-----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, AqTxmHqSjCsP3rVdo1TeICun50oRrsEDNa+OsiELkYruPgT/eQqTyFhJecTxU5pv LbdhRWWUWR0lJmSBa46GHg== 0000950168-98-003492.txt : 19981113 0000950168-98-003492.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950168-98-003492 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WACHOVIA CORP/ NC CENTRAL INDEX KEY: 0000774203 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 561473727 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09021 FILM NUMBER: 98745165 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-Q 1 WACHOVIA THIRD QUARTER 1998 / 10Q - ---------------- 1998 Form 10-Q - -------------------------------------------------------------------------------- United States Securities and Exchange Commission Washington, DC 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 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 As of September 30, 1998, Wachovia Corporation had 202,751,280 shares of common stock outstanding. 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. Documents Incorporated by Reference - -------------------------------------------------------------------------------- Financial Information for the quarter ended September 30, 1998 is incorporated by reference to the Wachovia Corporation Financial Supplement (the "Financial Supplement") in Exhibit 19 as indicated in the table below. Except for parts of the Financial Supplement expressly incorporated herein by reference, the Financial Supplement is not to be deemed filed with the Securities and Exchange Commission. Part I Item 1. Financial Statements The information required by this item is incorporated by reference to the tables titled "Selected Period-End Data" and "Common Stock Data--Per Share" on page 3 of the Financial Supplement and to the following consolidated financial statements on pages 26 through 29 of the Financial Supplement: Consolidated Statements of Condition Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows The above referenced Financial statements do not include all information and footnotes required under generally accepted accounting principles. However, in the opinion of management, the profit and loss information presented in the interim financial statements reflects all adjustments necessary to present fairly the results of operations for the periods presented. Adjustments reflected in the third quarter of 1998 figures are of a normal, recurring nature. The results of operations shown in the interim statements are not necessarily indicative of the results that may be expected for the entire year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated by reference to the information appearing under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 4 through 25 of the Financial Supplement. Item 3. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference to the information appearing under the subheading "Asset and Liability Management, Interest Rate Sensitivity and Liquidity Management" on pages 13 through 16 of the Financial Supplement. Part II Item 1. Legal Proceedings. None Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submissions of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Report on Form 8-k (a) Exhibits. The exhibits listed on the accompanying Index to Exhibits, immediately following the signature page are filed as part of, or incorporated by reference into, this report. (b) Reports on Form 8-K. A Current Report on Form 8-K dated October 8, 1998 was filed with the Securities and Exchange Commission to report certain agreements with third parties to underwrite the issuance of $250 million in Senior Floating Rate Notes due September 28, 2000 and $300 million in Senior Floating Rate Notes due October 9, 2001. SIGNATURES Pursuant to the requirements 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. November 12, 1998 WACHOVIA CORPORATION By: Robert S. McCoy, Jr. Senior Executive Vice President and Chief Financial Officer And By: Donald K. Truslow Executive Vice President, Treasurer and Comptroller Item 6. Exhibits - ----------------- 1.1 Underwriting agreement dated September 18, 1998 between Wachovia Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated as the Underwriter with respect to the sale by Wachovia Corporation and the purchase by the Underwriter of $250,000,000 aggregate principal amount of Senior Floating Rate Notes due September 28, 2000. (Exhibit 1.1 to Report on Form 8-K dated October 8, 1998, File No. 1-9021*) 1.2 Underwriting agreement dated September 30, 1998 between Wachovia Corporation and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., Credit Suisse First Boston Corporation, J.P. Morgan Securities, Inc., Morgan Stanley & Co. Incorporated, Salamon Smith Barney Inc. as the Underwriters with respect to the sale by Wachovia Corporation and the purchase by the Underwriters, acting severally and not jointly, of $300,000,000 aggregate principal amount of Senior Floating Rate Notes due October 9, 2001. (Exhibit 1.2 to Report on Form 8-K dated October 8, 1998, File No. 1-9021*) 3.1 Amended and Restated Articles of Incorporation of the registrant. (Exhibit 3.1 to Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1998, File No. 1-9021*) 3.2 Bylaws of the registrant as amended (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 Instruments defining the rights of security holders, including indentures - Wachovia Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of security holders that are not required to be filed. 4.1 Articles IV, VII, IX, X and XI of the registrant's Amended and Restated Articles of Incorporation (Included in Exhibit 3.1 hereto). 4.2 Article 1, Section 1.8, and Article 6 of the registrant's Bylaws (Included in Exhibit 3.2 hereto). 4.3 Indenture dated as of May 15, 1986 between South Carolina National Corporation and Morgan Guaranty Trust Company of New York, as Trustee, relating to $35,000,000 principal amount of 6 1/2% Convertible Subordinated Debentures due in 2001 (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, 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*). 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 Form of Indenture dated July 15, 1998 between The Chase Manhattan Bank, as trustee, and Wachovia Corporation relating to subordinated debt securities (Exhibit 4(b) to Form S-3 Registration Statement of Wachovia Corporation, File No. 333-59165*). 4.8 Indenture dated as of August 15, 1996 between Wachovia Corporation and The Chase Manhattan Bank, as Trustee, relating to senior securities (Exhibit 4(a) of Post-Effective Amendment No. 1 to Form S-3 (Shelf) Registration Statement of Wachovia Corporation, File No. 33-6280*). 4.9 Indenture between Wachovia Corporation, Wachovia Capital Trust II and First National Bank of Chicago, as Trustee, relating to Floating Rate Junior Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures). (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.) 4.10 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). 4.11 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). 4.12 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). 4.13 Indenture between Central Fidelity Banks, Inc., Central Fidelity Capital Trust I and The Bank of New York, as Trustee, relating to $100,000,000 Floating Rate Junior Subordinated Debentures (Exhibit 4.1 to Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 4.14 Amended and Restated Declaration of Trust of Central Fidelity Capital Trust I (Exhibit 4.4 to Form S-3 Registration Statement of Central Fidelity Banks, Inc., dated April 23, 1997, File No. 333-28917). 4.15 Form of New Guarantee Agreement for the benefit of the holders of the Trust Securities (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 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 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*). 10.5 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*). 10.6 Form of Employment Agreement between Wachovia Corporation an 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*). 10.7 Form of Employment Agreement between Wachovia Corporation and 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*). 10.8 Agreement between Wachovia Corporation and Mr. John G. Medlin, Jr. (Exhibit 10.13 to Report on Form 10-Q of Wachovia Corporation for the quarter ended June 30, 1998, File No. 1-9021*) 10.9 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*). 10.10 Amendment to Executive Retirement Agreement described in Exhibit 10.9 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*). 10.11 Amendment to Executive Retirement Agreement described in Exhibit 10.9 hereto (Exhibit 10.3 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1993, File No. 1-9021*). 10.12 Amendment to Executive Retirement Agreement described in Exhibit 10.9 hereto (Exhibit 10.4 to Quarterly Report on Form 10-Q of Wachovia Corporation for the quarter ended September 30, 1993, File No. 1-9021*). 10.13 Form of 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*). 10.14 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*). 10.15 Amendment to Executive Retirement Agreements described in Exhibits 10.13 and 10.14 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*). 10.16 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*). 10.17 1990 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.16 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*). 10.18 1996 Declaration of Amendment to Senior Management and Director Stock Plan as described in Exhibit 10.16 hereto (Exhibit 10.24 to Report on Form 10-K of Wachovia Corporation for fiscal year ended December 31, 1996, File No. 1-9021*). 10.19 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*). 10.20 Amendment to Deferred Compensation Plan described in Exhibit 10.19 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*). 10.21 Amendment to Deferred Compensation Plan described in Exhibit 10.19 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*). 10.22 Amendment to Deferred Compensation Plan described in Exhibit 10.19 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*). 10.23 Amended and Restated Wachovia Corporation Stock Plan (Exhibit 4.1 to S-8 Registration Statement No. 033-53325*). 10.24 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*). 10.25 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*). 10.26 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*). 10.27 Executive Long Term Disability Income Plan. (Exhibit 10.34 to Report on Form 10-K of Wachovia Corporation for the fiscal year ended December 31, 1997, File No. 1-9021*) 11 Computation of Earnings Per Share (Table 2 on page 6 of the third quarter 1998 financial supplement*). 12 Statement setting forth computation of ratio of earnings to fixed charges. 19 Financial Supplement for Third Quarter 1998. 27 Financial Data Schedule (for SEC purposes only). * Incorporated by reference. EX-12 2 EXHIBIT 12 WACHOVIA CORPORATION RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
Nine Months Year Ended Ended September 30, December 31, (A) Excluding interest on deposits 1998 1997 ------------- ------------ Earnings: Income before income taxes $944,603 $869,119 Less capitalized interest (548) (167) Fixed charges 732,007 884,806 ---------- ---------- Earnings as adjusted $1,676,062 $1,753,758 ========== ========== Fixed charges: Interest on purchased and other short term borrowed funds $429,600 $478,162 Interest on long-term debt 285,712 387,107 Portion of rents representative of the interest factor (1/3) of rental expense 16,695 19,537 ---------- ---------- Fixed charges $732,007 $884,806 ========== ========== Ratio of earnings to fixed charges 2.29 X 1.98 X (B) Including interest on deposits: Adjusted earnings from (A) above $1,676,062 $1,753,758 Add interest on deposits 1,032,458 1,303,549 ---------- ---------- Earnings as adjusted $2,708,520 $3,057,307 ========== ========== Fixed charges: Fixed charges from (A) above $732,007 $884,806 Interest on deposits 1,032,458 1,303,549 ---------- ---------- Adjusted fixed charges $1,764,465 $2,188,355 ========== ========== Adjusted earnings to adjusted fixed charges 1.54 X 1.40 X
EX-19 3 EXHIBIT 19 [WACHOVIA LOGO] Financial Supplement Third Quarter 1998 - ---------------------------------------------------------------------------- Directors and Officers - -------------------------------------------------------------------------------- Directors of Wachovia Corporation and Wachovia Bank, N.A. L.M. Baker, Jr. Chairman, President and Chief Executive Officer 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 Executive 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 Chairman and Chief Executive Officer Burlington Industries, Inc. W. Hayne Hipp President and Chief Executive Officer The Liberty Corporation Robert A. Ingram Chief Executive Officer Glaxo Wellcome plc Chairman, Chief Executive Officer and President Glaxo Wellcome Inc. George R. Lewis President and Chief Executive Officer Philip Morris Capital Corporation John G. Medlin, Jr. Chairman Emeritus Lloyd U. Noland, III Chairman, President and Chief Executive Officer Noland 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. Chairman, 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 2 - -------------------------- Selected Period-End Data - -------------------------------------------------------------------------------- September 30 September 30 1998 1997 ------------- ------------ Banking offices: North Carolina ............................... 200 202 Virginia ..................................... 263 245 Georgia ...................................... 132 128 South Carolina ............................... 120 127 Florida ...................................... 40 ---- ------- ------- Total ....................................... 755 702 ======= ======= Automated banking machines: North Carolina ............................... 448 406 Virginia ..................................... 311 253 Georgia ...................................... 300 260 South Carolina ............................... 288 264 Florida ...................................... 32 ---- ------- ------- Total ....................................... 1,379 1,183 ======= ======= Employees (full-time equivalent) .............. 21,248 20,582 Common stock shareholders of record ........... 54,318 47,228 Common shares outstanding (thousands) ......... 202,751 193,837
- -------------------------------- Common Stock Data -- Per Share - -------------------------------------------------------------------------------- 1998 ---------------------- Third Second Quarter Quarter --------- -------- Market value: (1) Period-end ........................................................... $ 85.25 $ 84.50 High ................................................................. 90.94 90.19 Low .................................................................. 72.88 77.38 Book value at period-end (2) .......................................... 25.79 26.02 Dividend (1) .......................................................... .49 .44 Price/earnings ratio (1), (3) ......................................... 28.0x 28.6x Price/earnings ratio without nonrecurring items (1), (3), (4) ......... 19.9 20.4 1998 1997 ------ ------------------- First Fourth Third Quarter Quarter Quarter ------- ------- ------- Market value: (1) Period-end ........................................................... $ 84.81 $ 81.13 $ 72.00 High ................................................................. 85.75 83.94 72.38 Low .................................................................. 72.75 71.06 58.19 Book value at period-end (2) .......................................... 25.40 25.13 23.31 Dividend (1) .......................................................... .44 .44 .44 Price/earnings ratio (1), (3) ......................................... 28.9x 27.6x 17.7x Price/earnings ratio without nonrecurring items (1), (3), (4) ......... 21.0 20.5 17.7
(1) Information before the 1997 fourth quarter represents that of Wachovia Corporation prior to merger with Central Fidelity Banks, Inc. (2) Book value per share has been restated to reflect the merger with Central Fidelity Banks, Inc., as a pooling-of-interests. (3) Based on the most recent twelve months of net income per diluted share and end of period stock price. (4) Excludes the after-tax impact of nonrecurring charges as described in notes (1), (2) and (3) of Table 1. - ----------------------- Financial Information - -------------------------------------------------------------------------------- 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).
Investor Contact Internet Address Robert S. McCoy, Jr. James C. Mabry Wachovia's Internet address is: www.wachovia.com Chief Financial Officer Senior Vice President (336) 732-5926 Investor Relations Winston-Salem, NC 27150 (336) 732-5788 Winston-Salem, NC 27150
3 Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------- Financial Summary Table 1 - -------------------------------------------------------------------------------- Twelve 1998 Months -------------------------- Ended September 30 Third Second 1998 Quarter Quarter ------------ ---------- --------- Summary of Operations (thousands, except per share data) Interest income ..................................$4,608,670 $ 1,171,466 $ 1,169,758 Interest expense ................................. 2,311,915 582,030 587,054 ---------- ------------- ----------- Net interest income .............................. 2,296,755 589,436 582,704 Provision for loan losses (1) .................... 292,291 72,809 68,441 ---------- ------------- ----------- Net interest income after provision for loan losses .......................................... 2,004,464 516,627 514,263 Other operating revenue .......................... 1,172,565 310,541 315,043 Securities gains (losses) (2) .................... 11,342 6,886 2,992 ---------- ------------- ----------- Total other income ............................... 1,183,907 317,427 318,035 Personnel expense ................................ 1,029,662 263,282 262,406 Nonrecurring charges (3) ......................... 365,883 11,934 30,849 Other expense .................................... 840,519 217,187 223,739 ---------- ------------- ----------- Total other expense .............................. 2,236,064 492,403 516,994 Income before income taxes ....................... 952,307 341,651 315,304 Applicable income taxes .......................... 316,099 114,284 105,388 ---------- ------------- ----------- Net income ....................................... $ 636,208 $ 227,367 $ 209,916 ========== ============= =========== Net income per common share: Basic ........................................... $ 3.10 $ 1.11 $ 1.02 Diluted ......................................... $ 3.04 $ 1.09 $ 1.00 Cash dividends paid per common share (4) ....................................... $ 1.81 $ .49 $ .44 Cash dividends paid on common stock (5)........... $ 369,391 $ 100,784 $ 90,973 Cash dividend payout ratio (5) ................... 58.06% 44.33% 43.34% Average basic shares outstanding ................. 204,703 204,832 206,718 Average diluted shares outstanding ............... 208,886 208,837 210,662 Selected Average Balances (millions) Total assets ..................................... $ 62,572 $ 63,429 $ 63,916 Loans -- net of unearned income .................. 43,344 43,894 43,974 Securities ....................................... 10,627 10,664 11,102 Other interest-earning assets .................... 1,582 1,508 1,558 Total interest-earning assets .................... 55,553 56,066 56,634 Interest-bearing deposits ........................ 31,744 31,654 32,182 Short-term borrowed funds ........................ 10,469 10,858 10,947 Long-term debt ................................... 6,053 6,080 6,092 Total interest-bearing liabilities ............... 48,266 48,592 49,221 Noninterest-bearing deposits ..................... 7,636 7,874 7,939 Total deposits ................................... 39,380 39,528 40,121 Shareholders' equity ............................. 5,094 5,173 5,211 Ratios (averages) Annualized net loan losses to loans .............. .67% .66% .62% Annualized net yield on interest-earning assets .......................................... 4.22 4.26 4.21 Shareholders' equity to: Total assets .................................... 8.14 8.16 8.15 Net loans ....................................... 11.90 11.93 12.00 Annualized return on assets ...................... 1.02 1.43 1.31 Annualized return on shareholders' equity......... 12.49 17.58 16.11 Net Income and Ratios Excluding the After-Tax Effect of Nonrecurring Items Included in (1), (2) and (3) (thousands, except per share data) Net income ....................................... $ 894,414 $ 235,243 $ 230,276 Net income per diluted share ..................... 4.28 1.13 1.09 Annualized return on assets ...................... 1.43% 1.48% 1.44% Annualized return on shareholders' equity......... 17.56 18.19 17.68 Cash dividend payout ratio (5) ................... 41.30 42.84 39.51 Nine Months Ended 1998 1997 September 30 ---------- ------------------------- -------------------------------- First Fourth Third Quarter Quarter Quarter 1998 1997 ------ ---------- ---------- ------------- ----------- Summary of Operations (thousands, except per share data) Interest income .................................. $ 1,147,829 $1,119,617 $ 1,072,921 $ 3,489,053 $ 3,142,768 Interest expense ................................. 578,686 564,145 549,277 1,747,770 1,604,673 ----------- ----------- ----------- ------------- ----------- Net interest income .............................. 569,143 555,472 523,644 1,741,283 1,538,095 Provision for loan losses (1) .................... 74,126 76,915 62,756 215,376 188,034 ----------- ----------- ----------- ------------- ----------- Net interest income after provision for loan losses .......................................... 495,017 478,557 460,888 1,525,907 1,350,061 Other operating revenue .......................... 283,723 263,258 256,047 909,307 742,510 Securities gains (losses) (2) .................... 3,157 (1,693) 1,091 13,035 3,147 ----------- ----------- ----------- ------------- ----------- Total other income ............................... 286,880 261,565 257,138 922,342 745,657 Personnel expense ................................ 259,724 244,250 230,352 785,412 660,907 Nonrecurring charges (3) ......................... 35,568 287,532 ---- 78,351 ---- Other expense .................................... 198,957 200,636 194,949 639,883 573,396 ----------- ----------- ----------- ------------- ----------- Total other expense .............................. 494,249 732,418 425,301 1,503,646 1,234,303 Income before income taxes ....................... 287,648 7,704 292,725 944,603 861,415 Applicable income taxes .......................... 92,327 4,100 93,803 311,999 272,213 ----------- ----------- ----------- ------------- ----------- Net income ....................................... $ 195,321 $ 3,604 $ 198,922 $ 632,604 $ 589,202 =========== =========== =========== ============= =========== Net income per common share: Basic ........................................... $ .95 $ .02 $ 1.02 $ 3.07 $ 2.99 Diluted ......................................... $ .93 $ .02 $ 1.00 $ 3.01 $ 2.94 Cash dividends paid per common share (4) ....................................... $ .44 $ .44 $ .44 $ 1.37 $ 1.24 Cash dividends paid on common stock (5)........... $ 90,589 $ 87,045 $ 83,952 $ 282,346 $ 240,258 Cash dividend payout ratio (5) ................... 46.38% 2,415.23% 42.20% 44.63% 40.78% Average basic shares outstanding ................. 205,894 201,415 194,981 205,811 197,237 Average diluted shares outstanding ............... 210,158 205,934 198,555 209,881 200,542 Selected Average Balances (millions) Total assets ..................................... $ 63,133 $ 59,835 $ 57,183 $ 63,494 $ 56,856 Loans -- net of unearned income .................. 43,749 41,770 39,731 43,873 39,024 Securities ....................................... 10,623 10,126 10,649 10,794 11,019 Other interest-earning assets .................... 1,630 1,637 1,457 1,565 1,381 Total interest-earning assets .................... 56,002 53,533 51,837 56,232 51,424 Interest-bearing deposits ........................ 32,455 30,706 29,300 32,094 29,204 Short-term borrowed funds ........................ 10,635 9,444 9,172 10,814 8,833 Long-term debt ................................... 6,107 5,935 6,031 6,093 6,185 Total interest-bearing liabilities ............... 49,197 46,085 44,503 49,001 44,222 Noninterest-bearing deposits ..................... 7,240 7,484 6,843 7,687 6,749 Total deposits ................................... 39,695 38,190 36,143 39,781 35,953 Shareholders' equity ............................. 5,109 4,884 4,391 5,165 4,415 Ratios (averages) Annualized net loan losses to loans .............. .68% .73% .63% .65% .64% Annualized net yield on interest-earning assets .......................................... 4.21 4.21 4.12 4.23 4.12 Shareholders' equity to: Total assets .................................... 8.09 8.16 7.68 8.13 7.77 Net loans ....................................... 11.82 11.85 11.20 11.92 11.46 Annualized return on assets ...................... 1.24 .02 1.39 1.33 1.38 Annualized return on shareholders' equity......... 15.29 .30 18.12 16.33 17.79 Net Income and Ratios Excluding the After-Tax Effect of Nonrecurring Items Included in (1), (2) and (3) (thousands, except per share data) Net income ....................................... $ 218,168 $ 210,727 $ 198,922 $ 683,698 $ 589,202 Net income per diluted share ..................... 1.04 1.02 1.00 3.26 2.94 Annualized return on assets ...................... 1.38% 1.41% 1.39% 1.44% 1.38% Annualized return on shareholders' equity......... 17.08 17.26 18.12 17.65 17.79 Cash dividend payout ratio (5) ................... 41.52 41.31 42.20 41.30 40.78
(1) Includes $10,845 in nonrecurring merger-related provision in the twelve months ended September 30, 1998 and in the 1997 fourth quarter. (2) Includes $4,639 of nonrecurring losses to restructure the available-for-sale portfolio in the twelve months ended September 30, 1998 and in 1997 fourth quarter. (3) Nonrecurring charges in the twelve months ended September 30, 1998 include merger-related items of $298,681 and personal computer charges of $67,202. Nonrecurring charges in the 1998 third, second and first quarters include merger-related items of $11,934, $30,849 and $35,568, respectively; nonrecurring charges in the 1997 fourth quarter include merger-related charges of $220,330 and personal computer impairment charges of $67,202. (4) Cash dividends per common share are those of Wachovia Corporation prior to the merger with Central Fidelity Banks, Inc. (5) Includes amounts of pooled companies. 4 -------------------------- Results of Operations ----------------------------------------------------------------- Overview The following narrative contains forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainty and any number of factors could cause actual results to differ materially from statements contained in this Financial Supplement and Form 10-Q. Risks and uncertainties that may affect future results include, but are not limited to, growth of the economy, interest rate movements, timely development by Wachovia of technology enhancements for its products and operating systems, the ability of Wachovia and its customers and vendors to address effectively Year 2000 issues, the impact of competitive products, services and pricing, Congressional legislation and similar matters. Management cautions readers of this Financial Supplement and Form 10-Q not to place undue reliance on forward-looking statements which are subject to influence by the named risk factors and unanticipated future events. Wachovia Corporation ("the corporation") is a southeastern interstate bank holding company with dual headquarters in Atlanta, Georgia, and Winston-Salem, North Carolina. The corporation's principal banking subsidiaries are Wachovia Bank, N. A., which maintains operations in Florida, Georgia, North Carolina, South Carolina and Virginia, and The First National Bank of Atlanta, which provides credit card services. Effective July 1, 1998, 1st United Bank, a Florida subsidiary acquired through the corporation's merger with 1st United Bancorp in November 1997, was merged into Wachovia Bank. On October 27, 1998, the corporation announced plans to acquire Interstate/Johnson Lane Inc., a full-service investment banking and securities brokerage firm with offices in Georgia, North Carolina, South Carolina and Virginia. The transaction will be accounted for on a purchase basis and is expected to close in the first half of 1999 subject to regulatory approval and vote by Interstate/Johnson Lane shareholders. Wachovia's growth strategy includes using acquisitions to gain access to additional customers in attractive markets and to enhance product and service capabilities. 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. Economic growth in the U.S. for the third quarter of 1998 continued the slowing pace set in the previous quarter as turmoil in overseas markets and higher domestic wages contributed to weakening sales and profits. Based on advance estimates for the period, gross domestic product in the third quarter rose 3.3 percent annualized from the preceding three months after increasing 1.8 percent in the second quarter and 5.5 percent in the first quarter. Seasonally adjusted unemployment for the nation increased to 4.6 percent for the three months from 4.4 percent in the second period. In response to the slowing growth, the Federal Reserve moved to lower short-term interest rates a quarter of a percentage point both in September and October. Business conditions within Wachovia's primary operating states, however, remained generally strong, with seasonally adjusted unemployment for the quarter averaging 4.3 percent in Florida, 4 percent in Georgia, 3.4 percent in North Carolina, 3.5 percent in South Carolina and 3.1 percent in Virginia. Wachovia's net income for the third quarter of 1998 was $227.367 million or $1.09 per diluted share compared with $198.922 million or $1.00 per diluted share in the same period of 1997. For the first nine months of the year, net income totaled $632.604 million or $3.01 per diluted share versus $589.202 million or $2.94 per diluted share a year earlier. Gains in both periods were driven by good revenue growth, with total revenues increasing $118.461 million or 14.9 percent for the three months and $361.011 million or 15.5 percent for the first nine months. Results included gains from branch sales in both 1998 and 1997, 5 as well as merger-related charges in 1998 associated with the corporation's new Virginia and Florida operations. Branch sale gains on a pretax basis totaled $17.155 million for the first nine months of 1998, with all gains occurring in the first quarter, compared with $21.096 million in the same period of 1997 including $2.437 million in the third quarter. On a pretax basis, merger-related charges were $11.934 million for the third period of 1998 and $78.351 million year to date. The net after-tax impact of the merger-related charges was $7.876 million or $.04 per diluted share for the three months and $51.094 million or $.25 per diluted share for the nine months. Operating net income excluding merger-related charges was $235.243 million or $1.13 per diluted share for the 1998 third quarter and $683.698 million or $3.26 per diluted share year to date. Management expects to incur remaining integration expenses for its Florida and Virginia banking operations of approximately $5 million in the fourth quarter of 1998. Expanded discussion of the corporation's operating results and financial condition is presented in the following narrative with accompanying tables. Interest income is stated on a taxable equivalent basis, which is adjusted for the tax-favored status of earnings from certain loans and securities. References to changes in assets and liabilities represent daily averages unless otherwise noted. Prior year financial results have been restated to reflect the corporation's pooling-of-interests merger with Central Fidelity Banks, Inc., effective December 15, 1997 but have not been restated for the corporation's purchase acquisitions of Jefferson Bankshares, Inc., and 1st United Bancorp in the fourth quarter of 1997 and of Ameribank Bancshares in the second quarter of 1998. - --------------------------------------------------- Computation of Earnings Per Common Share Table 2 - -------------------------------------------------------------------------------- (thousands, except per share) Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ----------------------------- 1998 1997 1998 1997 ----------- ---- ----------- ---- Basic Average common shares outstanding .............................. 204,832 194,981 205,811 197,237 =========== ======= =========== ======= Net income ..................................................... $ 227,367 $ 198,922 $ 632,604 $ 589,202 =========== ========= =========== ========= Per share amount ............................................... $ 1.11 $ 1.02 $ 3.07 $ 2.99 Diluted Average common shares outstanding .............................. 204,832 194,981 205,811 197,237 Dilutive common stock options at average market price .......... 3,666 3,347 3,778 3,112 Dilutive common stock awards at average market price ........... 313 221 278 185 Convertible long-term debt assumed converted ................... 26 6 14 8 ----------- --------- ----------- --------- Average diluted shares outstanding ............................. 208,837 198,555 209,881 200,542 =========== ========= =========== ========= Net income ..................................................... $ 227,367 $ 198,922 $ 632,604 $ 589,202 Add interest on convertible long-term debt, net of tax ......... 20 1 28 4 ----------- --------- ----------- --------- Adjusted net income ............................................ $ 227,387 $ 198,923 $ 632,632 $ 589,206 =========== ========= =========== ========= Per share amount ............................................... $ 1.09 $ 1.00 $ 3.01 $ 2.94
6 Net Interest Taxable equivalent net interest income increased $63.967 million Income or 11.9 percent for the third quarter of 1998 from a year earlier and was higher by $194.214 million or 12.3 percent for the first nine months. Growth in both periods reflected greater loan volume and improvement in the net yield on interest-earning assets (defined as taxable equivalent net interest income as a percentage of average interest-earning assets). Compared with the second quarter of 1998, taxable equivalent net interest income rose $7.094 million or 4.8 percent annualized, with the corporation benefiting primarily from a higher average earning yield and a lower average funding rate. The net yield on interest-earning assets expanded 14 basis points for the three months and 11 basis points for the first nine months from a year earlier and was up 5 basis points from the second quarter. Based on loan origination activity and interest rates as of the beginning of the fourth quarter of 1998, taxable equivalent net interest income is expected to expand in the final three months of 1998 from the third quarter while the net yield on interest-earning assets is expected to moderate. Taxable equivalent interest income rose $96.720 million or 8.9 percent and $337.311 million or 10.6 percent for the three- and nine-month periods, respectively. Increased loan volume, including additions from purchase acquisitions, primarily drove the growth, which benefited also from a higher average earning yield. Loans expanded $4.163 billion or 10.5 percent for the quarter and $4.849 billion or 12.4 percent year to date, with the average rate earned expanding 4 basis points and 6 basis points, respectively. Taxable equivalent interest income grew $2.070 million or less than 1 percent from the second quarter of 1998 primarily due to a 4 basis point increase in the average loan yield. Commercial loans, including related real estate categories, accounted for most of the loan growth in both periods, rising $3.644 billion or 16.4 percent for the third quarter from a year earlier and $4.043 billion or 18.7 percent year to date. Solid gains occurred in all categories except tax-exempt loans, which continued to decline due to the reduced availability of tax-exempt financing under current tax laws and to paydowns in employee stock ownership plan loans. Taxable commercial loans increased $2.240 billion or 19.8 percent for the three months and $2.637 billion or 23.9 percent for the nine months. Commercial mortgages and construction loans expanded $730 million or 12 percent and $329 million or 21.3 percent, respectively, for the quarter and $852 million or 14.3 percent and $432 million or 30.1 percent, respectively, year to date. Lease financing, primarily consisting of leverage leases and other structured corporate transactions, grew $594 million or 58.2 percent for the three months and $404 million or 43.9 percent for the nine months, while foreign loans were up $398 million or 80.4 percent for the third period and $222 million or 45.7 percent year to date. The corporation's foreign credits outstanding consist of loans and lease financing. Growth in foreign loans was driven partly by originations in the corporation's London office to companies operating in Europe. At September 30, 1998, foreign loans were $985 million, representing 2.2 percent of total loans compared with $496 million or 1.2 percent of total loans one year earlier and $843 million or 1.9 percent of loans at June 30, 1998. Because foreign loans are reported based on the address of the borrower and not on the country where security for the credit resides, foreign loans as reported do not necessarily indicate the corporation's country risk exposure. At September 30, 1998, the corporation's country of risk profile for its foreign loan portfolio was as follows: Western Europe, $354 million or 36 percent of total foreign loans; Latin America, $332 million or 34 percent; the United States, $229 million or 23 percent; and all other, $70 million or 7 percent. There were no extensions of credit in Russia, and extensions of credit in Asia were insignificant. Included in the $1.688 billion of lease financing at September 30, 1998 was $742 million of foreign leverage leases, all with countries of risk in Western Europe. The corporation had no significant concentrations of loans in any one industry at September 30, 1998. Based on regulatory definitions, commercial real estate loans were $8.692 billion or 19 percent of total loans at September 30, 1998 versus $7.652 billion or 18.8 percent of loans one year earlier and $8.632 7 - -------------------------------------------------- Net Interest Income and Average Balances Table 3 - -------------------------------------------------------------------------------- Twelve Months 1998 Ended ------- September 30 Third Second 1998 Quarter Quarter ------------ -------- -------- Net Interest Income -- Taxable Equivalent (thousands) Interest income: Loans, including fees ..................$3,830,434 $ 980,636 $ 967,461 Securities ............................. 738,457 181,853 191,666 Interest-bearing bank balances ......... 11,741 3,182 3,411 Federal funds sold and securities purchased under resale agreements ............................ 25,730 6,168 5,735 Trading account assets ................. 51,228 11,817 13,313 ---------- ------------- ------------ Total ............................... 4,657,590 1,183,656 1,181,586 Interest expense: Interest-bearing demand ................ 66,657 15,526 17,047 Savings and money market savings ....... 444,970 115,077 110,078 Savings certificates ................... 570,233 136,462 136,782 Large denomination certificates ........ 160,855 40,482 45,426 Interest-bearing deposits in foreign offices ............................... 131,325 34,005 37,332 Short-term borrowed funds .............. 556,904 144,881 145,827 Long-term debt ......................... 380,971 95,597 94,562 ---------- ------------- ------------ Total ............................... 2,311,915 582,030 587,054 ---------- ------------- ------------ Net interest income .....................$2,345,675 $ 601,626 $ 594,532 ========== ============= ============ Annualized net yield on interest- earning assets ......................... 4.22% 4.26% 4.21% Average Balances (millions) Assets: Loans -- net of unearned income ........ $ 43,344 $ 43,894 $ 43,974 Securities ............................. 10,627 10,664 11,102 Interest-bearing bank balances ......... 145 138 139 Federal funds sold and securities purchased under resale agreements ............................ 455 440 411 Trading account assets ................. 982 930 1,008 ---------- ------------- ------------ Total interest-earning assets ....... 55,553 56,066 56,634 Cash and due from banks ................ 3,184 3,068 3,166 Premises and equipment ................. 846 874 845 Other assets ........................... 3,414 3,822 3,709 Unrealized gains on securities available-for-sale .................... 111 133 96 Allowance for loan losses .............. (536) (534) (534) ---------- ------------- ------------ Total assets ........................ $ 62,572 $ 63,429 $ 63,916 ========== ============= ============ Liabilities and shareholders' equity: Interest-bearing demand ................ $ 4,916 $ 4,646 $ 4,687 Savings and money market savings ....... 11,278 11,873 11,700 Savings certificates ................... 10,334 9,642 9,984 Large denomination certificates ........ 2,907 3,146 3,212 Interest-bearing deposits in foreign offices ............................... 2,309 2,347 2,599 Short-term borrowed funds .............. 10,469 10,858 10,947 Long-term debt ......................... 6,053 6,080 6,092 ---------- ------------- ------------ Total interest-bearing liabilities ........................ 48,266 48,592 49,221 Demand deposits ........................ 7,636 7,874 7,939 Other liabilities ...................... 1,576 1,790 1,545 Shareholders' equity ................... 5,094 5,173 5,211 ---------- ------------- ------------ Total liabilities and shareholders' equity ............... $ 62,572 $ 63,429 $ 63,916 ========== ============= ============ Total deposits .......................... $ 39,380 $ 39,528 $ 40,121 1998 1997 Nine Months Ended ------- ----------------------- September 30 First Fourth Third --------------------------- Quarter Quarter Quarter 1998 1997 ------- -------- ------- ----------- ----------- Net Interest Income -- Taxable Equivalent (thousands) Interest income: Loans, including fees .................. $ 952,282 $ 930,055 $ 883,319 $ 2,900,379 $ 2,561,937 Securities ............................. 185,655 179,283 183,758 559,174 569,802 Interest-bearing bank balances ......... 3,228 1,920 1,816 9,821 3,310 Federal funds sold and securities purchased under resale agreements ............................ 5,285 8,542 5,980 17,188 13,777 Trading account assets ................. 13,130 12,968 12,063 38,260 38,685 ------------ ------------- ------------ ------------- ----------- Total ............................... 1,159,580 1,132,768 1,086,936 3,524,822 3,187,511 Interest expense: Interest-bearing demand ................ 16,751 17,333 16,009 49,324 46,916 Savings and money market savings ....... 111,133 108,682 102,930 336,288 296,762 Savings certificates ................... 146,030 150,959 145,164 419,274 431,186 Large denomination certificates ........ 34,117 40,830 39,806 120,025 123,561 Interest-bearing deposits in foreign offices ............................... 36,210 23,778 23,824 107,547 63,542 Short-term borrowed funds .............. 138,892 127,304 125,116 429,600 350,858 Long-term debt ......................... 95,553 95,259 96,428 285,712 291,848 ------------ ------------- ------------ ------------- ----------- Total ............................... 578,686 564,145 549,277 1,747,770 1,604,673 ------------ ------------- ------------ ------------- ----------- Net interest income ..................... $ 580,894 $ 568,623 $ 537,659 $ 1,777,052 $ 1,582,838 ============ ============= ============ ============= =========== Annualized net yield on interest- earning assets ......................... 4.21% 4.21% 4.12% 4.23% 4.12% Average Balances (millions) Assets: Loans -- net of unearned income ........ $ 43,749 $ 41,770 $ 39,731 $ 43,873 $ 39,024 Securities ............................. 10,623 10,126 10,649 10,794 11,019 Interest-bearing bank balances ......... 189 116 126 156 79 Federal funds sold and securities purchased under resale agreements ............................ 374 594 423 408 331 Trading account assets ................. 1,067 927 908 1,001 971 ------------ ------------- ------------ ------------- ----------- Total interest-earning assets ....... 56,002 53,533 51,837 56,232 51,424 Cash and due from banks ................ 3,340 3,165 2,797 3,190 2,816 Premises and equipment ................. 819 844 790 846 790 Other assets ........................... 3,396 2,733 2,206 3,644 2,287 Unrealized gains on securities available-for-sale .................... 114 99 76 117 54 Allowance for loan losses .............. (538) (539) (523) (535) (515) ------------ ------------- ------------ ------------- ----------- Total assets ........................ $ 63,133 $ 59,835 $ 57,183 $ 63,494 $ 56,856 ============ ============= ============ ============= =========== Liabilities and shareholders' equity: Interest-bearing demand ................ $ 5,984 $ 4,368 $ 4,000 $ 5,101 $ 4,021 Savings and money market savings ....... 10,334 11,189 10,603 11,308 10,395 Savings certificates ................... 11,044 10,676 10,207 10,218 10,260 Large denomination certificates ........ 2,449 2,816 2,776 2,938 2,967 Interest-bearing deposits in foreign offices ............................... 2,644 1,657 1,714 2,529 1,561 Short-term borrowed funds .............. 10,635 9,444 9,172 10,814 8,833 Long-term debt ......................... 6,107 5,935 6,031 6,093 6,185 ------------ ------------- ------------ ------------- ----------- Total interest-bearing liabilities ........................ 49,197 46,085 44,503 49,001 44,222 Demand deposits ........................ 7,240 7,484 6,843 7,687 6,749 Other liabilities ...................... 1,587 1,382 1,446 1,641 1,470 Shareholders' equity ................... 5,109 4,884 4,391 5,165 4,415 ------------ ------------- ------------ ------------- ----------- Total liabilities and shareholders' equity ............... $ 63,133 $ 59,835 $ 57,183 $ 63,494 $ 56,856 ============ ============= ============ ============= =========== Total deposits .......................... $ 39,695 $ 38,190 $ 36,143 $ 39,781 $ 35,953
8 billion or 19.4 percent at June 30, 1998. Regulatory definitions for commercial real estate include loans which have real estate as the collateral but not the primary consideration in a credit risk evaluation. Consumer loans, including residential mortgages, increased $519 million or 3 percent for the third period and $806 million or 4.6 percent for the first nine months. Residential mortgages and indirect retail loans, primarily consisting of automobile sales financing, substantially accounted for all of the quarter's growth, rising $330 million or 4.4 percent and $204 million or 7.1 percent, respectively. Year to date, consumer loan growth occurred primarily in residential mortgages, which were up $635 million or 8.7 percent and included gains in equity bank lines. Credit cards declined slightly for the three months but were modestly higher for the first nine months and increased from the second quarter. On September 4, 1998, the corporation purchased $269 million of credit card receivables from Wells Fargo & Co. The acquisition is part of the corporation's consumer growth strategy to selectively build its customer base. At September 30, 1998, managed credit card outstandings were $6.273 billion, representing 13.6 percent of total managed loans, versus $6.251 billion or 15.1 percent of managed loans one year earlier and $6.033 billion or 13.4 percent at June 30, 1998. Managed credit card amounts included $500 million of securitized loans both at September 30, 1998 and June 30, 1998 and $557 million at the end of the third quarter of 1997. Additional information on the corporation's managed credit card portfolio is presented on page 17. Period-end loans as of September 30, 1998 and the preceding four quarters are shown in the following table. Period-end Loans ----------------------------------------------------------------- Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 thousands 1998 1998 1998 1997 1997 ----------- ----------- ----------- ----------- ----------- Commercial .............................. $15,040,796 $14,162,763 $14,519,889 $13,528,344 $12,133,710 Tax-exempt .............................. 1,024,855 1,285,639 1,379,660 1,607,159 1,695,993 ----------- ----------- ----------- ----------- ----------- Total commercial ..................... 16,065,651 15,448,402 15,899,549 15,135,503 13,829,703 Direct retail ........................... 1,111,654 1,125,885 1,160,162 1,249,612 1,161,279 Indirect retail ......................... 3,143,670 3,056,582 3,038,397 3,028,288 2,879,128 Credit card ............................. 5,773,009 5,533,435 5,603,381 5,919,098 5,693,563 Other revolving credit .................. 517,047 503,758 485,093 459,563 422,389 ----------- ----------- ----------- ----------- ----------- Total retail ......................... 10,545,380 10,219,660 10,287,033 10,656,561 10,156,359 Construction ............................ 1,865,675 1,835,906 1,873,528 1,779,522 1,553,500 Commercial mortgages .................... 6,826,459 6,796,424 6,824,990 6,790,446 6,098,647 Residential mortgages ................... 7,652,614 7,893,928 7,959,185 8,098,794 7,563,967 ----------- ----------- ----------- ----------- ----------- Total real estate .................... 16,344,748 16,526,258 16,657,703 16,668,762 15,216,114 Lease financing ......................... 1,688,053 1,420,875 1,105,555 1,094,169 1,049,269 Foreign ................................. 984,884 843,353 548,441 639,387 496,164 ----------- ----------- ----------- ----------- ----------- Total loans, net of unearned income .. $45,628,716 $44,458,548 $44,498,281 $44,194,382 $40,747,609 =========== =========== =========== =========== ===========
Securities, the second largest category of interest-earning assets, were substantially unchanged for the third quarter from a year earlier but were modestly lower year to date. Compared with the second quarter of 1998, securities declined $438 million or 3.9 percent, reflecting maturing investments in securities available-for-sale. At September 30, 1998, securities available-for-sale were $9.075 billion and securities held-to-maturity were $1.521 billion, as detailed in the following table. 9 Securities -----------------------------------------------------------------
thousands Securities available-for-sale at fair value: U.S. Government and agency ......................... $ 3,861,426 Mortgage-backed securities ......................... 4,577,040 Other .............................................. 636,950 ----------- Total securities available-for-sale ............. 9,075,416 Securities held-to-maturity: U.S. Government and agency ......................... 534,880 Mortgage-backed securities ......................... 707,719 State and municipal ................................ 185,397 Other .............................................. 92,588 ----------- Total securities held-to-maturity ............... 1,520,584 ----------- Total securities ................................ $10,596,000 ===========
Marking the securities available-for-sale portfolio at September 30, 1998 to fair value resulted in an unrealized gain over amortized cost of $213.225 million, pretax, and $131.325 million, net of tax. Marking the average available-for-sale portfolio to fair value resulted in unrealized gains of $133.172 million, pretax, and $81.664 million, net of tax, for the third quarter and $116.588 million, pretax, and $71.689 million, net of tax, year to date. Unrealized gains are included, net of tax, in shareholders' equity. Securities held-to-maturity had a fair value of $1.593 billion at September 30, 1998, representing a $72.594 million appreciation over book value. Interest expense rose $32.753 million or 6 percent for the third quarter and $143.097 million or 8.9 percent year to date. Growth in both periods was driven by higher levels of interest-bearing liabilities, principally interest-bearing deposits and short-term borrowings, with the increase in interest expense offset partially by a lower average rate paid. Interest-bearing liabilities expanded $4.089 billion or 9.2 percent for the three months and $4.779 billion or 10.8 percent for the nine months, including additions from purchase acquisitions, while the average rate paid declined 15 basis points and 8 basis points, respectively. Interest expense in the third quarter decreased $5.024 million or 3.4 percent annualized from the preceding three months due to reduced levels of interest-bearing liabilities as well as a lower average rate paid. As part of its funding strategy, the corporation is marketing traditional funding products 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 addition of PC Banking; and significant enhancements to the corporation's basic checking products. Wholesale funding sources include senior and subordinated debt, trust capital securities and a global bank note program. Management believes continued flexibility and innovation will be required of financial institutions to attract future funding through deposit products and alternative sources. Interest-bearing deposits grew $2.354 billion or 8 percent for the quarter and $2.890 billion or 9.9 percent year to date. Gains occurred primarily in savings and money market savings, up $1.270 billion or 12 percent for the three months and $913 million or 8.8 percent for the nine months; in demand deposits, higher by $646 million or 16.2 percent for the third period and $1.080 billion or 26.9 percent year to date; and in foreign deposits, which expanded $633 million or 36.9 percent for the quarter and $968 million or 62 percent for the nine months. Growth in savings and money market savings continued to be driven by the corporation's Premiere and Business Premiere accounts. The increase in interest-bearing foreign deposits reflected recently granted deposit-taking capabilities of the corporation's London office as well as the attractiveness of foreign deposits relative to other wholesale funding sources. Interest-bearing deposits were down modestly from the second quarter, largely due to declines in higher-rate savings certificates and to some moderation in foreign deposits. Gross deposits averaged $39.528 billion for the third period and $39.781 billion year to date, up $3.385 billion or 9.4 percent and $3.828 billion or 10.6 percent, respectively, from year-earlier periods. Collected deposits, net of float, averaged $37.361 billion for 10 - --------------------------------------------------------------------------- Taxable Equivalent Rate/Volume Variance Analysis -- Third Quarter* Table 4 - -------------------------------------------------------------------------------- + (millions) ++ (thousands) Average Volume+ Average Rate -------------------- -------------------- 1998 1997 1998 1997 -------- ---- -------- ---- Interest Income Loans: Commercial ....................................... $13,575 $11,335 7.28 7.35 Tax-exempt ....................................... 1,083 1,730 9.62 8.90 -------- ------- Total commercial ........................... 14,658 13,065 7.45 7.55 Direct retail .................................... 1,114 1,168 10.10 9.01 Indirect retail .................................. 3,090 2,886 8.23 8.49 Credit card ...................................... 5,593 5,645 13.38 12.96 Other revolving credit ........................... 508 417 11.58 12.26 -------- ------- Total retail ............................... 10,305 10,116 11.39 11.20 Construction ..................................... 1,876 1,547 9.03 9.33 Commercial mortgages ............................. 6,795 6,065 8.59 8.32 Residential mortgages ............................ 7,752 7,422 7.82 8.07 -------- ------- Total real estate .......................... 16,423 15,034 8.28 8.30 Lease financing .................................. 1,615 1,021 12.63 10.04 Foreign .......................................... 893 495 6.85 6.88 -------- ------- Total loans ................................ 43,894 39,731 8.86 8.82 Securities: Held-to-maturity: U.S. Government and agency ................... 547 ---- 6.06 ---- Mortgage-backed securities ................... 763 1,033 8.29 8.01 State and municipal .......................... 188 210 10.70 11.26 Other ........................................ 97 3 6.59 8.87 -------- ------- Total securities held-to-maturity .......... 1,595 1,246 7.71 8.56 Available-for-sale:** U.S. Government and agency ................... 3,900 5,384 6.56 6.49 Mortgage-backed securities ................... 4,513 3,053 6.56 6.89 Other ........................................ 656 966 7.13 6.48 -------- ------- Total securities available-for-sale ........ 9,069 9,403 6.60 6.62 -------- ------- Total securities ........................... 10,664 10,649 6.77 6.85 Interest-bearing bank balances ................... 138 126 9.13 5.72 Federal funds sold and securities purchased under resale agreements ........................ 440 423 5.56 5.61 Trading account assets ........................... 930 908 5.04 5.27 -------- ------- Total interest-earning assets .............. $56,066 $51,837 8.38 8.32 ======== ======= Interest Expense Interest-bearing demand .......................... $ 4,646 $ 4,000 1.33 1.59 Savings and money market savings ................. 11,873 10,603 3.85 3.85 Savings certificates ............................. 9,642 10,207 5.61 5.64 Large denomination certificates .................. 3,146 2,776 5.10 5.69 -------- ------- Total interest-bearing deposits in domestic offices ........................... 29,307 27,586 4.16 4.37 Interest-bearing deposits in foreign offices ..... 2,347 1,714 5.75 5.52 -------- ------- Total interest-bearing deposits ............ 31,654 29,300 4.28 4.44 Federal funds purchased and securities sold under repurchase agreements ............... 7,273 6,740 5.33 5.39 Commercial paper ................................. 1,405 822 5.21 5.12 Other short-term borrowed funds .................. 2,180 1,610 5.23 5.67 -------- ------- Total short-term borrowed funds............. 10,858 9,172 5.29 5.41 Bank notes ....................................... 2,407 2,896 6.01 6.18 Other long-term debt ............................. 3,673 3,135 6.38 6.49 -------- ------- Total long-term debt ....................... 6,080 6,031 6.24 6.34 -------- ------- Total interest-bearing liabilities ......... $48,592 $44,503 4.75 4.90 ======== ======= --------- ----- Interest rate spread 3.63 3.42 Net yield on interest-earning assets ========= ===== and net interest income ........................ 4.26 4.12 ========= ===== Variance Interest++ Attributable to++ ------------------- -------------------------- 1998 1997 Variance++ Rate Volume ----- ---- ---------- ------ ------- Interest Income Loans: Commercial ....................................... $ 248,927 $ 209,990 $ 38,937 $ (2,026) $ 40,963 Tax-exempt ....................................... 26,269 38,786 (12,517) 2,932 (15,449) ----------- ----------- ---------- Total commercial ........................... 275,196 248,776 26,420 (3,355) 29,775 Direct retail .................................... 28,373 26,541 1,832 3,105 (1,273) Indirect retail .................................. 64,112 61,797 2,315 (1,936) 4,251 Credit card ...................................... 188,570 184,412 4,158 5,899 (1,741) Other revolving credit ........................... 14,840 12,891 1,949 (747) 2,696 ----------- ----------- ---------- Total retail ............................... 295,895 285,641 10,254 4,897 5,357 Construction ..................................... 42,688 36,378 6,310 (1,202) 7,512 Commercial mortgages ............................. 147,187 127,225 19,962 4,239 15,723 Residential mortgages ............................ 152,832 150,871 1,961 (4,710) 6,671 ----------- ----------- ---------- Total real estate .......................... 342,707 314,474 28,233 (760) 28,993 Lease financing .................................. 51,423 25,853 25,570 7,855 17,715 Foreign .......................................... 15,415 8,575 6,840 (38) 6,878 ----------- ----------- ---------- Total loans ................................ 980,636 883,319 97,317 4,037 93,280 Securities: Held-to-maturity: U.S. Government and agency ................... 8,364 ---- 8,364 ---- 8,364 Mortgage-backed securities ................... 15,945 20,845 (4,900) 707 (5,607) State and municipal .......................... 5,067 5,962 (895) (286) (609) Other ........................................ 1,602 64 1,538 (21) 1,559 ----------- ----------- ---------- Total securities held-to-maturity .......... 30,978 26,871 4,107 (2,865) 6,972 Available-for-sale:** U.S. Government and agency ................... 64,445 88,096 (23,651) 938 (24,589) Mortgage-backed securities ................... 74,637 53,015 21,622 (2,647) 24,269 Other ........................................ 11,793 15,776 (3,983) 1,461 (5,444) ----------- ----------- ---------- Total securities available-for-sale ........ 150,875 156,887 (6,012) (471) (5,541) ----------- ----------- ---------- Total securities ........................... 181,853 183,758 (1,905) (2,151) 246 Interest-bearing bank balances ................... 3,182 1,816 1,366 1,172 194 Federal funds sold and securities purchased under resale agreements ........................ 6,168 5,980 188 (52) 240 Trading account assets ........................... 11,817 12,063 (246) (530) 284 ----------- ----------- ---------- Total interest-earning assets .............. 1,183,656 1,086,936 96,720 7,858 88,862 Interest Expense Interest-bearing demand .......................... 15,526 16,009 (483) (2,846) 2,363 Savings and money market savings ................. 115,077 102,930 12,147 ---- 12,147 Savings certificates ............................. 136,462 145,164 (8,702) (762) (7,940) Large denomination certificates .................. 40,482 39,806 676 (4,348) 5,024 ----------- ----------- ---------- Total interest-bearing deposits in domestic offices ........................... 307,547 303,909 3,638 (14,912) 18,550 Interest-bearing deposits in foreign offices ..... 34,005 23,824 10,181 1,033 9,148 ----------- ----------- ---------- Total interest-bearing deposits ............ 341,552 327,733 13,819 (12,029) 25,848 Federal funds purchased and securities sold under repurchase agreements ............... 97,672 91,514 6,158 (1,027) 7,185 Commercial paper ................................. 18,448 10,592 7,856 189 7,667 Other short-term borrowed funds .................. 28,761 23,010 5,751 (1,894) 7,645 ----------- ----------- ---------- Total short-term borrowed funds............. 144,881 125,116 19,765 (2,825) 22,590 Bank notes ....................................... 36,487 45,109 (8,622) (1,208) (7,414) Other long-term debt ............................. 59,110 51,319 7,791 (883) 8,674 ----------- ----------- ---------- Total long-term debt ....................... 95,597 96,428 (831) (1,586) 755 ----------- ----------- ---------- Total interest-bearing liabilities ......... 582,030 549,277 32,753 (17,050) 49,803 ----------- ----------- ---------- Interest rate spread Net yield on interest-earning assets and net interest income ........................ $ 601,626 $ 537,659 $ 63,967 19,758 44,209 =========== =========== ==========
* Interest income and yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. Any variance attributable jointly to volume and rate changes is allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each. ** Volume amounts are reported at amortized cost; excludes pretax unrealized gains of $133 million in 1998 and $76 million in 1997. 11 - -------------------------------------------------------------------------- Taxable Equivalent Rate/Volume Variance Analysis -- Nine Months* Table 5 - -------------------------------------------------------------------------------- + (millions) ++ (thousands) Average Volume+ Average Rate ----------------------- ------------------- 1998 1997 1998 1997 --------- ------- ------- ---- Interest Income Loans: Commercial ....................................... $13,679 $11,042 7.30 7.29 Tax-exempt ....................................... 1,282 1,786 9.12 8.96 ----------- -------- Total commercial ........................... 14,961 12,828 7.46 7.52 Direct retail .................................... 1,154 1,180 9.57 8.97 Indirect retail .................................. 3,050 2,963 8.39 8.60 Credit card ...................................... 5,630 5,589 13.40 12.85 Other revolving credit ........................... 489 420 11.12 12.25 ----------- -------- Total retail ............................... 10,323 10,152 11.38 11.13 Construction ..................................... 1,866 1,434 9.08 9.43 Commercial mortgages ............................. 6,792 5,940 8.65 8.28 Residential mortgages ............................ 7,898 7,263 7.98 8.03 ----------- -------- Total real estate .......................... 16,556 14,637 8.38 8.27 Lease financing .................................. 1,325 921 11.39 9.42 Foreign .......................................... 708 486 6.85 6.86 ----------- -------- Total loans ................................ 43,873 39,024 8.84 8.78 Securities: Held-to-maturity: U.S. Government and agency ................... 333 ---- 6.12 ---- Mortgage-backed securities ................... 846 1,071 8.31 8.03 State and municipal .......................... 198 222 10.75 11.95 Other ........................................ 107 2 6.71 10.77 ----------- -------- Total securities held-to-maturity .......... 1,484 1,295 8.03 8.71 Available-for-sale:** U.S. Government and agency ................... 4,189 5,434 6.73 6.57 Mortgage-backed securities ................... 4,424 3,186 6.72 6.90 Other ........................................ 697 1,104 7.10 6.54 ----------- -------- Total securities available-for-sale ........ 9,310 9,724 6.75 6.68 ----------- -------- Total securities ........................... 10,794 11,019 6.93 6.91 Interest-bearing bank balances ................... 156 79 8.45 5.56 Federal funds sold and securities purchased under resale agreements ........................ 408 331 5.63 5.57 Trading account assets ........................... 1,001 971 5.11 5.32 ----------- -------- Total interest-earning assets .............. $56,232 $51,424 8.38 8.29 =========== ======== Interest Expense Interest-bearing demand .......................... $ 5,101 $ 4,021 1.29 1.56 Savings and money market savings ................. 11,308 10,395 3.98 3.82 Savings certificates ............................. 10,218 10,260 5.49 5.62 Large denomination certificates .................. 2,938 2,967 5.46 5.57 ----------- -------- Total interest-bearing deposits in domestic offices ........................... 29,565 27,643 4.18 4.35 Interest-bearing deposits in foreign offices ..... 2,529 1,561 5.69 5.44 ----------- -------- Total interest-bearing deposits ............ 32,094 29,204 4.30 4.40 Federal funds purchased and securities sold under repurchase agreements .................... 7,530 6,627 5.35 5.28 Commercial paper ................................. 1,222 746 5.18 5.05 Other short-term borrowed funds .................. 2,062 1,460 5.26 5.58 ----------- -------- Total short-term borrowed funds ............ 10,814 8,833 5.31 5.31 Bank notes ....................................... 2,674 3,121 6.12 6.13 Other long-term debt ............................. 3,419 3,064 6.39 6.49 ----------- -------- Total long-term debt ....................... 6,093 6,185 6.27 6.31 ----------- -------- Total interest-bearing liabilities ......... $49,001 $44,222 4.77 4.85 =========== ======== -------- ----- Interest rate spread 3.61 3.44 Net yield on interest-earning assets and net ======== ===== interest income ................................ 4.23 4.12 ======== ===== Variance Interest++ Attributable to++ ------------------------ ------------------------- 1998 1997 Variance++ Rate Volume ---------- ---------- ----------- ------- ------- Interest Income Loans: Commercial ....................................... $ 747,231 $ 602,274 $ 144,957 $ 903 $ 144,054 Tax-exempt ....................................... 87,379 119,646 (32,267) 2,094 (34,361) ----------- ----------- ---------- Total commercial ........................... 834,610 721,920 112,690 (6,332) 119,022 Direct retail .................................... 82,554 79,089 3,465 5,207 (1,742) Indirect retail .................................. 191,384 190,532 852 (4,668) 5,520 Credit card ...................................... 564,340 537,205 27,135 23,209 3,926 Other revolving credit ........................... 40,664 38,440 2,224 (3,762) 5,986 ----------- ----------- ---------- Total retail ............................... 878,942 845,266 33,676 19,258 14,418 Construction ..................................... 126,786 101,176 25,610 (3,882) 29,492 Commercial mortgages ............................. 439,525 367,793 71,732 17,187 54,545 Residential mortgages ............................ 471,324 435,993 35,331 (2,552) 37,883 ----------- ----------- ---------- Total real estate .......................... 1,037,635 904,962 132,673 12,583 120,090 Lease financing .................................. 112,907 64,862 48,045 15,488 32,557 Foreign .......................................... 36,285 24,927 11,358 310 11,048 ----------- ----------- ---------- Total loans ................................ 2,900,379 2,561,937 338,442 18,520 319,922 Securities: Held-to-maturity: U.S. Government and agency ................... 15,212 ---- 15,212 ---- 15,212 Mortgage-backed securities ................... 52,555 64,317 (11,762) 2,195 (13,957) State and municipal .......................... 15,942 19,868 (3,926) (1,897) (2,029) Other ........................................ 5,382 191 5,191 (99) 5,290 ----------- ----------- ---------- Total securities held-to-maturity .......... 89,091 84,376 4,715 (6,895) 11,610 Available-for-sale:** U.S. Government and agency ................... 210,843 267,115 (56,272) 6,236 (62,508) Mortgage-backed securities ................... 222,222 164,354 57,868 (4,453) 62,321 Other ........................................ 37,018 53,957 (16,939) 4,296 (21,235) ----------- ----------- ---------- Total securities available-for-sale ........ 470,083 485,426 (15,343) 5,425 (20,768) ----------- ----------- ---------- Total securities ........................... 559,174 569,802 (10,628) 999 (11,627) Interest-bearing bank balances ................... 9,821 3,310 6,511 2,300 4,211 Federal funds sold and securities purchased under resale agreements ........................ 17,188 13,777 3,411 153 3,258 Trading account assets ........................... 38,260 38,685 (425) (1,586) 1,161 ----------- ----------- ---------- Total interest-earning assets .............. 3,524,822 3,187,511 337,311 36,838 300,473 Interest Expense Interest-bearing demand .......................... 49,324 46,916 2,408 (8,870) 11,278 Savings and money market savings ................. 336,288 296,762 39,526 12,713 26,813 Savings certificates ............................. 419,274 431,186 (11,912) (10,150) (1,762) Large denomination certificates .................. 120,025 123,561 (3,536) (2,345) (1,191) ----------- ----------- ---------- Total interest-bearing deposits in domestic offices ........................... 924,911 898,425 26,486 (34,462) 60,948 Interest-bearing deposits in foreign offices ..... 107,547 63,542 44,005 2,959 41,046 ----------- ----------- ---------- Total interest-bearing deposits ............ 1,032,458 961,967 70,491 (22,906) 93,397 Federal funds purchased and securities sold under repurchase agreements .................... 301,099 261,750 39,349 3,273 36,076 Commercial paper ................................. 47,342 28,155 19,187 758 18,429 Other short-term borrowed funds .................. 81,159 60,953 20,206 (3,371) 23,577 ----------- ----------- ---------- Total short-term borrowed funds ............ 429,600 350,858 78,742 343 78,399 Bank notes ....................................... 122,320 143,209 (20,889) (432) (20,457) Other long-term debt ............................. 163,392 148,639 14,753 (2,257) 17,010 ----------- ----------- ---------- Total long-term debt ....................... 285,712 291,848 (6,136) (1,821) (4,315) ----------- ----------- ---------- Total interest-bearing liabilities ......... 1,747,770 1,604,673 143,097 (27,468) 170,565 ----------- ----------- ---------- Interest rate spread Net yield on interest-earning assets and net interest income ................................ $1,777,052 $1,582,838 $ 194,214 43,429 150,785 =========== =========== ==========
* Interest income and yields are presented on a fully taxable equivalent basis using the federal income tax rate and state tax rates, as applicable, reduced by the nondeductible portion of interest expense. Any variance attributable jointly to volume and rate changes is allocated to volume and rate in proportion to the relationship of the absolute dollar amount of the change in each. ** Volume amounts are reported at amortized cost; excludes pretax unrealized gains of $117 million in 1998 and $54 million in 1997. 12 the three months and $37.532 billion for the first nine months, higher by $3.130 billion or 9.1 percent and $3.502 billion or 10.3 percent, respectively, from the same periods in 1997. Short-term borrowings rose $1.686 billion or 18.4 percent for the quarter and $1.981 billion or 22.4 percent year to date, with all categories increasing in both periods. Federal funds purchased and securities sold under repurchase agreements were up $533 million or 7.9 percent for the three months and $903 million or 13.6 percent for the nine months. Commercial paper expanded $583 million or 70.9 percent and $476 million or 63.8 percent for the quarter and year to date, respectively. Other short-term borrowings, primar-ily consisting of short-term bank notes, grew $570 million or 35.4 percent for the third period and $602 million or 41.2 percent for the nine months. Short-term borrowings decreased modestly from the second quarter as expansion of commercial paper and other short-term borrowings was offset by a reduction in federal funds purchased and securities sold under repurchase agreements. Long-term debt for the three and nine months remained essentially unchanged both year over year and from the preceding quarter. Medium-term bank notes decreased $489 million or 16.9 percent for the quarter from a year earlier and were lower by $447 million or 14.3 percent year to date. Largely offsetting the decline in medium-term bank note funding were higher levels of other long-term debt, which consists of senior and subordinated debt and trust capital securities. The corporation issued $350 million of 10-year subordinated fixed-rate notes on July 29, 1998 and $250 million of two-year senior floating-rate notes on September 18, 1998. On September 30, 1998, the corporation issued $300 million of three-year senior floating-rate notes. The senior notes are rated Aa3 by Moody's and AA- by Standard & Poor's and the subordinated notes are rated A1 by Moody's and A+ by Standard & Poor's. All three issuances were part of a $2.500 billion shelf offering registered with the Securities and Exchange Commission on July 15, 1998 for unsecured senior and subordinated debt. Trust capital securities at September 30, 1998 totaled $996 million, reflecting issuances in December 1996 and in January, April and June 1997. 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. In July 1998, Wachovia Bank increased the amount of its global bank note program from $16 billion to $21.557 billion, which includes $3.557 billion of notes previously issued under the program. The program consists of issuances with original maturities beginning at 7 days. Bank notes with original maturities of one year or less are included in other short-term borrowed funds, and bank notes with original maturities greater than one year are classified as medium-term bank notes under long-term debt. Short-term bank notes outstanding at September 30, 1998 were $1.048 billion with an average cost of 5.52 percent and an average maturity of 2.5 months. Medium-term bank notes were $2.436 billion and had an average cost of 5.93 percent and an average maturity of 3.1 years on the same date. Short-term issues under the global bank note program are rated P-1 by Moody's and A-1+ by Standard & Poor's, while medium-term issues are rated Aa2 by Moody's and AA by Standard & Poor's. Asset and Liability The income stream of the corporation is subject to risk resulting Management, from interest rate fluctuations to the extent there is a difference between the amount of interest-earning Interest Rate assets and the amount of interest-bearing liabilities that are prepaid, withdrawn, mature or reprice in specified periods. Sensitivity The goal of asset and liability Sensitivity management is to maintain high quality and consistent growth of net interest and Liquidity income with acceptable levels of risk to changes in interest rates. The corporation seeks to meet this goal by influencing Management 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 position and discretionary on- and off-balance sheet activity are reviewed quarterly by the Board Finance Committee. Interim oversight of the asset and 13 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. 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, off-balance sheet financial instruments and interest rates. The model projections are based on 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 points up or down over the same period. The corporation's 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 September 30, 1998, the model indicated that a 200 basis point gradual rise in rates over 12 months would result in approximately a .1 percent decrease in net interest income, while a 200 basis point decline in rates over the same period would result in approximately a .7 percent decrease in net interest income as compared with 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 September 30, 1998. In addition to on-balance sheet instruments such as 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 September 30, 1998, the corporation had $3.455 billion notional amount of derivatives outstanding for asset and liability management purposes. 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. 14 The fair value of all asset and liability derivative positions for which the corporation was exposed to counterparties totaled $179 million at September 30, 1998. The fair value of all asset and liability derivative positions for which counterparties were exposed to the corporation amounted to $28 million on the same date. Fair value details and additional asset and liability derivative information are included in the following tables. Estimated Fair Value of Asset and Liability Management Derivatives by Purpose ----------------------------------------------------------------- September 30, 1998 ------------------------------------------------------- Net Fair Value Notional Fair Value Fair Value Gains millions Value Gains (Losses) (Losses) ------ --------- ---------- -------- Convert floating rate liabilities to fixed: Swaps -- pay fixed/receive floating ... $ 568 $ 1 $ (11) $ (10) Convert fixed rate assets to floating: Swaps -- pay fixed/receive floating ... 345 ---- (17) (17) Forward starting swaps -- pay fixed/receive floating ................ 110 ---- ---- ---- Convert fixed rate liabilities to floating: Swaps -- receive fixed/pay floating ... 1,675 168 ---- 168 Convert term liabilities with quarterly rate resets to monthly: Swaps -- receive floating/pay floating. 300 ---- ---- ---- Convert floating rate assets to fixed: Swaps -- receive fixed/pay floating ... 457 10 ---- 10 Index amortizing swaps -- receive fixed/pay floating .................... ---- ---- ---- ---- --------- ------ ------- ---------- Total derivatives ......................... $ 3,455 $179 $ (28) $ 151 ========= ====== ======= ========== September 30, 1997 ---------------------------------------------- Net Fair Fair Fair Value Notional Value Value Gains millions Value Gains (Losses) (Losses) -------- ----- --------- -------- Convert floating rate liabilities to fixed: Swaps -- pay fixed/receive floating ... $ 359 $ ---- $ (3) $ (3) Convert fixed rate assets to floating: Swaps -- pay fixed/receive floating ... 351 ---- (6) (6) Forward starting swaps -- pay fixed/receive floating .................... 18 ---- (1) (1) Convert fixed rate liabilities to floating: Swaps -- receive fixed/pay floating ... 1,500 39 (3) 36 Convert term liabilities with quarterly rate resets to monthly: Swaps -- receive floating/pay floating. 300 ---- ---- ---- Convert floating rate assets to fixed: Swaps -- receive fixed/pay floating ... 409 6 ---- 6 Index amortizing swaps -- receive fixed/pay floating .................... 125 2 ---- 2 -------- ------ ----------- ----------- Total derivatives ......................... $ 3,062 $ 47 $ (13) $ 34 ======== ====== =========== ===========
Maturity Schedule of Asset and Liability Management Derivatives ----------------------------------------------------------------- September 30, 1998 Within One Two Three Four millions Year Years Years Years ------ ------ ------ ------ Interest rate swaps: Pay fixed/receive floating: Notional amount ......................... $ 248 $ 161 $ 106 $ 5 Weighted average rates received ......... 2.72% 5.50% 5.56% 2.59% Weighted average rates paid ............. 4.27 5.23 5.89 3.79 Receive fixed/pay floating: Notional amount ......................... $ 224 $ 151 $ 253 $ 102 Weighted average rates received ......... 6.80% 5.93% 6.02% 6.96% Weighted average rates paid ............. 5.67 5.20 5.55 5.60 Receive floating/pay floating: Notional amount ......................... ---- ---- $ 300 ---- Weighted average rates received ......... ---- ---- 5.57% ---- Weighted average rates paid ............. ---- ---- 5.63 ---- Total interest rate swaps: Notional amount ......................... $ 472 $ 312 $ 659 $ 107 Weighted average rates received ......... 4.67% 5.70% 5.74% 6.76% Weighted average rates paid ............. 4.94 5.22 5.64 5.51 Forward starting interest rate swaps: Notional amount ......................... ---- ---- ---- $ 100 Weighted average rates paid ............. ---- ---- ---- 4.88% Total Derivatives (notional amount) ....................... $ 472 $ 312 $ 659 $ 207 Over Average Five Five Life millions Years Years Total (Years) ------ ------ ------ -------- Interest rate swaps: Pay fixed/receive floating: Notional amount ......................... $ 233 $ 160 $ 913 2.65 Weighted average rates received ......... 5.50% 5.53% 4.75% Weighted average rates paid ............. 5.60 6.87 5.42 Receive fixed/pay floating: Notional amount ......................... $ 252 $1,150 $2,132 7.59 Weighted average rates received ......... 6.47% 7.10% 6.78% Weighted average rates paid ............. 5.63 5.87 5.72 Receive floating/pay floating: Notional amount ......................... ---- ---- $ 300 2.68 Weighted average rates received ......... ---- ---- 5.57% Weighted average rates paid ............. ---- ---- 5.63 Total interest rate swaps: Notional amount ......................... $ 485 $1,310 $3,345 5.80 Weighted average rates received ......... 6.00% 6.91% 6.11% Weighted average rates paid ............. 5.61 5.99 5.63 Forward starting interest rate swaps: Notional amount ......................... ---- $ 10 $ 110 3.57 Weighted average rates paid ............. ---- 5.83% 4.97% Total Derivatives (notional amount) ....................... $ 485 $1,320 $3,455 5.80
Note -- Maturity is based upon expected average lives rather than contractual lives. Asset and liability management derivatives transactions are accounted for following existing hedge accounting rules. As discussed under New Accounting Standards, an accounting standard was issued in June 1998 that will change the existing hedge accounting rules. Under the existing hedge accounting rules, gains and losses related to the fair value of derivative contracts used for asset and liability management purposes are not recognized immediately in earnings. If the hedged or altered balance sheet amounts were marked to 15 market, the resulting unrealized balance sheet gains or losses could be expected to approximately offset unrealized derivatives gains and losses. To ensure the corporation is positioned to meet immediate and future cash demands, management relies on liquidity analysis, knowledge of business trends over past economic cycles and forecasts of future conditions. Liquidity is maintained through a strong balance sheet and operating performance that assures market acceptance, as well as through policy guidelines which limit the level, maturity and concentration of noncore funding sources. Through its balance sheet, the corporation generates liquidity on the asset side by maintaining significant amounts of securities available-for-sale, which may be sold at any time, and by 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. Through policy guidelines, the corporation limits net purchased funds to 50 percent of long-term assets, which include net loans and leases, 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 were $171.679 million or .38 percent of Assets loans and foreclosed property at September 30, 1998. The total was up $47.618 million or 38.4 percent from one year earlier and higher by $19.451 million or 12.8 percent from the end of the second quarter, primarily due to the addition of one large credit to nonaccrual status. The largest category of total nonperforming assets is real estate related. Real estate nonperforming assets were $127.110 million or .78 percent of real estate loans and foreclosed real estate at September 30, 1998 compared with $102.987 million or .68 percent one year earlier and $109.680 million or .66 percent at the end of the second quarter. Included in real estate nonperforming assets were real estate nonperforming loans of $105.042 million at September 30, 1998, $80.040 million one year earlier and $89.533 million at June 30, 1998. - ----------------------------------------------------------------- Nonperforming Assets and Contractually Past Due Loans Table 6 - -------------------------------------------------------------------------------- (thousands) Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 1998 1998 1998 1997 1997 -------- -------- -------- ---------- -------- Nonperforming assets: Cash-basis assets ............................... $144,654 $127,376 $121,734 $101,156 $95,580 Restructured loans .............................. ---- ---- ---- ---- ---- -------- -------- -------- ---------- -------- Total nonperforming loans ................... 144,654 127,376 121,734 101,156 95,580 Foreclosed property: Foreclosed real estate ......................... 34,935 33,604 35,518 38,071 33,930 Less valuation allowance ....................... 12,867 13,457 14,754 16,625 10,983 Other foreclosed assets ........................ 4,957 4,705 5,225 6,893 5,534 -------- -------- -------- ---------- -------- Total foreclosed property ................... 27,025 24,852 25,989 28,339 28,481 -------- -------- -------- ---------- -------- Total nonperforming assets .................. $171,679 $152,228 $147,723 $129,495 $124,061 ======== ======== ======== ========== ======== Nonperforming loans to period-end loans ......... .32% .29% .27% .23% .23% Nonperforming assets to period-end loans and foreclosed property ............................ .38 .34 .33 .29 .30 Period-end allowance for loan losses times nonperforming loans ............................ 3.79x 4.30x 4.47x 5.38x 5.43x Period-end allowance for loan losses times nonperforming assets ........................... 3.19 3.60 3.69 4.21 4.19 Contractually past due loans (accruing loans past due 90 days or more) ....................... $119,034 $112,720 $87,569 $114,343 $81,931 ======== ======== ======== ========== ========
16 Commercial real estate nonperforming assets totaled $69.865 million or .80 percent of related loans and foreclosed real estate versus $65.769 million or .86 percent at the end of the third quarter of 1997 and $53.168 million or .62 percent at June 30, 1998. Commercial real estate nonperforming loans were $57.139 million at September 30, 1998, $51.268 million one year earlier and $42.544 million at the close of the second quarter. Provision and The provision for loan losses was $72.809 million for the third Allowance for quarter and $215.376 million year to date, up $10.053 million or 16 percent and $27.342 million or 14.5 percent from the same Loan Losses respective periods in 1997. Compared with the second quarter of 1998, the provision increased $4.368 million or 6.4 percent. 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 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. Effective with the first quarter of 1998, management began implementing as part of its overall credit review process assessments of Year 2000 compliance among borrowers. Net loan losses totaled $72.695 million or .66 percent of average loans for the three months, rising $9.960 million or 15.9 percent from a year earlier. For the first nine months, net loan losses were $215.026 million or .65 percent of average loans, an increase of $27.051 million or 14.4 percent. Higher losses in credit cards and commercial loans primarily accounted for the increases in both periods, with the rise in commercial net loan losses largely due to one large charge-off. Net loan losses were up $4.472 million or 6.6 percent from the second quarter, principally reflecting increased charge-offs in other retail loans, lower recoveries in real estate loan losses and the write-down of one large commercial credit. Excluding credit cards, net loan losses were $11.174 million or .12 percent of average loans for the third quarter and $25.638 million or .09 percent year to date versus $8.352 million or .10 percent and $31.186 million or .12 percent, respectively, a year earlier and $5.478 million or .06 percent in the second quarter. Credit card net loan losses totaled $61.521 million or 4.40 percent of average credit card loans for the quarter and $189.388 million or 4.49 percent year to date, up $7.138 million or 13.1 percent and $32.599 million or 20.8 percent, respectively, from a year earlier. Commercial net charge-offs were $3.084 million or .08 percent of average related loans for the three months and $5.827 million or .05 percent of loans for the nine months, higher by $3.386 million and $3.361 million from the same respective periods in 1997. Selected data on the corporation's managed credit card portfolio, which includes securitized loans, appears in the following table. Managed Credit Card ----------------------------------------------------------------- 1998 -------------------------------------- Third Second First thousands Quarter Quarter Quarter -------- ------ ------- Average credit card outstandings ........................$6,092,515 $6,056,770 $6,246,315 Net loan losses ....................... 66,324 67,978 69,409 Annualized net loan losses to average loans ....................... 4.35% 4.49% 4.44% Delinquencies (30 days or more) to period-end loans ........... 3.11 2.69 2.68 Nine Months Ended 1997 September 30 --------------------------- -------------------------------- Fourth Third thousands Quarter Quarter 1998 1997 -------------- -------- ---------- --------- Average credit card outstandings ........................$6,281,488 $6,221,174 $6,131,304 $6,191,213 Net loan losses ....................... 67,735 59,595 203,711 172,653 Annualized net loan losses to average loans ....................... 4.31% 3.83% 4.43% 3.72% Delinquencies (30 days or more) to period-end loans ........... 2.75 2.77 3.11 2.77
The allowance for loan losses at September 30, 1998 was $547.686 million, representing 1.20 percent of loans and 379 percent of nonperforming loans. This compared with $519.356 million, representing 1.27 percent of loans and 543 percent of nonperforming loans one year earlier, and $547.572 million, representing 1.23 percent of loans and 430 percent of nonperforming loans at June 30, 1998. 17 - ----------------------------------- Allowance for Loan Losses Table 7 - -------------------------------------------------------------------------------- (thousands) 1998 --------------------------------- Third Second First Quarter Quarter Quarter --------- ------ ------ Summary of Transactions Balance at beginning of period ................ $547,572 $544,741 $544,723 Additions from acquisitions ................... ---- 2,613 ---- Provision for loan losses ..................... 72,809 68,441 74,126 Deduct net loan losses: Loans charged off: Commercial .................................. 4,601 3,252 2,662 Credit card ................................. 69,043 70,015 72,061 Other revolving credit ...................... 2,736 2,927 2,089 Other retail ................................ 8,515 6,624 10,388 Real estate ................................. 264 634 1,209 Lease financing ............................. 782 726 886 Foreign ..................................... ---- ---- ---- --------- -------- -------- Total ..................................... 85,941 84,178 89,295 Recoveries: Commercial .................................. 1,517 1,271 1,900 Credit card ................................. 7,522 7,270 6,939 Other revolving credit ...................... 610 630 690 Other retail ................................ 2,242 3,070 3,015 Real estate ................................. 1,223 3,578 2,537 Lease financing ............................. 132 136 106 Foreign ..................................... ---- ---- ---- --------- -------- -------- Total ..................................... 13,246 15,955 15,187 --------- -------- -------- Net loan losses .............................. 72,695 68,223 74,108 --------- -------- -------- Balance at end of period ...................... $547,686 $547,572 $544,741 ========= ======== ======== Net Loan Losses (Recoveries) by Category Commercial .................................... $ 3,084 $ 1,981 $ 762 Credit card ................................... 61,521 62,745 65,122 Other revolving credit ........................ 2,126 2,297 1,399 Other retail .................................. 6,273 3,554 7,373 Real estate ................................... (959) (2,944) (1,328) Lease financing ............................... 650 590 780 Foreign ....................................... ---- ---- ---- --------- -------- -------- Total ..................................... $ 72,695 $ 68,223 $ 74,108 ========= ======== ======== Net loan losses -- excluding credit cards ..... $ 11,174 $ 5,478 $ 8,986 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial .................................... .08% .05% .02% Credit card ................................... 4.40 4.52 4.54 Other revolving credit ........................ 1.67 1.86 1.20 Other retail .................................. .60 .34 .70 Real estate ................................... (.02) (.07) (.03) Lease financing ............................... .16 .19 .29 Foreign ....................................... ---- ---- ---- Total loans ................................... .66 .62 .68 Total loans -- excluding credit cards ......... .12 .06 .09 Period-end allowance to outstanding loans...... 1.20% 1.23% 1.22% Nine Months Ended 1997 September 30 ------------------------ ------------------------- Fourth Third Quarter Quarter 1998 1997 ---------- --------- ---------- ---- Summary of Transactions Balance at beginning of period ................ $ 519,356 $519,335 $544,723 $519,297 Additions from acquisitions ................... 24,641 ---- 2,613 ---- Provision for loan losses ..................... 76,915 62,756 215,376 188,034 Deduct net loan losses: Loans charged off: Commercial .................................. 3,801 686 10,515 5,453 Credit card ................................. 68,796 61,277 211,119 177,212 Other revolving credit ...................... 3,659 2,520 7,752 6,905 Other retail ................................ 9,032 8,777 25,527 30,769 Real estate ................................. 5,786 1,469 2,107 5,778 Lease financing ............................. 916 988 2,394 3,572 Foreign ..................................... ---- ---- ---- ---- ----------- --------- ---------- -------- Total ..................................... 91,990 75,717 259,414 229,689 Recoveries: Commercial .................................. 1,184 988 4,688 2,987 Credit card ................................. 6,251 6,894 21,731 20,423 Other revolving credit ...................... 588 575 1,930 1,773 Other retail ................................ 2,577 2,638 8,327 9,260 Real estate ................................. 5,125 1,787 7,338 7,008 Lease financing ............................. 76 100 374 263 Foreign ..................................... ---- ---- ---- ---- ----------- --------- ---------- -------- Total ..................................... 15,801 12,982 44,388 41,714 ----------- --------- ---------- -------- Net loan losses .............................. 76,189 62,735 215,026 187,975 ----------- --------- ---------- -------- Balance at end of period ...................... $ 544,723 $519,356 $547,686 $519,356 =========== ========= ========== ======== Net Loan Losses (Recoveries) by Category Commercial .................................... $ 2,617 $ (302) $ 5,827 $ 2,466 Credit card ................................... 62,545 54,383 189,388 156,789 Other revolving credit ........................ 3,071 1,945 5,822 5,132 Other retail .................................. 6,455 6,139 17,200 21,509 Real estate ................................... 661 (318) (5,231) (1,230) Lease financing ............................... 840 888 2,020 3,309 Foreign ....................................... ---- ---- ---- ---- ----------- --------- ---------- -------- Total ..................................... $ 76,189 $62,735 $215,026 $187,975 =========== ========= ========== ======== Net loan losses -- excluding credit cards ..... $ 13,644 $ 8,352 $ 25,638 $ 31,186 Annualized Net Loan Losses (Recoveries) to Average Loans by Category Commercial .................................... .08% (.01%) .05% .03% Credit card ................................... 4.36 3.85 4.49 3.74 Other revolving credit ........................ 2.81 1.87 1.59 1.63 Other retail .................................. .61 .61 .55 .69 Real estate ................................... .02 (.01) (.04) (.01) Lease financing ............................... .32 .35 .20 .48 Foreign ....................................... ---- ---- ---- ---- Total loans ................................... .73 .63 .65 .64 Total loans -- excluding credit cards ......... .15 .10 .09 .12 Period-end allowance to outstanding loans...... 1.23% 1.27% 1.20% 1.27%
Noninterest Total other operating revenue, which excludes securities sales, Income increased $54.494 million or 21.3 percent for the third quarter from a year earlier and was up $166.797 million or 22.5 percent year to date. All major categories advanced in both periods, with growth strongest in capital markets income, service charges on deposit accounts, trust services, mortgage fees, electronic banking and investment fees. Included in total other operating revenue were branch sales gains of $17.155 million in the first nine months of 1998, all of which occurred in the first quarter, compared with gains of $21.096 million in the same period of 1997, including $2.437 million in the third quarter. Excluding branch sales gains, total other operating 18 revenue for the third period expanded $56.931 million or 22.4 percent year over year and was higher by $170.738 million or 23.7 percent year to date. Total other operating revenue decreased modestly from the second quarter but is expected to expand moderately in the final three months of 1998 from the third quarter based on anticipated growth in deposit account service charges, credit card fee income, investment services, mortgage fees and electronic banking. Capital markets income grew $22.631 million or approximately 151 percent for the third period from a year earlier and expanded $60.557 million or approximately 181 percent for the first nine months. Growth in both periods occurred largely in corporate financing and in derivatives activities, with increased business in consulting services also contributing to the gain year to date. In June, Wachovia received Tier I powers for its Section 20 capital markets subsidiary. These powers enable the subsidiary to engage in underwriting and dealing in municipal revenue bonds, commercial paper, mortgage related securities and consumer related receivables, all of investment quality rating. Tier II powers permitting further expansion into corporate debt and equity securities without investment grade limitation are expected to be effective in 1999. Service charge revenues on deposit accounts grew $8.090 million or 10.6 percent and $22.759 million or 10.1 percent for the three and nine months, respectively. Higher levels of overdraft charges, commercial analysis fees and demand account service charges accounted for most of the increases in both periods. Fees for trust services were up $7.532 million or 17.3 percent for the quarter and $17.869 million or 13.9 percent year to date. Gains were driven, in part, by good growth in Personal Financial Services and in fees associated with the Wachovia Funds, the corporation's proprietary family of mutual funds. Assets for the Wachovia Funds totaled $6.262 billion at September 30, 1998 compared with $5.050 billion one year earlier. Mortgage fee income rose $6.540 million or 114.5 percent for the three months and $15.422 million or 96.2 percent for the nine months. Growth primarily reflected higher mortgage origination activity, increased gains on loans sold to the secondary market and gains on the sale of mortgage servicing rights. Electronic banking revenue grew $2.608 million or 15.5 percent for the quarter and $7.226 million or 15.3 percent year to date, primarily fueled by increased debit card usage and by increased ATM foreign access fees. Investment fee income expanded $991 thousand or 10.2 percent for the third period and $6.858 million or 25.7 percent for the first nine months. Higher fees from customer mutual fund trading and brokerage commissions accounted for the gains. Credit card fee income was up slightly for both the three and nine months following a modest decline in the second quarter from a year earlier. The corporation anticipates credit card fee income to expand in the final three months of 1998 from third quarter's level. Remaining combined categories of total other operating revenue, excluding gains from branch sales, increased $8.409 million or 19.6 percent for the third period and $38.966 million or 32.3 percent year to date. Insurance premiums and commissions were modestly higher for both the three and nine months. Bankers' acceptance and letter of credit fees rose slightly for the quarter and were up $2.706 million or 10.2 percent year to date. Other service charges and fees essentially were flat for the third quarter and advanced modestly for the nine months, while other income rose $7.997 million or 50.9 percent for the three months and $34.718 million or 83.3 percent for the nine months. Including securities sales, total noninterest income increased $60.289 million or 23.4 percent for the quarter and $176.685 million or 23.7 percent year to date. Securities sales had net gains of $6.886 million for the three months and $13.035 million for the nine months compared with $1.091 million and $3.147 million, respectively, in 1997. 19 - ---------------------------- Noninterest Income Table 8 - -------------------------------------------------------------------------------- (thousands) 1998 --------------------------------- Third Second First Quarter Quarter Quarter --------- --------- -------- Service charges on deposit accounts ............... $ 84,674 $ 82,465 $ 80,874 Fees for trust services ........................... 51,185 48,802 46,053 Credit card income -- net of interchange payments ......................................... 43,312 43,077 38,544 Electronic banking ................................ 19,449 18,667 16,395 Capital markets income ............................ 37,625 40,304 16,110 Investment fees ................................... 10,712 11,665 11,191 Mortgage fees ..................................... 12,251 11,502 7,704 Insurance premiums and commissions ................ 8,213 8,135 7,568 Bankers' acceptance and letter of credit fees ..... 9,745 9,802 9,569 Other service charges and fees .................... 9,680 10,125 10,350 Other income ...................................... 23,695 30,499 39,365 --------- --------- -------- Total other operating revenue ................. 310,541 315,043 283,723 Securities gains (losses) ......................... 6,886 2,992 3,157 --------- --------- -------- Total ......................................... $317,427 $ 318,035 $286,880 ========= ========= ======== Nine Months Ended 1997 September 30 -------------------- ------------------------ Fourth Third Quarter Quarter 1998 1997 -------- ------- -------- -------- Service charges on deposit accounts ............... $ 80,977 $ 76,584 $248,013 $225,254 Fees for trust services ........................... 47,378 43,653 146,040 128,171 Credit card income -- net of interchange payments ......................................... 38,382 43,182 124,933 123,852 Electronic banking ................................ 17,355 16,841 54,511 47,285 Capital markets income ............................ 16,040 14,994 94,039 33,482 Investment fees ................................... 9,541 9,721 33,568 26,710 Mortgage fees ..................................... 7,509 5,711 31,457 16,035 Insurance premiums and commissions ................ 7,169 7,966 23,916 23,036 Bankers' acceptance and letter of credit fees ..... 8,116 9,589 29,116 26,410 Other service charges and fees .................... 9,257 9,671 30,155 29,493 Other income ...................................... 21,534 18,135 93,559 62,782 ---------- -------- --------- --------- Total other operating revenue ................. 263,258 256,047 909,307 742,510 Securities gains (losses) ......................... (1,693) 1,091 13,035 3,147 ---------- -------- --------- --------- Total ......................................... $261,565 $257,138 $922,342 $745,657 ========== ======== ========= =========
Noninterest Total noninterest expense grew $67.102 million or 15.8 percent Expense for the third quarter and $269.343 million or 21.8 percent year to date. Included in total noninterest expense for 1998 were merger- related charges of $11.934 million, pretax, for the three months and $78.351 million, pretax, for the first nine months for systems conversions, signage changes and employee benefits expenses associated with the corporation's new Virginia and Florida operations. On a core operating basis excluding integration-related charges, noninterest expense increased $55.168 million or 13 percent for the third quarter and $190.992 million or 15.5 percent year to date but declined $5.676 million or 4.7 percent annualized from the second quarter. Remaining integration charges for the Florida and Virginia banking operations are expected to total approximately $5 million, pretax, with the full amount to be recognized in the final three months of 1998. Excluding merger-related charges, noninterest expense is expected to decrease in the fourth quarter from the third quarter based on anticipated reductions in personnel costs, advertising and other expense. Total personnel expense was up $32.930 million or 14.3 percent for the third period and $124.505 million or 18.8 percent year to date. Salaries expense increased $30.808 million or 16.2 percent for the three months and $112.484 million or 20.8 percent for the nine months, reflecting increased incentive pay for revenue-generating businesses and a higher overall salary base. Employee benefits expense rose $2.122 million or 5.3 percent for the quarter and $12.021 million or 10 percent year to date, primarily due to growth in medical benefits costs and to increased payroll taxes for a larger base of employees. Combined net occupancy and equipment expense rose $7.342 million or 11.1 percent for the three months and $25.743 million or 13.4 percent for the nine months. Net occupancy expense increased $5.080 million or 17 percent for the quarter and $16.831 million or 19.6 percent year to date reflecting, in part, growth in building depreciation expense and operating expenses of acquired companies. Equipment expense was up $2.262 million or 6.2 percent and $8.912 million or 8.4 percent for the three and nine months, respectively, with the rise in both periods largely due to higher depreciation and equipment leasing costs. Remaining combined categories of noninterest expense, excluding merger-related charges, grew $14.896 million or 11.6 percent for the quarter and $40.744 million or 10.7 percent year to date. Amortization expense of intangible assets accounted for more than half of the growth in both periods, rising $7.493 million for the three months and $21.308 million for the nine months on increases primarily of goodwill and deposit base intangibles from purchase acquisitions. Partially offsetting the growth was a reduction in outside data processing, programming and software expense primarily attributable to lower Year 2000 costs. 20 - ----------------------------- Noninterest Expense Table 9 - -------------------------------------------------------------------------------- (thousands) 1998 ------------------------------------- Third Second First Quarter Quarter Quarter --------- --------- --------- Salaries ................................ $221,242 $ 219,731 $ 212,758 Employee benefits ....................... 42,040 42,675 46,966 ---------- ---------- --------- Total personnel expense ............. 263,282 262,406 259,724 Net occupancy expense ................... 34,896 34,119 33,783 Equipment expense ....................... 38,545 41,288 34,687 Postage and delivery .................... 13,373 13,368 13,278 Outside data processing, programming and software ........................... 18,496 16,244 12,737 Stationery and supplies ................. 10,689 7,233 7,506 Advertising and sales promotion ......... 17,147 22,555 17,738 Professional services ................... 14,929 14,522 11,304 Travel and business promotion ........... 7,656 7,638 6,439 Regulatory agency fees and other bank services ............................... 4,112 4,075 4,485 Amortization of intangible assets ....... 9,840 9,226 9,117 Foreclosed property expense, net of income ................................. (164) 88 130 Personal computer impairment charge* ................................ ---- ---- ---- Merger-related charges* ................. 11,934 30,849 35,568 Other expense ........................... 47,668 53,383 47,753 ---------- ---------- --------- Total ............................... $492,403 $ 516,994 $ 494,249 ========== ========== ========= Overhead ratio .......................... 54.0% 56.8% 57.2% Overhead ratio without nonrecurring charges ................... 52.7 53.4 53.1 Nine Months Ended 1997 September 30 ------------------------ -------------------------------- Fourth Third Quarter Quarter 1998 1997 ---------- --------- ---------- ---- Salaries ................................ $ 200,859 $ 190,434 $ 653,731 $ 541,247 Employee benefits ....................... 43,391 39,918 131,681 119,660 ----------- --------- ------------- ----------- Total personnel expense ............. 244,250 230,352 785,412 660,907 Net occupancy expense ................... 30,687 29,816 102,798 85,967 Equipment expense ....................... 36,619 36,283 114,520 105,608 Postage and delivery .................... 12,539 11,883 40,019 36,118 Outside data processing, programming and software ........................... 22,952 21,980 47,477 63,545 Stationery and supplies ................. 7,637 8,415 25,428 23,323 Advertising and sales promotion ......... 15,768 20,355 57,440 56,278 Professional services ................... 16,348 14,102 40,755 37,765 Travel and business promotion ........... 7,433 6,120 21,733 17,782 Regulatory agency fees and other bank services ............................... 3,523 3,458 12,672 11,077 Amortization of intangible assets ....... 6,433 2,347 28,183 6,875 Foreclosed property expense, net of income ................................. 492 487 54 1,383 Personal computer impairment charge* ................................ 67,202 ---- ---- ---- Merger-related charges* ................. 220,330 ---- 78,351 ---- Other expense ........................... 40,205 39,703 148,804 127,675 ----------- --------- ------------- ----------- Total ............................... $ 732,418 $ 425,301 $ 1,503,646 $ 1,234,303 =========== ========= ============= =========== Overhead ratio .......................... 88.0% 53.6% 56.0% 53.1% Overhead ratio without nonrecurring charges ................... 53.5 53.6 53.1 53.1
* Nonrecurring charges. Year The change in date to the year 2000 from 1999 will cause data 2000 recognition problems in computers, software and facility operations dependent on computer chip devices due to programming standards that historically limited data date fields to two digits. In late 1995, the corporation initiated a formal evaluation of Year 2000 issues, establishing in the early months of 1996 a full-time project team to assess and address both internal and external risks associated with the change in date event. The project team is in the latter stages of executing a Year 2000 readiness plan consisting of five phases: problem awareness; identification of affected systems, functions and facilities; conversion or replacement of identified areas to Year 2000 compliant standards; testing; and implementation. The corporation's readiness plan encompasses both information technology systems and computer chip embedded functions, such as those operating facilities including elevators, security systems, and building heating and cooling. In 1996, the corporation completed its awareness and identification phases, extending and completing the processes in 1997 for recent merger partners. As of September 30, 1998, 99 percent of all information technology systems had been converted. While regulatory guidelines require conversion only of mission critical systems, the corporation is converting all information technology systems and is scheduled to complete the process by November 30, 1998. For computer chip embedded functions, the corporation is replacing noncompliant functions essential to business operations and plans to have all essential functions replaced and tested by year-end 1998. In-house testing of information technology systems currently is underway, with testing completed on approximately 67 percent of all applications at September 30, 1998. Testing is done in both a 21st century and 20th century date environment before systems are returned to production to ensure data accuracy and consistency. All exceptions to testing results are resolved before further testing is permitted. Management has chosen to implement converted systems back into production as systems are tested to permit greater 21 flexibility in the event of future system flaws or failures. The percentage of systems implemented, therefore, closely approximates the percentage tested. The corporation also is working to assess and address Year 2000 readiness on the part of external entities, particularly critical vendors and significant credit customers. Identification and monitoring of external entities began in 1996 and includes surveys with follow-up reviews and contacts. Substantially all of the corporation's vendors have responded to management's surveys regarding Year 2000 readiness, with approximately 70 percent compliant as of September 30, 1998. The project team is continuing to monitor the progress of remaining noncompliant vendors as well as the status of large corporate borrowers identified as potentially at risk. The corporation will conduct testing with external entities in 1999 as they become Year 2000 ready, with some limited testing already occurring in 1998. Management estimates that total Year 2000 project costs will be approximately $80 million, with $60 million having been spent through September 30, 1998, including $8 million in the third quarter and $22 million in the first nine months of 1998. The total projected cost is up from $55 million estimated earlier due to additional expenditures for internal testing. The corporation's remaining Year 2000 project costs are not expected to have a material impact on Wachovia's results of operations, liquidity or capital resources. The corporation faces a number of risks related to the Year 2000 date change event including project management risks, legal risks and financial risks. Project management risks refer primarily to the failure to adequately assess Year 2000 planning and resource needs, resulting in under- or over-allotment of resources assigned to complete the project work, missed deadlines and estimation errors. Legal risks include the failure to meet contractual service agreements, leading to possible punitive actions including those of a regulatory nature. Financial risks concern the possibility of lost revenues, asset quality deterioration or even business failure. The corporation conducted a project management risk assessment in early 1997 and is in the process of addressing its legal and financial risks. Management of the date change event entails additional risks separate from those of project management. Major risks associated with the date change event include a shut down of voice and data communication systems due to failure by switching systems, satellites, or telephone companies; excessive cash withdrawal activity; ATM failures; cash couriers delayed or not available; problems with international accounts or offices, including inaccurate or delayed information or inaccessibility to account data; and government offices or facilities not opening or operating. The corporation has identified 60 risks associated with the date change event and is in the process of developing contingency plans for each major risk. The corporation is addressing contingency planning for the date change event from both an internal and external perspective and from a preevent and post-event standpoint. This enables management to determine both the level of control over mitigating a risk and the time period the corporation would be impacted. Internal, preevent contingency plans were developed in 1997 and have been implemented on three occasions. External, preevent contingency plans focused on vendor readiness to determine the need for alternative vendors. Internal, post-event contingency plans will focus on implementing alternative plans if problems occur with application systems, infrastructure components or branch equipment. External, post-event contingency plans will focus on actions that can be taken if mission critical service providers such as voice and data communication systems experience difficulties. The corporation expects to have formal contingency plans for the date change event and post-event risks developed by year-end 1998. The corporation believes the actions it is taking should reduce the risks posed by Year 2000 challenges to its own systems. Management recognizes that date change event problems will occur with external entities, impacting the corporation due to the interrelatedness of its business. 22 Income Applicable income taxes rose $20.481 million or 21.8 percent for Taxes the quarter from a year earlier and were up $39.786 million or 14.6 percent year to date. Income taxes computed at the statutory rate are reduced primarily by the assumed tax effect of 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 and in some cases state taxes. The tax-exempt nature of these assets provides both an attractive return for the corporation and substantial interest savings for local governments and their constituents. - ----------------------- Income Taxes Table 10 - -------------------------------------------------------------------------------- (thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 1998 1997 1998 1997 --------- -------- --------- --------- Income before income taxes ........................................ $ 341,651 $ 292,725 $ 944,603 $ 861,415 ========== ========== ========== ========== Federal income taxes at statutory rate ............................ $ 119,578 $ 102,453 $ 330,611 $ 301,495 State and local income taxes -- net of federal benefit ............ 7,269 4,380 12,936 12,781 Effect of tax-exempt securities interest and other income ......... (13,210) (10,477) (38,736) (35,010) Other items ....................................................... 647 (2,553) 7,188 (7,053) ---------- ---------- ---------- ---------- Total tax expense ............................................ $ 114,284 $ 93,803 $ 311,999 $ 272,213 ========== ========== ========== ========== Current: Federal .......................................................... $ 23,793 $ 55,740 $ 120,209 $ 181,335 Foreign .......................................................... 88 125 449 290 State and local .................................................. 5,472 1,437 11,270 6,042 ---------- ---------- ---------- ---------- Total ........................................................ 29,353 57,302 131,928 187,667 Deferred: Federal .......................................................... 79,221 31,201 171,441 70,927 State and local .................................................. 5,710 5,300 8,630 13,619 ---------- ---------- ---------- ---------- Total ........................................................ 84,931 36,501 180,071 84,546 ---------- ---------- ---------- ---------- Total tax expense ............................................ $ 114,284 $ 93,803 $ 311,999 $ 272,213 ========== ========== ========== ==========
New Accounting In December 1996, the Financial Accounting Standards Board issued Standards Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125" (FASB 127). FASB 127 delayed until 1998 certain provisions of FASB 125 that deal with repurchase agreements, securities lending and other similar transactions and pledged collateral. Adoption of FASB 127 was not 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. The disclosure requirements of FASB 130 have been included in the corporation's consolidated statements of shareholders' equity. 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. FASB 131 will be adopted, as required, beginning with year-end 1998. The disclosure requirements will have no impact on the corporation's financial position or results of operations. 23 In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which provides guidance as to when it is or is not appropriate to capitalize the cost of software developed or obtained for internal use. The corporation adopted SOP 98-1 effective January 1, 1998; the effect was not material. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FASB 133). FASB 133 establishes new accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. The standard requires all derivatives to be measured at fair value and recognized as either assets or liabilities in the statement of condition. Under certain conditions, a derivative may be specifically designated as a hedge. Accounting for the changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. Adoption of the standard is required for the corporation's December 31, 2000 financial statements with early adoption allowed as of the beginning of any quarter after June 30, 1998. Management is in the process of assessing the impact and period of adoption of the standard. Adoption is not expected to result in a material financial impact. --------------------------------------------- Financial Condition and Capital Ratios ----------------------------------------------------------------- At September 30, 1998, assets totaled $65.574 billion, including $58.164 billion of interest-earning assets and $45.629 billion of loans. Comparable amounts one year earlier were $58.041 billion of assets, $51.986 billion of interest-earning assets and $40.748 billion of loans. At June 30, 1998, assets were $64.727 billion, interest-earning assets were $57.303 billion and loans were $44.459 billion. Deposits were $38.807 billion at September 30, 1998, including $31.072 billion of interest-bearing deposits, representing 80.1 percent of the total. Deposits one year earlier were $36.911 billion, with interest-bearing deposits of $29.471 billion or 79.8 percent of the total, and at June 30, 1998, deposits were $39.915 billion, including $31.841 billion of interest-bearing deposits or 79.8 percent of the total. Shareholders' equity was $5.229 billion at September 30, 1998, up $712 million or 15.8 percent from $4.517 billion one year earlier. Included in shareholders' equity at the end of the third quarter of 1998 was $747.744 million from common stock issued in connection with the corporation's fourth quarter 1997 purchase acquisitions of Jefferson Bankshares and 1st United Bancorp. Purchase transactions consummated during the second quarter of 1998 resulted in the issuance of 1.099 million shares of common stock with a corresponding increase in shareholders' equity of $83.313 million. Shareholders' equity at September 30, 1998 also included unrealized gains of $131.325 million, net of tax, on securities available-for-sale marked to fair value compared with $68.657 million, net of tax, one year earlier. On June 23, the corporation's board of directors authorized the repurchase of up to 12 million shares of the corporation's common stock effective through January 28, 2000. During the third quarter of 1998, the corporation repurchased a total of 4,221,400 shares of its common stock at an average price of $82.563 per share for a total cost of $348.530 million. At its meeting on October 23, 1998, the corporation's board of directors declared a fourth quarter dividend of $.49 per share, payable December 1 to shareholders of record as of November 6. The dividend is higher by 11.4 percent from $.44 per share paid in the same quarter of 1997. For the full year, the dividend will total $1.86 per share, a 10.7 percent increase from $1.68 per share in 1997. Intangible assets at September 30, 1998 totaled $688.018 million, consisting of $537.398 million of goodwill, $97.308 million of deposit base intangibles, $42.079 million of purchased credit card premiums, $10.906 million of mortgage servicing rights and $327 thousand of other intangibles. Intangible assets one year earlier were $112.068 million, with $45.828 million of goodwill, $51.676 million of deposit base intangibles, $13.989 million of mortgage servicing rights and $575 thousand of other intangibles including 24 purchased credit card premiums. Goodwill and deposit base intangibles increased from the end of the third quarter of 1997 due to purchase acquisitions of Jefferson Bankshares and 1st United Bancorp in the fourth quarter of 1997 and of Ameribank Bancshares in the second quarter of 1998. Purchased credit card premiums rose due to the acquisition of receivables from Wells Fargo & Co. in September 1998. On January 1, 1999, eleven member countries of the European Union will establish the Euro as their common legal currency and establish a fixed conversion rate between their current sovereign currencies and the Euro. Management has a risk assessment committee that has been examining the risks associated with the upcoming Euro conversion such as the adequacy of information technology systems, currency risk and the competitive impact of cross-border price transparency. Based on the findings of the risk assessment committee, management does not expect the impact of the Euro conversion to have a material adverse impact on the corporation's financial condition or results of operations. 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 fair 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. It is the policy of the corporation that it and its banking subsidiaries be well capitalized at all times. At September 30, 1998, the corporation's Tier I to risk-adjusted assets ratio was 8.22 percent and total capital to risk-adjusted assets was 11.30 percent. The Tier I leverage ratio was 8.67 percent. Included in the capital ratios at September 30, 1998 was $996.274 million of trust capital securities versus $995.899 million one year earlier. - ---------------------------------------- Capital Components and Ratios Table 11 - -------------------------------------------------------------------------------- (thousands) 1998 ---------------------------- Third Second Quarter Quarter ------------ -------- Tier I capital: Common shareholders' equity ....................................... $ 5,229,191 $ 5,375,793 Trust capital securities .......................................... 996,274 996,180 Less ineligible intangible assets ................................. 665,408 669,448 Unrealized gains on securities available-for-sale, net of tax ..... (131,325) (74,990) ------------- ----------- Total Tier I capital ........................................... 5,428,732 5,627,535 Tier II capital: Allowable allowance for loan losses ............................... 547,686 547,572 Allowable long-term debt .......................................... 1,486,537 1,138,711 ------------- ----------- Tier II capital additions ...................................... 2,034,223 1,686,283 ------------- ----------- Total capital .................................................. $ 7,462,955 $ 7,313,818 ============= =========== Risk-adjusted assets ............................................... $66,065,593 $63,906,411 Quarterly average assets * ......................................... $62,630,533 $63,184,419 Risk-based capital ratios: Tier I capital .................................................... 8.22% 8.81% Total capital ..................................................... 11.30 11.44 Tier I leverage ratio .............................................. 8.67 8.91 1998 1997 ----------- ---------------------------- First Fourth Third Quarter Quarter Quarter -------- ------------ -------- Tier I capital: Common shareholders' equity ....................................... $ 5,236,700 $ 5,174,301 $ 4,517,021 Trust capital securities .......................................... 996,087 995,993 995,899 Less ineligible intangible assets ................................. 604,325 634,052 93,101 Unrealized gains on securities available-for-sale, net of tax ..... (63,849) (71,098) (68,657) ----------- ------------- ----------- Total Tier I capital ........................................... 5,564,613 5,465,144 5,351,162 Tier II capital: Allowable allowance for loan losses ............................... 544,741 544,723 519,356 Allowable long-term debt .......................................... 1,193,533 1,193,451 1,283,165 ----------- ------------- ----------- Tier II capital additions ...................................... 1,738,274 1,738,174 1,802,521 ----------- ------------- ----------- Total capital .................................................. $ 7,302,887 $ 7,203,318 $ 7,153,683 =========== ============= =========== Risk-adjusted assets ............................................... $62,747,353 $59,543,254 $56,481,076 Quarterly average assets * ......................................... $62,457,463 $59,139,712 $57,042,701 Risk-based capital ratios: Tier I capital .................................................... 8.87% 9.18% 9.47% Total capital ..................................................... 11.64 12.10 12.67 Tier I leverage ratio .............................................. 8.91 9.24 9.38
* Excludes ineligible intangible assets and average unrealized gains on securities available-for-sale, net of tax. 25 Wachovia Corporation and Subsidiaries - -------------------------------------- Consolidated Statements of Condition - -------------------------------------------------------------------------------- $ in thousands September 30 December 31 September 30 1998 1997 1997 Assets Cash and due from banks ..................................................... $ 2,967,037 $ 4,221,818 $ 3,511,111 Interest-bearing bank balances .............................................. 156,518 133,191 89,704 Federal funds sold and securities purchased under resale agreements ......... 610,500 1,589,234 340,104 Trading account assets ...................................................... 1,172,683 999,122 1,057,277 Securities available-for-sale ............................................... 9,075,416 8,909,537 8,533,778 Securities held-to-maturity (fair value of $1,593,178, $1,578,464 and $1,285,503, respectively).................................... 1,520,584 1,509,339 1,217,798 Loans, net of unearned income ............................................... 45,628,716 44,194,382 40,747,609 Less allowance for loan losses .............................................. 547,686 544,723 519,356 ----------- ----------- ----------- Net loans ................................................................. 45,081,030 43,649,659 40,228,253 Premises and equipment ...................................................... 886,122 810,155 809,240 Due from customers on acceptances ........................................... 732,829 628,398 649,263 Other assets ................................................................ 3,371,289 2,946,616 1,604,273 ----------- ----------- ----------- Total assets .............................................................. $65,574,008 $65,397,069 $58,040,801 =========== =========== =========== Liabilities Deposits in domestic offices: Demand ..................................................................... $ 7,734,695 $ 8,598,055 $ 7,439,737 Interest-bearing demand .................................................... 4,767,577 4,654,172 4,039,330 Savings and money market savings ........................................... 11,901,799 11,679,432 10,574,436 Savings certificates ....................................................... 9,491,260 10,934,720 10,189,885 Large denomination certificates ............................................ 2,733,174 2,284,068 2,902,894 ----------- ----------- ----------- Total deposits in domestic offices ........................................ 36,628,505 38,150,447 35,146,282 Interest-bearing deposits in foreign offices ................................ 2,178,639 4,503,396 1,764,261 ----------- ----------- ----------- Total deposits ............................................................ 38,807,144 42,653,843 36,910,543 Federal funds purchased and securities sold under repurchase agreements ..... 8,689,234 8,322,716 7,167,827 Commercial paper ............................................................ 1,408,832 1,034,024 835,478 Other short-term borrowed funds ............................................. 2,677,503 752,874 1,335,579 Long-term debt: Bank notes ................................................................. 2,435,683 2,939,952 2,939,476 Other long-term debt ....................................................... 4,043,442 2,994,181 2,996,450 ----------- ----------- ----------- Total long-term debt ...................................................... 6,479,125 5,934,133 5,935,926 Acceptances outstanding ..................................................... 732,829 628,398 649,263 Other liabilities ........................................................... 1,550,150 896,780 689,164 ----------- ----------- ----------- Total liabilities ......................................................... 60,344,817 60,222,768 53,523,780 Shareholders' Equity Preferred stock, par value $5 per share: Authorized 50,000,000 shares; none outstanding ............................. ---- ---- ---- Common stock, par value $5 per share: Authorized 1,000,000,000, 500,000,000 and 500,000,000 shares; issued and outstanding 202,751,280, 205,926,632 and 193,837,284 shares, respectively .............................................................. 1,013,756 1,029,633 969,186 Capital surplus ............................................................. 657,923 974,803 298,578 Retained earnings ........................................................... 3,426,187 3,098,767 3,180,600 Accumulated other comprehensive income ...................................... 131,325 71,098 68,657 ----------- ----------- ----------- Total shareholders' equity ................................................ 5,229,191 5,174,301 4,517,021 ----------- ----------- ----------- Total liabilities and shareholders' equity ................................ $65,574,008 $65,397,069 $58,040,801 =========== =========== ===========
26 Wachovia Corporation and Subsidiaries - ------------------------------------ Consolidated Statements of Income - -------------------------------------------------------------------------------- thousands, except per share Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 Interest Income Loans, including fees ....................................... $ 973,202 $ 874,344 $ 2,879,408 $ 2,533,436 Securities available-for-sale ............................... 147,940 154,262 461,161 477,373 Securities held-to-maturity: State and municipal ........................................ 3,571 3,747 11,246 12,393 Other investments .......................................... 25,709 21,020 72,875 64,815 Interest-bearing bank balances .............................. 3,182 1,816 9,821 3,310 Federal funds sold and securities purchased under resale agreements ................................................. 6,168 5,980 17,188 13,777 Trading account assets ...................................... 11,694 11,752 37,354 37,664 ------------ ----------- ------------- ----------- Total interest income ..................................... 1,171,466 1,072,921 3,489,053 3,142,768 Interest Expense Deposits: Domestic offices ........................................... 307,547 303,909 924,911 898,425 Foreign offices ............................................ 34,005 23,824 107,547 63,542 ------------ ----------- ------------- ----------- Total interest on deposits ................................ 341,552 327,733 1,032,458 961,967 Short-term borrowed funds ................................... 144,881 125,116 429,600 350,858 Long-term debt .............................................. 95,597 96,428 285,712 291,848 ------------ ----------- ------------- ----------- Total interest expense .................................... 582,030 549,277 1,747,770 1,604,673 Net Interest Income ......................................... 589,436 523,644 1,741,283 1,538,095 Provision for loan losses ................................... 72,809 62,756 215,376 188,034 ------------ ----------- ------------- ----------- Net interest income after provision for loan losses ......... 516,627 460,888 1,525,907 1,350,061 Other Income Service charges on deposit accounts ......................... 84,674 76,584 248,013 225,254 Fees for trust services ..................................... 51,185 43,653 146,040 128,171 Credit card income .......................................... 43,312 43,182 124,933 123,852 Electronic banking .......................................... 19,449 16,841 54,511 47,285 Capital markets income ...................................... 37,625 14,994 94,039 33,482 Investment fees ............................................. 10,712 9,721 33,568 26,710 Mortgage fees ............................................... 12,251 5,711 31,457 16,035 Other operating income ...................................... 51,333 45,361 176,746 141,721 ------------ ----------- ------------- ----------- Total other operating revenue ............................. 310,541 256,047 909,307 742,510 Securities gains ............................................ 6,886 1,091 13,035 3,147 ------------ ----------- ------------- ----------- Total other income ........................................ 317,427 257,138 922,342 745,657 Other Expense Salaries .................................................... 221,242 190,434 653,731 541,247 Employee benefits ........................................... 42,040 39,918 131,681 119,660 ------------ ----------- ------------- ----------- Total personnel expense ................................... 263,282 230,352 785,412 660,907 Net occupancy expense ....................................... 34,896 29,816 102,798 85,967 Equipment expense ........................................... 38,545 36,283 114,520 105,608 Merger-related charges ...................................... 11,934 ---- 78,351 ---- Other operating expense ..................................... 143,746 128,850 422,565 381,821 ------------ ----------- ------------- ----------- Total other expense ....................................... 492,403 425,301 1,503,646 1,234,303 Income before income taxes .................................. 341,651 292,725 944,603 861,415 Applicable income taxes ..................................... 114,284 93,803 311,999 272,213 ------------ ----------- ------------- ----------- Net Income .................................................. $ 227,367 $ 198,922 $ 632,604 $ 589,202 ============ =========== ============= =========== Net income per common share: Basic ...................................................... $ 1.11 $ 1.02 $ 3.07 $ 2.99 Diluted .................................................... $ 1.09 $ 1.00 $ 3.01 $ 2.94 Average shares outstanding: Basic ...................................................... 204,832 194,981 205,811 197,237 Diluted .................................................... 208,837 198,555 209,881 200,542
27 Wachovia Corporation and Subsidiaries - -------------------------------------------------- Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------- $ in thousands, except per share Common Stock Capital Shares Amount Surplus Period Ended September 30, 1997 Balance at beginning of year ..................... 201,252,539 $1,006,263 $ 706,649 Net income ....................................... Change in unrealized gains on securities available-for-sale, net of tax and reclassification adjustment ..................... Comprehensive income* ........................ Cash dividends declared by pooled companies: Wachovia Corporation -- $1.24 a share............ Central Fidelity Banks, Inc. -- $.70 a share..... Common stock issued pursuant to: Stock option and employee benefit plans ......... 1,213,366 6,067 48,122 Dividend reinvestment plan ...................... 206,231 1,031 11,470 Conversion of debentures ........................ 3,628 18 52 Common stock acquired ............................ (8,838,480) (44,193) (468,392) Miscellaneous .................................... 677 ------------- ---------- ----------- Balance at end of period ......................... 193,837,284 $ 969,186 $ 298,578 ============= ========== =========== Period Ended September 30, 1998 Balance at beginning of year ..................... 205,926,632 $1,029,633 $ 974,803 Net income ....................................... Change in unrealized gains on securities available-for-sale, net of tax and reclassification adjustment ..................... Comprehensive income* ........................ Cash dividends declared on common stock -- $1.37 a share........................... Common stock issued pursuant to: Stock option and employee benefit plans ......... 1,956,037 9,780 87,468 Dividend reinvestment plan ...................... 235,799 1,179 17,410 Common stock acquired ............................ (6,466,638) (32,333) (499,005) Acquisitions ..................................... 1,099,450 5,497 77,815 Miscellaneous .................................... (568) ------------- ---------- ----------- Balance at end of period ......................... 202,751,280 $1,013,756 $ 657,923 ============= ========== =========== Accumulated Other Total Retained Comprehensive Shareholders' Earnings Income Equity Period Ended September 30, 1997 Balance at beginning of year ..................... $2,843,803 $ 51,686 $ 4,608,401 Net income ....................................... 589,202 589,202 Change in unrealized gains on securities available-for-sale, net of tax and reclassification adjustment ..................... 16,971 16,971 ------------- Comprehensive income* ........................ 606,173 Cash dividends declared by pooled companies: Wachovia Corporation -- $1.24 a share............ (200,038) (200,038) Central Fidelity Banks, Inc. -- $.70 a share..... (40,220) (40,220) Common stock issued pursuant to: Stock option and employee benefit plans ......... 54,189 Dividend reinvestment plan ...................... 12,501 Conversion of debentures ........................ 70 Common stock acquired ............................ (512,585) Miscellaneous .................................... (12,147) (11,470) ---------- ------------- ------------- Balance at end of period ......................... $3,180,600 $ 68,657 $ 4,517,021 ========== ============= ============= Period Ended September 30, 1998 Balance at beginning of year ..................... $3,098,767 $ 71,098 $ 5,174,301 Net income ....................................... 632,604 632,604 Change in unrealized gains on securities available-for-sale, net of tax and reclassification adjustment ..................... 60,227 60,227 ------------- Comprehensive income* ........................ 692,831 Cash dividends declared on common stock -- $1.37 a share........................... (282,346) (282,346) Common stock issued pursuant to: Stock option and employee benefit plans ......... 97,248 Dividend reinvestment plan ...................... 18,589 Common stock acquired ............................ (531,338) Acquisitions ..................................... 83,312 Miscellaneous .................................... (22,838) (23,406) ---------- ------------- ------------- Balance at end of period ......................... $3,426,187 $ 131,325 $ 5,229,191 ========== ============= =============
* Comprehensive income for the third quarters of 1998 and 1997 was $283,702 and $223,250, respectively. 28 Wachovia Corporation and Subsidiaries - ---------------------------------------- Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- thousands Nine Months Ended September 30 1998 1997 Operating Activities Net income ............................................................... $ 632,604 $ 589,202 Adjustments to reconcile net income to net cash provided by operations: Provision for loan losses ............................................... 215,376 188,034 Depreciation and amortization ........................................... 110,388 89,267 Deferred income taxes ................................................... 180,071 84,546 Securities gains ........................................................ (13,035) (3,147) Gain on sale of noninterest-earning assets .............................. (4,404) (3,262) Increase (decrease) in accrued income taxes ............................. 79,752 (13,095) Decrease in accrued interest receivable ................................. 11,019 1,844 Increase in accrued interest payable .................................... 14,519 72,821 Net change in other accrued and deferred income and expense ............. 258,133 83,960 Net trading account activities .......................................... (173,561) 132,549 Net loans held for resale ............................................... (107,458) 22,214 ------------- ------------- Net cash provided by operating activities ............................. 1,203,404 1,244,933 Investing Activities Net increase in interest-bearing bank balances ........................... (23,327) (11,833) Net decrease (increase) in federal funds sold and securities purchased under resale agreements ....................................... 1,012,034 (64,162) Purchases of securities available-for-sale ............................... (2,945,474) (2,378,431) Purchases of securities held-to-maturity ................................. (394,664) (35,858) Sales of securities available-for-sale ................................... 208,686 1,449,108 Calls, maturities and prepayments of securities available-for-sale ....... 2,763,134 2,249,696 Calls, maturities and prepayments of securities held-to-maturity ......... 393,813 173,843 Net increase in loans made to customers .................................. (1,415,772) (2,968,352) Capital expenditures ..................................................... (196,690) (122,298) Proceeds from sales of premises and equipment ............................ 31,023 8,094 Net (increase) decrease in other assets .................................. (484,019) 128,974 Business combinations .................................................... 16,108 (947) ------------- ------------- Net cash used by investing activities ................................. (1,035,148) (1,572,166) Financing Activities Net (decrease) increase in demand, savings and money market accounts ..... (685,564) 478,217 Net (decrease) increase in certificates of deposit ....................... (3,393,053) 1,110,590 Net increase in federal funds purchased and securities sold under repurchase agreements ............................................. 355,767 11,822 Net increase in commercial paper ......................................... 374,808 126,595 Net increase in other short-term borrowings .............................. 1,924,629 248,866 Proceeds from issuance of bank notes ..................................... 259,450 948,372 Maturities of bank notes ................................................. (763,857) (2,315,367) Proceeds from issuance of other long-term debt ........................... 1,050,873 769,612 Payments on other long-term debt ......................................... (4,861) (496,535) Common stock issued ...................................................... 67,417 42,691 Dividend payments ........................................................ (282,346) (239,602) Common stock repurchased ................................................. (522,750) (506,676) Net increase (decrease) in other liabilities ............................. 196,450 (14,433) ------------- ------------- Net cash (used) provided by financing activities ...................... (1,423,037) 164,152 Decrease in Cash and Cash Equivalents .................................... (1,254,781) (163,081) Cash and cash equivalents at beginning of year ........................... 4,221,818 3,674,192 ------------- ------------- Cash and cash equivalents at end of period ............................... $ 2,967,037 $ 3,511,111 ============= ============= Supplemental Disclosures Unrealized gains on securities available-for-sale: Increase in securities available-for-sale ............................... $ 98,364 $ 25,192 Decrease in deferred taxes .............................................. (38,109) (8,482) Increase in shareholders' equity ........................................ 60,227 16,971
29 [WACHOVIA LOGO] ----------------------------- BULK RATE U.S. POSTAGE PAID WACHOVIA CORPORATION ----------------------------- Wachovia Corporation P.O. Box 3099 Winston-Salem, NC 27150 #11-19 EX-27 4 EXHIBIT 27
9 0000774203 Wachovia Third Quarter 1998 1,000 U.S. Dollars 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 2,967,037 156,518 610,500 1,172,683 9,075,416 1,520,584 1,593,178 45,628,716 547,686 65,574,008 38,807,144 12,775,569 2,282,979 6,479,125 0 0 1,013,756 4,215,435 65,574,008 2,879,408 545,282 64,363 3,489,053 1,032,458 1,747,770 1,741,283 215,376 13,035 1,503,646 944,603 632,604 0 0 632,604 3.07 3.01 4.23 144,654 119,034 0 0 544,723 259,414 44,388 547,686 0 0 0 INVESTMENTS-AVAILABLE-EQUITY EPS-BASIC
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