Personnel expense ................... 244,250 230,352 218,916 Nonrecurring charges (3) ............ 287,532 ---- ---- Other expense ....................... 200,636 194,949 201,485 ------------ ----------- ----------- Total other expense ................. 732,418 425,301 420,401 Income before income taxes .......... 7,704 292,725 288,843 Applicable income taxes ............. 4,100 93,803 92,038 ------------ ----------- ----------- Net income (4) ...................... $ 3,604 $ 198,922 $ 196,805 ============ =========== =========== Net income per common share: Basic .............................. $ .02 $ 1.02 $ 1.00 Diluted (4) ........................ $ .02 $ 1.00 $ .98 Cash dividends paid per common share (5) ................... $ .44 $ .44 $ .40 Average basic shares outstanding ........................ 201,415 194,981 196,676 Average diluted shares outstanding ........................ 205,934 198,555 199,819 Selected Average Balances (millions) Total assets ........................ $ 59,835 $ 57,183 $ 57,044 Loans -- net of unearned income ............................. 41,770 39,731 39,100 Investment securities ............... 10,225 10,724 11,129 Other interest-earning assets ....... 1,637 1,457 1,370 Total interest-earning assets ....... 53,632 51,912 51,599 Interest-bearing deposits ........... 30,706 29,300 29,449 Short-term borrowed funds ........... 9,444 9,172 8,917 Long-term debt ...................... 5,935 6,031 6,063 Total interest-bearing liabilities... 46,085 44,503 44,429 Noninterest-bearing deposits ........ 7,484 6,844 6,789 Total deposits ...................... 38,190 36,144 36,238 Shareholders' equity ................ 4,884 4,391 4,376 Ratios (averages) Annualized net yield on interest-earning assets ............ 4.21% 4.12% 4.10% Annualized return on assets (6) ......................... .02 1.39 1.38 Annualized return on shareholders' equity (6) ........... .30 18.12 17.99 1996 --------- -------------------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- ---------- ------ ------- ----- Summary of Operations (thousands, except per share data) Interest income ..................... $ 1,018,225 $ 1,023,499 $ 1,020,667 $986,332 $ 979,010 Interest expense .................... 515,973 522,595 529,286 514,293 519,597 ----------- ------------- ----------- -------- --------- Net interest income ................. 502,252 500,904 491,381 472,039 459,413 Provision for loan losses (1) ....... 62,231 59,295 51,792 45,048 37,641 ----------- ------------- ----------- -------- --------- Net interest income after provision for loan losses .......... 440,021 441,609 439,589 426,991 421,772 Other operating revenue ............. 226,869 227,740 220,529 220,428 206,035 Investment securities (losses) gains (2) .......................... 1,558 3,318 424 (172) 1,018 ----------- ------------- ----------- -------- --------- Total other income .................. 228,427 231,058 220,953 220,256 207,053 Personnel expense ................... 211,639 205,579 200,734 194,667 195,952 Nonrecurring charges (3) ............ ---- ---- ---- ---- ---- Other expense ....................... 176,962 180,447 183,713 175,186 172,695 ----------- ------------- ----------- -------- --------- Total other expense ................. 388,601 386,026 384,447 369,853 368,647 Income before income taxes .......... 279,847 286,641 276,095 277,394 260,178 Applicable income taxes ............. 86,372 85,133 86,367 89,222 82,327 ----------- ------------- ----------- -------- --------- Net income (4) ...................... $ 193,475 $ 201,508 $ 189,728 $188,172 $ 177,851 =========== ============= =========== ======== ========= Net income per common share: Basic .............................. $ .97 $ 1.00 $ .93 $ .91 $ .86 Diluted (4) ........................ $ .95 $ .98 $ .92 $ .90 $ .85 Cash dividends paid per common share (5) ................... $ .40 $ .40 $ .40 $ .36 $ .36 Average basic shares outstanding ........................ 200,110 202,139 203,801 205,967 207,694 Average diluted shares outstanding ........................ 203,307 205,179 206,167 208,209 210,211 Selected Average Balances (millions) Total assets ........................ $ 56,333 $ 56,034 $ 56,088 $ 55,311 $ 54,894 Loans -- net of unearned income ............................. 38,223 37,746 37,200 36,439 35,556 Investment securities ............... 11,370 11,413 11,957 12,053 12,459 Other interest-earning assets ....... 1,316 1,489 1,698 1,621 1,710 Total interest-earning assets ....... 50,909 50,648 50,855 50,113 49,725 Interest-bearing deposits ........... 28,857 28,087 27,716 27,110 27,514 Short-term borrowed funds ........... 8,403 8,594 9,101 9,257 9,123 Long-term debt ...................... 6,465 6,766 7,016 6,777 6,208 Total interest-bearing liabilities... 43,725 43,447 43,834 43,145 42,845 Noninterest-bearing deposits ........ 6,612 6,701 6,458 6,459 6,343 Total deposits ...................... 35,469 34,788 34,174 33,569 33,857 Shareholders' equity ................ 4,479 4,493 4,431 4,435 4,472 Ratios (averages) Annualized net yield on interest-earning assets ............ 4.13% 4.08% 3.99% 3.95% 3.90% Annualized return on assets (6) ......................... 1.37 1.44 1.35 1.36 1.30 Annualized return on shareholders' equity (6) ........... 17.28 17.94 17.13 16.97 15.91
(1) Includes $10,845 in nonrecurring merger-related provision in the 1997 fourth quarter. (2) Includes $4,639 of nonrecurring losses to restructure the available-for-sale portfolio in the 1997 fourth quarter. (3) Nonrecurring charges in the 1997 fourth quarter include merger-related items of $220,330 and personal computer hardware and software disposal charge of $67,202. (4) Net income excluding nonrecurring items was $210,727 for the 1997 fourth quarter. Net income per diluted share was $1.02 for the 1997 fourth quarter. (5) Cash dividends per common share are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. (6) Excluding the after-tax impact of nonrecurring charges of $207,123, annualized returns were 1.41% on assets and 17.26% on shareholders' equity for the 1997 fourth quarter. 42 ----------------------------- Fourth Quarter Analysis ----------------------------------------------------------------- Net income per diluted share was $.02 for the fourth quarter of 1997 compared with $.98 per diluted share in the same period of 1996. Net income totaled $3.604 million versus $201.508 million a year earlier and was reduced by special charges taken in the fourth quarter to complete three merger transactions, write-down the value of personal computer hardware and software, and restructure the investment securities portfolio. The net impact of the special charges was $207.123 million, after-tax, or $1.00 per diluted share. On an operating basis, excluding the special charges, net income per diluted share was $1.02 and net income was $210.727 million. Total revenues grew $85.250 million or 11.4 percent for the quarter. Taxable equivalent net interest income increased $49.732 million or 9.6 percent, and total other operating revenue rose $35.518 million or 15.6 percent. Growth in taxable equivalent net interest income was fueled by increased loan volume, with a higher average rate earned also contributing to the rise. Loans expanded $4.024 billion or 10.7 percent, led by gains in taxable commercial loans, residential mortgages, commercial mortgages, construction loans and credit QUARTERLY NET INCOME PER SHARE, 1997 (DILUTED) (Graph appears below) 1st Quarter .95 2nd Quarter .98 3rd Quarter 1.00 4th Quarter .02* *Excluding nonrecurring items, net income per diluted share was $1.02. QUARTERLY NET INCOME PER SHARE, 1996 (DILUTED) (Graph appears below) 1st Quarter .85 2nd Quarter .90 3rd Quarter .92 4th Quarter .98 - -------------------------------------------------- Components of Earnings Per Basic Share Table 14 - --------------------------------------------------------------------------------
1997 1996 Fourth Fourth Quarter Quarter Change ------- ------- ---- Interest income ............................................. $ 5.56 $ 5.06 $ .50 Interest expense ............................................ 2.80 2.58 .22 -------- -------- ------- Net interest income ......................................... 2.76 2.48 .28 Provision for loan losses ................................... .38 .29 .09 -------- -------- ------- Net interest income after provision for loan losses ......... 2.38 2.19 .19 Other operating revenue ..................................... 1.31 1.12 .19 Investment securities (losses) gains ........................ ( .01) .02 ( .03) -------- -------- ------- Total other income .......................................... 1.30 1.14 .16 Personnel expense ........................................... 1.21 1.02 .19 Personal computer impairment charge ......................... .33 ---- .33 Merger-related charges ...................................... 1.10 ---- 1.10 Other expense ............................................... 1.00 .89 .11 -------- -------- ------- Total other expense ......................................... 3.64 1.91 1.73 Income before income taxes .................................. .04 1.42 (1.38) Applicable income taxes ..................................... .02 .42 ( .40) -------- -------- ------- Net income .................................................. $ .02 $ 1.00 $ (.98) ======== ======== =======
43 cards. The average rate earned on loans improved 17 basis points. Increased funding for loan growth came primarily from interest-bearing time deposits, which rose $2.619 billion or 9.3 percent, reflecting gains largely in the corporation's Premiere account. Short-term borrowings also increased for the period while long-term debt declined. - ------------------------------------------------------------------------------- Taxable Equivalent Rate/Volume Variance Analysis -- Fourth Quarter* Table 15 - -------------------------------------------------------------------------------- + (Millions) ++ (Thousands)
Average Volume+ Average Rate - ----------------------- ------------------- 1997 1996 1997 1996 - --------- ------- ------- ---- Interest Income Loans: $12,173 $10,493 7.40 7.15 Commercial ..................................... 1,616 2,031 8.85 8.85 Tax-exempt ..................................... - ----------- -------- 13,789 12,524 7.57 7.43 Total commercial ............................... 1,235 1,214 9.07 8.95 Direct retail .................................. 2,976 3,113 8.46 8.52 Indirect retail ................................ 5,735 5,313 13.14 12.30 Credit card .................................... 437 420 12.33 12.19 Other revolving credit ......................... - ----------- -------- 10,383 10,060 11.28 10.72 Total retail ................................... 1,689 1,219 9.30 8.79 Construction ................................... 6,444 5,681 8.50 8.33 Commercial mortgages ........................... 7,894 7,026 7.89 8.08 Residential mortgages .......................... - ----------- -------- 16,027 13,926 8.28 8.24 Total real estate .............................. 1,057 771 10.46 10.20 Lease financing ................................ 514 465 7.13 6.93 Foreign ........................................ - ----------- -------- 41,770 37,746 8.83 8.66 Total loans .................................... Investment securities: Held-to-maturity: 119 ---- 6.12 ---- U.S. Government and agency ..................... 981 1,128 8.04 7.97 Mortgage-backed securities ..................... 218 248 11.63 12.21 State and municipal ............................ 85 2 6.62 10.13 Other .......................................... - ----------- -------- 1,403 1,378 8.35 8.74 Total securities held-to-maturity .............. Available-for-sale:** 4,781 5,288 6.78 6.61 U.S. Government and agency ..................... 3,141 3,451 6.94 6.77 Mortgage-backed securities ..................... 801 1,222 6.53 6.82 Other .......................................... - ----------- -------- 8,723 9,961 6.81 6.69 Total securities available-for-sale ............ - ----------- -------- 10,126 11,339 7.02 6.94 Total investment securities .................... 116 280 6.56 7.90 Interest-bearing bank balances ................. Federal funds sold and securities purchased 594 211 5.71 5.43 under resale agreements ........................ 927 998 5.55 5.48 Trading account assets ......................... - ----------- -------- $53,533 $50,574 8.39 8.19 Total interest-earning assets .................. =========== ======== Interest Expense $ 4,368 $ 4,069 1.57 1.51 Interest-bearing demand ........................ 11,189 9,851 3.85 3.67 Savings and money market savings ............... 10,676 10,450 5.61 5.65 Savings certificates ........................... 2,816 2,430 5.75 5.81 Large denomination certificates ................ - ----------- -------- 29,049 26,800 4.34 4.31 Total time deposits in domestic offices......... 1,657 1,287 5.69 5.30 Time deposits in foreign offices ............... - ----------- -------- 30,706 28,087 4.41 4.35 Total time deposits ............................ Federal funds purchased and securities sold 7,091 6,794 5.34 5.23 under repurchase agreements .................... 887 666 5.10 4.84 Commercial paper ............................... 1,466 1,134 5.54 5.36 Other short-term borrowed funds ................ - ----------- -------- 9,444 8,594 5.35 5.22 Total short-term borrowed funds ................ 2,940 4,397 6.14 5.81 Bank notes ..................................... 2,995 2,369 6.59 6.44 Other long-term debt ........................... - ----------- -------- 5,935 6,766 6.37 6.03 Total long-term debt ........................... - ----------- -------- $46,085 $43,447 4.86 4.79 Total interest-bearing liabilities ............. =========== ======== -------- ----- 3.53 3.40 Interest rate spread ======== ===== Net yield on interest-earning assets and net 4.21 4.08 interest income ................................ ======== =====
Variance Interest Attributable to ----------------------- --------------------- 1997 1996 Variance++ Rate Volume --------- --------- ------ ------- ---- Interest Income Loans: Commercial ..................................... $ 227,131 $ 188,657 $ 38,474 $ 6,911 $ 31,563 Tax-exempt ..................................... 36,043 45,183 (9,140) ---- (9,140) ------------ ------------ ---------- Total commercial ............................... 263,174 233,840 29,334 4,625 24,709 Direct retail .................................. 28,237 27,323 914 397 517 Indirect retail ................................ 63,469 66,695 (3,226) (447) (2,779) Credit card .................................... 189,903 164,305 25,598 11,854 13,744 Other revolving credit ......................... 13,573 12,860 713 157 556 ------------ ------------ ---------- Total retail ................................... 295,182 271,183 23,999 14,870 9,129 Construction ................................... 39,604 26,946 12,658 1,658 11,000 Commercial mortgages ........................... 138,084 118,917 19,167 2,537 16,630 Residential mortgages .......................... 156,915 142,705 14,210 (3,373) 17,583 ------------ ------------ ---------- Total real estate .............................. 334,603 288,568 46,035 1,439 44,596 Lease financing ................................ 27,860 19,787 8,073 521 7,552 Foreign ........................................ 9,236 8,097 1,139 243 896 ------------ ------------ ---------- Total loans .................................... 930,055 821,475 108,580 16,927 91,653 Investment securities: Held-to-maturity: U.S. Government and agency ..................... 1,843 ---- 1,843 ---- 1,843 Mortgage-backed securities ..................... 19,874 22,590 (2,716) 201 (2,917) State and municipal ............................ 6,390 7,614 (1,224) (345) (879) Other .......................................... 1,407 54 1,353 (25) 1,378 ------------ ------------ ---------- Total securities held-to-maturity .............. 29,514 30,258 (744) (1,304) 560 Available-for-sale:** U.S. Government and agency ..................... 81,648 87,909 (6,261) 2,246 (8,507) Mortgage-backed securities ..................... 54,939 58,714 (3,775) 1,481 (5,256) Other .......................................... 13,182 20,947 (7,765) (856) (6,909) ------------ ------------ ---------- Total securities available-for-sale ............ 149,769 167,570 (17,801) 3,013 (20,814) ------------ ------------ ---------- Total investment securities .................... 179,283 197,828 (18,545) 2,319 (20,864) Interest-bearing bank balances ................. 1,920 5,554 (3,634) (819) (2,815) Federal funds sold and securities purchased under resale agreements ........................ 8,542 2,872 5,670 156 5,514 Trading account assets ......................... 12,968 13,757 (789) 179 (968) ------------ ------------ ---------- Total interest-earning assets .................. 1,132,768 1,041,486 91,282 26,920 64,362 Interest Expense Interest-bearing demand ........................ 17,333 15,401 1,932 681 1,251 Savings and money market savings ............... 108,682 90,920 17,762 4,720 13,042 Savings certificates ........................... 150,959 148,321 2,638 (934) 3,572 Large denomination certificates ................ 40,830 35,513 5,317 (365) 5,682 ------------ ------------ ---------- Total time deposits in domestic offices......... 317,804 290,155 27,649 2,124 25,525 Time deposits in foreign offices ............... 23,778 17,132 6,646 1,357 5,289 ------------ ------------ ---------- Total time deposits ............................ 341,582 307,287 34,295 4,427 29,868 Federal funds purchased and securities sold under repurchase agreements .................... 95,440 89,326 6,114 1,987 4,127 Commercial paper ............................... 11,411 8,112 3,299 461 2,838 Other short-term borrowed funds ................ 20,453 15,276 5,177 536 4,641 ------------ ------------ ---------- Total short-term borrowed funds ................ 127,304 112,714 14,590 2,944 11,646 Bank notes ..................................... 45,501 64,221 (18,720) 3,497 (22,217) Other long-term debt ........................... 49,758 38,373 11,385 925 10,460 ------------ ------------ ---------- Total long-term debt ........................... 95,259 102,594 (7,335) 5,632 (12,967) ------------ ------------ ---------- Total interest-bearing liabilities ............. 564,145 522,595 41,550 8,086 33,464 ------------ ------------ ---------- Interest rate spread Net yield on interest-earning assets and net interest income ................................ $ 568,623 $ 518,891 $ 49,732 17,557 32,175 ============ ============ ==========
* 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. ** Volume amounts are reported at amortized cost; excludes pretax unrealized gains of $99 million in 1997 and $74 million in 1996. 44 - ------------------------------------- Allowance for Loan Losses Table 16 - -------------------------------------------------------------------------------- (thousands)
1997 --------------------------------------- Fourth Third Second Quarter Quarter Quarter ----------- ------ ------ Summary of Transactions Balance at beginning of period ..... $ 519,356 $519,335 $ 519,312 Additions from acquisitions ........ 24,641 ---- ---- Provision for loan losses .......... 76,915 62,756 63,047 Deduct net loan losses: Loans charged off: Commercial ....................... 3,801 686 1,772 Credit card ...................... 68,796 61,277 59,935 Other revolving credit ........... 3,659 2,520 2,259 Other retail ..................... 9,032 8,777 10,027 Real estate ...................... 5,786 1,469 1,764 Lease financing .................. 916 988 1,218 Foreign .......................... ---- ---- ---- ----------- --------- --------- Total .......................... 91,990 75,717 76,975 Recoveries: Commercial ....................... 1,184 988 1,289 Credit card ...................... 6,251 6,894 6,573 Other revolving credit ........... 588 575 591 Other retail ..................... 2,577 2,638 2,929 Real estate ...................... 5,125 1,787 2,465 Lease financing .................. 76 100 104 Foreign .......................... ---- ---- ---- ----------- --------- --------- Total .......................... 15,801 12,982 13,951 ----------- --------- --------- Net loan losses ................... 76,189 62,735 63,024 ----------- --------- --------- Balance at end of period ........... $ 544,723 $519,356 $ 519,335 =========== ========= ========= Net Loan Losses (Recoveries) by Category Commercial ......................... $ 2,617 $ (302) $ 483 Credit card ........................ 62,545 54,383 53,362 Other revolving credit ............. 3,071 1,945 1,668 Other retail ....................... 6,455 6,139 7,098 Real estate ........................ 661 (318) (701) Lease financing .................... 840 888 1,114 Foreign ............................ ---- ---- ---- ----------- --------- --------- Total .......................... $ 76,189 $62,735 $ 63,024 =========== ========= ========= Net loan losses -- excluding credit cards ...................... $ 13,644 $ 8,352 $ 9,662 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial ......................... .08% (.01%) .01% Credit card ........................ 4.36 3.85 3.85 Other revolving credit ............. 2.81 1.87 1.59 Other retail ....................... .61 .61 .69 Real estate ........................ .02 (.01) (.02) Lease financing .................... .32 .35 .50 Foreign ............................ ---- ---- ---- Total loans ........................ .73 .63 .64 Total loans -- excluding credit cards ............................. .15 .10 .12 Period-end allowance to outstanding loans ................. 1.23% 1.27% 1.29%
1996 -------- ------------------------------------------------ First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------- -------- ------ ------ ------ Summary of Transactions Balance at beginning of period ..... $519,297 $519,271 $519,205 $518,928 $518,808 Additions from acquisitions ........ ---- ---- ---- 200 ---- Provision for loan losses .......... 62,231 59,295 51,792 45,048 37,641 Deduct net loan losses: Loans charged off: Commercial ....................... 2,995 1,181 2,875 796 1,523 Credit card ...................... 56,000 53,907 46,967 44,456 39,057 Other revolving credit ........... 2,126 3,313 2,266 1,823 1,432 Other retail ..................... 11,965 11,714 10,338 9,626 9,903 Real estate ...................... 2,545 2,897 1,270 2,572 1,176 Lease financing .................. 1,366 675 348 235 377 Foreign .......................... ---- ---- ---- ---- ---- -------- ----------- -------- --------- -------- Total .......................... 76,997 73,687 64,064 59,508 53,468 Recoveries: Commercial ....................... 710 2,555 887 1,466 997 Credit card ...................... 6,956 5,849 5,431 5,405 4,760 Other revolving credit ........... 607 456 547 340 352 Other retail ..................... 3,693 2,855 3,027 3,137 2,505 Real estate ...................... 2,756 2,673 2,388 4,148 7,279 Lease financing .................. 59 30 58 41 54 Foreign .......................... ---- ---- ---- ---- ---- -------- ----------- -------- --------- -------- Total .......................... 14,781 14,418 12,338 14,537 15,947 -------- ----------- -------- --------- -------- Net loan losses ................... 62,216 59,269 51,726 44,971 37,521 -------- ----------- -------- --------- -------- Balance at end of period ........... $519,312 $519,297 $519,271 $519,205 $518,928 ======== =========== ======== ========= ======== Net Loan Losses (Recoveries) by Category Commercial ......................... $ 2,285 $(1,374) $ 1,988 $ (670) $ 526 Credit card ........................ 49,044 48,058 41,536 39,051 34,297 Other revolving credit ............. 1,519 2,857 1,719 1,483 1,080 Other retail ....................... 8,272 8,859 7,311 6,489 7,398 Real estate ........................ (211) 224 (1,118) (1,576) (6,103) Lease financing .................... 1,307 645 290 194 323 Foreign ............................ ---- ---- ---- ---- ---- -------- ----------- -------- --------- -------- Total .......................... $ 62,216 $59,269 $ 51,726 $44,971 $ 37,521 ======== =========== ======== ========= ======== Net loan losses -- excluding credit cards ...................... $ 13,172 $11,211 $ 10,190 $ 5,920 $ 3,224 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial ......................... .07% (.04%) .06% (.02%) .02% Credit card ........................ 3.52 3.62 3.31 3.27 2.94 Other revolving credit ............. 1.44 2.72 1.64 1.42 1.04 Other retail ....................... .78 .82 .67 .60 .68 Real estate ........................ (.01) .01 (.03) (.05) (.19) Lease financing .................... .62 .33 .17 .12 .24 Foreign ............................ ---- ---- ---- ---- ---- Total loans ........................ .65 .63 .56 .49 .42 Total loans -- excluding credit cards ............................. .16 .14 .13 .07 .04 Period-end allowance to outstanding loans ................. 1.32% 1.37% 1.36% 1.40% 1.43%
45 The provision for loan losses was $76.915 million, exceeding net charge-offs and up $17.620 million or 29.7 percent from $59.295 million in the fourth quarter of 1996. Included in the provision for the fourth quarter of 1997 was $10.845 million for a special merger-related charge. Net loan losses were $76.189 million or .73 percent annualized of average loans, an increase of $16.920 million or 28.5 percent from $59.269 million or .63 percent of loans a year earlier. Credit card net loan losses were $62.545 million or 4.36 percent of average credit cards, up $14.487 million or 30.1 percent from a year earlier and accounted for most of the rise in total net loan losses. On a managed basis, including securitized loans, net credit card losses were $67.735 million or 4.31 percent of averaged managed receivables compared with $53.562 million or 3.61 percent a year earlier. Managed credit card outstandings averaged $6.281 billion for the period versus $5.938 billion in 1996. Excluding credit cards, net loan losses totaled $13.644 million or .15 percent of average loans compared with $11.211 million or .14 percent in the same period of 1996. Gains occurred in all major categories of total other operating revenue. Deposit account service charge revenues were up $8.667 million or 12 percent, trust service fees increased $8.430 million or 21.6 percent, and investment fee income rose $3.986 million or 34.4 percent, leading the growth. Including investment securities sales, total noninterest income was higher by $30.507 million or 13.2 percent. Sales of investment securities resulted in a net loss of $1.693 million in the fourth quarter of 1997, including a loss of $4.639 million from sales to restructure the available-for-sale portfolio for higher yields. Noninterest expense, including $287.532 million in special charges, was up $346.392 million or 89.7 percent. The special charges were $220.330 million for merger-related expenses and $67.202 million for the write-down and disposal of personal computer hardware and software. Excluding these nonrecurring charges, noninterest expense for the quarter rose $58.860 million or 15.2 percent. Growth was driven primarily by personnel costs, which rose $38.671 million or 18.8 percent, reflecting increased compensation levels and larger medical and retirement benefit expenses. Outside data processing, programming and software expense and professional services expense were up $9.711 million or 73.3 percent and $5.908 million or 56.6 percent, respectively, due largely to continued Year 2000 project costs. - ----------------------------- Noninterest Income Table 17 - -------------------------------------------------------------------------------- (thousands)
1997 --------------------------------- Fourth Third Second Quarter Quarter Quarter ---------- ------ ------ Service charges on deposit accounts .............. $ 80,977 $ 76,584 $ 74,576 Fees for trust services .......................... 47,378 43,653 43,668 Credit card income -- net of interchange payments ........................................ 38,382 43,182 43,814 Electronic banking ............................... 17,355 16,841 15,678 Investment fee income ............................ 15,564 14,798 11,710 Mortgage fee income .............................. 7,509 5,711 5,154 Trading account profits -- excluding interest ........................................ 9,170 6,890 6,511 Insurance premiums and commissions ............... 7,169 7,966 8,170 Bankers' acceptance and letter of credit fees..... 8,116 9,589 8,910 Other service charges and fees ................... 9,257 9,671 9,622 Other income ..................................... 22,381 21,162 31,781 ---------- -------- -------- Total other operating revenue ................ 263,258 256,047 259,594 Investment securities (losses) gains ............. (1,693) 1,091 498 ---------- -------- -------- Total ........................................ $261,565 $257,138 $260,092 ========== ======== ======== 1996 -------- -------------------------------------------- First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter ------ -------- ------ ------ ------ Service charges on deposit accounts .............. $ 74,094 $ 72,310 $ 71,766 $ 70,507 $ 66,087 Fees for trust services .......................... 40,850 38,948 38,053 38,980 38,640 Credit card income -- net of interchange payments ........................................ 36,856 36,803 38,258 34,799 33,522 Electronic banking ............................... 14,766 15,767 15,471 14,154 10,834 Investment fee income ............................ 11,415 11,578 10,447 11,177 10,545 Mortgage fee income .............................. 5,170 6,135 5,797 3,834 5,605 Trading account profits -- excluding interest ........................................ 4,280 6,655 5,686 7,175 3,138 Insurance premiums and commissions ............... 6,900 5,299 5,581 5,035 4,647 Bankers' acceptance and letter of credit fees..... 7,911 7,450 7,389 6,857 6,547 Other service charges and fees ................... 10,200 9,070 9,815 9,373 10,332 Other income ..................................... 14,427 17,725 12,266 18,537 16,138 -------- --------- -------- -------- -------- Total other operating revenue ................ 226,869 227,740 220,529 220,428 206,035 Investment securities (losses) gains ............. 1,558 3,318 424 (172) 1,018 -------- --------- -------- -------- -------- Total ........................................ $228,427 $231,058 $220,953 $220,256 $207,053 ======== ========= ======== ======== ========
46 - ------------------------------- Noninterest Expense Table 18 - -------------------------------------------------------------------------------- (thousands) 1997 ------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ------ ------ ------- Salaries ................................... $ 200,859 $ 190,434 $ 178,987 $ 171,826 Employee benefits .......................... 43,391 39,918 39,929 39,813 ----------- ---------- ---------- --------- Total personnel expense .................. 244,250 230,352 218,916 211,639 Net occupancy expense ...................... 30,687 29,816 27,657 28,494 Equipment expense .......................... 36,619 36,283 35,792 33,533 Postage and delivery ....................... 12,539 11,883 11,899 12,336 Outside data processing, programming and software .............................. 22,952 21,980 26,988 14,577 Stationery and supplies .................... 7,637 8,415 7,676 7,232 Advertising and sales promotion ............ 15,768 20,355 20,349 15,574 Professional services ...................... 16,348 14,102 14,385 9,278 Travel and business promotion .............. 7,433 6,120 6,154 5,508 Regulatory agency fees and other bank services .................................. 3,523 3,458 3,791 3,828 Amortization of intangible assets .......... 6,433 2,347 2,264 2,264 Foreclosed property expense ................ 492 487 951 (55) Personal computer impairment charge ........ 67,202 ---- ---- ---- Merger-related charges ..................... 220,330 ---- ---- ---- Other expense .............................. 40,205 39,703 43,579 44,393 ----------- ---------- ---------- --------- Total .................................... $ 732,418 $ 425,301 $ 420,401 $ 388,601 =========== ========== ========== ========= Overhead ratio* ............................ 88.0% 53.6% 53.4% 52.2% 1996 ------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter --------- ------ ------ ------ Salaries ................................... $ 171,923 $ 164,886 $ 159,617 $ 158,639 Employee benefits .......................... 33,656 35,848 35,050 37,313 ------------ ---------- ---------- ---------- Total personnel expense .................. 205,579 200,734 194,667 195,952 Net occupancy expense ...................... 27,792 29,179 28,153 28,877 Equipment expense .......................... 33,575 33,664 32,381 33,155 Postage and delivery ....................... 11,716 11,779 11,546 12,154 Outside data processing, programming and software .............................. 13,241 12,985 12,804 12,109 Stationery and supplies .................... 7,201 6,950 7,917 7,975 Advertising and sales promotion ............ 15,419 16,569 17,561 19,090 Professional services ...................... 10,440 8,795 11,426 10,562 Travel and business promotion .............. 6,180 5,071 5,500 4,345 Regulatory agency fees and other bank services .................................. 844 11,298 2,432 2,197 Amortization of intangible assets .......... 2,290 2,296 2,299 2,278 Foreclosed property expense ................ 523 50 595 762 Personal computer impairment charge ........ ---- ---- ---- ---- Merger-related charges ..................... ---- ---- ---- ---- Other expense .............................. 51,226 45,077 42,572 39,191 ------------ ---------- ---------- ---------- Total .................................... $ 386,026 $ 384,447 $ 369,853 $ 368,647 ============ ========== ========== ========== Overhead ratio* ............................ 51.7% 52.6% 51.9% 53.7%
* Overhead ratio excluding the after-tax impact of nonrecurring charges was 53.48% in the 1997 fourth quarter. -------------------------- Results of Operations ----------------------------------------------------------------- 1996 vs. Consolidated net income for 1996 totaled $757.259 million or $3.65 1995 per diluted share compared with $707.913 million or $3.36 per diluted share in 1995. Results for the year reflected good revenue growth moderated by a higher provision for loan losses and increased spending primarily for personnel. Taxable equivalent net interest income rose $113.804 million or 6 percent. Increased loan volume drove the growth, offsetting the impact of a lower average rate earned and higher levels of interest-bearing liabilities. The net yield on interest-earning assets declined 6 basis points to 3.98 percent for the year. Taxable equivalent interest income was higher by $188.420 million or 4.8 percent. Average loans expanded $3.229 billion or 9.6 percent, while the average rate earned declined 26 basis points. All loan categories were up for the year, with gains strongest in taxable commercial loans, residential mortgages, commercial mortgages and credit cards. Interest expense increased $74.616 million or 3.7 percent. Average interest-bearing liabilities rose $3.164 billion or 7.9 percent, reflecting growth primarily in time deposits and long-term debt. The average rate paid on interest-bearing liabilities decreased 20 basis points, moderating the rise in interest expense. The following table summarizes the variances in taxable equivalent interest income and interest expense due to changes in rates and volumes between 1996 and 1995. Changes that are not due solely to rate or volume are allocated proportionately to rate and volume. 47
1996 over 1995 --------------------------------------- Attributable to --------------------------- Rate Volume Total -------- ----- ---- $ in thousands Increase (decrease) in interest income: Loans ................................................................. ($ 90,809) $ 279,379 $ 188,570 Investment securities: Held-to-maturity: State and municipal ................................................... 1,722 (18,367) (16,645) Other ................................................................. 26,567 (201,350) (174,783) Available-for-sale: Other ................................................................. (64) 173,979 173,915 Interest-bearing bank balances ........................................ 57 23,850 23,907 Federal funds sold and securities purchased under resale agreements ... (1,476) 3,608 2,132 Trading account assets ................................................ (9,045) 369 (8,676) ---------- Total interest-earning assets ......................................... (97,965) 286,385 188,420 Increase (decrease) in interest expense: Total time deposits in domestic offices ............................... (27,203) 74,697 47,494 Time deposits in foreign offices ...................................... (2,413) 15,479 13,066 Total short-term borrowed funds ....................................... (54,802) 9,273 (45,529) Total long-term debt .................................................. (36) 59,621 59,585 ---------- Total interest-bearing liabilities .................................... (79,724) 154,340 74,616 ---------- Increase in net interest income ............................... $ 113,804 ==========
Nonperforming assets at December 31, 1996 were $131.518 million or .35 percent of loans and foreclosed property. The total was lower by $3.745 million or 2.8 percent from year-end 1995, reflecting lower levels of nonperforming loans and foreclosed real estate. The provision for loan losses was $193.776 million, slightly exceeding net charge-offs and up $63.272 million or 48.5 percent from $130.504 million in 1995. Net loan losses totaled $193.487 million or .53 percent of average loans versus $127.828 million or .38 percent a year earlier, an increase of $65.659 million or 51.4 percent. The rise in net charge-offs reflected higher losses in consumer loans, primarily credit cards and other retail loans, partially offset by greater net recoveries in real estate loans. Credit card net charge-offs were $162.942 million or 3.29 percent of average outstandings compared with $109.657 million or 2.41 percent in 1995. Excluding credit cards, net loan losses totaled $30.545 million or .10 percent of average loans versus $18.171 million or .06 percent a year earlier. At December 31, 1996, the allowance for loan losses was $519.297 million, representing 1.37 percent of period-end loans and 526 percent of nonperforming loans compared with $518.808 million, 1.46 percent and 507 percent, respectively, at year-end 1995. Total other operating revenue grew $117.617 million or 15.5 percent, with all major categories increasing for the year except mortgage fee income and trading account profits. Gains were led by deposit account service charges, which rose $35.999 million or 14.7 percent; electronic banking revenues, which were higher by $16.504 million or 41.5 percent; credit card fee income, up $16.229 million or 12.8 percent; and investment fee income, which increased $16.091 million or 58.2 percent. Including sales of investment securities and the sale in 1995 of a mortgage-servicing portfolio, total noninterest income for 1996 was up $62.852 million or 7.7 percent from 1995. Investment securities sales resulted in a net gain of $4.588 million in 1996 versus a net loss of $19.672 million in 1995, with the loss in 1995 resulting from portfolio restructuring to improve yields. In 1995, a portion of the corporation's mortgage servicing portfolio was sold, resulting in a pretax gain of $79.025 million. Total noninterest expense increased $67.344 million or 4.7 percent, driven principally by higher personnel expense. Salaries expense grew $51.024 million or 8.4 percent and employee benefits expense rose $12.118 million or 9.3 percent, reflecting expansion of the corporation's workforce in sales and in other business growth areas. Combined net occupancy and equipment expense was up moderately, while remaining other combined categories of noninterest expense declined due largely to the Federal Deposit Insurance Corporation's elimination in 1996 of insurance premiums for well-capitalized banks. 48 Management's Responsibility for Financial Reporting The management of Wachovia Corporation is responsible for the preparation of the financial statements, related financial data and other information in this annual report. The financial statements are prepared in accordance with generally accepted accounting principles and include amounts based on management's estimates and judgment where appropriate. Financial information appearing throughout this annual report is consistent with the financial statements. In meeting its responsibility both for the integrity and fairness of these statements and information, management depends on the accounting system and related internal controls that are designed to provide reasonable assurances that transactions are authorized and recorded in accordance with established procedures and that assets are safeguarded and proper and reliable records are maintained. The concept of reasonable assurance is based on the recognition that the cost of internal controls should not exceed the related benefits. As an integral part of internal controls, the corporation maintains a professional staff of internal auditors who monitor compliance with and assess the effectiveness of internal controls and coordinate audit coverage with the independent auditors. The Audit Committee of Wachovia's Board of Directors, composed solely of outside directors, meets regularly with the corporation's management, internal auditors, independent auditors and regulatory examiners to review matters relating to financial reporting, internal controls and the nature, extent and results of the audit effort. The independent auditors, internal auditors and banking regulators have direct access to the Audit Committee with or without management present. The financial statements have been audited by Ernst & Young LLP, independent auditors, who render an independent professional opinion on management's financial statements. Their appointment was recommended by the Audit Committee, approved by the Board of Directors and ratified by the shareholders. Their examination provides an objective assessment of the degree to which the corporation's management meets its responsibility for financial reporting. Their opinion on the financial statements is based on auditing procedures which include reviewing the internal controls and performing selected tests of transactions and records as they deem appropriate. These auditing procedures are designed to provide a reasonable level of assurance that the financial statements are presented fairly in all material respects. Report of Independent Auditors The Board of Directors Wachovia Corporation We have audited the accompanying consolidated statements of condition of Wachovia Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Central Fidelity National Bank and subsidiaries for the year ended December 31, 1997 or the consolidated financial statements of Central Fidelity Banks, Inc. and subsidiaries for the years ended December 31, 1996 and 1995, which statements reflect total assets constituting 16% in 1997 and 18% in 1996, and total interest income constituting 20% in 1997, 19% in 1996 and 20% in 1995 of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Central Fidelity National Bank and subsidiaries and Central Fidelity Banks, Inc. and subsidiaries, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wachovia Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Winston-Salem, North Carolina January 20, 1998 49 Wachovia Corporation and Subsidiaries - --------------------------------------- Consolidated Statements of Condition - -------------------------------------------------------------------------------- $ in thousands
December 31 December 31 1997 1996 ------------ ----------- Assets Cash and due from banks .................................................................. $ 4,221,818 $ 3,674,192 Interest-bearing bank balances ........................................................... 133,191 77,871 Federal funds sold and securities purchased under resale agreements ...................... 1,589,234 275,941 Trading account assets ................................................................... 999,122 1,189,826 Securities available-for-sale ............................................................ 8,909,537 9,824,752 Securities held-to-maturity (market value of $1,578,464 in 1997 and $1,423,555 in 1996)... 1,509,339 1,352,091 Loans and net leases ..................................................................... 44,210,286 38,033,031 Less unearned income on loans ............................................................ 15,904 25,802 ----------- ----------- Total loans ............................................................................ 44,194,382 38,007,229 Less allowance for loan losses ........................................................... 544,723 519,297 ----------- ----------- Net loans .............................................................................. 43,649,659 37,487,932 Premises and equipment ................................................................... 810,155 793,929 Due from customers on acceptances ........................................................ 628,398 751,893 Other assets ............................................................................. 2,946,616 1,800,213 ----------- ----------- Total assets ........................................................................... $65,397,069 $57,228,640 =========== =========== Liabilities Deposits in domestic offices: Demand .................................................................................. $ 8,589,595 $ 7,300,819 Interest-bearing demand ................................................................. 4,654,172 4,192,185 Savings and money market savings ........................................................ 11,679,432 10,076,268 Savings certificates .................................................................... 10,934,720 10,361,404 Large denomination certificates ......................................................... 2,284,068 2,198,567 Noninterest-bearing time ................................................................ 8,460 7,822 ----------- ----------- Total deposits in domestic offices ..................................................... 38,150,447 34,137,065 Time deposits in foreign offices ......................................................... 4,503,396 1,184,829 ----------- ----------- Total deposits ......................................................................... 42,653,843 35,321,894 Federal funds purchased and securities sold under repurchase agreements .................. 8,322,716 7,206,005 Commercial paper ......................................................................... 1,034,024 706,376 Other short-term borrowed funds .......................................................... 752,874 1,039,221 Long-term debt: Bank notes .............................................................................. 2,939,952 4,307,802 Other long-term debt .................................................................... 2,994,181 2,716,837 ----------- ----------- Total long-term debt ................................................................... 5,934,133 7,024,639 Acceptances outstanding .................................................................. 628,398 751,893 Other liabilities ........................................................................ 896,780 570,211 ----------- ----------- Total liabilities ...................................................................... 60,222,768 52,620,239 Off-balance sheet items, commitments and contingent liabilities -- Notes J, K and M Shareholders' Equity Preferred stock, par value $5 per share: Authorized 50,000,000 shares; none issued or outstanding ................................ ---- ---- Common stock, par value $5 per share: Authorized 500,000,000 shares; issued and outstanding 205,926,632 shares in 1997 and 201,252,539 shares in 1996 ............................................................. 1,029,633 1,006,263 Capital surplus .......................................................................... 974,803 706,649 Retained earnings ........................................................................ 3,098,767 2,843,803 Unrealized gains on securities available-for-sale, net of tax ............................ 71,098 51,686 ----------- ----------- Total shareholders' equity ............................................................. 5,174,301 4,608,401 ----------- ----------- Total liabilities and shareholders' equity ............................................. $65,397,069 $57,228,640 =========== ===========
See notes to consolidated financial statements 50 Wachovia Corporation and Subsidiaries - ------------------------------------ Consolidated Statements of Income - -------------------------------------------------------------------------------- $ in thousands, except per share
Year Ended December 31 1997 1996 1995 ------------ ------------ ----------- Interest Income Loans .................................................................... $ 3,455,296 $ 3,109,698 $2,910,678 Securities available-for-sale: Other investments ....................................................... 625,139 684,134 506,713 Securities held-to-maturity: State and municipal ..................................................... 16,452 21,039 34,023 Other investments ....................................................... 87,632 96,508 260,218 Interest-bearing bank balances ........................................... 5,230 33,284 9,376 Federal funds sold and securities purchased under resale agreements ...... 22,319 15,411 12,930 Trading account assets ................................................... 50,317 49,434 56,172 ------------- ----------- ---------- Total interest income .................................................. 4,262,385 4,009,508 3,790,110 Interest Expense Deposits: Domestic offices ........................................................ 1,216,229 1,148,797 1,101,303 Foreign offices ......................................................... 87,320 54,942 41,876 ------------- ----------- ---------- Total interest on deposits ............................................. 1,303,549 1,203,739 1,143,179 Short-term borrowed funds ................................................ 478,162 482,236 527,765 Long-term debt ........................................................... 387,107 399,796 340,211 ------------- ----------- ---------- Total interest expense ................................................. 2,168,818 2,085,771 2,011,155 Net Interest Income ...................................................... 2,093,567 1,923,737 1,778,955 Provision for loan losses ................................................ 264,949 193,776 130,504 ------------- ----------- ---------- Net interest income after provision for loan losses ...................... 1,828,618 1,729,961 1,648,451 Other Income Service charges on deposit accounts ...................................... 306,231 280,670 244,671 Fees for trust services .................................................. 175,549 154,621 145,464 Credit card income ....................................................... 162,234 143,382 127,153 Electronic banking ....................................................... 64,640 56,226 39,722 Investment fee income .................................................... 53,487 43,747 27,656 Mortgage fee income ...................................................... 23,544 21,371 26,139 Trading account profits .................................................. 26,851 22,654 24,235 Other operating income ................................................... 193,232 152,061 122,075 ------------- ----------- ---------- Total other operating revenue .......................................... 1,005,768 874,732 757,115 Gain on sale of mortgage servicing portfolio ............................. ---- ---- 79,025 Investment securities gains (losses) ..................................... 1,454 4,588 (19,672) ------------- ----------- ---------- Total other income ..................................................... 1,007,222 879,320 816,468 Other Expense Salaries ................................................................. 742,106 655,065 604,041 Employee benefits ........................................................ 163,051 141,867 129,749 ------------- ----------- ---------- Total personnel expense ................................................ 905,157 796,932 733,790 Net occupancy expense .................................................... 116,654 114,001 109,543 Equipment expense ........................................................ 142,227 132,775 127,268 Personal computer impairment charge ...................................... 67,202 ---- ---- Merger-related charges ................................................... 220,330 ---- ---- Other operating expense .................................................. 515,151 465,265 471,028 ------------- ----------- ---------- Total other expense .................................................... 1,966,721 1,508,973 1,441,629 Income before income taxes ............................................... 869,119 1,100,308 1,023,290 Applicable income taxes .................................................. 276,313 343,049 315,377 ------------- ----------- ---------- Net Income ............................................................... $ 592,806 $ 757,259 $ 707,913 ============= =========== ========== Net income per common share: Basic ................................................................... $ 2.99 $ 3.70 $ 3.40 Diluted ................................................................. $ 2.94 $ 3.65 $ 3.36 Average shares outstanding: Basic ................................................................... 198,290 204,889 208,230 Diluted ................................................................. 201,901 207,432 210,600
See notes to consolidated financial statements 51 Wachovia Corporation and Subsidiaries - -------------------------------------------------- Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------- $ in thousands, except per share
Common Stock Shares Amount Year Ended December 31, 1995 Balance at beginning of year ......................... 195,708,013 $ 978,540 Net income ........................................... Cash dividends declared by pooled companies: Wachovia Corporation -- $1.38 a share................ Central Fidelity Banks, Inc. -- $.79 a share......... Common stock issued pursuant to: Stock option and employee benefit plans ............. 1,230,527 6,154 Dividend reinvestment plan .......................... 466,784 2,334 Conversion of debentures ............................ 165,885 829 Common stock acquired ................................ (1,890,517) (9,453) Unrealized gains on securities available-for-sale, net of tax .......................................... Miscellaneous ........................................ (674) (4) ------------- ------------ Balance at end of year ............................... 195,680,018 $ 978,400 ============= =========== Year Ended December 31, 1996 Balance at beginning of year ......................... 195,680,018 $ 978,400 Net income ........................................... Cash dividends declared by pooled companies: Wachovia Corporation -- $1.52 a share................ Central Fidelity Banks, Inc. -- $.86 a share......... Common stock issued pursuant to: Stock option and employee benefit plans ............. 1,056,131 5,280 Dividend reinvestment plan .......................... 349,928 1,750 Conversion of debentures ............................ 312,594 1,563 Acquisition of bank ................................. 208,207 1,041 Common stock acquired ................................ (8,885,278) (44,426) Three-for-two common stock split by Central Fidelity Banks, Inc. ................................ 12,530,939 62,655 Unrealized losses on securities available-for-sale, net of tax .......................................... Miscellaneous ........................................ ------------- ----------- Balance at end of year ............................... 201,252,539 $1,006,263 ============= =========== Year Ended December 31, 1997 Balance at beginning of year ......................... 201,252,539 $1,006,263 Net income ........................................... Cash dividends declared by pooled companies: Wachovia Corporation -- $1.68 a share................ Central Fidelity Banks, Inc. -- $.94 a share......... Common stock issued pursuant to: Stock option and employee benefit plans ............. 1,547,645 7,737 Dividend reinvestment plan .......................... 298,553 1,493 Conversion of debentures ............................ 3,628 18 Common stock acquired ................................ (8,918,515) (44,593) Unrealized gains on securities available-for-sale, net of tax .......................................... Acquisition of banks ................................. 11,742,782 58,715 Miscellaneous ........................................ ------------- ----------- Balance at end of year ............................... 205,926,632 $1,029,633 ============= =========== Unrealized Securities Capital Retained Gains Surplus Earnings (Losses) Year Ended December 31, 1995 Balance at beginning of year ......................... $ 995,155 $2,075,746 ($ 139,861) Net income ........................................... 707,913 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.38 a share................ (235,495) Central Fidelity Banks, Inc. -- $.79 a share......... (47,022) Common stock issued pursuant to: Stock option and employee benefit plans ............. 27,667 Dividend reinvestment plan .......................... 16,374 Conversion of debentures ............................ 2,355 Common stock acquired ................................ (60,026) Unrealized gains on securities available-for-sale, net of tax .......................................... 279,839 Miscellaneous ........................................ 1,103 (1,844) ----------- ---------- ----------- Balance at end of year ............................... $ 982,628 $2,499,298 $ 139,978 =========== ========== =========== Year Ended December 31, 1996 Balance at beginning of year ......................... $ 982,628 $2,499,298 $ 139,978 Net income ........................................... 757,259 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.52 a share................ (254,458) Central Fidelity Banks, Inc. -- $.86 a share......... (51,282) Common stock issued pursuant to: Stock option and employee benefit plans ............. 33,250 Dividend reinvestment plan .......................... 15,130 Conversion of debentures ............................ 4,444 Acquisition of bank ................................. 9,003 Common stock acquired ................................ (375,138) Three-for-two common stock split by Central Fidelity Banks, Inc. ................................ 36,797 (99,530) Unrealized losses on securities available-for-sale, net of tax .......................................... (88,292) Miscellaneous ........................................ 535 (7,484) ----------- ---------- ----------- Balance at end of year ............................... $ 706,649 $2,843,803 $ 51,686 =========== ========== =========== Year Ended December 31, 1997 Balance at beginning of year ......................... $ 706,649 $2,843,803 $ 51,686 Net income ........................................... 592,806 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.68 a share................ (273,301) Central Fidelity Banks, Inc. -- $.94 a share......... (54,002) Common stock issued pursuant to: Stock option and employee benefit plans ............. 55,689 Dividend reinvestment plan .......................... 18,030 Conversion of debentures ............................ 52 Common stock acquired ................................ (500,343) Unrealized gains on securities available-for-sale, net of tax .......................................... 19,412 Acquisition of banks ................................. 689,029 Miscellaneous ........................................ 5,697 (10,539) ----------- ---------- ----------- Balance at end of year ............................... $ 974,803 $3,098,767 $ 71,098 =========== ========== ===========
See notes to consolidated financial statements 52 Wachovia Corporation and Subsidiaries - ---------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- $ in thousands
Year Ended December 31 1997 Operating Activities Net income ............................................................................ $ 592,806 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ............................................................ 264,949 Depreciation and amortization ........................................................ 165,692 Deferred income taxes ................................................................ 35,169 Investment securities (gains) losses ................................................. (1,454) Gain on sale of mortgage servicing portfolio ......................................... ---- Gain on sale of noninterest-earning assets ........................................... (4,775) (Decrease) increase in accrued income taxes .......................................... (6,416) Decrease (increase) in accrued interest receivable ................................... 9,173 Increase (decrease) in accrued interest payable ...................................... 36,764 Net change in other accrued and deferred income and expense .......................... 196,902 Net trading account activities ....................................................... 190,704 Net loans held for resale ............................................................ 144,849 -------------- Net cash provided by operating activities ........................................... 1,624,363 Investing Activities Net decrease (increase) in interest-bearing bank balances ............................. 393 Net (increase) decrease in federal funds sold and securities purchased under resale agreements ........................................................................... (1,258,355) Purchases of securities available-for-sale ............................................ (3,418,951) Purchases of securities held-to-maturity .............................................. (36,340) Sales of securities available-for-sale ................................................ 2,211,721 Calls, maturities and prepayments of securities available-for-sale .................... 2,341,747 Calls, maturities and prepayments of securities held-to-maturity ...................... 273,696 Net increase in loans made to customers ............................................... (4,639,373) Capital expenditures .................................................................. (162,286) Proceeds from sales of premises and equipment ......................................... 46,164 Proceeds from sale of mortgage servicing portfolio .................................... ---- Net increase in other assets .......................................................... (476,129) Business combinations ................................................................. 133,081 -------------- Net cash used by investing activities ............................................... (4,984,632) Financing Activities Net increase in demand, savings and money market accounts ............................. 1,719,641 Net increase (decrease) in certificates of deposit .................................... 3,076,795 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements ................................................................ 1,041,778 Net increase in commercial paper ...................................................... 327,648 Net (decrease) increase in other short-term borrowings ................................ (286,347) Proceeds from issuance of bank notes .................................................. 948,372 Maturities of bank notes .............................................................. (2,315,367) Proceeds from issuance of other long-term debt ........................................ 687,940 Payments on other long-term debt ...................................................... (418,982) Common stock issued ................................................................... 59,281 Dividend payments ..................................................................... (327,303) Common stock repurchased .............................................................. (532,682) Other equity transactions ............................................................. (154) Net (decrease) increase in other liabilities .......................................... (72,725) -------------- Net cash provided by financing activities ........................................... 3,907,895 Increase in Cash and Cash Equivalents ................................................. 547,626 Cash and cash equivalents at beginning of year ........................................ 3,674,192 -------------- Cash and cash equivalents at end of period ............................................ $ 4,221,818 ============== Supplemental Disclosures Unrealized gains (losses) on securities available-for-sale: Increase (decrease) in securities available-for-sale ................................. $ 31,356 (Decrease) increase in deferred taxes ................................................ (11,944) Increase (decrease) in shareholders' equity .......................................... 19,412 1996 1995 Operating Activities Net income ............................................................................ $ 757,259 $ 707,913 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ............................................................ 193,776 130,504 Depreciation and amortization ........................................................ 117,731 104,113 Deferred income taxes ................................................................ 50,052 5,943 Investment securities (gains) losses ................................................. (4,588) 19,672 Gain on sale of mortgage servicing portfolio ......................................... ---- (79,025) Gain on sale of noninterest-earning assets ........................................... (2,486) (7,467) (Decrease) increase in accrued income taxes .......................................... 8,092 89,928 Decrease (increase) in accrued interest receivable ................................... 34,917 (72,375) Increase (decrease) in accrued interest payable ...................................... (42,086) 67,953 Net change in other accrued and deferred income and expense .......................... (7,300) 46,316 Net trading account activities ....................................................... (74,401) (223,973) Net loans held for resale ............................................................ 524,191 (346,542) -------------- -------------- Net cash provided by operating activities ........................................... 1,555,157 442,960 Investing Activities Net decrease (increase) in interest-bearing bank balances ............................. 448,408 (494,516) Net (increase) decrease in federal funds sold and securities purchased under resale agreements ........................................................................... 30,398 96,626 Purchases of securities available-for-sale ............................................ (1,358,041) (5,068,510) Purchases of securities held-to-maturity .............................................. (45,679) (665,727) Sales of securities available-for-sale ................................................ 541,533 2,980,553 Calls, maturities and prepayments of securities available-for-sale .................... 1,912,940 1,201,551 Calls, maturities and prepayments of securities held-to-maturity ...................... 318,205 508,830 Net increase in loans made to customers ............................................... (3,138,067) (3,711,173) Capital expenditures .................................................................. (223,153) (205,521) Proceeds from sales of premises and equipment ......................................... 100,515 31,972 Proceeds from sale of mortgage servicing portfolio .................................... ---- 142,011 Net increase in other assets .......................................................... (401,488) (41,031) Business combinations ................................................................. 2,814 413,022 -------------- -------------- Net cash used by investing activities ............................................... (1,811,615) (4,811,913) Financing Activities Net increase in demand, savings and money market accounts ............................. 1,719,718 1,204,766 Net increase (decrease) in certificates of deposit .................................... (781,971) 2,400,814 Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements ................................................................ 313,514 (46,777) Net increase in commercial paper ...................................................... 203,881 103,315 Net (decrease) increase in other short-term borrowings ................................ (769,057) 731,414 Proceeds from issuance of bank notes .................................................. 2,465,005 1,349,812 Maturities of bank notes .............................................................. (2,498,492) (1,525,294) Proceeds from issuance of other long-term debt ........................................ 950,796 610,587 Payments on other long-term debt ...................................................... (94,803) (924) Common stock issued ................................................................... 37,445 43,151 Dividend payments ..................................................................... (304,733) (281,466) Common stock repurchased .............................................................. (415,084) (65,032) Other equity transactions ............................................................. (78) ---- Net (decrease) increase in other liabilities .......................................... 71,406 (75,275) -------------- -------------- Net cash provided by financing activities ........................................... 897,547 4,449,091 Increase in Cash and Cash Equivalents ................................................. 641,089 80,138 Cash and cash equivalents at beginning of year ........................................ 3,033,103 2,952,965 -------------- -------------- Cash and cash equivalents at end of period ............................................ $ 3,674,192 $ 3,033,103 ============== ============== Supplemental Disclosures Unrealized gains (losses) on securities available-for-sale: Increase (decrease) in securities available-for-sale ................................. $ (143,324) $ 445,944 (Decrease) increase in deferred taxes ................................................ 55,032 (166,105) Increase (decrease) in shareholders' equity .......................................... (88,292) 279,839
See notes to consolidated financial statements 53 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- $ in thousands Note A -- Accounting Policies Nature of Operations -- The Corporation is a southeastern interstate bank holding company maintaining dual headquarters in Atlanta, Georgia, and Winston-Salem, North Carolina. The corporation's principal banking subsidiary is Wachovia Bank, N.A., which maintains operations in Georgia, North Carolina and South Carolina. Credit Card services are provided through The First National Bank of Atlanta. In addition to general commercial banking, the Corporation and its subsidiaries are engaged in trust and investment management, residential mortgage origination, leasing, state and local government securities underwriting, foreign exchange, corporate finance and other money market services. Wachovia Corporation acquired three bank holding companies in 1997. Jefferson Bankshares, Inc., of Charlottesville, Virginia, and 1st United Bancorp of Boca Raton, Florida, were accounted for as purchase transactions. The acquisition of Central Fidelity Banks, Inc., of Richmond, Virginia, was accounted for as a pooling-of-interests. In November 1997, Wachovia announced a definitive agreement to acquire Ameribank Bancshares of Hollywood, Florida. Ameribank has total assets of approximately $293,000 at December 31, 1997 and will be accounted for as a purchase transaction during 1998. Principles of Consolidation -- The consolidated financial statements include the accounts of Wachovia Corporation and its subsidiaries after elimination of all material intercompany balances and transactions. Business Combinations -- In business combinations accounted for as poolings-of-interests, the financial position and results of operations and cash flows of the respective companies are restated as though the companies were combined for all historical periods. In business combinations accounted for using the purchase method of accounting, the net assets of the companies acquired are recorded at their fair values at the date of acquisition. Goodwill is amortized on a straight-line basis over the estimated periods benefited. Identifiable intangibles, including deposit base intangibles, are amortized on an accelerated or straight-line basis over the estimated periods benefited. The results of operations of the acquired companies are included since the date of acquisition. Use of Estimates -- The financial statements are prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Due From Banks -- The Corporation considers cash and due from banks, all of which are maintained in financial institutions, as cash and cash equivalents for purposes of the Consolidated Statements of Cash Flows. Trading Instruments -- The Corporation maintains trading positions in both derivative and nonderivative (or cash) financial instruments. Trading cash instruments are held for distribution through retail sales or in anticipation of market movements and are carried at fair value. Gains and losses, both realized and unrealized, are included in trading account profits (losses). Interest revenue arising from cash financial instruments is included in interest income-trading account assets. Trading cash instruments are comprised primarily of securities backed by the U.S. Treasury and various federal agencies and state and local governmental bodies. Trading derivative financial instruments are customer oriented, and trading positions are established as necessary to accommodate customers' requirements. Gains and losses from securities trading derivatives and foreign exchange activities are included in other income. Investment Securities Held-to-Maturity and Available-for-Sale -- Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are classified as held-to-maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity or trading and marketable equity securities are classified as available-for-sale and are stated at fair value. Unrealized gains and losses, net of tax, on available-for-sale securities are recorded in a separate component of shareholders' equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported as investment securities gains and losses. Risk Management Instruments -- Interest rate swaps and options (caps and floors) are used as part of the Corporation's overall interest rate risk management and are designated as hedges of interest-bearing assets, liabilities, firm commitments and anticipated transactions. These derivatives modify the interest rate characteristics of specified financial instruments. Amounts receivable or payable under interest rate swap and option agreements are recognized in net interest income. Derivative instruments not qualifying as end-user positions are treated as trading positions and marked-to-market. To qualify as a hedge, the swap or option must be designated and documented as a hedge and be effective in reducing the market risk associated with the existing asset, liability, firm commitment, or identified anticipated transaction which is probable to occur. Effectiveness of the hedge is evaluated on an initial and ongoing basis using statistical calculations of correlation. Gains and losses on risk management derivatives that are terminated early are deferred and amortized to net interest income over the remaining period originally covered by the instrument. If the underlying designated item is no longer held, or if an anticipated transaction is no longer likely to occur, any previously unrecognized gain or loss on the derivative contract is recognized in earnings and the contract is subsequently accounted for at fair value. Loans and Allowance for Loan Losses -- Loans are carried at their principal amount outstanding, except for loans held for resale which are carried at the lower of cost or market. Interest on loans is accrued and recorded as interest income based upon the principal amount outstanding. Except for revolving credit loans, the recognition of interest income is discontinued when a loan becomes 90 days past due as to principal and interest or when, in management's judgment, the interest will not be collectible in the normal course of business. When interest accruals are discontinued, the balance of accrued interest is reversed. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balance and accrued interest and the loan is in the process of collection. Interest is accrued on revolving credit loans until payments become 120 days delinquent, at which time the outstanding principal balance and accrued unpaid interest is charged off. 54 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note A -- Accounting Policies -- Concluded The allowance is maintained at a level believed to be adequate by management to absorb potential losses in the loan portfolio. Management's determination of the adequacy of the allowance is based on an evaluation of the portfolio, past loan loss experience, current domestic and international economic conditions, volume and composition of the loan portfolio and other risks inherent in the portfolio. Premises and Equipment -- Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the life of the leasehold asset or the lease term. Impairment of Long-Lived Assets -- Effective January 1, 1996, the Corporation prospectively adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FASB 121). The statement requires recognition of impairment losses on long-lived assets to be held and used whenever events or changes in circumstances result in the carrying value of the assets exceeding the sum of the expected future cash flows. The measurement of the impairment losses recognized is based on the difference between the fair value and carrying value of the assets. FASB 121 also requires long-lived assets to be disposed of be reported at the lower of carrying value or fair value less cost to sell. The effect of the adoption of this policy in 1996 was not material. Income Taxes -- The Corporation applies Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FASB 109). Under FASB 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Each subsidiary provides for income taxes based on its contribution to income taxes (benefit) of the consolidated group. The Corporation and its subsidiaries file a consolidated tax return. Stock-Based Compensation -- The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Corporation's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock awards and appreciation rights is recorded based on the market price at the end of the period. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123), encourages, but does not require, adoption of a fair value method of accounting for employee stock-based compensation plans. The Corporation follows the pro forma disclosure provisions of FASB 123. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (FASB 125), which prescribes accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets and extinguishments of liabilities. The Corporation adopted FASB 125 for transactions occurring after December 31, 1996, except those provisions relating to repurchase agreements, securities lending and other similar transactions and pledged collateral, which have been delayed until after December 31, 1997 by FASB 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125." Adoption of FASB 125 was not material; FASB 127 will be adopted as required in 1998 and is not expected to be material. Earnings Per Share -- In accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," all earnings per share amounts have been restated to present basic and diluted earnings per share. The effect of the new standard was not material. Reporting Comprehensive Income -- In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FASB 130), was issued and establishes standards for reporting and displaying comprehensive income and its components. FASB 130 requires comprehensive income and its components, as recognized under accounting standards, to be displayed in a financial statement with the same prominence as other financial statements. The Corporation plans to adopt the standard, as required, in 1998. Disclosures about Segments of an Enterprise and Related Information -- In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued and establishes new standards for reporting information about operating segments in annual and interim financial statements. The standard also requires descriptive information about the way the operating segments are determined, the products and services provided by the segments and the nature of differences between reportable segment measurements and those used for the consolidated enterprise. The Corporation plans to adopt the standard, as required, in 1998. - -------------------------------------------------------------------------------- Note B -- Business Combinations On December 15, 1997, the Corporation merged with Central Fidelity Banks, Inc. (Central Fidelity), headquartered in Richmond, Virginia. Each outstanding share of Central Fidelity common stock was converted into and exchanged for .63 of a share of the Corporation's common stock, resulting in the issuance of approximately 36.3 million shares. The acquisition was accounted for as a pooling-of-interests, and accordingly, all historical financial information for the Corporation has been restated to include Central Fidelity historical information for all periods presented herein. Intercompany transactions prior to the merger have been eliminated, and certain reclassifications were made to the Central Fidelity financial statements to conform to the Corporation's presentations. No material adjustments were recorded to conform Central Fidelity's accounting policies. In connection with the merger, the Corporation recorded charges of $220,330 for direct and other merger-related costs. The merger plan includes restructuring activities that will result in consolidation of operations, business line locations and administrative functions. These activities are expected to be completed during 1998. The charge includes $114,079 for severance and personnel related costs; $66,953 for 55 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note B -- Business Combinations -- Concluded systems and operations conversion costs; $22,982 for deal costs and other expenses; and $16,316 for business line and branch integration expenses. Included in systems and operations conversion costs and business line and integration costs are activities such as contract termination, write down of unutilized assets and other business and systems conversion costs. The liability at December 31, 1997 represents severance, contract termination costs and deal fees. Management anticipates recording an additional $50,000 merger charge in 1998, relating primarily to integration expenses. Details of the merger-related costs follow. 1997 Utilized Provision in 1997 Balance -------- --------- ------ Severance and personnel related costs ............................... $114,079 $ ---- $114,079 Systems and operations conversion costs .................... 66,953 51,530 15,423 Business line and integration expenses ............................ 16,316 9,660 6,656 Deal costs and other expenses ......... 22,982 20,031 2,951 -------- ------- -------- Total .......................... $220,330 $81,221 $139,109 ======== ======= ======== On October 31, 1997, the Corporation completed its merger with Jefferson Bankshares, Inc. (Jefferson), headquartered in Charlottesville, Virginia. Each outstanding share of Jefferson common stock was converted into and exchanged for .625 shares of the Corporation's common stock, resulting in the issuance of approximately 8.7 million shares of common stock valued at $554,337. The transaction was accounted for as a purchase; accordingly, operating results of Jefferson have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the net assets acquired, based on preliminary estimates of fair value and resulted in $337,452 of goodwill and $41,512 of deposit base intangibles. On November 11, 1997, the Corporation completed its merger with 1st United Bancorp (1st United), headquartered in Boca Raton, Florida. Each outstanding share of 1st United common stock was converted into and exchanged for .3 shares of the Corporation's common stock, resulting in the issuance of approximately 3.0 million shares of common stock valued at $193,407. The transaction was accounted for as a purchase; accordingly, operating results of 1st United have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the net assets acquired, based on preliminary estimates of fair value and resulted in $141,154 of goodwill and $22,718 of deposit base intangibles. Goodwill and deposit base intangibles, arising from the Jefferson and 1st United purchase transactions, are being amortized over 25 and 7 years, respectively. Changes to the preliminary purchase price allocation are not expected to be significant. Merger-related expenses of $23,055 were accrued to reflect management's best estimate of severance costs related to premerger Jefferson and 1st United employees and other expenses of premerger activities related to the Jefferson and 1st United transactions. The fair value of Jefferson and 1st United assets and liabilities acquired at the dates of acquisition was $3,426,567 and $2,678,823, respectively. The pro forma results, giving effect to the purchase transactions as though they occurred as of the beginning of the reporting periods, do not vary significantly from actual results. - -------------------------------------------------------------------------------- Note C -- Fair Value of Financial Instruments The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented are based on pertinent information available to management as of December 31, 1997 and 1996. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates and therefore, current estimates of fair value may differ significantly from the amounts presented. Trading Account Assets -- Fair values are based on quoted market prices as recognized in the statements of condition. Investment Securities -- Fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities. Loans -- For credit card, equity lines and other loans with short-term or variable rate characteristics, the carrying value reduced by an estimate of credit losses inherent in the portfolio is a reasonable estimate of fair value. The fair value of all other loans is estimated by discounting their future cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. The discount rates used are commensurate with the interest rate and prepayment risks involved for the various types of loans. Deposits -- The fair values disclosed for demand deposits (e.g., interest- and noninterest-bearing demand, savings and money market savings) are equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated monthly maturities. 56 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note C -- Fair Value of Financial Instruments -- Concluded Long-Term Debt -- Fair values are estimated using discounted cash flow analyses, based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Many of the Corporation's assets and liabilities are short-term financial instruments whose carrying amounts reported in the statements of condition approximate fair value. These items include cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under resale agreements, due from customers on acceptances, short-term borrowed funds, acceptances outstanding, and the financial instruments included in other assets and liabilities. The estimated fair values of the Corporation's remaining on-balance sheet financial instruments as of December 31 are summarized below. 1997 ----------------------------- Carrying Estimated Value Fair Value ------------ ------------- Financial assets: Trading account assets ......... $ 999,122 $ 999,122 Investment securities .......... 10,418,876 10,488,001 Loans, net of allowance for loan losses ...................... 43,649,659 43,944,373 Financial liabilities: Deposits ....................... 42,653,843 42,757,011 Long-term debt ................. 5,934,133 6,041,697 1996 ----------------------------- Carrying Estimated Value Fair Value ---------- ------------- Financial assets: Trading account assets ......... $1,189,826 $1,189,826 Investment securities .......... 11,176,843 11,248,307 Loans, net of allowance for loan losses ....................... 37,487,932 37,546,451 Financial liabilities: Deposits ....................... 35,321,894 35,527,581 Long-term debt ................. 7,024,639 7,088,339 Off-Balance Sheet Instruments -- Fair values are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing for loan commitments and letters of credit, and the estimated amount the Corporation would receive or pay to terminate or replace the contract at current market rates for the remainder of the off-balance sheet instruments. See Notes J and K for additional information about off-balance sheet financial instruments. The estimated fair values of the Corporation's off-balance sheet financial instruments as of December 31 are summarized below. The amounts for commitments and letters of credit are presented as negative in order to represent the approximate cost the Corporation would incur to pay third parties to assume these commitments. Interest rate contracts and other off-balance sheet financial instruments represent the net fair value gain or loss of the contracts. 1997 1996 Estimated Estimated Fair Value Fair Value ------------ ------------- Unfunded commitments to extend credit ......... ($ 44,682) ($ 40,736) Letters of credit ............................. (58,429) (41,469) Interest rate contracts issued for trading purposes .................................... 5,990 3,997 Interest rate contracts held for purposes other than trading .......................... 62,557 1,828 Other off-balance sheet financial instruments issued or held for trading or lending purposes ............................ 3,318 3,647 This presentation excludes certain financial instruments and all nonfinancial instruments. The disclosures exclude all nonfinancial instruments such as customer relationships, deposit base intangibles and goodwill. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. - -------------------------------------------------------------------------------- Note D -- Investment Securities The aggregate amortized cost, fair value and gross unrealized gains and losses of investment securities as of December 31 were as follows:
1997 ----------------------------------------- Amortized Unrealized Unrealized Cost Gains Losses ------------- ------------- ----------- Held-to-Maturity - ------------------------------------------ U.S. Treasury and other agencies ......... $ 202,913 $ 818 $ 188 State and municipal ...................... 222,903 22,894 ---- Mortgage-backed .......................... 962,161 45,106 187 Other .................................... 121,362 682 ---- ------------- -------- ----------- $1,509,339 $ 69,500 $ 375 ============= ======== =========== Available-for-Sale - ------------------------------------------- U.S. Treasury and other agencies ......... $4,501,547 $ 57,579 $ 1,017 State and municipal ...................... 79,795 3,150 7 Mortgage-backed .......................... 3,543,711 39,967 2,495 Other .................................... 508,975 3,255 862 Equity ................................... 160,649 15,443 153 ------------- -------- ----------- $8,794,677 $119,394 $ 4,534 ============= ======== =========== 1996 ----------- -------------------------------------------------- Fair Amortized Unrealized Unrealized Fair Value Cost Gains Losses Value -------- ---------- ---------- ---------- ------ Held-to-Maturity - ------------------------------------------- U.S. Treasury and other agencies ......... $ 203,543 $ ---- $ ---- $ ---- $ ---- State and municipal ...................... 245,797 167,901 20,949 98 188,752 Mortgage-backed .......................... 1,007,080 1,104,355 46,727 398 1,150,684 Other .................................... 122,044 79,835 4,291 7 84,119 ---------- ---------- -------- ------- ---------- $1,578,464 $1,352,091 $ 71,967 $ 503 $1,423,555 ========== ========== ======== ======= ========== Available-for-Sale - ------------------------------------------- U.S. Treasury and other agencies ......... $4,558,109 $5,135,275 $ 57,175 $ 9,148 $5,183,302 State and municipal ...................... 82,938 97,251 2,432 109 99,574 Mortgage-backed .......................... 3,581,183 3,387,117 37,338 17,336 3,407,119 Other .................................... 511,368 967,753 4,101 1,406 970,448 Equity ................................... 175,939 153,852 10,705 248 164,309 ---------- ---------- -------- ------- ---------- $8,909,537 $9,741,248 $111,751 $28,247 $9,824,752 ========== ========== ======== ======= ==========
57 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note D -- Investment Securities -- Concluded The amortized cost and estimated fair value of investment securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. Amortized Fair Cost Value -------- ------ Held-to-Maturity - ------------------------------------------------- Due in one year or less ........................ $ 151,592 $ 152,055 Due after one year through five years .......... 352,102 359,321 Due after five years through ten years ......... 224,994 240,748 Due after ten years ............................ 780,651 826,340 ----------- ----------- Total .................................... 1,509,339 1,578,464 Available-for-Sale - -------------------------------------------------- Due in one year or less ........................ 1,515,846 1,524,086 Due after one year through five years .......... 4,126,392 4,178,560 Due after five years through ten years ......... 679,513 686,245 Due after ten years ............................ 2,312,277 2,344,707 ----------- ----------- Total .................................... 8,634,028 8,733,598 No contractual maturity ........................ 160,649 175,939 ----------- ----------- Total .................................... 8,794,677 8,909,537 ----------- ----------- Total investment securities .............. $10,304,016 $10,488,001 =========== =========== Proceeds, gross gains and losses realized from the sales, calls and prepayments of available-for-sale securities for December 31 were as follows: 1997 1996 ---------- -------- Proceeds ............. $2,211,721 $541,533 Gross gains .......... 6,576 6,838 Gross losses ......... 5,122 2,250 Trading account assets are reported at fair value with net unrealized gains (losses) of ($1,736), $906 and ($836) included in earnings during 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, investment securities with a carrying value of $6,259,029 and $7,357,835, respectively, were pledged as collateral to secure public deposits and for other purposes. There were no obligations of any one issuer exceeding 10% of consolidated shareholders' equity at December 31, 1997. There were no transfers or sales of held-to-maturity securities during 1997 or 1996. - -------------------------------------------------------------------------------- Note E -- Loans and Allowance for Loan Losses Loans at December 31 are summarized as follows: 1997 1996 ----------- ----------- Commercial: Commercial, financial and other ......... $13,528,344 $10,340,809 Tax-exempt .............................. 1,607,159 2,015,725 Retail: Direct .................................. 1,249,612 1,217,961 Indirect ................................ 3,028,288 3,082,440 Credit card ............................. 5,919,098 5,596,334 Other revolving credit .................. 459,563 424,543 Real estate: Construction ............................ 1,779,522 1,246,687 Commercial mortgages .................... 6,790,446 5,683,762 Residential mortgages ................... 8,098,794 7,132,129 Lease financing -- net ..................... 1,094,169 831,135 Foreign .................................... 639,387 435,704 ----------- ----------- Total loans -- net .................... $44,194,382 $38,007,229 =========== =========== Loans at December 31, 1997 and 1996 that had been placed on a cash basis were $101,156 and $98,638, respectively. Interest income which would have been recorded pursuant to the original terms of loans restructured to below market rates was $11,390 and $10,665 on the preceding dates. Interest income recorded on these loans was $4,606 and $5,184, respectively. Loans totaling $197 at December 31, 1997, which have been restructured at market rates and have been returned to accrual status, are not included in the nonperforming loan total. Foregone interest on these balances is included in the above amounts. The Corporation follows Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (FASB 114). A loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts of principal and interest due according to the contractual terms of the loan agreement. Impaired loans are included as a portion of cash-basis assets. The following table summarizes impaired loans and related allowance information at December 31. 1997 1996 1995 ------- ------- ------- Impaired loans with related allowance ......................... $15,711 $21,179 $32,907 Impaired loans with no related allowance ......................... 32,207 39,533 27,246 ------- ------- ------- Total impaired loans ......... $47,918 $60,712 $60,153 ======= ======= ======= Allowance on impaired loans ......... $ 2,209 $ 5,011 $ 8,232 ======= ======= ======= Year Ended December 31 --------------------------------- 1997 1996 1995 ------- ------- ------- Average impaired loans ............. $47,862 $62,742 $61,227 Interest income .................... 1,957 3,308 1,737 Cash-basis interest income ......... 614 1,014 1,640 At December 31, 1997, the Corporation had no significant outstanding commitments to lend additional funds to borrowers whose loans have been restructured. Changes in the allowance for loan losses for the three years ended December 31 were as follows:
1997 1996 1995 -------- -------- -------- Balance at beginning of year ......... $519,297 $518,808 $516,132 Additions from acquisitions .......... 24,641 200 ---- Provision for loan losses ............ 264,949 193,776 130,504 Recoveries on loans previously charged off ........................ 57,515 57,240 52,952 Loans charged off .................... (321,679) (250,727) (180,780) -------- -------- -------- Balance at end of year ............... $544,723 $519,297 $518,808 ======== ======== ========
Loans totaling $17,413, $16,236 and $10,337 were transferred to foreclosed real estate during 1997, 1996 and 1995, respectively. It is the policy of the Corporation to review each prospective credit in order to determine an adequate level of security or collateral to obtain prior to making the loan. The type of collateral will vary and ranges 58 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note E -- Loans and Allowance for Loan Losses -- Concluded from liquid assets to real estate. The Corporation's access to collateral, in the event of borrower default, is assured through adherence to state lending laws and the Corporation's sound lending standards and credit monitoring procedures. The Corporation regularly monitors its credit concentrations on loan purpose, industry and customer bases. At year-end, there were no significant credit concentrations within these categories. See Note J for discussion of off-balance sheet credit issues. The Corporation's subsidiaries have granted loans and extended letters of credit to certain directors and executive officers of the Corporation and its subsidiaries and to their associates. The aggregate amount of loans was $272,695 and $525,968 at December 31, 1997 and 1996, respectively. During 1997, $589,777 in new loans were made and repayments totaled $843,050. Outstanding standby letters of credit to related parties totaled $1,922 and $31,646 at December 31, 1997 and 1996, respectively. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. Loans held for sale at December 31 along with activity during the period are summarized as follows: 1997 1996 ----------- ----------- Balance at beginning of year ......... $ 254,281 $ 778,473 Originations/purchases ............... 12,006,679 16,780,536 Sales/transfers ...................... (12,149,714) (17,304,728) ----------- ----------- Balance at end of year ............... $ 111,246 $ 254,281 =========== =========== - -------------------------------------------------------------------------------- Note F -- Premises, Equipment and Leases Premises and equipment at December 31 are summarized as follows: 1997 1996 --------- --------- Land ....................................... $ 127,976 $ 112,267 Premises ................................... 632,555 545,606 Equipment .................................. 778,652 810,785 Leasehold improvements ..................... 121,829 103,795 --------- --------- 1,661,012 1,572,453 Less accumulated depreciation and amortization ............................. 850,857 778,524 --------- --------- Total premises and equipment ......... $ 810,155 $ 793,929 ========= ========= The annual minimum rentals under the terms of the Corporation's noncancelable operating leases as of December 31, 1997 are as follows: 1998 ........................................ $ 60,197 1999 ........................................ 54,425 2000 ........................................ 47,443 2001 ........................................ 40,995 2002 ........................................ 30,599 Thereafter .................................. 113,578 -------- Total minimum lease payments ......... $347,237 ======== The net rental expense for all operating leases amounted to $63,701 in 1997, $58,239 in 1996 and $56,534 in 1995. Certain leases have various renewal options and require increased rentals under cost of living escalation clauses. Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was $154,223, $109,901 and $97,163, respectively. During 1997, an impairment charge of $67,202, which approximated the carrying value of the assets, was recorded as a result of the Corporation's plan to implement a company-wide distributed technology platform for improved employee communication capabilities. The plan involves the write-down and disposal of personal computer hardware and software acquired before 1997. - -------------------------------------------------------------------------------- Note G -- Credit Arrangements, Short-Term Borrowed Funds and Certificates of Deposit At December 31, 1997 and 1996, lines of credit arrangements aggregating $400,000 and $300,000, respectively, were available to the Corporation from unaffiliated banks. Commitment fees were 8 basis points in 1997 and 1996; compensating balances are not required. The unused portion of these banking arrangements principally serves as commercial paper back-up lines. There were no borrowings outstanding under credit arrangements during 1997 or 1996. Federal funds purchased and securities sold under repurchase agreements generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are delivered to either broker-dealers or to custodian accounts for customers. The broker-dealers may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Corporation identical securities at the maturity of the agreements. Other borrowed funds consist of term federal funds purchased, treasury tax and loan deposits and short-term bank notes and are generally repaid within seven to 120 days from the transaction date. Information concerning short-term borrowed funds is included in Table 7 of Management's Discussion and Analysis of Financial Condition and Results of Operations. The scheduled maturities of certificates of deposit subsequent to December 31, 1997 are $9,920,561 in 1998, $1,790,107 in 1999, $975,710 in 2000, $344,732 in 2001 and $196,138 thereafter. - -------------------------------------------------------------------------------- 59 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note H -- Long-Term Debt Long-term debt at December 31 is summarized as follows:
1997 1996 ---------- ---------- Bank notes, net of discount of $5,548 and $5,948, respectively (a)........................ $2,939,952 $4,307,802 Other long-term debt: Federal Home Loan Bank borrowings (b) ................................................... 307,186 400,080 7.0% subordinated debt securities due in 1999, net of discount of $915 and $1,343, respectively (c)........................................................................ 299,085 298,657 6.375% subordinated debt securities due in 2003, net of discount of $1,163 and $1,346, respectively (c)........................................................................ 248,837 248,654 6.8% subordinated notes due in 2005, net of discount of $291 and $320, respectively (c).. 249,709 249,680 6.375% subordinated notes due in 2009, net of discount of $267 and $284, respectively (c) 249,733 249,716 6.605% subordinated notes due in 2025 (c) ............................................... 250,000 250,000 Wachovia Capital Trust I-7.64% Capital Securities due in 2027 (d) ....................... 300,000 300,000 Wachovia Capital Trust II-Floating Rate Capital Securities due in 2027, net of discount of $3,161 (e)........................................................................... 296,839 ---- Wachovia Capital Trust V-7.965% Capital Securities due in 2027 (f) ...................... 300,000 ---- Central Fidelity Capital Trust I-Floating Rate Capital Securities due in 2027, net of discount of $846 (g).................................................................... 99,154 ---- 6.625% senior notes due in 2006, net of discount of $793 and $858, respectively.......... 199,207 199,142 8.15% subordinated notes due in 2002 (c) ................................................ 150,000 150,000 5.664% mandatorily redeemable securities due in 1999 .................................... ---- 331,100 Other ................................................................................... 44,431 39,808 ---------- ---------- Total other long-term debt ............................................................ 2,994,181 2,716,837 ---------- ---------- Total long-term debt .................................................................. $5,934,133 $7,024,639 ========== ==========
(a) Wachovia Bank, N.A. has an ongoing bank note program under which the bank may offer an aggregate principal amount of up to $16 billion. The notes can be issued globally as fixed or floating rate and with maturities beginning at seven days. Bank notes with original maturities of one year or less are included in other short-term borrowed funds. Bank notes with original maturities greater than one year are classified as long-term debt. Interest rates on long-term notes ranged from 4.9% to 7.75% and 4.5% to 7.75% with maturities ranging from 1998 to 2008 and 1997 to 2008 at December 31, 1997 and 1996, respectively. The average rates were 6.12% and 5.81% with average maturities of 2.9 years and 1.8 years at December 31, 1997 and 1996, respectively. (b) The Federal Home Loan borrowings were issued as fixed or floating rate with terms of 2 years to 6 years. Interest rates on the borrowings ranged from 5.63% to 8.31% for December 31, 1997 and 1996 and with maturities ranging from 1998 to 2003 and 1997 to 2003 at December 31, 1997 and 1996, respectively. (c) Obligation qualifies for inclusion in the determination of total capital under the Risk-Based Capital guidelines. (d) In December 1996, Wachovia Capital Trust I (WCT I), a wholly owned subsidiary, issued $300,000 of 7.64% Capital Securities due in 2027. WCT I invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT I's Common Securities, in $309,280 of the Corporation's 7.64% Junior Subordinated Deferrable Interest Debentures. WCT I's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT I's obligations under the Capital Securities. Additionally, the Capital Securities qualify for inclusion in Tier I capital under the Risk-Based Capital guidelines. (e) In January 1997, Wachovia Capital Trust II (WCT II), a wholly owned subsidiary, issued $300,000 Floating Rate Capital Securities due in 2027. WCT II invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT II's Common Securities, in $305,692, net of discount of $3,588, of the Corporation's Floating Rate Junior Subordinated Deferrable Interest Debentures. WCT II's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT II's obligations under the Capital Securities. Additionally, the Capital Securities qualify for inclusion in Tier I capital under the Risk-Based Capital guidelines. (f) In June 1997, Wachovia Capital Trust V (WCT V), a wholly owned subsidiary, issued $300,000 of 7.965% Capital Securities due in 2027. WCT V invested the proceeds of the Capital Securities, together with $9,280 paid by the Corporation for WCT V's Common Securities, in $309,280 of the Corporation's 7.965% Junior Subordinated Deferrable Interest Debentures. WCT V's sole asset is the Junior Subordinated Deferrable Interest Debentures which mature in 2027. The Corporation has guaranteed all of WCT V's obligations under the Capital Securities. Additionally, the Capital Securities qualify for inclusion in Tier I capital under the Risk-Based Capital guidelines. (g) In April 1997, Central Fidelity Capital Trust I (CFCT I), a wholly owned subsidiary, issued $100,000 Floating Rate Capital Securities due in 2027. CFCT I invested the proceeds of the Capital Securities, together with $3,093 paid by the Corporation for CFCT I's Common Securities, in $103,093 of the Corporation's Floating Rate Junior Subordinated Debt Securities. CFCT I's sole asset is the Junior Subordinated Debt Securities which mature in 2027. The Corporation has guaranteed all of CFCT I's obligations under the Capital Securities. Additionally, the Capital Securities qualify for inclusion in Tier I capital under the Risk-Based Capital guidelines. The principal maturities of long-term debt subsequent to December 31, 1997 are $1,048,191 in 1998, $924,832 in 1999, $67,391 in 2000, $832,723 in 2001, $604,212 in 2002 and $2,456,784 thereafter. Interest paid on deposits and other borrowings was $2,132,054 in 1997, $2,127,857 in 1996 and $1,943,202 in 1995. - -------------------------------------------------------------------------------- Note I -- Capital Stock At December 31, 1997, 28,344,740 common shares were reserved for the conversion of notes and issuance for employee benefit plans and the dividend reinvestment plan. During 1997, the Corporation repurchased 6,913,400 shares pursuant to three separate stock repurchase authorizations by the Board of Directors. Repurchased shares will be used for various corporate purposes including the issuance of shares for purchase business combinations, employee benefit plans and the dividend reinvestment plan. In January 1998, the Board of Directors authorized the repurchase of up to 946,662 shares to be issued in connection with the Ameribank purchase transaction. Total repurchases were authorized up to an amount that would preserve the accounting for the merger with Central Fidelity as a pooling-of-interests. Common stock repurchases by Central Fidelity during 1997 (adjusted for the exchange ratio) totaled 1,883,196 shares. The Corporation has one active stock option plan, the restated 1994 Wachovia Corporation Stock Plan. Under this Plan, up to 2.5% of the Corporation's outstanding common stock at year-end may be granted to selected key employees and nonemployee directors in the form of incentive and nonqualified stock options, stock appreciation rights (SARS), restricted stock awards and restricted units. Since the inception, a total of 4,994,608 options, 659,374 awards and 125,000 SARS have been granted. The Corporation also has several predecessor plans, the 1989 and 1986 Plans, and plans of merged entities which were assumed with appropriate conversion shares under option and option price. These plans continue to have options outstanding which may be exercised. The Corporation's stock plans provide for the granting of options or awards for the purchase or issuance of 10,309,408 shares at 100% of the fair market value of the stock at the date of the grant. A committee of the Board of Directors determines such times options and awards 60 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note I -- Capital Stock -- Concluded shall be granted and exercised and the term of the exercise period (not to exceed 10 years). The plan awards officers shares of restricted stock earned contingent upon both a performance requirement and time period requirement (5 years). Additionally, newly elected nonemployee directors are granted a one-time award of 1,000 shares of restricted stock to be earned over a three-year period and nonemployee directors are awarded 250 shares of restricted stock annually which are earned over a one-year period. The Corporation follows APB 25 and related interpretations to account for its employee stock options, stock awards and SARS. Accordingly, compensation cost is measured as the excess, if any, of the quoted market price of the Corporation's stock at the date of grant over the amount an employee must pay to acquire the stock. The cost relating to performance-based stock compensation was $9,131, $4,522 and $1,975 during 1997, 1996 and 1995, respectively. The following table reflects pro forma net income and earnings per share had the Company elected to adopt the fair value approach of FASB 123. 1997 1996 1995 -------- ----- ----- Net Income: As reported .......... $592,806 $757,259 $707,913 Pro forma ............ 585,442 751,226 706,032 Basic earnings per share: As reported .......... $ 2.99 $ 3.70 $ 3.40 Pro forma ............ 2.95 3.67 3.39 These pro forma amounts may not be representative of future years since only awards and options granted after January 1, 1995 have been included in accordance with FASB 123. The weighted average fair values of options at their grant date during 1997, 1996 and 1995 were $13.29, $9.53 and $8.67, respectively. The estimated fair value of each option granted is calculated using the Black-Scholes option-pricing model. The following summarizes the weighted-average of the assumptions used in the model. 1997 1996 1995 ------ ---- ---- Risk-free interest rate ............... 6.50% 5.67% 7.41% Expected years until exercise ......... 6.30 6.32 6.34 Expected stock volatility ............. 22% 22% 24% Dividend yield ........................ 3.31% 3.40% 3.38% Activity in the option and award plans during 1997, 1996 and 1995 is summarized as follows:
Options and Awards Outstanding Available --------------------------- Option Price for Grant Awards Options Per Share --------------- ------- ------ ------------------ Balance December 31, 1994 .................... 5,978,364 225,588 6,628,982 $ 5.41-37.00 Authorized by Central Fidelity ..... 1,653,750 ---- ---- ---- Granted ................. (1,136,806) 109,750 1,027,056 28.06-36.875 Exercised ............... ---- (60,898) (1,104,614) 5.41-34.625 Forfeited ............... 39,757 (1,674) (93,045) 18.3855-34.625 ---------- ------- ---------- Total December 31, 1995 .................... 6,535,065 272,766 6,458,379 12.50-36.875 Granted ................. (2,043,839) 242,107 1,801,732 24.85-47.125 Exercised ............... ---- (68,366) (1,015,339) 12.50-43.75 Forfeited ............... 65,296 (2,500) (85,616) 28.13-43.75 ---------- ------- ---------- Total December 31, 1996 .................... 4,556,522 444,007 7,159,156 15.4165-47.125 Granted ................. (2,732,191) 243,517 2,488,674 43.56-76.6875 Assumed (Jefferson and 1st United)....... ---- ---- 217,355 11.10-45.30 Exercised ............... ---- (26,000) (1,477,080) 15.4165-45.30 Cancelled ............... (552,633) ---- ---- ---- Authorized .............. 3,794,392 ---- ---- ---- Forfeited ............... 82,075 (1,550) (92,444) 21.6875-57.25 ---------- ------- ---------- Total December 31, 1997 .................... 5,148,165 659,974 8,295,661 15.729-76.6875 ========== ======= ==========
The following table summarizes information concerning currently outstanding and exercisable options.
Options Outstanding Options Exercisable - -------------------------------------------------------------------- ------------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ------------------- ----------- ----------- ----------- ----------- --------- $ 11.10-25.00 1,142,239 2.36 $ 18.30 1,142,239 $ 18.30 28.25-34.625 3,163,684 5.53 32.04 2,246,317 31.24 36.875-47.125 2,197,139 7.22 41.56 1,263,499 39.96 55.50-76.6875 1,792,599 9.11 57.86 67,974 71.09 --------- --------- 8,295,661 4,720,029 ========= =========
- -------------------------------------------------------------------------------- Note J -- Off-Balance Sheet Trading and Lending Activities The Corporation maintains positions in a variety of financial instruments with off-balance sheet risk to accommodate customers' financing objectives and management of interest rate and foreign currency risk. The Corporation maintains active trading positions in foreign exchange forward contracts and manages credit risk through the establishment of offsetting sell positions, as well as standard limit and monitoring procedures. The Corporation maintains a trading portfolio of interest rate swap and option (caps and floors) contracts and foreign exchange options consisting of generally matched, offsetting contracts with customer and market counterparties. Off-balance sheet financial instruments involve, in varying degrees, exposure to credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The Corporation follows the same credit policies and careful underwriting practices in making commitments and conditional obligations as it does for on-balance sheet instruments. In those instances where collateral is necessary to support financial instrument credit risk, the Corporation assures its ability to access borrower's collateral, in the event of default, through strict adherence to corporate lending policy and applicable state lending laws. 61 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note J -- Off-Balance Sheet Trading and Lending Activities -- Continued Derivative Financial Instruments Held or Issued for Trading Purposes -- The amounts disclosed below represent the year end notional and fair value of derivative financial instruments held or issued for trading purposes and the average fair value during the year. Notional principal amounts are often used to express the volume of these transactions but do not represent the much smaller amounts potentially subject to credit risk. The Corporation's credit exposure to off-balance sheet derivative financial instruments is represented by the fair value gain of the instrument if a counterparty fails to perform. Options written do not expose the Corporation to credit risk, except to the extent of the underlying risk in the debt instrument that the Corporation may be obligated to acquire under certain written put options. The present value of purchased caps and floors in a gain position represents the Corporation's potential credit exposure.
1997 ------------------------------------------------------ Notional Fair Value Fair Value Average Value Gains (Losses) Fair Value ------------- ----------- ----------- ------------ U.S. dollar interest rate contracts as intermediary: Interest rate swaps-pay fixed .............. $3,624,822 $8,423 ($ 32,930) $ (94) Interest rate swaps-pay floating ........... 4,206,981 38,366 (7,876) 116 Interest rate caps and floors written ...... 1,886,230 1,729 ---- 21 Interest rate caps and floors purchased..... 1,867,736 ---- (1,722) (21) Securities trading activities: Commitments to purchase securities, futures and forward contracts ............. 537,237 1,768 (163) (66) Commitments to sell securities, futures and forward contracts ..................... 584,187 357 (1,896) 222 Net options written to purchase or sell securities ................................ ---- ---- ---- ---- Foreign exchange trading activities: Commitments to purchase foreign exchange .................................. 1,457,485 5,725 (28,525) 7,162 Commitments to sell foreign exchange ....... 1,460,270 30,816 (4,776) (4,696) Foreign exchange options written ........... 12,737 179 (15) 62 Foreign exchange options purchased ......... 12,070 13 (165) (49) 1996 --------------------------------------------------------- Notional Fair Value Fair Value Average Value Gains (Losses) Fair Value ---------- ------ --------- --------------- U.S. dollar interest rate contracts as intermediary: Interest rate swaps-pay fixed .............. $2,238,309 $8,351 ($12,926) $ (31) Interest rate swaps-pay floating ........... 2,298,809 16,353 (7,786) 54 Interest rate caps and floors written ...... 698,219 1,228 ---- 25 Interest rate caps and floors purchased..... 696,219 ---- (1,222) (25) Securities trading activities: Commitments to purchase securities, futures and forward contracts ............. 284,160 457 (782) 69 Commitments to sell securities, futures and forward contracts ..................... 309,745 957 (452) 219 Net options written to purchase or sell securities ................................ 196,000 ---- (72) (3) Foreign exchange trading activities: Commitments to purchase foreign exchange .................................. 1,480,039 70,338 (8,816) 12,692 Commitments to sell foreign exchange ....... 1,478,494 11,694 (69,686) (10,657) Foreign exchange options written ........... 15,323 119 (3) 44 Foreign exchange options purchased ......... 6,111 3 (108) (36)
The Corporation controls the credit risk of these instruments through adherence to credit approval policies, monetary limits and monitoring procedures. Entering into interest rate swap agreements involves not only credit risk but also interest rate and foreign currency risk associated with unmatched positions. The Corporation controls the interest rate and foreign currency risk inherent in the derivative trading portfolio by entering into offsetting positions or by using other hedging techniques. Risks are further mitigated for those instruments that trade on organized exchanges, as the exchanges provide oversight and determine who may buy and sell such instruments. Interest Rate Swaps -- These transactions generally involve the exchange of fixed and floating rate payments without the exchange of the underlying principal amounts. Payments made or received under swap contracts are accrued based on contractual terms and are reported as other operating income. The related accrued amounts receivable or payable to customers or counterparties are included in other assets or liabilities. Revenues from the customer portfolio represent a small profit margin on intermediated transactions. The difference in the fair value of the offsetting contracts is not material. At December 31, 1997, the weighted average maturity of pay-fixed swaps and receive-fixed swaps held in the customer portfolio was 3.8 years. Under pay-fixed swap agreements, the Corporation paid interest at a weighted average fixed rate of 5.17% and received interest at a weighted average floating rate of 5.747% (based on year-end rates). Under receive-fixed swap agreements, the Corporation received interest at a weighted average fixed rate of 5.30% and paid interest at a weighted average floating rate of 5.743% (based on year-end rates). Interest Rate Caps and Floors -- These instruments are written by the Corporation to enable its customers to transfer, modify, or reduce their interest rate risk exposure. In a cap or floor contract, the purchaser pays a premium at the initiation of the contract for the right to receive payments if market interest rates are greater than the strike price of a cap or less than the strike price of a floor. Payments made or received under cap or floor contracts are accrued based on contractual terms and are reported as other operating income. Commitments to Purchase and Sell Securities, Futures and Forward Contracts -- These instruments are contracts for delayed delivery of securities or money market instruments in which the seller agrees to deliver a specified instrument at a specified price or yield at a specified date. Commitments to purchase and sell securities, futures and forward contracts used in securities trading operations are recognized currently at market value and are reported as trading account profits (losses). Net Options Written to Purchase and Sell Foreign Exchange -- Forward commitments involve the purchase or sale of foreign currency amounts for delivery at a specified future date. Payments on forward commitments are exchanged on the delivery date based on the exchange rate in the contract. Forward commitments to purchase and sell foreign exchange are recognized at market value and are reported as other operating income. 62 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note J -- Off-Balance Sheet Trading and Lending Activities -- Concluded Foreign Exchange Options -- These agreements represent rights to purchase or sell foreign currency at a predetermined price at a future date. The purchaser pays a premium at the initiation of the contract for the right to exchange a specified amount at the contract's exchange rate at the maturity of the option. Revenues from the derivative trading portfolio are shown below. 1997 1996 1995 ------- ------- ------ Interest rate contracts ............. $ 8,020 $ 3,071 $4,332 Securities activities ............... (3,035) 2,772 (7,569) Foreign exchange activities ......... 11,283 10,292 12,123 ------- ------- ------ Total .......................... $16,268 $16,135 $8,886 ======= ======= ====== Off-Balance Sheet Financial Instruments Issued for Lending Activities -- The Corporation issues off-balance sheet financial instruments as part of its commercial and consumer lending activities. The contract amounts of these instruments represent potential credit risk at December 31 as shown below: 1997 1996 ----------- ----------- Commercial and consumer lending activities: Unfunded commitments to extend credit .......................... $44,484,255 $36,200,295 Standby letters of credit ......... 8,106,782 5,845,756 Commercial and similar letters of credit .......................... 183,695 147,346 Participations in bankers' acceptances ..................... 5,850 5,438 Commitments to Extend Credit -- These are legally binding contracts to lend to a customer, provided there is no contract violation. These commitments have fixed termination dates and generally require payment of a fee. As most commitments expire prior to being drawn, the amounts shown do not necessarily represent the future cash requirements of the contracts. Credit worthiness is evaluated and in some instances collateral is obtained to support the borrowing. At December 31, 1997 and 1996, approximately 15% and 14%, respectively, of unfunded commitments to extend credit were supported by collateral. Of the total unfunded commitment amounts presented, approximately 25% in 1997 and 30% in 1996 were comprised of cancelable credit card commitments, and approximately 10% in 1997 and 1996 were represented by real estate commitments. Standby, Commercial and Similar Letters of Credit -- These instruments are conditional commitments issued by the Corporation guaranteeing the performance of a customer to a third party. These guarantees are issued primarily to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit to customers and is subject to the Corporation's underwriting process. At December 31, 1997 and 1996, approximately 4% and 2%, respectively, of these instruments were supported by collateral. There were no significant concentrations of letters of credit to any one group of borrowers at either year-end. Participation in Bankers' Acceptances -- These instruments represent risk participation in time drafts drawn by customers under a committed multibank credit facility. These drafts have been accepted and remarketed by other financial institutions. Under the terms of these arrangements, the Corporation may be required to reimburse the accepting financial institution for the Corporation's pro rata share of any payment default by the customer. - -------------------------------------------------------------------------------- Note K -- Off-Balance Sheet Risk Management Activities The Corporation uses a variety of off-balance sheet financial instruments as part of its overall interest rate risk management process. The Corporation's principal objective of asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the Corporation's funding needs. Accordingly, the Corporation uses a combination of derivative financial instruments, including interest rate swaps, futures and options with indices that correlate to on-balance sheet instruments to modify the repricing characteristics of interest-earning assets and interest-bearing liabilities. 63 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note K -- Off-Balance Sheet Risk Management Activities -- Concluded The amounts disclosed below represent the period-end notional and fair value of derivative financial instruments held for risk management purposes. The Corporation's credit exposure to off-balance sheet derivative financial instruments is represented by the fair value gain of the instrument if a counterparty fails to perform. There were no deferred losses resulting from terminated swap contracts at December 31, 1997 and 1996.
1997 ------------------------- Notional Fair Value Value Gains ------------- ------------ Convert floating rate liabilities to fixed: Swaps-pay fixed/receive floating ....................................... $ 357,056 $ 287 Convert fixed rate assets to floating: Swaps-pay fixed/receive floating ....................................... 358,299 ---- Forward starting swaps-pay fixed/receive floating ...................... ----- ---- Convert fixed rate liabilities to floating: Swaps-receive fixed/pay floating ....................................... 1,375,000 65,915 Convert liabilities with quarterly rate resets to monthly: Swaps-receive floating/pay floating .................................... 300,000 ---- Convert floating rate assets to fixed: Swaps-receive fixed/pay floating ....................................... 409,196 6,932 Index amortizing swaps-receive fixed/pay floating ...................... 125,000 878 ------------- ------- Total interest rate swaps and options ................................. 2,924,551 74,012 Financial futures contracts -- hedge of federal funds purchased ......... 1,000,000 ---- ------------- ------- Total derivatives ..................................................... $3,924,551 $74,012 ============= ======= 1996 ----------- ------------------------------------ Fair Value Notional Fair Value Fair Value (Losses) Value Gains (Losses) --------- ---------- ------- --------- Convert floating rate liabilities to fixed: Swaps-pay fixed/receive floating ....................................... $(2,366) $ 122,239 $ 625 $(1,773) Convert fixed rate assets to floating: Swaps-pay fixed/receive floating ....................................... (8,689) 431,465 ---- (6,912) Forward starting swaps-pay fixed/receive floating ...................... ---- 18,200 ---- (984) Convert fixed rate liabilities to floating: Swaps-receive fixed/pay floating ....................................... ---- 800,000 7,934 (5,477) Convert liabilities with quarterly rate resets to monthly: Swaps-receive floating/pay floating .................................... (279) 300,000 ---- (348) Convert floating rate assets to fixed: Swaps-receive fixed/pay floating ....................................... (75) 314,859 3,462 (830) Index amortizing swaps-receive fixed/pay floating ...................... ---- 250,000 6,131 ---- --------- ---------- ------- --------- Total interest rate swaps and options ................................. (11,409) 2,236,763 18,152 (16,324) Financial futures contracts -- hedge of federal funds purchased ......... (46) ---- ---- ---- --------- ---------- ------- --------- Total derivatives ..................................................... ($ 11,455) $2,236,763 $18,152 ($ 16,324) ========= ========== ======= =========
- -------------------------------------------------------------------------------- Note L -- Income Taxes The provision for income taxes is summarized below. Included in these amounts are income taxes related to securities transactions of $648, $1,557 and ($7,437) in 1997, 1996 and 1995, respectively. The Corporation made income tax payments totaling $304,072 in 1997, $273,422 in 1996 and $290,026 in 1995. 1997 1996 1995 -------- -------- -------- Currently payable: Federal ............................ $233,618 $282,405 $297,114 Foreign ............................ 594 542 288 State and local .................... 6,932 10,050 12,032 -------- --------- --------- Total currently payable ......... 241,144 292,997 309,434 Deferred: Federal ............................ 23,453 51,383 13,631 State .............................. 11,716 (1,331) (7,688) -------- --------- --------- Total deferred .................. 35,169 50,052 5,943 -------- --------- --------- Total tax expense ............... $276,313 $343,049 $315,377 ======== ========= ========= The reasons for the difference between consolidated income tax expense and the amount computed by applying the statutory federal income tax rate of 35% to income before taxes were as follows:
1997 1996 1995 -------- ---------- ---------- Income before income taxes ........... $869,119 $1,100,308 $1,023,290 ======== ========== ========== Federal income taxes at statutory rate .................... $304,192 $ 385,108 $ 358,152 State and local income taxes, net of federal benefit ............ 12,121 5,648 2,824 Effect of tax-exempt securities interest and other income ......... (42,031) (38,457) (50,387) Other items .......................... 2,031 (9,250) 4,788 -------- ---------- ---------- Total tax expense ............. $276,313 $ 343,049 $ 315,377 ======== ========== ==========
Under FASB 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities at December 31 are as follows: Deferred Tax Assets ---------------------------- 1997 1996 -------- -------- Allowance for loan losses ................ $197,012 $192,375 Employee compensation and retirement benefits ............................... 72,602 29,293 Other .................................... 40,630 29,527 -------- -------- Gross deferred tax assets ......... $310,244 $251,195 ======== ======== Deferred Tax Liabilities ---------------------------- 1997 1996 --------- -------- Unrealized gains on securities available- for-sale .................................... $ 42,468 $ 31,818 Depreciation .................................. 4,052 43,260 Lease financing ............................... 200,921 95,001 Accretion of discounts on securities .......... 18,326 17,137 Identifiable intangibles ...................... 22,898 ---- Other ......................................... 19,922 8,799 --------- -------- Gross deferred tax liabilities ......... $ 308,587 $196,015 ========= ======== Net deferred tax asset ................. $ 1,657 $ 55,180 ========= ======== Management believes that the Corporation will fully realize the net deferred tax asset as of December 31, 1997 based on the Corporation's refundable taxes from carryback years, as well as its current level of operating income. - -------------------------------------------------------------------------------- 64 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note M -- Cash, Dividend, Loan Restrictions, Capital Ratios and Contingent Liabilities In the normal course of business, the Corporation and its subsidiaries enter into agreements, or are subject to regulatory requirements, that result in cash, debt and dividend restrictions. A summary of the most restrictive items follows. The Corporation's banking subsidiaries are required to maintain average reserve balances with the Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1997 was approximately $335,656. Under current Federal Reserve regulations, the banking subsidiaries also are limited in the amount they may loan to their affiliates, including the Corporation. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of the bank's capital, surplus and undivided profits plus the allowance for loan losses. Based on these limitations, approximately $618,035 was available for loans to the Corporation at December 31, 1997. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds the bank's net profits, as defined, for that year combined with its retained net profits for the preceding two calendar years. Under this formula, the banking subsidiaries cannot distribute as dividends to the Corporation in 1998, without the approval of the Comptroller of the Currency, more than $156,426 plus an additional amount equal to the banks' retained net profits for 1998 up to the date of any dividend declaration. As a result of the above dividend and loan restrictions, approximately $5,103,144 of consolidated net assets of the Corporation's banking subsidiaries at December 31, 1997 was restricted from transfer to the Corporation in the form of cash dividends, loans or advances. The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory, and possible discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. The Corporation and its banking subsidiaries are required to maintain minimum Tier I capital, total risk-based capital and Tier I leverage ratios of 4%, 8% and 3%, respectively. The Corporation and its banking subsidiaries meet all capital adequacy requirements to which they are subject. At December 31, 1997, the most recent notification from the Comptroller of the Currency categorized the Corporation's banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be well capitalized, the banking subsidiaries must maintain minimum Tier I capital, total risk-based capital, and Tier I leverage ratios of 6%, 10% and 5%, respectively. There are no conditions or events since that notification that management believes have changed the banking subsidiaries' well capitalized status. The actual capital amounts and ratios for the Corporation and its principal banking subsidiaries at December 31 are presented in the following table. The capital amounts and ratios for Wachovia Bank, N.A. at December 31, 1996, have been restated to reflect the merger of Wachovia Bank of North Carolina, N.A., Wachovia Bank of Georgia, N.A., and Wachovia Bank of South Carolina, N.A., into a single bank at June 1, 1997. 1997 1996 ----------------------- ---------------------- Amount Ratio Amount Ratio ---------- ------- ---------- --- Wachovia Corporation Tier I capital ........... $5,465,144 9.18% $4,765,206 9.46% Total risk-based capital.. 7,203,318 12.10 6,572,544 13.04 Tier I leverage .......... 5,465,144 9.24 4,765,206 8.52 Wachovia Bank, N.A. Tier I capital ........... $3,613,618 7.43% $3,594,498 8.50% Total risk-based capital.. 5,155,622 10.59 4,598,799 10.87 Tier I leverage .......... 3,613,618 7.85 3,594,498 8.07 Central Fidelity National Bank Tier I capital ........... $ 718,679 8.89% $ 748,814 9.71% Total risk-based capital.. 902,097 11.15 995,337 12.91 Tier I leverage .......... 718,679 7.08 748,814 7.31 The Corporation and its subsidiaries are defendants in certain legal proceedings arising in connection with their business. In the opinion of management and general counsel, the ultimate resolution of those proceedings will result in no material adverse effect on the Corporation's financial position and results of operations. There are no known situations where the Corporation has an environmental liability that will materially affect the financial position or results of operations. - -------------------------------------------------------------------------------- Note N -- Pension and Other Postretirement Benefits The Corporation maintains a defined benefit pension plan which covers substantially all employees. The plan provides pension benefits that are based upon the employee's length of credited service and final average compensation as defined in the plan. The pension expense of the plan is determined using the projected unit credit method. The Corporation's policy is to fund amounts allowable for federal income tax purposes. The following table sets forth the funded status of the Corporation's defined benefit pension plan and the amounts recognized in the Consolidated Statements of Condition at December 31. 65 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note N -- Pension and Other Postretirement Benefits -- Continued
1997 1996 --------- --------- Actuarial present value of accumulated benefit obligation: Vested .......................................... $520,038 $414,169 Nonvested ....................................... 38,279 30,136 --------- --------- Total ...................................... $558,317 $444,305 ========= ========= Actuarial present value of projected benefit obligation for service rendered to date ......... ($680,780) ($521,112) Plan assets at fair value -- primarily listed stocks, fixed income securities and collective funds ........................................... 742,203 603,675 --------- --------- Plan assets in excess of projected benefit obligation ...................................... 61,423 82,563 Unrecognized net actuarial loss ................... 6,273 1,973 Unrecognized prior service cost ................... 63 (17,012) Unrecognized transition asset ..................... (28,643) (34,322) --------- --------- Prepaid pension cost .............................. $39,116 $33,202 ========= ========= Net pension cost included the following components: 1997 1996 1995 -------- ------- -------- Service cost -- benefits earned during the period ................... $ 23,130 $21,777 $ 15,328 Interest cost on projected benefit obligation .......................... 41,580 37,081 33,207 Actual return on plan assets .......... (130,114) (72,033) (108,518) Net amortization and deferral ......... 71,063 19,254 62,639 -------- ------- -------- Net periodic pension cost ............. $ 5,659 $ 6,079 $ 2,656 ======== ======= ========
The rates used in determining the actuarial present value of the projected benefit obligation were as follows: 1997 1996 ----- ---- Discount rates ................................... 7.25% 7.75% Rates of increase in compensation levels ......... 5% 4% - 5% The expected long-term rate of return on plan assets used to determine the net periodic pension benefit was 8%, 8% - 9.25%, and 8% - 9% for 1997, 1996 and 1995, respectively. The Corporation also sponsors separate unfunded nonqualified pension plans that provide certain officers with defined pension benefits in excess of limits imposed on qualified plans by federal tax law and for certain compensation not covered in the qualified plans. The following table summarizes the plans at December 31. 1997 1996 -------- -------- Actuarial present value of accumulated benefit obligation: Vested .......................................... $54,057 $44,925 Nonvested ....................................... 5,969 5,615 -------- -------- Total ....................................... $60,026 $50,540 ======== ======== Actuarial present value of projected benefit obligation for service rendered to date ......... ($73,959) ($64,734) Unrecognized net actuarial loss ................... 19,333 15,221 Unrecognized transition obligation ................ 4,615 5,112 Unrecognized prior service cost ................... 6,383 7,093 -------- -------- Accrued pension cost .............................. ($43,628) ($37,308) ======== ======== Net pension cost included the following components: 1997 1996 1995 ------ ------ ------ Service cost -- benefits earned during the period .......................... $1,530 $1,519 $1,122 Interest cost on projected benefit obligation .......................... 5,046 4,310 4,035 Net amortization and deferral ......... 2,761 2,670 2,016 ------ ------ ------ Net periodic pension cost ............. $9,337 $8,499 $7,173 ====== ====== ====== The rates used in determining the actuarial present value of the projected benefit obligation were as follows: 1997 1996 ----- ---- Discount rates ................................... 7.25% 7.75% Rates of increase in compensation levels ......... 5% 4% - 5% The Corporation also provides supplemental benefits to substantially all employees through defined contribution plans designed to encourage participants to save on a regular basis and to provide such participants with deferred compensation and additional performance incentive. Total expense relating to these plans, which represented the Corporation's matching and discretionary contributions, was $25,969 in 1997, $19,847 in 1996 and $19,059 in 1995. Employee participants may elect to contribute from 1% to 12% of base salary, with the Corporation matching 50% of each participant's contribution up to a maximum employer contribution of 3% of base salary. The plans provide for additional contributions of up to 3% of salary in accordance with a preestablished formula based on certain earnings performance criteria and also for special discretionary employer contributions of up to 4% of each eligible employee's base salary as approved annually by the Board of Directors. The Corporation and its subsidiaries provide certain health care benefits for retired employees. Substantially all of the employees may become eligible for these benefits if they reach normal retirement age while working for the Corporation or its subsidiaries. The benefits are provided through self-insured plans administered by insurance companies whose premiums are based on the claims paid during the year. The following table presents the status of the plan as of December 31. 1997 1996 ---------- ---------- Accumulated postretirement benefit obligation: Retirees ........................................ ($ 50,326) ($ 49,968) Fully eligible active plan participants ......... (11,103) (7,987) Other active plan participants .................. (24,223) (14,777) ---------- ---------- Total ....................................... (85,652) (72,732) Plan assets at fair value -- primarily insurance contracts ....................................... 12,170 12,786 Unrecognized net actuarial gain ................... (8,167) (19,177) Unrecognized transition obligation ................ 59,695 63,674 Unrecognized prior service cost ................... 626 683 ---------- ---------- Accrued postretirement benefit cost ............... ($ 21,328) ($ 14,766) =========== ========== 66 Wachovia Corporation and Subsidiaries - --------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note N -- Pension and Other Postretirement Benefits -- Concluded Net periodic postretirement benefit cost included the following components: 1997 1996 1995 ------- ------ ------- Service cost ............................ $ 2,407 $1,955 $ 1,391 Interest cost ........................... 5,718 5,245 5,603 Actual return on plan assets ............ (895) (770) ---- Amortization of gain .................... (484) (476) (707) Amortization of transition obligation over 20 years ......................... 3,980 3,979 3,980 Amortization of prior service cost ...... 57 57 57 -------- ------- --------- Net periodic postretirement benefit cost .................................. $10,783 $9,990 $10,324 ======== ======= ========= The annual assumed rate of increase in health care costs used in determining the accumulated postretirement benefit obligation and net periodic postretirement benefit costs were 8% - 8.4% for retirees under age 65 and 6% - 8.4% for retirees age 65 and over for 1997, 8% - 8.4% for retirees under age 65 and 6% - 8.4% for retirees age 65 and over for 1996, and 8% - 8.6% for retirees under age 65 and 6% - 8.6% for retirees age 65 and over for 1995. These rates are assumed to remain constant for each of these categories of retirees. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation for the plan as of December 31, 1997 and 1996 by $5,086 and $4,633, respectively, and the aggregate of the service and interest cost of the net periodic postretirement benefit cost for 1997, 1996 and 1995 by $617, $617 and $268, respectively. The discount rates used in determining the accumulated postretirement benefit obligations at December 31, 1997 and 1996 were 7.25% and 7.75%, respectively. - -------------------------------------------------------------------------------- Note O -- Selected Income Statement Information The components of other operating income and expense for the three years ended December 31 were as follows:
1997 1996 1995 -------- -------- -------- Other operating income: Insurance premiums and commissions ...................... $ 30,205 $ 20,562 $ 17,455 Bankers' acceptance and letter of credit fees ........... 34,526 28,243 25,953 Other service charges and fees .......................... 38,750 38,590 30,271 Other income ............................................ 89,751 64,666 48,396 --------- --------- --------- Total other operating income .......................... $193,232 $152,061 $122,075 ========= ========= ========= Other operating expense: Postage and delivery .................................... $ 48,657 $ 47,195 $ 44,553 Outside data processing, programming and software ....... 86,497 51,139 47,737 Stationery and supplies ................................. 30,960 30,043 30,238 Advertising and sales promotion ......................... 72,046 68,639 57,957 Professional services ................................... 54,113 41,223 41,152 Travel and business promotion ........................... 25,215 21,096 20,267 Regulatory agency fees and other bank services .......... 14,600 16,771 63,136 Amortization of intangible assets ....................... 13,308 9,163 12,296 Foreclosed property expense ............................. 1,875 1,930 2,420 Other expense ........................................... 167,880 178,066 151,272 --------- --------- --------- Total other operating expense ......................... $515,151 $465,265 $471,028 ========= ========= =========
- -------------------------------------------------------------------------------- 67 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- $ in thousands Note P -- Earnings Per Share
Year Ended December 31 ---------------------------------------- 1997 1996 1995 -------- ---- ---- Basic (thousands, except per share) Average common shares outstanding .............................. 198,290 204,889 208,230 ======== ======= ======= Net income ..................................................... $592,806 $757,259 $707,913 ======== ======== ======== Per share amount ............................................... $ 2.99 $ 3.70 $ 3.40 Diluted (thousands, except per share) Average common shares outstanding .............................. 198,290 204,889 208,230 Dilutive common stock options at average market price .......... 3,394 2,322 1,877 Dilutive common stock awards at average market price ........... 210 126 88 Convertible long-term debt assumed converted ................... 7 95 405 -------- -------- -------- Average diluted shares outstanding ............................. 201,901 207,432 210,600 ======== ======== ======== Net income ..................................................... $592,806 $757,259 $707,913 Add interest on convertible long-term debt, net of tax ......... 6 65 330 -------- -------- -------- Adjusted net income ............................................ $592,812 $757,324 $708,243 ======== ======== ======== Per share amount ............................................... $ 2.94 $ 3.65 $ 3.36
- -------------------------------------------------------------------------------- Note Q -- Wachovia Corporation (Parent Company Only) Information The following is a condensed statement of financial condition of the parent company at December 31. 1997 1996 ---------- ---------- Assets - ------- Cash on demand deposit with bank subsidiary ................................. $ 6,968 $ 44 Interest-bearing bank balances with bank subsidiaries ............................... 856,503 1,171,697 Securities available-for-sale ................ 51,523 378,222 Demand loans to nonbank subsidiaries ......... 993,073 464,101 Capital notes receivable from bank subsidiaries ............................... 1,506,529 936,677 Investments in: Bank subsidiaries .......................... 5,260,189 4,520,586 Nonbank subsidiaries ....................... 224,157 191,395 Other assets ................................. 164,910 138,192 ---------- ---------- Total assets ............................. $9,063,852 $7,800,914 ========== ========== Liabilities and Shareholders' Equity - ------------------------------------- Parent company commercial paper .............. $1,034,024 $ 706,376 Subordinated capital notes includes $1,080,659 from nonbank subsidiaries in 1997; $693,297 in 1996................... 2,553,612 2,165,667 6.625% senior notes due 2006 ................. 199,207 199,142 Demand loans from bank and bank holding company subsidiaries ............... 18,015 18,015 Other liabilities ............................ 84,693 103,313 Shareholders' equity ......................... 5,174,301 4,608,401 ---------- ---------- Total liabilities and shareholders' equity ................................. $9,063,852 $7,800,914 ========== ========== The principal maturities of the parent company's long-term debt subsequent to December 31, 1997 are $3,822 in 1998, $352,915 in 1999, none in 2000, $25,592 in 2001, $151,678 in 2002 and $2,218,812, thereafter. The operating results of the parent company for the three years ended December 31 are shown below. 1997 1996 1995 -------- -------- -------- Income - ------ Dividends from: Bank subsidiaries ................... $658,800 $561,800 $257,700 Nonbank subsidiaries ................ 11,060 800 52,075 Interest from subsidiaries ............ 184,476 104,823 89,278 Other interest income ................. 15,320 16,877 571 Other income .......................... 34,012 55,243 49,272 -------- --------- --------- Total income ..................... 903,668 739,543 448,896 Expense - ------- Interest on short-term borrowed funds ............................... 39,566 30,491 29,394 Interest on long-term debt ............ 169,192 105,075 79,632 Interest paid to subsidiaries ......... 22,354 15,488 4,781 Other expense ......................... 50,655 34,349 30,056 -------- --------- --------- Total expense .................... 281,767 185,403 143,863 Income before income taxes and equity in undistributed net income of subsidiaries .............. 621,901 554,140 305,033 Applicable income taxes (benefit) ........................... (16,519) (7,055) (1,889) -------- --------- --------- Income before equity in undistributed net income of subsidiaries ........................ 638,420 561,195 306,922 Equity in (excess dividends) undistributed net income of subsidiaries ........................ (45,614) 196,064 400,991 -------- --------- --------- Net income ....................... $592,806 $757,259 $707,913 ======== ========= ========= 68 Wachovia Corporation and Subsidiaries - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements -- Concluded - -------------------------------------------------------------------------------- $ in thousands Note Q -- Wachovia Corporation (Parent Company Only) Information -- Concluded The cash flows for the parent company for the three years ended December 31, were as follows:
1997 1996 1995 -------- -------- -------- Operating Activities - -------------------- Net Income ............................ $592,806 $757,259 $707,913 Other, net ............................ 23,830 (7,177) 14,320 Equity in excess dividends (undistributed net income) of subsidiaries ....................... 45,614 (196,064) (400,991) -------- -------- -------- Net cash provided by operations ....................... 662,250 554,018 321,242 Investing Activities - -------------------- Net decrease (increase) in interest-bearing bank balances ........................... 315,194 (406,418) (387,154) Purchases of securities available-for-sale ................. (17,097) (334,586) (67,360) Sale of securities available-for-sale ................. 349,052 30,485 65,749 Net (increase) decrease in demand loans to nonbank subsidiaries ....................... (559,130) (149,483) 47,708 Capital notes issued to bank subsidiaries ....................... (550,000) ---- (250,000) Capital notes repaid by bank subsidiaries ....................... ---- 585 30,500 Net (increase) decrease in other assets ............................. (5,154) 26,771 (54,137) Equity investment in subsidiaries ....................... (45,956) (68,252) (55,551) -------- -------- -------- Net cash used by investing activities ..................... (513,091) (900,898) (670,245) Financing Activities - -------------------- Net increase in demand loans from subsidiaries .................. 355,340 629,616 60,558 Net increase in commercial paper .............................. 327,648 204,090 95,430 Proceeds from long-term debt .......... ---- 196,106 496,387 Decrease in other liabilities ......... (19,346) (462) (54) Issuance of stock ..................... 59,281 37,445 43,151 Dividend payments ..................... (327,303) (304,733) (281,466) Common stock repurchased .............. (537,855) (415,162) (65,032) -------- -------- -------- Net cash (used) provided by financing activities ............. (142,235) 346,900 348,974 -------- -------- -------- Increase (decrease) in cash ........... 6,924 20 (29) Cash at beginning of year ............. 44 24 53 -------- -------- -------- Cash at end of year ................... $ 6,968 $ 44 $ 24 ======== ======== ======== Noncash investing and financing activities: Common stock issued on conversion of long-term debt ............................. $ 70 $ 6,007 $ 3,184
On December 1, 1995, South Carolina National Corporation was merged into Wachovia Corporation; the assets and liabilities merged into Wachovia Corporation totaled $54,664 and $45,506, respectively. - -------------------------------------------------------------------------------- 69 Wachovia Corporation and Subsidiaries - -------------------------------- Consolidated Average Balances - -------------------------------------------------------------------------------- thousands
1997 1996 Amount % Amount % Assets Loans -- net of unearned income: Commercial ................................................................ $11,326,589 19.7 $10,480,829 18.9 Tax-exempt ................................................................ 1,743,227 3.0 2,126,486 3.8 ------------ ----- ------------ ----- Total commercial ....................................................... 13,069,816 22.7 12,607,315 22.7 Direct retail ............................................................. 1,193,557 2.1 1,194,349 2.1 Indirect retail ........................................................... 2,966,521 5.1 3,138,707 5.6 Credit card ............................................................... 5,626,062 9.8 4,948,626 8.9 Other revolving credit .................................................... 423,900 .7 417,953 .8 ------------ ----- ------------ ----- Total retail ........................................................... 10,210,040 17.7 9,699,635 17.4 Construction .............................................................. 1,498,438 2.6 1,069,576 1.9 Commercial mortgages ...................................................... 6,067,194 10.5 5,452,795 9.8 Residential mortgages ..................................................... 7,422,225 12.9 6,796,978 12.2 ------------ ----- ------------ ----- Total real estate ...................................................... 14,987,857 26.0 13,319,349 23.9 Lease financing ........................................................... 955,055 1.7 655,485 1.2 Foreign ................................................................... 493,110 .9 457,500 .8 ------------ ----- ------------ ----- Total loans ............................................................ 39,715,878 69.0 36,739,284 66.0 Investment securities: Held-to-maturity: State and municipal ...................................................... 221,196 .4 273,529 .5 Other investments ........................................................ 1,101,603 1.8 1,199,467 2.1 ------------ ----- ------------ ----- Total securities held-to-maturity ...................................... 1,322,799 2.2 1,472,996 2.6 Available-for-sale: Other investments (1) .................................................... 9,535,910 16.5 10,495,775 18.8 ------------ ----- ------------ ----- Total investment securities ............................................ 10,858,709 18.7 11,968,771 21.4 Interest-bearing bank balances ............................................. 88,801 .2 420,838 .8 Federal funds sold and securities purchased under resale agreements ........ 397,213 .7 286,478 .5 Trading account assets ..................................................... 960,244 1.7 921,764 1.7 ------------ ----- ------------ ----- Total interest-earning assets .......................................... 52,020,845 90.3 50,337,135 90.4 Cash and due from banks .................................................... 2,904,160 5.0 2,789,738 5.1 Premises and equipment ..................................................... 803,362 1.4 785,438 1.4 Other assets ............................................................... 2,399,430 4.2 2,184,835 4.0 Allowance for loan losses .................................................. (520,722) (.9) (512,943) (.9) ------------ ------ ------------ ------ Total assets ........................................................... $57,607,075 100.0 $55,584,203 100.0 ============ ====== ============ ====== Liabilities and Shareholders' Equity Time deposits in domestic offices: Interest-bearing demand ................................................... $ 4,108,606 7.1 $ 3,993,079 7.2 Savings and money market savings .......................................... 10,594,764 18.4 9,440,738 17.0 Savings certificates ...................................................... 10,364,936 18.0 10,521,925 18.9 Large denomination certificates ........................................... 2,929,042 5.1 2,612,410 4.7 ------------ ------ ------------ ------ Total time deposits in domestic offices ................................ 27,997,348 48.6 26,568,152 47.8 Time deposits in foreign offices ........................................... 1,585,149 2.8 1,040,585 1.9 ------------ ------ ------------ ------ Total interest-bearing deposits ........................................ 29,582,497 51.4 27,608,737 49.7 Federal funds purchased and securities sold under repurchase agreements..... 6,743,997 11.7 7,136,064 12.8 Commercial paper ........................................................... 781,345 1.4 595,806 1.1 Other short-term borrowed funds ............................................ 1,461,781 2.5 1,286,160 2.3 ------------ ------ ------------ ------ Total short-term borrowed funds ........................................ 8,987,123 15.6 9,018,030 16.2 Bank notes ................................................................. 3,075,331 5.3 4,609,878 8.3 Other long-term debt ....................................................... 3,046,492 5.3 2,082,894 3.7 ------------ ------ ------------ ------ Total long-term debt ................................................... 6,121,823 10.6 6,692,772 12.0 ------------ ------ ------------ ------ Total interest-bearing liabilities ..................................... 44,691,443 77.6 43,319,539 77.9 Other deposits: Demand in domestic offices ................................................ 6,921,083 12.0 6,476,977 11.7 Demand in foreign offices ................................................. 169 .0 1,563 .0 Noninterest-bearing time in domestic offices .............................. 13,192 .0 12,362 .0 Other liabilities .......................................................... 1,447,863 2.5 1,315,939 2.4 Shareholders' equity ....................................................... 4,533,325 7.9 4,457,823 8.0 ------------ ------ ------------ ------ Total liabilities and shareholders' equity ............................. $57,607,075 100.0 $55,584,203 100.0 ============ ====== ============ ====== Total Deposits ............................................................. $36,516,941 $34,099,639
(1) Includes unrealized gains (losses) of $65,846 in 1997, $93,556 in 1996, $34,248 in 1995 and ($12,405) in 1994 70 - --------------------------------------------------------------------------------
Five-Year 1995 1994 1993 1992 Compound Amount % Amount % Amount % Amount % Growth Rate $ 9,727,718 18.8 $ 7,923,773 17.1 $ 6,691,358 15.8 $ 6,315,629 16.1 12.4% 2,067,016 4.0 2,066,908 4.4 1,993,493 4.7 2,118,900 5.4 (3.8) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 11,794,734 22.8 9,990,681 21.5 8,684,851 20.5 8,434,529 21.5 9.2 1,177,466 2.3 1,087,952 2.3 955,942 2.2 926,881 2.4 5.2 2,973,026 5.8 2,862,342 6.2 2,593,024 6.1 2,326,705 5.9 5.0 4,551,448 8.8 4,014,135 8.6 2,993,593 7.1 2,145,377 5.5 21.3 398,693 .8 382,216 .8 370,403 .9 369,819 .9 2.8 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 9,100,633 17.7 8,346,645 17.9 6,912,962 16.3 5,768,782 14.7 12.1 948,248 1.8 791,154 1.7 801,627 1.9 942,000 2.4 9.7 4,902,241 9.5 4,529,213 9.7 4,131,072 9.7 4,030,680 10.3 8.5 6,182,282 12.0 5,587,543 12.0 5,028,473 11.9 4,381,737 11.2 11.1 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 12,032,771 23.3 10,907,910 23.4 9,961,172 23.5 9,354,417 23.9 9.9 278,038 .5 180,022 .4 140,887 .3 124,415 .3 50.3 304,277 .6 108,028 .2 76,212 .2 72,347 .2 46.8 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 33,510,453 64.9 29,533,286 63.4 25,776,084 60.8 23,754,490 60.6 10.8 423,747 .8 599,206 1.3 826,228 1.9 966,746 2.5 (25.6) 3,735,893 7.1 3,371,132 7.1 9,146,254 21.5 7,557,743 19.2 (32.0) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 4,159,640 7.9 3,970,338 8.4 9,972,482 23.4 8,524,489 21.7 (31.1) 7,851,827 15.2 7,255,003 15.6 1,020,590 2.4 761,192 1.9 65.8 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 12,011,467 23.1 11,225,341 24.0 10,993,072 25.8 9,285,681 23.6 3.2 119,277 .2 31,941 .1 92,927 .2 316,967 .8 (22.5) 221,359 .4 303,177 .7 564,358 1.3 589,261 1.5 (7.6) 916,140 1.8 689,417 1.5 721,892 1.7 1,079,314 2.7 (2.3) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 46,778,696 90.4 41,783,162 89.7 38,148,333 89.8 35,025,713 89.2 8.2 2,801,993 5.5 2,688,765 5.9 2,640,520 6.2 2,616,485 6.7 2.1 722,418 1.4 663,773 1.4 613,822 1.4 585,401 1.5 6.5 1,917,594 3.7 1,922,633 4.1 1,630,243 3.8 1,498,474 3.8 9.9 (517,430) (1.0) (516,702) ( 1.1) (503,697) (1.2) (477,562) (1.2) 1.8 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ $51,703,271 100.0 $46,541,631 100.0 $42,529,221 100.0 $39,248,511 100.0 8.0 ============= ====== ============= ====== ============= ====== ============= ====== $ 3,923,942 7.6 $ 4,047,307 8.7 $ 3,851,842 9.1 $ 3,362,915 8.6 4.1 8,318,312 16.1 7,973,997 17.1 7,906,297 18.6 7,565,250 19.3 7.0 10,435,857 20.3 8,419,653 18.0 8,372,243 19.6 8,799,194 22.4 3.3 2,173,624 4.2 1,889,807 4.1 2,263,284 5.3 2,912,041 7.4 .1 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ 24,851,735 48.2 22,330,764 47.9 22,393,666 52.6 22,639,400 57.7 4.3 749,511 1.4 516,157 1.1 466,571 1.1 423,069 1.1 30.2 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ 25,601,246 49.6 22,846,921 49.0 22,860,237 53.7 23,062,469 58.8 5.1 6,263,319 12.1 6,146,656 13.2 5,015,727 11.8 4,017,740 10.2 10.9 535,210 1.0 524,715 1.1 503,317 1.2 489,551 1.3 9.8 2,061,418 4.0 697,743 1.5 981,020 2.3 1,390,607 3.5 1.0 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ 8,859,947 17.1 7,369,114 15.8 6,500,064 15.3 5,897,898 15.0 8.8 4,174,561 8.1 3,629,703 7.8 1,535,750 3.6 272,688 .7 62.4 1,520,122 2.9 1,524,081 3.3 994,090 2.3 210,530 .5 70.7 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ 5,694,683 11.0 5,153,784 11.1 2,529,840 5.9 483,218 1.2 66.2 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ 40,155,876 77.7 35,369,819 75.9 31,890,141 74.9 29,443,585 75.0 8.7 6,214,100 12.0 6,215,419 13.4 6,117,579 14.4 5,587,641 14.3 4.4 6,823 .0 5,380 .0 5,516 .0 5,759 .0 (50.6) 12,537 .0 70,997 .2 75,976 .2 89,599 .2 (31.8) 1,150,355 2.2 1,067,818 2.3 921,075 2.2 1,022,218 2.6 7.2 4,163,580 8.1 3,812,198 8.2 3,518,934 8.3 3,099,709 7.9 7.9 - ------------- ------ ------------- ------ ------------- ------ ------------- ------ $51,703,271 100.0 $46,541,631 100.0 $42,529,221 100.0 $39,248,511 100.0 8.0 ============= ====== ============= ====== ============= ====== ============= ====== $31,834,706 $29,138,717 $29,059,308 $28,745,468 4.9
71 Wachovia Corporation and Subsidiaries - ------------------------ Summary of Operations - -------------------------------------------------------------------------------- thousands
1997 1996 Amount % Amount % Interest Income ............................................. $ 4,262,385 80.9 $ 4,009,508 82.0 Interest Expense ............................................ 2,168,818 41.2 2,085,771 42.7 ------------- ---- ------------- ---- Net Interest Income ......................................... 2,093,567 39.7 1,923,737 39.3 Provision for loan losses ................................... 264,949 5.0 193,776 4.0 ------------- ---- ------------- ---- Net interest income after provision for loan losses ......... 1,828,618 34.7 1,729,961 35.3 Other Income Service charges on deposit accounts ......................... 306,231 5.8 280,670 5.7 Fees for trust services ..................................... 175,549 3.3 154,621 3.2 Credit card income .......................................... 162,234 3.1 143,382 2.9 Electronic banking .......................................... 64,640 1.2 56,226 1.2 Investment fee income ....................................... 53,487 1.0 43,747 .9 Mortgage fee income ......................................... 23,544 .4 21,371 .4 Trading account profits (losses) ............................ 26,851 .5 22,654 .5 Student loan servicing ...................................... ---- ---- ---- ---- Other operating income ...................................... 193,232 3.8 152,061 3.1 ------------- ----- ------------- ----- Total other operating revenue ........................... 1,005,768 19.1 874,732 17.9 Gain on sale of mortgage servicing portfolio ................ ---- ---- ---- ---- Gain on sale of subsidiary .................................. ---- ---- ---- ---- Investment securities gains (losses) ........................ 1,454 ---- 4,588 .1 ------------- ----- ------------- ----- Total other income ...................................... 1,007,222 19.1 879,320 18.0 Other Expense Salaries .................................................... 742,106 14.1 655,065 13.4 Employee benefits ........................................... 163,051 3.1 141,867 2.9 ------------- ----- ------------- ----- Total personnel expense ................................. 905,157 17.2 796,932 16.3 Net occupancy expense ....................................... 116,654 2.2 114,001 2.3 Equipment expense ........................................... 142,227 2.7 132,775 2.7 Personal computer impairment charge ......................... 67,202 1.3 ---- ---- Merger-related charges ...................................... 220,330 4.2 ---- ---- Other operating expense ..................................... 515,151 9.8 465,265 9.5 ------------- ----- ------------- ----- Total other expense ..................................... 1,966,721 37.3 1,508,973 30.8 Income before income taxes .................................. 869,119 16.5 1,100,308 22.5 Applicable income taxes ..................................... 276,313 5.2 343,049 7.0 ------------- ----- ------------- ----- Net Income .................................................. $ 592,806 11.3 $ 757,259 15.5 ============= ===== ============= ===== Net income per common share: Basic ...................................................... $ 2.99 $ 3.70 Diluted .................................................... $ 2.94 $ 3.65 Cash dividends paid per common share (2) .................... $ 1.68 $ 1.52 Average shares outstanding: Basic ...................................................... 198,290 204,889 Diluted .................................................... 201,901 207,432
(1) Percentages reflected above are based on total income (interest plus other). (2) Cash dividends per common share are those of Wachovia Corporation paid prior to merger with Central Fidelity Banks, Inc. 72 - --------------------------------------------------------------------------------
Five-Year 1995 1994 1993 1992 Compound Amount % Amount % Amount % Amount % Growth Rate $3,790,110 82.3 $3,025,654 81.9 $ 2,738,164 78.5 $2,803,880 80.7 8.7% 2,011,155 43.7 1,369,006 37.1 1,128,709 32.4 1,252,659 36.1 11.6 - ----------- ---- ----------- ---- ------------- ---- ----------- ---- 1,778,955 38.6 1,656,648 44.8 1,609,455 46.1 1,551,221 44.6 6.2 130,504 2.8 96,122 2.6 172,161 4.9 219,177 6.3 3.9 - ----------- ---- ----------- ---- ------------- ---- ----------- ---- 1,648,451 35.8 1,560,526 42.2 1,437,294 41.2 1,332,044 38.3 6.5 244,671 5.2 231,646 6.3 237,328 6.8 219,881 6.3 6.8 145,464 3.2 142,026 3.8 133,651 3.8 121,712 3.5 7.6 127,153 2.7 126,886 3.4 104,922 3.0 83,104 2.4 14.3 39,722 .9 28,347 .8 17,857 .5 15,290 .4 33.4 27,656 .6 14,522 .4 17,153 .5 13,021 .4 32.7 26,139 .6 33,997 .9 41,339 1.2 41,747 1.2 (10.8) 24,235 .5 8,794 .2 20,063 .6 (5,199) (.1) ---- ---- ---- ---- 5,535 .2 33,250 1.0 (100.0) 122,075 2.7 103,881 2.9 91,621 2.6 73,043 2.1 21.5 - ----------- ----- ----------- ----- ------------- ---- ----------- ----- 757,115 16.4 690,099 18.7 669,469 19.2 595,849 17.2 11.0 79,025 1.7 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 8,030 .2 19,486 .6 (100.0) (19,672) (.4) (21,972) (.6) 74,256 2.1 54,151 1.5 (51.5) - ----------- ----- ----------- ----- ------------- ----- ----------- ----- 816,468 17.7 668,127 18.1 751,755 21.5 669,486 19.3 8.5 604,041 13.1 566,368 15.3 545,869 15.6 533,000 15.3 6.8 129,749 2.8 125,144 3.4 139,754 4.0 112,179 3.2 7.8 - ----------- ----- ----------- ----- ------------- ----- ----------- ----- 733,790 15.9 691,512 18.7 685,623 19.6 645,179 18.5 7.0 109,543 2.4 102,131 2.8 101,225 2.9 100,818 2.9 3.0 127,268 2.8 124,321 3.4 119,340 3.4 116,993 3.4 4.0 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 471,028 10.2 425,287 11.5 448,070 12.9 433,039 12.5 3.5 - ----------- ----- ----------- ----- ------------- ----- ----------- ----- 1,441,629 31.3 1,343,251 36.3 1,354,258 38.8 1,296,029 37.3 8.7 1,023,290 22.2 885,402 24.0 834,791 23.9 705,501 20.3 4.3 315,377 6.8 261,480 7.1 239,779 6.9 193,760 5.6 7.4 - ----------- ----- ----------- ----- ------------- ----- ----------- ----- $ 707,913 15.4 $ 623,922 16.9 $ 595,012 17.0 $ 511,741 14.7 3.0 =========== ===== =========== ===== ============= ===== =========== ===== $ 3.40 $ 3.00 $ 2.84 $ 2.51 3.6 $ 3.36 $ 2.96 $ 2.80 $ 2.46 3.6 $ 1.38 $ 1.23 $ 1.11 $ 1.00 10.9 208,230 208,117 208,880 203,803 (.5) 210,600 210,651 212,584 208,759 (.7)
73 Wachovia Corporation and Subsidiaries - ------------------------------------------ Net Interest Income -- Taxable Equivalent - -------------------------------------------------------------------------------- thousands
1997 1996 Amount % Amount % Interest Income Loans: Commercial ................................................................. $ 829,406 19.2 $ 747,463 18.3 Tax-exempt ................................................................. 155,689 3.6 190,285 4.7 ----------- ----- ------------- ----- Total commercial ........................................................ 985,095 22.8 937,748 23.0 Direct retail .............................................................. 107,326 2.5 106,634 2.6 Indirect retail ............................................................ 254,001 5.9 266,435 6.5 Credit card ................................................................ 727,114 16.8 595,208 14.6 Other revolving credit ..................................................... 52,007 1.2 51,026 1.2 ----------- ----- ------------- ----- Total retail ............................................................ 1,140,448 26.4 1,019,303 24.9 Construction ............................................................... 140,780 3.3 99,470 2.4 Commercial mortgages ....................................................... 505,876 11.7 452,576 11.1 Residential mortgages ...................................................... 592,907 13.7 552,944 13.5 ----------- ----- ------------- ----- Total real estate ....................................................... 1,239,563 28.7 1,104,990 27.0 Lease financing ............................................................ 92,721 2.1 61,717 1.5 Foreign .................................................................... 34,164 .8 32,098 .8 ----------- ----- ------------- ----- Total loans ............................................................. 3,491,991 80.8 3,155,856 77.2 Investment securities: Held-to-maturity: State and municipal ...................................................... 26,259 .6 33,547 .8 Other investments ........................................................ 87,631 2.0 96,509 2.4 ----------- ----- ------------- ----- Total securities held-to-maturity ....................................... 113,890 2.6 130,056 3.2 Available-for-sale: Other investments ........................................................ 635,195 14.7 700,202 17.1 ----------- ----- ------------- ----- Total investment securities ............................................. 749,085 17.3 830,258 20.3 Interest-bearing bank balances .............................................. 5,230 .1 33,284 .8 Federal funds sold and securities purchased under resale agreements ......... 22,319 .5 15,411 .4 Trading account assets ...................................................... 51,654 1.3 51,740 1.3 ----------- ----- ------------- ----- Total interest income .................................................... 4,320,279 100.0 4,086,549 100.0 Interest Expense Interest-bearing demand ..................................................... 64,249 1.5 59,761 1.5 Savings and money market savings ............................................ 405,444 9.4 336,596 8.2 Savings certificates ........................................................ 582,145 13.4 598,869 14.6 Large denomination certificates ............................................. 164,391 3.8 153,571 3.8 ----------- ----- ------------- ----- Total time deposits in domestic offices ................................. 1,216,229 28.1 1,148,797 28.1 Time deposits in foreign offices ............................................ 87,320 2.0 54,942 1.3 ----------- ----- ------------- ----- Total time deposits ..................................................... 1,303,549 30.1 1,203,739 29.4 Federal funds purchased and securities sold under repurchase agreements ..... 357,190 8.3 382,976 9.4 Commercial paper ............................................................ 39,566 .9 29,054 .7 Other short-term borrowed funds ............................................. 81,406 1.9 70,206 1.7 ----------- ----- ------------- ----- Total short-term borrowed funds ......................................... 478,162 11.1 482,236 11.8 Bank notes .................................................................. 188,710 4.4 264,486 6.5 Other long-term debt ........................................................ 198,397 4.6 135,310 3.3 ----------- ----- ------------- ----- Total long-term debt .................................................... 387,107 9.0 399,796 9.8 ----------- ----- ------------- ----- Total interest expense .................................................. 2,168,818 50.2 2,085,771 51.0 ----------- ----- ------------- ----- Net Interest Income ......................................................... $2,151,461 49.8 $ 2,000,778 49.0 =========== ===== ============= ===== Percentage of interest-earning assets: Interest income ............................................................ 8.32% 8.13% Interest expense ........................................................... 4.18 4.15 ----------- ------------- Net interest income ..................................................... 4.14% 3.98% =========== ============= Taxable equivalent adjustment included in interest income: Loans ...................................................................... $ 36,695 $ 46,158 Investment securities ...................................................... 19,862 28,577 Trading account assets ..................................................... 1,337 2,306 ----------- ------------- Total (2) ............................................................... $ 57,894 $ 77,041 =========== =============
(1) Percentages reflected above are based on total interest income. (2) The taxable equivalent adjustment for 1997, 1996, 1995, 1994 and 1993 reflects the federal income tax rate of 35% and state tax rates, as applicable, reduced by the nondeductible portion of interest expense; the taxable equivalent adjustment for 1992 reflects the federal income tax rate of 34%. 74 - --------------------------------------------------------------------------------
Five-Year 1995 1994 1993 1992 Compound Amount % Amount % Amount % Amount % Growth Rate $ 728,263 18.7 $ 486,566 15.6 $ 362,764 12.7 $ 384,266 13.3 16.6% 203,551 5.2 186,360 5.9 181,785 6.4 185,892 6.4 ( 3.5) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 931,814 23.9 672,926 21.5 544,549 19.1 570,158 19.7 11.6 103,522 2.7 86,093 2.7 80,775 2.8 100,424 3.5 1.3 245,936 6.3 223,830 7.1 220,751 7.8 224,607 7.8 2.5 566,391 14.5 453,117 14.6 359,334 12.6 313,955 10.9 18.3 50,544 1.3 44,904 1.4 42,392 1.5 44,711 1.5 3.1 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 966,393 24.8 807,944 25.8 703,252 24.7 683,697 23.7 10.8 93,152 2.4 70,261 2.2 58,712 2.1 70,729 2.4 14.8 423,149 10.9 352,563 11.2 308,194 10.8 324,085 11.2 9.3 505,995 13.0 434,177 13.9 410,837 14.5 398,592 13.9 8.3 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 1,022,296 26.3 857,001 27.3 777,743 27.4 793,406 27.5 9.3 24,173 .6 14,090 .4 12,540 .4 12,423 .4 49.5 22,610 .6 6,162 .2 3,318 .1 3,760 .1 55.5 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 2,967,286 76.2 2,358,123 75.2 2,041,402 71.7 2,063,444 71.4 11.1 50,192 1.3 75,069 2.4 97,057 3.4 113,159 3.9 (25.3) 271,292 7.0 234,557 7.5 596,239 21.0 562,245 19.4 (31.0) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 321,484 8.3 309,626 9.9 693,296 24.4 675,404 23.3 (30.0) 526,287 13.5 416,408 13.3 60,408 2.1 57,284 2.0 61.8 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 847,771 21.8 726,034 23.2 753,704 26.5 732,688 25.3 .4 9,377 .2 1,322 .0 2,980 .1 13,444 .5 (17.2) 13,279 .3 13,262 .4 18,675 .7 21,326 .7 .9 60,416 1.5 36,407 1.2 28,481 1.0 60,510 2.1 ( 3.1) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 3,898,129 100.0 3,135,148 100.0 2,845,242 100.0 2,891,412 100.0 8.4 74,179 1.9 70,890 2.3 76,099 2.7 89,164 3.0 ( 6.3) 304,294 7.8 221,317 7.1 209,608 7.4 252,399 8.7 9.9 596,122 15.2 383,670 12.2 384,360 13.5 479,400 16.6 4.0 126,708 3.3 84,669 2.7 112,188 3.9 166,611 5.8 ( .3) - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 1,101,303 28.2 760,546 24.3 782,255 27.5 987,574 34.1 4.3 41,876 1.1 22,318 .7 14,503 .5 15,646 .5 41.0 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 1,143,179 29.3 782,864 25.0 796,758 28.0 1,003,220 34.6 5.4 374,158 9.6 268,155 8.6 159,265 5.7 145,448 5.1 19.7 29,324 .8 20,587 .7 15,103 .5 17,199 .6 18.1 124,283 3.2 29,559 .9 31,827 1.1 58,744 2.0 6.7 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 527,765 13.6 318,301 10.2 206,195 7.3 221,391 7.7 16.6 258,885 6.6 203,777 6.5 79,734 2.8 13,183 .5 70.3 81,326 2.1 64,064 2.0 46,022 1.6 14,865 .5 67.9 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 340,211 8.7 267,841 8.5 125,756 4.4 28,048 1.0 69.0 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- 2,011,155 51.6 1,369,006 43.7 1,128,709 39.7 1,252,659 43.3 11.6 - ------------- ----- ------------- ----- ------------- ----- ------------- ----- $ 1,886,974 48.4 $ 1,766,142 56.3 $ 1,716,533 60.3 $ 1,638,753 56.7 5.6 ============= ===== ============= ===== ============= ===== ============= ===== 8.35% 7.50% 7.46% 8.26% 4.31 3.28 2.96 3.58 - ------------- ------------- ------------- ------------- 4.04% 4.22% 4.50% 4.68% ============= ============= ============= ============= $ 55,068 $ 52,918 $ 53,899 $ 49,073 46,817 52,268 52,426 40,368 4,594 2,871 2,235 719 - ------------- ------------- ------------- ------------- $ 106,479 $ 108,057 $ 108,560 $ 90,160 ============= ============= ============= =============
75 Wachovia Corporation and Subsidiaries - --------------------- Statistical Summary - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 Average Yields Earned (taxable equivalent) Loans: Commercial ................................................ 7.32% 7.13% 7.49% 6.14% 5.42% 6.08% Tax-exempt ................................................ 8.93 8.95 9.85 9.02 9.12 8.77 Total commercial ........................................ 7.54 7.44 7.90 6.74 6.27 6.76 Direct retail ............................................. 8.99 8.93 8.79 7.91 8.45 10.83 Indirect retail ........................................... 8.56 8.49 8.27 7.82 8.51 9.65 Credit card ............................................... 12.92 12.03 12.44 11.29 12.00 14.63 Other revolving credit .................................... 12.27 12.21 12.68 11.75 11.44 12.09 Total retail ............................................ 11.17 10.51 10.62 9.68 10.17 11.85 Construction .............................................. 9.40 9.30 9.82 8.88 7.32 7.51 Commercial mortgages ...................................... 8.34 8.30 8.63 7.78 7.46 8.04 Residential mortgages ..................................... 7.99 8.14 8.18 7.77 8.17 9.10 Total real estate ....................................... 8.27 8.30 8.50 7.86 7.81 8.48 Lease financing ........................................... 9.71 9.42 8.69 7.83 8.90 9.99 Foreign ................................................... 6.93 7.02 7.43 5.70 4.35 5.20 Total loans ............................................. 8.79 8.59 8.85 7.98 7.92 8.69 Held-to-maturity: State and municipal ....................................... 11.87 12.26 11.84 12.53 11.75 11.71 Other investments ......................................... 7.95 8.05 7.26 6.96 6.52 7.44 Total securities held-to-maturity ....................... 8.61 8.83 7.73 7.80 6.95 7.92 Available-for-sale: Other investments ......................................... 6.71 6.73 6.73 5.73 5.92 7.53 Total investment securities ............................. 6.94 6.99 7.08 6.46 6.86 7.89 Interest-bearing bank balances ............................. 5.89 7.91 7.86 4.14 3.21 4.24 Federal funds sold and securities purchased under resale agreements ................................................ 5.62 5.38 6.00 4.37 3.31 3.62 Trading account assets ..................................... 5.38 5.61 6.59 5.28 3.95 5.61 Total interest income ................................... 8.32 8.13 8.34 7.50 7.46 8.26 Average Rates Paid Interest-bearing demand .................................... 1.56% 1.50% 1.89% 1.75% 1.98% 2.65% Savings and money market savings ........................... 3.83 3.57 3.66 2.78 2.65 3.34 Savings certificates ....................................... 5.62 5.69 5.71 4.56 4.59 5.45 Large denomination certificates ............................ 5.61 5.88 5.83 4.48 4.96 5.72 Total time deposits in domestic offices ................. 4.34 4.32 4.43 3.41 3.49 4.36 Time deposits in foreign offices ........................... 5.51 5.28 5.59 4.32 3.11 3.70 Total time deposits ..................................... 4.41 4.36 4.47 3.43 3.49 4.35 Federal funds purchased and securities sold under repurchase agreements ................................................ 5.30 5.37 5.97 4.36 3.18 3.62 Commercial paper ........................................... 5.06 4.88 5.48 3.92 3.00 3.51 Other short-term borrowed funds ............................ 5.57 5.46 6.03 4.24 3.24 4.22 Total short-term borrowed funds ......................... 5.32 5.35 5.96 4.32 3.17 3.75 Bank notes ................................................. 6.14 5.74 6.20 5.61 5.19 4.83 Other long-term debt ....................................... 6.51 6.50 5.35 4.20 4.63 7.06 Total long-term debt .................................... 6.32 5.97 5.97 5.20 4.97 5.80 Total interest bearing liabilities ...................... 4.85 4.81 5.01 3.87 3.54 4.25 Interest rate spread ....................................... 3.47 3.32 3.33 3.63 3.92 4.01 Net yield on interest-earning assets ....................... 4.14 3.98 4.04 4.23 4.50 4.68 Ratios (averages) Shareholders' equity to: Total assets .............................................. 7.87% 8.02% 8.05% 8.19% 8.27% 7.90% Net loans ................................................. 11.57 12.31 12.62 13.14 13.92 13.32 Deposits .................................................. 12.41 13.07 13.08 13.08 12.11 10.78 Equity and long-term debt ................................. 42.54 39.98 42.24 42.52 58.17 86.52 Return on assets ........................................... 1.03 1.36 1.37 1.34 1.40 1.30 Return on shareholders' equity ............................. 13.08 16.99 17.00 16.37 16.91 16.51 Return on deposits ......................................... 1.62 2.22 2.22 2.14 2.05 1.78 Dividends paid as a percentage of net income ............... 55.21 40.37 39.91 40.77 38.73 38.98
76 Wachovia Corporation and Subsidiaries - ---------------------- Year-End Information - -------------------------------------------------------------------------------- 1997 1996 Condensed Balance Sheet (millions) Cash and due from banks .............................. $ 4,222 $ 3,674 Interest-bearing bank balances ....................... 133 78 Federal funds sold and securities purchased under resale agreements ................... 1,589 276 Trading account assets ............................... 999 1,190 Investment securities Available-for-sale .................................. 8,960 9,825 Held-to-maturity .................................... 1,458 1,352 Loans and net leases ................................. 44,210 38,033 Less unearned income on loans ........................ 16 26 -------- -------- Total loans ........................................ 44,194 38,007 Less allowance for loan losses ....................... 544 519 -------- -------- Net loans .......................................... 43,650 37,488 Premises and equipment ............................... 810 794 Other assets ......................................... 3,576 2,552 -------- -------- Total assets ....................................... $ 65,397 $ 57,229 ======== ======== Deposits in domestic offices ......................... $ 38,151 $ 34,137 Deposits in foreign offices .......................... 4,503 1,185 -------- -------- Total deposits ..................................... 42,654 35,322 Federal funds purchased and securities sold under repurchase agreements .................... 8,323 7,206 Commercial paper ..................................... 1,034 707 Other short-term borrowed funds ...................... 753 1,039 Bank notes ........................................... 2,940 4,308 Other long-term debt ................................. 2,994 2,717 Other liabilities .................................... 1,525 1,322 Shareholders' equity ................................. 5,174 4,608 -------- -------- Total liabilities and shareholders' equity ......... $ 65,397 $ 57,229 ======== ======== Loan Portfolio (millions) Domestic borrowers: Commercial .......................................... $ 13,528 $ 10,341 Tax-exempt .......................................... 1,607 2,016 Direct retail ....................................... 1,250 1,218 Indirect retail ..................................... 3,028 3,082 Credit card ......................................... 5,919 5,596 Other revolving credit .............................. 460 424 Construction ........................................ 1,780 1,247 Commercial mortgages ................................ 6,790 5,684 Residential mortgages ............................... 8,099 7,132 Lease financing, net ................................ 1,094 831 -------- -------- Total .............................................. 43,555 37,571 Foreign ............................................. 639 436 -------- -------- Total loans ........................................ $ 44,194 $ 38,007 ======== ======== Loan Portfolio (percentages) Commercial ........................................... 34.2 32.5 Credit card .......................................... 13.4 14.7 Other revolving credit ............................... 1.0 1.1 Other retail ......................................... 9.7 11.3 Real estate .......................................... 37.7 37.0 Lease financing ...................................... 2.5 2.2 Foreign .............................................. 1.5 1.2 --------- --------- Total .............................................. 100.0 100.0 ========= =========
1995 1994 1993 1992 Condensed Balance Sheet (millions) Cash and due from banks .............................. $ 3,033 $ 2,953 $ 2,839 $ 2,925 Interest-bearing bank balances ....................... 526 7 13 224 Federal funds sold and securities purchased under resale agreements ................... 302 399 884 701 Trading account assets ............................... 1,115 891 791 897 Investment securities Available-for-sale .................................. 11,034 7,018 4,094 43 Held-to-maturity .................................... 1,620 4,185 7,879 10,346 Loans and net leases ................................. 35,617 31,692 27,776 25,075 Less unearned income on loans ........................ 32 28 22 25 -------- -------- -------- -------- Total loans ........................................ 35,585 31,664 27,754 25,050 Less allowance for loan losses ....................... 519 516 510 482 -------- -------- -------- -------- Net loans .......................................... 35,066 31,148 27,244 24,568 Premises and equipment ............................... 781 690 650 591 Other assets ......................................... 2,315 1,951 1,794 1,783 -------- -------- -------- -------- Total assets ....................................... $ 55,792 $ 49,242 $ 46,188 $ 42,078 ======== ======== ======== ======== Deposits in domestic offices ......................... $ 33,594 $ 29,380 $ 29,201 $ 29,528 Deposits in foreign offices .......................... 761 916 807 519 -------- -------- -------- -------- Total deposits ..................................... 34,355 30,296 30,008 30,047 Federal funds purchased and securities sold under repurchase agreements .................... 6,892 6,939 6,198 4,887 Commercial paper ..................................... 535 432 606 405 Other short-term borrowed funds ...................... 1,776 1,044 1,101 859 Bank notes ........................................... 4,691 4,751 2,782 758 Other long-term debt ................................. 1,493 997 751 607 Other liabilities .................................... 1,449 873 998 1,136 Shareholders' equity ................................. 4,601 3,910 3,744 3,379 -------- -------- -------- -------- Total liabilities and shareholders' equity ......... $ 55,792 $ 49,242 $ 46,188 $ 42,078 ======== ======== ======== ======== Loan Portfolio (millions) Domestic borrowers: Commercial .......................................... $ 10,365 $ 8,915 $ 7,250 $ 6,802 Tax-exempt .......................................... 2,328 1,907 2,055 2,071 Direct retail ....................................... 1,197 1,128 1,008 926 Indirect retail ..................................... 3,118 2,813 2,804 2,452 Credit card ......................................... 4,610 4,522 3,586 2,605 Other revolving credit .............................. 417 398 382 376 Construction ........................................ 1,008 829 747 768 Commercial mortgages ................................ 5,113 4,673 4,242 4,086 Residential mortgages ............................... 6,537 6,028 5,444 4,760 Lease financing, net ................................ 502 197 163 131 -------- -------- -------- -------- Total .............................................. 35,195 31,410 27,681 24,977 Foreign ............................................. 390 254 73 73 -------- -------- -------- -------- Total loans ........................................ $ 35,585 $ 31,664 $ 27,754 $ 25,050 ======== ======== ======== ======== Loan Portfolio (percentages) Commercial ........................................... 35.7 34.2 33.5 35.4 Credit card .......................................... 12.9 14.3 12.9 10.4 Other revolving credit ............................... 1.2 1.3 1.4 1.5 Other retail ......................................... 12.1 12.4 13.7 13.5 Real estate .......................................... 35.6 36.4 37.6 38.4 Lease financing ...................................... 1.4 .6 .6 .5 Foreign .............................................. 1.1 .8 .3 .3 --------- --------- --------- --------- Total .............................................. 100.0 100.0 100.0 100.0 ========= ========= ========= =========
77 Stock Data The following charts present high and low trading ranges for the corporation's common stock, price to earnings ratios and data on cash dividends per share and cash dividend payouts for the most recent six years. Stock price trading ranges and price to earnings ratios for the most recent eight quarters also are provided. The Five-Year Total Return chart compares Wachovia, the S&P 500 Index and the Keefe, Bruyette & Woods (KBW) 50 Total Return Index in stock price appreciation and dividends, assuming quarterly reinvestment, from the base period December 31, 1992 through year-end 1997. The KBW 50 Index is a market capitalization weighted measure of total return for 50 of the largest U.S. banking companies including all money center and most regional banks. Wachovia's common stock is listed on the New York Stock Exchange under the trading symbol WB. The corporation is a member of the Standard & Poor's 500 Index of stocks and the S&P 500 Major Regional Banks Industry Group. COMMON STOCK PRICE RANGE* NYSE SYMBOL: WB (Graph appears below) High Low 1992 34.75 28.25 1993 40.50 31.68 1994 35.38 30.13 1995 48.25 32.00 1996 60.25 39.63 1997 83.94 53.50 * Prices represent those of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. COMMON STOCK PRICE/EARNINGS RATIOS* (Graph appears below) High Low 1992 14.0 11.4 1993 14.4 11.3 1994 11.3 9.7 1995 13.8 9.1 1996 15.8 10.4 1997 28.6 18.2 * Amounts based on high and low common stock prices for each year and annual net income per diluted share as originally reported by Wachovia Corporation. The 1997 amounts were based on net income reported by the pooled companies. CASH DIVIDENDS PER SHARE* Five Year Compound Growth Rate = 10.9% (Graph appears below) 1992 1.00 1993 1.11 1994 1.23 1995 1.38 1996 1.52 1997 1.68 * Dividends per share represent those paid by Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. CASH DIVIDEND PAYOUT* (MILLIONS) (Graph appears below) 1992 39.0% 1993 38.7% 1994 40.8% 1995 39.9% 1996 40.4% 1997 55.2% * Dividends include amounts paid by pooled companies. % Payout ratio (total dividends as a percentage of net income) - ----------------------------------------- Common Stock Data -- Per Share Table 19 - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 ------ ---- ---- ---- ---- ---- Market value: * End of year ..................... $ 81.13 $ 56.50 $ 45.75 $ 32.25 $ 33.50 $ 34.12 High ............................ 83.94 60.25 48.25 35.38 40.50 34.75 Low ............................. 53.50 39.63 32.00 30.13 31.88 28.25 Book value ** .................... 25.13 22.90 22.08 18.79 17.98 16.25 Dividend * ....................... 1.68 1.52 1.38 1.23 1.11 1.00 Price/earnings ratio *** ......... 27.6 x 14.8 x 13.1 x 10.3 x 11.9 x 13.8 x
* Information for years before 1997 represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. ** Book value per share has been restated to reflect the merger with Central Fidelity Banks, Inc., as a pooling-of-interests. *** Price earnings ratio is based on end-of-year stock price and net income per diluted share. Information for years before 1997 represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. Excluding the after-tax impact of nonrecurring charges, the 1997 price earnings ratio was 20.5x. 78 QUARTERLY COMMON STOCK PRICE RANGE* (Graph appears below) Low High 1996 1st Quarter 41.25 48.38 2nd Quarter 40.88 46.25 3rd Quarter 39.63 49.88 4th Quarter 48.75 60.25 1997 1st Quarter 54.50 64.63 2nd Quarter 53.50 66.88 3rd Quarter 58.19 72.38 4th Quarter 71.06 83.94 * Prices represent those of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. QUARTERLY COMMON STOCK PRICE/EARNINGS RATIOS* (Graph appears below) Low High 1996 1st Quarter 11.6 13.6 2nd Quarter 11.5 13.1 3rd Quarter 10.9 13.7 4th Quarter 12.8 15.8 1997 1st Quarter 13.9 16.4 2nd Quarter 13.3 16.7 3rd Quarter 14.3 17.8 4th Quarter 23.2 27.4 * Amounts based on high and low common stock prices for each period and net income per diluted share for the 12 months ended on the last day of each period as originally reported by Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. The 1997 fourth quarter amounts were based on net income reported by the pooled companies. FIVE-YEAR TOTAL RETURN* (Graph appears below) Wachovia S&P 500 KBW 50 Index 1992 100% 100% 100% 1993 101.28 105.54 110.08 1994 101.23 100.16 111.53 1995 148.93 160.41 153.44 1996 190.05 226.91 188.67 1997 280.10 331.73 251.62 * Base period 12/31/92 = 100. Dividends reinvested. Data for the KBW 50 Index is weighted by market capitalization. 79 Historical Comparative Data The following charts present six-year comparative data for Wachovia Corporation and the median of the 25 largest U.S. bank holding companies based on assets as of each year-end. The median is representative of the typical bank holding company within the comparison group. All historical data is as originally reported, not restated for pooling- of-interests mergers or acquisitions. Wachovia's results for 1997 were impacted by nonrecurring charges taken in the fourth quarter. Results on an operating basis are footnoted in the relevant charts below. Return on Assets (Average) (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 1.36 .90 1993 1.46 1.20 1994 1.46 1.21 1995 1.45 1.21 1996 1.43 1.29 1997 1.03* 1.26 * Excluding nonrecurring items, the return was 1.39%. Return on Common Equity (Average) (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 16.69 14.18 1993 17.13 16.94 1994 17.41 16.10 1995 17.67 16.77 1996 17.62 17.02 1997 13.08* 18.53 * Excluding nonrecurring items, the return was 17.65%. Common Equity to Assets (Average) (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 8.16 6.16 1993 8.54 6.57 1994 8.36 6.86 1995 8.22 7.00 1996 8.09 7.47 1997 7.87 7.36 Net Interest Income* as a Percentage of Average Earning Assets (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 4.75 4.44 1993 4.64 4.48 1994 4.34 4.34 1995 4.16 4.45 1996 4.02 4.36 1997 4.14 4.24 * Taxable Equivalent Noninterest Expense as a Percentage of Total Adjusted Revenues* (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 58.61 64.85 1993 57.05 62.54 1994 54.15 61.88 1995 54.23 61.72 1996 52.21 60.91 1997 62.29** 60.88 * Excluding sales of securities transactions, mortgage servicing portfolio and subsidiary. ** Excluding nonrecurring items, the ratio was 53.19%. Net Loan Losses to Average Loans (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 .48 1.25 1993 .31 .75 1994 .29 .39 1995 .37 .44 1996 .49 .53 1997 .67 .63 Nonperforming Assets to Year-End Loans and Foreclosed Property (Graph appears below) Wachovia 25 Largest U.S. Banks (Median) 1992 1.25 3.09 1993 .67 1.90 1994 .39 1.03 1995 .24 .80 1996 .25 .76 1997 .29 .62 80 Supervision and Regulation Wachovia Corporation is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, (BHC Act) and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (FRB). State banking commissions also serve in a supervisory and regulatory capacity with respect to bank holding company activities. Wachovia Corporation is also a savings and loan holding company registered under the Home Owners' Loan Act of 1933 (HOLA), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), and is subject to the examination, supervision and reporting requirements of the Office of Thrift Supervision (OTS). As federally insured national banks, Wachovia Bank, N.A., The First National Bank of Atlanta, Jefferson National Bank and Central Fidelity National Bank, are subject to the regulation, supervision and reporting requirements of the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). 1st United Bank is an FDIC insured, state chartered bank in Florida, and is subject to the regulation, supervision and reporting requirements of the FDIC, as well as the Florida Department of Banking and Finance (FDBF). The Corporation's banking subsidiaries are directly affected by the actions of the FRB in managing the money supply and credit availability in the economy. The Corporation's nonbanking subsidiaries are subject to a variety of state and federal laws. For example, the Corporation's discount brokerage and investment advisory subsidiary is subject to supervision and regulation by the Securities and Exchange Commission (SEC), the National Association of Securities Dealers, Inc., state securities regulators and the various exchanges through which it conducts business. The Corporation's insurance subsidiaries are subject to the insurance laws of the states in which they are active. All nonbanking subsidiaries are supervised by the FRB. Federal law regulates transactions among Wachovia Corporation and its affiliates, including the amount of banking affiliates' loans to or investments in nonbank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state laws regulate the operations of the Corporation's banking affiliates, requiring the maintenance of reserves against deposits, limiting the nature of loans and interest that may be charged thereon, restricting investments and other activities. Under FRB policy, the Corporation is expected to act as a source of financial strength to, and commit resources to support, each of its subsidiary banks. In addition, FIRREA provides that a depository institution insured by the FDIC can be held liable by the FDIC for any loss incurred or reasonably expected to be incurred in connection with the default of a commonly controlled FDIC insured depository institution. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), federal banking regulators are required to take prompt corrective action in respect of depository institutions that do not meet minimum capital requirements. FDICIA imposes substantial examination, audit and reporting requirements on insured depository institutions. The regulation also requires that risk-based capital standards be revised to incorporate interest rate risk, market risk, concentration of credit risk and the risks of nontraditional activities. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Act) enabled nationwide interstate banking through bank subsidiaries and interstate bank mergers. Effective September 29, 1995, the bill allowed adequately capitalized and managed bank holding companies to acquire control of a bank in any state subject to concentration limits. Beginning June 1, 1997, banks are permitted to merge with one another across state lines. The legislation preserves state laws which require that a bank must be in existence for a minimum period of five years or less before being acquired. The legislation has relevance for the banking industry due to increased competition from institutions consolidating through mergers and moving into new markets by branching across state lines. During January 1997, the Corporation's Board of Directors approved a plan of merger whereby Wachovia Bank of Georgia and Wachovia Bank of South Carolina would be merged with and into Wachovia Bank of North Carolina, which, as the survivor, would change its name to Wachovia Bank, N.A. The merger took place on June 1, 1997 pursuant to the authority of the Act. The merger builds on the many efficiencies already achieved through standardization of operations and delivery systems and results in additional cost savings from consolidated financial reporting and reduced regulatory fees. There continue to be a number of legislative and regulatory proposals that would have an impact on the operation of bank holding companies and their banks. While the potential effects of legislation currently under consideration cannot be measured with any degree of certainty, the Corporation is unaware of any pending legislative reforms or regulatory activities which would materially affect its financial position or operating results in the foreseeable future. 81 Directors and Officers Directors of Wachovia Corporation and Wachovia Bank, N.A. - -------------------------------------------------------------------------------- L.M. Baker, Jr. President and Chief Executive Officer John G. Medlin, Jr. Chairman of the Board James S. Balloun Chairman, President and Chief Executive Officer National Service Industries, Inc. James F. Betts Consultant and Former President USLIFE Corporation Peter C. Browning President and Chief Operating Officer Sonoco Products Company John T. Casteen III President University of Virginia John L. Clendenin Chairman Emeritus BellSouth Corporation Lawrence M. Gressette, Jr. Chairman of the Executive Committee SCANA Corporation Thomas K. Hearn, Jr. President Wake Forest University George W. Henderson III President and Chief Executive Officer Burlington Industries, Inc. W. Hayne Hipp President and Chief Executive Officer The Liberty Corporation Robert M. Holder, Jr. Chairman RMH Group, LLC Robert A. Ingram Chief Executive Officer Glaxo Wellcome plc Chairman, Chief Executive Officer and President Glaxo Wellcome Inc. James W. Johnston President and Chief Executive Officer Stonemarker Enterprises, Inc. George R. Lewis President and Chief Executive Officer Philip Morris Capital Corporation Lloyd U. Noland, III Chairman, President and Chief Executive Officer Noland Company Wyndham Robertson Writer and Retired Vice President, Communications University of North Carolina Herman J. Russell Chairman of the Board H.J. Russell & Company Sherwood H. Smith, Jr. Chairman of the Board Carolina Power & Light Company John C. Whitaker, Jr. Chairman and Chief Executive Officer Inmar Enterprises, Inc. Principal Corporate Officers of Wachovia Corporation - -------------------------------------------------------------------------------- L.M. Baker, Jr. President and Chief Executive Officer Mickey W. Dry Senior Executive Vice President Chief Credit Officer Walter E. Leonard, Jr. Senior Executive Vice President Operations/Technology Kenneth W. McAllister Senior Executive Vice President General Counsel/Administrative Services Robert S. McCoy, Jr. Senior Executive Vice President Chief Financial Officer G. Joseph Prendergast Senior Executive Vice President General Banking 82 Shareholder Information Corporate Headquarters Wachovia Corporation 100 North Main Street Winston-Salem, NC 27150 191 Peachtree Street, NE Atlanta, GA 30303 Corporate Mailing Addresses and Telephone Numbers Wachovia Corporation P.O. Box 3099 Winston-Salem, NC 27150 336-770-5000 P.O. Box 4148 Atlanta, GA 30302 404-332-5000 Notice of Annual Meeting The Annual Meeting of Shareholders of Wachovia Corporation will be held Friday, April 24, 1998 at 10:30 a.m. EDT, in the Jefferson Hotel, Franklin & Adams Streets, Richmond, Virginia. All shareholders are invited to attend. Common Stock Wachovia common stock trades on the New York Stock Exchange under the ticker symbol WB. Transfer Agent Wachovia Bank, N.A. Winston-Salem, NC 1-800-633-4236 Correspondence and transfer requests should be sent to the following: Wachovia Shareholder Services P.O. Box 8218 Boston, MA 02266-8218 Shareholder Account Assistance Shareholders who wish to change the address or ownership of stock, report lost certificates, eliminate duplicate mailings or for other account reregistration procedures and assistance should contact the Transfer Agent at the address or phone number above. Wachovia Shareholder Direct Shareholders and other interested individuals can access timely corporate information on Wachovia, such as earnings and dividend announcements, by calling 1-888-4WB-NEWS (1-888-492-6397). The toll-free service will be available beginning April 15, 1998, 24-hours-a-day, 7-days-a-week. Internet Address The corporation's Internet address is: www.wachovia.com Investor Contact Robert S. McCoy, Jr. Chief Financial Officer 336-732-5926 James C. Mabry Senior Vice President Investor Relations 336-732-5788 Winston-Salem, NC 27150 Shareholder Relations Contact H. Jo Barlow Assistant Vice President 336-732-5787 Winston-Salem, NC 27150 Dividend Services Through the Dividend Reinvestment and Common Stock Purchase Plan record shareholders can invest dividends as well as optional cash payments in additional shares without payment of brokerage commissions or service charges. Direct Deposit of Cash Dividends is a timesaving method of receiving cash dividends through automatic deposit to an account at any financial institution that participates in an Automated Clearing House. Independent Auditors Ernst & Young LLP 83 EX-23 6 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 33-34386, 33-15706, 33-54094, 33-53325, 333-02239, 333-32255, 33-35357, 333-37339, 333-36889, 333-45099: Form S-3: Nos 33-2232, 333-06319) of Wachovia Corporation and in the related prospectuses of our report dated January 20, 1998, with respect to the consolidated financial statements of Wachovia Corporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP Winston-Salem, North Carolina March 27, 1998 EX-23 7 EXHIBIT 23.2 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 33-34386, 33-15706, 33-54094, 33-53325, 333-02239, 333-32255, 33-35357, 333-37339, 333-36889, 333-45099: Form S-3: Nos 33-2232, 333-06319) of Wachovia Corporation of our report dated January 20, 1998, relating to the consolidated balance sheet of Central Fidelity National bank and subsidiaries as December 31, 1997, and the related consolidated statements of income, cash flows and changes in shareholder's equity for the year then ended, and of our report dated January 15, 1997, relating to the consolidated balance sheet of Central Fidelity Banks, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and changes in shareholder's equity for each of the year in the three-year period ended December 31, 1996, which reports appear in the December 31, 1997 annual report on Form 10-K of Wachovia Corporation. /s/ KPMG peat Marwick LLP Richmond, Virginia March 27, 1998 EX-24 8 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: We, the undersigned directors of Wachovia Corporation, and each of us, do hereby make, constitute and appoint Kenneth W. McAllister and Alice Washington Grogan, and each of them (either of whom may act without the consent or joinder of the other), our attorneys-in-fact and agents with full power of substitution for us and in our name, place and stead, in any and all capacities, to execute for us and in our behalf the Annual Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1997 and any and all amendments to the foregoing Report and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as we might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, we the undersigned have executed this Power of Attorney this 23rd day of January, 1998. /s/ L. M. Baker, Jr. /s/ James S. Balloun - ---------------------------------- ------------------------------------ L. M. Baker, Jr. James S. Balloun /s/ James F. Betts /s/ Peter C. Browning - ---------------------------------- ------------------------------------ James F. Betts Peter C. Browning /s/ John T. Casteen III /s/ John L. Clendenin - ---------------------------------- ------------------------------------ John T. Casteen III John L. Clendenin /s/ Lawrence M. Gressette, Jr. /s/ Thomas K. Hearn, Jr. - ---------------------------------- ------------------------------------ Lawrence M. Gressette, Jr. Thomas K. Hearn, Jr. /s/ George W. Henderson III /s/ W. Hayne Hipp - ---------------------------------- ------------------------------------ George W. Henderson III W. Hayne Hipp /s/ Robert A. Ingram - ---------------------------------- ------------------------------------ Robert M. Holder, Jr. Robert A. Ingram /s/ James W. Johnston /s/ George R. Lewis - ---------------------------------- ------------------------------------ James W. Johnston George R. Lewis /s/ John G. Medlin, Jr. /s/ Lloyd U. Noland III - ---------------------------------- ------------------------------------ John G. Medlin, Jr. Lloyd U. Noland III - ---------------------------------- ------------------------------------ Wyndham Robertson Herman J. Russell /s/ Sherwood H. Smith, Jr. /s/ John C. Whitaker, Jr. - ---------------------------------- ------------------------------------ Sherwood H. Smith, Jr. John C. Whitaker, Jr. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: I, the undersigned director of Wachovia Corporation, do hereby make, constitute and appoint Kenneth W. McAllister and Alice Washington Grogan, and each of them (either of whom may act without the consent or joinder of the other), my attorneys-in-fact and agents with full power of substitution for me and in my name, place and stead, in any and all capacities, to execute for me and in my behalf the Annual Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1997 and any and all amendments to the foregoing Report and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I the undersigned have executed this Power of Attorney this 30th day of January, 1998. /s/ Herman J. Russell ------------------------------------ Herman J. Russell POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: I, the undersigned director of Wachovia Corporation, do hereby make, constitute and appoint Kenneth W. McAllister and Alice Washington Grogan, and each of them (either of whom may act without the consent or joinder of the other), my attorneys-in-fact and agents with full power of substitution for me and in my name, place and stead, in any and all capacities, to execute for me and in my behalf the Annual Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1997 and any and all amendments to the foregoing Report and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I the undersigned have executed this Power of Attorney this 30th day of January, 1998. /s/ Wyndham Robertson ------------------------------------ Wyndham Robertson POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: I, the undersigned director of Wachovia Corporation, do hereby make, constitute and appoint Kenneth W. McAllister and Alice Washington Grogan, and each of them (either of whom may act without the consent or joinder of the other), my attorneys-in-fact and agents with full power of substitution for me and in my name, place and stead, in any and all capacities, to execute for me and in my behalf the Annual Report on Form 10-K of Wachovia Corporation for the year ended December 31, 1997 and any and all amendments to the foregoing Report and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I the undersigned have executed this Power of Attorney this 30th day of January, 1998. /s/ Robert M. Holder, Jr. ------------------------------------ Robert M. Holder, Jr. EX-27 9 FDS 27.1 FOR 10-K 1997
9 1000 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 4,221,818 133,191 1,589,234 999,122 8,909,537 1,509,339 1,578,464 44,194,382 544,723 65,397,069 42,653,843 10,109,614 1,525,178 5,934,133 0 0 1,029,633 4,144,668 65,397,069 3,455,296 729,223 77,866 4,262,385 1,303,549 2,168,818 2,093,567 264,949 1,454 1,966,721 869,119 869,119 0 0 592,806 2.99 2.94 4.14 101,156 114,343 0 0 519,297 321,679 57,515 544,723 489,046 3,702 51,975 EPS BASIC
EX-27 10 FDS 27.2 FOR 10-K 1996
9 1000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 3,674,192 77,871 275,941 1,189,826 9,824,752 1,352,091 1,423,555 38,007,229 519,297 57,228,640 35,321,894 8,951,602 1,322,104 7,024,639 0 0 1,006,263 3,602,138 57,228,640 3,109,698 801,681 98,129 4,009,508 1,203,739 2,085,771 1,923,737 193,776 4,588 1,508,973 1,100,308 757,259 0 0 757,259 3.70 3.65 3.98 98,638 84,788 0 0 518,808 250,727 57,240 519,297 463,620 3,702 51,975
EX-27 11 FDS 27.3 FOR 10-K 1995
9 1000 U.S DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 3,033,124 526,279 301,839 1,115,348 11,033,907 1,619,480 1,721,222 35,584,874 518,808 55,792,288 34,354,655 9,203,264 1,449,955 6,184,110 0 0 978,400 3,621,904 55,792,288 2,910,678 800,954 78,478 3,790,110 1,143,179 2,011,155 1,778,955 130,504 (19,672) 1,441,629 1,023,290 707,913 0 0 707,913 3.40 3.36 4.04 102,310 69,953 0 0 516,132 180,780 52,952 518,808 444,526 3,697 70,585
EX-27 12 FDS 27.4 FOR THIRD QUARTER 1997
9 1000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 3,511,112 89,704 340,104 1,057,277 8,533,778 1,217,798 1,285,503 40,747,609 519,356 58,040,801 36,910,543 9,338,884 1,338,426 5,935,927 0 0 969,186 3,547,835 58,040,801 2,533,436 554,580 54,752 3,142,768 961,967 1,604,673 1,538,095 188,034 3,147 1,234,303 861,415 589,202 0 0 589,202 2.99 2.93 4.12 124,063 81,931 0 0 519,297 229,689 41,714 519,356 0 0 0 AVAILABLE AT YEAR END ONLY
EX-27 13 FDS 27.5 FOR THE SECOND QUARTER 1997
9 1000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 3,707,050 83,620 320,519 845,752 9,932,421 1,271,149 1,333,211 40,200,976 519,335 59,177,858 37,014,930 9,873,224 1,461,232 6,345,012 0 0 976,381 3,507,080 59,177,858 1,659,092 375,552 35,203 2,069,847 634,233 1,055,396 1,014,451 125,278 2,056 809,002 568,690 390,280 0 0 390,280 1.97 1.93 4.10 128,588 86,084 0 0 519,297 153,972 28,732 519,335 0 0 0 AVAILABLE ONLY AT YEAR END
EX-27 14 FDS EXHIBIT 27.6 FOR FIRST QUARTER 1997
9 1000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 3,266,242 36,581 386,205 1,058,687 10,068,609 1,325,556 1,377,812 39,382,724 519,312 58,060,088 36,849,305 9,340,108 1,307,081 6,065,261 0 0 992,382 3,505,949 58,060,088 811,917 189,554 16,754 1,018,225 309,629 515,973 502,252 62,231 1,558 388,601 279,847 193,475 0 0 193,475 .97 .95 4.13 129,230 79,155 0 0 519,297 76,997 14,781 519,312 0 0 0 AVAILABLE ONLY AT YEAR END
EX-27 15 FDS EXHIBIT 27.7 FOR THIRD QUARTER 1996
9 1000 U.S. DOLLARS 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 1 3,292,223 479,268 418,479 1,144,465 10,324,878 1,403,972 1,461,686 38,173,745 519,271 57,806,822 35,403,097 9,836,528 1,290,089 6,732,846 0 0 1,012,525 3,531,738 57,806,822 2,299,136 610,371 76,502 2,986,009 896,452 1,563,176 1,422,833 134,481 1,270 1,122,947 813,667 555,751 0 0 555,751 2.70 2.67 3.99 137,926 75,665 0 0 518,808 177,040 42,822 519,271 0 0 0 AVAILABLE ONLY AT YEAR END
EX-27 16 FDS EXHIBIT 27.8 FOR SECOND QUARTER 1996
9 1000 U.S. DOLLARS 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 1 2,864,569 473,037 460,375 1,066,639 10,419,882 1,482,031 1,539,624 37,152,225 519,205 56,341,872 33,937,559 10,010,534 1,030,141 6,855,430 0 0 1,022,071 3,486,137 56,341,872 1,505,669 409,070 50,603 1,965,342 594,008 1,033,890 931,452 82,689 846 347,881 537,572 366,023 0 0 366,023 1.77 1.75 3.95 135,443 84,632 0 0 518,808 112,976 30,484 519,205 0 0 0
EX-27 17 FDS EXHIBIT 27.9 FOR FIRST QUARTER 1996
9 1000 U.S. DOLLARS 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 1 2,918,319 460,481 541,710 882,204 10,828,391 1,535,659 1,615,807 36,246,927 518,928 55,868,778 33,707,272 9,583,031 1,219,088 6,821,651 0 0 1,033,605 3,504,132 55,868,778 745,943 207,185 25,882 979,010 303,184 519,597 459,413 37,641 1,018 368,647 260,178 177,851 0 0 177,851 .86 .85 3.90 139,302 77,279 0 0 518,808 53,468 15,947 518,928 0 0 0 AVAILABLE ONLY AT YEAR END
EX-99 18 EXHIBIT 99.1 [LOGO] KPMG Peat Marwick LLP Suite 1900 1021 East Cary Street Richmond, VA 23219-4023 Independent Auditors' Report Shareholders of Central Fidelity National Bank and subsidiaries: We have audited the consolidated balance sheet of Central Fidelity National Bank and subsidiaries (the "Company") as of December 31, 1997, and the related consolidated statements of income, cash flows and changes in shareholders' equity for the year then ended (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of Central Fidelity National Bank and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Richmond, Virginia January 20, 1998 EX-99 19 EXHIBIT 99.2 - ------------------------------- Independent Auditor's Report - ------------------------------- - -------------------------------------------------------------------------------- KPMG Peat Marwick LLP Certified Public Accountants Suite 1900 1021 East Cary Street Richmond, Virginia 23219-4023 The Board of Directors and Shareholders Central Fidelity Banks, Inc.: We have audited the consolidated balance sheet of Central Fidelity Banks, Inc. and subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of income, cash flows and changes in shareholders' equity for the years ended December 31, 1996 and 1995 (not presented separately herein). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of Central Fidelity Banks, Inc. and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 15, 1997 -----END PRIVACY-ENHANCED MESSAGE-----